Queensland flood good for economy, says lousy economists

January 9th, 2011

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A couple of days ago, we saw this article reported in the mainstream news media: A meagre upside, admittedly, but Queensland rebuild will boost GDP.

Oh dear!

Is the mainstream news media so gulliable and stupid that they can’t recognise the opinions of fools dressed up as ‘respectable’ economists? If the Queensland flood will ultimately benefit Australia by? boosting the GDP, why don’t we all do this: evacuate say, Sydney and bomb the hell out of it and surely, the rebuilding of Sydney will boost Australia’s GDP big time and bring great prosperity?

To understand why these economists are fools, consider this essay by Frederic Bastiat in 1850,

In the department of economy, an act, a habit, an institution, a law, gives birth not only to an effect, but to a series of effects. Of these effects, the first only is immediate; it manifests itself simultaneously with its cause – it is seen. The others unfold in succession – they are not seen: it is well for us, if they are foreseen. Between a good and a bad economist this constitutes the whole difference – the one takes account of the visible effect; the other takes account both of the effects which are seen, and also of those which it is necessary to foresee. Now this difference is enormous, for it almost always happens that when the immediate consequence is favourable, the ultimate consequences are fatal, and the converse. Hence it follows that the bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come, – at the risk of a small present evil.

What did those fools fail to see?

You see, the rebuilding of Queensland after the flood will consume money and resources from the Australian economy. Tradesmen have to come in to repair broken homes, engineers have to rebuild destroyed infrastructure, household durable goods have to be imported and so on. Those fools can only see that this will boost Australia’s GDP. But what they fail to see is that as a result, these same money and resources cannot be used on other sectors of the economy. The result is a net loss to the Australian economy.

For example, suppose a bridge is destroyed by the flood. Engineers have to come in to rebuild that bridge. Now, consider the case that there’s no flood. These same engineers could be deployed to build a new bridge instead. So, with the flood, we have only one bridge. Without the flood, we have two bridges.

In Australia’s case, we all know that the mining industry grappling with the shortage of skills to build mining infrastructure in order to dig more metals to sell more to China. The last thing they want is for those skills to be redirected to the rebuilding of Queensland. Elsewhere, the Federal government’s nation building projects would most likely have to be postponed to make way for the rebuilding of Queensland.

It is true that more engineers and workers will have to work harder in the coming months to repair and rebuild. That in itself may boost the final GDP number. But it is a fallacy to think that a boosted GDP number implies greater prosperity for Australia. In reality, a boosted GDP number means that the economy has to work ‘harder’ to repair, replace and rebuild what was lost. That makes Australia less prosperous despite the boosted number.

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  • Pete

    Great article CIJ.

    Besides, those people who obsess over GDP as some kind of perfect indicator of economic prosperity are ‘very misguided’.

    …or politicians.

  • Shirleybates

    you forget this will be done by the puplic service so the other bridge was not in the budget and will proberly cost as much as 2 bridges just to repair

  • Hermit

    The article states that a lot of insurance money will flow into Australia from overseas, so its not necessarily Australian money that will be consumed. Therefore this doesn’t fit the usual scenario for the ‘broken window fallacy.’

  • Pete

    Whilst some of that may be true, won’t insurance premiums rise as well?

    And I would also suggest that not everything can be covered by insurance… I don’t have figures but i’d be surprised if even half of the damage is

  • Bridge

    except there were no plans to bhuild that second bridge, you dick. So the bridge builders now have work instead of holding up ice cream shops to pay the bills. Have a look at rebuilding after world wars and argue with those facts.

  • That’s where you are totally wrong. There were plenty of plans to build the metaphorical ‘bridge.’ We are surprised that you are not aware of all those infrastructure projects that’s in the pipeline and have to be cancelled/delayed because of the Queensland flood.

  • Hermit

    And even if there were no plans to build a second bridge, the resources would have been availabe for something else.

  • Pete

    (No need to be offensive)

    Given this logic, wouldn’t it be a good idea to evacuate all of Sydney and then burn it all down? There would be a lot of new building.

    Or even just smash up the Sydney Harbour Bridge…there are plenty of alternatives, it wouldn’t affect business that much, and we’d definitely need to rebuild it.

    Sorry if my suggestions sound a bit silly – i’m just following this ‘growth through destruction’ idea. Maybe we can think of a few other things to destroy and we’ll have the highest GDP growth in the world…

  • La Ninas will dominate summer weather patterns on the east of Australian for many years.

    La Nina occurs when colder than average sea temperatures in the Pacific combine with stronger winds and increased cloud density to alter weather patterns in Australia.

    La Nina and El Nino events are clustered every 10-40 years (not random) and the previous run of La Ninas hapened between the 40s – 70s (and ended with the floods of 74).

    They were followed by around 30 years of dry El Nino patterns. We will see much wetter summers and greater flood risks from Rockhampton to the NSW central coast for the next 30 years.

    Even though La Ninas usually dissipate by April-May, intervening months can still bring monsoonal rain to soaked catchment areas.

    This return to La Nino cycle will have a devastating impact on Australia, worse than last time due to increased population density in the affected areas.

    It’s likely we face 30 years of extreme La Nina weather events.

    Sam Brown
    Australian House Price Crash – My New Blog and Forum

  • Interesting, where can I find out more?

  • matto

    long time no comment, when your money supply is predicated by the expansion of debt via the banking multiplier, any new debt is good for the economy in a twisted messed up way.

    Matto

  • Very messed up indeed šŸ™‚ but are you implying that the money supply should be expanded in another way? Care to elucidate?