When Will the First ‘Broken Window’ Fallacy Be Written About South Asia?

I’m not an economist, but I did specialize a bit in international political economy in grad school, and I read a couple of economics blogs, so I have learned a couple of home truths. One is that with every disaster, there seems to be some well-meaning person who attempts to find the silver lining in the cloud of despair. The piece ususally goes something like, “One positive thing to come out of the disaster will be the economic jolt from spending on reconstruction.” Since people will be employed rebuilding things, it will create jobs, thus boosting the economy, right?

Wrong. This BBC story details the first attempts to come to grip with the costs. I hate to be the bearer of even more bad news, but this is an unmitigated (and unprecedented) disaster. While many of the people who were killed or who have been made homeless were very poor, they had some wealth, and that wealth is gone now. Furthermore, many, if not most, of the deaths were of those who are or will be producers of wealth. So future wealth creation has been curtailed. In the short term, the efforts to provide food, clean water, shelter, and disease treatment to these people will be much more expensive than had they not been affected–another net cost. Any money spent on disaster relief is money that will not be spent on some naturally productive area of the global economy.

That money must be spent, spent gladly, and spending more now will prevent spending even more later. But just because disaster relief is a good thing doesn’t mean that it will be a good thing for the global economy. Remember the Asian Flu of the late 90’s? Only the Internet bubble and some fancy maneuvering on the part of the global financial community kept that from affecting us in the West. This may have a measurable impact as well.

One more note about economic rhetoric. The BBC piece talks about some of the countries “lowering taxes and spending more to stimulate the economy.” That is more realistically phrased as “borrowing from future generations to invest in reconstruction now in the hopes that a future economy will be stronger and able to pay of the debt.” It’s a reasonable move in the short term, though anyone watching the current US Administration will find that policy strangely familiar and unsettling. The longer you finance current consumption with debt, the greater the bill when it comes due–and it will come due.

Fortunately, it’s a good bet that this area will be more wealthy in the future. And it’s a sound investment to provide them relief now so a greater tragedy is averted. Remember, all that relief doesn’t have to come from the government: you can and should help, too.