1. Skip to navigation
  2. Skip to content
  3. Skip to sidebar
Source link: http://archive.mises.org/4498/a-flood-of-folly/

A Flood of Folly

December 30, 2005 by

Economic ignorance rises to the top: that’s Tim Kern’s explanation for FEMA’s continued support of building in flood-prone areas, and Congressional demands for FEMA to do even more of the same. If we are learning any lessons at all, we shouldn’t be insuring two-time loser properties, especially when those risks are underwritten by the very people who have enough sense to stay away from hurricane magnets like Dauphin Island. FULL ARTICLE

{ 25 comments }

Douglas McKnight December 30, 2005 at 9:14 am

There’s more bad news. On December 7, the federal government extended the Terrorist Risk Insurance Act. This act provides insurance for buildings, particularly those located in high-risk areas, at much lower rates than private insurers are willing to. Some of the cities with the highest risk for terrorism, such as Washington and New York, are also areas where monetary stimulus has had the greatest impact.

Furthermore, several states are offering or considering offering environmental liability insurance policies. These policies are currently offered by private insurers for larger properties but are not financially feasible for small properties. The states want to insure the smaller properties.

Ron Brown December 30, 2005 at 9:32 am

HELP! I’m one of the people with “enough sense” to live in a reasonably weather safe area (northeast Ohio) but am forced to pay approximately $80 per month for flood insurance. Believe me when I say that the chances of my home being flooded are virtually zero.

For the past two years I’ve been working with an attourney in an effort to be excluded from this theft but have so far been unsucessful.

Could anyone recommend a private firm or other methods of getting released from this? I know the insurance is not required if your mortgage is paid off, but it still lowers the property value when you sell.

Alan R December 30, 2005 at 10:55 am

This situation described in this article has broader applicability. In the West it is common for people to build houses in areas that are both flood-prone (river valleys and riparian areas) and fire-prone (in forests). (A local journalist refers to these areas as “stupid zones”.) They then expect local government or the Forest Service to protect them when wildfires occur, which they inevitably do. Stupid zones also exist in areas that are not specifically flood- or fire-prone, such as the Gulf Coast, and especially as we have seen in recent years, the entire state of Florida. Why should FEMA or any other government entity be responsible for disaster assistance generally for residents of areas that are repeatedly and predictably hit by hurricanes? Shouldn’t all Floridians and Texans, for instance, be required to fend for themselves during and after hurricanes and not expect ANY government assistance? I note the author lives in Florida.

billwald December 30, 2005 at 11:05 am

I think one would find that this is another scheme to transfer assets from the working people to our owners. Poor guy migh get his trailer replaced but rich guy gets his vacation house on the Outer Banks replaced.

Alan Gifford December 30, 2005 at 5:24 pm

billwald: we don’t take kindly to folks who consider themselves owned around here.

What? It’s all fine and well for “rich” people to put in more money in taxes, oh yes. In fact, that’s how you think it should be: they are well off, they can afford to pay, so they should pay more. From each according to his abilities, to each according to his needs; your mentality is consitent with communism. But when it comes to using the tax money, all of a sudden it’s reprehensible to you that the “rich” should get back a proportional amount to what they put in. Hypocrite.

Let me just say this: we all come into this world with abilites that should be used by us to provide for our existence. It is our responsibility to take care of ourselves. If you can’t pull your own weight, then someone else has to, and that ain’t right. Just because you got the sh*t end of the stick doesn’t mean anyone else owes you. Shut up and eat your ramen noodles.

(Sorry to anyone if I seem uncivil, it’s funnier this way.)

Dewaine December 31, 2005 at 2:27 am

My apologies to Prof. Block (at the U. in Lousiana), but it looks like a stormy hurricane season ahead is brewing — maybe even worse than 2005. It would be in bad taste to say it would be funny, but it certainly would be amusing to see all the money spent on saving N.O. underwater again before next Christmas.
http://www.nhc.noaa.gov/text/refresh/MIADSAAT+shtml/301605.shtml?

Alan Dunn December 31, 2005 at 9:16 am

Great article.

“The government should not be subsidizing insurance payments for anyone; and it’s irresponsible to use other people’s money to effectively encourage stupid people (who else builds in flood-prone areas?) to do ever-more-stupid things. Granting the natural right to behave stupidly, doing so should not come at other’s expense.”

