As is always the case, the economically ignorant trot out the broken window fallacy. And you can bet that there will also be idiotic complaints about “price gouging” in the coming days. I dealt with that one years ago.
[Update a while later]
Amazingly, Matt Yglesias gets it:
…more price gouging would greatly improve inventory management. There is a large class of goods—flashlights, snow shovels, sand bags—for which demand is highly irregular. Maintaining large inventories of these items is, on most days, a costly misuse of storage space. If retailers can earn windfall profits when demand for them spikes, that creates a situation in which it makes financial sense to keep them on hand. Trying to curtail price gouging does the reverse.
None of which is to say that people should be greedy all the time. Disasters really are times when people pull together and we see large and small acts of kindness that rightly inspire us. But consider that declining to raise prices in the face of spiking demand and inelastic supply is a very odd form of charity: It doesn’t create any new resources, just allocates them arbitrarily to whoever shows up first. If you feel bad about the idea of earning windfall profits off the misfortunes of others, then donate the money to charity. If that seems too impersonal, give your employees a bonus for showing up under difficult circumstances. But storm or no storm, the best practice is to try to set prices that balance supply with demand. State governments shouldn’t be trying to stop you.
Amen.
That … is amazing.
Kudos to Yglesias, I guess. (Only fair, since I damn him when he’s wrong, to praise him when he’s right.)
Robert Reich already posted a complaint about the airline companies “exploiting” passengers with $4000 tickets prices. Then, he attempts to neatly tie it into an example of how Romney’s America would be run, “Rational and efficient in terms of supply and demand, guaranteed to maximize profits, but fundamentally unfair.”. Oh boohoo, life ain’t fair. Instead of jacking up ticket prices they shoulda just had a lottery to randomly pick who gets a to fly to safety. /sarc
Are you suggesting that the inventory management argument applies to airline tickets?
Infinite seats don’t exist just because we can print more tickets.
The rising prices should allow for planes to be diverted. The people that had previously purchased a ticket for the plane that’s no longer going their way have to be ‘bought out’. Mandating ticket prices does not do this – it’s price fixing, the first refuge of the moron.
Thank you. I was thinking “well, airlines can’t afford to have planes sitting around in hangers waiting for a surge in demand”, which is the direct analogy to the flashlights. I hadn’t thought about diverting planes and canceling service to elsewhere. I concede the point, but I do wonder about the long term cost of customer fury when their flights from one weather non-affected area to anther weather non-affected area are canceled, particularly if the customers understand why their flight was canceled. Regardless of how well I was compensated, in some circumstances I might be furious, and I’d avoid that airline in the future, and I’d be loyal to the one which honored my ticket.
And yet, this is another thing for ‘the market’ to work out.
If an airline company is going to divert flights, they -can- set the threshold at: “Cost of direct buyout” + “cost of immediate PR campaign” + “Cost of completely lost business”. No, they don’t have any concrete idea what that might be.
But most of these decision-making processes are fundamentally -always- “NP-Hard”. That is (basically): They get exponentially tougher as the -numbers- of things-to-model get larger.
So 12 (or howevermany) airlines each independently figuring out how much extra they need to charge ends up almost guaranteed to be closer to the ‘minimal added cost’ when compared to one governmental edict meant to apply to all of them.
(If NP-Hard doesn’t mean anything to you, read up on “The Traveling Salesman”, and realize a -lot- of problems can be -proven- to be fundamentally the same type of problem. Then think about what happens when you start splitting the responsibility. Either as subordinates or as ‘competitors’.)
Yes, it applies Bob, but something even more fundamental applies. If I own a plane and offer a seat for a trillion dollars who has the right to tell me I have to sell that seat for less? If my price is unreasonable, I will lose the income I would get by making my price reasonable, so without help from anybody smarter and wiser and cooler and more moral than me that price is going to come down. Why would anyone else have the right to set the price for my seat on my plane? Perhaps I have children that would truly starve or employees who have children that would starve if someone else forced me to lower my price more than I am willing to lower it.
Lol, uh yes, yes I am…..
I once worked on inventory management software for airline tickets. Are you saying that has been discontinued?
