BMW’s problems began after it decided to “adopt a vortex.”
Where are we going? To the economic impact of a storm.
But first, the BMW story…
Like hurricanes are named in the U.S., so too are high- and low-pressure weather areas that approach Central Europe. To name one of those European weather events, you and I just have to buy a letter from the meteorological institute at the Free University of Berlin. Switching annually, the lows are female and the highs are male during even years and the opposite for the odd numbers.
A “named” weather map:
BMW’s problems began when their advertising agency decided to buy naming rights to a high-pressure area. Hoping to remind people of their Mini Cooper, they selected “C” for $394 in 2012. However, instead of cool, crisp wintry weather, the “Cooper front” was disastrous. With hazardous conditions, extreme cold, and temperatures sinking way below zero, more than 100 people died. BMW even had to issue a statement explaining, “It was not intentional, and you cannot tell in advance what a weather system will do.”
When destructive weather strikes, media coverage displays the damage and sometimes the dollars spent on the clean-up. According to hurricane research from the University of Illinois, the cost is actually much higher. Understated by half, the storm price tag from government ignores the aftermath. Including unemployment insurance, medical expenses, disability and other safety net programs, disaster relief is less obvious once the cameras leave.
The following graphs from Assistant Finance Professor Tatyana Deryugina’s research show the 10-year fiscal impact of a hurricane:
Specific Government Transfers
Our Bottom Line: The Broken Window Fallacy
Economies usually do not benefit from storms. As 19th century economist Frederic Bastiat (1801-1850) explained, “destruction is not profitable” because disaster recovery replaces what was lost. So, although GDP could surge, national wealth has not necessarily increased and could indeed be less than it was before disaster struck.
Calling it “the fallacy of the broken window,” economist Bastiat questions the assumption that a broken window can be an economic blessing. He agrees that a glazier would receive, for example, 6 francs to fix it. However, he then says, “…if…you conclude…that it is good to break windows, that it helps to circulate money…I am obliged to cry out: That will never do! Your theory stops at what is seen. It does not take account of what is not seen.”
Bastiat then points out that the money given to the glazier would otherwise have been spent on new shoes or a book. And, having been able to spend the 6 francs on a new pair of shoes, their owner would have had new shoes and the old, unbroken window.
So, as BMW and countless communities have discovered, storms are expensive.
My sources: Thanks to the Washington Post Wonkblog for an update on hurricane costs, to the BBC for the BMW story (which we looked at previously), and to Dr. Tatyana Deryugina. Please note that Our Bottom Line and the BMW story appeared in a previous post.