Monday, 6 September 2010

“I love the sound of breaking windows” [update 10]

I'm sure the thoughts of all my readers are with the people in Christchurch, and have been since they first heard of the disaster.

That it is a disaster instead of a tragedy is almost a miracle.

That no-one was killed may be attributed to the earthquake striking when everyone was abed, instead of out in the streets; that our structural engineers have the knowledge to allow structures to safely resist a 7.1 shake and 93 aftershocks (and counting); and because New Zealand is still wealthy enough to build what they recommend.

Thank goodness for NZ's structural engineers, who in the field of seismic design are recognised world leaders.

Thank goodness too for the civilised way in which most Christchurch folk pulled together to help each other through the calamity, and will no doubt continue to. With the exception of a few vandals taking the opportunity to loot other people's property, these are the sort of people whose city one would like to share—one of the few blessings of a catastrophe like this lies in discovering (if you didn't already know them) the good people who live just over your fence.

One of the alleged silver linings that is talked about, however, is very much NOT a blessing.

There is a lot of work to do now just to get the city back into the shape it once was, and this going to take an awful lot of resources and cost somebody an awful lot of money.  Around 500 damaged buildings, several damaged bridges and many damaged roads, broken sewerage and failed water reticulation systems … all up everyone in the city now faces a bill of around $2 billion in repair costs to get things back to how they were, not to mention all the time and opportunities lost while those repairs are being done.

Early Saturday morning I wondered aloud on Twitter who would be the first moron to start talking about the blessings of all that destruction.  We didn't have long to wait for that moron.  9:20 the very next morning, the Prime Minister was front and centre on TVNZ’s Q&A programme saying (with a smile) “every cloud has a silver lining, there’ll be tremendous stimulus.” [Watch the moron here, at 11:30min in.  Hat tip Paul B for spotting it.] In subsequent interviews elsewhere, Smile and Wave talk more about the “stimulus” effect of the destruction, with the government (he says) picking up most of the tab for the repairs. And he’s been joined in this chorus by other morons like the head of the Contractor’s Federation, Ollie Turner, who talked about this as “a much needed [economic] upturn”—especially for his members.

These are people who love the sound of breaking windows—or at least the fallacy thereof—and who wish to compound the unavoidable natural disaster with an entirely avoidable economic one.

Since he’s only thinking about his members, the head of the Contractor’s Federation could at least be forgiven for violating the very first rule of economics, stated so well by Henry Hazlitt:

_Quote The whole of economics can be reduced to a single lesson, and that lesson can be reduced to a single sentence. The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy: it consists in tracing the consequences of that policy not merely for one group but for all groups.

Hazlitt wrote a whole book expressing the lessons embodied in that one principle.  The very first application of the lesson is, of course, our old friend the broken window fallacy. Allow me to just slightly rewrite Hazlitt’s illustration of it for today’s readers, to demonstrate how morons can turn a $2 billion disaster into one costing everyone $4 billion:

_QuoteLet us begin with the most topical illustration possible: let us choose all the broken buildings and shattered panes of glass now littering Christchurch’s streets.
    A crowd gathers, both in Christchurch and on televisions around the world, staring with quiet horror at the gaping holes in the buildings and the rubble and shattered glass over the streets and businesses of the city. After a while the crowd feels the need for philosophic reflection. And several of its members are almost certain to remind each other or the business owners that, after all, the misfortune has its bright side.
    A Smiling and Waving Man smiles and waves about the work this will give to unemployed tradesmen. And the head of the local Contractor’s Federation smiles that it will make business for many glaziers and the members of the local Contractor’s Federation.
    As they begin to think of this they elaborate upon it. How much is the whole repair bill? Two billion dollars? That’s quite a sum. After all, if earthquakes didn’t happen in a recession, what would happen to the glass business and the businesses of all those builders? Then, of course, the thing is endless. The builders will have $2 billion more to spend with other merchants, and these in turn will have $2 billion more to spend with still other merchants, and so ad infinitum. The rubble and smashed windows and  will go on providing money and employment in ever-widening circles.
     The logical conclusion from all this would be, if the crowd drew it, that, far from being a public menace, the earthquake was a public benefactor.

