SHOOT: We seem to have lost our common sense. War, storm damage, theft and vandalism are seen to have a silver lining, because insurance money is pumped into the economy, creating more money. Really? Read this from the MarketOracle.
One more interesting feature of the Hurricane Sandy episode is that
the National Weather Center (NWC) and state governors seem to believe
economic losses are eliminated when they are paid for by insurance
companies.
In fact, I thought it was odd when the NWC downgraded Sandy from
"Hurricane Sandy" to "Post-Tropical Storm Sandy" the second it crossed
the New Jersey shore on Monday evening.
It now turns out that most insurance companies have much higher
deductibles for hurricanes than for regular storms, so the authorities
were trying to maximize the payout on voters' insurance claims.
The problem is that insurance companies are people too, even if a
quirk of the Constitution fails to give them the right to vote.
Conniving at insurance fraud by pretending Sandy wasn't really a
hurricane is NOT the ethical behavior we should expect from those in
authority.
And if you work for an insurance company, go picket the New Jersey
State House in Trenton or New York's City Hall. Mayor Bloomberg, of all
people, ought to know better!
So how big are the damages caused by so many "broken windows"?
The disaster modeling company Eqecat currently estimates the insured
losses on Sandy at $20 billion, with an additional $50 billion in
uninsured economic losses. (Those include the lost opportunities caused
by most of New York not showing up to work for a week.)
Contrary to popular opinion, the $20 billion covered by insurance are
real losses; they will be reflected in higher insurance premiums going
forward, otherwise the insurance companies would go out of business.
As a result of the higher premiums, some projects in the future will
be shelved because their cost is too high, some houses will not be built
because homeowners can no longer afford them.
You see, Keynes is wrong. The $20 billion is a real loss to the
economy, and in the long run it will not simply come out of insurance
company profits, but be passed on throughout the economic system as
higher costs-which equals less money.
Similarly, the $50 billion economic costs of the storm are real.
To take one example, if Goldman Sachs (NYSE: GS) averages $100
million every day in trading profits, then having the exchange closed
for two days will reduce their fourth quarter profit by $200 million,
with no chance of making that up.
This effect will also be reflected throughout the larger economy.
Many New York and New Jersey businesses will go bankrupt, because the
losses push them over the edge. And if the state decides to refund the
costs, the additional taxes in future years will push other businesses
over the edge as well.
Yes, the money spent on reconstruction is real, but it just substitutes for other money that won't get spent.
Maybe a restaurant is forced to rebuild using insurance money, and
now has a larger, newer building. However, apart from the insurance
premium increases discussed above, and any out-of-pocket cost to the
restaurateurs, there may have been customers attracted by the old
restaurant's charm, who will be repelled by the antiseptic new one.
Certainly if I were told I could rebuild my 1911 house with a 2013
one of equivalent size I would refuse; instead I would search high and
low for another house with as much charm as my current residence.
As in most economic matters, I am on the side of Bastiat, not Keynes.
In this case, many of the costs of Hurricane Sandy are hidden, or postponed to future years, but they are nonetheless real.
That's true no matter what guys like New York Times columnist (and Nobel Prize winner - jeez --) Paul Krugman say.
You may remember what Paul Krugman said in August last year when he
proposed that we could somehow rescue the economy by preparing for an
imaginary alien invasion, building huge laser-guided defense systems,
none of which would be needed unless aliens surprised us by actually
invading on schedule.
Needless to say Bastiat would disagree. With cool nineteenth-century
logic he would point out that whether it's an unnecessary window repair
or an unnecessary atomic ray gun,
if it's useless it's useless.
Our leaders should take Bastiat's lesson to heart, and not just when there's a hurricane.
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