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Source link: http://archive.mises.org/8092/natural-disasters-it-turns-out-are-bad/

Natural Disasters, It Turns Out, Are Bad

May 7, 2008 by

It seems that we may never rid ourselves of the broken-window fallacy. it’s not only that disasters just have a silver lining: economists have long believed that natural disasters and wars are actually good for the economy! Until recently they have not made any attempt to empirically test their views. Now the good news. A recently published paper in Economic Inquiry by Cuaresma, Hlouskova, and Obersteiner brings the positive benefits of disasters into question. FULL ARTICLE

{ 113 comments }

newson May 17, 2008 at 11:52 pm

to owen:
you’ve pretty well summed up the austrian view of the depression, and you’ll find me in agreement.

you now acknowledge war to be a negative for the economy at large, despite boosting gdp. so here also we agree. but this was not your position, as is clear from this:

“WW2 weapons production was a big shot in the arm towards getting where it is today. The economy grew more in 20 years than in had in the previous 50, in large part because of the industrialisation that had flow-on effects for later peacetime goods.”

the austrian argument would be that military industrialization stunted whatever other peacetime economic development would have otherwise occurred. roosevelt’s death was probably the only good thing for the us economy during ww2. subsequently the more zealous new-dealers were sidelined, and inflation saw that real money wages finally came down to where the market demanded, ending the unemployment crisis (notwithstanding dramatic cuts in public spending on the war’s end).

now about my beef with you over gdp – i bounced the thing off stefan karlsson, and he concurred with your view. thought you’d like to take a look at his comments. here’s the link -https://www.blogger.com/comment.g?blogID=14390234&postID=541886920192650136

so there you go – i’ve got more homework to do on national accounts. and did i not mention how much i loathed macroeconomics at university, all those years ago?

Owen May 18, 2008 at 12:44 am

TLWP Sam and Newson:

No-one in this thread (least of all me) has argued either way on the merits of wars or natural disasters, rather the discussion was on the economic impacts that FOLLOW them.

Newson:

GDP is not a fabulous measure at all and is only crude at best. It doesn’t measure WHAT is produced, nor does it measure wealth as Inquisitor stated. Most damningly it is based on a notion that living standards and happiness are only affected by material goods and services which is hardly true. Finally ist doesn’t measure wealth or income inequality which can impact who actually receives this GDP.

But the assertion that many natural disasters and wars have not increased GDP is proved false by history. Furthermore, dispite it’s shortcomings, Increases GDP-per capita is strongly correlated to increases in living standards. Just have a look at East Asia.

I prefer the war never happened too. If it didn’t, then those resources could have been used for other means. You must remember however the WW2 followed the most restrictive world tariff situation ever known and if the war had not happened when it did, then countries like the USA would have likely continued to suffer. There was almost a dam bursting and the the USA made it’s GDP explosion based on EXPORTS that were previously not possible. So in many ways you can argue both ways that the war did infact open markets and demand for industrialisation.
The Pre-WW2 political and economic management of countries would be considered nieve at best based on what we know now based on hard experience. The USA is currently doing all it can to prevent the pending recession by printing money and the coming inflationary pressure and drop in the exchange rate will soon bring things to a head anyway most people feel. In short the market should be left alone to find it’s own feet without interventionism monetary or no.

The only interventionism I support is that which defends and secures people’s rights. Remember though that rights are subjective and at the moment that conception of rights is what is accepted by the government of the day.

I also loathe much of mainstream economics. But do not begrudge either it nor Austrian economics nor any other construct of social activity of valid additions to our store of knowledge which are logical and empirically true.

newson May 18, 2008 at 2:51 am

to owen:
the tariff wars were started by the smoot-hawley act 1930. other countries then responded to the us in kind.

surely it would have been easier just to rescind this tariff rather than go to war? trade impairment can only heighten nationalist sentiments. pearl harbour and the japanese push south to java was motivated by roosevelt’s blockade. deprived of fuel supplies, the javanese fields must have seemed irresistible to the japanese.

the economic rejuvenation of the us was primarily a factor of the internal log-jams being removed during the course of the war, and not the war itself. (the more extreme of the new-deal programmes being wound down, and inflation curing the mispricing of fixed nominal wages).

the soviets’ war-industrialization did nothing to stem their long, slow slide into poverty (helped along by the the draining afghan war).

the former axis countries moving to a more open economic model than national socialism naturally saw their imports rise. the marshall plan was a red-herring, and austrians regard it as an exercise in wealth destruction, whose negative effects were more than offset by the wealth generated by the comparative liberalizations of the german and japanese domestic markets.

