15 Trillion Gallons Of Keynesian Goodness?

If you ever wondered why our monetary central planners and their Wall Street megaphones are so clueless about the on-going deterioration of capitalist prosperity in America, look no farther than this bit of tommyrot from JPMorgan’s chief economist. Therein one Michael Feroli avers that Harvey’s estimated 15 trillion gallon deluge on Houston may appear to be crushing tens of billions of residential, commercial and industrial properties, but not really.

Alas, what finally appears to be real news from CNN is not all that. By the lights of Feroli’s economics, Harvey is a fake disaster that will lead to an increase in GDP!

As a general rule, hurricanes tend to be a short-run depressant and a medium-run boost to economic activity. Sources within the insurance industry as well as J.P. Morgan’s insurance industry research team estimate that the physical damage will be in the $10-$20 billion range…….Total damage, and total rebuilding, should be greater than this amount, as invariably there will be uninsured losses that will be repaired. Even taking this into account, we believe the overall impact on GDP in Q3 and Q4 should be positive but very small, consistent with the historical experience. For this reason, we are not changing our top-line GDP forecast.

We could send him Bastiat’s essay on the “broken window fallacy” and be done with it. After all, $30-50 billion (or even more depending on the final storm phases) of perfectly good capital stock—-drilling rigs, oil and gas platforms, refineries and chemical plants, office buildings, hotels and shopping malls, public roads and utility lines and hundreds of thousands of residences and apartment units—are being destroyed or badly impaired.

That subtracts from societal wealth pure and simple: There is no economic growth or Keynesian goodness to it!

Time to buy old US gold coins

Indeed, if that simple proposition were not true, why leave it to the chance of Mother Nature having one of her episodic hurricane tantrums? The geniuses on Capitol Hill might as well be encouraged to deploy demolition crews around the country to foster the need for vast rebuilding efforts in their wake, thereby sending the GDP growth stats soaring and Home Depot’s stock to new all-time highs.

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……(Feroli) has proceeded straight to the “broken window fallacy” nirvana: the growth that destruction somehow always guarantees in a Keynesian world. If that was the case, why not just nuke the US and rebuild it from scratch, assuring triple digit GDP growth for decades to come.

So the reason to focus on Hurricane Harvey’s 15 trillion gallon deluge and the nattering bits of Keynesian idiocy it has elicited among Wall Street economists is that it is a metaphor for the “broken window fallacy” that lies at the heart of government and central banking policy all around the world. T0 wit, true prosperity and growth arises from gains in free market efficiency and entrepreneurial innovation, but the impact of state policy— especially its central banking branch—is everywhere and always to promote inefficiency and block innovation.

Stated differently, in the economic sphere the state is reactionary; it gets captured by lobbies and economic players with a vested interest in preserving the status quo or in artificially directing economic resources and activity toward their investments, not the best and highest uses determined by the free market.

A powerful lesson with respect to this truth is happening before our very eyes today as the Army Corps of Engineers has been forced to open the Addicks and Barker dams 17 miles west of downtown Houston and thereby knowingly and deliberately destroy potentially thousands of homes downstream. This seemingly unaccountable action is taking place because the alternative would be even worse—–namely, uncontrolled flooding in the communities around the reservoirs, which are now overflowing their banks. At one point, the water level was rising by a half of foot per hour.

Needless to say, both of these dams were constructed by Washington in the 1940s to reduce flooding along Buffalo Bayou, a narrow body of water that runs through downtown Houston, at the behest of local developers. It was part of the much larger project of channeling and dredging the bayou and turning Houston into a major deep water port via the massive Houston Ship Channel. Over the years literally tens of billions of Federal dollars have been spent to deepen the channel to 45 feet and widen it to 530 feet so that ocean-going ships and tankers can navigate 50 miles inland!

During the years since then, of course, a whole lot of “GDP” has been generated in downtown Houston owing to the perception that flooding risks had been sharply reduced, bringing billions of windfall gains to land owners and property developers who got in on the ground floor. Likewise, the massive refining and petrochemical industries berthed along the Ship Channel are there owing to the Army Corps projects, as are the fashionable communities and commercial districts that developed around the reservoir lakes. The Great Deformation:... David Stockman Best Price: $2.22 Buy New $8.33 (as of 07:24 EDT - Details)

In short, Houston was not created by God, pioneers or free market developers and industrialists. It was all made possible by the handiwork of the Army Corps of Engineers and the Texas Congressional delegation. And that reaches way back to the 1930s, when one Jesse Jones, a Texas banker/developer who ran the original crony capitalist pork barrel known as the Reconstruction Finance Corporation, provided much of the financing for the Houston Ship Channel.

Needless to say, all of this channeling, dredging, filling, banking, contouring and rerouting of mother nature’s original scheme of things ended up creating a fiendishly complex water management system that mostly worked well enough during “normal” conditions for the last 75 years. But then came Hurricane Harvey, which busted all the parameters on which the water management system had been predicated. Now even CNN is truthfully reporting the unmitigated chaos and perverse feedbacks and backflows that have been unleashed.

In the case of the two reservoirs depicted in the map below, they are now overflowing their banks and wreaking havoc on local residences as shown in the adjoining picture.—- even as the waters released by the Army Corps are surging downstream to inflict even more damage. At length, of course, the impacted properties will be rebuilt and toted up as gains to GDP!

