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Are Disasters Good for the Economy?

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Time Required:

1 class period

Materials:

  • overhead transparencies #1- 6 (#7optional)
  • copies of student handouts:
    • Clues (Visual #6) – 1 set per student group, cut into strips, 1 clue per strip (It is helpful to give groups different colored sets of clues.)
    • (Optional) Bastiat, “The Broken Window Fallacy” (Visual # 4)
    • Group Directions (Visual #2) – 1 per student group

1. Show students visual #1 and develop the vocabulary. Emphasize that their task is to consider evidence from 3 major historical disasters to come to a consensus on the answer to the question of whether disasters are “good for the economy.”

2. Divide students into working groups. Place a prize in the middle of each group’s table.

3. After distributing the “Group Directions” handout, display Visual #2 on the overhead and read through with students.

  • Emphasize that there are 2 tasks assigned:

1) to answer the question, and

2) to determine which clues are essential to answering the question. (The goal is to answer with the fewest clues.)

  • Announce the rule for the prize in the middle of the table: If I can answer the question using fewer clues than your group, you must forfeit the prize. If I cannot use fewer clues than you did, you keep the prize. .
  • Show (but do not yet distribute) the clue packets. Answer questions about the procedures.

4. Distribute the clue packets and directions handouts. Announce the deadline for turning in answer forms.

5. At the end of the work time, collect the decision forms.

  • Sort the forms, and begin with the group claiming the greatest number of clues necessary to resolve the issue. Ask the group spokesperson to identify their answer and the necessary clues, briefly explaining the reasons for including those clues.
  • Invite other groups to challenge the answer and/or the number of clues. Challengers must refer to specific clues from the activity in making the challenge.
  • Depending on whether and how quickly the class reaches a consensus, choose a strategy for continuing the discussion. For example:
  • Interrupt the discussion and start again from the other direction: Identify the group claiming the lowest number of necessary clues and ask them to identify their answer and clue and to defend their position, briefly. Invite other groups to challenge the answer and/or the clue.
  • Set up a “moving debate.” Direct students who think that disasters are good for the economy to one side of the room, and those who think they are not to the other side of the room. Proceed with the discussion – reminding students that comments must reference the clues – by calling on individuals who wish to contribute to the debate. Students may change sides of the room at any time, as they are convinced by the comments. Students may not sit in the middle of the room; they must take a position.
  • Resolve the discussion by asserting that disasters are not good for the economy and that only 1 clue – any clue that tells us that resources (including people) were destroyed – is necessary to reach that conclusion. (Quickly determine which groups may keep their prizes before continuing the debriefing. Collect prizes from the other teams.)

6. Debriefing:

  • What determines how much an economy can produce? (Production, or output, is a function of resources – land, labor, capital, and entrepreneurship.)
  • What happens to the resource base of an economy during a disaster? (It is reduced, and therefore, output – GDP – must fall.)
  • How is it possible for the GDP of an economy to fall, and GDP per capita to rise at the same time? (If population falls more than GDP, then GDP per capita will rise. Even though less is produced, there are fewer people to consume it.)
  • What is likely to happen to GDP and GDP per capita if a disaster, like a pandemic, causes many deaths but little destruction of property? (GDP will fall but GDP per capita may rise.)
  • Note also to students that GDP and GDP/capita measures of output do not capture very real elements of well-being like emotional pain and loss. Additionally, we have no way to measure the contributions that might have been made, in the future, by people who were killed in the disaster.
  • What kinds of disasters are likely to cause both GDP and GDP per capita to fall? (Those – like hurricanes, earthquakes, and volcanic eruptions – in which the major effect is property damage.)
  • (Optional) Use examples from the lesson 1 background materials to develop the production possibilities frontier model (PPF) with students and to demonstrate the effects of disasters on economic output. With more advanced students, teachers may also wish to use the background materials on how different types of disasters affect capital-to-labor ratios.
  • Suppose that a flurry of rebuilding activity follows a natural disaster, resulting in a rate of economic growth that is higher after the disaster than it was before. (The rate of economic growth measures how quickly GDP grows.) Why is the increased rate of growth not indicate that the disaster was good for the economy? (The disaster destroyed resources, so GDP fell. The growth that occurs after the disaster, rapid though it may be, starts from a lower level and our measurement doesn’t reflect the activity that is essentially replacement.)
  • Provide students with some examples in which credible people are claiming that disasters are “good for the economy,” and help them to develop a model for evaluating these claims. For example, look back at Clue #9:

J.P. Morgan senior economist Anthony Chan: “Preliminary estimates indicate 60 percent damage to downtown New Orleans. Plenty of cleanup work and rebuilding will follow in all the areas. That means over the next 12 months, there will be lots of job creation, which is good for the economy.”

Questions to ask:

  • Is this a credible source?
  • If so, are the standards for comparison specified? What does the person mean by “the economy”?
  • What data is being offered and what does that data measure? Are the conclusions based on that data sound?
  • Is this a case of miscommunication (about “the economy”) or is the author’s understanding flawed?

7. Introduce students to Bastiat using Visuals # 3 and # 4. (Visual #4 may also be distributed as a handout.)

  • What would Bastiat consider the “seen” in measurements of the economy after a pandemic disaster? (The increases in GDP/capita, the increased rate of growth of GDP.)
  • What would Bastiat consider to be the “unseen” in measurements of the economy after such a disaster? (The emotional costs of the deaths, and the unknown future contributions of the people who died.)
  • What might Bastiat consider to be the seen and unseen impacts of disasters on individuals? (The Economics Content Standards remind us that economic change hurts some people and helps others. See Lesson 1 background materials for examples of “winners” and “losers” in the aftermath of recent natural disasters in the United States.)
  • Economist Julian Simon gave us some objective measure of the importance of people to economic growth. (See Visual # 5.)
  • The source of . . . improvements in productivity is the human mind, and a human mind is seldom found apart from a human body. And becauseimprovements – their invention and their adoption – come from people, the amount of improvement plainly depends on the number of people available to use their minds.”

“The connections between numbers of scientists, inventors, and ideas, and the adoption and use of new discoveries are difficult to delineate clearly. But the links needed to confirm this effect seem very obvious and strong. For example, the data show clearly that the bigger the population of a country, the greater the number of scientists and the larger the amount of scientific knowledge produced; more specifically . . . scientific output is proportional to population size, in countries at the same level of income.

. . . The main contribution that additional persons make to society is the new knowledge of all kinds – scientific, organizational, and everyday knowledge. . . that they create and leave behind them. And to repeat an earlier statement, these gains are the result not only of geniuses but of a real number of work-a-day ingenious people.” (Julian Simon, Ultimate Resource 2, 380 & 385)

8. Use Visual #6 to reinforce to students that even modern economists sometimes seem to search for a silver lining in disasters, but that the bottom line is that disasters destroy resources and that reduces an economy’s ability to produce goods and services.

In his column “After the Horror” (New York Times, Sept. 14, 2001), [Paul Krugman, Princeton University economist] says, “Ghastly as it may seem to say this, the terror attack . . . could do some economic good.” He suggests that the destruction will stimulate the economy through business investment in rebuilding.

We know this has to be fishy just by asking: Would there have been even greater “economic good” had the terrorists succeeded in destroying buildings in Los Angeles, San Francisco, Chicago, Philadelphia, Boston and all other major cities? Of course, you and I know that is utter nonsense. Property destruction always lowers the wealth of a nation. I hope one of Krugman’s students asks him, “If property destruction is good for the economy, why aren’t Beirut and Belfast boom towns?

Walter Williams,

George Mason University economist