Keynes and floods

“Tap” their savings “in the depths” of a recession, eh?

Cue the moral outrage gang.

@Richard Tol

In your Irish Independent article, you said this:

===begins=====
Companies perform better if focused on their core business. The ESB should make and sell electricity. But there is more than corporate management at stake here. Hydropower is more profitable if the reservoirs are full, while flood management is easier if they are empty. There is a clear conflict of interest between the ESB as a power company and as a flood-management authority. Lesson Two: the ESB should be relieved from its duties in flood management.
===ends=====

Lesson Two seems to be based on the assertion in the first sentence rather than on examination of the ESB’s actual performance in this or earlier floods. From where I’m sitting, downstream of Parteen Villa Weir (but near the top of a hill), the ESB seems to have done a good job. I suggest that, at least at Ardnacrusha, the conflict between power generation and flood management is not significant as, once the flows below Killaloe go above 400 cubic metres per second, they are of no use to Ardnacrusha. I cannot comment on floods on the Liffey or on the Lee.

You also said:

===begins=====
Climate change is likely to bring more winter floods to Ireland. Flooding will occur more frequently. This means Ireland’s drainage system needs to be reviewed and, if necessary, overhauled. This is not easy. In winter, we want to move the water faster to the sea. In summer, we want to keep the water longer to mitigate drought. More frequent dredging may be enough, but we may need deeper rivers with more dams and reservoirs. Other solutions are conceivable too. Lesson Six: a review of water flows is necessary, and probably some major civil engineering works too.
===ends=====

Having re-read the article by Alan Matthews here …

http://www.irisheconomy.ie/index.php/2009/02/18/latest-cso-figures-underline-vulnerability-of-irish-agriculture/

… I wonder whether there is any point in undertaking any works in order to drain farmland.

Declaration of interest: I want navigable rivers.

bjg

Maybe we could have a national flooding programme. Get the 1 billion in estimated damages up to a level approaching a national stimulus package.

Ah, the general equilibrium approach. However, are the premiums that are now going to be imposed on people and businesses living in ‘danger’ zones going to put these businesses under pressure?
Anecdotal reports in the media were mentioning figures per year for flood insurance that seemed excessive. How many firms will just shut down as a result of the flood, or just reopen with no future flood insurance?

Seems logical to me if you cant get insured for your commercial premises then you move commercial premises. There is a hell of a lot of commercial premises out there lying idle to choose from and all of sudden your contract is no longer upward only rent review. Cant break your current lease – fold your company. Blame the recession and move on.

A stimulus package via an Act of God? Beats moving statues and visions of Our Lady at Knock, I guess.

Surely those affected can hover above their homes inside their private helicopters until the waters subside?

Indeed – the wonderful assumption that if it (the stimulus) is foreign and from the private sector, then it has got to be okay!

Of course towns and businesses that have previously been flooded or are in risk areas will not have been offered private insurance cover. The insurance market does not operate as a social good. Only the state has the ability to cover such risk and coordinate the relief efforts – private insurance companies do not undertake this function. So flooding increases the demand for state labour.

The origin of the stimulus ultimately depends on who underwrote the risk. It is not guaranteed to be foreign.

Good thing we make loads of cars, furniture, carpets etc. in this country and that insurance premiums won’t extract the price for the next ten years, eh?

I think a few people may be misinterpreting Prof Tol’s argument.
He’s not saying that floods are good in the long term (note he is quoted as saying “Floods are bad” in the attached IT article). There is an underlying assumption that the effects on insurance premiums etc are unavoidable. Thus if we must have floods, then it’s useful if they come at a time of underemployment of factors.

@yoganmahew
It may of course be that people will buy their new furniture and white goods in the North, which would stimulate their economy not ours.

The reverse happens when the international insurance companies follow through with higher insurance premiums across the board to recover their “losses”.

Some properties built on flood plains will become uninsurable. Such properties will have near zero values on balance sheets and will become practically impossible to sell or even use as collateral for loans. Granted most will already have mortgages on them.

Mr. Gormley was unable to answer a question as to who is responsible for the losses on these properties, especially those built recently.

The land was zoned or rezoned by councils, who then gave planning permission. Board Pleanala obviously concurred that these developments were in conformity with planning laws and sustainable development. All these bodies have every kind of experts, professionals at their disposal. Gormley told those effected that he was not a lawyer. However, it will be interesting when these cases end up in the high court and supreme court to see where the liability for these catastrophic losses lies.

