Tuesday, 30 August 2011

Hurricanes, broken windows, and the EQC

We have it reconfirmed this morning, as if we needed reconfirmation, that earthquakes, hurricanes, tsunamis and other natural disasters are not good for economies, or for people.

First of all, we’re now told (nearly a year after the fist quake, that’s how “fast” these people move) that the liability of the Earthquake Commissionalone after the Christchurch Earthquakes has now more than doubled to $7.1 billion.  Not bad when the EQC has only around $1.5 billion of real assets to call on. The rest of the bill rests on you and me and every other taxpayer—calling into question the reason for this blundering bureaucracy to even exist.

And second, after the damage caused by Hurricane Irene we’re starting to see the realisation spread that destruction really isn’t good at all. Jeff Jacoby, for example, writes in the Boston Globe that Disaster isn't a stimulus package, even though mainstream economics still teaches that it is:

Consider the massive earthquake and tsunami that devastated Japan earlier this year -- a catastrophe that killed more than 22,000 people, caused the worst nuclear crisis since Chernobyl, and pitched the already sagging Japanese economy into recession. Three days after disaster struck, the Huffington Post published California intellectual Nathan Gardels's essay celebrating "The Silver Lining of Japan's Quake." Urging his readers to "look past the devastation," he rejoiced that "the need to rebuild a large swath of Japan will create huge opportunities for domestic economic growth" and observed that "Mother Nature has accomplished what fiscal policy and the central bank could not." …     "The result of all the new wealth creation," Gardels concluded, "will be money in the pockets of Japanese."
    Japanese who survived, that is. The tens of thousands who died won't be pocketing any new wealth… True, trillions of yen will be spent to repair, rebuild, and restore. But equally true is that all those trillions will no longer be available for everything they would have otherwise been spent on…
    Yet the conviction that devastation is really a boon never seems to go out of fashion.
    "It seems almost in bad taste to talk about dollars and cents after an act of mass murder,"
wrote Paul Krugman in The New York Times less than 72 hours after the atrocities of 9/11, but the terrorist attacks could "do some economic good." …    The same was said of Hurricane Katrina, one of the severest calamities in US history. Barely had the storm subsided when J.P. Morgan economist Anthony Chan was assuring CNN/Money that hurricanes tend to stimulate growth
    In 2007, immense wildfires in southern California consumed more than 1,600 homes, burned 500,000 acres, and forced the largest evacuation in state history. A senseless tragedy? No, a blessing! "This will probably be a stimulus," University of San Diego economist Alan Gin
told the Los Angeles Times [hat tip Jeff Perren]

You can see lots more examples of this rank insanity after the Christchurch earthquakes, including from a Prime Minister who said the destruction would create “tremendous stimulus.”

Where’s that stimulus now, Prime Minister?

But as Jacoby points out to these numb nuts, the money and resources spent on fixing the destruction has to come from somewhere.  From capital. Or from savings. And this money he money spent to repair destruction is not bein g used for now the purposes its owners had previously planned. “This  represents a loss of wealth, not an economic gain.”

Astute readers will notice that this is just our old friend the Broken Window Fallacy again. As Jacoby writes,

More than 160 years ago, the French political economist Frederic Bastiat skewered such attitudes in a now-famous parable:

A boy breaks a shopkeeper's window, and everyone who sees it deplores the pointless destruction. Then someone insists that the damage is actually for the good: The six francs it will cost the shopkeeper to replace his window will benefit the glazier, who will consequently have more money to spend on something else. Those six francs will circulate, and the economy will grow.
  The fatal flaw in that thinking,
Bastiat wrote, is that it concentrates only on "what is seen" -- the glazier being paid to make a new window. What it ignores is "what is not seen" -- that the shopkeeper, forced to spend six francs repairing damage, has lost the opportunity to spend them on better shoes, a new book, or some other addition to his standard of living. The glazier may be better off, but the shopkeeper isn't -- and neither is society as a whole.
Broken windows aren't economic stimulus. Hurricanes aren't either. There is no silver lining in useless destruction. Not even if "experts" say otherwise.

UPDATE: Oh, by the way, the government’s deficit is now “expected” to be around 18 billion dollarsEighteen billion large ones.  And that’s at present exchange rates, which can change very quickly. And for a country with just one million taxpayers.

Just thought you’d like to know what this “responsible government” is loading onto your shoulders without your say so.

And speaking of economic fallacies, here’s another one on display in Bill English’s announcement of EQC’s increased liability:

The increased liability will have a one-off impact on the Government's books this year. But English said he still expects a return to surplus by 2014-15.

