In yesterday's Washington Post, Neil Irwin comments,
If there’s a silver lining to be found in past experiences, it’s that sometimes the need to rebuild — to replace older buildings and infrastructure — creates longer-term benefits for communities.
In a 2002 paper published in the journal Economic Inquiry, Mark Skidmore and Hideki Toya analyzed areas that were affected by natural disasters around the world. They found that such events can provide the impetus needed to invest in new and more productive capital.
Think of the intuition this way: Utilities may have resisted investing in underground power lines because of the expense. But after this hurricane, they may be more inclined to bury those lines, significantly reducing power outages during future storms.
That’s one of many economic ripples likely to emerge from the devastation, though it’s perhaps small solace to those who have lost their home to Sandy’s floods.
Irwin does acknowledge the destruction of property and lives, essentially arguing that the devastation to those who lost must be included in any supposed benefit from rebuilding, but it's still incorrect reasoning. Worst still, it's that third-to-last paragraph, the one noting the study, that puzzles me.
If it were financially beneficial for a company to invest in new technology or infrastructure as Irwin uses as an example, it would already have done so. There are no free lunches, and the description of the cited study leads me to believe that it's portrayed as a free lunch.
For example, let's say that the utility could invest $100 in new technology and in doing so, earn $5 in additional profit net of the next best return it would have earned investing that $100. In that case it's in the financial interest of the utility and its shareholders to make the investment in new technology. But what if that alternative investment would return $20 profit in excess of the same amount invested in new technology. Then investing in the new technology is a waste to not only the utility, but to its customers and to society as well. It should not make the investment in new technology and should stick with the alternative investment. Given scarce resources, it should invest that money in ways that maximizes the company's profits.
Yes, it may be that the destruction caused by the hurricane includes downed power lines, making the cost of burying the lines seemingly less, but that still does not turn the investment in new technology or buried power lines into an economic benefit. The more profitable project that the utility would have invested that $100 - one that benefits customers more than buried power lines - is now foregone. It is a cost that still needs to be included in the calculations of burying the power lines or adding new technology as a benefit from the hurricane. Just because the power lines are down, requiring either they be rehung on poles or now buried, which is seemingly less costly relative to the hurricane not happening (since the utility will net out the difference between burying or hanging from a pole), does not negate the lost opportunity of the alternative investment. There is no free lunch.