The Dim-Post

September 8, 2010

Does the broken window argument hold?

Filed under: economics — danylmc @ 9:10 am

The chief economist from Westpac was on Radio New Zealand earlier challenging the idea that the earthquake will boost the economic recovery, citing the broken windows parable popularised by Frédéric Bastiat:

Have you ever witnessed the anger of the good shopkeeper, James Goodfellow, when his careless son happened to break a pane of glass? If you have been present at such a scene, you will most assuredly bear witness to the fact that every one of the spectators, were there even thirty of them, by common consent apparently, offered the unfortunate owner this invariable consolation—”It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?”

Now, this form of condolence contains an entire theory, which it will be well to show up in this simple case, seeing that it is precisely the same as that which, unhappily, regulates the greater part of our economical institutions.

Suppose it cost six francs to repair the damage, and you say that the accident brings six francs to the glazier’s trade—that it encourages that trade to the amount of six francs—I grant it; I have not a word to say against it; you reason justly. The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child. All this is that which is seen.

But if, on the other hand, you come to the conclusion, as is too often the case, that it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, “Stop there! Your theory is confined to that which is seen; it takes no account of that which is not seen.”

It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented.

But what’s happened in New Zealand is – to mangle the analogy – the shopkeeper saved a very large sum of money that he could only spend if his window were broken. Then his business hit a downturn, revenue dropped, things were looking grim . . . and then his son broke a window.

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55 Comments »

  1. True, the earthquake will “release” a lot of money from insurance. That will most certainly give builders a few good years.

    But overall people will still take a while to recover from this. While his shop is being rebuilt, a wiget maker can’t make wigets, so he’s losing profits and his workers are losing wages. Plus that money, having been spent, needs to be replenished.

    Comment by scrubone — September 8, 2010 @ 9:25 am

  2. The Stainless Steel Rat had a similar philosophy about robbing banks. He rationalised htat it got the police excited and gave them a sense of purpose when crime was almost non existent, gave security consultants something to do and the incremental insurance costs were so minimal as to have zero effect, all of which was a boost to economic activity.

    I don’t get your analogy. Why could he ‘only’ spend it on a window and not shop fittings? What if he now can’t afford to fit out his shop?

    Haven’t you recently been arguing about the importance to save more and now you are saying that consumption is good.

    All those broken windows are potentially taking not only the shop owner’s six francs but a couple of francs from you and me in the form of diverted tax to pay for those employer subsidies, and insurance premiums. Thats a few francs that won’t be going into my savings.

    Comment by insider — September 8, 2010 @ 9:25 am

  3. I don’t pretend to know how money works, but if it was physics it sounds kinda like the tradeoff between potential and kinetic energy.

    For a while the shopkeeper has been gaining altitude, storing up that potential energy. Then the earthquake hits his shop-plane and he has to trade some of that potential to get the engines going again. So he trades altitude for speed so a local tradesman can pull up alongside and jumpstart the engines. Then he can go back to gaining altitude & storing potential again.

    It’s a horribly mangled analogy but I guess what it means is there’s a short-term gain for the tradesman with money flowing that would usually be locked up. The shopkeeper in the short-term loses the income that he can’t get while his windows are broken. And in the long-term his insurance fund has been depleted so he’s worse off than before.

    The one thing I am pretty sure of though is that “stimulus” like this that goes directly to businesses that employ people to do work is much, much better for the economy than bailing out the retirement funds of speculators.

    Comment by gazzaj — September 8, 2010 @ 9:26 am

  4. “But what’s happened in New Zealand is – to mangle the analogy – the shopkeeper saved a very large sum of money that he could only spend if his window were broken. Then his business hit a downturn, revenue dropped, things were looking grim . . . and then his son broke a window.”

    Shouldn’t the analogy be that not only was the shopkeeper’s business in a downturn, but the glazier (read construction industry) also was short of work, and so by accessing the savings the shopkeeper had built up a lot of previously locked-up capital got injected into the wider economy through rebooting the glazier’s business?*

    *Written by someone with no professional understanding of economics … rip into it!

    Comment by Andrew Geddis — September 8, 2010 @ 9:27 am

  5. The other issue with the analogy is the implication that the solution to the business downturn for the shopkeeper is getting a new window. What if the window loss makes things even worse?

