Storm Economics in One Lesson

Guest post by Jeffrey Tucker of Laissez Faire Books 

In a natural disaster like Hurricane Sandy, the only thing people should fear more than the storm is the government's response.

Let us count the ways.

Mandatory evacuations presume that politicians know the risks better than property owners themselves. That can't possibly be true. In an information age, we all have access to the same data. Especially these days. We should be able to make our own risk assessments, coming and going from our property as we choose.

Where is the evidence that property owners systematically underrate risk whereas political elites are clear headed and know precisely what to do? The incentives for the government is to clear everyone out because doing so exempts city workers from liability for failing to do the job they exist to do, namely to protect and serve people in times of crisis.

There is also something extremely perverse about arresting people for failing to take government-mandated steps to protect themselves. When it is all over, government is in then in a position to control access to one's own home and property. In every natural disaster with evacuations, people find themselves struggling against their own government to get back to their own property and assess the damage.  [Christchurch, anyone?]

In this case, all across the Northeast region, even where storms only brought some wind and rain, it was the government workers who fled first. It makes sense because they tend to regard themselves as more valuable than the rest of us. A friend posted the following even before the storm hit:

So I call 911 for the downed power line in the alley way. I get Fairfax county 911. They transfer me to Alexandria city 911. They refer me to the storm damage emergency line. I get the voicemail for the city communications office.
So I call 911 again. They transfer me again. They refer me again. I tell them, but nobody is answering. They say that's where I'm supposed to call. So I call again. The guy there does not know for sure whether he is supposed to take calls for downed power lines. (pause) He looks it up. (pause) He decides he is supposed to take my information and enter it into the computer.
I call my landlord. He comes right over.

Then there's the anti-gouging mania that hits every government executive. They warn with great bravado that no private seller can raise prices more than 10% in the event of an emergency. This defies reality. Storms and impending storms send existing supply and demand matrices into total upheaval.

Prices change, and that's a good thing. It should go without saying that when things and services are in shorter supply, the price of them goes up. This serves two purposes. It provides a signalling device and incentive for new sellers to jump into the market. It also signals the need for more and alerting consumers to conserve until more arrives. This is good for everyone. Would you rather pay $5 a gallon for water or have no water available for sale at all? That's the choice.

When government threatens people not to profiteer, it discourages producers from entering the market. And yet this is what they do. One North Carolina paper even editorialized for people to rat out any gougers by turning them. "It's a good law, and is made better when the public reports profiteering incidents to authorities."
Amazing: demonize the people who are providing solutions in time of crisis!

Short-circuiting the pricing process discourages gas stations, water sellers, restaurants, and everyone else in the commercial marketplace not even to bother showing up. Why take the risk when there is no reward? As for the goods and services that are available, they will be depleted more rapidly than they should be.

Lives are at stake here. Yet all the politicians seem to care about is their reputation and power, regardless of the consequences. Long experience tells us that it is not government that serves people well in emergencies, but places like WalMart, Waffle House, and Lowe's. Of course, these commercial establishments are the ones that the political class tries to shut down. It's perverse even by government standards.

Given the torrent of criticism over the last disaster, FEMA did its best to spin opinion in its direction this time. They have the National Response Coordination Center, which, as the New York Times says, decides "where officials gather to decide where rescuers should go, where drinking water should be shipped, and how to assist hospitals that have to evacuate."

In other words, they tell people what to do. But who is actually doing the thing itself? The Wall Street Journal reports that WalMart "staffed up an emergency operations center at its headquarters last Thursday and began routing shipments of goods to 10 disaster distribution centers along the storm's projected path. As the storm clears, WalMart will dispatch trucks from the disaster warehouses to stores in the areas hit by the storm."

Sandy was a less deadly storm than it might have been because of such preparations. Can we get a round of applause for Home Depot, Wal-Mart, Lowes, and the thousands of other retailers who made a difference this time around?
As well, how about a respectful nod to new commercial technologies. Even when the power failed, the cell towers still functioned. 3G connections were going full blast while the lights were out. YouTube's live streaming technology allowed anyone to watch live reports on their smart phones. Instagram permitted live documentation of the entire storm, with 10 images per second being posted. Reporters filed reports from their iPads even with massive power outages. This was the most-documented storm in the history of the world, all thanks to the market economy.

