Posts Tagged ‘New York City’

Rejoice For The Stimulus Project Called Hurricane Sandy!

In Economy, Job Creation, Obama Administration on November 2, 2012 at 8:06 pm

Do you believe in stimulus programs?  Do you believe jobs are created by the government?  Are you Keynesian?  Are you voting for Barack Obama?

If so, rejoice!  Hurricane Sandy is a massive stimulus program.  Set aside the civilian deaths for a moment and focus on the government and private sector spending.

Think of Sandy as a $60 billion dollar injection of stimulus. [1]

In one watery swoop, Sally sept into millions of tight-fisted consumers’ wallets.  A frugal Congress can’t stop government spending via FEMA.  “Fannie Mae and Freddie Mac said they will offer help to borrowers whose homes were damaged or destroyed.” [1] 

Deductibles and out-of-pocket expenses to fix broken windows will rev up the metropolitan New York economy.  Think of all the drywall and generators sold by Home Depot.  Surely, pump makers like Britain’s Andrew Sykes Group are busy.  Ruined cars must be replaced, employing autoworkers in Japan and the USA. 

NYC looters [2] act as stimuli, forcing small businesses to restock.  Retailers who love a few dozen TVs and smartphones in a robbery have to replace their electronic inventory.   This creates jobs, doesn’t it?  Even if the products are made abroad, Americans are employed in the ports, on the railroads and at the trucking firms that bring in the replacement wide-screen plasmas.  The looters might even be 99%’s, taking from 1% retailers.

The rebuilding money comes from the federal government, consumers and insurance companies.  Isn’t it good to raid greedy insurance companies?

But does Mother Nature’s destruction of a 2011 Impala actually help us?  The 2012 Impala replacement comes from a combination of an insurance company’s settlement plus a consumer’s deductible.  Is that money free? 

The illustrious French economist Frederic Bastiat addressed the Lindsay Lohan-like thinking behind the above “Sandy stimulus” in his classic  “That Which Is Seen, and That Which Is Not Seen.” [3]   Bastiat looked at the example of the shopkeeper, whose window is broken by someone.  The Obama-Krugman view is that broken windows are very good.  The shopkeeper spends six francs to purchase a window; someone is paid to install it.  The window seller and the window installer receive those francs which they then spend elsewhere in the economy, say for beer and fishing rods, employing even more.  The broken window bonanza flows through the economy, creating what the Keynesians call a “multiplier effect”.  A single dollar spent fixing a window broken by a vandal might become $5 as it filters through the world economy.

The strange conclusion becomes that the economy really needs more broken windows.  Vandals are heroes.  Bastiat saw through that twisted logic, writing about the unseen effects, namely the things the shopkeeper would have spent the six francs on something else, which would have the same multiplicative effect on the economy.  The difference would be a net increase in the economy.  Instead of ending with a replacement window no different from the previous pane, at a cost of six francs, the shopkeeper would have bought something else.

As our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented. [3]

Let us take a view of industry in general, as affected by this circumstance. The window being broken, the glazier’s trade is encouraged to the amount of six francs: this is that which is seen.

If the window had not been broken, the shoemaker’s trade (or some other) would have been encouraged to the amount of six francs: this is that which is not seen.

And if that which is not seen is taken into consideration, because it is a negative fact, as well as that which is seen, because it is a positive fact, it will be understood that neither industry in general, nor the sum total of national labor, is affected, whether windows are broken or not.

The Keynesian fallacy rests on an idea of huge amounts of savings, selfishly unspent, that could be employing someone.  In the USA of 2012, most everyone is leveraged.  The US government is $16 Trillion in debt, with no hope of repayment.  Consumers are struggling to make ends meet, many deep in debt.  Tens of millions of homeowners’ mortgages are as underwater as the Queens-Midtown Tunnel.  Insurance money is not free, it comes from somewhere.  Property insurers will liquidate their stock and bond holdings to pay Sandy claims, slicing money from the economic system.  They will replenish those reserves by reducing dividends, which takes money out of the economy, and by raising insurance premiums, which also grabs cash from the economy.

