Silver Hurricane Clouds?

As the level of material destruction in New Orleans mounted, I began to have a horrible sinking feeling that politicians would soon proclaim the hidden blessings of all the rebuilding work that will inevitably be done. This kind of thing (which happened after the last few major earthquakes in California, the terrorist attacks on 2001, and the more recent hurricanes to strike Florida) usually goes as follows: "Yes, this destruction is terrible, but think of all the construction jobs created by the rebuilding effort." Or, think back to the more ominous tones in 1945: "This second World War is an unprecedented exercise of human suffering. But we're lucky it saved us from the Great Depression."

Both of these are examples of Frederic Bastiat's Broken Window Fallacy. It's a parable illustrating how people easily get confused about the deadweight loss imposed by natural or human-made disasters. Suppose a bakery's shop window is broken by a vandal hurling a brick. The baker then has to hire a window glazer to replace the shattered pane. The glazer in turn has to order sheet glass from a supplier, glaze from another supplier, and pay some laborers to cut and install the glass. The sheet-glass supplier in turn can hire somebody to supply sand and fuel for his furnace. And so on throughout the entire network of suppliers. A casual onlooker is tempted to say that the broken window is a net gain; after all, a whole cascade of "new" business has been generated at the price of the baker's window replacement costs.

But this totally ignores the fact that the baker was not going to bury in his backyard the money which now has to be spent on a new window. Perhaps he was about to invest in a new oven (and set of a similar ripple effect along the network of producers who supply the oven). Or maybe he was set to buy a new suit from the tailor across the street. Even if this money was to be saved, the act of saving (through banks, stocks, etc) releases resources for somebody else to use. The possibilities are too numerous to predict, but by definition the baker already had something more urgent planned for that money than window replacement. Absent the vandal's action, the baker would have both a window and the fruits of this other planned use of the money. Instead he now has only a window.

I personally attribute a lot of the confusion here to the fact that people get tripped up by the concept of money. They think that cash changing hands constitutes an automatic gain. In macroeconomic matters, it's often helpful to pretend that money doesn't exist at all. If a disaster comes along and destroys a big chunk of resources (war materials, windows, non-earthquake-proof buildings, whatever...) society is obviously less wealthy than it otherwise would have been.

Getting back to Katrina: my suspicions were validated as I listened to syndicated AM radio news this last week. FEMA talking heads were espousing the benefits of the forthcoming vigorous construction boom. It seemed that we are slipping again into this weird fetish that venerates destruction. Then I saw this story running around on MSNBC pointing out the Broken Window Fallacy. In the mass media! Perhaps we'll be spared the politician's claims of a silver lining this time. I remain skeptical, but less sure than before.

In the Headlines

Liberty is all in the news! Well, sort of... the featured article on Wikipedia for today is "Anarcho-capitalism" (proof here). The timing is impeccable; they must have read my startup entry on this site and decided to promote the entry (thanks go to Jesse Greenwald for this link).

On a more technical note, it's nice to see that I listed more of the important stuff mentioned in Wikipedia's synopsis. I did forget to mention Walter Block as an important author in the area. Block, however, sometimes goes too far and proposes ideas that seem like unintuitive and contrived. For example, he decomposes the abortion law question into two issues of killing versus eviction, and a middle-ground compromise is reached by following the "general libertarian" requirement that defensive force be applied in the most gentle manner possible. Example: if somebody is trespassing on your lawn, you must give them verbal notice of eviction before moving to more robust means of repulsion. The analogue would be that an expectant mother may end the pregnancy at any time (Block says that to do otherwise would be to sanction trespass) but this minimal-defensive-force injunction applies. So if the baby is viable already at moment when its removal is decided upon, then the mother is obligated to submit to a medical procedure which will deliver the baby without killing it. If, on the other hand, it's not viable, then regular termination would be the course.

