Reminder: Quakes aren’t stimulus

During this undeniably tragic time I’ve noticed a little fallacy flying around again – that the latest quake will at least be good for the economy.

This is of course, not the case.

Not only does the recent earthquake have massive social costs, but even if we force ourselves to ignore all the pain inflicted on individuals by this disaster and decide to focus narrowly on measured economic activity this is a net negative.

Yes, economic growth will accelerate a year from now as Christchurch rebuilds (after slowing in the near term mind you).  However, a ton of Christchurch’s capital stock – its firms, its homes, its offices – have been destroyed.  Rebuilding them is akin to taking on a cost just to try and get back to where you were before you lost the properties.

We will get some “unemployed resources” into work in a year’s time because of the crisis – but these people will be rebuilding what we have lost, not “adding new value” to what was available prior to the earthquake.

Furthermore, people who are focusing on the stimulus are ignoring the massive negative impact right now – even in strict financial terms, the negative impact on consumer confidence and on capacity in Christchurch will smash economic activity.  In essence this has made some sort of double dip recession a near certainty – even if we don’t quite technically have one.

  • http://www.tvhe.co.nz rauparaha

    Stocks vs flows, innit?

  • http://www.tvhe.co.nz Matt Nolan

    @rauparaha

    Yar.

    Although, there is another point. The long-term flow is dependent on the stock of capital – which will be lower than in the non-quake case. So both the long-term stock of capital and the long-term flow of consumption from the capital stock will be lower.

  • http://www.tvhe.co.nz rauparaha

    So you’re saying flows depend on stocks and stocks depend on flows? It all sounds awfully confusing; you economists are underpaid if you have to sort that mess out. Have you thought about lobbying the government to do something about it?

  • http://www.tvhe.co.nz Matt Nolan

    @rauparaha

    Like give me money. I hadn’t thought of that – maybe one day when I have a spare moment.

    Also by “you economists” I see you are also talking about yourself 😉

  • Det Mackey

    Have you got links to stories presenting the quake as good for the economy this time around?

    There were plenty last time, but the NZ Herald, at least, has smartened up and the quoted economists have been more careful with how they phrase things. http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10708098

  • http://www.tvhe.co.nz Matt Nolan

    @Det Mackey

    Agreed, the papers have been more balanced this time – I saw that article yesterday morning, before I put this up.

    I wrote the post after hearing it discussed on the TV two nights ago – I’m hoping we aren’t going to hear much of it this time. Also, I just wanted to have it written down as I’ve had a number of people say to me “but at least it will be good for the economy”.

  • http://www.wholesaleace.com/ WholesaleAce

    Felt really sorry for all my Kiwi friends, no one was hurt but all my sympathy to everyone that suffered in this sad event.

  • http://www.sportoboots.net/ Katten

    HUGE sympathy and thoughts to everyone out in New Zealand, what a terrible disaster this was! Best wishes to everyone affected and the world is still thinking of you believe me!

  • http://www.graphicpackaging.org/ J@Graphic Packaging

    Hopefully we haven’t all forgotten about this, in light of the other world disasters! What’s going on in the damn world these days! RIP all!