We are not just talking about replacing furniture here we are talking about serious structural damage. Is it o.k. to repair these buildings and then sit back and wait for the next flood (stimulus package)?

This type of stimulus package will be happening a lot more if that is any consolation! Oh, and BTW when the waters recede a lot of the NAMA assets will become visible again.

@Robert
I’m not a lawyer either so I do not know who is liable for the damage done.

A law or regulation should be introduced that one can only sell newly built houses together with flood insurance (structure + contents).

Just think all the good it could do if we could persuade Obama to do a bit of “Shock and Awe” on downtown Dublin…

Thats not even counting the stimulus from reconstruction 🙂

Planking money in bottles and burying them, would involve less collateral damage!

@ Robert Browne

Where the division between public and individual reposnsibility lies, is an interesting question.

If a public body was held responsible, then there would be caution not only on flood plains but on coastal developments, because of climate change.

@ Richard

I am not a lawyer but I will admit that I know more than the average person about building. I think builders would somehow get around your suggestion. They would set up their own insurance company pay a bond, issue the certificates then go bankrupt when the claims pour in, pun intended. There should be an outright ban on building on flood plains.

The responsibility lies with the “planners”. The word planning implies that there is a plan. What was the plan when they allowed buildings to be built on known flood plains? They have not just been negligent, they have given a specific interpretation to planning law which says, “go ahead and build we think this is the right thing to do”. Once the buildings were allowed they were built, marketed and sold. People have a right to believe that highly paid officials working high up with a plethora of experts knew what they were doing. That is why they are paid so much.

When you get planning permission permission, their is a sentence which says, “this document is an important legal document, keep it safely and put it with your deeds”. Planners failed to plan, the DoE failed, Board Pleanala etc. a whole raft of government departments have failed ordinary people.

They will all try to hide behind each other, the usual carry on. Investigations, buck-passing, hand wringing, talk of more tribunals but the public will not countenance tribunals. So. it will make it’s way to the Supreme Court. The government will make all sorts of noises about not having the money to pay if it goes against them etc. taxes/borrowing having to increase The Supreme Court will listen then rule against them.

They various authorities have been criminally negligent in allowing these developments.

Personally, I have worn a path to DCC to object to all sorts of unsustainable development. They hide behind the advice of their experts whom they do not mind paying from 1,000 to 5,000 Euro per day. The Supreme court will ask, “what would an ordinary person, a reasonable person, have expected to happen when you allowed builders to build on flood plains?” The answer will be that it is reasonable to expect flooding! It is what they call an inconvenient truth!

@Robert
I would have to disagree somewhat. If you choose to buy a house that is built on a floodplain, then I’m sorry, its your problem when it floods.

Can I sue the state for being hit by a car, when the state gave permission for that person to drive a car?

@ Michael Hennigan

The public will argue that they should be able to rely on these experts. The reality though is, they have proved that we cannot. The issues raised are quite similar to what has happened in the financial area where the products being sold were supposed to have been regulated. People were told that the buildings they were buying, valued by their own experts, not yours or mine, were worth x hundreds of thousands or millions as the case might be. I know they will say that these were current market valuations. The banks got NAMA but who is going to rescue the financial flood victims?

@Robert / insurance
Fair enough. The insurance should be offered by a bona fide insurance company, as certified by the Financial Services Authority.

There is no need to remind people that there are issues with the FSA.

@ Robert
I agree that there should be a ban on building in flood plains – Ireland is not short of land suitable for development so why build in flood plains? (answer: because it is cheaper as farmers are quite happy to flog their wet field to unscrupulous developers – not the farmers fault!).

However, I do not fully agree with you on the role of expert planners and an board planala. The latter only matters in cases where there are serious objections. I also wonder how many planning decisions, that would have stopped development in flood plains, have subsequently been overturned by our knowledgable county councillors in the council chamber??

This also points to the legal responsibility of different parties – developers and those who made the planning decision. At the same time the owners also bear some responsibility for their purchase – after all they could have employed their own expert – as you would when you buy an old house.

Calling Bastiat

@Edgar
“I also wonder how many planning decisions, that would have stopped development in flood plains, have subsequently been overturned by our knowledgable county councillors in the council chamber??”
Indeed:
http://www.thepropertypin.com/viewtopic.php?p=326279#p326279
A FF councillor/developer absented himself from the meeting as he had an interest in the lands…

It is not just the decisions that are the problem, it is the decisions based on who owns/wants to develop the land…

@ lain
You study the “rules” of the road and adhere to them for the half hour the test takes (most people), you get the license and away you go until you crash! If you are responsible for the crash you cannot hide behind a license. You cannot say the piece of paper gave you the right too fast!

