Economics and Hurricanes
EC 201H
For the meteorologists we’ve all been watching so much lately, hurricanes seem to be a
great spectator event. For them, hurricanes must be what eclipses are for astronomers; a
source of new data and a demonstration of important ideas of their trade. For the rest of
us, hurricanes are pretty intriguing, but it’s intrigue that most of us would be happy to
skip, particularly those of us who have been through a couple of these things.
A hurricane is also interesting as an economic phenomenon. In the ordinary course of
things, the working of markets goes on almost unnoticed. Entrepreneurial action-planning, pricing, searching, and gambling--recedes into the background. Economic
equilibria are not unlike atmospheric equilbria; a nice place 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.
When hurricanes are in the forecast, people got to the stores to buy batteries, tarps, tape,
water, generators, chain saws and other emergency goods. When there is a serious threat
some of these goods may sell at ten to twenty times their usual rates. Yet the stores are
stocked and restocked. There are stock-outs, but the real story is how readily these goods
are available.
Hurricane Fran, which hit this area quite hard in 1996 and which most of you remember,
brought a host of amazing phenomena, some of them meteorological, some of them
sociological and psychological, and some of them economic.
Perhaps the most interesting economic aspect of Fran was the evidence of the rapid
coordination that occurred, desirable actions induced by market incentives--profit
motives. The hurricane hit on a Thursday night. By 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 all of this to happen, 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.
Another interesting group of phenomena concerned pricing behavior. For the most part,
large companies--those evil corporations we always hear about--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 prices not only attracted these service
providers, but they 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;
people had every reason to do this for themselves.
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.
In the aftermath of Fran, however, I thankful for the greed my neighborhood hardware
store owner. He was so evil as to open up at dusk, running his cash registers and lighting
on a portable generator. 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, my friendly hardware man had held to his advertised sale prices for
batteries. That meant the customers who arrived before me had no incentive to curtail
their purchases to what they needed for the emergency. Why not stock up? I’d have done
the same thing had I been there first. Had the shop owner been a bit more greedy and
pulled the sale-price 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. Following a
hurricane, it’s common to hear one or more pundits argue that hurricanes can be good for
the local economy, stimulating demand through the need for repairs. Your instinct is
probably that this is nuts. Your instincts are good. Your instincts may be sharpened by
your experience 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, Bastiat writes of some hooligan who has
broken a butcher’s window. A crowd gathers and soon gets 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 butcher 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
I’ve included 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. Good luck in coming storm. See you next week.
Some Economics of Hurricane Fran
First presented September 9, 1996
We've had a lot of weather over the last few days. We've also had a lot of
economics. Just as we can learn a lot of meteorology from a hurricane, we can 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?) 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 stocks came in to the city (Where were they before, where else
would they have gone?) to restock these stores. 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. A tree service firm that was in the neighborhood extracting
an oak from a living room, observed this work and offered him $35.00/hour to work on
Sunday and any other time that he could spare. Normally, tree workers make well 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?