I hadn't ever heard this obligation of minimal defensive force espoused as a formal requirement before. Now, I'm not quite through reading Man, Economy, and State yet, so perhaps I just didn't get there yet. But I don't remember Mises saying anything about it (this is, however, inconclusive—there are lots of things which Rothbard and Hans Hoppe said more conclusively than Mises; he was more of a trailblazer). This lacks the purity of concept (in either way) that I have come to associate with Rothbard-inspired law theory. I don't intend to weigh-in on this topic, just to point out Block's position. To be fair, Block does have his moments. For example, he gives the best refutation of the "roads-as-a-public-good" socialist position that I've ever heard. And his public speaking skills are very, very good.

Sunk Costs

After several days of watching a catastrophe unfold in New Orleans, I now join some of my friends in commenting.

It's becoming clear now that the proximate cause of the persistent flood in low-lying New Orleans is the enwalling of the Mississippi River for the last three and a half centuries. That delta area slowly sinks if not infused with fresh silt by a naturally meandering course of the river. But the river has been fixed in position for a long time now. The result is that apartment buildings which used to be street level are now subterranean (this last anecdote is courtesy of Jesse Greenwald), and by a good measure. As if the city's slow march to lower elevations isn't bad enough, this arrangement has another source of positive feedback. The method of canal-ifying the Mississippi has also prevented it from carrying the silt out to the Gulf of Mexico. Instead, the induced calmness of the waters makes the sediment load deposit continually in the city-surrounded portion of the channel. Dredging has not kept pace with this action, so the elevation of the water level has trended higher and higher. While the city itself sinks. The result is that large parts of the city sit below the actual level of the Mississippi River.

This is a recipe for trouble. It necessitates expensive, ongoing fortification of seawalls to keep the above-ground waters in their place. Lew Rockwell writes a column discussing lots of ways to fairly say that the government has botched the management of this crisis. He gives lots of reasons to think that, were the risks and costs incurred by flooding in New Orleans not paid for in a collectivist (that is, governmental) manner, the seawall would never have breached, nor would the city's flood pumps have fallen out of operation. I think Lew's right on target in his article.

But what of the prevention angle? How would this be dealt with in a free market order? The first bit of an answer comes from John Stossel's article in reason.com, Confessions of a Welfare Queen. John, a fellow who made a transition from liberal to self-proclaimed libertarian, owned a beach house in North Carolina about 100 feet from the surf. It's a known, predictable risk that flooding will destory some percentage of homes in this position. After a decade and a half, this house was washed away. Unlucky Mr. Stossel? No: the government (that is, all taxpayyers) reimbursed him for the full cost of his home. Despite the fact that all parties knew ex ante that this flooding is a calculable risk. The insurance companies certainly knew it: Mr. Stossel's premiums were affordable only because Congress subsidizes their prices. Now, John has since undergone a bit of an ideological "awakening" he doesn't think this was a good arrangement anymore. The article does a good job of pointing out several ways that government subsidies induce people to engage in risky activities which they otherwise would not:

Why subsidize affluent people like Gephardt and me? Why not let us sink or swim on our own? If my house erodes away, it should be my tough luck. [...] Federal flood insurance payments are like buying drunken drivers new cars after they wreck theirs. I never invited you taxpayers to my home. You shouldn’t have to pay for my ocean view.

Then later:

Farmers argue, "We need subsidies -- because the food supply is too important to be left to the uncertainties of free market competition." But farmers who grow beans, pears, and apples receive no government subsidies, and they thrive. Free markets are best at producing ample supplies of everything. Notice any shortages of unsubsidized green beans, pears, and apples? Me neither.

Yes, some farmers have a tough time. Some will go broke and lose their farms. That’s sad. But it’s also sad when people at Woolworth’s or TWA lose their jobs. Letting businesses fail is vital for the creative destruction that allows the market to work. Those who fail move on to jobs where their skills are put to better use. In the long run, it makes life better for the majority.

So the point is: when people are not made to bear the full costs of their actions, risky and/or unprofitable behaviors will dominate more than on an open market. In economics jargon, they will discount the marginal cost of the behavior and therefore shift their demand for it so that more of the risky behavior is "produced" at equilibrium.