    He’s now dealing with that and the reduction in his savings. Now of course that means his children will starve and he’ll start drinking and beating his wife. We could go on like this for ages.

    Comment by insider — September 8, 2010 @ 9:49 am

  6. It depends whether there is any real stimulus – money being spent that otherwise wouldn’t be spent – or just a redirection of spending.

    For example, the government gives Christchurch workers $350 a week (gross) for up to 4 weeks, but if it still wants to balance its books, it makes cuts somewhere else. Where else might not be apparent for some time. If the government has to inject money to fix Christchurch’s infrastructure, Auckland is less likely to get any new infrastructure projects in the near future.

    In the meantime, my insurance premiums will surely go up.

    Stimulus? With Bill English in charge, not if you live in Auckland.

    Comment by Me — September 8, 2010 @ 9:52 am

  7. Presumably the point is that the money he saved for the broken window is money he could have instead invested in his business, and thus be richer now.

    TBH, I have some sympathy for the Westpac guy. Knocking buildings down and then reassembling them is not an inherently productive activity. However, knocking buildings down and then replacing them with new, more efficient buildings, and doing so with money we saved up during the good years … maybe that’s a useful thing to do?

    Comment by Repton — September 8, 2010 @ 10:10 am

  8. Seems to me it depends what happens to insurance premiums. If New Zealand insurance companies have to put their premiums up to recoup the losses, then it doesn’t benefit the economy. If they are basically getting the money from re-insurance policies with other insurance companies internationally, and if the premiums don’t go up because this quake is only evidence of a risk that was already fully taken account of in premiums, then it does work.

    Comment by kahikatea — September 8, 2010 @ 10:37 am

  9. The critical point is this is not a voluntary event.. its a disaster and a loss. However, there are savings to cover a fair portion of the loss, a lot of the infrastructural repairs would have had to be made anyway, and the extra work for a depressed industry is welcome.

    Dangerous buildings are either down or will be soon, strengthening of 100,000 houses will be done, a serious look at building siting and practices should lead to a national effort to better site and build the future housing stock, for at least some time people will perhaps make better provision for being without power, food and water, debriefs will point to improvements in disaster responses, more people will insure their houses etc.

    It is a disaster and huge loss, but in a small country like ours the lessons learned should mitigate against the next natural disaster. Who knows.. maybe the windfall $1 billion coming back to SI term depositors will be channeled into productive loans to Cantabs through a govt guaranteed investment scheme with just a modest return?

    JC

    Comment by JC — September 8, 2010 @ 11:03 am

  10. ‘Broken windows’ is a micro-economic parable, which doesn’t have a lot of empircal support or evidence at a long-run Macro level, from what I can see.

    Natural disasters tend to have short lived consequences, not only for GDP growth rates but also GDP tracks. I.e.; you end up back where you were, not at a lower overall level.

    I suppose one case study that might be worth looking into is Germany v Japan, post-war. The German economy, infrastructure specifically, was a total write-off, while Japan was largely untouched. Yet they both economies developed at much faster rates than others, top the point where they were the second and third largest in the world.

    Comment by Phil — September 8, 2010 @ 11:03 am

  11. @ 10 – perhaps add in britain to that analysis
    japan and germany got something like 1.0 & 1.7 billion $ in aid from usa after the war and built good economies
    britain got 2.7 billion $ in aid from same source and almost went bankrupt as a nation within 25 or 30 years.
    what did those 3 nations spend the money on when they got it? and how did the money flow on from those who received the money?

    just asking, cos i have no idea where the money went.

    Comment by amc32 — September 8, 2010 @ 11:09 am

  12. @11

    The Germans and Japs were always an industrious lot with a penchant for saving, but the UK perhaps went into entitlement mode.

    Thats the trouble with modern war, you can exhaust yourself winning it but now you can’t claim the spoils of victory.. indeed. you can end up pouring money into the old foe to shore him up against outside predation, or a potential return bout of hostilities.

