BrothersJudd Blog: IT'S ALL WELL AND GOOD TO BREAK THE BAKER'S WINDOWS...:

March 21, 2011

IT'S ALL WELL AND GOOD TO BREAK THE BAKER'S WINDOWS...:

Creative Destruction? (James Surowiecki, March 28, 2011 , The New Yorker)

[H]istory suggests that, despite the terrifying destruction and the horrific human toll, the long-term impact of the quake on the Japanese economy could be surprisingly small.

That may seem hard to reconcile with the scale and the scope of the devastation. But, as the economists Eduardo Cavallo and Ilan Noy have recently suggested, in developed countries even major disasters “are unlikely to affect economic growth in the long run.” Modern economies, it turns out, are adept at rebuilding and are often startlingly resilient.

The quintessential example comes from Japan itself: in 1995, an earthquake levelled the port city of Kobe, which at the time was a manufacturing hub and the world’s sixth-largest trading port. The quake killed sixty-four hundred people, left more than three hundred thousand homeless, and did more than a hundred billion dollars in damage (almost all of it uninsured). There were predictions that it would take years, if not decades, for Japan to recover. Yet twelve months after the disaster trade at the port had already returned almost to normal, and within fifteen months manufacturing was at ninety-eight per cent of where it would have been had the quake never happened. On the national level, Japan’s industrial production rose in the months after the quake, and its G.D.P. growth in the following two years was above expectations. Similarly, after the Northridge earthquake, in 1994, the Southern California economy grew faster than it had before the disaster. A recent FEMA study found that after Hurricane Hugo devastated Charleston, in 1989, the city outpaced growth predictions in seven of the following ten quarters. And the 2008 Sichuan earthquake, despite its enormous human toll, may have actually boosted the economy’s growth rate.

These were all monumental catastrophes, and yet, a couple of years after the fact, domestic growth rates showed little sign that they had happened. The biggest reason for this, as the economist George Horwich argued, is that even though natural disasters destroy physical capital they don’t diminish the true engines of economic growth: human ingenuity and productivity. With enough resources, a damaged region can reconstruct itself with surprising speed. Although the Northridge quake demolished the Santa Monica Freeway, it reopened after just sixty-six days. Healthy economies are by definition adaptive: in the case of Kobe, other Japanese ports picked up the slack until it was back on line. And, because governments generally flood disaster areas with money, there’s no dearth of cash for new investments.

In a study of eighty-nine countries, the economists Mark Skidmore and Hideki Toya, after controlling for every variable they could think of, found that countries that suffered more climatic disasters actually grew faster and were more productive. This seems bizarre: it’s close to the broken-windows fallacy identified by the nineteenth-century economist Frédéric Bastiat—the idea that breaking windows is economically useful, because it makes work for glaziers.