    Now let us take another look. The crowd is at least right in its first conclusion. This major act of destruction will in the first instance mean more business for glaziers and contractors. They will be no more unhappy to learn of the incident than an undertaker to learn of a death. But the ratepayers, taxpayers, business owners and their insurers will be out $2 billion that they were planning to spend for new suits, new factory equipment, new computers, new buildings, new investments and new business opportunities.
    Because, instead, they are first going to have to put things back the way they were, they will have to go without the suits, factory equipment, computers, buildings, investments and business opportunities (or some equivalent needs or luxuries). Instead of having a functioning city and $2 billion we now (after some time) have merely a functioning city. Or, as all these plans were already in the making before the earthquake hit, instead of having both a functioning city and new suits, new factory equipment, new computers, new buildings, new investments and new business opportunities we must be content instead with just the reconstructed city.
    The net result of the “silver lining” is that the community has lost all the new suits, new factory equipment, new computers, new buildings, new investments and new business opportunities that might otherwise have come into being, and is just that much poorer for the loss.
    The gain in business for the glaziers and contractors making repairs, in short, is merely the loss of business for the tailors, retailers and entrepreneurs, and for the builders and designers who erect new buildings. No new "employment" has been added. Smile and Wave and the people in the crowd were thinking only of two parties to the transaction, the owners of the bent buildings and the repairers. They had forgotten all the potential third parties involved, those who missed out on their business because they had to pay for the buildings to be un-bent. They forgot about them precisely because they will not now ever enter the scene.
    They will see the new windows and repaired buildings in the next few weeks and months—along with all the strutting politicians who will say that it was they who made the repairs possible. They will never see the extra suits, computers, buildings and business opportunities precisely because they will never be made. The morons see only what is immediately visible to the eye, and nothing or no-one else beyond it.

So far as I know, Smile and Wave and the head of the Contractor’s Federation are the only morons so far to use words like “stimulus” “earthquake” and “silver lining” in the same sentence.  But please do send in any other sighting you see—I’d love to start cataloguing them here.

And feel free too to send the sightings to the US blog that catalogues sightings “Broken Window” stupidity.  Here it is: Broken Window Watch.

And here’s Nick Lowe, with what could be their theme song.

UPDATE 1: More sightings of the Broken Window Fallacy sent in by readers:

  • _QuoteDon Brash, on Q+A on muttered that the quake would have economic benefits because of the work required to rebuild the city. Don should know better.  (Sometime back North Shore mayor Williams said that the leaky homes saga would be good for economic growth for the same misguided reason. [Sent in by Don W.]

Keep ‘em coming.

UPDATE 2: Kudos to writer Zetetic at The Standard who correctly identifies Key’s blather as an example of the Broken Window Fallacy.  But I’ll take a point off because he/she can’t tell the difference between a Broken Window and “real stimulus.”

UPDATE 3: Stephen Toplis, head of research at Bank of New Zealand. Cameron Bagrie, chief economist at ANZ. Hamish Rutherford, Business Day journalist.  Abject fucking morons, the lot of them.

_QuoteBut as Christchurch Central MP Brendon Burns described it, these losses may be offset by a “silver lining.” The rebuilding programme will kickstart the construction industry in the region and probably require tradespeople from other centres. Gross domestic product figures will improve in the aftermath and so will the employment rate…

UPDATE 6:  NZ Herald business editor Liam Dann confirms his credentials as a stimulunatic.

_QuoteIn Italy at the weekend, the world's smartest economists gathered to discuss weighty issues, such as whether governments should pump more stimulus into their ailing economies.
    At the same time in New Zealand, a massive earthquake was making that decision for us…. nature has unleashed the biggest job creation scheme this country has seen…. we are going to see billions of Government dollars injected into the southern economy.
    With any luck, that may kick-start strong economic growth for the whole nation.

Fortunately, several of Dann’s readers demonstrate in the comments below his moronic Pollyanna-ism that they’ve got more smarts than he has, one of them pointing out, correctly, “If earthquakes are a source of prosperity then there is no need to wait or them to come along - just start tearing down buildings and enjoy the prosperity.”

UPDATE 7:  ASB chief economist Nick Tuffley joins his colleagues from the other major banks in talking complete and utter bollocks:

_QuoteOver a longer period, the impact on GDP is likely to be positive [said the moron in an article penned by Brian Fallow], on the grounds that $2 billion, say, of damage represents close to $2 billion of additional demand, in rebuilding, repairing and replacing what was damaged.