    JC

    Comment by JC — September 8, 2010 @ 11:41 am

  13. The shopkeeper’s savings that can only be spent on fixing broken windows was, until Saturday, capital that was invested somewhere, presumably supporting other businesses. The wealth that has to be consumed fixing the broken windows has to be withdrawn from capital markets elsewhere, preventing whatever other activities it was supporting.
    The key to the Broken Window fallacy is to “see that which is unseen”. The shopkeeper is no better off – he is back where he was on Friday. The glazier is a bit better off but whoever the shopkeeper would have otherwise spent the money with, the insurance company’s shareholders, and whoever the insurance company was investing in are all worse off.

    Comment by Bernard Darnton — September 8, 2010 @ 11:43 am

  14. @ 11: Post-war Britain decided to run its economy on the basis of celebrity, football, alcohol, pop music and American-owned nuclear weapons (and an obsession with tax cuts and house prices) instead of export-based industrialisation, modernisation and innovation to pay for it all.
    Its rationing after the war wasn’t helped by the fact it needed to pay off large war loans to the Americans (Canada was far more supportive and didn’t charge commercial lending rates)

    Comment by Uroskin — September 8, 2010 @ 11:43 am

  15. At the end of the day the money that is spent on reconstruction is money that cannot now be spent elsewhere generating new wealth…Before Saturday we already had a complete city with working infastructure…now we have a munted city in a negative state needing money spent on it to break back even.

    Theres no wriggling room here….the money has to come from somewhere and you simply can’t have your cake and eat it too.

    Comment by James — September 8, 2010 @ 11:53 am

  16. @Uroskin – The other thing Britain chose to do was to blow it’s North Sea oil on consumption, an artificially high currency and tax cuts. Now the oil is running out, the British economy is stuffed.

    Comment by Sanctuary — September 8, 2010 @ 11:55 am

  17. Bernard @ 11:43 – “The shopkeeper’s savings that can only be spent on fixing broken windows was, until Saturday, capital that was invested somewhere, presumably supporting other businesses. ”

    From the EQC website: “In late 2001 there was an addition to EQC’s investment portfolio when, following a ministerial direction, the Commission started to invest in international equities. The objective of this move was to ensure the Commission holds assets outside the region that will be directly affected by a major natural disaster. The Commission has now completed the transfer of funds into global equities. Investment in equities is kept within a range of 27-33 percent of the Commission’s total portfolio.”

    So at least a part of the money to be spent fixing up Canterbury will come from “other businesses” overseas … a net capital inflow for NZ?

    Comment by Andrew Geddis — September 8, 2010 @ 12:21 pm

  18. Andrew @ 12:21: If you count the people who benefit but don’t count those who bear the costs you’ll always come up with a positive result. That’s the point of the fallacy.

    Even then, EQC’s portfolio will be reduced by the value of its payouts, the potential for future growth on top of what has been disinvested has been lost, etc., which is a reduction in wealth for the owners of EQC (i.e. the NZ government).

    Comment by Bernard Darnton — September 8, 2010 @ 12:30 pm

  19. Bernard,

    Granted … there’ll be a smaller pot available the next time the EQC is called on – but so long as that pot remains big enough to meet future calls, does that really matter? Unless there some notional figure at which the EQC stops taking money in (i.e. has the payout meant that the EQC’s surcharge on insurance premiums will continue for longer than it otherwise would have done)? Genuine question there … I don’t know if it has some “magic number” deemed to be “enough” for future calamities, or if it just keeps on keeping on forever.

    I guess the real point is, though, that if we didn’t have earthquakes, etc, we wouldn’t need the EQC (or equivalent insurance measures) and so could invest the money it presently locks up into other uses. But given that earthquakes do happen, the EQC does exist, and that it is going to release previously locked up capital (a portion of which was invested overseas, hence repatriating it) for the purpose of rebuilding, then I kind of get it when economists say this event will “boost the economy”.

    Still sucks that it happened, though.

    Comment by Andrew Geddis — September 8, 2010 @ 12:49 pm

  20. @AMC/Uros/Sanc,

    The reason I bought this up was to compare Germany and Japan with each other, not the two with other countires.

    Post war, German infrastructure was a broken window. Japan was not. The broken window argument would tend to suggest that, after they both got aid, Japan should end up better off than Germany. They’ve both grown very quickly, but Japan isn’t any better off.

    What this suggests to me; the money multiplier effect far outweighs any ‘broken window’ offset.