Owen May 18, 2008 at 4:41 am

newson:

The Tariff wars were a result of political and economic leaders naivety and lack of knowledge about the outcomes. The prevailing economic wisdom being that domestic production needed to be protected from foreign imports. It was no 100% wrong because the dramatic growth of Japan, Germany and the East Asian tigers after WW2 followed this strategy successfully. However it can only work if you have high tariffs on selected strategic industries and your trading partners do not tariff your exports. it just so happens that the USA and Europe had a strong interest in supporting these emerging economies by gifting them unequal tariff regimes in order to foster growth.

In the 1970′s most of the unequal tariffs to east asia were taken away and now they operate on a more equal footing.

So you cannot say that tarrifs do not work in principle but it requires the support of your trading partners to not start a tariff war.

Germany and Japan. Mmmm – two of the strongest growing economies after WW2?

First of all, they enjoyed massive interest free loans and donations from western powers and also unequal tariff regimes that protected their industries until they became strong. This was not done out of love but as a bullwark against communism. the same goes for East asian tigers (Singapore, Hong Kong, taiwan and South Korea).

Could it be also that in fact they were the most heavily bombed and especially their infrastructure (the first thing targeted by an enemy) were certainly completely destroyed by 1945.

This sort of reinforces the line of thinking that disasters preceed high GDP growth does it not?

fundamentalist May 18, 2008 at 1:31 pm

newson: “now about my beef with you over gdp – i bounced the thing off stefan karlsson, and he concurred with your view.”

I think there is a bit of arguing past each other with regard to Karlsson and Reisman on GDP. Reisman’s real argument is that what we call GDP is not “gross domestic production” but “net domestic production.” Reisman is correct if you follow standard accounting principles. GDP clearly is not gross domestic production. Kuznets never intended it to be. He intended it to be value added production, which by definition is net production, not gross production. Why he chose to be deceitful in naming the stats I don’t understand, although most socialists have a hard time telling the truth about anything.

Because of its name, people as misled into thinking that GDP measures the output of a country in the same way that sales measure the output of a company. That’s why you get ignorant socialists comparing the sales of a large corporation with the GDP of nations. It’s a stupid comparison because the two are calculated very differently.

By focusing on value added exclusively, the “GDP” for consumer goods industries naturally appears much larger than the “GDP” of producers good industries. Consumers goods make up about 70% of GDP figures, which justifies Keynesian econ. And it’s a mathematical illusion created by the value added methodology.

Most people don’t understand the highly stylized calculations involved in the GDP, nor the misleading name, so they assume that GDP measures the output/sales of the nation. It doesn’t. About 10 years ago the BEA added the GO, gross ouput, figures, which are the sum of all sales in the US by industry. The GO is honest in that it is truely a gross figure while the GDP is not. And it corresponds to what people think the GDP is, but in reality is not.

My personal concern with GDP is including government spending and excluding sales of used items. The latter is far more important to the wealth and well-being of the people than the former. By including state spending in GDP figures, GDP fools people into thinking that state spending makes them wealthier when it does just the opposite.

Germany, Japan and the US boosted GDP’s dramatically during WWII through state spending on military equipment. Germans, especially, were so ignorant in the 1930′s that they thought Hitler was a miracle worker for turning the German economy around. He did for a very short period by expanding state spending. But did military spending make any country wealthier? Some ignorant economists claim it did. But if that’s the case, then why don’t we just have the US government buy up all surplus production in the US and destroy it? That’s all that war does in economic terms.