I swear, if you didn’t read these comments for yourself, you’d think I was just making them up.

UPDATE 8: Hallelujah!  Despite the welter of alleged economists talking up the benefits of destruction, Westpac’s Brendan O’Donovan says we’re worse off for the earthquake, not better. GDP is not a good measure, he told Radio New Zealand this morning, because it doesn’t measure the capital destruction. If natural disasters were really a boost to the economy then we should just go around smashing our windows every week. “If it is a $2 billion cost then wealth has taken a $2 billion hit.”  Listen in to this rare piece of good sense out in public.  The conversation starts about 1:30 minutes in.  Listen to it at least twice,

UPDATE 10:  Good sense is finally starting to outdo non-sense.  This just in from Stuff’s Business Editor Patrick Smellie:

_QuoteLet’s get one thing straight. Earthquakes are not good for the economy.
    There’s been some feverish talk about the damage to Christchurch being some kind of god-send for the construction industry, especially after last week’s prediction of a collapse in activity in that sector, with 20,000 to 30,000 jobs at risk.
    But try painting the destruction as good news for someone whose house is threatened with collapse on the next big after-shock. Don’t expect a sympathetic reaction.
    Yes, it’s true that there’s suddenly a lot of work in Christchurch for anyone skilled in wielding first a sledgehammer and then a normal hammer.
    But an earthquake is only good for the economy in the same way that wars are: once everything’s been wrecked, it needs to be rebuilt.
    But what do you have once you’ve rebuilt? You have what you had before, only newer.
    Admittedly, there will be an opportunity to throw some Batts in the ceilings of elderly homes that are temporarily unroofed, and some property owners will take the opportunity to renovate earlier than they might have. Nationally, retailers of baked beans, torch batteries and big bottles of water will probably report a stronger month than usual.
    But there is still virtually no productivity gain, no new long-term economic activity generated, and no addition to the national balance sheet from reconstruction in the aftermath of a disaster.

Well said, sir. The point about renovation is worth chewing over a bit more.  The third chapter of Hazlitt’s seminal Economics in One Lesson, written immediately after the war when so many alleged economists were talking about “The Blessings of Destruction,” contains this observation on the improvements the destruction makes possible [starting on page 13]:

_QuoteIt is sometimes said that the Germans or the Japanese had a postwar advantage
over the Americans because their old plants, having been destroyed completely by
bombs during the war, they could replace them with the most modern plants and
equipment and thus produce more efficiently and at lower costs than the Americans
with their older and half-obsolete plants and equipment. But if this were
really a clear net advantage, Americans could easily offset it by immediately
wrecking their old plants, junking all the old equipment. In fact, all manufacturers
in all countries could scrap all their old plants and equipment every year and erect
new plants and install new equipment.
    The simple truth is that there is an optimum rate of replacement, a best time for
replacement. It would be an advantage for a manufacturer to have his factory and
equipment destroyed by bombs only if the time had arrived when, through deterioration
and obsolescence, his plant and equipment had already acquired a null or a
negative value and the bombs fell just when he should have called in a wrecking
crew or ordered new equipment anyway.
    It is true that previous depreciation and obsolescence, if not adequately reflected in
his books, may make the destruction of his property less of a disaster, on net balance,
than it seems. It is also true that the existence of new plants and equipment
speeds up the obsolescence of older plants and equipment. If the owners of the
older plant and equipment try to keep using it longer than the period for which it
would maximize their profit, then the manufacturers whose plants and equipment
were destroyed (if we assume that they had both the will and capital to replace
them with new plants and equipment) will reap a comparative advantage or, to
speak more accurately, will reduce their comparative loss.
    We are brought, in brief, to the conclusion that it is never an advantage to have
one’s plants destroyed by shells or bombs unless those plants have already become
valueless or acquired a negative value by depreciation and obsolescence.
    In all this discussion, moreover, we have so far omitted a central consideration.
Plants and equipment cannot be replaced by an individual (or a socialist government)
unless he or it has acquired or can acquire the savings, the capital accumulation,
to make the replacement….

