Question

In 1992, Bill Nelson, a representative from the Florida House of Representatives in Tallahassee, was touring the damage done by Hurricane Andrew in Homestead. As he looked out the windows of his limousine at the devastated houses and destroyed roads, he remarked, “Look at all this damage! This will stimulate the construction industry and put everyone to work! I always did say that hurricanes are good for Florida…” From the point of view of economic theory, what is wrong with Mr. Nelson’s statement?

Answer 1

This statement is incorrect from economic perspective.

A hurricane destroys capital stock, which decreases the potential GDP because the economy now has a lower stock of resources and factors of production. Until the time capital stock starts to increase and potential GDP increases at least to the original potential GDP level, the economy remains in stagflation due to lower aggregate supply causing a fall in real GDP and output combined with higher price level. In addition, lower capital stock hampers future growth, thereby lowering the real GDP growth rate and the economy slows down.