Are you suggesting that the inventory management argument applies to airline tickets?
Why wouldn’t it? Planes require fuel to fly. If you think getting fuel for automobiles is difficult (lots of coverage of lines at gas stations), then its also difficult for the airports.
Airports do tend to be supplied by pipelines. However, after a natural disaster, those pipelines have to be inspected for any damage. There’s a history of pipeline failures after hurricanes. Also, you need people to do the inspections, operate pumping stations, operate the airport, and so on. Most of those people live in the area affected by the same natural disaster. Usually, not all of the employee base can just magically return to work (again, see the coverage of lines at gas stations and bridges). The employees that do show up are asked to work extra time, which includes overtime and other incentives (double pay/bonuses) to convince them to stick around (Hey, even the union guys will price gouge!) And let’s keep in mind, those people trying to escape the area are leaving those at the airport behind, while also taking away manpower that could increase services and goods if they stayed.
All of these things are the supply of goods and services, which are constrained by the damage of infrastructure caused by the natural disaster. When supply is suddenly cut, price of goods and services suddenly spike until equilibrium is reached.
As for those who get pissed off about it, then by all means, try another airline. If another airline has prepared in such a way that they can keep prices lower, then they certainly are trying to earn your business. But if you can’t find another airline with a lower price, then I suggest it is ignorance that leads to the thought the airlines are colluding to gouge customers rather than dealing with the economics of a disaster.
Robert Reich is a lummox who apparently doesn’t know the difference between first class and coach.
If you buy a ticket at the last minute only seat left is full-fare first-class, is it “unfair” that you pay for a full-fare first-class ticket? Is it less unfair if you aren’t in the middle of a disaster?
If the airline discounted that $4000 first-class ticket to $400 to please Reich, there would be many customers who wanted it. Which customer would it be “fair” to give it to? What about all the other customers who paid $400 for a coach ticket, in advance? Is it “fair” that they don’t get to sit in first class.
I’ve been in the position of needing to buy an airline ticket immediately following a natural disaster. It’s amazing how well the airline system holds up. The men and women responsible for it deserve credit for their efforts. Instead, they get slimed by Robert Reich and Jim.
I also wonder, is Robert Reich working overtime to help travelers affected by the disaster — as I’m sure many airline employees are? If not, how is that “fair”?
Next, Con Ed workers will be criticized because they are getting double overtime.
Instead, they get slimed by Robert Reich and Jim.
Huh?
Okay, which one of you clowns hijacked Yggy’s internet access and posted that uncharacteristic declaration of logic and common sense under his byline?
The fact that you consider it uncharacteristic suggests that you don’t read Yglesias very much. It’s completely in keeping with his general take on economic issues (see his “The Rent Is Too Damn High”, a book-length argument for land use deregulation).
The mixed message there is so childish.
It isn’t “greedy” to charge the maximum price that people will pay to clear the stock that you have available.
If that were the case, any price would be too high. People need those flashlights and you’re hoarding them like some sort of J… Ferengi? Oh, shame on you!
From each according to his ability, to each according to his need. Try it sometime, see how far life on Earth can resemble hell.
Meanwhile, in the Real World, the stocks of the corporations that will be doing the rebuilding or supplying the materials needed are soaring while their sales will be part of the future U.S. GDP and the workers they will hire will impact the national unemployment figures in future months.
So please continue to indulge in your philosophical economic fantasies while the smart folks make money based on understanding how the economy actually works
Some people and companies will benefit but for the nation as a whole, it’s a net loss. It’s no different than government spending. Some local people on the receiving end will benefit but before the money can be given out, it has to be taken away from the economy. That’s why government can not be a net producer of jobs.
As for this hurricane, billions of dollars will be spent to restore things to the way they were. That’s money that could’ve gone to improving productivity or creating new goods and services. Billions more will be lost due to businesses being shut down while repairs are made. During that time, employees will be out of work. Some businesses will go under completely resulting in more lost jobs.
But go ahead and show your economic ignorance. We find it highly amusing.
By Matula logic, the government should deliberately flood every city in the US. Then every part of the country could benefit.