    Comment by Phil — September 8, 2010 @ 1:17 pm

  21. Andrew @ 12:49: I understand what they’re saying too. If you have already mentally written off EQC’s assets and you disregard the effects of withdrawing that capital from the markets it’s invested in then you can come up with a specialised definition of “boosts the economy” that ignores everything outside the boundary you’ve drawn.

    That is the point of the fallacy though. This new definition of “boosts the economy” is so narrow that it ignores important facts. It ignores the massive destruction of wealth that occurred on Saturday morning. It ignores the fact that capital currently invested in productive matters is now going to be consumed. It ignores the fact that accumulated savings is what the next generation of consumption grows from.

    When those economists say that this event will “boost the economy” what they should say is that it will boost spending, which isn’t the same thing, particularly if it means eating your seed corn.

    Comment by Bernard Darnton — September 8, 2010 @ 1:37 pm

  22. But Bernard,

    Are we simply “eating our seed corn” here? At least with regards the EQC money, it is ring fenced capital that can’t be used for any other purpose (granted that the EQC won’t cover the full cost of all rebuilding, so there undeniably will be redirection of resources that would be used for other things … but not $2 billion worth). And if (at least some of) that ring fenced capital is being pulled from other markets, then aren’t we actually eating the seed corn of US/Japanese/Australian businesses … which may (fractionally) weaken the world economy, but make us here in NZ nice and fat?

    Also, there’s the question of how the rebuilding happens. If it’s just “like for like”, then obviously no gain. But given that many of the buildings badly affected are old commercial ones in the CBD, can the rebuilding actually produce better premises (i.e. requiring less maintenance, more energy efficient, wired for broadband, etc)? And if so, then the spending will have a productive benefit above and beyond mere consumption of resources.

    But I’m quibbling a bit here – better no earthquake and a fatter EQC pot than the opposite. I admit that.

    Comment by Andrew Geddis — September 8, 2010 @ 2:33 pm

  23. Bernard @21,

    You could also ask what the most productive use of these billions is. The EQC money invested overseas might be prudent but its boosting other economies, not ours; the money the tax payer puts into Canty might be better deployed there than overseas jaunts for MPs, insurance payouts may be better used in Canty than other forms of investment, overcapacity in some industries is surely better deployed there, and there may be intellectual capital build in a challenging environment.

    JC

    Comment by JC — September 8, 2010 @ 2:38 pm

  24. If the EQC money is invested in shares overseas, it’s not clear that selling those shares to free up the money is a destruction of real wealth (though it is likely to contribute to a minor drop in share price, which is a destruction of nominal wealth).

    Comment by kahikatea — September 8, 2010 @ 2:53 pm

  25. It didn’t help that Britain kept buying expensive food from NZ and neglecting the opportunity to trade with continental Europe. After that stopped it grew quite fast, at the expense of NZ.

    But also, they’d borrowed to fight the war (not to mention WW1) and tried to hang on to imperial lands and associated defence infrastructure way beyond their means.

    If they’d abandoned all the colonies post WW2 and ran a minimal home defence force the Russian’s wouldn’t have invaded and they’d have got quietly wealthy.

    Comment by rich — September 8, 2010 @ 4:42 pm

  26. The shopkeeper is no better off – he is back where he was on Friday. The glazier is a bit better off

    The shopkeeper is better off – the glazier can now afford to shop there! :-)

    Granted … there’ll be a smaller pot available the next time the EQC is called on – but so long as that pot remains big enough to meet future calls, does that really matter?

    I would very much imagine that if there were no Earthquakes for the next 50 or 100 years, and the EQC built up a massive pot, then the EQC levy would be reduced, even if not abandoned.

    Comment by Graeme Edgeler — September 8, 2010 @ 4:54 pm

  27. What may have been missed is that apart from the EQC the major financial cost of reconstruction and business losses will fall on private insurers and the bulk of their liability is reinsured overseas.
    A plethora of claims will lead to a massive inflow of overseas funds to fix the damage. Surely this is equivalent to a massive boost in exports; in this case money comes in to fund productive work, rather than the usual order in which productive work creates export sales.

    Comment by Peter S — September 8, 2010 @ 5:00 pm

  28. Andrew @ 2:33: We may be able to push most of our costs overseas, say through reinsurance, but they are still costs and should be counted if you want an accurate assessment of a statement like “this earthquake will boost the economy”.

