Many in the press are of the
belief that the destruction caused by Katrina and Rita will
cause the economy to expand at an accelerated rate, based
on jobs created and profits from re-construction. In 1848,
Frederic Bastiat, a French economist (no that’s not
an oxymoron), postulated that replacing destroyed property
will not boost the economy. His example was of a shopkeeper
whose son broke one of his store windows. People consoled
the shopkeeper by telling him that the broken window would
cause money to circulate through the glazier who would be
paid to replace the window. The money the shopkeeper had to
spend to replace the window could have been spent elsewhere.
In Bastiat’s example, for a new pair of shoes. This
would have been more enjoyable to the shopkeeper, and in addition,
if the window was not broken he would still have the enjoyment
of that also. In Bastiat’s opinion, “To break,
to spoil, to waste is not to encourage national labor, or
more briefly, destruction is not profit.”
Bastiat also writes about what is seen and what is not seen.
We have two types of financing for rebuilding in the wake
of the hurricanes. Government funding and insurance funding.
Government spending will be targeted at short-term rescue,
recovery and repair. This is what is seen. What’s not
seen is money coming from the insurance companies. Some of
this money will be spent on repairing or rebuilding small
businesses damaged in the storm. More will be spent replacing
appliances, clothes, automobiles and the like. This money
will be more permanently stimulative to the economy. Private
enterprise has the knowledge and ability to rebuild efficiently,
and as this is risk money, it will not be wasted. Raising
taxes to pay for reconstruction would be a bad idea. This
also is what is not seen. Taking money away from the consumer
would negatively impact the economy.
As to how long it will take for this reconstruction, the
answer is less time than anyone may think. In 1995, a 6.9
magnitude earthquake rocked Kobe, Japan. The quake destroyed
the port and more than 100,000 buildings. Most thought it
would take years or even decades for Kobe to recover. Within
eighteen months manufacturing was at 98% of where it would
have been without the quake. Professor Horwick wrote in Economic
Lessons of the Kobe Earthquake: “Destroy any amount
of physical capital, but leave behind a critical number of
knowledgeable human beings whose brains still house the culture
and technology of a dynamic economy, and the physical capital
will tend to re-emerge almost spontaneously.” In addition,
private enterprise will rebuild more efficiently and be more
economically viable than in the past with modern technological
advances put in place.
What will be the impact of inflation on this reconstruction?
Not as much as one might think. Higher costs in one area,
gasoline for example, leave less money to bid up prices in
other areas. We have been down this road many times. Consumers
are already adjusting. Sales of gas guzzling SUVs are dropping
while sales of hybrids are accelerating. Thermostats will
be turned down this winter, and consumers will spend more
on home entertainment.
Cheers! Here’s to your gas tanks. The worldwide glut
of wine has become so huge that France is distilling some
of its highest rated wines into fuel. France has periodically
turned table wines into ethanol, but now even some premium
wines are cheaper than bottled water. This year the equivalent
of 133 million bottles of wine will be turned into crystal-clear
ethanol. Currently, French gasoline contains 1% ethanol. That
will increase to 5.75% by 2010. France exports gasoline and
one of its biggest markets is the US. So sometime next year
we may all be filling our tanks with Pinot Noir and Chardonnay.
What fuel shortage?
Random thought for October 2005:
Talk about efficiency. In Japan they have square watermelons
– they stack better.
|
