Arnold Kling  

Hurricanes and Broken Windows

Tax Reform... Single Tax Rate...

Walter E. Williams writes,

Why are Florida's hurricanes a "plus"? It's simple. According to St. Petersburg Times reporter Joni James, "Construction creates thousands of jobs, insurance provides for billions in consumer purchases, and new facilities built to higher standards might help offset future storm-related losses."

...Bastiat wrote a parable about this that has become known as the "Broken Window Fallacy." A shopkeeper's window is broken by a vandal. A crowd forms, sympathizing with the man, but pretty soon, the people start to suggest the boy wasn't guilty of vandalism; instead, he was a public benefactor, creating economic benefits for everyone in town. After all, fixing the broken window creates employment for the glazier, who will then buy bread and benefit the baker, who will then buy shoes and benefit the cobbler, and so forth.

Those are the seen effects of the broken window. What's unseen is what the shopkeeper would have done with the money had the vandal not broken his window. He might have employed the tailor by purchasing a suit.

I think perhaps Florida could benefit from the hurricane if (a) much of the insurance costs are borne by people outside of Florida and (b) if the hurricane causes Floridians to spend relatively more on local services and relatively less on "imports" from the rest of the country.

For Discussion. How likely is my scenario, and would it really improve Florida's economy?

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CATEGORIES: Economic Education

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COMMENTS (14 to date)
A reader writes:

I don't see point (b). Are you implying that Floridians are better off (other things equal) by restricting imports ?

You're forgetting (c): hundreds of millions of dollars of Federal aid.

James Erlandson writes:

(a) Insurance money flowing into Florida from Nebraska and Ohio would certainly benefit the recipients. However, that's not how insurance works -- not for long anyway.

The (incremental) cost of property insurance attributable to potential hurricane damage is borne by the insured in Florida and Texas and other hurricane prone states. More simply, if the probability of your $100,000 house being blown away is 100%, your premium will be $100,000. If the probability is 20%, your premium (and that of your four neighbors) will be $20,000. If the insurance company tries to lower your premium to $10,000 and make up the difference by raising rates in Nebraska and Ohio, he's never going to sell enough insurance in Nebraska and Ohio to make it work.

Premiums that pay for hurricane damage come from hurricane prone states.

(b) Re-read the chapter on free trade. Am I better off manufacturing roof shingles or renting rooms on the beach and planting tomatoes? Its not likely that the recent storms (hurricanes were blowing through Florida long before Mickey Mouse got there) will make a big change in how the economy makes money.

Lawrance George Lux writes:

You forget such activity is Capital replacement, and do not factor in lost production incited by the Capital loss. The Insurance from out of state is neutral, because it simply returns Florida to previous Capitalization levels. The second (b) becomes negated because of loss of initial employment. lgl

PELLUCID writes:

This is a trick question, right? Maybe you are trying to make your students think??

Hurricanes destroy valuable things. This is never good for the local economy, even if outsiders donate lotsa goods and labor. Sure, everybody is as busy as a one-armed paper hanger, but overall you're tireder and poorer once everything is repaired.

Trust me on this one, I went through the eye of Andrew in '92 and have no desire for a repeat!

Capt. Bob Knaus

Nick Schulz writes:

Ah, the seen and the unseen. How's this for unseen. I had a guy from a fence company come out to my house to discuss getting a new fence. As it turns out, wood is really expensive right now since it's all going to Florida. So I held off on purchasing a new fence -- my fence is literally unseen.

p writes:

The hurricanes will be a net loss for Florida. First, the huuricane destroyed property that had economic value. Reconstruction of that property results in merely replacing property. There is also an opportunity cost associated with redeploying the capital. Second the hurricane will likely increase insurance prices and thus push down real estate prices. Thus Flodida as a whole is worth less.

Brad Hutchings writes:

Florida would be much better off enacting a "Geraldo Tax", but calling it a use fee. Anyone would be free to come down and film themselves being beaten down by rain and perilously close to being blown away by Cat 5 winds -- if they will pay a $10,000 permt fee.

