Transcript ARE disasters good for the economy?

Directions:
• Distribute the clues so that each person is holding at least one.
•Clues #1-4: Black Death, #5-8: Spanish Flu,
#9-10: Hurricane Katrina
•Share the clues in a round-robin fashion, putting each clue into
one of the following piles:
•Relevant to solving the problem
•Not helpful in solving the problem
•Not sure
•Answer the question: ARE disasters good for the economy?
•Determine the least # of clues necessary to answer the question.
•Be prepared to defend your answer & clue selection.
NO! NO! NO! NO! NO! NO! NO!
Resources are limited
Resources are necessary for production
(output ƒ resources)
Disasters increase resource scarcity
(disasters destroy land, labor &/or capital)
Output must be lower than it would have been
had the disaster not occurred
GDP
Activity Clue #9:
J.P. Morgan senior economist Anthony Chan:
"Preliminary estimates indicate 60 percent damage to
downtown New Orleans. Plenty of cleanup work and
rebuilding will follow in all the areas. That means over
the next 12 months, there will be lots of job creation,
which is good for the economy."
Terminology & Measurement:
•What do we mean by “the economy”? 2 options
•output = real GDP
•well-being” or standard of living = real GDP/capita
or
•economic growth:
•increase in real GDP &/or real GDP/capita
•???? Confusion ???? : Did he mean level or rate?
Level vs. Rate
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Time
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disaster
bottom
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Time
D
disaster
R
recovery
O
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Q
Time
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Time
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Time
Activity Clue #9:
J.P. Morgan senior economist Anthony Chan:
"Preliminary estimates indicate 60 percent damage to
downtown New Orleans. Plenty of cleanup work and
rebuilding will follow in all the areas. That means over
the next 12 months, there will be lots of job creation,
which is good for the economy."
Production Possibilities Frontier (PPF)
Assumptions of the Model:
1. All resources are used to produce
the 2 categories of products on the X
and Y axes
2. At all points on the curve, all
resources are fully employed, given
the available technology.
(we choose from the possibilities)
x
Production Possibilities Frontier (PPF)
Assumptions of the Model:
3. Technological improvements or the
discovery of new resources makes
more production possible. The
curve moves “out,” to the right.
4. Destruction of resources or
technology makes less production
possible; the curve moves “in” and
“down,” to the left.
Productivity: output per unit of input
ƒ { human capital, physical capital }
• skills & talents
• buildings
• education
• machines & tools
• training
• technology
Labor Productivity: output per person-hour
ƒ {availability of capital}
Effect of population change in economy
with little capital
Capital to Labor Ratio
capital to labor
ratio falls
capital to labor
ratio rises
capital to labor
ratio falls
capital to labor
ratio rises
capital to labor
ratio falls
capital to labor
ratio rises
capital to labor
ratio falls
capital to labor
ratio rises
capital to labor
ratio falls
capital to labor
ratio rises
capital to labor
ratio falls
capital to labor
ratio rises
capital to labor
ratio rises
capital to labor
ratio falls
Tseax Cone Explosion: circa 1750
NO! NO! NO! NO! NO!
•Resources are destroyed
•Total output ( real GDP) falls
the PPF always
shrinks
economic “well-being” standard of living (real GDP/capita)
When capital to
labor ratios rise,
real GDP/capita
may rise even as total real
GDP falls
Activity Clue #9:
J.P. Morgan senior economist Anthony Chan:
"Preliminary estimates indicate 60 percent damage to
downtown New Orleans. Plenty of cleanup work and
rebuilding will follow in all the areas. That means over
the next 12 months, there will be lots of job creation,
which is good for the economy."
Questions to Ask:
•Is this a credible source?
•If so, are the standards for comparison specified?
(What are you measuring?)
“There is only one difference
between a bad economist and a
good one: the bad economist
confines himself to the visible
effect; the good economist takes
into account both the effect
that can be seen and those
effects that must be foreseen.”
“The Broken
Window Fallacy”
Suppose James Goodfellow’s
son breaks a window.
"It's an ill wind that blows nobody some good. Such
accidents keep industry going. Everybody has to make
a living. What would become of the glaziers if no one
ever broke a window?"
. . . Suppose that it will cost six francs to repair the
damage. . . . The glazier will come, do his job,
receive six francs, congratulate himself, and bless
in his heart the careless child. That is what is
seen.
But if, by way of deduction, you conclude, as
happens only too often, that it is good to break
windows, that it helps to circulate money, that it
results in encouraging industry in general, I am
obliged to cry out: That will never do! Your
theory stops at what is seen. It does not take
account of what is not seen.”
It is not seen that if he had not had a
windowpane to replace, he would
have replaced, for example, his wornout shoes or added another book to
his library.
Let us next consider industry in
general. The window having been
broken, the glass industry gets six
francs' worth of encouragement; that
is what is seen.
If the window had not been broken,
the shoe industry (or some other)
would have received six francs' worth
of encouragement; that is what is
not seen.
. . . Destruction is not profitable.”
He Should Know Better:
"Ghastly as it may seem to say this, the terror attack . .
. could do some economic good." [. . . destruction will
stimulate the economy through business investment in
rebuilding] .
Paul Krugman, Princeton University
New York Times, Sept. 14, 2001
Bastiat Hasn’t Been Forgotten:
We know this has to be fishy just by asking: Would there
have been even greater "economic good" had the
terrorists succeeded in destroying buildings in Los
Angeles, San Francisco, Chicago, Philadelphia, Boston
and all other major cities? Of course, you and I know that
is utter nonsense. Property destruction always lowers the
wealth of a nation. I hope one of Krugman's students asks
him, "If property destruction is good for the economy, why
aren't Beirut and Belfast boom towns?
Walter Williams, George Mason University
http://www.jewishworldreview.com/cols/williams100401.asp
"If property destruction is good for the economy, why
aren't Beirut and Belfast boom towns?”
Not Everyone Is Hurt By Disasters
Fallacy of Composition: To erroneously assume that what
is true of the whole is true of an individual.
Economic change creates winners and losers.
Lesson 2:
•Prices & information
•Supply shocks
•Consumption shocks


