Sep

4

 Forget the unemployment numbers.

The question I've got is how much of a bump to the GDP is generated by the rebuilding of Houston and the rest of Texas hit by the recent inundation?

anonymous writes: 

This will help: "The Parable of the Broken Window"

George Devaux writes: 

I am not sure about the truth of the parable.

Consider that for years people transferred wealth to insurance companies. The insurance companies put liabilities on their balance sheets, and used the cash to generate net wealth.

With the event, the insurance companies transfer cash to the people (and reduce the liabilities on the insurance companies) to restore the destructed wealth. The insurance companies retain the net wealth.

In the longer term, people having seen the destruction build differently. The people are also more prone to secure insurance. The insurance companies use their collective wisdom to innovate solutions or at least improvements that reduce future destruction.

In summary, destruction forces improvements.

Russ Sears writes: 

Banks and insurance companies cause the multiplier effect. the higher the leverage, the higher the multiplier effect is. Holding more reserves and surplus slows the speed of money. Hence rather than just GDP, it should have an "inflationary" effect as the speed of money increases. Prices also increase because of demand and supply shocks. We've already seen the effect on gasoline. 

Rocky Humbert writes: 

This is actually a complex analysis with many feedback loops. It is possible, but not necessarily true that short-term US GDP will increase due to the hurricane rebuild. Nor is it necessarily true that this will be inflationary, however, certain prices (such as local lumber and wallboard) will likely increase. I believe that the primary determinant on short-term and longer-term US GDP is what activities and investments and jobs will be sacrificed/diverted to the hurricane rebuild; what income will be temporarily or permanently lost; and what the relative multiplier effects are between these alternative uses of capital and labor and the hurricane rebuild. Furthermore, if the economy were in a recession with a high unemployment rate, the effect on GDP would probably be greater than the effect in a modestly expanding economy with a low unemployment rate.

For illustration, if my house was destroyed by a hurricane, and even if I have flood insurance, I will surely still have uncovered losses. I will therefore likely immediately reduce other spending, such as a trip to Disney World and eating out at restaurants and buying new clothes. I might also delay the purchase of a new car and other big ticket items because I will need to buy replacement furniture. More generally, local businesses will likely be disrupted — and productive local service employees will be laid off for days/weeks/months — resulting in less economic activity in the region — offset by an increased need for carpenters, plumbers, and tradesmen.

There is a debate among economists about the real multiplier effect from infrastructure spending. But even that debate assumes that the infrastructure will be upgraded and improved — not simply hauled away and replaced. But the multiplier effect is beyond the question on the table. The bottom line is: it's complicated…..


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