Different River

”You can never step in the same river twice.” –Heraclitus

February 8, 2005

No, Tsunamis are not good for the economy

Filed under: — Different River @ 7:13 pm

I’m an economist, but I know exactly how a geographer would feel if he saw a news story from a major wire service explaining how the earth is flat, hardly even bothering to mention that some people think it’s round. This is not unusual; it happens every time there’s a major natural disaster.

Tsunami a blessing in disguise for Sri Lanka’s economy: analysts

Mon Feb 7,10:47 PM ET

COLOMBO (AFP) – The Indian Ocean tsunamis killed 31,000 people in Sri Lanka and caused unprecedented damage, but were also a blessing to its economy which had been heading for a major catastrophe, according to analysts.

Analysts said the avalanche of assistance from global lenders and the post-tsunami reconstruction across the devastated regions will kick-start economic growth now expected to cross five percent next year.

There will be a dip in the gross domestic product (GDP) in 2005 as an immediate effect of the tsunami, but from next year the reconstruction effort will emerge as a growth engine, the analysts said.

“This is the opportunity for growth for Sri Lanka,” said Alastair Corera, vice president at global rating agency, Fitch.

No, no, no. Wrong, wrong, wrong. There is absolutely no way the tsunami can be a “a blessing to its economy.” If the economy were previously “heading for a major catastrophe,” then it hit an even more-major catastrophe.

There are two explanations for this, the calm explanation and the exasperated explanation. Both are correct.

First, the calm explanation: To say “the country’s economy is good” (or bad) is simply shorthand for saying the people in that country are living well (or not so well). Economists normally measure this by gross domestic product (GDP) per capita – that is, the total output of all goods and services produced per year, divided by the total population of that country. This is basically a measure of the average income per person in a given country. However, part of how well you live is sometimes determined not by how much income you have this year, but by what durable assets you have — which you may have received many years ago, but from which you still derive benefit today. For example, someone in Sri Lanka may earn $3,700 per year (the estimated per capital GDP for that country in 2003; this the average for all people including children, so the average worker certainly earns much more). If you earn $3,700 per year (per person) you can live at a certain level. You can live at a higher level if you earn $3,700 per year and also have a house your father built on the beach a few decades ago, and a fishing boat you bought or built a few years ago. Your actual standard of living is what you produce this year, plus what you produced in the past that is still useful.

Now, the tsunami comes and knocks down your house. You live in a tent, if that, but now, with “economic growth now expected to cross five percent next year” you can get a great job at a five percent raise. Gosh, that means you can earn $3,885 next year! Sure, you lost your house, your fishing boat, your bicycle, and all your other assets, but hey, you’ll get an extra $185 a year from now on! Isn’t the tsunami wonderful for economic growth?

In fact — and here comes the exasperated explanation — if a tsunami that destroys three-fourths of the Sri Lankan coastline is so great for the economy, then a tsunami that destroys the entire coastline, plus half the interior of the country should be even better, right? And if there’s no tsunami this year, it’s no big deal — can’t they create economic growth just by having the Sri Lankan air force bomb the coast every few years? They’ll be rich! Gosh why didn’t anyone think of that before? Solve world poverty by bombing all the poor countries into prosperity! Brilliant!

No, no, no. Wrong, wrong, wrong.

Tsunamis are bad for the Sri Lankan economy because they destroy the wealth of people in Sri Lanka. The fact that they get “economic growth” from rebuilding is bad, not good, because it represents Sri Lankans working really hard just to get back to where they were before. It is not really “economic growth” in the normal sense; it’s just a measure of the fact that they have to “catch up” to where they would have been without the tsunami. If you think I’m wrong, then burn your house down and see if that makes you richer.

The “expert” quoted in that story, Alastair Corera, is the “country head” for Fitch Ratings in Sri Lanka, and a Chartered Financial Analyst. I think that means he should know better.

By the way, there another critical error in this “disasters are good for the economy” theory. This error is so blatant, and so common, I nearly dforgot to mention it. And that is, they completely ignore the fact that thousands of people died from the tsumani. If dying doesn’t make you worse off economically, I don’t know what does. And this is not to mention the fact that if you survived but lost family members, you are also worse off for not having them, in addition to your material losses.

I know it’s hard to put an economic value on somebody’s life, but to ignore the human cost implicitly assumes that human life has zero value. Got that? To believe that the tsunami is good for the economy, you not only have to believe that the small increase in future income is worth more than the huge loss of assets, but you also have to believe that human life is worthless.

It’s really scary how many people believe that. If you’re paying attention, you’ll see an article like this after practically every disaster; not just the tsunami, but hurricanes, earthquakes, terrorist attacks, and so on. As an economist, I find this level of economic ignorance appalling — and scary, knowing that people who think this way are sometimes making big economic decisions.

