Yea I knew that, I was just aiming for a specific definition! Hence the second part of my statement – where I say it is a bit sneaky to blame a concept like “capitalism” when it is large integrated states that have been hit!

Also, Kleins thesis rests on a series of misinformation and downright lies – she is hardly my favourite person tbh, given that she is more interested in selling her brand than trying to actually discuss issues of concern.

However, even if we were going down the road of the state using fear to push through policies that benefit its cronies instead of the public at large – I have no idea how it is really related to the Broken Window Parable, which as I note above is about the fact that the “activity” due to breaking something we value is not a “good” in the sense of individuals and communities having more things. It is merely replacement for what we have destroyed.

Hi Miguel. I had remembered discussion at the time of the Sept 04 quake about how EQC had moved away from reinsuring overseas, but I guess that had been only partial. For over insurance, I suspect we are using the terms a bit differently. I only meant that when capital stock is replaced by insurance, it will typically be better, if only becuase it is newer than what it replaces.
As to the more substantive points about whether there can be a beneficial impact even when the insurance liability is local, and whether less-than-full-employment renders the broken-windows fallacy non-fallacious, these are interesting points that I thought deserved their own posts. See http://offsettingbehaviour.blogspot.co.nz/2013/09/broken-windows-part-i-measured-gdp.html and a follow-up post tomorrow.

The term was coined by Naomi Klein in her book “The Shock Doctrine”.

http://www.amazon.com/The-Shock-Doctrine-Disaster-Capitalism/dp/0312427999/ref=sr_1_1?ie=UTF8&qid=1378256417&sr=8-1&keywords=shock+doctrine

I don’t understand the question – what is disaster capitalism? And where is this disaster capitalism occurring, given the state accounts for half of economic activity in countries that experienced the sharpest financial crises (such as the UK) 😉

It is a compositional effect – economic activity associated with capital investment that is replacing lost capital doesn’t provide “welfare” in the same way consumption of that income would. The essence of the broken window idea isn’t the level of GDP per se, it is the fact that this aggregate measure of activity involves a lower level of welfare than it would have otherwise – I think that was the main point the post was going for as well, and perhaps we are all talking past each other 🙂

“We’re clearly not in full employment now, and we weren’t before the
quakes, so what basis do we have for claiming that “all the resources
now devoted to cleaning up and rebuilding would have been employed
elsewhere”? My point is that economists are too content to simply make
this assertion without actually demonstrating it.”

We given monetary policy an active role to ensure we expect “head back to potential” ex-ante – that is the factor that allows us to make this argument. The fact that there was underutilisation of workers and capital ex-post doesn’t invalidate that, especially if the reason for this was unforeseeable.

We are all claiming it on those grounds.

Hi Seamus – as I read it, the BIS results weren’t dependent on either over-insurance (whatever “over” might mean) or offshore reinsurance. By the way, your comment on EQC is not quite right – reinsurance will cover up to $5bn of their estimated $12bn liability.

On the second point, I imagine the reason that people focus on the dollar income is because the real resources story seems patently absurd to them. We’re clearly not in full employment now, and we weren’t before the quakes, so what basis do we have for claiming that “all the resources now devoted to cleaning up and rebuilding would have been employed elsewhere”? My point is that economists are too content to simply make this assertion without actually demonstrating it.

The context of course is that parts of the economy are non-traded. That was the reason for highlighting the impact on construction and non-construction jobs.

Seamus, thanks for the thoughtful reply. I have been out of action with some deadlines. I think the main issue, perhaps one I should have explained further, is that the GDP test is not necessarily the right one. When we look at the other costs, such as the displacement etc, its pretty clear that natural disasters are not good for the economy.

Miguel. You are right that there is a possibility of a natural disaster resulting in a higher present value of a country’s output if a) there is over-insurance in the sense that insurance replaces assets that are better (maybe just by being newer) than what was destoryed, and b) that fraction of that insurance that comes from within the country is smaller than the fraction of payouts that are over insurance. But I don’t think the criticism of the BWF brigade is right here, for two reasons:
First, it is very clear in Christchurch that insurance has not been sufficient to restore many of our assets without additional top-ups, and in any event a lot of the insurance was held by EQC which did not reinsure overseas, so empricially, I don’t think the conditions for net benefit to NZ are met.
Second, the possibility of over-insurance is not what the “disaster’s are good for GDP” people are thinking; the BWF brigade are attacking that analysis that focuses on dollar income rather than real resources.

The key factor in where the benefit lies is the degree of insurance coverage. The BIS did some research on this last year; see http://www.bis.org/publ/work394.htm. They found that uninsured natural disasters are unambiguously costly, but when there’s a high level of insurance – as is the case in NZ – the effect on the long-run level of GDP can be neutral or even slightly positive. Quibble about the modelling if you like, but I find this far more sensible than the BWF brigade, who conveniently sidestep the issue of insurance by treating all damage as self-inflicted. I somehow doubt that nuking yourself would be covered by any insurance policy.