So what has this to do with New Orleans? Some allegations have arisen that the levies and pumps maintained by the Army Corps of Engineers had been allowed to fall into disrepair since the mid '60s. If we paraphrase this to the world of agriculture, this is the same thing as letting the seed corn rot over the winter; the valuable capital is not maintained and depreciates. I sympathize with the Corps on a small matter here though: as a government arm their budget is subject to the same lack of rational allocation as any other tax-funded project. As Ludwig von Mises pointed out famously, prices (private market production) are the only way to be sure that the amount of flood protection (or anything else) produced is in agreement with the desires of the consumers (the potential victims of the flood).

Getting back to the Lew Rockwell post about the flooding there:

Only the public sector can preside over a situation this precarious and display utter and complete inertia. What do these people have to lose? They are not real owners. There are no profits or losses at stake. They do not have to answer to risk-obsessed insurance companies who insist on premiums matching even the most remote contingencies. So long as it seems to work, they are glad to go about their business in the soporific style famous to all public sectors everywhere.

Rockwell is driving home with a sledge the point about public stewardship. In any realistic arrangement, a non-subsidized private insurance organization has far longer scope of vision than government secretaries. It is the insurance company which must find its customers voluntarily. If they do a poor job of estimating risks and charge too little to underwrite a flood-prone property, they make losses and (having no taxpayers of last resort to bail them out) must revise their habits.

This is the crucial bit: the insurance companies have incentive to be proactive. Perhaps, in their capacity as a collective bearer of the flooding risk, they would decide that the properties most near the river should simply be left undeveloped as a buffer zone against flooding. This has two advantages: (1) there's no need to rebuild anything if it actually gets flooded, and (2) no big wall need be constructed around the river — the water just overflows here every now and again. I have gathered some anecdotes that this flood control strategy is used to good effect in other river valleys.

But it seems that this sort of thing has little chance to be tested. Already the clamoring for federal aid to rebuild the city has begun. If this socialized risk-sharing model is maintained, the developers of New Orleans have no reason to change their designs. And, more to the point, the idea of subsidizing the rebuilding of New Orleans in the same place violates a cardinal commandment of rational decision making: Don't throw good money after bad investments. Or, to motivate the title of this post, some costs are unrecoverable (sunk). Don't attempt to save them by throwing more money at the issue. Bad investments such as building a city below the level of the water which it neighbors are regrettable, but once committed they are a fact of history. One must not attempt to justify the errors of the past by funneling more resources at an investment which will, from this point forward, make losses. If New Orleans needs an unrequited infusion of taxmoney from outside in order to rebuild, this is a plain-as-day signal that nobody thinks it's profitable to rebuild.

It would be nice to stop paying people to build houses on top of the San Andreas fault, to stop paying farmers to grow unproductive crops, to stop paying the insurance premiums of eroded beachfront homes, and to stop paying for the flood risk in low-lying coastal cities. Let each person pay her own way.

Open for Business

At long last, I hereby return from the netherworld of data archival. Should I become unhumanly ambitious, perhaps my old posts kindly hosted at the former incarnation of Travis Bradshaw's site can be syndicated here. Until that time, the reader will receive full doses only of this new forum.

A word on the title: Anarkhos (an alternative spelling of the more common anarchos) is not the moniker of my supervillian alterego. It is a Greek word translated into English approximately as "without head or chief." I imagine that the majority of my comments will center on the theory and application of anarchocapitalism.

As one of those strange people who enjoys reading scholarly tomes in his free time, I consider myself an adherent to the Austrian School of economics. I particularly admire the contributions of Ludwig von Mises and Murray N. Rothbard. From this angle, the content here will often be critical examinations of state activities and discussions on how a free market order can efficiently serve consumer wants. I enjoy reading libertarian-oriented legal perspectives such as those given by Professors Glen Whitman and Tom Bell at their site, but I lack the law school training and meticulous knowledge of caselaw needed to write that sort of thing.

And, when I'm in a really lazy mood, I occasionally write about everyday technical things such as Linux, GNOME, and whatever software things on which I happen to be engrossed at the moment.