The biggest problem is that this reasoning escapes all politicians, the odd Nobel laureate, and the Nobel Prize committee. In itself, this should be a criminal offence, I think, because promoting the broken window model of economic stimulation is akin to running a pyramid scheme or some other fraudulent activity.

But in terms of creating wealth, it’s best not spent by anyone. The insurance company of course would rather keep the wealth in their control, but by investing it broadly it does support wealth creation.

This is not to say insurance is a bad idea, though. It’s unfortunately necessary unless people are willing to absorb all costs for catastrophic events. Most can’t.

If a hurricane destroys your house, your place of employment, and eliminates your possessions, you have no wealth and, temporarily at least, no source of income. If this situation brings on a heart attack and you equally have no health insurance, well, you’re kinda screwed.

Observing Florida hurricanes and reconstruction first hand since Donna in 1960, one thing has always stood out to me: most of the new stuff is an improvement over the things it replaces.

When Cleo and Dora ganged up to reduce the Duval County coastline to rubble in 1964, the result was not just a recovery for the nearly blighted beaches but a complete revitalization. Houses built in Dade county to replace the ones that Andrew blew away are stronger, now actually being built to code in many cases.

To rebuild a shattered deck is probably a good example of the broken window principle, but adding the jacuzzi is new production (and it’s not likely the insurance company or the government paid for it.)

Restoration after storms is nearly always more than just fixing what broke. In most of the cases I’ve seen, communities improve beyond their previous condition, and I suspect that’s good for the overall economy, too.

I also think if people are over-insured–and I’m not sure if they are or not–this can have an effect on things.

There is something puzzling in what you say Radley; you suggest the “economy” is not better off if you buy medical services from an accident. But if that was the next best thing for you to buy with your money–like other necessities, it’s at least Kaldor-Hicks efficient–then it’s no more a net negative then if you buy a security system for your house b/c of crime or a meal b/c you’re hungry.

P.S. For everyone who thinks I’m an idiot or immature, have you read The Problem of Social Cost by Ronald Coase. It blows your dogmatism to smitherenes!

1. Money parked in nonproductive investments (such as gold coins) is used to pay for productive and efficient repairs.

2. Damage is in a problem area (flood prone land, bad neighborhood, California, etc.) and rebuilding occurs somewhere better.

3. A high unemployment region is devastated, and people take their insurance money and move to a low employment region.

I doubt that any of the above scenarios happen to a significant extent, but theoretically the economy could improve after a major disaster.