Strangely though, Prof Williams is making a case for signing Kyoto. By signing it, we will reduce the number of horrible hurricanes that are reported on television each year. At least, that's how I understand the issue.

skh writes:

Huh? Kyoto restricts weather event reporting on television? News to me.

We Floridians ARE spending relatively more than normal on local services, but not much more. The reason for that is the service industry here is normally near capacity (I don't know that as fact, but I do have friends in every spectrum of the construction trades, and they were all working 50+ hours/week BEFORE Ivan). The local roofers can't shingle enough roofs to meet the demand, so people from as far away as Minnesota are here reparing the damage. We simply can't perform all of the work.

Here in Pensacola, the majority of the clean-up effort was/is performed by companies from out-of-state. The major contract holder is from Alabama. That's big money, too...I read $100 million for city and county rights of way alone.

The situation may be a bit different down south, but I'd think that it probably is pretty much the same story.

Tracy writes:

If hurricanes or other natural disasters lead to people working longer hours than normal and getting paid for them (not just builders but civil defence personnel, newsreporters, etc), you'd expect market incomes to increase and therefore GDP to increase compared to what it would otherwise be.

Such an increase of course is not the same as an increase in the total well-being of the population, as presumably in the absence of the hurricanes people would have worked shorter hours, and their extra work is merely protecting lives and property and returning things to normal rather than increasing overall wealth.

Rigoberto Duodena writes:

Anecdotally, the unusual hurricane season has been serious setback for Florida. In addition to the distortion of the construction market, a large proportion of the state's citrus and fresh produce crop was destroyed (sales never to be made) distorting prices on what is left, further reducing sales.

Many conventions have cancelled, with attendant loss in restaurant, hotel, and tourist attraction business. Many "snowbirds" significantly delayed their returns here, although the election may have played a role in keeping folks back in their home states.

As far as insurance goes, after Hurricane Andrew the Florida legislature raised the damage deductible significantly, ensuring much or most of the costs of the summer storms stay right here in state. Allstate has stopped writing new policies pending the legislature's review of insurance, damping what was a robust building season here.

Also, please remember that hurricanes in the mid-20's destroyed the first Florida economic boom and proved to be one prop kicked out from under the US economy leading up to the Great Depression.

Hope no one seriously sees the 2004 hurricane season as anything other than a rocking, rolling disaster.

New to Econ writes:

As I see it, the question about the net gain or benefit is erroneous. The question might need to be, Is it really a gain?

As in this case - "What is seen, What is unseen", Bastiat sets a different tone than just bean counting. Not only did he consider the exchange of the capital, livelihoods sustained, and services provided; he looked to the transcendent truths about the workings of economy and capital and their relationship to morality. Then he showed how the immoral acts negatively effect the economy - never positively.

Thus, with this situation, we should be more inclinded to ask... Were the benefits, if any, moral? If so, then the exchanges will be beneficial. If not, the exchange was a very huge scale of trade for a loss. Ultimately, it is - One window destroyed, one suit unpurchased.

But this scenario is about a hurricane, not a delinquent youth breaking a window.

As for the ideas about it ever right for an individual to force his neighbor to pay for his unfortunate circumstances? If not, Is it moral for those in Neb. or some midwest state to have their premiums increased to subsidize the insurance for another?

What about the intrastate (closed border) vs interstate (free trade) idea that is being proposed???

Sounds like the crazy idea that foriegn trade is bad for our US economy. What if it is better to import some products? Should Floridians suffer cost increases because they want locals only????

How are my thoughts Professor Kling?

Bill Denman writes:

Destroyed property never benefits society. The whole point made by Frederic Bastiat was that the time and energy used to replace destroyed property could be used to create NEW property that WOULD benefit society. Thus destroying the time, energy and natural resources that was necessary to build homes in Florida is gone forever and replacement will divert economic production that could have been applied to creating new wealth. Under the "broken window" theory, everyone would be better off if the hurricane had destroyed the entire United States. Then we could go back to the cave man days and start all over again. Wouldn't that be wonderful!!!

Clint writes:

FWIW, hurricane frequency has been decreasing for 50 years, with no signs of abatement. While the storms themselves *might* increase in intensity, there's little evidence to suggest that activity will increase. To those of us in Florida that's cold comfort this year, but there it is.

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