A Lot of Broken Glass

There’s an economic example often used to illustrate, among other things, how government spending affects the economy. [See here and here.]

From Greg Mankiw's blog

In short, if a vandal breaks the glass display window of a bakery, it stimulates the economy: a glazier gets, say, $500 for the work and materials to replace the window. But what we don’t see is where that $500 would have been spent if the window had remained intact. Maybe the baker could have bought a new suit, and/or hired another worker in his shop. The suit tailor and/or the new employee are out that amount of money.

There is the seen and the unseen.

So, in the aftermath of Hurricane Harvey, here in Houston, we’re looking at an estimated $30-40 billion in metaphorical broken glass, or property damage. What is going to happen next? A lot of renovation and rebuilding. In fact, it will be a boom town for renovators. If they’re mobile enough, it would be prudent for such workers to move to Houston and set up shop for the next year or so. The same is true for drywall and flooring suppliers. And furniture sales. There’s $30-40 billion here, above and beyond what the economy needed before the storm.

Jobs galore! Isn’t this great?

Ask one of those families how they feel about it. Are they better off economically by spending money on flooring, drywall, and furniture replacement—after possibly spending money on hotels or apartment rent during the rebuild, along with clothing replacement and the expense of eating out—or would they have preferred to use their money in ways they had intended before the storm? Things like a new car, education, retirement savings, a vacation?

from the southern section of my neighborhood

Even those with insurance are likely to prefer their own plans for their money, rather than the storm-caused new plans.

People who are charitably giving sense this. They wish to mitigate the damage by volunteering labor, materials, money, or other help so that the cost to the storm victims is less severe.

Let’s take a look at the volunteer labor. The professional cost for mucking out a house—removing flooring, drywall, ruined furniture, and other debris, and then cleaning, drying, and preparing the walls and floor for rebuilding—before any rebuilding is begun, so, separate from those costs—is an estimated $16,000 per house.

Does that charitable giving deprive the economy of money? Technically, it would deprive those particular professionals of money they might have made. But there is a time issue involved. Suddenly there is a shortage of companies that do this service, since in non-storm times such needs are limited to broken pipes or other hit-and-miss personal disasters. And it’s assumed that a home needs to be cleared and aired out as quickly as possible. Any home that remains waterlogged and growing mold for 30 days is likely to be a total loss.

We’re at day 19 today. Some houses are still underwater. But this time issue is why, anywhere the water has receded enough for homeowners to return, you see the debris piles along the streets. They want to give their home the best chance possible for a successful rebuild.

Volunteers are spending their time. But we’re assuming they’re spending out of their surplus. So they’re not short-changing the economy by failing to earn during those volunteer hours. Anyone who would prevent the volunteer neighbor-helping-neighbor work would be doing nothing for the available workers in that field, since they have more work than they can do already. But they would be condemning those homeowners to total loss.

So I think we can agree volunteer work after a disaster is a community good.

While we’re talking about giving, there are plenty of places to give to charity, for anyone who wishes to alleviate some of the pain. Among those that send all donations directly to those in need:

·         Rebuild Texas Fund, which Governor Abbott has endorsed.

·         J. J. Watt Foundation, which has raised $33.5 million, but will be ending fundraising Friday, September 15, at 5:00 PM.

·         LDS Humanitarian Services, which has already provided 22 truckloads of supplies in Houston, including equipment for all those Mormon Helping Hands to use. (We are still housing the generator they provided during Hurricane Ike, for use in our congregation. We shared it with neighbors on both sides during the eight days we were without power.)

Additionally, a number of people have set up GoFundMe sites, to raise money for specific people. In this kind of grassroots arrangement, you know the money you send goes directly to those who need it. I know the people involved in these two:

·         Derrick Campos Family in Houston 

·         Harvey Recovery—Tom Tidwell 

I’ve mentioned Derrick’s story and shared his photos in the past couple of weeks. He lives not far from me. Here'e Derrick talking about coming to be willing to accept this help:

   

The Tidwells live in Port Arthur. I’ve been friends of their extended family since my first year of college. Both families ended up being rescued by boat and face a long recovery. There are going to be many many others in similar situations. But I know any donation you can afford would be well spent on these families.

Back to our economic discussion. One of the reasons central planning is always a bad idea for economics is that the central planners can’t know what the needs of the individual are. They can’t make better decisions than the people earning the money and deciding how to spend it. They can’t see the unseen—the economic choices that are lost when one choice is made rather than another.

Government has its role: protection of life, liberty, and property. But its economic role is mainly to get out of the way. If only!

One way the private sector has managed disaster recovery in the past is insurance. I read this helpful note earlier today:

Most of the money from previous Texas hurricanes has come from private insurance. And, in some ways, this process of rebuilding restores a balance in the economy. For the past couple of decades, almost all homeowners have paid for insurance but few people make a claim. Most of that money sits on the balance sheet of big insurance companies to pay out future claims, and those companies often invest those dollars on Wall Street and real estate. That’s all fine—good, healthy commerce.

Now the time has come for the flow to go the other way. Big insurance companies will be paying out money to settle insurance claims, and most of that will go to working class Americans who will rebuild damaged property. Demand for labor will rise, as will wages, as the money starts to flow. The tilting of the economy away from physical labor toward the financial sector will reverse – maybe only temporarily, but it will still reverse.

In other words, insurance money has been in the economy all along; this disaster just changes where it is put to work for a while. It has given many homeowners and businesses a chance to get back to their previous economic track more quickly than if they hadn’t been putting money toward insurance all along.