Agreed, pretty much everything we need to know about why subsidies are the disease not the cure.

With Respect to Mr. Gifford:

“It is our responsibility to take care of ourselves. If you can’t pull your own weight, then someone else has to, and that ain’t right. Just because you got the sh*t end of the stick doesn’t mean anyone else owes you.”

Funny thing involuntary unemployment, many deny it exists. Yet Icannot in my lifetime remember when the number of Job vacancies was greater than the number of unemployed. Though I am only 36 :0).

Should we punish the unemployed or those responsible for not creating enough job opportunities?

In Mr. Gifford’s case it appears he has chosen the former rather than the latter cohort.

But for what reasons does he make this choice?

Dave Scotese December 31, 2005 at 11:55 pm

Billwald,

I too, feel owned, Mr. Gifford’s comments notwithstanding. But there are two kinds of rich people – the kind who earn riches providing people with the kind of services for which they pay him willingly, and one who earns the loot taken from us by those Alan Dunn thinks are responsible for not creating enough job opportunities (government) by providing services some bureaucrat decided we private citizens need but are too stupid to purchase on our own. It is these latter rich who own us, and that claim is backed up in the two senses of the word own:

1) The government controls us legitimately through legislation – meaning not only does it control us, but it’s legitimate; most people expect it to control us.
2) The government, however stupidly and unfortunately, exercises stewardship over us – purporting to feed us when we starve, clothe us when we’re naked, and house us when Katrina destroys our homes.

Mr. Dunn,

Job opportunities are created by entrepreneurs because they strive to earn more. It is not a responsibility of anyone – just as it is not your responsibility to find me a job. What those people you’re thinking about are responsible for is the destruction of job opportunities through legislation such as minimum wage, taxation, etc etc.

Your question about who we should punish fails to specify the most important part of question about what we should do: the goal. Whenever the question of what should be done is raised, the crucial first step is to establish what goal is to be accomplished by the proposed actions. As I understand Robert LeFevre’s position on power and the state, any expenditure of effort to accomplish any goal through punishment is counterproductive. So my answer is NO, we should not.

Tim Kern,

As a writer and a thinker, you may be interested in the things I have been working on at my website. The url should be registered with this comment. If not, you can always google me.

Alan Dunn January 1, 2006 at 2:21 am

Dear Mr. Scotese,

Thank you for comments.

job opportunities are created by entrepreneurs.

What I beleive is that it is the responsibility
of a government to provide legislation and policy in general that does not impede the abilities of entrepreneurs to create opportunities and hence jobs.

what policies this would require is not something I wish to address here.

With respect to your 2nd comment I didn’t “fail[s] to specify the most important part of question about what we should do: the goal”. Rather I ommited the goal to give others the opportunity to express their goals and methods for realising them.

Therefore, I will say that my goal is an economic environment whereby anyone who wants a job can have a job.

The government through its legislation and policies effectively chooses whether or not unemployment exists.

Thus the point I make is that the government is responsible for persons being unemployed more often than not.

With this I think you will agree. So why is it that many attribute unemployment to idleness rather than its true source inappropriate government policy?

With how or why the government impedes job creation, our views may not be the same.

My goal here is to learn Austrian Economics, it is not to criticise the economics of Mises or those who choose to continue his legacy.

If I agree or not with the views expressed by yourself or others here does not alter my goalto learn about Austrian Economics..

I have been critical in the past, but now choose to ask the questions for which I require answers for. Which I think is a rather Liberal thing to do.

Thank you Mr. Scotese your analysis is most appreciated,

Paul Edwards January 1, 2006 at 4:13 am

Hi again, Alan,

I would like to reply to your comments with what I believe to be a representative Austrian response.

“What I beleive is that it is the responsibility of a government to provide legislation and policy in general that does not impede the abilities of entrepreneurs to create opportunities and hence jobs.”

If this were the case, then the government would entirely cease to intervene in the market because any government interventions in the market must always lead to an overall impediment to entrepreneurial efforts, waste, inefficiencies, lowered productivity, and market distortions which include involuntary unemployment.

