12

After the Sendai earthquake, news sites say that rebuilding the city will be an "economic boost" for Japan. Okay, great for construction companies, but the government and insurance companies are paying for that. I don't think this is something that boosts the economy of Japan, unless it is paid 100% by foreign insurance companies.

Am I wrong in my thinking?

14

You are not wrong. This is called the "Broken Window" fallacy in economics.

Imagine if 20% of a population was employed to go around breaking windows. This would stimulate the economy as many people would have to be employed to make new windows, repair the broken windows, etc.. The problem is that everyone would have been better off if they didn't have to spend their valuable resources on repairing a perfectly functioning window.

Although many people will be employed to rebuild Japan, this doesn't improve the standard of living for the folks in Japan.

15

You're entirely correct. It's one of those "broken window" fallacies.

Have you ever witnessed the anger of the good shopkeeper, James B., when his careless son happened to break a square of glass? If you have been present at such a scene, you will most assuredly bear witness to the fact, that every one of the spectators, were there even thirty of them, by common consent apparently, offered the unfortunate owner this invariable consolation - "It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?"

Frederic Bastiat's 1850 essay, "That which is seen and that which is not seen" is still the best and most beautifully-written of such explanations.

As you point out, a gain for the construction companies is more than offset by the loss of life and financial expenditure of the insurance companies. Plus, it is never possible to quantify the entirety of the loss in terms of opportunities foregone ("that which is not seen"). People who were about to do incredible things but now gone. Property, of any nature, no longer of use to build on or perform service.

Any replacement comes at the expense of other opportunities.

3

The problem here is that the metrics that are used to track the economy are looking for things like growth and change. In a perfect world, everyone would have exactly what they need and there would no need for economists because the economy would be static.

3

It will have some positives, and some negatives.

The hardest hit will be the insurance agencies, as well as banks. Manufacturing will also take a short term hit.

When insurance payments come out, then there will be a boom in construction, consumer goods, industrial goods, etc. Companies will upgrade their equipment whereas before they might have let it run for another 10-20 years or longer. After all, if you are going to buy something, you aren't going to get it used, you'll get something more modern. Of course, Japan already was one of the most modern countries in the world, so they likely won't see as many gains as other countries, but this would hold more true in a less technologically advanced society.

Long term, 10-20 years down the line, when everything is rebuilt, it might have a slight positive increase in productivity, but this will be somewhat offset because Japan already is such a technological powerhouse, and on the cutting edge in many technologies. But I agree, it's quite foolish to say that it'll improve the economy of Japan, some clarification should be done to clear that one up...

  • 1
    There can't be net positives and net negatives. There are gross positives and gross negatives, but on net it is either negative, neutral or positive and these are mutually exclusive possibilities. – jason Mar 16 '11 at 19:17
  • Good point, I'm removing the word net... – PearsonArtPhoto Mar 16 '11 at 19:35
2

The people who benefit are large engineering and construction companies, manufacturers of construction equipment, bankers and lawyers.

So in the world of realpolitik that we live in, the misery of millions of "other people" is spun as a net benefit, because "we" benefit from that misery.

0

It certainly creates an opportunity for the re-distribution of wealth. Money will be transferred from insurance companies to construction companies. Businesses that go under will be replaced by ones that survived.

Some companies will make a profit out of this, but as you have already figured out, no new wealth is created by the disaster. (Although lots has been destroyed, so we are looking at a net loss.)

  • what makes you think no new wealth will be created? – warren Mar 15 '11 at 21:14
  • Because all of the rebuilding efforts are funded by existing wealth (e.g. insurance companies). The rebuilding just brings the city back to where it was. So, AT BEST it is a wash. – myron-semack Mar 18 '11 at 14:46
  • and yet all the new rebuilding will be with more modern materials and techniques, buildings formerly in the way will be gone, and new businesses will have a chance to grow where they were previously inhibited – warren Mar 18 '11 at 19:20
  • In general, an old building isn't so much of an impediment to business growth that a natural disaster is needed to wipe the slate clean. If I need to expand my business, I'll make the necessary investments (or a real-estate developer will). I don't see that as a major wealth-creator. – myron-semack Mar 21 '11 at 0:22
0

Wikipedia's article on the Parable of the broken window mentions that Keynesians would argue that broken windows can be useful in depressed economies. I think Japan's economy was somewhat depressed, so if it applies anywhere, it'd apply in this scenario.

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