Hurricanes and Economics

HURRICANES AND ECONOMICS

There's two things that I'm wondering about right now.

The first is the fact that economists have been wondering whether Katrina (and I suppose Rita), will have a negative or positive effect on the US economy. I, being the depressive economist that I am, was more bearish than was orignially thought. But then I ran across something on www.cafehayek.com that struck me as interesting, but was never fully explained in any of my classes. It's the idea of the Broken Window Fallacy. You can read the link if you want to know what the fallacy is all about.

But this relates to the hurricane because many prognosticators out there believe that GDP would actually increase because of the Katrina and Rita clean-up and rebuilding costs. Of course, as GDP would increase, but that doesn't make the economy any better off... or does it. Does rebuilding the same stuff, but only newer and more expensive consitute growth. The same money could be put to use elsewhere. So while the GDP numbers themselves would say that there would be economic growth, it does not seem very effecient to me. Of course, your run of the mill business person doesn't care about the Broken Window Fallacy, just whatever the Fed puts out. Like pigs to the trough.

The second issue that perturbed me was this article on cnn.com Basically, the doofus writing the opinion piece thinks that just because a bunch of people write to him and say that he shouldn't be talking about possible gas prices increases because it gives energy companies a chance to screw people over. I think I'm going to draft an email to this guy. I'm not sure how sarcastic I want to be (I was thinking about putting a business degree joke in there), but basically this is the point:

Demand Curves slope downward. In fact, using my amazing skills on MS Paint, here's a picture or two:





The first graph is a situation where demand shifts to the right for whatever reason, basically because they want to get gas NOW, rather than later. With supply fixed, for the most part, retailers charge more money because that's what the market clearing price is. If they charge less, then there's a shortage. If they charge more, then people don't buy their gas. That simple.

In the other situation, demand remains unchanged, but supply shifts backwards. This is the situation that will happen with the hurricane. Basically, the hurricane knocks out refinery capacity. Supply shifts to the left, prices increase and supply decreases. Basically, that's what happened around here. Both increases in price AND shortages. So even around here, the prices set by the gas companies weren't high enough. The other piece of evidence: there were no reports of "gouging" in the state. Nor did the local newspaper report anything either. So that settles that.

Here's a gem from his article:

Hey, what people don't know won't hurt them, right? Who needs to know about the possibility of higher gas prices?

I hope this guy is being sarcastic with this piece of commentary. It would be nice if he alluded to whether or not he was serious. If he was writing this article tongue-in-cheek, then at least he could've done a better job of saying so. If he's serious... yesh.

So this is what I'm writing to him...

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Dear sir,

I hope your article "High gas? Mum's the word" on money.cnn.com was written tongue-in-cheek. Otherwise, I would have to really question your credentials as an editor of a financial magazine. Or perhaps you never really paid attention in your microeconomics class. In either case, you are not doing anything to help the situation by driving populist fears against big, bad oil companies.

Let me illuminate the situation with a hypothetical. Suppose we didn't have any information the hurricane or where it would land. Nor does the media report on the hurricane and the damage it does to oil refineries. People go on their merry way driving the way they normally do without a care in the world. Then, the supply shock hits them and prices have to rise dramatically because everyone wants gas and there isn't enough to go around. So there are lines and prices skyrocket. Tempers flare and people are unable to get gas and do the things they plan on doing.

Compare that to a situation where people know the situation. People know that there will be shortages of gas in the future. So those people who want gas now will get gas now. Those who don't will adjust their behavior accordingly. Prices will rise gradually rather than in one sharp spike as people know what to expect and plan accordingly. Demand will increase in the early stages because people will want to get gas while they can. However, as time passes and those people get gas and adjust to the new prices, demand will decrease and prices will shift downward. Not to the point where they were before, since supplies will still be curtailed by the damage inflicted by the hurricane.

The end result is that prices are going to rise no matter what the situation is. It is simple supply and demand dynamics. I would hope that the editor of the financial section of a major news outlet would understand all of that and communicate that to the public without having to be sarcastic or pander to them.

I hope that you would issue a correction in the near future on this issue. Or at least find another job so that someone more competent can inform the public on the issues at hand.

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I think that gets my point across. I'll post whatever response he has, if there is one.