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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