Friday, November 02, 2012

Growth and Disaster Economics

Well, Sandy has left an utter destruction in its wake along the North-East coast of the US. And while the people there suffer and try to rebuild their society from the ground up, I am reminded of people like Krugman and Morici who actually think that this is a good idea: "See, all that rebuilding will mean growth and spending!"

Well, that is true. A good example can be found in Tyler Cowen and Alex Tabarroks video on The Solow Model. However, what is not directly shown in the video but implied and told, is that this growth comes at a high price. The exmaple centers on Germany and Japan after World War II. Their cities are bombed out, the capital utterly destroyed. We start with a yield-curve close to 0 and as expected by the model, we get huge growth for the first unit of capital added. This is the period between 1950 and 1960. However, as previously noted, this is catch up growth and it levels out, once the countries returned to their former growth pace, meaning it was only temporary. So, should we really destroy our cities every 10 or 15 years? Hell, no, this is the crux, they totally blend out human suffering and the fact that over the 15 years of rebuilding a lower growth would have ended up at the same level of GDP (just look here). You will see a downward dip first the great depression, then World War II and you see the growth miracle. However, if you had lineary extrapolated the old growth trend then you would have arrived at the same wealth point!

I am not an economist and yet, even I understand that these ideas of Krugman and co. are just nuts. They are perhaps good as an academic exercise, but they should not be taken seriously on a public policy level.

However, there might be one, however dubious and contestable, side-effect that is not entirely bad. If you have been to Italy or France, you see that like in most Europa, the city still is build like the Medieval cities. Medieval cities were built for horses and pedestrians. They were built for slow carriages and single file. Modern societies have a higher flow-rate for goods and also need more square feet to work. The devastated Germanies and Japan had the chance to take this into consideration and rebuilt their cities accordingly and mostly they did. This is afterall a major advantage, but then would it alone justify any destruction of wealth? I highly doubt that.

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