    There may well be more money sloshing around Christchurch in the next few months but that view is narrow both in space, ignoring costs to overseas reinsurance or capital markets or to taxpayers elsewhere in New Zealand, and in time, ignoring the constant trickle of high insurance premiums that New Zealand is certain to attract. And that’s all the fallacy is trying to illustrate: destruction may create narrow gains but it always creates broad losses.

    JC @ 2:38: The only person who can judge what the best use of those billions is is the owner of those billions. In this case the question is confused by government ownership but that’s an endless argument for a different thread.

    I have no doubt that, at this point, rebuilding the CBD is better use of money than a politician’s “fact-finding mission” but if the CBD had never been destroyed you’d have a CBD and a happily occupied MP. The broken windows fallacy doesn’t argue that you shouldn’t fix the window; it says that breaking a window and then fixing it is not a net gain.

    Graeme @ 4:54: I assume the smiley means you know you’re being silly. If the shopkeeper is better off because the glazier can shop there then the shopkeeper should just give the glazier all his money.

    Comment by Bernard Darnton — September 8, 2010 @ 5:42 pm

  29. “But given that many of the buildings badly affected are old commercial ones in the CBD, can the rebuilding actually produce better premises ”

    Some businesses that you patronise may be the ones that relied on the lower rents charged for the “lesser” buildings. If they get all new shiney buildings, they’ll have all new shiney rents: some (many?) businesses won’t return, folk will be out of a job.

    Comment by Clunking Fist — September 8, 2010 @ 5:47 pm

  30. Some businesses that you patronise may be the ones that relied on the lower rents charged for the “lesser” buildings. If they get all new shiney buildings, they’ll have all new shiney rents: some (many?) businesses won’t return, folk will be out of a job.

    So you hypothesise that building owners will construct buildings that sit empty because no one can afford to rent space?

    Comment by Repton — September 8, 2010 @ 5:53 pm

  31. @Bernard – I was largely being silly. Although there is probably an argument to be made in the short term in respect not of the shopkeeper’s money but his insurance company’s money.

    Comment by Graeme Edgeler — September 8, 2010 @ 5:55 pm

  32. I don’t think anyone’s ever argued that the earthquake will provide a stimulus to the global economy. That’s a strawman being burnt by the libertarians. In doing so they commit the broken window fallacy fallacy. There will be a couple of billion coming into Canterbury from the EQC and other sources and this will be used for reconstruction and will thus provide an economic stimulus for the region. This is a fact, as is the occurrence of the earthquake and the existence of the (undoubtedly Stalinist) EQC.

    Comment by Guy Smiley — September 8, 2010 @ 6:25 pm

  33. “It didn’t help that Britain kept buying expensive food from NZ and neglecting the opportunity to trade with continental Europe. After that stopped it grew quite fast, at the expense of NZ.”

    another reason we used to be in the “top 1/2 of oecd” – preferential access to the british market. once we were exposed to some market reality, in combination with the european economies getting back to square one after being bombed to rubble, we dropped back to irrelevance.

    and britain? went broke trying to pretend it was a still a great power, with things like nukes and aircraft carriers – all the while trying to pay off debt to the USA. the same USA who sat out and manufactured tanks and ammo till forced into the fight at pearl harbour…

    Comment by Che Tibby — September 8, 2010 @ 7:33 pm

  34. Guy @ 6:25: There will undoubtedly be a couple of billion or more coming into Canterbury over the coming months. Given where we are right now, that’s a good thing. Better to rebuild than to leave the city as rubble.

    However, a couple of billion or more of wealth was destroyed on Saturday morning and the end result of the earthquake plus vast reconstruction spending will not be better than had nothing happened. That’s all the fallacy points out.

    The danger of broken window thinking is that it encourages bad ideas: that consumption spending is just as good as productive investment; that spending should only be judged on its gross benefits rather than its net benefits; or, both economically illiterate and utterly inhumane, that war is good for the economy.

    Comment by Bernard Darnton — September 8, 2010 @ 7:38 pm

  35. The only person who can judge what the best use of those billions is is the owner of those billions. In this case the question is confused by government ownership but that’s an endless argument for a different thread.

