The Dangerous Ignorance of Economics Aggravates Fire Devastation

The staggering loss from the runaway fires in Southern California will be made worse by the man-made shortage of commercial and residential fire insurance. For at least two years, California laws limiting insurance premiums caused insurance companies to withhold coverage.

Price gouging laws and price controls cause shortages. A simple supply and demand chart predicts the economic catastrophe that uninsured home and business owners now face.

*Credit: B. Posner © Penn State is licensed under* *CC BY-NC-SA 4.0*

You may remember this picture from your high school economics textbook. It very clearly predicts that a government-imposed cap on prices (PC) leads to sellers scaling back production (Q(s)) while demand increases (Q(d)). In the gap between Q(s) and Q(d) are millions of homeowners with no insurance.

As I have written in the aftermath of other disasters, what people call “price gouging” is really just a logical way to attract desperately needed supplies. Word spreads faster than wildfire when people realize they can make thousands just by transporting one truckload of supplies to a disaster area. Price-gouging laws eliminate the profit motive. What people donate out of charity for disaster victims is a fraction of what they can supply for profit.

People who don’t understand supply and demand should not be elected to any position of power. A misunderstanding of supply and demand is among the reasons so many politicians cause unemployment, inflation, shortages, and, now, thousands of homes burning down without insurance. Bad policy makes a crisis much worse than it needs to be.

Insurance companies declined to renew 2.8 million homeowner policies in the state between 2020 and 2022, according to the most recent data from the California Department of Insurance. The loss in uninsured wealth in California will be staggering enough to disrupt the already faltering national economy.

This disaster was not only foreseeable: It was foreseen. Just six months ago, Joe Rogan used his widely-viewed platform to raise the alarm about a conversation he had with a fireman who warned of exactly the scenario we are experiencing. High winds and dry conditions came together to cause the unstoppable fire he predicted six months earlier.

California is not some magical land where either the laws of nature or economics can be repealed. For too long, California’s abundant wealth masked the incompetence and corruption of its government. Total losses from this fire are already being pegged at several tens of billions of dollars. The costs will soar even higher as the country absorbs an army of now homeless and financially devastated refugees. It’s time to stop electing politicians who fritter away the wealth of their constituents with emotional spending and wishful thinking.

Comments (2)

“As I have written in the aftermath of other disasters, what people call ‘price gouging’ is really just a logical way to attract desperately needed supplies.”

No, price gouging is price gouging. Insurance companies are essentially banks or investment companies seeking one thing–to maximize return. Furthermore, with certain types of mandatory insurance the insurance companies essentially are trapping people in contracts of adhesion. That is why there are sharp limits placed on how much insurance companies can profit off those types of policies. Should there be no regulation of that? And if there should be regulation of whatever, at least to some extent, where do you draw the line?

“The loss in uninsured wealth in California will be staggering enough to disrupt the already faltering national economy.”

Perhaps. But where is the article about the effect of shipping billions to Ukraine, dwarfing the cost of these fires, or ridiculous supply-side economics that involve essentially giving countless “tax breaks” to, among other things, major companies? What fiscal and monetary effects do those things cause. For better of worse the feds will pick up the remaining tab for much of the damage, and in many respects that is what government is for. To stopgap, take care of, or create what no lesser entity has the capacity to do realistically.

“People who don’t understand supply and demand should not be elected to any position of power.”

I figured out my first week of Macro that Economics was at best a bunch of suppositions. Even economists when honest will say some variation of that. Further, of course at some guaranteed floor companies will sell anything. That is no great supply and demand issue.

The REAL issue is that Los Angeles is a desert and never should be looked at as realistically able to support that many people, especially with scarce water supplies overall. Yes, California is stunningly overregulated and corrupt as with almost all big government entities that have been entrenched. Throw in progressivism and, yes, everything about California government often sucks. But what occurred here is essentially an apocalyptic event. Neither all the insurance in the world would have stopped the fires nor is there enough water to access to have put a substantial dent in halting the fires. Lastly, interestingly, your types will and are saying that just more building and overall less regulation would solve much. No. My God, do you know what the damages would be if Los Angeles had been “regulated” like Houston’s sprawl?

January 10, 2025 Michael Kaiser Reply

Given that insurance companies cannot be compelled to write policies covering the property of those living in high-risk areas, property owners are faced with the hard choice of relocating or paying for the damage to their property out of their own pockets. Also, it should not be the responsibility of the government to compensate these property owners for their losses caused by predictable and re-occurring disasters like earthquakes, mud slides, floods, wildfires, tornados, and hurricanes.

January 10, 2025 Donald Walker Reply

The Dangerous Ignorance of Economics Aggravates Fire Devastation

Leave a Reply

Cancel Reply