I heard some estimates on tv that the cost of rebuilding New Orleans will be over $200 billion dollars and that the harm of the economy (gas price, shock, loss of production in affected areas etc.) will be about $50 billion dollars. My question is that assuming everything else remains the same and those estimates are accurate, will the GDP actually rise by about $150 billion? And if so, does this mean that Katrina was a good thing in terms of economics?
Terrific question!
The short answer is "No". Katrina was not a good thing in terms of economics or the economy. It was a terrible event, which beyond the horrific human toll will also exact a price on the economy.
The issue of whether destruction is good for an economy is covered in great detail in the article "Are Wars Good for the Economy?, which I recommend everyone interested in this issue read.
The reason why the hurricane will not be good for the economy is relatively straightforward. That $200 billion dollars spent on the reconstruction has to come from somewhere - it's not new productivity that suddenly emerges. Money spent on the reconstruction is money not spent on other projects, or on reducing government debt, or on tax cuts.
It helps to think of things on a much smaller scale. Suppose the Federal Government pays $10 million to have one of the Levees in Louisana rebuilt. That is $10 million dollars that they could have spent on another project, such as building a bridge in California, or the opening of a ferry service from Cleveland to Ontario, Canada.
Since the hurricane hit, the government no longer spends money on the ferry, instead it uses the money to build the levee. Had the hurricane not hit, the government could have both the ferry, and the levee, since the levee would not have to be rebuilt. Thus the economy has one less ferry than it would have without the hurricane; this is clearly a net loss to the economy.
The destruction caused by hurricanes and wars are a net negative due to the fact that every action and every dollar spent has an opportunity cost - that is an action which is foregone. Having something destroyed and rebuilt is not a net benefit to the economy, because the money spent on rebuilding has to come from somewhere.
Thanks for your great question! I hope this clears up the issue. If you have any questions on economics or the economy, please contact me by using the feedback form.