That’s probably not feasible in desert states like Nevada, but Tom could ask his friend Harry Reid to set off a couple of nuclear bombs in Las Vegas and Reno.
“By Matula logic . . . ”
Matula logic. Heh.
Paraphrasing Clemenceau, “Matula logic is is logic as military music is to music.”
Larry,
You are assuming the same decades old technology will be used in the rebuilding. Why would it? Part of the reason Germany and Japan were so competitive in industries like steel was because they rebuilt with the newest technology after World War II.
Your are also assuming there are no slack resources when they are since we are still recovering from the Great Recession.
Its apparent that you are not up on the actual research that has been done on the subject.
Skidmore, Mark; Toya, Hideki (2002). “Do Natural Disasters Promote Long-Run Growth?”. Economic Inquiry 40 (4): 664–87.
Germany and other European countries were able to rebuild so quickly and effectively in no small part because of the Marshall Plan and other aid given by the US. From Wikipedia:
During the four years that the plan was operational, US $13 billion in economic and technical assistance was given to help the recovery of the European countries that had joined in the Organization for European Economic Co-operation. This $13 billion was in the context of a U.S. GDP of $258 billion in 1948, and was on top of $13 billion in American aid to Europe between the end of the war and the start of the Plan that is counted separately from the Marshall Plan.
The US as also instrumental in the reconstruction of Japan.
Had they been left to their own recovery, it would’ve taken far longer to rebuild. Disasters, like wars, can result in improvements in infrastructure for the effected area but on a national level (and without outside help), the losses exceed the gains.
Matula is still trapped in the world of smokestack-and-mining industry.
New York City isn’t filled with steel mills based on obsolete technology. It’s the financial center, filled with office buildings and corporate headquarters. There haven’t been a lot of major advances that make the buildings themselves obsolete.
There have been a lot of advances in office equipment, of course, but that gets upgraded on a regular basis anyway. It’s not like Merrill Lynch is still using 1950’s mainframes, which the flood will finally give them an excuse to get rid of.
I’m sure there will be some niche cases — a small shop that was still using a mechanical cash register, etc. — but trying to justify a $15+ billion expense on such cases is loopy.
“There haven’t been a lot of major advances that make the buildings themselves obsolete. ”
Well, it could drive Trump bankrupt. Hey, wait a second, maybe there is something to this whole plan.
Edward,
You are the one living in a world of smoke stacks.
Why does the NYSE even need a building? Why not move all their data to a secured cloud distributed among multiple server farms and set up virtual trading floors? Then the NYSE will be beyond the reach of any future hurricanes, floods, or other natural disasters.
In fact there is nothing but inertia keeping all the financial brokers clustered on Wall Street like Neanderthals around a fire, something which may be dawning on a number of traders as they took their laptops to a local Starbucks or McDonalds to trade when their offices lost Internet access….
I thought you would know better, Thomas. The broken window fallacy is getting to the point of cliche.
Short term economic activity doesn’t imply long term economic gain. Sure, it’s better that these companies repair and rebuild New Jersey rather than leave the place a mess. But this is a standard case of opportunity cost. If there wasn’t a disaster, then the wealth spent on disaster recovery could be spent productively in other ways that would benefit us more in the long term.
Karl,
FYI
Skidmore, Mark; Toya, Hideki (2002). “Do Natural Disasters Promote Long-Run Growth?”. Economic Inquiry 40 (4): 664–87.
Skidmore, Mark; Toya, Hideki (2002). “Do Natural Disasters Promote Long-Run Growth?”.
Well, let’s look at Japan. Japan’s GDP Growth for the 4 quarters including and after the earthquake/tsunami: -.6 average
But wait, Japan’s GDP is now booming at 3.2% growth in last quarter and expect to be 4.2% growth for the year! Matula must be right! Well, except Japan’s GDP was growing better than 4.2% annual for the year prior to the earthquake/tsunami. Growth is just as good now as it was before the disaster; except the Japanese economy had a year of zero growth. Let’s call it “Japan’s lost year”.
GDP Doesn’t track wealth. It tracks wealth generation.