Which is precisely Brendan O’Donovan’s point above.  If the earthquake imposes a $2 billion cost, then capital has taken a $2 billion hit.


  1. No doubt Smile & Wave would believe that destruction of the entire country would make us the richest country in the world. Also, considering the 1800 Million dollars spent on SCF last week and the likelyhood of another 1000 Million dollars heading that way shortly, the taxpayer is around 2800 million dallors further in the hoc than they were just 7 days ago. Nice work!

  2. Oh, cool Nick Low song too, love that keyboard

  3. Nah the only decent song Nick Lowe did was co-pen ‘Milk and Alcohol’ by Dr Feelgood.

    The rest of Lowes stuff was largely dish-water.



  4. Ha, I didn't know that. I used to listen to 'milk & alcohol' at a mates place during school lunch time; from memeory we had his dad's beer for lunch...I was shipped off to boarding school soon after

  5. Assorted bank economists ...

  6. And what about the looting!
    By Bob Parker I mean. Saying that the government will pay for the uninsured as well as the insured, thereby looting from those that did insure themselves (both in Christchurch and elsewhere) and giving it to those that didn't bother.
    Another great example of are robber government at work.

  7. Elijah Lineberry6 Sept 2010, 16:15:00

    I was staying at an Hotel in central Christchurch when the earthquake struck.

    Hopefully no one will think I am a wimp when I admit it was terrifying and scared the s__t out of me for those 30 seconds or so.

    "Oh great, this is where it all ends? with an hotel collapsing on my head in an earthquake?!?!" was what was going through my mind.

    I quickly threw on clothes, grabbed some readies I had stashed in the room safe, and made my way downstairs convinced the entire building was about to collapse.

    Downstairs on Cathedral Square there was a large crowd of people from the various hotels and backpacker hostels.

    I do need to pay tribute to everybody in Cathedral Square on Saturday morning - there was no panic, everybody was asking everybody else if they were alright (I zoomed over to a couple of yummy Pommy backpackers wearing only dressing gowns asking if they were cold and offering to warm them up!), blankets were being handed out.
    An Indian Restaurant had a gas cooker thingy had were making cups of tea, which was nice.

    One thing I must stress - nobody attempted to take advantage of myriad of broken shop windows and help themselves. Goodness knows where the 'looting' stories on the news have come from but it certainly never occured in the central city between 4:40 and 8am.

    By about 5:30am when everybody in the Square had calmed down and realised that neither any of the tall buildings, nor the Cathedral, were about to fall down on [our] heads, most people went for a walk to survey the damage.

    I will never as long as I live forget my sense of astonishment when I first walked the few metres to Manchester street and saw the devastation - it seemed as if every second building had collapsed (the internet cafe I had been at the previous afternoon, the restaurant I had eaten dinner hours earlier etc) and when I saw that the building where my Monday business appointment was scheduled was no longer standing I thought "hmmm, guess that meeting is cancelled then"

    I was impressed with the chaps from First Security, they swung into action very quickly assisting the PC Plods with putting up cordons and encouraging people to move out of the area due to the risk of falling debris.

    As it got lighter the mood of the large number of people on the street seemed to change from terror to relief at still being alive, to shock at the extent of the damage, to a sense of "gosh, I have never been at the centre of a major emergency before and this is rather exciting" - most people by around 7am having a quizzical look on their face.

    Later on Saturday morning I was (like everyone else) told I could no longer remain at my hotel so wandered round to Latimer Square where my business associate was staying in an hotel/apartment and so have been able to sleep on the sofa the last couple of nights.

    Various houses in that area were damaged with chimneys falling down and I assisted a chap across the street with clearing away the bricks and putting a tarpaulin over the 'hole'; quite an amusing undertaking as I had never done any 'manual' labour before.

    I have been most impressed with the sense of calm and, as Peter says in his post, everyone helping each other out.

    The surreal part of this is experience has been that after a break of 12 years I return to Christchurch on business and 2 days later this happens! ha ha!

    So yes, here have been some impressions from someone in the CBD on Saturday.

  8. Look, the impact on GDP GROWTH is positive, even though all that is happening is that inventory is being replaced.

    Standing inventory is not counted in GDP. And the destruction of inventory is not counted as negative growth. So the replacement of destroyed property will show an increase in GDP growth. GDP is funny like that.