UPDATE (2/9/05 2:00pm):

In the comments, Medical Madhouse points out that they also forgot to include medical costs to treat the injured-but-not-killed victims. I’m sure they did. However, since they include the cost of rebuilding buildings as a good thing (“economic growth”), they could just as easily include the cost of rebuiling people, i.e., medical care, as a part of economic growth. This would be just as (in)correct.

Perhaps it’s obvious that medical costs are a loss, since they just take a person back (at best) to the situation they were in before the disaster. In that case though, shouldn’t it be equally obvious that rebuilding costs are also a loss, for exactly the same reason?

UPDATE (2/10/05 2:15pm):

Don Boudreaux agrees.

UPDATE (2/10/05 5:45pm):

Rite Wing Technopagan and Jane Galt point out that this is yet another example of the Broken Window Fallacy, as described by Frédéric Bastiat in 1848. (Thanks to Jane for the link.)

The Broken Window Fallacy is the (incorrect) idea that if some delinquent throws a brick through a window of a shop, this is good for the economy, since the owner of the shop will have to pay to fix it, and the glazier who fixes the window will use that money to buy other things, from people who will in turn use that money to buy still other things, and so on. Why is this wrong? Because if they window had not been broken, the shop owner would still have spent that money, just on other things. And, whoever he bought from would have used that money to buy other things, etc. So, with the broken window, the shop owner spends money just to get back to where he started — he started with an intact window, and has one again. If it had never been broken, he’d have an intact window plus whatever else he could buy with the money he doesn’t have to use to replace the window. The only “winner” when the window breaks is the guy who fixes the window — and he “wins” at the direct expense of somebody else. Society as a whole is still worse off by the cost of one window.

It’s the same thing with tsunamis, hurricanes, earthquakes, and blackouts — it’s just with those, there are a lot more windows broken.

Vocabulary Problem

Filed under: — Different River @ 6:15 pm

The Virginia Senate yesterday approved a constitutional amendment that defines traditional marriage as the union of a man and a woman. The Senate voted 30-10 to pass the amendment after an emotional 30-minute debate during which several Democrats likened the measure to the Holocaust.”
Washington Times, Feb. 8

Other than the six million murdered Jews, the resemblance is uncanny.
James Taranto, Feb. 8

Do people really think they enhance their credibility by calling the marriage of a man an a woman “like the Holocaust”?

Do they really expect to be able to say things like that and still be taken seriously? Or do they simply think they can redefine words like “Holocaust” to mean both “utterly evil” and “anything we disagree with”? Well, maybe they do. After all, they think they can redefine another word (“marriage”) to mean something completely different from what it’s meant for the entire history of the English language.

Discrimination in Brookline

Filed under: — Different River @ 9:00 am

Chinese-born U.S. Army second lieutenant and a 53-year-old African-American domestic abuse victim have been denied the right to carry a gun in Brookline, Massachusetts — and in the case of Lt. Kang Lu, it was the renewal of his permit that was denied.

Why, do you ask, did the Brookline police deny Lt. Lu his renewal? Because that scofflaw (boo! hiss!) was once caught reading in the wrong section of a public library.

Apparently, in Brookline, that’s a crime.

From the Brookline TAB:

But on a weekday afternoon in June 2002, Lu said a [Coolidge Corner Library] staff member approached him and said he had to leave his study table because he was told it was in the “children’s section.” He noted that no children were in that section of the library, but was told to leave the area anyway.

“I told the librarian ‘If you believe I’m violating a law, call the police and see what they say.’”

A short time later, police arrived at the library, and Lu said officers told him that he was violating library policy and could be cited for trespassing if he did not clear the area.

In a June 24, 2003, letter to Lu from O’Leary, however, “the facts surrounding the incident you were involved in at the Coolidge Corner Library” was listed as the first among the reasons why Lu’s license to carry was pulled.

Folks, as Dave Barry would say, I am not making this up. I could not make this stuff up! I am not nearly creative enough to make up a world as completely, totally, unremittingly loony as what passes for reality in the Bay State.

For the full story — and it gets worse, much, much worse — see the aptly named blog mASS BACKWARDS, which has the full TAB article with an excellent point-by-point commentary.

(Hat tip: Clayton Cramer.)

You know, you would never know from the situation now that the American Revolution started just outside Boston, with a conflict over the (British) government’s confiscation of guns.

Cheney won’t run — not no way, not no how!

Filed under: — Different River @ 8:00 am

In case you were wondering, Vice President Cheney is trying to make it as clear as possible that he is not running for president in 2008.

“I will say just as hard as I possibly know how to say … ‘If nominated, I will not run,’ ‘If elected, I will not serve,’ or not only no, but ‘Hell no,”‘ Cheney told “Fox News Sunday. … I’ve got my plans laid out. I’m going to serve this president for the next four years, and then I’m out of here.”

This is obviously a reference to the statement of General William Tecumseh Sherman, who said in 1884: “If I nominated I will not run. If elected I will not serve. If forced to choose between the penitentiary and the White House for four years, I would say the penitentiary, thank you.

It’s nice when people know exactly what they (don’t) want.

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