HURRICANOMICS
THE NEFF ZONE -- BY JIM NEFF
CADILLAC NEWS -- SEPTEMBER 23, 2017
I know “hurricanomics” is not a real word. But in the wake of hurricanes Harvey and Irma, plus who knows how many more in the two months yet to go in hurricane season, perhaps new terminology needs to be invented.
The economic devastation of these storms will affect the entire nation for years to come. “There's no economic silver lining to these hurricanes. Experts who say recovery will boost U.S. growth are overlooking their costs.”
When considering recovery efforts, looking past the immediate situation is a key. “Economically speaking, it’s great news that all this damage in Texas and Florida needs to be fixed, right? Not only does this mean big bucks for cleanup crews, but think of all the money that street sweepers, construction workers and Home Depots will rake in.”
In the long term, however: “Replacing something that has already been purchased is a maintenance cost, not a purchase of truly new goods, and maintenance doesn't stimulate production. After the fact, there might be an improvement for that immediate area, but it doesn’t account for all the economic activity lost in the process.”
A column in the Boston Globe tacked this subject. “It never fails. A terrible disaster wreaks havoc and ruin, and is promptly followed by experts insisting that the devastation will be great for the economy. Could anything be more absurd? The shattering losses caused by hurricanes, earthquakes, forest fires, and other calamities are grievous misfortunes that obviously leave society poorer. Vast sums of money may be spent afterward to repair and rebuild, but society will still be poorer from the damage caused by the storm or other disaster. Every dollar spent on cleanup and reconstruction is a dollar that could have been spent to enlarge the nation’s reservoir of material assets. Instead, it has to be spent replacing what was lost. It is the tragedy of vanished wealth and opportunity, to say nothing of immense human suffering.”
This is not a new economic concept. The “broken window fallacy” dates back to the mid-1800s. Frenchman Frederic Basiat was its author. The Library of Economics and Liberty recognizes Baisiat as “the most brilliant economic journalist who ever lived.” (http://www.econlib.org/library/Enc/bios/Bastiat.html)
Bastiat used the parable of a broken window to point out why destruction doesn't benefit the economy. “In Bastiat's tale, a man's son breaks a pane of glass, meaning the man will have to pay to replace it. The onlookers consider the situation and decide that the boy has actually done the community a service because his father will have to pay the glazier (window repair man) to replace the broken pane. The glazier will then presumably spend the extra money on something else, jump-starting the local economy. The onlookers come to believe that breaking windows stimulates the economy, but Bastiat points out that further analysis exposes the fallacy. By breaking the window, the man's son has reduced his father's disposable income, meaning his father will not be able purchase new shoes or some other luxury good. Thus, the broken window might help the glazier, but at the same time, it robs other industries and reduces the amount being spent on other goods. Moreover, replacing something that has already been purchased is a maintenance cost, rather than a purchase of truly new goods, and maintenance doesn't stimulate production. In short, Bastiat suggests that destruction - and its costs - don't pay in an economic sense.” (http://www.investopedia.com/ask/answers/08/broken-window-fallacy.asp)
Now add to this (that destruction does not stimulate the economy), how the hurricanes affect us here in Northern Michigan even though we are miles and miles away from Texas and Florida.
“Motorists and homeowners throughout Texas and Florida as well as those who live anywhere from Alabama to Wyoming could see their premiums rise, as insurance companies pay out billions of dollars to customers whose properties were destroyed or damaged. The estimated U.S. insured losses, excluding any National Flood Insurance Program claims, are $20 billion to $25 billion from Harvey and $40 billion to $60 billion from Irma, according to JLT Re, a global reinsurance brokerage and consulting firm.” (https://www.usatoday.com/story/money/2017/09/15/hurricanes-could-push-up-insurances-rarteshomeowners-auto-insurance-rates-could-rise-tx-fl-and-beyon/653203001/)
In terms of auto insurance, did you know that Geico is the number two insurer in Texas and the number one in Florida. Warren Buffet, who owns the company, figures losses will be about 50,000 cars in Texas. Florida could be worse because Geico has 26 percent of the auto insurance market there. How those losses will be absorbed by the company and its customers remains to be seen. (http://www.investors.com/news/warren-buffett-hurricane-harvey-was-worse-than-irma-for-car-insurer-geico/)
As for the insurance of homes in the affected areas, an article in Florida's Treasure Coast Newspaper posed a logical question. “Why do we continue to allow new construction in such vulnerable areas?”
The article went on to observe: “Barrier islands are, as their names imply, barriers that protect the mainland. When you make your home on one, you run the risk of living on shifting sands. Can we do better about new construction? Where homes are lost to storms, can we rebuild smart? How can we prevent taxpayers from subsidizing the protection of waterfront mansions? In 2012, the Federal Emergency Management Agency paid $3.2 million to physically raise 11 homes in the wealthy coastal town of Sewall's Point so they would be less vulnerable to flooding. How many more homes will government money pay to protect?” By the way, that “taxpayer money” does not come from just Texas and Florida. It comes from every taxpayer in the United States. (https://www.tcpalm.com/story/opinion/columnists/eve-samples/2017/09/14/eve-samples-after-irma-time-talk-limiting-coastal-construction-florida/662785001/)
In short, there's not much good that comes from a disaster such as a hurricane. Truth be told, there isn't much you can do to protect your car during a disaster. Michigan residents would be in a similar pickle if all our cars were buried under forty feet of snow.
Building homes in dangerous places is perhaps something that deserves more consideration. As one “hurricanomics” article pointed out: “The only economic good to come from Hurricanes Harvey and Irma would be a remedial course in basic common sense.”
Jim Neff is a local columnist. Read NeffZone columns online at CadillacNews.com and NeffZone.com/cadillacnews.