  9. @Kimble: GDP does not measure gross product, economic growth or economic activity--and the idea that it does has done much economic harm.

    So called "Gross" Domestic Product is not a gross figure at all but actually a highly "netted" figure.

    It only counts final goods and services instead of the goods and services used to produce those goods.

    It measures consumption spending, but not gross investment. It measures consumer spending but not business-to-business spending. It measures govt spending, but not business-to-business spending.

    Little wonder the stimulunatics see consumer spending and govt spending (which GDP does measure) as a boon, and business-to to-business spending (which makes that spending possible) as irrelevant.

    More on the same subject here.

  10. The broken windows fallacy is bullshit in most cases.

    Take the original analogy. The business owner can't pay for a suit because he has to pay for a window. This is a joke; if he can't afford to pay for both at the same time he will simply pay for the suit next week or next month.

    The theory only holds water at the extreme end of the scale.

  11. Liam Dann at NZ Herald comes dangerously close.


    The broken windows fallacy is bullshit in most cases.

    Take the original analogy. The business owner can't pay for a suit because he has to pay for a window. This is a joke; if he can't afford to pay for both at the same time he will simply pay for the suit next week or next month.

    The theory only holds water at the extreme end of the scale.

    But Ross you would surely agree that if you look at his inventory at any given point of time, there will be one less suit when the window was broken compared to if it wasn't. Yes - he gets the suit next month. But whatever he would have got that month then has to wait, and so on. He is still made permanently poorer by one suit (or unit of good) when the window is broken.

  12. Read and weep. From Stuff's business section, a piece called Quake Could be Good for Economy.


    The Canterbury earthquake is likely to cut New Zealand's economic growth in the coming months but will have a positive impact in the longer term as repairs take place, economists say.

    Stephen Toplis, head of research at Bank of New Zealand, said while the personal costs of the earthquake were often extreme, this did not translate into macroeconomic damage, which appeared to be more limited and mostly short term.

    "If you look at the macroeconomic perspective, you probably come to the rather perverse conclusion that this is going to be GDP [gross domestic product] positive,'' Mr Toplis said this morning.

    While the Canterbury economy is likely to be hit by business being closed, staff being absent and general disruption to the central business district of Christchurch, in the longer term the boost to the construction sector as buildings are repaired would more than offset the short term losses, Mr Toplis said.

    "Once you get past that [short term impact], the clear macroeconomic costs are construction. If the initial estimates are anywhere near accurate... that will swamp the short term negatives.''

    Most economists are predicting the cut in earnings caused by the earthquake will be 0.2-0.5 per cent of GDP in the coming months, but that over the next 12-18 months the kick start to the reconstruction sector could add more than 1 per cent to economic growth.

    Cameron Bagrie, chief economist at ANZ, said while ``an awful lot of growth ...

    But on far more important matters what worries me is today's after-shocks are much bigger than yesterdays. It's 6.27pm and we've just had two very strong shocks over the last 15 minutes. So, do I go to bed tonight or just drink bottles of red wine?

  13. Hi Mark .. my own 7.1'er occurred nearly 21 yrs ago in San Francisco. (Wrote about it here on its 20th anni last year). And like Elijah, I, too wondered if that was it for me ...

    For the record, some 4000 aftershocks were recorded in the six weeks after the big one and although most were unfelt, the bigger ones occurred within the first week.

    I spent all day today reversing orders originally scheduled for the SI and redirecting them to NI distribution centres, whereas 21 yrs ago I was desperately trying to find roads open and trucks available - in that order - to get my orders out. Spkg from experience, it's going to be a pickle for a while.

    My thoughts are with you.

  14. Matt B

    Yes he will be poorer by the price of one suit. But the BWF is all about the economy being worse off, which would only be the case if the business was always breaking even rather than making a profit.

    The BWF ignores the fact that 'broken windows' take money away from unproductive places like gold in bank vaults and puts it into the local economy.

  15. So blowing up the houses of all those with savings (unproductive money in your words) - defered consumption - should take priority to make the country rich...brilliant lets get too it.

  16. And they keep coming. Here is Liam Dann, Business editor of the New Zealand Herald :

    "With any luck, that may kick-start strong economic growth for the whole nation."

