“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 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:
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:
Let 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:
- Don 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.
But 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…
In 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:
Over 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:
Let’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]:
It 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.