We shouldn’t be having this conversion. It’s idiotic to claim that warfare enriches people by increasing production. Almost all of that production gets destroyed in the war. None of what isn’t destroyed can be used to produce other goods, and when the war ends, all of that production is totally worthless. If war could enrich people, then we could accomplish the same thing and save lives by continuing to produce all of that military equipment for ever and just sinking it to the bottom of the ocean. Destruction would be the path to prosperity.

But GDP figures make that ridiculous scenario seem reasonable, because it includes state spending as part of GDP. The state can boost GDP by producing huge amounts of military hardware, but only for a very short time. To pay for that production, the state can not take all of the income of people through taxes or the people would starve. It can’t borrow all of the money the people have or they would still starve. At some point the state must simply print money, but it can do that for only so long before hyperinflation sets in, which is why states impose price controls. But the combination of wide open printing presses and price controls impoverish a nation. Germany, the USSR, China and Zimbabwe have proven that.

GDP is the wrong measure of national output because the name is a lie that misleads people and it contains state spending, which impoverished people even though the GDP claims to be a measure of income. Had GDP left out state spending, as it should, the American people would be able to see very clearly how much WWII impoverished them. Instead, GDP has convinced many weak-minded people that war enriches a nation.

And we wonder why so few people oppose war.

fundamentalist May 18, 2008 at 3:20 pm

To illustrate the silliness of the GDP method further, consider what the GDP of Exxon might look like. Follwoing GDP’s “valued added methodology, you would have to substract the cost of drilling rigs and oil purchased from states from total sales. That would leave employee salaries for the most part, which would make Exxon’s GDP about half the size of its revenue. For what purpose could anyone use such calculations, other than simply to make Exxon look smaller?

Owen May 18, 2008 at 4:37 pm

But fundamentalist…that is not silly at all. The GDP for the crude oil belongs to the countries where it is sourced from and you will actually find that annual cash investment in drilling rigs is included in GDP.

GDP would then fairly attribute to it the portion of the price of it’s sales that belong to it’s activities of drilling, exploration, distribution and sales and that which belongs to others such as Crude oil reserves. Where Exxon purchases intermediate inputs from another company such as an oil tanker then this must be subtracted from Exxon’s GDP and added to the GDP of that other company.

Unfortunately Middle Eastern countries have a bank of black gold beneath their feet an everytime they get more oil it increases their GDP with little effort.

Only if you wanted to calculate the total GROSS outputs of all these players assuming they were one country, then you could use simple GDP and the sales value of Exxon would suffice.

GDP itself is not net output, but gross output as the name suggests. Because the value of all intermediate inputs into final goods are included in the final selling price. Just like when you are told by your gas station that they are increasing their prices because of higher crude oil prices. This is precisely because the value of crude oil used to manufacture that gas is included in it’s final selling price. If it was not included then why do they have to increase their prices?

If they didn’t increase their prices they would go out of business.

newson May 18, 2008 at 10:12 pm

to fundamentalist:
national accounts i find particularly complicated, probably because it’s illogical to compare company accounting with national accounting (the trade balance comes to mind). here’s a couple of articles by corrigan about the very same topic:

http://brookesnews.com/071604corrigan.html
http://brookesnews.com/072304businesscycle.html

karlsson takes a benign view of government services being included, which i don’t fully agree with, or not the way he puts it.
https://www.blogger.com/comment.g?blogID=14390234&postID=541886920192650136

if we’re including government services, the exclusion of pre-owned goods transactions from gdp worries me too. karlsson’s example suffers from contrivance. sales of secondhand goods obviously confers value, but the example of repeatedly selling and repurchasing the same object, thereby boosting the gross output seems belaboured. where’s the subjective value in that round-robin?

newson May 18, 2008 at 10:22 pm

owen says:
“Germany and Japan. Mmmm – two of the strongest growing economies after WW2?
First of all, they enjoyed massive interest free loans and donations from western powers and also unequal tariff regimes that protected their industries until they became strong.”