    Bernard, doesn’t this sort of slide by the fact that we are talking about insurance. The money was owned by people who thought the best use of it was to set it aside in case of earthquakes. The investments it has been put to in the meantime were not what they thought the best use of the money was. If they did think that then they would have just invested it there themselves and bugger buying insurance.

    Also I’m not convinced that economy is just a big pile of stuff, and that porductive work is only counted as such if it adds to the size of the pile. Just as it is obviously correct that the earthquake broke heaps of things, and we fixing them has an oppurtunity cost. It is obvious that demand now exists that did not exist before the earthquake.

    And the earthquake was a natural event, which strikes me as somehow being different from getting kids to break windows fighting wars. I think there is a bit of straw man confronting going on. The created demand from an earthquake is in no sense artificial, as far as I can tell. (Not to throw cold water on the Bob Parker theories, about which I am a sceptic, not a denialist)

    Comment by Pascal's bookie — September 8, 2010 @ 8:28 pm

  36. I think one difference between the broken window analogy is that some of the destroyed assets wont simply be replaced. Better assets, with more suitable land use may ensue. Which in turn may be a catalyst for regeneration of a part of the city. I don’t know Christchurch but I understand some of the worst destruction was in a run down area of the CBD?

    In Manchester UK it is said that the IRA bombings in the city centre in the 90′s sparked a wave of significant regeneration. Obviously things are more complicated than that but I think the regeneration aspect is worth considering.

    Comment by Matthew — September 8, 2010 @ 9:00 pm

  37. Bernard @27,

    “The only person who can judge what the best use of those billions is is the owner of those billions.”

    Not so. Once the money is released from its essentually passive investment it goes to homeowners who directly employ the tradesman who rebuild the homes, infrastructure, businesses and farm industries. Sure, its a non tradeable, but Canty is a massive exporter compared to almost any other region, and spending money in a region so highly geared towards tradeables is likely to improve its contribution.

    “In this case the question is confused by government ownership but that’s an endless argument for a different thread.
    I have no doubt that, at this point, rebuilding the CBD is better use of money than a politician’s “fact-finding mission” but if the CBD had never been destroyed you’d have a CBD and a happily occupied MP. The broken windows fallacy doesn’t argue that you shouldn’t fix the window; it says that breaking a window and then fixing it is not a net gain.”

    Agreed. But Murphy’s Law says that a broken window is an inevitable consequence and cost of doing business. That window has got to be repaired to retain productivity regardless of opportunity cost, or profit to the glass maker. Thats business.

    JC

    Comment by JC — September 8, 2010 @ 9:04 pm

  38. Pascal’s bookie @ 8:28: The comment you quote is about EQC, which is neither fish nor fowl. You don’t have to buy insurance but if you do you have to pay EQC levies. EQC is a sort of collective self-insurance scheme the merits of which don’t bear strongly on the broken windows fallacy.

    My problem is with the people who are chirpy about “ending the recession” and the earthquake being good – in the long term – for GDP. This isn’t a strawman. One News tonight had a reporter, a spreadsheet-person from Treasury, and an upbeat chimney dismantler all pushing this line and that undoubtedly leads plenty of people to believe it.

    It won’t end the recession because the recession is about cheap money being pumped into dodgy investments and diverting real resources from their best use. Breaking a bunch of stuff and then fixing it doesn’t alter that. This disaster may well increase GDP but that tells you more about the GDP measure than it does about what’s good for the economy: GDP is a gross measure not a net measure, which means its a misleading indicator if lots of stuff gets broken all at once.

    As you say, the earthquake was a natural event and so there’s little we can do except clean up afterwards. The problem with holding the broken windows fallacy is that its faulty economics encourages a similar repsonse to non-natural events like, oh, finance company collapses, where cleaning up afterwards and subsidising the people who’ve lost everything is the exact opposite of what you should do.

    Comment by Bernard Darnton — September 8, 2010 @ 9:13 pm

  39. Bernard

    Obviously breaking a whole lot of NZ’s stuff and then using NZ’s savings to fix it is not a net benefit to the NZ economy.

    I think some people are saying that this is not what is happening. Because NZ is insured it is not NZ’s savings that are being used to fix it, it is other people’s savings overseas. If that is what is happening then it is not economically illiterate to suggest that is potential gain to NZ (while still a loss to the world as a whole).

