It’s well understood that if you see the world through sufficiently Keynesian eyes, you might welcome a destructive hurricane or the threat of an alien invasion (together with the frantic spending it would stimulate) as just the ticket to lift the economy out of a recession.
What seems to have been largely overlooked is that even in a thoroughly non-Keynesian world where markets work perfectly (or as perfectly as they can in the presence of a distortionary income tax), and recessions cure themselves, we might still want that hurricane.
Or, because we can’t always call forth hurricanes when we need them, we might want our government to simulate their effects by diverting funds from useful to destructive spending projects — or just occasionally showing up at people’s houses and trashing their furniture.
Here’s why: Hurricanes make us collectively poorer. When we’re poorer, we work more. When we work more, the government collects additional income tax revenue. But — taking total government spending as given — the government can’t continue to collect additional revenue forever; sooner or later it must lower tax rates. (This assumes we’re on the good side of the Laffer curve, where the way to collect less revenue is to lower rates, not raise them.) When tax rates fall, labor markets work more efficiently. So much so, in fact, that the efficiency gains can more than compensate for the initial destruction.
I only realized this recently, and it surprised me (along with several others I showed it to) enough that I wrote it up as a short paper. (Update: A more recent version of the paper is here.) I also looked back through my blog archives to see how badly I’d gotten this wrong in the past.
Here’s what I wrote last year in response to the notion that Hurricane Sandy could be “good for the economy” by creating a lot of construction jobs:
If you find yourself in an argument about this, ask your opponent whether it’s “good for the ants” when you put a stick down their anthill, wiggle it around and destroy their infrastructure. Go ahead and acknowledge that this can sure put a lot of ants to work.
Or, for that matter….
Ask if spilling ink on the living room rug is “good for your household’s economy” because of all the cleanup work you’ll do.
Of if a flu epidemic is “good for the economy” because it keeps doctors working overtime.
Well, let’s see now. Ants, as far as I am aware, don’t pay income taxes. So I stand by the assertion that you do them no favor by destroying their anthill. Spilling ink on your living room rug won’t affect your income tax rate, so I stand by the assertion that it can’t be good for your household’s economy. On the other hand, if we all spill ink on our rugs, and then work a little overtime so we can afford to pay the cleaning bills, income tax rates must fall and we can be better off. A flu epidemic, on the other hand, is likely to lead to less work, not more, so I’m still firmly anti-flu.
But while I hate the phrase “good for the economy”, I do have to admit that a destructive hurricane can be good for people, which is of course what we really care about.
On the other hand, the reason destruction can be good for us has nothing to do with the commonly cited arguments about “putting people to work”, because those arguments do not invoke the existence of a distortionary tax structure, and so would apply mutatis mutandus to an ant colony (or, in those rare instances when the arguments are more carefully constructed, to an ant colony with high menu costs).
Perhaps the real moral, though, is that our tax structure is so destructive on its own that a hurricane can actually improve matters. Rooting for natural disasters — or replacing national parks with holes in the ground — is not the only conceivable way to address that problem.