Yes. This has been the latest in our series “Short Answers to Misconceived Questions”.
Actually, there’s a longer answer over the fold, another extract from my book-in-progress Economics in Two Lessons. You can find a draft of the opening sections here.
This extract is a subsection of Part 2, in which I explore the implications of Lesson 1:
Market prices reflect and determine opportunity costs faced by consumers and producers.
The conclusion is
if the damage bill measures the cost of restoring assets to their pre-disaster condition, it is also equal to the opportunity cost of the disaster, namely the goods and services that would otherwise have been produced.
I’ll be interested to see whether readers’ reaction is “That’s obvious” or “That’s obviously wrong”, assuming of course that you have any reaction at all. As always, civil comments of all kinds are welcome, particularly constructive criticism.
Natural disasters like floods, earthquakes and hurricanes come seemingly out of nowhere, wreak intense havoc in a short period, and move on, leaving vast, and largely random, destruction in their wake. Reports of such events commonly provide estimates of the associated damage bill.  The cost is partially covered by insurance claims and government disaster assistance, but inevitably much of it falls on the residents of the area hit by the disaster.
It is only natural for people, faced with such disasters, to seek to find some consolatory ‘silver lining’, and one such consolation is the idea that natural disasters will create work, and thereby stimulate the economy. Disasters certainly create work for emergency services of all kinds when they occur and for all the many kinds of workers needed to rebuild damaged houses and infrastructure.
The wages earned by these workers might be seen as an offset against the damage from the disaster. That would be true if they had nothing else to do. But, most of the time, such workers are not to be found sitting idle and waiting for a disaster to happen.
Government budgets are chronically tight, so emergency services are routinely overstretched. Providing additional services to respond to a disaster comes with an opportunity cost, that of the more routine services that would ordinarily be provided.
Similarly, unless the disaster happens to coincide with a slump in the construction industry, rebuilding damaged houses comes at the expense of the new houses that would otherwise have been built.
Lesson 1 tells us that, when markets are working well, the opportunity cost of the resources used in disaster recovery and rebuilding can be measured by their market value, that is the price paid for materials and the wages paid to workers. So, if the damage bill measures the cost of restoring assets to their pre-disaster condition, it is also equal to the opportunity cost of the disaster, namely the goods and services that would otherwise have been produced.
Much of Hazlitt’s Economics in One Lesson consists simply of restating this application of Lesson 1 in a variety of contexts, from the broken window in the glazier story to the massive destruction wrought by World War II. In all these cases, assuming that markets are initially working well, the effect of unexpected destruction is simply to divert resources from new production to damage repair.
Lesson 2 shows that the proviso ‘when markets are working well’ is critical, and that Hazlitt’s argument must be heavily qualified as a result. In the presence (all too frequent in market economies) of mass unemployment, wages are not a good measure of opportunity cost. In these situations, events that create work may yield positive benefits. But natural disasters strike at random, and most of the time do not coincide with any requirement to create jobs in the construction sector. Moreover, there are many more useful ways of creating jobs. So, in economic terms, disasters are, in most cases, just as bad as they appear at first sight.
 Footnote These measures usually don’t take account of injury and loss of life, which may often be more significant. We will be discussing this issue later.