What about government money? If it’s there, we’ll take it. But this same author says something that maybe ought to be obvious but isn’t:

Of course, if the federal government decides to give away money, I suppose people will sign up for it. But this madness eventually needs to end. The federal government is broke, and insisting that folks in Kansas or Vermont pay for a hurricane in Houston is silly on the face of it. This is not an invading army we’re talking about here. It’s a really bad storm. The Constitution doesn’t contain the words “storm,” “weather,” or “insurance.” Why are we continuing to twist its meaning to make Congress and the President look like heroes? If they want to help, let them help with their own time, talent, and treasure. Like the rest of us.

But we also don’t want to be suckers. If Washington DC decides not to help Houston, they should end it for everyone in the future. Which they should, in my opinion.

I’ve had good things to say about Houston Mayor Sylvester Turner during the past few weeks. But earlier this week, he kind of wiped out all that good will. He decided that now is a good time to add an 8.9% property tax hike to all Houston property owners. Rates will be charged at pre-storm property values—even though those values may have plummeted because of storm damage. Why? Because, to a Democrat, paying for government is paramount.

What will the citizens get for this? Not protection from this storm or future storms. Not greater fire and police protection. Not better roads or infrastructure. Nothing but the dubious satisfaction of getting city government fully funded before they even get back into their own damaged homes.

Was there a cost to the city caused by the storm? Yes. It was far less than it would have been without good engineering and planning, based on past storms. But shouldn’t the city economize, as the citizens have to, rather than burdening people who are already suffering financially?

Again, it’s that short-sighted economic view that sees only a chosen segment of society—in this case, city government. If we can get Houston back on its feet, and rebuilt, and economically humming along in its normal healthy way, wouldn’t that benefit the city well enough?

I’ll note that Harris County, a government entity that is larger than any local government entity in the US except possibly the City of Los Angeles, has decided to economize, rather than burden the people.

Fortunately, the mayor must go through the city council, with a final vote in mid-October. It may be that the people can be vocal enough to convince the city that now is not the time to force storm-weary citizens to cough up an additional $100 million in taxes.

So, when there’s proverbial broken glass, that temporarily helps the window repairman. That’s the seen benefit. But unseen are all the lost uses for that money. I hope we can soon get back to letting the people who earned it decide how to spend it.

Glass Breaking Fun

This past week economist Greg Mankiw’s blog posted a couple of cartoons relating to the broken glass fallacy. I summarized the fallacy last July this way:

A vandal comes and breaks a baker’s window. The baker then employs a glazier to replace the window, so the glazier has more income, which he spends to by a suit. And so on, implying that the economy is better off because of the broken window. But this looks only at what is seen, not what is unseen. The baker was building up capital to buy a larger oven and hire more workers. But he had to use the capital on the window, which he wouldn’t have had to do without the breakage. So there was a loss in the economy to the baker, to his possible employees that didn’t get hired, and to the manufacturer of the new oven that didn’t get purchased. Those losses are unseen. The economy is actually worse off because of the unnecessary glass breakage.

First there was this cartoon:

From Greg Mankiw's blog

 Then there was this follow-up:

My son Political Sphere was visiting for spring break this past weekend, and we were laughing about these cartoons (I know, our forms of entertainment are admittedly a little arcane), and he asked if I’d heard about the real life example. This happened in Arizona while he was living there, so he was familiar with it; I had to look it up. Here’s a portion of the story from January 2009:

A Maricopa County grand jury returned the Jan. 22 indictment against Troy Jason Vollberg, 34, who was arrested Friday by Scottsdale police.

The indictment contains 12 felony counts including fraudulent schemes, aggravated criminal damage and burglary in the first degree….

Those documents accuse Vollberg, owner of Tri-State Glass, of being the mastermind behind an effort nearly two years ago to bilk the Scottsdale Unified School District out of hundreds of thousands of dollars to replace broken bus windshields.

Investigators claim Vollberg paid Scott Sloan $5,000 to find a person to knock out the glass, and then paid Mike Olivares $15,000 in April 2007 to break out the front windshields of 70 school buses in a Scottsdale bus yard.

Vollberg, whose company was a subcontractor for the school district, charged the district $134,000 to repair the windshields.

Police documents say Vollberg pocketed the money and used it for a "trip to Las Vegas and new tires for his truck."

This is a real-life example of literally broken glass. Clearly the prosecution shows there is a belief by society that Vollberg’s “contribution” to the economy was not a net positive. Yes his glass repair company (or mainly himself) got a temporary net increase of $134,000, pretty significant business. He “invested” $20,000 to a couple of thugs to do the actual glass breakage, so subtract that amount from his profit, but include it as being spent elsewhere in the economy. And then he spent a chunk of the profits on a trip to Las Vegas, contributing to the tourism industry, and also purchasing new truck tires, with some trickle-down economic benefit there. All positives so far, right? Then why the prosecution?

Because he caused the school district to spend $134,000 of its budget on bus window repairs. Now, I’m often critical of the way public schools prioritize their spending, but I can’t imagine any district preferring to spend their budget on vandalism repair, for the sake of the economy, at the expense of educating children.

Later on, Vollberg “invested” $8,000 to hire a thug to break windows at a trucking company, where he got a return of $45,000 for repairs, and additionally spent a mere $10,000 for smashed bus windows—again—this time charging $270,000. It was the inflated price for repairs this time that set off the investigation that finally uncovered his window-breaking scheme. So, this one man has given us plenty of real life case studies.

If it’s not clear to you that damaging other people’s property in order to profit yourself is (and should be) against the law, you may be a Keynesian. If you believe in respect for private property, and believe the use of capital for positive ends is better than for unnecessary damage repair, you may be a free marketer (AKA classical economist).

More pertinent (and more in accord with the cartoons), Keynesians believe government ought to "stimulate the economy" by spending money somewhere, even if it means "breaking some glass" to spend it on, while free marketers believe government interference is much more likely to harm than help the economy.