Scarcity IS
Scarcity requires rationing – the question is
not whether to ration, but which method of
rationing to use addresses scarcity.
Guideline for choice among alternatives:
•Which provides us with the greatest excess of benefits
over costs?
•(or, another way to say it is, “Which best addresses
scarcity?”)
What markets do best:
1. Transmit information to decision-makers
2. Direct resources to their most highly valued
uses
3. Encourage the least-cost use of resources,
including human time and effort
Frederich von Hayek:
The essential task of economic systems:
rapid adaptation to the changes in the particular
circumstances of time and place
The nature of knowledge and information:
information about the particular circumstances of
time and place is localized and widely dispersed,
BUT, unlike central planners,
economic decision-makers in markets only
need SOME of that information
“Assume that somewhere in the world a new
opportunity for the use of some raw materials, say
tin, has arisen, or that one of the sources of supply
of tin has been eliminated. It does not matter . . .
which of these two causes has made tin more
scarce. All that the users of tin need to know is
[what the higher price tells them—]
The whole acts as one market, not because
any of its members survey the whole field . . .
[but because] individual fields of vision
sufficiently overlap so that through many
intermediaries the relevant information is
communicated to all.”
1.
Relief work
clearing debris and
reaching coastal
communities in
Banda Aceh was
delayed until what
could be acquired
after the 2004
Asian tsunami?
2.
If you had been in
charge of setting
up a survivor
daily-supply store
after Hurricane
Katrina, what 3
items would you
have stocked?
3.
If you had been in
charge of taking
care of displaced
pets after
Hurricane Rita,
what non-food
item would you
have taken to
Houston in your
supply truck?
4.
What relief item
is most likely to
be oversupplied
after a disaster?
5. You’re in charge
of emergency
medical care in
Haiti. What piece
of equipment will
you need to
function in this
impoverished
undeveloped
country?
6. You’re in charge of
helping people who
need to communicate
with friends and
relatives after
Hurricane Sandy.
What equipment will
meet immediate
needs until
infrastructure can be
repaired?
Kathy
Market Analysis: Supply Shock
1.
2.
3.
4.
Disasters destroy
resources.
Less can be produced;
output falls.
Price rises.
Quantity purchased falls.
Safter
$
Sbefore
D
P
Q
before & after
Market Analysis: Supply Shock
Higher prices have 2
effects:

Consumers buy less.
(They substitute.)