Remember, that expectation is based wholly and solely on a Treasury forecast making some rather heroic (not to say “imaginary”) assumptions about “growth” between now and then. And you know now what shysters economic forecasters are.

If we had a decent opposition, this guy would be being battered about now.

Unfortunately, however, we have an opposition wants to borrow and spend even more…


  1. Not wishing to contradict what you wrote you can't deny that having suffered the quake an opportunity to re-design presents itself that would have been impossible if the quake had not occurred. The harm even if preventable is already done and renewal will bring benefits that were not possible for financial and political reasons before the quake. The net benefit over time will be positive if the re-thinking is better than the old thinking.

  2. @Antarctic: You think maybe we should knock down all our other cities as well then? After all, you wouldn't deny that having been knocked down an opportunity to re-design presents itself that would have been impossible if the demolition had not occurred. Nor would you deny that renewal will bring benefits that were not possible for financial and political reasons before the demolition.

    And I suspect you might even subscribe to the idea that the demolition itself, perhaps performed with large amounts of gelignite, would itself represent a stimulus project. Not so much "hammer ready" but crowbar ready -- or gelignite ready.

    Just think, stimulus by TNT! What could be more useful?!

  3. Where do you get the $18b deficit figure from? The Budget statement said $16.7m and tax receipts as of last month are up $300m on Budget estimates, so if you are correct, Gov't expenditure must already be tracking at more than $1.5b over Budget.

  4. S/b $16.7 billion (of course)!

  5. @Kiwiwit: "Where do you get the $18b deficit figure from?"

    Radio NZ news.

  6. I agree with Antarctic. We need destruction so that to stimulate our global economies.

    With the economic troubles that the US is facing at the moment, members of the US Congress are wasting their time on debating on how to move forward or improve the economy. All they need to do, is to give permission to Obama to drop nukes in all major US cities (provided that citizens are being warned first to move to some safer locations - those which are designated not to be nuked).

    I'm pretty sure that Antarctic would approve this nuking of US cities, because such devastation and destruction will only be good for the economy as a whole, once the reconstruction work started. That's a good stimulus.

    John Key should request Obama to also drop nukes in Wellington & Auckland. Citizens of both cities must be advised to move somewhere temporary while the nuking take place. I'm sure that the rebuilding phase after the destruction of both Wellington and Auckland will stimulate the NZ economy as a whole.

  7. Yes, just heard Bill English on Radiolive confirming the deficit for this year has already blown out extra $1.5b. Not good.

  8. No, not good.

    But, given the ridiculous growth assumptions on which the Budget was based (at least publicly), neither should it be any surprise.

  9. (provided that citizens are being warned first to move to some safer locations - those which are designated not to be nuked).

    Why? If the population is wiped out along with the cities, that will be even better: fewer workers competing for the rebuilding jobs will mean higher wages for the remaining people...and of course we'll need to repopulate, which will provide off-hours fun for those overworked souls. The net benefit over time will obviously be positive!

  10. Also bear in mind our commodity price index is at all time high and can only go down - also not factored into growth estimates.

  11. Jeez guys whatz with the flames ... is that a Libertarian thing? I'm not advocating nuking anything. But since the city is down already we have the opportunity to make it better and restore the loss more quickly than otherwise we might. Also my point is that local politics is so moribund in reality it sometimes needs to have decisions made for it.

  12. @Antarctic - there's a vast gulf between the good old kiwi "make the best of a bad situation" approach, and what you (and others) were advocating, which seems to be "it was a good situation". The net benefit must take into account every single bit of property and production which was destroyed (and that it would still have been producing all throught the post quake downtime and rebuild). So if you think the net benefit over time will be positive, well, I guess the value you're using for time must be pretty damn high.

    Think about the concept of depreciation. An asset's value is spread over what is deemed its useful life. This is usually determined by the amount of time you can use an item before it becomes more economical to replace it. A natural disaster wipes out a lot of things. Not many of those things would have been at the point where they should be replaced. Why then, is there any value to be had from starting again?

    It's not intended as a flame, it's just that I (and clearly others here) get really tired of seeing the same muddy thinking over and over using arguments which just don't stand up in the face of reality. Please don't be discouraged. Keep thinking, and please keep participating.

  13. Interesting talk of the budget deficit blow out because of the increase in EQC liability for Christchurch. Can you tell me how the government factors into the budget the now unfunded liability the government faces from EQC covering New Zealanders homes and contents in other centres from any new earthquake?



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