“what policies this would require is not something I wish to address here.”

A policy of complete non-intervention would be necessary and sufficient.

“Therefore, I will say that my goal is an economic environment whereby anyone who wants a job can have a job.”

A free market unhampered by government intervention would provide this. Supply and demand analysis applies to labor and therefore all available labor would be employed at the market price.

“The government through its legislation and policies effectively chooses whether or not unemployment exists.”

Yes. To the extent that government policy influences overall involuntary unemployment at all, it always increases it.

“Thus the point I make is that the government is responsible for persons being unemployed more often than not.”

Yes. Furthermore, without government interference there would be no such thing as involuntary unemployment. Those who wanted to work would be able to find work provided he was willing to accept market prices for his labor. If he was not, he would remain voluntarily unemployed.

“With this I think you will agree. So why is it that many attribute unemployment to idleness rather than its true source inappropriate government policy?”

Austrian analysis always concludes that involuntary unemployment is due to government intervention in the labor market. The most notable intervention is minimum wage laws. There is no Austrian basis for animosity towards the unemployed. It is an Austrian axiom that all humans act in a way they think will maximize their well-being in the future. This includes not hiring labor at a price above what it seems will be profitable to apply that labor towards.

Paul D January 1, 2006 at 10:35 am

“Yet Icannot in my lifetime remember when the number of Job vacancies was greater than the number of unemployed.”

That’s pretty much true here in Japan. Every other business has a help-wanted sign, and a person can generally find a job the same day one starts looking. I think it’s because the minimum wage, if there is one, is below the market price of labour.

Curt Howland January 1, 2006 at 2:43 pm

Paul D., Japan is the only place I have been where there are elevator operators in the department stores. That does indeed say something about the cost of labor. Everywhere I went in Tokyo and Kyoto, personal service was the rule rather than the exception.

Dave Scotese January 1, 2006 at 9:34 pm

Alan,

You asked: So why is it that many attribute unemployment to idleness rather than its true source inappropriate government policy?

Idleness certainly makes people unemployed – they are simply too idle to get a job. But there are things we all do that make people idle, and make them want to be idle. Charity, welfare, and taxation (in my case) come to mind. When these things are done by choice, let the chips fall where they may because people should be free. But when these things are done through force (the welfare state), the natural feedback mechanism built into a free market is disrupted.

Mr. Edwards,
You wrote about the Austrian conclusion that “involuntary unemployment” is a result of government intervention. I thought it would be wise to point out that on an individual level, even in a free market, there will be people involuntarily unemployed, but it will be a result of their insistence on a wage higher than the employers they approached are willing to pay. Government intervention lowers that wage through taxation, and all kinds of laws, and also makes it illegal to pay employees whose work is worth a wage below a certain level with the minimum wage law.

However, I disagree that government intervention is the root cause of all this. If government resources were collected through voluntary taxation, then all manner of government intervention would be just another part of the free market – wouldn’t it? My own analysis has identified forced tax payments as the root cause of economic decay.

Most people think the government would cease to exist if it had to rely on voluntary support. They do not realize that this is a tacit admission that government is useless. The attitude also shows that they have bought the propaganda that private citizens are just too stupid to take care of the most important things (law and order).

Paul Edwards January 2, 2006 at 12:00 am

Hi Dave,

To your comment “there will be people involuntarily unemployed, but it will be a result of their insistence on a wage higher …”, i would answer that the Austrian definition of voluntary unemployment includes the situation where an individual values his leisure above the best wages he can get on the free market. That he would work only at a higher wage doesn’t mean he is involuntarily unemployed.

“If government resources were collected through voluntary taxation, then all manner of government intervention would be just another part of the free market – wouldn’t it?”

Although i view “voluntary taxation” as an oxymoron, i think we still may not be so far apart. I think what you may mean is voluntary market transactions. When i use the term “government”, i’m meaning the coercive state. Under a completely free market with no state, then i agree that whatever government we had, being non-coercive, would not impose any of the problems i attribute to the present ones.

In a free market, there would be no state coercion and therefore no forced taxation, no quotas, tariffs, minimum wage laws and no involuntary unemployment.