But that does not gainsay the patently obvious fact the billions of capital and wealth are being destroyed in the here and now.

More importantly, since it is estimated that less than 15% of Houston property damage will be covered by flood insurance, the upwards of $100 billion that will be needed to rebuild these areas will mostly come from current and unborn US taxpayers—–97% of whom do not live in Houston!

That’s right and the irony of the matter adds insult to injury. The massive pending disaster relief bill, which will be rushed through Congress with hardly a question asked, will be used to rebuild the very developments that were fostered years ago by another batch of Federal money paid for by taxpayer who were also not from Houston. That is, the huge Army Corps of Engineers flood control and navigation projects that made Houston possible in its current configuration were funded overwhelmingly by taxpayers in New Hampshire, Iowa and Oregon etc.

That’s because no city fathers in their right mind would have stumped up their own nickels to fund these gigantic water projects that always stood in harms’ way. Those risks and dangers were especially known in coastal Texas owing to experiences like the Galveston Hurricane of 1900 that killed upwards of 10,000 residents. Nor is it likely that they could have extracted the massive levies required from local taxpayers—-given that the gains from the resulting developments went to the few and would have been paid for by the many.

Indeed, back in the day at OMB, we were the scourge of the Army Corps and the water project pork barrel, and before that we had even tried to help Jimmy Carter defund the worst of them as a junior member of the US House. Our essential argument was that the natural, efficient order of things—-even in this industrial age—-did not entail putting a major city below sea level in a Hurricane Corridor (New Orleans) or building deep water ports 50 miles inland (Houston).

But if it was to be done at all, we argued, it needed to be funded with stiff user fees and by local taxpayers only. Likewise, the recurrently necessary economic bailouts, which Washington politicians are pleased to call “humanitarian disaster aid”, needed to be funded from local insurance pools built up during fair-weather times by communities, industries and developers who insisted on plopping down in harms’ way.

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Needless to say, Jimmy Carter’s veto of the water projects bill got over-ridden and President Reagan’s effort to kill abominations like the Red River project in Louisiana and Arkansas got cancelled when Senator Long’s vote was needed to pass the tax bill.

We also tried to eliminate the counter-productive subsidies embedded in the national flood insurance programs which encourage developments on vulnerable flood plains by disguising the true cost of building there. Needless to say, those efforts were thwarted by a bipartisan flying wedge—-even though environmental groups like the National Wildlife Federation strongly supported curtailment.

Indeed, two decades ago the latter published a study called “Higher Ground” which warned that Houston was a disaster waiting to happen and that the program was so deeply flawed that just 2 percent of the program’s insured properties were receiving 40 percent of its damage claims. One home in Houston, for example, had flooded 16 times in 18 years, generating more than $800,000 in recoveries for its owner even though it was valued at less than $115,000.

As Michael Grunwald summarized the report,

Houston, we have a problem,” declared the report’s author, David Conrad. The repetitive losses from even modest floods, he warned, were a harbinger of a costly and potentially deadly future. “We haven’t seen the worst of this yet,” Conrad said. Houston’s problem was runaway development in flood-prone areas, accelerated by heavily subsidized federal flood insurance.

Now that Hurricane Harvey has turned Conrad’s warnings into reality, it’s worth noting that Houston’s problem was in part a Washington problem, a slow-motion disaster that was easy to predict but politically impossible to prevent. Congress often discusses fixing flood insurance to stop encouraging Americans to build in harm’s way, but the National Flood Insurance Program is still almost as dysfunctional as it was 19 years ago.

It is now nearly $25 billion in the red, piling debt onto the national credit card. Meanwhile, cities like Houston—as well as New Orleans, which Higher Ground identified as the national leader in repetitive losses eight years before Hurricane Katrina— continue to sprawl into their vulnerable floodplains, aided by the availability of inexpensive federally supported insurance.

Hurricane Harvey is not the first costly flood to hit Houston since that 1998 report. In 2001, Tropical Storm Allison dumped more than two feet of rain on the city, causing about $5 billion in damages. Two relatively modest storms that hit Houston in 2015 and 2016—so small they didn’t get names—did so much property damage they made the list of the 15 highest-priced floods in U.S. history.

But Houston’s low-lying flatlands keep booming, as sprawling subdivisions and parking lots pave over the wetlands and pastures that used to soak up the area’s excess rainfall, which is how Houston managed to host three “500-year floods” in the past three years.

We fully understand, of course, that modern welfare state democracies are explicitly engaged in organized larceny in the push and pull of the perennial pork barrels embedded in operations like the Army Corps’ water projects and the national flood insurance program… But absent the Keynesian broken window fallacy, it would be at least obvious that these programs are a zero sum game at best, not a motor force of honest economic growth.

Now comes the 15 trillion gallon inundation, which is a horrible thing for the 3.4 million citizens who over the decades have been lured into domiciling their lives, properties and investments in the Keynesian project of Houston. But the incredible proposition that this will result in economic gains, rather than huge, permanent deadweight economic losses, is exactly why the geniuses of the Imperial City are now fixing to attach a $100 billion Houston bailout bill to a measure lifting the nation’s $20 trillion debt ceiling to pay for it.

Yes, something broken this way comes. And it’s a lot bigger than the tens of thousands of (broken) windows now underwater in Houston.

Reprinted with permission from David Stockman’s Contra Corner.