Simlarly, the state gave the license to build the developments. If the state are found to have been criminally negligent they likewise should not be able to hide behind the flawed licenses they issued. They waffle on about “sustainable development” and then give permission for buildings which flood two or three years later! Something is wrong and they cannot hide behind the old Caveat emtor chestnut.

@ Edgar
I have noticed most decisions of any consequence especially for multiple dwellings end up with An Board Plaeanla. The are the de facto planning authority for most counties as the buck usually stops at their door and seldom goes on to the high court and rarely to the supreme.

@ Richard
I think the ban is more straight forward. Like you say, they have to get mapping and mapping fast and talking to old people and farmers who remember floods. I agree with your article in the indo about the contradiction between the ESB as electricity generator and minder of the valleys and wet lands, this needs to be sorted fast!

@ lain

Sorry typo. “the right to drive too fast”,

@Robert
I’m not a lawyer, but I would imagine that any liability would result in tortious action rather then criminal. However, I disagree with some of your points here. Lets take this from the start.

There exists a parcel of land, which lies in a floodplain.
Firstly (I believe) the zoning of the land is determined by the county council. They decide whether buildings can be erected on the land or not.
Assuming permission to build is given, you submit a proposal. Am I mistaken in believing that the judgement of the planners are more focused on the characteristics of the proposed build? The decision of build / no build is usually relative to a series of points – e.g. the building is not suitable for this locale, the building needs better sewage work etc, however the overall ‘build / no build in this location’ is set by the designated zoning of the land. So it lies with the council to determine if building can take place, and with the planners to determine what kind of buildings can be erected.

But again, the choice was taken by the agent to engage in construction on a plot of land subject to advice from an architect who will have engaged in their own feasibility study and EIS.

Partial negligence might be attributable to the planning office, however for each building constructed in a floodplain there should be ample evidence that the homeowner walked into the water with their eyes wide open and a tacit approval of the project is clearly given by the council, the planners, the architect and builders involved and finally, the homeowner himself.

But this takes us far away from the point originally made by Richard.

I checked with someone who knows. Flood risk is not a consideration in planning permission. Flood risk is a consideration in zoning, but only a consideration and not an overriding concern.

This needs to change.

@bjg / esb

September was relatively dry. If the reservoirs had been emptied then, they could have stored water in November. Instead, water had to be released to guarantee the integrity of the dams.

@bjg / drainage

Improved drainage of farmland would bring the water faster to the river and increase flood risk. Dredging rivers would bring the water faster to the sea and reduce flood risk.

Where’s Bastiat when you need him?

@Richard Tol:
“Dredging rivers would bring the water faster to the sea and reduce flood risk.”

From Parteen Villa Weir to Limerick, there are two channels: the Ardnacrusha headrace, capacity 400 tons per second, and the original course of the river, capacity perhaps 700 tons per second (that’s a guess) but recently, I’m told, running at over 800. Average annual flow in recent years was 180 tons per second.

You can’t “dredge” the original course of the river: you would in effect have to construct a new channel, starting at the flooded area above Parteen Villa Weir. And that channel would have to be considerably larger than the headrace. I don’t think it can be done. I suggest that the most economic option is for farmers and others to learn to live with flooding. And I see no reason why the ESB should not continue to manage the water levels at Parteen Villa.

bjg

@Richard Tol:
“September was relatively dry. If the reservoirs had been emptied then, they could have stored water in November.”

What reservoirs? The whole of the Shannon is the “reservoir” for Ardnacrusha.

“Instead, water had to be released to guarantee the integrity of the dams.”

Eh? I think you may be talking about Cork, a distant country about which I know nothing, or perhaps about Dublin, an even stranger place if we are to believe the tales of travellers. But on the Shannon, the release of water down the old course of the river, from Parteen Villa Weir, is the only way of reducing water levels on the whole of the rest of the Shannon basin, at least as far as Lough Allen.

bjg

@lain

I have a copy of a Decision to Refuse in front of me dated 22/09/09 and there are 5 reasons given for “Refusal” of 58 units.

The proposal would be contrary to the proper planning and development of the area in that:-

Reason No. 2. ” Planning Authority (Limerick City Council).
The site is located in an area known to be the subject of potential flooding as identified in Appendix 6 of the City Development Plan and OPW flood hazard mapping, where in the absence of a comprehensive Flood Risk Assessment and resulting mitigation proposals, the planning Authority is not satisfied that the proposed development is in compliance with the guidance set out in the ‘Draft’ Planning System & Flood Risk Management Guidelines, 2008′ and therefore could lead to the intensification of a flood risk at this location and in turn depreciate the value of property in the vicinity by reason of an increased flooding risk. The proposed development, by itself or the precedent it would set for other development in this area of potential flooding, is considered to be contrary to Policy W18 of the City Development Plan and is therefore contrary to the proper planning and sustainable development of the area as a whole”.

So I think it is not just about aesthetics any longer, they seem to taking this a bit more seriously now. Note also that this was before the recent deluge.

@ Richard Tol,

what this discussion really needs is a good physicist who is able to jump into an economic discussion. The physicist would be then able to inform that economist about certain theories in physics which state, that eventually all things fall apart. It is not a matter of if, but a matter of when.

Even mountains eventually fall apart. Even the sun will eventually burn out. It seems to me that an awful lot of economics depends on this quite crucial law in the physical universe.

I rambled on a bit in this blog entry:

http://www.irisheconomy.ie/index.php/2009/12/01/credit-and-financial-crises-in-the-long-run/

About the notion of inter-generational exchanges of wealth. It certainly applies in the case of environmental projects. What is credit? BP Woods asked. Credit in the best sense is a gift from the future. Where future generations need something very badly tomorrow, but can only obtain it, if the investment and the work happens today. It is like that movie, back to the future.

It is quite interesting to look at the old communist system in the eastern block. The communist system was focussed heavily on control of investment and about maximisation of production, moving to industrialisation and so on. But the dirty little secret of communism was that it consumed most of the infrastructure available to it from the time of the Tzars etc. In other words, communism had no choice in the end but to collapse because it had used up completely, what remained of its viable infrastructure – buildings, roads, bridges etc.

There was something about the communist system – perhaps a radical breakdown of the concept of ‘trust’ on many levels – which prevented one generation from granting ‘gifts’ to another, in order to maintain the infrastructure that was required over time. I know some architects who worked in the eastern block countries. They informed me that buildings were literally ready to fall down in about 1989. It all goes back to that same physical law I referred to in the beginning. Most economic activity has to do with attempting to ‘defeat’ the physical fact of decay.

Another good example that springs to my mind is the Concorde. Our generation found itself in a position where it no longer made economic sense to continue the Concorde jet airplane project and hand it on to the next generation. It had been handed to us by a previous generation who perhaps had developed it as a prestige project. It is funny that, when a technology like supersonic air travel completely stops. It doesn’t happen very often in the modern world. The internet is nothing like the internet that ARPA created in the 1950s. The thing has evolved and changed. What was good about the original ARPA net was its open architecture I suppose. We may not have the same open architecture to hand onto the next generation though.

In other words, the nature of privacy is what is eroding at the moment and being broken down. We will not have ‘privacy’ as a concept to hand on to our future generations like we received it. As Scott McNealy once said, you have already lost your privacy, get over it. I know I have rambled about a lot here. But I might close with the point that Noam Chomsky made. If the generation in the 1950s in the United States had been given the choice (they weren’t) between a better health system, or the personal computer, which would they have chosen. I was again reminded of that, when I asked someone yesterday what do they regret most about the last decade in the US? The person answered me, that it has taken this long in the white house to get a decent debate going on about the state of health care in the US.

It goes back to that same point I guess – even with a ‘system’ like health care – the physicist and his law of permanent destruction. Everything falls apart.

@ Brian

“the law of permanent destruction” yes I can handle that having lived in a country ruled by FF for so long, but what about the poor residents who live on these flood plains and who have to put up with the law of intermittent destruction. The insurance companies don’t fancy this proposition.

Is this not the broken window fallacy?

http://en.wikipedia.org/wiki/Parable_of_the_broken_window

The art of economics is to enable wise policiees and to maximise someone’s wealth.

The need for good quality housing with proper foundations and insulation etc has been known for over a hundred years. Still the builders cut corners because the PTB do not give a damn. Laws are meant to be enforced but not in Ireland. Taking a system from the British and pretending to obey it. I declare it a failure. Until local aurhorities have tax powers local people will ignore what goes on. Yet we also see this happen nationally? What is wrong with the Irish?No respect for laws that hold people equal?

Looking at a number of the flood pictures on the IT galleries I noticed the modern farm bungalow in two feet of water, built down in a hollow while further up the hill were old ruins. It seems some people wanted the convenience of being near the road so they built down in the hollow. Our ancient predecessors had common sense!

There is a real danger though in all of this discussion about flood plains, planning and whatever. Chief amongst these dangers is as follows.

For much of the time in Ireland, building of residential was un-planned and un-designed. Then when Ireland got more wealth, we began to demand better planning policy and better design. Our TV’s were suddenly full of programs showing one how to ‘improve’ your dwelling by spending more money on it.

Suddenly aesthetics and quality of environment became real factors in going about building projects. I always remember a statement used at Architecture school – the building should improve the site. That is, the site is not worsened or affected in any bad way because of development.

When we got wealthy in Ireland we demanded that of our planning system and we hired designers where possible to come up with innovative solutions. In a large measure we demanded something and we were given it. We got projects which enhanced their site. We got verandas, large balconies and bigger windows to our living rooms.

Our homes began to ‘relate’ to the landscape and to nature. The two were meant to hug and embrace one another is a virtuous relationship. You will see beautiful new hotels, apartment blocks and private homes built alongside rivers all over Ireland. They were built with the best of design and planning intentions.

No expense was saved in many cases and builders did believe they were improving standards of development, not dis-improving them. The fact was, that in many cases something like a ‘river view’ or canal-side, or lake shore selling name was essential. Architects wanted to show off their designs as having some kind of warm, cosy, eco-friendly co-existence with nature.

The buyers simply gobbled it up and queued up to buy. Nature became ‘sexy’. I find it hard to see it all from the buyer/victim point of view. People wanted homes built beside rivers, they wanted exclusivity, they wanted a ‘theme’, a brand, a slogan.

Developers didn’t simply acquire flood plain land often because they were short of land or ideas. They acquired flood prone land because they knew buyers liked rivers and nature, parks and wild life. Buyers wanted exclusivity and something that was a novelty.

I trust the novelty has worn off by now. But all one has to do is look at the brochures used to sell many ‘well designed’ projects in Ireland. Water features were a selling point.

A little bit more background to the above post while I am at it.

The best reference to try to understand this change in our culture is Naomi Klein’s book, No Logo. Surprisingly enough, the book is about nothing else except Logo’s. It is this sense that in the modern world one must belong to some kind of tribe, by wearing a brand or identifiable symbol which marks one’s identity. It is interesting that at the same time buyers were queue-ing up to buy Shannon banks real estate, they were going to shopping malls and buying X, Y and Z brand also. While driving between one and the other in some ‘W’ branded means of transportation.

I attended a lecture given by an editor of a Spanish architectural journal a while back. He noted that many of the STAR-itect buildings were designed to look as though they had been hit by an earthquake. There was a perfume called ‘Chaos’. High tech bombing aircraft began to look crumpled up and strange. Chaos, natural disasters etc became fashion-able. Buildings build according to the new ‘chaot-ic’ style became very good backdrops for photo shots of models for the best fashion magazines.

@Joe
No. This is not the broken window fallacy. Breaking a window and repairing it is good for economic activity (GNP) but bad for economic welfare (NNP).

By the same token, floods are bad for economic welfare (NNP) even if you do not count the distress.

At the same time, flood restoration does stimulate the economy. Part of the stimulus is insurance money. Over the years, we’ve given little sums of money to the insurers. Most of that money is invested abroad. It now comes back to us in one big sum. As in any recession, Irish households are saving extraordinary amounts in case they’d lose their jobs. People will use their savings to restore the damage, thus reducing the saving’s rate.

In a normal recession, we would look to the government to boost demand. In this case, flood restoration will.

This does not mean that the floods were a good for welfare. But they are for economic activity.

I wish I had a lot more time and material to contribute to the Irish economy discussion. I really do.

I have somewhat or completely withdrawn my energies these days from economic debate – seeing that I haven’t the energies to throw at it, sufficient to maintain a working knowledge of all the opinions, contributions etc. In short, I have fallen far behind progress in the great discussion. However, I know what I know.

I just finished watching a Yale university lecture about the financial crisis I had been meaning to watch. Geanakoplos, Shiller and Levin of Yale discussing their theories.

Robert Shiller

Shiller spoke a lot about culture. He picked up a lot on the issue of psychology in bubbles. He observed that people believed home prices would continue to rise by 10% per year indefinitely. What Shiller is taking about is very similar to what I tried to articulate above. The very sudden change in culture in the past ten years.

John Geanakoplos

Geanakoplos talked about reducing the principal amount in the loans associated with homes. The idea of reducing the principal amount ensures the subprime borrower still has some ‘stake’ left in their asset. Something at least to persaude them to hold onto it. Something of value to pass on to children later etc.

I suppose this relates to the flood damage issue also. In the sense, if people were in negative equity, un-employed and with a house under water, they would simply walk away from it. The mere fact that people are willing to re-invest in their homes, implies they still have something left to salvage out of the whole mess, somewhere down the line.

Richard Levin

Levin talked about throwing more man power at existing ‘pork belly’ projects to finish them in half the time. This idea of shovel ready projects. What about the projects where the shovels are already working Levin asked. Why not throw more people at those projects and finish them early?

Relating to my own experience, I will say that much for certain Irish property developers. They were inclined to finish projects as fast as they could. Indeed, that was the part about the development industry which disturbed many people. They tried to work too quickly. Some people would have preferred a more gradual and considered roll out of the work.

I can only relate to my own experience, but a company such as Danninger existed to provide many people with work doing projects. Rather than a company devoted to doing projects, which simply required man power. If that makes sense. The man power and employment was the primary driving force. Rather than the project. When you work this way, be prepared to get criticism. You are working too quickly. You should have considered more/better options. You can limited horizons and vision.

Levin offered one interesting point in his short talk. The ‘stimulus’ employed by the US government in the form of tax cuts was useless. Namely, because the welfare that people received in tax relaxation, they used to de-leverage. In other words, you throw over $300 billion at the economy and it creates no new employment whatsoever.

This might build upon Richard’s point above, where people are no using savings to fix flood damage. It is not like the tax cut which is used to pay down the credit card bills etc. The flood damage investment is money that finds its way back into the (local) economy.

The brief summary based on theories offered to use by John Geanakoplos, Robert Shiller and Richard Levin. (as it relates to flood damage)

The fact people invest in flood damage repair implies their is asset value left to salvage as opposed to none. (Geanakoplos)

The fact that investment in flood damage repair is not being used to de-leverage or save. (Levin)

The cultural phenomena which drove the asset bubble in the first place which resulted in the roll out of so many ‘river-view’ developments – the notion that a ‘river-view’ might help the asset price to maintain this steady upward trajectory. You can see this factor-ed into developments built all over Ireland. (Shiller)

Is this the Broken Window Fallacy I see before me?

@Geckko
See my response to Joe.

Richard,

Your entire explanation in your response to Joe seems to reinforcement that this is a broken window fallacy.

The entire notion rests on the fallacious idea that savings are in fact bad, when in reality they constitute demand for producers’ goods – and are in fact the engine of growth.

On the plus side, I’ve never seen anyone so remorseful in posting such a horrific idea.

@Matt
The broken window fallacy is a device to teach undergraduates the difference between GDP and NDP.

I suggest that you read Dacy and Kunreuther, Albala-Bertrand, and Alexander.

Richard.

You’re right. How could I be so silly.

We should stuggle in the years ahead to save and invest in capital stock located in prime flood plains. As the waters wash away our efforts, we will be rewarded with rising national output.

I am being glib, but to highligh such misundersanding of Keynes’ theories is the true reason we use the Broken Window Fallacy in undergrad classes.

What you really needed to say was that we will now need to use our scarce economic resources to replace lost capital stock. While that appears to give a short-term boost to output, we are poorer for it.

The partially mitigating factor in this case is that some, some, of the value of the lost capital stock was insured by foreigners. But even then, we face higher premiums now as risk will surely be reassessed and repriced by the market, so we will be paying more out to foreign reinsurers in the future.

In brief:
the net foreign transfers < insured value of lost capital stock < economic value of the lost capital stock = lost income.
Plus – NPV of future cost of insurance premium has increased.

So we suffer a net loss (but a brief injection of income on a gross basis).

I think it is a useful educational piece to let people understand that brief periods of reconstruction after natural (or other) disasters are of illusory benefit to an economy.

Just a interesting point.

If we could engineer the “natural” destruction of many of the excess capital stock of residential housing AND it is reinsured at values in excess of it economic value (i.e. bubble prices, or maybe even anything above zero), then we could be net winner with this Floodsian economics. As long as we aren’t required to build more houses with the transfers we get.

@Geckko

Pls read the literature.

49 replies on “Keynes and floods”