I strongly agree with you that the free market can provide everything of value that is presently provided by the state, including law and order. Have you read much of the anarcho-capitalistic leaning literature available here on mises.org? I think you’d like it.

Peter January 2, 2006 at 12:31 am

thought it would be wise to point out that on an individual level, even in a free market, there will be people involuntarily unemployed, but it will be a result of their insistence on a wage higher than the employers they approached are willing to pay.

Then they’re voluntarily unemployed! They could have a job if they wanted it; they choose not to – that’s the definition of “voluntary”.

Alan Dunn January 4, 2006 at 9:13 pm

Thanks Paul and David for answering my question

:0)

Alan Dunn January 11, 2006 at 8:30 pm

Thanks to David and Paul for their helpful comments.

Wouldnt the so-called minimum wage need to be zero or perhaps negative to clear the labour market?

Supply and demand analysis assumes this if money has any speculative properties, or taxes exist.

Say’s Law (should be called Mill’s Law) also comes to mind. The Identity must always by definition hold. Unfortunately Say’s Equality, to the best of my knowledge cannot hold if taxes, speculative demand for money, and a positive rate of interest exist.

P.S – this is not a Keynesian perspective – they think I’m on the loonatic fringe as well :0).

Cheers.

Paul Edwards January 12, 2006 at 1:08 am

Hi Alan,

I’d recommend a small change in angle at which you look at a minimum wage law in respect to a market clearing labor price. Imagine for a sec a labor market where there was no such thing as a minimum wage law. This market would by definition, then, obtain a market clearing price and it would necessarily be greater than zero. Those who wished to work at the market price would do so, and those who wished to employ people at that price would do so. There would be no barrier to trade in labor. Those abstaining from selling or hiring labor at the market price would do so because they valued their leisure time or money respectively over the trade. The entire market would be voluntary.

I agree that supply and demand analysis must and does account for speculation and taxes. Speculation affects both demand and supply and taxes affects supply in that it is a cost borne by suppliers. It eliminates the marginal suppliers from a market that would otherwise be viable without that extra cost.

I may have to ask you to elaborate on your point regarding Say’s law; however, i’ll blast away based on my impression of your point. Say’s law is that demand implies the ability, not just the desire to obtain a good. It means to demand, you must first produce so that you have something to trade for what you want. Economic demand inherently entails possessing economic means to purchase or trade for what it is you demand. It means you necessarily produced first.

What it is that makes an employer willing and able to pay a wage is the discounted marginal productivity of the labor he is paying for. The entrepreneur can and will only pay for labor what it pays him to hire the labor, minus the interest discount. No legislation can increase the productivity of labor and therefore no legislation can increase the wage that the market can afford to pay labor.

I don’t know how hard my arguments are for you to swallow, but i can say you don’t sound like a lunatic to me. I enjoy the discussion.

Alan Dunn January 12, 2006 at 3:07 am

Hi Paul,

Thanks, I also enjoy the discussion.

“Say’s law is that demand implies the ability, not just the desire to obtain a good. It means to demand, you must first produce so that you have something to trade for what you want. Economic demand inherently entails possessing economic means to purchase or trade for what it is you demand. It means you necessarily produced first.”

Yes, I totally agree with what you say here. Therefore, if supply decisions are made exAnte and demand decisions are made exPost – then there may be a problem.

If for example, exAnte supply was greater than ex post realised demand, then we would have an unintended accumulaion of inventories, goods, stock… whatever we want to call it.

As a consequence, I would assume, that producers would revise their production decisions downward, to at the very least, clear the accumulation of unintended inventories.

Revising production downwards could take place several ways. The existing workforce for the firm could do less work and accept a new wage, that reflects their new revised marginal productivity. Perfect price flexibility would allow this – communist institutions such as labour unions would probably “go to the matresses” to resist the wage change neccessary.

Or, the most likely scenario, employers would retrench labour… I know I would if I was running a business.

No concern here about this point either. Firms should be able to hire or fire people, pay them any wage they want, and sell their products at any price they want.

But at the end of the day,we are at a level below full employment.

“No legislation can increase the productivity of labor and therefore no legislation can increase the wage that the market can afford to pay labor”.

As for minimum wages, I think wages / salaries in general often do not reflect the marginal productivity of those receiving them.