    But I understand the problem with this argument is that NZ is effectively self insured. So it WILL be NZ’s savings (the EQC fund) that are used to fix the stuff.

    So it would seem it IS a net loss to the NZ economy, in the long run. We will get a medium term boost, but that will be offset over the longer term because more money (higher premiums) will need to be diverted into the EQC fund that would have been the case had there not been an earthquake.

    Comment by Will Truth — September 8, 2010 @ 11:51 pm

  40. economy with and without earthquake

    -

    – -
    – – – -
    – -
    – -
    – –
    - – -
    -

    Comment by Will Truth — September 8, 2010 @ 11:58 pm

  41. ok i tried to do graphs but it changed my formatting when i posted it:(

    Comment by Will Truth — September 8, 2010 @ 11:59 pm

  42. 42. how come the shopkeeper has 6 francs?
    if he has insurance…..

    Comment by Cnr Joe — September 9, 2010 @ 12:56 am

  43. Won’t topping the EQC fund back up after paying out $4 billion to fix things up just transfer wealth from the private sector via tax to the EQC validating the crux of the BWF?…..The EQC is a handy thing to have,no question…but keeping it up to maximum still takes wealth away meaning it can’t be spent on other things…correct?

    Comment by James — September 9, 2010 @ 7:34 am

  44. James,

    That’s only true if there is some point at which the EQC stops taking in cash (i.e. it has a putative “maximum” that, when it is reached, payments to it cease). In that case, the earthquake payout will push that point back in time (i.e. require payments to continue for longer than if no payout had happened). But if there is no “maximum” level for the EQC – or, at least, that maximum is so high it will never be reached in the real world in which the EQC will have to make periodic payouts due to the near certainty that earthquakes etc will happen – then the issue of future payments is irrelevant … we’d have had to make them anyway.

    Unless we abolish the EQC. I can’t see any point to it myself. Bloody nanny state and all that.

    Comment by Andrew Geddis — September 9, 2010 @ 7:47 am

  45. che

    The USA had a much better-funded military than the UK throughout the post-war period, but didn’t experience economic decline. France maintained a large military, a colonial empire, developed an independent nuclear deterrent, and also avoided decline.

    The key difference is Britain’s economy grew more slowly than France and the US, not to mention Japan and Germany. This probably isn’t the place to debate why.

    Comment by bobux — September 9, 2010 @ 9:06 am

  46. “So you hypothesise that building owners will construct buildings that sit empty because no one can afford to rent space”

    I hypothesis that many buildings cannot be rebuilt in the next few years, as the owners will have insufficient insurance or other money. How the reduction in square footage will interact with the reduction in businesses is anyone’s guess. But my guess is that none of the stuff built will be available at a price that those start-up/fringe/low-margin/vegan businesses can afford*. I only need to look at vacancy rates in our cities to see that many landlords appear willing and able to hold out (for a good while at least) to avoid discounting the rent. A sham operates in the market: empty property is fine, throwing fit-out money and rent-free periods at tenants is fine, but cheap rents devalue ALL commercial property.
    I may be wrong, we may see landlords giving cheap, but short term, leases.

    *Tattoo parlours, second-hand book-shops, headquarters of tiny charity, MP’s electorate offices, sewing machine repair shop, etc

    “It is obvious that demand now exists that did not exist before the earthquake”. But there is no more resource to sate that demand. Thus the quarry, instead of selling crushed rock to build a motorway in Auckland, instead sells it to a construction company in Chch who’ve bid up the price. The motorway in Auckland still needs to be built, so they bid away supplies from homeowners in Lyttlelton. They take supplies away from a new supermarket in Napier, who take supplies away from the scout group in Warkworth who raised money to build a new hall. They have no more money available, so the work doesn’t go ahead this year. Inflation, plus the “poorest” miss out again.
    This is almost the same sort of inflation-inducing activity as massive government borrowing to stimulate the economy: it bids resources away from other activities and still has to be paid back at some stage by taxpayers.
    “The created demand from an earthquake is in no sense artificial” That’s not what folk are claiming (I believe), I think folk are saying the construction boom will not be a silver lining to the wider economy.

    “I understand some of the worst destruction was in a run down area of the CBD” start-ups and other marginal businesses NEED so-called run-down areas.

