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Hurricane Harvey and Our Government’s Finances

Summary:
Natural disasters such as Hurricane Harvey have consequences that extend far beyond the terrible and heartbreaking human tragedies that we are witnessing right now. Concerns about the consequences to our GDP and finances, while not as important as ensuring that people are safe (or as safe as can be under the circumstances), are increasingly talked about. I am certainly being asked about it a lot.  First, it is worth reminding people that disasters are never a boon for the economy — even when they force the government and the private sector to spend massive amounts of money in the devastated area. No one explained it better than French economist Frederic Bastiat in what is known as the broken-window fallacy. This idea comes from his classic work, That Which Is Seen, and That Which Is Not

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Natural disasters such as Hurricane Harvey have consequences that extend far beyond the terrible and heartbreaking human tragedies that we are witnessing right now. Concerns about the consequences to our GDP and finances, while not as important as ensuring that people are safe (or as safe as can be under the circumstances), are increasingly talked about. I am certainly being asked about it a lot. 

First, it is worth reminding people that disasters are never a boon for the economy — even when they force the government and the private sector to spend massive amounts of money in the devastated area. No one explained it better than French economist Frederic Bastiat in what is known as the broken-window fallacy. This idea comes from his classic work, That Which Is Seen, and That Which Is Not Seen. But economists have done more work on the issue, confirming the fact that devastation, wars, and disasters are never a boon to economic growth

Second, George Mason University’s Tyler Cowen has a good article about the consequences of large-scale disasters on cities and individuals: 

“One body of research looks at how cities bounce back from natural and man-made catastrophes. If we consider the 1871 Chicago fire, the 1906 San Francisco earthquake, the 1889 Johnstown flood, or the 1900 Galveston hurricane, after rebuilding periods economic progress continued in each case. Even the bombings of Japanese cities during World War II didn’t affect their longer-term economic futures very much. New Orleans, which seems to have become a permanently smaller city after Hurricane Katrina in 2005, is the exception.

What about the fates of individuals affected by major storms? The best study we have, conducted by economist Steven Levitt and co-authors, found that within a few years, Katrina victims’ incomes fully recovered. Additional research found that people who relocated after Katrina (often to Houston, by the way) often improved their incomes. I wouldn’t expect those same income upgrades after Hurricane Harvey, because Houston is a wealthier and better-managed city than was New Orleans. Still, Americans have a remarkable ability to bounce back and rebuild their lives and job prospects.”

How about our finances? Well, there isn’t any doubt that the cost of Harvey will weigh heavily on our budget this year and next. Leaving aside the fact that federal intervention in disaster recoveries can be counterproductive, there is a role the federal government can play in emergencies — and there isn’t any discussion that this isn’t one — when state and local governments and the private sector can’t. Of course, the question remains how that emergency spending should be handled. So here are a few reminders. 

  • Emergency-spending bills should be clean. No pork-barrel spending attached to it or unrelated to disaster-relief spending. 
  • The funding should be limited to areas that are not state, local, and private functions
  • Ideally, part or whole of the emergency spending should be offset. That’s unlikely here considering the size of the disaster. However, we should remember that it used to be the case that Congress would offset some of the money going to emergency-spending bills before lawmakers realize that they could use the “emergency” label to spend beyond spending limits.

On another note, this is a good reminder of why we need to have a financially healthy government. This event will put massive amount of stress on a budget process that is already very complicated because of concerns about our debt. The more in the red we are, the harder it is to respond to true emergencies and catastrophic events such as Harvey.

Veronique De Rugy

Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University and a nationally syndicated columnist. Her primary research interests include the U.S. economy, the federal budget, homeland security, taxation, tax competition, and financial privacy. Her popular weekly charts, published by the Mercatus Center, address economic issues ranging from lessons on creating sustainable economic growth to the implications of government tax and fiscal policies. She has testified numerous times in front of Congress on the effects of fiscal stimulus, debt and deficits, and regulation on the economy.

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