Friday, July 18, 2008

Seeing through the broken window 

One pleasant part of doing early morning radio is talking about the weather (the morning show gets an hourly call from friend and colleague Bob Weisman.) One thing Bob reminded me of as we experienced rain this week was the flooding in southern Minnesota, Iowa and Wisconsin. In some flatter riverbeds the water has not receded back to the banks.

Rick Mattoon has a good review of the economic dislocation of the flood of 1993 and an estimate of what will be the loss this year. In the process he teaches an important economic lesson:

Following the 1993 floods, estimates for the third quarter reduced personal income by $9 billion and forecasted uninsured losses to be $2 billion. Losses to proprietors� incomes were estimated at another $1 billion.

Remarkably, such initial losses soon appear to translate into economic gains as business and households rebuild. The rise in construction activity and the resumption of business activity often boost gross domestic product (GDP) estimates for future quarters, as households and businesses attempt to rebuild their physical capital and, in the case of businesses, to fill order backlogs. For example, following Hurricane Andrew, annualized GDP growth hit 5.7% in the fourth quarter of 1992, spurred by rebuilding activities.

However, such rebuilding does not reflect an actual economic gain in the broad long-term perspective. In most cases the rebuilding merely replaces lost capital stock�meaning that, in the long term, the nation�s product will not exceed what would have been produced without the disaster. While the immediate burst of economic activity is quite evident, the losses from the foregone output of interrupted and diminished business activity may go largely undetected because the diminished growth takes place in small amounts spread over many years.

Students of economics will recognize the title's reference to Bastiat. See further insights by Tim Schilling.

A look at Minnesota damages from last year's floods.

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