Excitement over broken windows

By Shamubeel Eaqub 03/09/2013


Oliver Hartwich of the NZ Initiative revisits the broken window fallacy:

“Natural disasters and wars never generate prosperity. They always destroy it, by definition.”

He is absolutely right. It’s good to see this revisited. Even though the “seen benefits, unseen costs” principle was articulated by Bastiat in an 1850 essay. Wikipedia article on the broken window parable here.

The Canterbury earthquakes led some to say it will be good for economic growth. In truth there has been limited impact on the national economy. Production shifted elsewhere and insurance money helped offset the wealth shock for many. Much more so than I expected. But there have been real economic costs for those who have lost jobs and their housing costs have surged.

Oliver, rightly points to the direct effects:

…as a direct result of the quakes, hundreds of firms went out of business, tax revenue was lost, and the government’s budget was pushed deep into the red.

And these are obviously only the economic costs of the natural disaster, not counting the loss of lives or the physical and mental health effects.

And Oliver points to the displacement effect:

If the earthquakes had never happened, there would not have been a need to deal with them. All the resources now devoted to cleaning up and rebuilding would have been employed elsewhere.

To add to his narrative, the impact is still unfolding. Take two aspects of usual life: jobs and housing.

The jobs market is still dire. According to the Household Labour Force Survey, the change in jobs since late 2010 and now is:

1)      16,000 lower total employment

2)      Construction and logistics jobs have surged by 10,000

3)      job losses of 26,000 in other sectors. Retail and hospitality has been hit the hardest.

Unless you are in the construction industry, the economic costs of the earthquakes are real.

The housing market shows the impact of a sudden reduction in supply. Prices have surged. According to MBIE data, rents in Canterbury TAs have risen by 8%-10%pa since the earthquake, while the national average has risen by 3%pa. House prices have risen in line with rents.

Unless you are an existing home owner, unaffected by the quakes, your cost of living went up sharply.

As someone who grew up in Canterbury, it is all too easy to see that the place has changed significantly because of the quakes. The costs are borne by the many, the benefits by the few.