Quakes aren’t good for the economy

Hey, I’m currently running so busy that I dont’ even have time to look at the other blogs – so I’m sure this has been covered somewhere else.  However, I felt I have to say something.

When Stephen Toplis and Cameron Bagrie say that GDP growth will accelerate due to the earthquake they ARE NOT saying that it is good for the economy.  That headline is completely inappropriate.

Effectively, a bunch of our capital stock was destroyed.  Because of this, the “marginal product” of capital is probably a little higher, and so the “flow” of capital (investment) will temporarily pick up – driving up GDP growth.  We’ve still lost a bunch of wealth.  We are simply having to “work” (which is costly) to try to regain some of it.  In no way does this mean that it is good for the economy – and that is not what these two economists were getting at.

I suspect the author of the article and/or the editor got confused between the flow concept, which is investment and GDP, and the stock concept, which is capital and underlying wealth.  We have lost capital, and we have lost wealth – this negative shock is not just sucky for the people who had to face a disaster, but it IS a “negative for the economy” in terms of measured wealth.

I mean flip, if destroying a city is “good for the economy” why don’t we send the tanks into Wellington to blow it up right now?  Actually, I’m in Wellington – lets make that Auckland instead 😉

I imagine that neither of these economists is particularly pleased that they are being sold as “merchants of doom” in this sense …

  • No, dammit… Wellington should go first. The capital of smug.

    And very good point made, thank you.

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  • You are wrong. The mistake you and Not PC are making is to apply the broken windows from a standing start. That is not the case. The destruction of valuable property has already taken place and is thus a sunk cost as far as our investment decision is concerned.
    Historical resource allocation had determined there was a preferential value to the historical investment and the investment was undertaken. Thus there is a degree of efficient resource allocation implied in the fact those buildings existed before the quake.

    To get back to the status quo ante would suggest justifiable resource allocation and a boost to GDP from where we are now. That is not to suggest that the earthquake is a good thing but it recognises that having the earthquake sunk cost we have efficient resource allocation and increased GDP to mitigate.

  • MarkS

    What about the fact that a lot of money will be coming from insurers? Much will come from the EQC, but more is likely from overseas re-insurers. If you ignore the fact that the re-insurers will lose out, won’t it be good for the economy?

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  • Miguel Sanchez

    Phil: hence the objection to the headline “Quake could be good for economy”.

  • JiveKitty

    @Phil Sage: “You are wrong. The mistake you and Not PC are making is to apply the broken windows from a standing start. That is not the case. The destruction of valuable property has already taken place and is thus a sunk cost as far as our investment decision is concerned.”

    No. Some people are taking this to mean the earthquake was good for the economy (or spinning it as such anyway), so while the earthquake is a sunk cost, it is valid in this context where people are saying “the earthquake is a good thing for the economy” to consider the counterfactual of the earthquake not occurring.

  • @Phil Sage (sagenz)

    Hi Phil,

    Just checking you read my post, it went like:

    1) GDP growth will be higher, because there are investment opportunities available now
    2) However, they are only available because the capital was destroyed – so we are doing something costly to try and get back where we are,
    3) As a result, this higher GDP growth stemming from an earthquake isn’t “good for the economy” like the headline said – and this isn’t what the economists were saying.

    The headline was “quake could be good for the economy” – this was wrong. I don’t know what Not PC said about GDP growth – I explicitly said it would be higher in my post. My post was against the idea that the earthquake was GOOD for the economy – which is highly unlikely.

    @MarkS

    If the premiums were set on the idea that there was a given probability of an earthquake this will all just wash out right – there will be some funds turning up now, but the premiums through time will more than pay for that. So I’m not sure I’d really use that as a “good for the economy” type argument either.

  • Kimble

    Even the GDP growth is likely to simply bring forward production that would have occured anyway. All those buildings would have been replaced at some point in time in the future.

  • JiveKitty

    Yip, and many of these buildings, etc, still likely had significant productive value.

  • hagrid han

    Well,earthquake bring the economy up?Or,rephrase that,just say the war bring the economy up.The first world war,and the second world war,do them really bring the economy up?
    No,I don’t think so,it’s just balance the world.But,it improve the technology,right?Whatever,the earthquake bring the economy up just like we destroy a thing,then make a new thing or more creative things out.

  • ianr

    A key point here is that the insurance industry is largely off-shore. Effectively we will be getting back some of the invisibles we have been importing for a period. Assuming that the insurance companies are underwritten by lloyds in london – the earthquake is an export industry

  • Miguel Sanchez

    ianr: that’s just another example of how the earthquake will boost measured GDP without actually benefiting the economy. Even if overseas insurers covered 100% of the cost of rebuilding, it doesn’t change the fact that the economy would have been at least as well off if the quake had never happened.

  • Miguel Sanchez

    Abstracting away from the quake might make it a bit easier to understand. The national accounts aren’t measured in the same way that a company’s accounts would be – they don’t factor in the regular depreciation of assets. A lot of what goes into GDP – repair and replacement of housing, machinery, durable goods etc – really amounts to running just to stand still. It’s only “good for the economy” in the sense that if we didn’t do it, our wealth would decline. Or more accurately, as Phil said, it would fall below what has been shown to be our preferred level.

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  • This is Obamanomics. Imagine all the people that’ll be put back to word rebuilding the city. It’s a great argument for nuclear war 🙂