An obscenely wealthy culture might have a very low or even negative GDP growth (consumables getting cheaper year-over-year).
A subsistence level tribe that discovers a method of achieving surplus might have amazing GDP growth.
The idea that moving from one of those to the other by just flattening everything is desirable… I have no words.
Al,
Not desirable, but necessary due to inertia. One of the greatest stimulus to human progress is disaster. It shakes up the status quo and allows new ideas and technology to take hold.
I don’t currently have access to this article, but the abstract indicates merely that they see an increase in the cost of labor and a decline in the value of existing capital. That’s not a net win for the economy.
Further, one already has a mechanism for eliminating inefficient infrastructure, the recession.
philosophical economic fantasies
Like only looking at one piece of a puzzle and fantasizing that you see the whole picture?
corporations that will be doing the rebuilding or supplying the materials
Case in point.
AFAIK nobody has ever said that the broken window fallacy applies to natural disasters in quite the same way as it does to deliberate vandalism. After all, if such a disaster flattens your house there is very little you could have done about it. (Except that, in areas known to be disaster-prone, building standards ought to be and in the West usually are higher. There are very few tornado cellars in England.)
Natural disasters as economic benefit are the broken window fallacy writ large. IIRC, you’ve mentioned you’re from the UK. Tell me, did England’s economy prosper after the Blitz?
“AFAIK nobody has ever said that the broken window fallacy applies to natural disasters in quite the same way as it does to deliberate vandalism.”
Yes. It’s been pointed out that deliberate vandalism is better because you had to pay someone to do it too.
It sounds moronic, because it -is- moronic. You just don’t get an actual stimulus from paying someone to dig a hole and someone else to fill it. Two people do end up with money. You do have two jobs to point to. You can enumerate how much that must have influenced the actual GDP.
But it’s still just as farking moronic as when Keynes argued for it because the opportunity cost is ignored.
Al,
But the opportunity cost only matters when you are at peak output.
The opportunity cost always matters to the individuals involved. The only people with the ability to gloss over it are the people that don’t end up actually paying it.
Destroying actual wealth is a loss. You can be a long, long way from “peak output” and -still- end up with an actual loss.
If you still actually doubt this, note that it should work perfectly well on a personal level. Are you at peak output? No? Go break your front window. For the country. At least as a thought experiment – THINK about it.
Al,
Yes, break your old window and replace it with a new one that reduces energy lost by 80 percent. And pays for itself in a few months with lower energy bills.
Sorry.
My current windows are within 10% of the top-tech-windows. It’s easy to make the radical claims about “paying for themselves in just a few months!” when you’re talking about literal antiques. And the claims also tend to be fallacious. That is: The price of the window itself is made back in however-many months. The labor is, of course, assumed to be free. The second problematic aspect is that it’s nowhere near typical for my particular situation. 1) Seattle has -low- energy. 2) Seattle has low snow, and -very- temperature extreme days.
The actual calculation, including the labor, isn’t nearly as pretty.
Going on the last estimate to fix just one of my windows (which has a leak, and I -am- tempted to just throw a rock through it sometimes – the company went bankrupt after selling it to the prior owner of my house), it would take me around 23 years to “make back” the replacement cost from energy savings.
Going for the total -bleeding- edge is also a problem. You’re overpaying.
It’s easy to make the radical claims about “paying for themselves in just a few months!” when you’re talking about literal antiques. And the claims also tend to be fallacious.
Completely agree. I looked into updating my home windows 3 years ago. Even if I took Matula’s claim of 80% improvement (intended to mean cut in) energy costs; I’m still dealing with relatively low energy bill being cut only by 80%, while also paying thousands of dollars for the new windows and installation. It would take a couple of years to recover the costs. The reality is the better windows are more likely to be very good at blocking heat, but only cut my energy bill by about 15% for AC. As my house would be too cool in the winter, heating costs would increase by 15%. There’s still a net gain since my cooling bills are higher, but now my savings is rather small. It would take decades to recover my sunken costs in replacing the windows. In the meantime, I’d need to stay in the house for those decades to recover the costs, because new windows have almost zero effect on the selling value of a home.