Sorry if any politicians are reading this, but I’m yet to meet one worth $200k a year – except of course for any politician reading this – I think their worth much more :0).

We also have the situation whereby management and ownership is seperate. Board members / executives basically choose their own salary packages. Perhaps this is a form of market wage determination – but I’m not so sure. Shareholders probably don’t have much say in the matter – Enron comes to mind here, and FAI in Australia.

Now I don’t think a maximum wage is the answer here either – its just as silly as having an exogenously determined minimum wage.

My opinion is that the invisible hand was bitten off by socialist dogs many years ago, and the ability of the market to clear rests on many factors other than just wage rates. Monetary Policy, Fiscal Policy, Trade policy… too much government policy…. and so on.

Cheers

Paul Edwards January 12, 2006 at 10:45 am

Hi Alan,

My responses assume a free market…

“Yes, I totally agree with what you say here. Therefore, if supply decisions are made exAnte and demand decisions are made exPost – then there may be a problem.

“If for example, exAnte supply was greater than ex post realised demand, then we would have an unintended accumulaion of inventories, goods, stock… whatever we want to call it.

“As a consequence, I would assume, that producers would revise their production decisions downward, to at the very least, clear the accumulation of unintended inventories.”

Production does require entrepreneurial speculation, investment, and time. This means that at the point where the final goods are put on the market, all decisions for production costs for these present goods are now in the past. At this point there remains only the objective fact of the given supply, and the subjective valuations of the consumer which is the demand. Regardless of whether the demand is up to the expectations and estimations of the entrepreneur or not, ignoring any speculation he might do that demand may rise shortly, he will immediately sell at the market clearing price. If he must sell at a loss, he will do so because that is better than nothing. If he continues to miscalculate in this fashion in the future, he will go out of business, and all resources including labor will become available for use by a more effective speculator.

“Revising production downwards could take place several ways. The existing workforce for the firm could do less work and accept a new wage, that reflects their new revised marginal productivity. Perfect price flexibility would allow this – communist institutions such as labour unions would probably “go to the matresses” to resist the wage change neccessary.

“Or, the most likely scenario, employers would retrench labour… I know I would if I was running a business.”

If production was not profitable, it would be reduced in that area of the market. Demand for factors in that line would diminish and factors would shift to more profitable enterprises that were fulfilling consumer demand more effectively. When we consider the affects of a single line of product, we must do so in the context of the larger market. In other words, each product, firm, industry, etc competes for factors with every other product, firm, industry. The most productive and profitable of these categories will bid these resources away from the less profitable.

“No concern here about this point either. Firms should be able to hire or fire people, pay them any wage they want, and sell their products at any price they want.

“But at the end of the day,we are at a level below full employment.”

At any given point in time, in the short term, there will be adjustments taking place where people are involuntarily out of work. But this is temporary. As long as the laborer is willing to take the market wage, he will be back at work shortly. The free market is always tending towards full employment of those wishing to be employed. Long-term involuntary unemployment is not a feature of a free market.

…

“As for minimum wages, I think wages / salaries in general often do not reflect the marginal productivity of those receiving them.

“Sorry if any politicians are reading this, but I’m yet to meet one worth $200k a year – except of course for any politician reading this – I think their worth much more :0).”

In the free market, wages would indeed reflect the marginal productivity of labor or at least the closest thing too it that is possible. Wages of politicians, bureaucrats, and those living off the avails of taxation are the outcome of fraud and theft and would therefore be eliminated and hence all wages would be market wages and hence would reflect their marginal productivity.

“We also have the situation whereby management and ownership is seperate. Board members / executives basically choose their own salary packages. Perhaps this is a form of market wage determination – but I’m not so sure. Shareholders probably don’t have much say in the matter – Enron comes to mind here, and FAI in Australia.”

Presently in this highly regulated and hampered market, stock-holders can posses a false sense of security from the incompetent and corrupt oversight by federal bureaus rather than their own efforts and reasoning. In a free market, the management is hired by a thinking ownership and remains employed only as long as the ownership remains happy with their performance and as long as the ownership itself remains competent.

“Now I don’t think a maximum wage is the answer here either – its just as silly as having an exogenously determined minimum wage.

