Katrina and Some Economics of Hurricanes September 8, 2005

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Katrina and Some Economics of Hurricanes

September 8, 2005

Hurricane Fran hit this area quite hard in 1996. I’m sure that many of you were in this area at the time and remember it well. At the time, I prepared some materials for one of my classes that discussed how the dislocation of a hurricane displayed the working of markets.
In the ordinary course of things, the working of markets goes on almost unnoticed. Entrepreneurial action--planning, pricing, searching, and risk taking--recedes into the background. Economic equilibria are not unlike atmospheric equilbria; nice places to live but not so much to talk about. Economic equilibrium is the same damn thing, over and over. A dislocation, a hurricane for example, provides a special show.
The most interesting economic aspect of Fran was the evidence of the rapid coordination that occurred, desirable actions induced by market incentives--profit motives. Sadly, Katrina was so devastating that even market responses have been slow. Communications networks, transport facilities, retail stores, and utilities were, for at least a week after the hurricane came through, either severely damaged or under water. Also, most of the market participants—buyers and sellers—are still outside the affected areas. Even with all that, some businesses are beginning to re-establish commerce. You probably read that most of the Walmart stores in the area have reopened, although eighteen were destroyed and will not reopen anytime soon.
Fran, which seemed so severe to us at the time, was modest by comparison and the market responses to the storm were of a very different character. Fran hit on a Thursday night. By the Friday afternoon, many stores had opened, sold out of their emergency goods, and restocked those same goods. By Sunday, under clear skies, many retailers, still without power, were operating in their parking lots on generators, offering abundant quantities of saws, garbage bags, gloves, propane cylinders, leaf blowers, tarps--you name it. How did all this stuff get here? Who was in charge?
For retail stores to be restocked so quickly, some of these goods must have been on trucks, rolling toward Raleigh before the hurricane had finished with us. None of the things I'm talking about was the result of any centralized plan. All of it was independent action by individuals and companies, all in search of profit opportunities. Of course, state and federal agencies did play a very important role in the recovery, but they were not much in evidence on Friday morning, or even through the weekend. And they had little to do with providing the ordinary commodities of comfortable life.
Other interesting phenomena concerned pricing behavior. For the most part, large companies offered goods at their usual prices. Goods that had been advertised at discounted prices just prior to the hurricane continued to be sold at those discounts. But for other kinds of goods and services such as tree cutting, construction, and other private emergency services, prices rose substantially. Profit opportunities brought in tree cutters from all over the eastern U.S. It was not unusual to see private work crews from Florida, West Virginia, Pennsylvania, Tennessee, or Ohio. The high prevailing prices for services attracted these service providers in to the area. The high prices also caused customers to sort, entirely for their own self-interests, which tree work needed to be done now and which could wait a while until the crisis passed. We didn’t need FEMA officials to sort out the high priorities from the low; consumers had every reason to do this for themselves. Getting the trees off the roof would get done right now, cleaning up the back yard could wait until the emergency had passed and prices had fallen.
Economic disturbances often bring political attacks on markets. The prices that we become used to--those equilibrium prices that we talk about--take on moral overtones. We tend to think of them as correct, or fair, or just prices. Politicians can make hay by denouncing any price elevation. We hear condemnation of greed. This happened with Fran; we’re hearing it again with Katrinal.
In Fran, I was thankful for the greed of my neighborhood hardware store owner. He was so evil as to open up at dusk, running his cash registers and lights on portable generators. While I was still in a daze from what had happened overnight, he was open for business, offering many of thing things I needed to begin putting our lives back together.
Unfortunately for me, my friendly hardware man had held to his advertised sale prices for batteries. That meant the customers who arrived before me on Friday morning had no incentive to curtail their purchases to what they needed for the emergency. Why not stock up at the sale prices? I’d have done the same thing had I been there first. Had the shop owner been a bit greedier and pulled the sale tags, I might have been able to buy some D cells. No matter though, he had restocked by noon.
Another companion to a disaster is confusion regarding its economic effect. Over the next few weeks, you may hear some commentator suggest that Katrina will be good for the Gulf Coast economy, stimulating demand through the need for repairs. Your instinct is probably that this is nuts. Your instincts are good. Your instincts are also probably sharpened by our experience in North Carolina with Floyd, which dealt a terrible blow to this state’s economic well being. The commentator’s error is nicely exposited in a famous essay by the nineteenth century essayist Fredric Bastiat. In that essay, a shopkeeper’s son has carelessly broken the shop’s window. A crowd gathers and before long people get to saying that this is good news for the glazier, who will spend his windfall and provide a payday for someone else, who will in turn spend his windfall and so on. The fallacy is that the shopkeeper had other plans for the money that he’ll have to spend on the new window. The full essay can be seen at http://www.jim.com/seen.htm#BrokB
The following are some comments and questions that I wrote up for a class that I taught a few days after Fran came through. Have a look. If we have time and people are interested, we’ll talk about some of this in class. See you Monday night.
Some Economics of Hurricane Fran

