[Steven Landsburg, guest-blogging, April 27, 2007 at 7:00am] Trackbacks

As I wind down my week of guest blogging, I want to thank Eugene for the invitation and the many readers who offered thoughtful commentary.

Each day brought forceful reminders that not everyone sees the world as economists do. When I observed that a policy of federal disaster assistance tends to raise property values in disaster-prone areas, several commenters dismissed the observation as idle speculation and called for evidence. I am frankly flabbergasted by this. There is no lack of evidence that when assets are made more desirable, their prices rise; that's why a Lexus sells for more than a Subaru. There is no lack of evidence that markets see reductions in risk as desirable; that's why the return on stocks beats the return on bonds. One doesn't need evidence specific to the housing market in New Orleans to be pretty sure that New Orleans housing conforms to the general rule.

There's also a wealth of evidence that goods with similar attributes sell for similar prices, so we really can be pretty confident that the value of federal disaster assistance---incorporated in housing prices---is roughly equal to what private disaster insurance would sell for. The evidence for general propositions of this form is so overwhelming, and so much a part of economists' everyday lives, that it's easy for us to forget that not everyone has digested it.

It does follow that if residents in those areas would not have chosen private disaster insurance, then a policy of federal disaster assistance does them no favor. We know that because we trust logic, just as we trust evidence.

This is not to say that the argument is airtight; like most arguments, it's not. Adam Scales, among others, had some interesting counter-thoughts. But it is to say that there's a genuine argument here, backed by decades of relevant research on the ways in which prices reflect risk. Evidence for a general principle is evidence for a special case.

I'll close with one last plug for my book, which is dedicated to the proposition that logic and evidence trump both idle speculation and common sense---including the idle and perhaps common-sensical (but nonetheless wrong) notion that you can improve the performance of an asset without affecting its price.