“My opinion is that the invisible hand was bitten off by socialist dogs many years ago, and the ability of the market to clear rests on many factors other than just wage rates. Monetary Policy, Fiscal Policy, Trade policy… too much government policy…. and so on.”

I agree wholeheartedly. The free market operates better than anything else we can imagine. A thorough and accurate economic analysis leads to the conclusion that any government intervention is always at the root of any fundamental problem the market suffers, including involuntary unemployment and poverty in general.

Alan Dunn January 12, 2006 at 2:26 pm

Hi Paul,

your comments are always appreciated.

Yes I think we agree here. My only concern is how do we actually get rid of the excess socialist baggage.

Removing minimum wages and making no other changes creates a distortion in the market place – if all other areas aren’t as , shall we say free.

For example – if we make labour the cheapest input of production, will this lead toward labour intensive production ?

it’s not the free market that concerns me, its the transition process I think. I didnt actually realise this until now.

Cheers

Paul Edwards January 12, 2006 at 3:35 pm

Since the problem is always intervention, i would argue that in each and all situations where there is a choice between more and less of it, we must always advocate less without hesitation. It is not practical to hope that all intervention will be withdrawn at once, and there is no situation where an added intervention mitigates the adverse affects of any previous one.

The impact of the minimum wage laws is very simple: it coercively bars those eager to buy and sell labor from doing so below the floor price legislated by government. It is purely coerced, involuntary unemployment. There is nothing to advocate about it and it in no way overcomes the problems induced by the distortions of previous market interventions.

So the course seems straight and narrow to me. The market may be hampered by government intervention, but at every opportunity, we must always agitate for less and never more of it.

Alan Dunn January 16, 2006 at 2:35 am

Hello

Absolutely, the less government intervention the better. I totally agree.

However, I do think that removing minimum wage laws while keeping all the other government baggage has one major problem.

The name of the game is productivity, and if we make labour the relatively cheaper factor of production isn’t it possible that business would shift toward more labor intensive production?

And as we know, real gains in labour productivity are minimal at best – its technological innovation such as machinery, and computers where the real gains are made.

So if business shifts towards more labour intensive production, and I have no reason to think otherwise – we might be lowering costs, but we are in no way increasing our marginal productivity.

Thus, removing minimum wage laws and nothing else creates another distortion to the market process.

So I could just see this all backfiring when government reacts with a new scheme to “encourage capital intensive production” -and here we go again…a new distortion, and a new bag of problems.

cheers

Alan Dunn January 16, 2006 at 2:36 am

Hello

Absolutely, the less government intervention the better. I totally agree.

However, I do think that removing minimum wage laws while keeping all the other government baggage has one major problem.

The name of the game is productivity, and if we make labour the relatively cheaper factor of production isn’t it possible that business would shift toward more labor intensive production?

And as we know, real gains in labour productivity are minimal at best – its technological innovation such as machinery, and computers where the real gains are made.

So if business shifts towards more labour intensive production, and I have no reason to think otherwise – we might be lowering costs, but we are in no way increasing our marginal productivity.

Thus, removing minimum wage laws and nothing else creates another distortion to the market process.

So I could just see this all backfiring when government reacts with a new scheme to “encourage capital intensive production” -and here we go again…a new distortion, and a new bag of problems.

cheers

Paul Edwards January 16, 2006 at 12:02 pm

Hi Allan,

You make some good points that are a great basis for a discussion of what is necessary and sufficient for productivity enhancing capital investment to take place. The key: savings. It is not by artificially raising labor (or land etc) costs that will induce capitalists to invest in capital, this will only reduce savings. Therefore, it is important to allow the market to find its own natural price levels for all factors, and allow the cycle of work, production, savings and then investment to freely take place at its optimal pace. The optimal pace is the pace at which the free market obtains.

Allowing any form of intervention in the market such as legislated minimum wages, even with good intentions will necessarily only lead to the opposite of the intended results. In this case, it would lead to reduced: employment, production, savings and therefore investment. And I believe this is an a priori fact. One intervention causes only a negative distortion, and as you mention, is often followed by a further intervention for a further negative distortion.

Eliminating a market intervention always means one less distortion; never does it imply more distortion.

Comments on this entry are closed.

Previous post:

Next post: