Pls read the literature.

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.

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.

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

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.

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)

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.

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.

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.

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.

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?

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

“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.

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.

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.

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

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

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.

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.

This needs to change.

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.

Sorry typo. “the right to drive 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!

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

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.