Environmental Economics

Another spin on the broken window fallacy

You hit a baseball and break your neighbor's window. Your neighbor hires someone to fix the window. Economic activity increases. So, breaking the window is good for the economy. Right? Wrong: the opportunity cost of the labor is high. It could have been pursuing more productive activities instead of fixing something broken.

The broken window fallacy is an argument frequently heard after natural disasters and other negative events "create jobs."

However, maybe in the long run a natural disaster leads to some sort of creative destruction where destroyed aging capital stock is replaced with newer technologies? On my reading list is a newly published paper that empirically examines this assertion:

JESÚS CRESPO CUARESMA, JAROSLAVA HLOUSKOVA, MICHAEL OBERSTEINER (2008) NATURAL DISASTERS AS CREATIVE DESTRUCTION? EVIDENCE FROM DEVELOPING COUNTRIES, Economic Inquiry 46 (2), 214–226 http://www.blackwell-synergy.com/doi/abs/10.1111/j.1465-7295.2007.00063.x

I'm applying this theory to the fire-damaged Boone Saloon. Maybe it will re-open with a reconfigured stage, no smoking after 10 pm, bands that start playing before 11 pm, and other desirable features aimed at the mid-40s demographic.

Hurricane forecasts and dinner conversation

At the Haab household dinner table Sunday, April 13.

Wife:  We should take out travel insurance for our trip to Oak Island [North Carolina] this summer.

Me: Why?  We're driving.

Wife:  I heard on the radio that they are forecasting a really bad hurricane season.

Me: @#$^&

Apparently I have about as much influence in my house as you would expect.

Where they'll stop, no one knows

Storms brewing ...

The Atlantic hurricane season could include more than a dozen tropical storms this year, with about half of them strong enough to become hurricanes, according to researchers at N.C. State University.

Of course, the most useful information is where they'll land and no one can tell you this until you are safe in the motel, 100 miles away from your coastal property, after evacuation.

Recreational user fees at work

Grand Canyon National Park charges a $25 per vehicle user fee.  Fees are used for infrastructure improvements to the park, and they seem to be working.  I couldn't help but think of John when I saw the sign to the right.  Sorry for the picture quality.  It's the best I could do while trying to inconspicuously take a picture of a restroom with a camera phone while people are streaming in and out (the sign in the middle reads UserFee: Your Fees at Work).   My kids hid in shame. 

The only function of [fill in your favorite topic] forecasting is to make astrology look respectable*

Following up on John's post this morning, the 2008 hurricane forecasts are out...PANIC! or not: 

Hurricane forecaster William Gray called Friday for seven Atlantic hurricanes, three of them major, during the 2008 season.

Gray's team at Colorado State University issued the prediction six months before the June-November season begins.

The preliminary forecast calls for a total of 13 named storms in the Atlantic. It also says it is probable that at least one major hurricane will hit the U.S. coastline.

"Despite fairly inactive 2006 and 2007 hurricane seasons, we believe that the Atlantic basin is still in an active hurricane cycle," Gray said. "This active cycle is expected to continue at least for another decade or two."

...and then the article has this gem of incite:

The predictions are not always on the mark.

Hmmm...do you think a hurricane forecaster would get more attention for consistently overestimating or consistently underestimating the strength of the season?  My bet is on overestimating.  Better to say "See I warned you," rather than "Oops, my bad."

*I moved offices recently, and in the clean out, I found my Bartlett's Familiar Quotations book.  Any guesses as to the original [topic] and author?  A free env-econ "Drive Less!" sticker to the first correct guess.  No googling.

Newmark's Door on hurricane forecasts

Tim sent me the third link below ("fudged") and I've been sitting on it until the guy with the work pillow removed it from my face. And now, I've been scooped by Craig Newmark at the people's university (NCSU):

We've just ended another hurricane season and the forecasts were pretty lousy:

Two years ago, way under. Last year, way over. This year, still not right.

(My own institution's forecast wasn't better.)

And there's a possibility that the number of storms are being fudged.

Two observations.

1. It's not just economists who have trouble forecasting.

2. Yogi Berra spoke the truth when he (allegedly) observed, "It's tough to make predictions, especially about the future."

Suppose you made macroeconomic forecasts and also were in charge of dating recessions. Maybe your recession dating activity might be dependent on your own forecasts? Ya think? It's kind of like point shaving, without the colorful characters.

Playing god?

Part 3 of my weeklong series, "Hey, what did I miss around here?" (Scientists a step closer to steering hurricanes):

Scientists have made a breakthrough in man's desire to control the forces of nature – unveiling plans to weaken hurricanes and steer them off course, to prevent tragedies such as Hurricane Katrina.

...

But the hurricane modifiers are fighting more than the weather. Lawyers warn that diverting a hurricane from one city to save life and property could result in multi-billion dollar lawsuits from towns that bear the brunt instead.

...

The theory has so far been tested only in computer simulation by Mr Alamaro's colleague, Ross Hoffman. Mr Alamaro said: "With small changes to this side or that side of the hurricane we can nudge it and change its track. We're starting with computer simulations, then will hopefully experiment on a small weather system."

Two comments:

• I have a theory that my vita would look better with an American Economic Review publication at the top of my list. So, far it has only been tested in a computer simulation.
• I'm guessing/hoping that these guys don't get much past the computer simulation. Over a post-seminar beer a couple of weeks ago we wondered if the unintended consequences might be catastrophic (e.g., kudzu).

A bad weekend for wildlife

From CNN.com:

Dozens of dead and injured seabirds found coated in black goo are the most visible victims of a 58,000-gallon oil spill in the San Francisco Bay, an incident that scientists say could threaten wildlife for years.

and this:

As many as 10 ships sank or ran aground in the strait and the northern Black Sea region during the fierce storm, including the tanker, the Volganeft-139, loaded with nearly 1.3 million gallons of fuel oil. Nearly half that amount had spilled into the strait and had begun washing up on nearby shorelines.

$380 million

FEMA Offers Up to $4,000 as Home Lure for Storm Victims:

Eager to reduce housing aid to the more than 95,000 households still displaced by Hurricanes Katrina and Rita, FEMA announced a program yesterday offering up to $4,000 for relocation expenses for families or individuals who return home or find permanent housing elsewhere by the end of February.

...

As of Sept. 25, Ms. Walker said, 95,439 households were receiving housing aid from the 2005 storms, including 29,798 receiving rent subsidies and the remainder living in FEMA trailers and the larger mobile homes.

The potential cost of the relocation policy is 95,000 x $4000 = $380,000,000. That is a lot of money. Almost a third of a billion.

The law of demand and moral hazard

From the WSJ (As premiums rise ...), an example of the law of demand:

A small but growing number of homeowners are taking an extreme approach to insurance against hurricane winds: They're going "bare" -- doing without the coverage entirely.

... and moral hazard:

While the option of doing without wind coverage is generally limited to people who don't have mortgages -- banks typically require borrowers to carry insurance -- even a slender increase in those going uncovered could have broader repercussions in the wake of another major storm. A drop in insurance payouts could leave storm-struck areas with fewer resources for rebuilding and shift some of the burden to taxpayers.