Tag Archive for: Economic Fallacies

Debunking Hurricane-Season Fallacies—3 Economic Fallacies to Watch Out For

You might be prepared for a hurricane, but are you prepared for a deluge of fallacies?

With hurricane season upon us, many are preparing for the worst. Windows are being boarded up, pantries are being stockpiled with extra food and water, and rescue crews are monitoring weather forecasts closely. Some have already experienced the worst, and are no doubt grateful they were ready when they got hit.

But while many are prepared for the hurricanes that sweep in, few seem prepared for the deluge of economic fallacies that inevitably accompanies these storms. These fallacies rain down from the highest levels of government and can be even more destructive than the hurricanes themselves. At best, the fallacies cause confusion and panic; at worst, shortages and life-threatening miscommunications.

So, in an effort to help us prepare for the storm before it’s too late, let’s explore three common fallacies that can come up during hurricane season.

The broken window fallacy is a classic hurricane-season misstep. “Hurricanes may do damage,” the reasoning goes, “but look on the bright side. Think of how many jobs will be created because of the destruction. Think about all the demand that will be stimulated. Things may look bleak, but this is actually good for the economy.”

Bastiat debunked this reasoning in his 1848 essay That Which Is Seen and that Which Is Not Seen, and countless economists since have echoed his remarks. In the essay, he tells the parable of a shopkeeper whose careless son breaks a window, and he asks the reader whether this is good for the economy. At first glance, it’s tempting to say yes. But as Bastiat shows in the story, this conclusion ignores the unseen effects of the broken window.

“If…you come to the conclusion,” he writes, “as is too often the case, that it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, ‘Stop there! your theory is confined to that which is seen; it takes no account of that which is not seen.’”

What is not seen, briefly, is the lost opportunities, the things that could have been done with our resources had they not been needed to replace the broken window. Taking those into account, it becomes clear that the broken window is harmful to the economy. After all, there is now one less window in our stockpile of goods.

The same reasoning applies on a larger scale. There may be plenty of jobs and demand when a hurricane destroys a town, but saying this is “good” for the economy is simply wrong. If this logic were true, the more destruction we experience the better off we’d be! But economic reasoning—and plain common sense—tells us this can’t be right.

Every time a hurricane comes in there is a surge of worry about so-called price gouging—raising prices sharply in response to a supply or demand shock. Hurricane Ian has been no different.

“I want to add one more warning…to the oil and gas industry executives. Do not — let me repeat, do not — use this as an excuse to raise gasoline prices or gouge the American people,” President Biden said on Wednesday. “This small temporary storm impact on oil production provides no excuse, no excuse for price increases at the pump. None.”

“If the gas companies try to use this storm to raise prices at the pump,” he continued, “I will ask officials to look into whether price gouging is going on.” “America is watching,” he added. “The industry should do the right thing.”

According to Biden, the “right thing” for the oil and gas industry is to keep prices right where they are. But if access to gasoline for those who need it most is the goal, keeping the price fixed during a supply disruption will only make matters worse

“[Anti-price-gouging] laws keep prices low during natural disasters but lead to bare shelves, closed stores, and empty gas stations,” explains economics professor Lili Carneglia. “This happens because the low mandated prices push consumers to purchase more water, gas, flashlights, and so on. Yet at the same time, sellers aren’t financially motivated to expend any additional effort to supply more of these necessities. Why would they spend their time or money bringing in additional goods during a disaster only to sell them for the same price they’d get under normal circumstances? This imbalance between the interest of buyers and sellers causes shortages, leaving many without anything at all.”

Laws against price gouging—and the disdainful attitude toward “price-gougers” that pervades our culture—are born from the fallacy that keeping prices low makes goods more accessible for those who need them. In many cases, this simply isn’t true. It’s not a question of having a high price or a low price. It’s a question of having a high price or an empty shelf.

And if someone’s truly in need, you can bet they’ll prefer the high price over the empty shelf any day of the week.