Then there's the aftermath in which government suddenly discovers millions and billions of dollars available to shovel onto the clean-up and rebuilding efforts. Decades of experience show that average people see little of this money. Instead, it goes to government contractors and real estate developers and other preferred groups who are closely connected to politics. The money is taken away from the private sector when it is needed most and transferred to people who waste it on projects that the market may or may not value.

The process to get approved for post-disaster largess causes city and state governments to even delay private clean-up efforts. The political class discovers that it has every reason to make the mess look as bad as possible as long as possible, all in the hope of getting ever more money sent from the capital city to the affected area.

Another tendency is for government to enforce licenses on all service professionals. Want someone to cut down the tree or fix your plumbing or rewire your home? You had better choose someone with a license to do business or you will be in big trouble. Of course, this only discourages an influx of new service providers just when they are needed most.

In general, government sees every emergency has a power-grab opportunity. I get shivers down my spine just reading about FEMA's wonderful plans to nationalize just about everything should the need present itself. If anyone believes that martial law is out of the question under these conditions, he hasn't been paying attention to the police-state trends over the past decade. Weapons confiscations? It's going to happen if conditions get bad enough, as happened in New Orleans during the Katrina disaster.

Then there's the role of economists. It is inevitable that some find an upside to the destruction in a natural disaster, same as they find an upside to stimulus and inflation and war. "While natural disasters take a large initial toll on the economy," Moody's Ryan Sweet said on economy.com, "they usually generate some extra activity afterward."
Yahoo Finance ran the most notorious example this time around, asserting that every act of destruction contains a multiplier that causes even more creation later.

For the umpteenth time, there is no upside to wealth destruction. But try telling that to the folks who calculate GDP. It is very likely the Sandy will be given credit for any fourth quarter fake economic growth. After all, that's how government affects the GDP. The more it spends, the higher economic growth appears to be.

You need only look at the third quarter 2012 GDP statistic that dominated the headlines last week. The government announced the thrilling news that the economy grew 2 percent. But Veronique de Rugy and Keith Hall of the Mercatus Center looked more carefully at the data to find that "all of the increase in GDP growth came from the biggest increase in federal government spending in over two years."

It turns out that government spending rose 9.6% at an annual rate in the third quarter. Hence the seeming “boost” to productivity. Never mind that the government has nothing that it doesn't take from somewhere else. Private sector growth rates actually fell in the third quarter compared with the second.

This is not economic growth. No matter how many economists tell us that the storm will inspire all kinds of new and wonderful things, the first impression will remain true. This storm has been a disaster and a serious blow to the economy when we least needed it.

At the same time, the storm should remind everyone who romanticizes about the wonders of nature that there is a more fundamental truth: the whole history of humanity has mostly consisted in finding ever more effective ways to diminish the nature's threat. First came shelter, then came clothes, then came tools to kills animals for our own use, then came transportation to overcome the limits of nature so that we could travel fast on land and water.

It's true with every advance: indoor heating, air conditioning, indoor plumbing, the washing machine, chemicals to kill pests, medical advances to keep killer bacteria at bay. To a very great extent, it is the struggle away from nature that defines the idea of progress. It is only once the elements have been master that we can afford to think of the environment around us as a friend.

These are things we can learn during times of natural disaster. They are the same things we should know before the natural disaster. Only people know what's best for themselves. Only markets can deliver goods and services. Only property owners know how to assess risk. As for politicians and bureaucrats, they care only about themselves.
Governments do vast damage in normal times, and vastly more precisely when it is commonly believed that they really need to act. In all times and places, people who are determined to build and sustain a life for themselves are inhibited only by the actions of powerful governments.

The people who are suffering through the aftermath of this storm are all being reminded that the political elites are not very useful in times of crisis, and, in fact, are frequently worse than useless. Storm preparation and storm survival is our job, not theirs.

There is no better preparation for any storm than understanding economic forces that are at work at all times and places. This is where the Laissez Faire Book Club does its work, helping people to understand their world in ways that government officials cannot and will not. Join us to stay dry in this and future storms.

Sincerely,
Jeffery Tucker
CEO of Laissez Faire Books , and Primus Inter Pares of the Laissez Faire Book Club