Broken Window

Updated: Sep 9, 2021

Hurricane Ida caught the news, as it left millions of people without power in New Orleans only 16 years after Hurricane Katrina. Natural disasters are great tragedies, but ultimately, we will focus our discussion on the effect on the economy.


Let's start with the broken window fallacy, penned by French Economist Frederick Bastiat. This fallacy disproves the myth that the destruction of property is beneficial to the economy. So in a situation where there's destruction, we may not see a change in GDP, but we do have a society with less wealth. So, therefore, we don't measure the economic activity that is unseen.


Natural Disasters

When we look at natural disasters, hurricanes are one of the most consistent and significant ticket items. However, we do have a property and casually for these disasters because they are tragedies. But let's take this and compare it to the same scenario from Frederick Bastiat, the seen versus unseen.


When you look at the New Orleans economy, it's going to look like it's been stimulated by GDP because there is a transfer of money that has been sent to replace the infrastructure that Hurricane Ida has destroyed. So, this is the "seen" part. But what we won't see is the money that the property and casualty companies would have used and saved for other investments to fund future catastrophes, where they would have to payout. So, therefore, we are not losing our spending as an economy but all the innovation that would have come from the property's investments.


Storm Costs

Another thing that happens a lot whenever hurricanes come about is the severity of storms and that storms are getting worse. It is likely not the severity of the storms driving these costs up over time; we are developing areas in our communities.


So if, if we had a storm come through and it's across the beach, and there's no development whatsoever, we're not going to account for all the different changes that happened in the environment because there was no economic component. So, therefore, as our economy continues to grow, the additional infrastructure increases.


Florida

So let's analyze Florida because hurricanes are typically the most significant event that we see in Florida.

We can look at the population growth for Florida and see 1960 Florida is not the same as present-day Florida. When we talk about the electoral college, Florida has a significant influence. It's one of the most populated states in the country, but not the case in the 1960s. We can see that the population since the 1960s has increased. So you may be thinking the population increases everywhere, so why Florida?


Well, we can see how the population influences Florida as the house of representatives increases over time. In 1944 they had six representatives; by '64, they had 12, and in 2004 they had 25. This number is likely to go up with the number of people continuing to move to that state. But all the increase in population means that beaches that were empty before now have all kinds of infrastructure surrounding them. So whenever a hurricane comes through, there are more places to hit and what's driving the increased costs.


Infrastructure Spending

Infrastructure spending has been moving slowly, and there has been a lot of going back and forth with politics. Janet Yellen wanted to get the $3.25 trillion passed before the infrastructure bill, but the Senate has now approved an additional $550 billion in spending. The extra $550 billion is set to be voted on September 27th.


Although natural disasters come and go, our economy can take the hit for longer. Keep up to date with the effects of Hurricane Ida on our economy and more every Wednesday at 3:30 p.m. CT. And to learn more about this week's Weekly Market Insights, be sure to listen to our recap video on our YouTube channel and SUBSCRIBE!

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Disclosures:


Economic forecasts may not develop as predicted, and there can be no guarantee that strategies promoted will be successful. Therefore, the opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.


All performance references are historical and are no guarantee of future results. In addition, all indices are unmanaged and may not be invested directly.


Securities and advisory services are offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC. All investing involves risk, including possible loss of principal. No strategy assures success or protects against loss.


The opinions in this material do not necessarily reflect the views of LPL Financial.

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