September 9, 1996

We've had a lot of weather over the past few days. We've also had a lot of economics. Just as we can learn a lot of meteorology from a hurricane, we can also learn a good bit of economics. Here are some things to think about.
1. Before the power was on in many neighborhoods, and before almost anything else was open, the hardware stores were open. Who decided that this was a high priority? (Was it FEMA or any other agency?) Who organized this result?
2. These hardware stores ordinarily might sell a couple of chainsaws per week. With the hurricane, they sold out their stock in a matter of minutes when they opened Friday morning. Additional stock came in to the city to restock these stores. (Where were they before, where else would they have gone?) By the middle of the day on Sunday, there were unsold stocks on dealer shelves. How did this happen? Who organized this mobilization of resources?
3. Store owners might have easily anticipated that they would sell out of batteries, propane, chainsaws, flashlights, two-cycle oil, and so on when they opened on Friday. The few gas stations that had electric power to pump gasoline on Saturday would soon sell out of gas. But most retailers did not raise prices. They could have sold out just the same at higher-than-normal prices but they did not. Why didn't they raise prices?
4. If store owners had raised their prices on a critical item--propane tanks for example--would that action have been socially harmful or helpful? By what criterion? Who would be better off? Who would be worse off?
6. On Saturday, an acquaintance of mine was helping a number of people in his neighborhood taking down trees and clearing debris. Although he normally makes his living as a motorcycle mechanic, he is quite skillful at tree work and was taking a lead role in the cleanup operation. The owner of a tree service firm that was working in the neighborhood observed his work and offered him $50.00/hour to work on Sunday and any other time that he could spare. Normally, tree workers make less than that, but lots of people needed tree work very badly, and the owner of the tree service must have though that it would take a pretty good wage to bid this motorcycle mechanic away from his usual activities. The mechanic will work for the tree service until his motorcycle shop gets power. Is his decision to work for the tree company something that reduces the wealth of anyone in the society? Does his decision raise an ethical question? Should the tree company be prevented from paying him this high wage? Do you suppose the company is paying its regular workers a higher-than-normal wage? Should that be permitted? Should the company be allowed to charge a higher that normal price for its services?

7. One television news station reported on the problem of price gouging. They interviewed a homeowner who was quoted a price of $2200 to remove a large tree that was damaged and leaning slightly. That price seems to be way out of line with even the current crisis prices. (The homeowner did not accept the bid.) Should such prices be outlawed? Relate your answer to this question to your answers to the questions above. Who could determine whether a price should be outlawed?

8. A young couple brought a truckload of chainsaws down from the mountains and sold them in a hardware store parking lot with the permission of the hardware store (Which was out of saws but was doing a fine business in gloves, safety goggles, bar oil and rope). The price reportedly wasn't a bad price, but it apparently included enough of a premium to make the enterprise worthwhile for this couple. Who might have been helped by this activity? Who was hurt? What is your evaluation of this activity? What if the enterprise was organized not by a young couple saving up for a down payment on a house, but a large manufacturer of chainsaws?
9. Johnson County, the county just south of Wake, has just instituted price controls. Prices of essential items cannot be sold for more than their pre-Fran prices. If you lived in Johnson County, would you be pleased with this?

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