well here i’d disagree with you. the tariffs that many of the asian tigers did put up (i’m thinking of south korea in particular, but malaysia also has a national champion mentality) act as a brake on their economic development, but these negatives are offset by other positives – relatively secure property rights, high savings rates, less intrusive government and lowish taxation.

the least protected economies turn out to have racked up the best performance. here’s a gerry jackson comparison of hong kong and singapore-
http://www.brookesnews.com/071203hongkong.html

south america, with the exception of chile, erected a tariff wall around its infant industries in the seventies and suffered from economic regression for a good two decades.

fundamentalist May 19, 2008 at 8:14 am

Owen: “GDP itself is not net output, but gross output as the name suggests. Because the value of all intermediate inputs into final goods are included in the final selling price.”

“Gross” and “net” are accounting terms, so you must use the accounting definition. GDP doesn’t. Gross revenue is the total sales, absolutely nothing subtracted from it. Net is the gross sales with various things subtracted. Figures can be “net” of interest, taxes, depreciation, or other things, in other words, “net” means the “gross” with something subtracted. GDP subtracts the costs of inputs at each step so that it avoids “double counting”. By definition, GDP is gross sales minus inputs at each stage of production. GDP is the value added portion of gross output, by definition the gross sales of every industry minus inputs except labor.

fundamentalist May 19, 2008 at 9:32 am

newson: “karlsson takes a benign view of government services being included, which i don’t fully agree with, or not the way he puts it.”
I don’t think including state spending is benign at all. It gives people the impression that state spending is as good as private spending when it comes to increasing our wealth. So it wouldn’t matter is the state did all of the spending and the private sector did none. Currently, the feds take in about 20% of GDP. State and local governments take in about another 20%. For GDP, it wouldn’t matter if the state eliminated private property and did all of the spending. After all, the USSR and China had GDP figures.
If you’re a socialist, that doesn’t matter. But for capitalists, GDP is useless. We have to compile our own figures, as Karlsson does with the IO tables. One could argue that the services provided by the courts, police and military should be included since they are part of the state’s real purpose of providing security for property and national defense. That’s a philosophical argument and would cut the state’s contribution by at least half since everything else in the budget is nothing but redistribution.
I don’t agree with Karlsson’s example about the used car. Sellers of used items provide a service just as much as any other service, such as accounting. Without the services of dealers in used items, the transaction costs of finding and negotiating the sale of used items would be much higher. If state spending should be included in GDP, then so should the services of sellers of used items.
In part one of the series you linked, Karlsson seems to approve of Reisman’s take on the GDP:
Karlsson: “Here, at last, we come to the half-truth hidden in the familiar cliché, for the data with which we are so familiar are compiled, à la Maynard, in such a fashion that consumption is indeed 60 per cent of the aggregate — if only because the supposedly gross product in fact nets out the literally trillions of dollars of intermediate goods and services which are essential to the continued satisfaction of human needs and in whose delivery the majority of the population earn their own daily bread.
“But being 60 per cent of this artificial and inconsistent construct is not the same as being 60 per cent of all significant economic activity: the model is not the market and the map is not the territory.” Part one.

newson May 19, 2008 at 10:21 am

to fundamentalist:
actually the two brookesnews links were by sean corrigan. i agree that counting the government spending in some construct is a great risk. whatever the merits or demerits of gdp, i think it’s great that reisman and co. have shone a spotlight on it.

as you say, this is a debate that should never be. destruction intuitively can’t be wealth creating, and it’s only the gdp trick that confuses.

even the concept of gdp as a value-added index confuses – i mean “value” is not profit in the accounting sense is it? i mean the gross output as i interpret it is purely sales revenue, a simple accounting term.

fundamentalist May 19, 2008 at 11:00 am

newson: “”value” is not profit in the accounting sense is it?”

I’m not an expert in accounting, though my daughter is. I haven’t seen the term in accounting and I don’t understand what “value added” is good for. I don’t know any area of econ or accounting that uses it except in GDP and the Value Added Tax in Europe. It’s pretty much worthless. But people use GDP as if it were the sum of all output, not all “value added” output. That’s the real problem.

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