The ice storm that paralyzed hundreds of thousands of North Carolinians in December set off much discussion about its impact and meaning. As with anything, some of this discussion has been useful, but other of it widely missed the mark. Let me take this opportunity to set the record straight, as I see it, on the real story of the ice storm and its aftermath.
Shortly after the storm hit, the media wanted to know the economic impact. How much would the storm cost the economy? Would the storm help or hurt retailers during the Christmas season? Could storm-related spending actually help the economy move out of the recession?
These are all legitimate questions, and my economist colleagues and I did our best to answer them. We generated various numbers for the first two questions. But I think the greatest confusion was with the last question. Could having a natural disaster like a winter ice storm actually benefit the economy?
The logic of those who answered “yes” goes the following way: The storm caused households, businesses, and government to spend money on cleanup and repair that they hadn’t planned to spend. More spending therefore circulated in the economy, and so aggregate economic activity was greater with the storm than without it. The spending after the storm was thus a positive “jolt” to the economy.
Unfortunately, this kind of thinking falls prey to the “broken window fallacy,” named for the idea that local economies can be stimulated by hiring hooligans to break windows, thereby necessitating spending to repair the windows. Economies can’t be improved simply by destroying existing structures and machinery and rebuilding them. Doing so may cause an apparent short-term spurt in spending, but it only brings the economy back to where it was before the destruction. It also ignores the fact that money spent on rebuilding could have been spent in some other productive way that actually improved the economy.
If there has been some additional spending after the storm, it would come at the expense of reduced spending in later months. So spending has simply been transferred from one time periodto another time period. Common sense tells us that destroying valuable property is not good for the health of our finances or the economy at large. In this case, go with your common sense.
When the lights and heat were out for several days, many of us probably thought: I certainly will appreciate all our modern conveniences and gadgets when the power comes back.
Of course, our appreciation for what we have will fade as time passes from the storm, and this is understandable. But consider, for a moment, what we have today that is taken for granted. As recently as 1970, only one-fourth of households had a dishwasher and frost-free refrigerator, only one-third owned a color TV or had central heat and air-conditioning, and just one-half of households possessed a washer and dryer. Today, an overwhelming majority of household have these items. Of course, most of these appliances and gadgets are powered by electricity, and virtually every home and apartment today is connected to electricity. But as recently as 1930, only two-thirds of households had access to electricity, and in 1900, electricity was used by a mere 3 percent of households.
And speaking of the downed power lines being repaired, there’s been much discussion since the storm about how fast or slow this occurred. There will be assessments and judgments made by both the utility companies and state and local governments.
But ultimately, the consumer is the one whose assessment most counts. In a normal competitive market, a consumer punishes a company the consumer thinks didn’t perform well by not patronizing that firm in the future. Conversely, the consumer rewards a company that did perform well by continuing to patronize the firm or by moving his business to the firm. The existence of such rewards and punishments keeps firms “on their toes” and sensitive to the desires of the consumer.
Yet herein lies a problem with the retail electricity market. There is no way for a consumer to punish or reward a company by dropping or adding his business because the market is not competitive. Retail electricity companies are regulated monopolies. Consumers are assigned a retail electricity provider based on the consumer’s residential location, and there is no way to change the provider short of moving, usually by a substantial distance.
So establishing natural pressures to improve the response of retail electricity providers to storm and power outages is another reason to consider instituting competition in the retail provision of electricity. This is an idea the North Carolina General Assembly had been considering, but unfortunately, has shelved for an indefinite period.
Hopefully, we won’t have a repeat of the ice storm anytime soon. However, the lessons cited above should be long-lasting.
Michael Walden is a William Neal Reynolds distinguished professor in the Department of Agricultural and Resource Economics at North Carolina State University and an adjunct scholar with the John Locke Foundation.