Sandy is not really a Stimulus project for the US economy.  It’s an economic calamity just as it’s a humanitarian crisis.





Which City Has The Most Inequality: New York or Salt Lake?

In Gini Ratio, Inequality on October 28, 2011 at 1:44 am

Following up on my state level inequality post, the Census Bureau has now released metro area details, also based on Gini ratios.  [1]  New York City has the greatest level of inequality, which is quite consistent with the hypothesis I advanced in

Salt Lake City was the most equal metro area. 

Coincidentally, Salt Lake City’s Utah is arguably the most Republican in the nation, whereas New York City and New York State are amongst the most Democratic.  This presumably is the opposite of what many expect.  As shown in my state inequality post, higher income tax rates are not even correlated with equality.

The least equal metros are:

1. New York City [labor specialization in finance, fashion, advertising and media]

2. Miami-Fort Lauderdale [home of many wealthy retired New Yorkers]

3. Los Angeles [a city with a high degree of labor specialization in entertainment, as mentioned in my post]

4. Houston [a city with a high degree of labor specialization in energy]

5. Memphis

6. New Orleans

7. San Francisco [a city with a high degree of labor specialization in technology]

8. Birmingham, AL

9. Chicago [a city with a high degree of labor specialization in finance]

10. Boston [labor specialization in biotech and technology]

It is interesting and perhaps not coincidental that other highly unequal cities are located in the Deep South and smaller than the other top 10 (Memphis, New Orleans, Birmingham).  One might hypothesize some vestiges of historic racial discrimination might possibly be a factor.  But, some of the least unequal (e.g. Virginia Beach-Norfolk #2 least unequal is Deep South and Raleigh-Cary, NC and Richmond, VA are also below average inequality).  The trick with testing such a theory is it is difficult to measure city by city “racism” in an objective statistical way.   Other factors, such as education systems, might also be a contributor to inequality in those Deep South cities.

My urbanization-concentrated specialized skills theory was as follows:

“Why would sparsely populated states be more equal and densely populated states have a greater gap between the rich and poor?  I hypothesize higher density means more urbanized areas, which means more specialization of skills.  The economic concept of division of labor shows how the greatest economic benefits come from having each person focus on what they are most economically productive at and then trading their output with the output of someone else for all other items.  One way to think of it is to imagine Steve Jobs working in isolation in a rural area.  He would have less time to spend inventing computers and whatnot if he was unable to employ other people to mow his lawn, clean his car and other household chores.  Imagine if he had to do his own legal work, build his own house, cook his own food because there were no restaurants, etc. 

Large cities allow a high degree of division of labor.   Urban areas tend to be centers of economic specialization.  There are centers of specific industry specialization such as entertainment in Los Angeles, energy in Houston, finance and media in New York, insurance in Hartford, government in Washington DC, pharmaceuticals in New Jersey, autos in Detroit and technology in San Jose.  Most cities provide network benefits for commerce.  Corporate headquarters are mostly found in large metropolitan areas as employers can easily find necessary skilled workers in management, marketing, human resources, accounting, law, consulting and finance. 

The concentration of highly paid professionals in these large cities also leads to a concentration of poorly paid service workers because of the high degree of division of labor.  Whereas a small town worker may handle many household chores on their own, the highly compensated professionals around big cities like Los Angeles and New York hire maids, nannies, gardeners and even dog walkers.  They outsource some of their work to dry cleaners and restaurant employees.  They also may do more retail shopping, which means more need for low skill, low wage workers at retailers plus truck drivers and distribution center workers to deliver the goods.  It is no surprise, then, that large cities like Chicago, New York, Detroit and Los Angeles are both very rich and very poor at the same time.” 

The wealthy professionals living in Atherton, CA, Huntington Beach, CA, Wilmette, IL, Grosse Point, MI and Irvington, NY trade some of their copious amounts of money for leisure time by sub-contracting low skill work like house painting and pizza delivery to low skill workers.  These low skilled workers are generally paid below average wages, which helps explain why the large cities, and the states they reside in, are both rich and poor.  This helps explain the high Gini ratios in the more densely populated states.” [2]


[1]  Technically, the non-state District of Columbia is less equal than any state.