Fletcher: “AFAIK”
You are an honest man. Are you also a man willing to expand what you know?
The broken window fallacy applies everywhere it applies.
Larry J – The point is that rebuilding after natural disasters is something that pretty well has to be done (assuming the resources are available) and will impact on the figures for such things as GDP. The resources, in financial terms, are released from the sticky hands of the (insert expletive here) who run the financial system and into the hands of those who actually work for a living, by the simple means of insurance claims.
Opportunity cost is only relevant if the opportunity was going to be taken. Which almost certainly isn’t the case in today’s economic climate.
BTW, no, the UK’s economy was not improved by the Blitz. However, it is arguable that the even worse destruction in Germany did indeed improve its economy – by removing semi-obsolete, inefficient industrial machinery and enforcing its replacement with more modern equipment.
Ditto Japan. Who won WWII, anyway? Germany and Japan today are economic powerhouses. The UK is a basket case, keeping itself going by banking.
Yes, rebuilding has to be done. Insurance companies are forced to use money that was invested to pay claims. The insurance companies don’t keep vaults full of cash on hand. They invest in all sorts of things from stocks to bond to money markets in order to make money. Those investments were contributing to the economy (unless they were in outfits like Solyndra), so removing money from the investments doesn’t help the economy.
Germany’s economy was improved in part by money from the US in the form of the Marshall Plan. If Germany had to rebuild on its own without outside help, it would’ve taken much longer. The US gave billions in loans and grants to help rebuild Western Europe.
This fundamentally conflates ‘wealth creation’ and ‘money spent’ (along with ignoring the opportunity cost).
Simplify the board:
There is a subsistence level tribe of spear-fishermen. They all know how to make spears, and they’re managing to catch fish. They can all catch far more fish than they can eat, but why bother.
Does breaking a spear cause work? Why, yes it does. (Mayor: “I made a job!“) Does it create wealth? No, because the total wealth of the village dropped when the spear was broken. At the very best you’ve made it back to the original wealth (if you assume the resources -and- the labor was completely free).
The destruction of the spear was wealth destruction. Replacing it does generate wealth – but not more than was destroyed. After all – the endpoint is exactly where you started (minus some labor, time, and resources that could have been used for something else).
The act of pure destruction can be offset somewhat by trade. But you are starting from the bottom of a hole.
If that wealth created by trade came anywhere near the value of the ‘lost wealth’, there would be an easy way to stimulate an economy. Simply order everyone to buy a new spear. Skip the destruction step. When attempted, no one has documented significant -net- improvements.
The only reason this even seems to work is because you’re looting the -individual- wealth to prop up “the economy”. And we have decent metrics to measure ‘the economy’ – but poor metrics for ‘individual wealth’. But the wealth of the entire nation actually dropped.
Al,
You are making the assumption of a static level of technology. That is not a valid assumption in today’s world of rapidly advancing technology.
For example, when Germany and Japan rebuilt their railroads after the war they didn’t rebuild around steam engines, the rebuilt around electric and diesel.
The New York transportation system doesn’t run on obsolete steam engines, Tom. The subway, PATH trains, etc. have been electric for quite some time.
You can only stretch a historical analogy so far before it bounces back and hits you in the face.
Actually, Germany rebuilt with steam locomotives. They took delivery of their last steam locomotive in 1959. They remained in service until 1970. Or by war, did you mean the Vietnam war? Perhaps even the Cold War? Because Germany didn’t begin using Intercity-Express electric locomotives until 1985, and not in mainline use until 1989.
For point of comparison, the US was using diesel-electric locomotives just after WWI. Union Pacific was using them for regular passenger service before WWII even began. So the technology existed for Germany to use after WWII in rebuilding.
I am in no way making that assumption.
In fact, it’s -strictly- the reverse for everything but valid infrastructure.
1) I have a spear.
2) I have no spear because a hooligan broke it in the name of stimulus.
3) Unless the spear has a negative actual price, I’m in a worse off spot.
It does -not- matter how the new spear is made. It can be a -lot- cheaper – and I’ve -still- suffered an actual loss. And that ignores the entire “sentimental, antique, artifact” progression in the typical handwaving fashion of complete fungibility as always.
