Yes, I went to the grocery store today. Buying food has become an unexpected pleasure, but also a little of a frustration as my mind glides over the many things I could make – if only I had the time, the reason (ie, guests), or the budget to purchase the ingredients. This economy we live in is truly amazing though. Bananas (fresh of course, and very tasty) were priced at $0.39 per pound. Stop and think about that for just a moment. What would be a reasonable real price for a pound of delicate fruit grown thousands of miles away, picked and rushed practically to your doorstep while still fresh, and available in such quantities that everyone has as much as they want?
How about less than five minutes of work by a low-skilled worker earning $5.50 an hour! Is that not incredible? Price is a marvelous signal of how resources need to be moved around in the market. Imagine if suddenly people began eating more bananas. At the low price of thirty-nine cents it would be easy to add several pounds of bananas to your weekly diet, and suddenly the grocery store would be running out or stock. Grocers would both increase the price they charge customers (but not too much or customers will shop elsewhere), which marginally reduces the poundage of bananas purchases, and the grocers would increase the price they pay their suppliers to provide a few extra boxes of bananas. By a similar mechanism, the increased money flowing to the suppliers would reach the growers (who may actually be one and the same, making the transmission of price very simple indeed), giving the growers - who until this time had been planting quantities of bananas and pineapples such that a box of one earned the same return as a box of the other - a very good reason to put more effort and land (resources of production) into growing bananas. Of course this story is highly simplified, but because prices were allowed to freely adjust at all levels, the increased demand for bananas was soon met with an increased supply. If price hadn’t been allowed to adjust shortages would have developed, there would have been “banana lines” in the grocery, and society would have been worse off by the value of the spent waiting in line.
Now let me jump to hurricane Katrina. Right off the bat, let me say that I am deeply sympathetic of the hurricane victims’ plight, they are in my prayers, and I understand that the nation should respond and help these many people get back on their feet. At this time I will not even touch the issue of to what level the federal government should be involved. Though it is true that the analysis of the costs and benefits of living in areas susceptible to natural disasters is badly distorted, that is a topic for some other time. However I would like to make a couple of “economist’s observations” about things I expect to see.
First, price controls. Refer to my story above. Now apply the same lesson to a shipment of generators headed for Alaska, output from a bottled water plant destined for Seattle, or plywood intended for developers in the Midwest. If the prices of these and many other goods that will be required in the hurricane-struck areas are not allowed to adjust, these and other goods intended for areas where life-as-normal continues will go where they are intended. Sure, the goods that are regularly supplied to the Gulf coast will continue to go there, but any increase in quantity will be slight regardless of how quickly stock sells out or how long the lines become. If prices are allowed to signal demand, generators, bottled water, plywood, and a thousand other goods will suddenly be freed-up from less vital requirements and made available to help with the recovery of the affected area. This reasoning also applies to the Atlanta gas panic on Wednesday. Though I hate to see gas prices going this high, I would rather see high prices than long lines at the station – even though I do have virtually no spare cash and lots of flexible time to wait in line.
Second, the economics of rebuilding. If anyone ever tells you that the rebuilding is somehow good for the economy, that it stimulates the economy, that it’s good for jobs, or any other such claptrap, they are wrong. As the great classical economist Fredrick Bastiat explains in his article, “What is Seen and What is Not Seen”, the resources that a society invests in restoring destroyed or damaged property are in essence wasted because they are expended merely to regain what was once had. So no, the rebuilding in the wake of Katrina is not a boon to the economy – resources and labor are merely being drawn from whatever other use they would have been put to in the absence of the destruction.
President Bush is absolutely right. It will take years to recover. My hope is that sound economic principles will be allowed to guide that recovery along as rapid a road as possible.
