Hurricane Disasters Fuel Bad Economics
No, hurricanes are not good for the economy. Do we really need to explain that?
The pictures of the devastation wrought by Hurricane Harvey have barely faded from our television screens (while Irma waits in the wings), but already we are seeing stories about the economic boost we can expect from rebuilding Houston.
Even aside from the massive cost in terms of human suffering, the destruction in Houston represents an enormous loss of national wealth, with estimates ranging from $20 billion to $40 billion.
Rebuilding Houston may indeed result in a temporary uptick in the statistical growth rate. But that is not the same thing as real improvement.
Rebuilding Houston will not create any new wealth; it will merely restore some of what was lost. Moreover, we can never know what might have been accomplished with the money spent in Houston if we didn’t need to rebuild Houston.
Disasters seem just about the worst possible time to discuss economic concepts. Yet for those of us who worry about outcomes rather than platitudes, it is incumbent to denounce bad ideas, and seek to propose better ones.
Natural disasters often lead to shortages of certain products, many of which might be considered essential. That does not mean we should throw out the price mechanism, which has important benefits in crises in terms of allocating scarce resources to those who value them most, and encouraging others to bring their goods to market.
Though well-intended, price gouging laws hurt more than they help.
Opponents of price gouging seem to believe that these price increases reflect sellers using their market power to unfairly profit from the disaster. In most cases, however, prices are merely messengers letting us know the relative scarcity of the good.
The result of price gouging laws is therefore an exacerbation of the cause of the surge in the first place – a greater gap between the supply and customer demand arising because new suppliers are not incentivized to meet wants and need.
In the aftermath of Hurricane Harvey, commentators have been quick to blame Houston’s lack of traditional zoning for the storm’s damage — and equally quick to minimize the various benefits that accompany Houston’s limited zoning. That’s short-sighted.
The truth is that limited zoning means more opportunity, more low-cost housing, and less politically-motivated and exclusionary policies. That’s good every day, but especially good in case of an emergency.
Houston’s lack of traditional zoning impedes its ability to act in political or exclusionary ways, and, thanks to limited zoning, Houston can accommodate housing needs more quickly and cheaply than other cities.
The large-scale federal intervention in natural disasters we saw during and after Katrina, Sandy, and Harvey is a relatively recent phenomenon. Prior to recent decades, the private sector handled much of the nation’s disaster response and rebuilding. The U.S. military and National Guard have long played important roles during natural disasters, but private charitable groups and businesses have been central to disaster response and rebuilding throughout U.S. history.
It is worth asking why the federal government feels obligated to provide flood insurance in place of the private market.
Evidence shows that the government’s role in the flood insurance market has exacerbated the damage done by catastrophic floods. By not charging the proper premiums for flood insurance, homeowners don’t make all cost-effective mitigation efforts and we see more development in flood-prone areas than would otherwise be the case.
Extricating itself from the flood insurance market would be the best thing the federal government could do in the long run if it wants to mitigate the damage caused by future floods.