In the case of actual infrastructure, there is at least the plausibility of sanity in the “replace it!” approach. But just flattening everything is still provably worse. Other than ignoring my relatives starving to death, which is typical, you’ve caused the same disruption at the entrepreneurial level.
At some point, the new tech takes over regardless. Yes, Germany and Japan were able to do it quickly because the alternative was ‘no train’. But America did manage exactly that same transition without being flattened. Somehow.
Opportunity cost is only relevant if the opportunity was going to be taken.
Reconsider Fletcher. Opportunity cost always exists when there are options (and there are always options.) Meaning, almost if not always, relevant.
Realizing and seeing those options is the difference between almost correct and correct. That’s a huge difference.
If disasters actually stimulated the economy, why don’t we make them part of fiscal policy? We can’t always depend on nature to cause massive destruction when we need it. Instead, we could implement a national lottery whever the economy is weak. The “winning” city would get destroyed. We’d evacuate the people, of course, then let the military bomb the place. We’d then rebuild the city and everyone would get rich.
This would have the added benefit of providing weapons practice for the military and stimulating the economy to build the replacement bombs and missiles. Twofer!
Larry,
One reason they stimulate the economy is because of human nature. Their is an inertia in upgrading infrastructure. Look at how many buildings, bridges and roads still date to the days of the WPA. I know I attend class in four buildings at New Mexico Tech that were that old, and they are still there with kludges added to keep them serviceable in the 21st Century world.
If humans were willing to scrap out dated technology and replace it with new technology there would be less of a effect in practice. But since humans don’t there is. And what we are discussing here is what is the impact in the real world, not some hypothetical one created to argue fine points of economic philosophy.
And what we are discussing here is what is the impact in the real world, not some hypothetical one created to argue fine points of economic philosophy.
A six-hundred year old stone building retrofitted from wood to coal, then oil, then gas, and then electricity, is still superior in value to a hole in the ground.
Flattening the building does allow a more modern building. But you’re setting the value of the wealth tied up in the building as zero.
GDP doesn’t track wealth. It tracks wealth generation.
A six-hundred year old stone building retrofitted from wood to coal, then oil, then gas, and then electricity, is still superior in value to a hole in the ground.
Yes, and 1930’s buildings are usually better built than modern buildings (which tend to monuments to shoddy workmanship) — “urban renewal” hype to the contrary.
The hilarious part is that the truly old buildings had minimal windows. Because they suck heat. And if you retrofit -just- the windows, they’re quite well off.
My daughter’s school flattened itself to become All Green!!! Heating is 120% higher because there are so many more windows. Better windows – yes. Individually.
This is why I’m not as smart as other’s replying to your false conclusions. I tend to give you wiggle room by agreeing with some of what you say like, “an inertia.” Yes, there is. But it, in no way shape or form, invalidates the broken window fallacy. I’m constantly sidetracked by these irrelevancies. Yet, I always try to find the simple fundamental issues that are truth.
You wiggle and wander away from the truth. You do see man’s fallen nature. Which is good and keeps others on their toes. But I know it’s not a good trade off. Especially since you are such a statist. Just lose that and you’d be way ahead of the game.
My comment was directed at Thomas. Sorry for the confusion.
The only confusion is in wondering why you felt the disclaimer was needed.
Well, I wasn’t explicit, Al. I’m getting old timers.
Al – Said 600-year-old stone building is going to have astronomical maintenance cost. Just ask any owner of an English stately home about that one.
Quite a few such buildings do in fact have negative value – if one considers the possible market value of the building vs. the cost of restoring it to its original condition, never mind improving such things as its energy efficiency to modern standards.
If it has a negative value then replacing it with a vacant lot would be an improvement of value. Why do you need a hurricane for that?
Well, demolishing buildings costs money too. 🙂
Actually, IMHO this is one of the UK’s minor problems; the insistence on “listing” buildings of minor historical interest, thus making it near-impossible to improve an area with such a building in it. Or improve the building itself; a fair number of houses are so listed, making the restoration of such a building from dilapidated condition to livability a bureacratic nightmare.