Another policy that sometimes gets discussed in the wake of hurricanes is the Jones Act. Officially called the Merchant Marine Act of 1920, the Jones Act makes it illegal to transport goods by ship between US ports unless the ship is US-built, US-flagged, is owned by Americans, and is at least three-quarters crewed by Americans.

The Jones Act has recently become a hot topic again because of the situation in Puerto Rico. The island is suffering from the damage wrought by Hurricane Fiona and is in desperate need of supplies. As it happens, a ship carrying 300,000 barrels of desperately-needed diesel fuel from Texas was right next to the island on Monday. However, the ship is not Jones Act compliant, so it had to wait until a “temporary and targeted” waiver to the Act was granted Wednesday before it could unload the fuel.

This isn’t the first time the Jones Act has been waived to facilitate hurricane-relief efforts. It was also temporarily waived following Hurricane Katrina, Hurricane Sandy, Hurricane Harvey, Hurricane Irma, and Hurricane Maria. Coincidentally, the Hurricane Maria waiver also concerned Puerto Rico, also happened in late September (2017), and also took two days before it came through.

So, why does this harmful Act exist in the first place? Essentially, the goal is to create a “strong” domestic shipping industry to ensure the US isn’t too dependent on other countries for its shipping (there’s also a mercantilist argument, but we’ll leave that aside for this discussion). If we require these ships to be all-American, the reasoning goes, US shipping will thrive and can be counted on to facilitate commerce and lend a hand should it be needed for national defense. The fear is that American ports, absent these restrictions, would come to be dominated by foreign ships built in foreign shipyards, and should there be a war, those ships would be called back to their home ports, leaving America with few vessels and little shipyard infrastructure to use for commercial purposes (or to commandeer for war).

The idea that it’s good for a nation to be “self-sufficient” in certain key industries like shipping is a typical protectionist talking point, but it has serious problems. Though it might seem like being “self-sufficient” makes us strong and being “dependent” on other nations makes us weak, the reality is exactly the opposite.

Imagine trying to make your home self-sufficient, or even your city or state. You’d have to grow all your own food, mine your own metal, and make everything yourself. Even if trade were only restricted in a few industries, it wouldn’t be long before you became an economic lightweight compared to what you could have been. Your technology will fall behind and you’ll struggle to accumulate capital. In short, your economy will be severely weakened.

This is the inevitable result of trade restrictions. To the extent that you cut yourself off from the world, you cripple yourself. And this is just as true on a national scale as it is on a more local scale.

“What protection teaches us,” said economist Henry George (1839-1897), “is to do to ourselves in time of peace what enemies seek to do to us in time of war.”

All that to say, hampered disaster relief is but one of the many ways “self-sufficiency” makes us worse off.

As with hurricanes, the key to mitigating the damage of economic fallacies is being prepared for them. If we don’t know even basic economics, we are setting ourselves up to be duped, and there are real consequences when that happens.

So just as we take time to board our windows and stock our pantries, let’s also take time to learn economics and think through some of the more common economic fallacies.

Given the stakes, it’s just the prudent thing to do.

This article was adapted from an issue of the FEE Daily email newsletter. Click here to sign up and get free-market news and analysis like this in your inbox every weekday.


Patrick Carroll

Patrick Carroll has a degree in Chemical Engineering from the University of Waterloo and is an Editorial Fellow at the Foundation for Economic Education.

EDITORS NOTE: This FEE column is republished with permission. ©All rights reserved.

Economics Can Help You Understand Why Warner Bros. Sunk $90 Million Batgirl Movie

Many questioning the decision are victims of the sunk cost fallacy.

Warner Bros. Discovery (WBD) recently made headlines when they canceled the release of their upcoming Batgirl movie, starring Michael Keaton, J.K. Simmons, and Leslie Grace in the title role.

Movies get canceled all the time, but what shocked many was the fact that Batgirl was already finished filming. In a statement, Warner Bros. Discovery (WBD) explained that shelving the project was part of a “strategic shift.”

“The decision to not release Batgirl reflects our leadership’s strategic shift as it relates to the DC universe and HBO Max,” the statement read. “Leslie Grace is an incredibly talented actor, and this decision is not a reflection of her performance.”

