There is nothing more permanent than death, taxes, and economic fallacies purported before, during, and after a natural disaster. Whenever a hurricane, tornado, wildfire, or some other tragic natural event occurs, you will typically come across two economic arguments that are not only iniquitous, but also erroneous: price gouging and destruction will create prosperity.
This was on full display recently when Hurricane Lane made landfall in Hawaii. The strongest hurricane in the Pacific Ocean in more than a decade, the weather event triggered mudslides, fires, flash floods, and heavy flooding in many parts of the island. The Category 3 storm, which has so far dumped 52 inches of rain, has now been downgraded to a tropical storm and the worst appears to be over.
Right on cue, public officials are telling reporters at photo-ops that they will not tolerate acts of price gouging. Likely because the natural disaster is still ongoing, we have yet to hear the Keynesian wails of how Lane is going to lead to job creation and put more money in the pockets of Hawaiians.
But we will. Don’t you worry.
So, why is price gouging wrong and why are broken windows a form of economic stimulus? Price gouging is not wrong and broken windows do not stimulate the economy.
Virtues of Price Gouging
The Department of Commerce and Consumer Affairs announced that it has received a handful of complaints from the public about skyrocketing prices for essential goods. Under state law, businesses are prohibited from raising the price of food, water, gasoline, batteries, and ice during a declared disaster or emergency situation.
But state authorities are wasting their time. They would be better off pinning these retailers with a solid gold medal when everything subsides. These are the heroes of the day who are only being socially and economically responsible – they are coming to the aid of their fellow man.
Throughout the chaos, there will inevitably be a spike in demand for a product, whether it’s gasoline or bread, but supplies have yet to adjust accordingly, so prices will spike to ensure inventories are replenished in time. Should prices be capped or prevented from adjusting to what the market dictates, then there would not be an incentive for businesses, entrepreneurs, and average folk to meet the demand.
How many people do you think will grab several power generators, drive eight hours through torrential rainfall, and deliver the generators to those in need? Indeed, there will always be altruistic individuals and merchants, but not enough to meet the immense demand.
Moreover, price gouging will encourage conservation of scarce items.
Should cases of bottles of water surge from a couple of bucks to $20, then two things will occur: the consumer will purchase less and conserve more – you’re not going to see homeowners suddenly wash the floor or take a shower with their finite water supplies. This means more supply.
One more thing: Should the price-tag for a crate of water suddenly soar, then those wanting to make a profit will take a risk in the deplorable weather conditions and deliver the water to the needy public.
Anti-price gouging laws are morally reprehensible and represent everything wrong with government. Rather than aiding as many people as possible, politicians want to ensure equal misery for all.
Broken Window Fallacy
A cornerstone of Keynesian economics is disseminating the false idea that widespread destruction will spur untold prosperity. This is the basis of the Second World War; it has long been stated that the war ended the Great Depression, when it was the end of the war that really ended the depression.
Paul Krugman, the Keynesian it-girl, made this theory famous when he appeared on CNN in 2011 and declared that a space alien invasion will boost gross domestic product (GDP) – he ostensibly learned this from an episode of The Twilight Zone. He has since doubled down on the argument, writing in 2015 that the French terrorist attacks would be great for the national economy. Krugman has recently backed off from these ludicrous concepts, likely fearful of the ridicule, but the Internet remembers forever.
Others have, unfortunately, followed suit. In the aftermath of Hurricane Sandy in 2012, experts contended just how beneficial the storm, which killed 233 and caused $70 billion in damages, would be to the U.S. economy.
Here we are again. Officials are still estimating the damage from Hurricane Lane, but it is potentially in the billions, like any other major weather event. But Keynesians are hyperventilating at this point by the mere possibility of massive property damage. Why? Prosperity! Jobs will be created, insurance companies will be held liable for exorbitant sums, households will need to rebuild, and small businesses need to start from scratch.
This is detached from reality.
French economist Frederic Bastiat debunked this concept in his famous 1850 piece, “That Which is Seen, and That Which is Not Seen.” In the first part of the eminent work, Bastiat writes about “The Broken Window”: A shopkeeper discovers his windows have been broken and now he needs to hire someone to repair the damage. The local townspeople are distressed by the discovery, but they say that it will at least help the economy because the businessowner needs to spend money to repair the windows.
Identified as the Broken Window Fallacy, Bastiat asserts that if the windows were never broken, then the shopkeeper would have the money to spend on a new tailored suit, a ticket for a classical concert, or the latest novel penned by Fyodor Dostoevsky – all with his store intact.
But, according to Keynesians, we should firebomb factories and demolish stores. Only then can we be a wealthy society and end all slumps!
Abandoning Basic Economics
Legendary economist Murray Rothbard wrote in 1995’s Making Economic Sense:
“It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a ‘dismal science.’ But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.”
And this is the problem with government in general. In the aim of appearing benevolent, federal, state, and local officials will pass laws, ordinances, and regulations that serve as hindrances to human progress. What’s worse, they defy elementary economics. It is neither munificent nor compassionate to ignore basic economic principles. It’s time to stop getting our economics from The Twilight Zone and start getting it from Human Action.
What do you think about price gouging and the Broken Window Fallacy? Let us know in the comments section!