| iambinarymind |

[L]et us concede for the sake of argument that there is, say, $10 billion in total reconstruction spending, and that this money sucks only unemployed workers back into production; no other output suffers. Just for a specific example, suppose that the $10 billion ends up going to 1 million previously unemployed workers, who each earn $10,000 over a few months repairing the damage. Official GDP goes up, because (by assumption) the output on other items follows the same path it otherwise would have, and now in addition we have the “finished goods and services” of the new window panes, shingles, telephone lines, etc. being produced over the next few months. Can we say in this case that the storm “helped the economy”?

We might say this, if we take “the economy” to be the same thing as “official GDP,” but in so doing we have totally severed the connection between conventional metrics of economic health and actual human welfare. For in this hypothetical case, the boost to GDP would go hand-in-hand with a demonstrable reduction in aggregate economic well-being. In particular, the people spending the $10 billion would be out $10 billion. By construction in this example, their consumption and accumulation of other durable goods is the same, but they are also spending an extra $10 billion just to repair storm damage. So their savings is necessarily lower by $10 billion, and they have nothing to show for it.

In contrast, the previously unemployed workers are up by $10 billion. Yet it’s not a simple transfer or redistribution—these people had to work for a few months to earn that money, so they didn’t actually gain a full $10 billion, as if they had just been handed the money for free. Thus, to the extent that we want to engage in aggregate measures of human well-being, the only sensible conclusion is that “society” or “America” or “the economy” is poorer on net. To repeat, this is because one group of Americans (those suffering storm damage) are down $10 billion and have nothing new to show for it, while another group of Americans (the 1 million previously unemployed who now get hired to fix the damage) are up, but not the full $10 billion, because of the value of their forfeited leisure.

The “macro” case of an economy with idle resources, suddenly being jolted out of its rut by a hurricane, is analogous to a “micro” case of a man who was laid off, agonizing over what to do with himself. Should he go back to school, apply to work at fast food restaurants, start his own lawn-cutting business…? Then, in the midst of his indecision, he realizes his house is on fire! The man suddenly knows exactly what he needs to do with himself—he has to run to the kitchen and grab the fire extinguisher. Yet would anybody dare argue that the fire, notwithstanding the property damage to the house, at least solved the man’s problem of idle labor?