Wednesday, August 31, 2005

Economic fallacies in the wake of natural disasters

David Held sent me a link to The Stalwart, which warns about the "broken window" fallacy that inevitably appears after natural disasters. Indeed, I'd already been expecting that myself. Russell Roberts of Cafe Hayek was already on top of the "president of ClearView Economics" suggesting that the rebuilding will "spur GDP growth."

My favorite example is Walter Williams chiding Paul Krugman a couple of weeks after 9/11. An economist of Krugman's alleged stature should know better, but he didn't. Dr. Williams mentioned this in his Nov. 17, 2004 column, where he debunked the idea that rebuilding after hurricanes (or any other destruction) will create economic growth. It's easy to get excited about the increase in income, but often forgotten is the equal loss of wealth. The income is necessary to achieve the same level of wealth as before.

As Bastiat said in "What Is Seen and What Is Not Seen": "On the second, that in which the accident did not happen, he would have spent six francs for new shoes and would have had the enjoyment of a pair of shoes as well as of a window." Today we regard his conclusion as a truism, but many of his contemporaries did not see that way: "Destruction is not profitable."

Tuesday afternoon, I heard a couple of new economic fallacies about post-disaster construction. I caught the last part of Rush Limbaugh's show while waiting for Sean Hannity's to begin. One of the last callers lives in Florida, and her house was damaged by one of last year's hurricanes. After a year, her roof still had no tiles, yet new buildings in her area have been constructed with complete roofs. She also complained that some companies are hiring "unskilled labor." Her proposed solution: laws to give existing homes priority access over new ones, because, she claimed, new buildings are using up all the roofing labor and roofing tiles. Her reasoning is that rebuilding old structures is preferable to building new ones, and in this she ignores not just supply and demand, but why the price system works the way it does.

I most recently discussed the price system and its marvelous operation in "Nobody can afford 'high-priced' gasoline?" and "What to do about the price of oil?" To recap, prices allocate resources to those who value them the most (and can use them best). A buyer must offer more money (which is fundamentally a representation of accumulated resources, i.e. wealth) than others if he really, really wants something that is scarce. A beneficial side effect is that this encourages people to produce more as part of competing for scarce resources. In the opposite system, without prices or with prices kept artificially low, more people will be able to afford scarce things. But the supply will still be low (notwithstanding high prices encourage new suppliers, and low prices drive away suppliers), and successful buying will come down to luck in finding a seller, or winning a lottery system like with green cards. The former means people will incur high search costs and have increasingly less time to produce their own goods and services. The latter means people lose the incentive to create wealth; they might as well produce little, if anything at all, and hope to "win" the resources they want.

Now to apply this to the scarcity of roofers and roofing materials in that part of Florida. The supply of both is probably about the same as before (perhaps even greater if people recognized a profit opportunity in roof construction). However, and this goes without saying, the hurricanes' destruction greatly increased the demand. So how will the roofing tile manufacturers and roofers determine who gets their goods and services? By charging higher prices.

The woman's lack of roofing tiles didn't appear to deny her the ability to live in her house. If she had the new tiles, however, there would be one less home for others to live in. (As Bastiat would say, that is the unseen effect.) Any new homeowners competing with her for a roof, by definition, place a higher value on roofing than she values having her roof fixed. They're willing to pay more so they can have an entire house, whereas she can still live in her house. Perhaps not as comfortably as before, but she still can. You become more efficient when having to compete with others who will pay a higher price: you make do with what you have, or you seek alternatives.

"Unskilled labor." What a negative connotation...and erroneously so. If the laborers perform a job worthy of their hire, what does it matter if they are considered "unskilled," and who classifies them as such? If someone competently works for me, that's sufficient "skill" for me. Qualifications are important in determining who to hire, but actual skill is what matters in job performance.

Let's also not forget that hiring "unskilled" workers helps meet the high demand for roofer labor, which helps keep that price lower than if only "skilled" roofers could do the job. The woman should be thankful for "unskilled" workers, otherwise fixing her roof would cost even more than it already does. Since she distrusts "unskilled" labor, she's perfectly free to hire only those considered "skilled" -- though she'll pay a higher price, as they would be in higher demand. It's her choice, and ideally no one can compel her in either direction.

The most beautiful aspect of the free market is its inherent freedom: you're as free to decline to buy as you are to accept. You're free to risk paying a lower price for a possibly inferior product; perhaps you deem its inferiority worth the lower cost. This woman, though, doesn't realize she's one of those who wants government to eliminate the risk from our lives. It's a form of paternalism, operating under the guise of helping people. It's also a subtle form of selfishness, because she wants to pay less for scarce resources than what others are willing to pay. Her insinuation is that she values a new roof more than others, but she's not willing to prove it by trading more of her own resources.


Blogger TKC said...

Next on the hit list will be price gouging.

On 'unskilled' labor, whenever there is a run on specific skill set there will almost certainly be some 'unskilled' labor involved. However, as long as somebody competent is overseeing the job then this should not present a problem. Then again, everybody, at somepoint, is pretty much an 'unskilled' laborer. So this sort of complaint is pretty much bogus.

Wednesday, August 31, 2005 3:38:00 PM  
Blogger Perry Eidelbus said...

Ah yes, the classic "ice bags scarcity." My microeconomics professor used that when I was an undergrad. Naturally, he as an Austrian economist would use the popular example among Mises devotees. He studied at NYU under Kirzner, who learned from Mises and Hayek.

What we didn't understand at first was Dr. Ikeda's question: what's the most altruistic thing to do, if you're the storekeeper with limited ice on hand? That's to sell the ice to those who will pay the most. Concern for others' welfare can certainly involve wanting them to use their resources efficiently. That's why I never give money to bums I encounter in the city, because it's true most of them will spend it on alcohol.

Now, altruism would certainly not hinder the storekeeper from charitably giving food to a family that wanted to buy the ice to preserve a minimal amount of food.

Thursday, September 01, 2005 12:00:00 AM  

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