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 dollars.  Eighteen 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…