Home > Uncategorized > Another classic Broken Window Fallacy

Another classic Broken Window Fallacy

Here is an example of someone who got it completely wrong…

Quake could be good for economy?

The Canterbury earthquake is likely to cut New Zealand’s economic growth in the coming months but will have a positive impact in the longer term as repairs take place, economists say.

Stephen Toplis, head of research at Bank of New Zealand, said while the personal costs of the earthquake were often extreme, this did not translate into macroeconomic damage, which appeared to be more limited and mostly short term.

“If you look at the macroeconomic perspective, you probably come to the rather perverse conclusion that this is going to be GDP [gross domestic product] positive,” Mr Toplis said this morning.

While the Canterbury economy is likely to be hit by business being closed, staff being absent and general disruption to the central business district of Christchurch, in the longer term the boost to the construction sector as buildings are repaired would more than offset the short term losses, Mr Toplis said.

“Once you get past that [short term impact], the clear macroeconomic costs are construction. If the initial estimates are anywhere near accurate… that will swamp the short term negatives.”

Most economists are predicting the cut in earnings caused by the earthquake will be 0.2-0.5 per cent of GDP in the coming months, but that over the next 12-18 months the kick start to the reconstruction sector could add more than 1 per cent to economic growth.

Cameron Bagrie, chief economist at ANZ, said while  “an awful lot of growth has been displaced” in the short term, the net impact overall would be positive as the reconstruction effort begins.

Mr Bagrie said consumer confidence in the region was likely to be hit by the earthquake, which came just days after the collapse of South Canterbury Finance. Visitor numbers could also be impacted.

“If there’s an area that we will be watching pretty closely, it will be tourism arrivals; Christchurch accounts for about 22 per cent of visitor arrivals in New Zealand, it’s a bit of a gateway, but I don’t think its going to be on the top of a lot of people’s travel hot spots at the moment,” Mr Bagrie said.

The markets reacted calmly this morning, with the New Zealand dollar dropping just marginally against our major trading partners, while the NZX-50 was up 0.7 per cent at 1:30pm.

But at least there were some that managed to get it right


Broken windows aplenty in quake aftermath

Shattered panes of glass weren’t the only types of broken windows on show after this week’s devastating Christchurch earthquake.

The broken window fallacy, debunked by French political economist Frederic Bastiat more than 150 years ago, refers to the mistaken idea that breaking things is good for the economy.

How, you might ask, could anyone think something so stupid?

Well, the thinking (if you can call it that) is that if a young hooligan goes and smashes the local butcher’s window this “stimulates” the economy because the butcher pays the glazier to fix the window.

The glazier in turn spends his windfall buying shoes from the cobbler, who uses the money to buy a cake from the baker, and so on and so forth.

Those who applaud this money-go-round ignore the opportunity cost to the butcher, who could have used the money on something else if he hadn’t had to pay for window repair.

Economic ignorance

The point of the broken window fallacy is that while destruction of resources may benefit certain people and sectors of the economy, it can never benefit the economy overall.

Someone should try telling Prime Minister John Key that – not long after the quake he was touting the economic stimulus the quake would provide.

Even left-wing blog site The Standard pulled him up on it; unfortunately its authors are in favour of “real (read: government) stimulus”, which they don’t seem to realise is also subject to the broken window fallacy.

However, New Zealand Herald business editor Liam Dann has provided perhaps the best example this week of failing to do as Mr Bastiat exhorted and look beyond what is seen and think of what is unseen.

“But between the man-made disaster that was South Canterbury Finance and this earthquake, we are going to see billions of Government dollars injected into the southern economy,” he wrote.

“With any luck, that may kick-start strong economic growth for the whole nation.”

Off to remedial economics class Mr Dann, and take Mr Key and Dr Brash with you.

A city devastated

While it’s wonderful no one was killed directly by the earthquake it is still a massive tragedy for the people of Christchurch and the other parts of the region struck by it.

Already the forecast repair bill has jumped from $2 billion to more than $4 billion and the cost to local businesses from having to shut up shop will be enormous.

A New World supermarket in Kaiapoi was damaged beyond repair, costing more than 80 workers their jobs.

There will probably be plenty of examples of other businesses failing as a result of the quake and its aftermath.

A psychological blow

While the economic impact will be lessened by the wonderful market invention of insurance (not to mention re-insurance), there is no way to blunt the psychological damage the quake has done to the people in Canterbury.

Already there are reports that some people, particularly older residents, are at risk of suffering heart attacks as a result of the stress the disaster caused.

Even if your house is insured, seeing it cracked down the middle by the furious battle between the Earth’s tectonic plates will still cause emotional harm.

For business and economic-minded people it can be easy to look at the bottom line and forget the human cost of an event that hopefully will prove to be a once in a lifetime experience.

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