Producers offer more
for sale. (They also
substitute.)
Safter
$
Sbefore
P
D
before & after
Q
Question: In a disaster, is this a good thing or a bad thing?
Market Analysis: Consumption Shock
1.
2.
Disasters destroy resources.
Demand shifts because of
changes in the prices of
substitutes. (ice for
refrigeration, for example
3.
4.
S
$
Price rises.
Greater quantity (of ice) is
offered for sale.
before & after
Dafter
P
Dbefore
Q
Market Analysis: Consumption Shock
S
Higher prices have 2 effects:

Consumers buy less.

Producers offer more for
sale.
before & after
$
Dafter
P
Dbefore
Q
Question: Is that a bad thing for disaster victims? (in
general? individually?)
2nd Question: If it is, what can be done to help them?
Profit is the motivator: Markets don’t wait
for disasters; they prepare.
•State Farm Insurance
•Wal-Mart
•Home Depot
•Fed-Ex
•Black & Decker
•Disaster-preparedness
industry – because
there’s profit in doing so.



The housing market after the Great Chicago
Fire of 1871
Wal Mart, Home Depot, & State Farm
Insurance after Hurricane Katrina
Market allocation of gasoline after Hurricane
Katrina
“The Gas Price Story of
Hurricane Sandy”:
Markets emerge, even
when you try to stop
them. And they work.
http://lfb.org/the-gas-price-story-of-hurricane-sandy/
article
http://lfb.org/today/the-gas-price-story-of-hurricane-sandy/
video
http://www.youtube.com/watch?v=USG7j8bP_l4
Thru 7:30
http://www.learnliberty.org/videos/price-gouging-immoral-should-itbe-illegal/

Markets can do what they do best – whether there
is a disaster or not:
◦ communicate information about relative scarcities
◦ use price signals to allocate goods, services, and resources
to their most highly valued uses
 (What about “price-gouging”? Activity this afternoon.)
Caveat:
Markets can only do what they do best IF the rules
of the game allow them to do so.
. . . Lesson 3
Market for Thing-a-ma-jigs
How to Play…
BUYERS
Goal: PROFIT
• Each buyer will have only one buyer card at a time. The card will allow you to
buy ONE thingamajig and will tell you how much you value it. To make a
“profit,” buy at a price lower than the price shown on your card. If you buy at a
higher price, you suffer a loss.
• DO NOT REVEAL THE PRICE.
• Record the buyer card price on your student score sheet.
• When the round starts, try to buy below your buyer-card price – the lower, the
better. (You may buy at a price higher than that on your buyer card, but note
that this will reduce your “profit” for the round.)
• When you make a purchase, record the transaction price on your score
sheet. Then, turn in the buyer card and get another buyer card from the buyer
pile.
How to Play…
Sellers
Goal: PROFIT
• At the beginning of each round, each seller will be given
an inventory of Thingamajigs and a role card with the cost
per thingamajig. To make profit, sell at a price higher
than the cost. If you sell at a lower price, you suffer a loss.
• DO NOT REVEAL THE PRICE.
• Record the seller card price on your student score
sheet.
How to Play…
BUYERS & SELLERS
• All stores are open to all buyers.
• When a buyer and seller agree on a price, they record the
transaction on their transaction records, and the seller
gives the Thingamajig to the buyer.
• The BUYER must then report the transaction by
turning in the Thingamajig card to the person keeping
the Market Tally in the front of the room. The buyer
may then exchange his buyer card for another and try to
make another purchase.
How to Play…
BUYERS & SELLERS
• When the teacher says “Start,” sellers and buyers are free
to move around the room and to make transactions with
one another. Any seller may talk with any buyer.
• Both buyers and sellers are free to make as many
transactions as they want in a round. Buyers, remember
to turn in your Thingamajig card to the tally keeper and get
a new buyer card after each transaction.
• During the game, keep track of your progress on the
student score sheet. Compute your gains and losses by
taking the difference between the price on your buyer or
seller card and the price of the transaction.

ROUND 1
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ROUND
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http://www.youtube.com/watch?v=R6ojYtKazgQ