    “That’s only true if there is some point at which the EQC stops taking in cash”
    I don’t agree: it has now become clear that it’s not just Wellington that we have to worry about (although I’m sure the folk in the business already know this) thus premiums will likely go up in the immediate future in order to ensure the fund is built up again to cover not just two major cities, but, say, four, etc.

    Comment by Clunking Fist — September 9, 2010 @ 1:09 pm

  47. Already, one New World that suffered great damage has laid-off it’s staff.

    Comment by Clunking Fist — September 9, 2010 @ 1:10 pm

  48. Architects Warren and Mahoney were on the radio today. One commented that he thought a lot of commercial land will remain as empty lots for some time as Chch had too much retail space.

    Comment by insider — September 9, 2010 @ 1:28 pm

  49. NZ and Christchurch in particular have just had a big wobbly global branding exercise for their geological and engineering expertise. There must be some gain in that. Global gain – not zero sum.

    Also, I hear that shopkeeper’s son Frank was so impressed by the glazier’s skills that he’s taken up an apprenticeship rather than being a good-for-nuffink window-breaker. Shopkeeper no longer has to feed the little guy and also now has someone he can call on to fix future windows for free. Frank is now too busy to get the girl next door pregnant, so she’s gone off to university.

    Its quite likely that engineering/geology has been drawn to the attention of school students around the country as a pretty heroic career option.

    Comment by Bea — September 9, 2010 @ 10:35 pm

  50. NZ and Christchurch in particular have just had a big wobbly global branding exercise for their geological and engineering expertise. There must be some gain in that. Global gain – not zero sum.

    Lets then just blow the shit out of the whole of NZ and become international pinups boys.

    Also, I hear that shopkeeper’s son Frank was so impressed by the glazier’s skills that he’s taken up an apprenticeship rather than being a good-for-nuffink window-breaker. Shopkeeper no longer has to feed the little guy and also now has someone he can call on to fix future windows for free. Frank is now too busy to get the girl next door pregnant, so she’s gone off to university.

    Shame about young Frank as he was destined to discover a passionate interest in medicine and after studying to become a doctor went onto help discover the cure for cancer…which would have been fantastic as far as the girl next door was concerned as she died of it at age 37.

    That which is seen and not seen…

    Comment by James — September 10, 2010 @ 9:08 am

  51. “Shame about young Frank as he was destined to discover a passionate interest in medicine and after studying to become a doctor went onto help discover the cure for cancer…which would have been fantastic as far as the girl next door was concerned as she died of it at age 37.”

    And if he hadn’t wasted his time doing THAT and instead followed his TRUE dreams, he would have written and sung a number one pop hit and made $7 million by the time he was 18 – most of which he would then have spent on hookers and blow over the next 5 years. The rest of it he would just have wasted.

    How long can we play this counter-factual game for? And why is every counter-factual always better than the factual in this analogy? Does this mean that if I had done anything other than what I have done with my life, I would have done better than I have? So by definition, every life is a failure compared to what it would have been had other choices been made?

    That which is seen and not seen, indeed!

    Comment by Andrew Geddis — September 10, 2010 @ 9:25 am

  52. …most of which he would then have spent on hookers and blow over the next 5 years. The rest of it he would just have wasted

    Epic. This is why we all secretly really want to be rockstars.

    ——–

    How long can we play this counter-factual game for?

    About Four ‘Cuils’, maybe?

    Comment by Phil — September 10, 2010 @ 1:52 pm

  53. “How long can we play this counter-factual game for?”

    How many economists does it take to screw in a lightbulb?

    Comment by Bea — September 11, 2010 @ 12:12 am

  54. How many economists does it take to screw in a lightbulb?

    None; their model of the economy assumes the light to be working efficiently.

    Comment by Phil — September 11, 2010 @ 4:49 pm

  55. The earthquake is an opportunity for the working class to get wealthier. For example, if my father’s house had been destroyed, which didn’t actually get destroyed and still retains its modest market value of $200,000, then the insurance company would have paid out the replacement cost. The market value of the new house, if the old one had been completely destroyed, would be a lot more than $200,000, more like $280,000 – $300,000. So my father is richer by about $70,000 – $80,000 after agent’s fees.

    Comment by Liam — September 20, 2010 @ 12:48 pm


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