Fed Suggestion That Hurricanes are Good for Economy? Hardly

The Federal Reserve is starting to look as absurd as a character from Alice in Wonderland.

Earlier this month, an official of the Federal Reserve Bank of New York suggested that the hurricanes that devastated Florida and the metropolitan Houston area would be good for the economy.

“The long-run effect of these disasters, unfortunately, is it actually lifts economic activity because you have to rebuild all the things that have been damaged by the storm,” said William Dudley, president of the NY Fed, while talking on CNBC.

That seems to be at odds with the truly massive total bill for the two storms.

Estimates for the economic costs of the damage from the two storms vary considerably, but it could top $290 billion, according to an estimate by forecasting service AccuWeather.

Such costs include damage to buildings, property and life, as well as foregone wages and lost revenue from orders not fulfilled, as well as other items.

With a tab like that, how can the Fed be correct?

The Fed’s Dudley is accurate but only on a technicality, which itself shows how out of touch the institution is with reality. He’s also wrong because his statement suggests that such a level of destruction is a good thing. But, of course, it is not a good thing, as anyone who has seen their home blown or washed away knows.

Here’s the skinny.

The problem is that Fed officials fixate on measures of activity, such as Gross Domestic Product (GDP). And it is true that economic activity will likely increase in the months ahead as Florida, Houston and other places caught in the storm’s path get rebuilt and repaired. It is also true that there will be many construction workers hired to clear away the debris and then start the reconstruction. Plus, sales of lumber will increase as will other related products.

The problem is that it gets us nowhere.

“GDP is a measure of effort, not standard of living,” says David Ranson, director of research at HCWE & Co. “This is an egregious example of where the two are completely at odds.”

In other words, we as a country will work a whole lot harder just to get back to the situation where we started from in August before the two storms hit.

That is to say, you start with a perfectly adequate house, then it gets trashed. So you rebuild it at great expense to yourself and with considerable effort by everyone involved. In the end, you get back a perfectly adequate dwelling. You are right back where you began, but having expended Herculean effort.

It can hardly be considered economic progress.

Worse still, collectively the country will drain its cash reserves. That is money that might have been invested in new factories. Sources of money for the cleanup include private insurance companies (for those who have it), the federal government via its flood insurance program, state governments and private savings.

In other words, it’s the wealth that gets hit.

“A general attitude among politicians is not to preserve wealth — rather, it is all about jobs and employment,” says Ranson.

If nothing else, the Fed has become a political actor. Indeed, given the frequent public grilling that Congress gives the institution, it would be hard for it to be anything but political. As a result, activity and jobs get top billing, but the preservation of wealth gets downplayed.

The result of the strange approach is the ridiculous outcome that more devastation is better for GDP, despite the fact that in such cases we must work harder just to maintain the same standard of living.

In short, the Fed’s view of the world is summed up in one comment from Lewis Carroll’s absurdist book Alice in Wonderland:

“My dear, here we must run as fast as we can, just to stay in place. And if you wish to go anywhere you must run twice as fast as that,” says the Red Queen to Alice.