The decision led to confusion and criticism from many. One of the actors in the movie went as far as to call WBD CEO David Zaslav an imbecile.

The response from fans was one of bewilderment. Why cancel a movie that you’ve already spent $90 million on? After spending so much, why not try to make back that money?

Without realizing it, many who argued the movie should be released did so by invoking one of the most common economic fallacies.

People, whether in business or just daily activities, make their decisions based on whether they think the benefits will outweigh the costs.

When a studio greenlights the creation of a movie, the studio heads must believe the benefit they get is more than what it will cost to make the film. If a CEO expects only 100 people are willing to spend $10 for a particular movie, and hiring the actors costs them $20,000, the movie won’t get made.

It’s possible studios may even receive some intangible benefits from making a beautiful artistic movie, but those intangible benefits still wouldn’t warrant extremely high costs.

In a similar way, when people buy stocks, they’ll only do so if the benefit outweighs the cost. If a stock costs you $75, and you’re absolutely certain the stock will be worth $100 tomorrow, you’d almost certainly buy that stock.

So people will do something if the benefits exceed the costs. But it’s important to note that we’re talking about future benefits and future costs. Past costs have no place in future decision-making.

To understand why, let’s return to our stock example.

Say after buying your stock the price actually fell the next day from $75 to $50. Even worse, you now have a strong reason to believe the price will fall to $25 tomorrow. What should you do? Well, assuming your intuition is right you should certainly sell.

While there may be a temptation to hold on to the stock to “make back what you lost,” it’s important to note that if you do hold the stock when it drops from $50 to $25, the final result is that you’ve lost $25 more dollars. The fact that you already lost money does not change the fact that selling at $50 leaves you richer than “riding it out” and letting it fall to $25.

The initial loss when the stock falls in value from $75 to $50 is what economists call a “sunk cost.” It isn’t recoverable and shouldn’t change the decision to sell the stock before it falls to $25. While people may dislike the idea of “selling at a loss,” it’s superior to an even bigger loss.

When people believe they should act on sunk costs rather than future costs, economists call this the “sunk cost fallacy.”

And the sunk cost fallacy applies to movies too.

The question on whether releasing Batgirl is a good idea has nothing to do with the $90 million already spent on production. That money is a sunk cost.

What matters for the studio is whether the release of Batgirl will bring in more money than the release would cost in the future.

So what would be the relevant costs of releasing Batgirl?

First, as IGN points out, WBD might lose out on tax write-offs if the movie is released. But this isn’t the only cost.

Whether company resources are used to put Batgirl in theaters or on a streaming service, those resources could be used to promote and place other projects instead. Each dollar spent making Batgirl available to viewers is a dollar not spent on a different project.

Finally, and maybe more importantly, WBD could have an enormous cost imposed on their brand if Batgirl turned out to be a bad movie.

The “DC Extended Universe” has already experienced its fair share of troubles. Critics and audiences have been disappointed by several portrayals of DC heroes.

From personal experience, I haven’t paid to watch a DC movie in theaters since the total dud portrayal of Superman that was Man of Steel.

I’m not interested in watching a DC Universe that can’t get its flagship hero right. And many fans may decide a bad Batgirl movie is the straw that breaks the camel’s back.

So even if DC already spent $90 million producing the movie, what good would it do to release the movie if it alienated more fans than it satisfied?

Although I’m not privy to any insider information, my suspicions are strongly towards this last explanation. The Marvel Cinematic Universe stands as an example of how valuable the comic book movie brand can be, and it’d be no surprise if WBD executives were trying to raise the bar on DC movies to reach that level.

So WBD’s decision to cut the already-finished Batgirl isn’t some crazy mistake where a corporation is abandoning a valuable movie.

The company likely believes the cost is greater than the benefit. And given the recent track record of DC movies, I don’t doubt they’re right.


Peter Jacobsen

Peter Jacobsen teaches economics and holds the position of Gwartney Professor of Economics. He received his graduate education George Mason University. His research interest is at the intersection of political economy, development economics, and population economics.

EDITORS NOTE: This FEE column is republished with permission. ©All rights reserved.