    Great to see a bunch of people making comments at the base of his article highlighting the error Liam committed and exposed by Bastiat in 1850.


  17. PC

    Destruction creates wealth "Smile and Wave talk more about the “stimulus” effect of the destruction". These are the same idiots who believe "consumption creates wealth" - although they always state it as government spending creates wealth.

  18. Why don't we just pretend we've had an earthquake?
    That way we could get all the growth without anything having to have been wrecked.
    Two for the price of none!

  19. Hi PC,

    Matt Nolan, as usual, does a better job explaining my point than I can do over at TVHE.

  20. "Why don't we just pretend we've had an earthquake?
    That way we could get all the growth without anything having to have been wrecked.
    Two for the price of none!"

    Heh...Not bad!....Im going to pretend my girlfriend has been fooling around on me so I have the excuse to go find a hotter/hornier one.


    Jon,I salute you,you are a genius....pretending for everyone!


  21. Grant M. McKenna7 Sept 2010, 16:28:00

    With regards to the PM, it is quite possible that he was only referring to the short-term benefit regarding unemployment. I hope that is what he meant, rather than earthquake magic :-)

    “PAUL Yes exactly, and I suppose people will be hoping they get full compensation, but that will all have to be worked out. I suppose when you look at the next few months in Canterbury and particularly in Christchurch there are employment opportunities too?

    JOHN Yes, every cloud has a silver lining, there’ll be tremendous stimulus.”

  22. Ross

    Yes he will be poorer by the price of one suit. But the BWF is all about the economy being worse off, which would only be the case if the business was always breaking even rather than making a profit.

    The BWF ignores the fact that 'broken windows' take money away from unproductive places like gold in bank vaults and puts it into the local economy.

    This is nonsense. First, gold must be in bank vaults for a reason - it's not as if market economies sit around blowing resources for no good reason absent disasters.

    Second, it should be self evident that the time builders and plumbers and concrete layers spend putting the world back to the way it was is time foregone building new things and creating surplus. That is the broken window fallacy: seeing the busy workers but forgetting the unseen surplus foregone but for the damage which must be repaired.

    Third the lost suit for the individual is also a lost suit for the economy.

  23. ....pretending for everyone!


  24. matt b

    Market economies blow vast amounts of money and resources all the time for no good reason.

    Builders etc restoring things the way they were will still be building the things they had planned previously - just at a later date.

    There is no 'lost suit' for the economy. The BWF is a microeconomic theory not a macroeconomic one.

  25. Ross, to help clarify things for you, lets take the example of a builder who builds a house on average every 3 months. Over his working life of 40 years, he is able to build 160 houses. An earthquake strikes, and destroys 4 of his builds, thus he has to go back and rebuild those 4 houses. No big deal, he still plugs along and produces 1 house every 3 months.
    Retirement comes around and our builder looks back at the suburb he created (we're assuming he has built in the same place) and counts up all houses, lo and behold there are only 156. Yes he was gainfully employed for the entire period, but due to the EQ his total stock of houses is reduced. Hopefully this will enlighten you a little, because the priciple is the same for an individual as it is for the use of capital.

  26. Whitehead's turn:

  27. PC

    A fantastic column here in the NBR. I don't think it is hard to guess that the writer of this column has visited your blog. Brilliant!

    "Shattered panes of glass weren’t the only types of broken windows on show after this week’s devastating Christchurch earthquake.

    The broken window fallacy, debunked by French political economist Frederic Bastiat more than 150 years ago, refers to the mistaken idea that breaking things is good for the economy.

    How, you might ask, could anyone think something so stupid?..."

  28. Simon, I think that's precisely why PC is enjoying writing for his blog. It is to spread ideas (idea factory). It's a pity that others who got ideas from here (like Tapu Misa, NBR, Chris Trotter, etc,...), never gave any credit to where it’s due. I read here first about the Te Kooti story (and his terrorist thugs) about a year or so ago, then Chris Trotter brought it up recently as a blog post on his blog site. The question to ask, was Trotter first stumbled on that story from this blog or he's just a keen reader on NZ history? Um, I seriously doubt the latter.

  29. And HERE is a fund manager embracing the Broken Window Fallacy.

    Remind me never to invest a penny with Brian Gaynor and his company Milford Asset Management.



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