Two of the biggest storms in US history — Hurricanes Harvey and Irma — have left a devastating impact on Texas, Florida, and other parts of the country. The initial trauma is behind us, but the larger question of what happens next to the US economy, and what kind of impact these massive storms will have are now hot topics for those in business media
Almost immediately economists, business journalists, and analysts have wanted to discuss who the winners and losers might be. I recently interviewed Liz Claman of Countdown to Closing the Bell on the Fox Business Network on my show, the Price of Business. One of my major concerns, and something very common in the view of many business observers, is the so called “up-side” to horrific events like Harvey and Irma. They argue, that money that otherwise would not be spent will now be used to spur the economy. This is often called the “broken window effect.” Fortunately, Claman takes a much more “real world” approach.
Taxpayers suffer with additions to the government’s near $20 trillion debt, while builders, banks, and retailers have a money making machine called natural disasters.
Claman noted that, in the short term, there is a sobering impact on the whole economy. She observed that it is common for markets to get nervous, that people think twice about expansion, those who invest on Wall Street become jittery. Should people maintain their interest in property insurance because demand for it is obviously going up or should people be worried about the financial health of these overly extended companies? There will certainly be many replacement of items after such a storm — approximately 40,000 homes were destroyed in the Houston area alone — but what items? She said that all those who are encouraged by the fact that people will be forced to buy things after a storm like this, will do so at the expense of other potential purchases or investments. It could easily translate to softer Christmas sales, fewer (or less elaborate) vacations, and many other unforeseen events. She says, in reality, much of this will only be determined in retrospect. It is safe to assume that rentals will likely grow, furniture sales will increase, and there will be several items sold that are in direct relationship to such storms. Other things are simply “wait and see.”
One of the biggest winners in such events is crony capitalism. At some point, people have got to wonder about continuously rebuilding where it is obvious they could be hit and devastated by terrible storms. People think the winners of government subsidized property insurance are homeowners. After all, the builder gets off without consequence and the homeowner gets his home and much of his or her other property taken care of with little consequence (other than lots of time). But after each of these storms, businesses rebuild in places where it is practically guaranteed they will be destroyed. Taxpayers suffer with additions to the government’s near $20 trillion debt while builders, banks, and retailers have a money making machine called natural disasters. This is the epitome of moral hazard gone awry. Instead of having every incentive to build in responsible places, builders benefit building at locations they know will likely require rebuilding. This is a government perversion of the market, and the beneficiaries of it are big business.
In the real world, if the government got out of the flood insurance business, companies would actually apply the principles of risk management and not give coverage where they know they will lose money or would provide premiums that make people think twice about buying a storm vulnerable home. Furthermore, irresponsible builders would be sued for building in such illogical places. That would give them incentives to build responsibly. Currently, thanks to so-called government insurance, people are developing a disposable attitude about their property, knowing it will only be around for a while, but government has it covered.
Our current insurance system defies reason. It is a boon for crony capitalism, but an expensive embarrassment for taxpayers who will have to pay for this irresponsibility for generations to come.