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The wrong kind of economic stimulus

Published on stuff.co.nz (Auckland), 2 September 2013

Now here’s an economic policy idea: What if we strategically placed a few pocket-sized atomic bombs around New Zealand and detonated them?

Not too devastating to wipe the country off the face of the earth, of course. But strong enough to cause significant damage to the infrastructure of our cities, destroy some residential housing and leave behind a lot of rubble to be cleaned up.

If this sounds like madness to you, you are absolutely right. In any case, as a German I probably should not even have suggested it (“Don’t mention the war!”).

But essentially, the same logic lies behind claims that the Canterbury rebuild, and the ‘stimulus’ it allegedly provides, are an exciting opportunity to the economy, so presumably the earthquakes were a good thing after all.

Earlier this year, BIS Shrapnel predicted that construction work in New Zealand would have a volume of $46 billion over the coming five years – not least thanks to the Canterbury rebuild.

The quakes apparently triggered a ‘construction tsunami’, the Institute of Directors claims in the current issue of Boardroom, its members’ magazine. The IoD certainly got its imagery right although victims of either quakes or tsunamis may find it a bit tasteless.

The narrative of the reconstruction boom is now so strong that in a conversation with a chief executive of a major company (ironically from the insurance sector) I was asked whether the New Zealand economy would be doing so well without the earthquake. As if the Canterbury quakes had done for us what the mining boom had done in Australia: provide a boost to economic activity.

My answer seemed to surprise my discussion partner. I believe that New Zealand would do just fine without the earthquakes and would probably be in a much better position than it is now, cleaning up after them.

There is no doubt that the rebuild is triggering a lot of economic activity.

The Canterbury Earthquake Recovery Authority released a report in May showing that economic activity and production in Canterbury continue to accelerate, outperforming the rest of New Zealand.

Canterbury firms also continue to report larger increases in trading activity and remain more optimistic about business prospects than firms in other regions.

But such positive developments cannot obscure the fact that 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.

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.

While we would not see such a pronounced construction boom, there would be across the board positive effects in other sectors of the economy. Meanwhile, instead of footing part of the bill of the rebuild, the government could have either returned the budget to surplus earlier, cut taxes or invested elsewhere.

With large projects, it is always easy to acknowledge the activity they have triggered. What is more difficult to ascertain is what other activities would have happened in their absence. We simply cannot see the business that would have taken place in Christchurch if the earthquakes had never happened.

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

The Canterbury earthquakes certainly demonstrated how resilient New Zealanders are in the face of adversity, but there is no doubt we would have been better off without them. Don’t let bad economics suggest otherwise.

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