Just when things are looking up, nature hits the economy.
Despite political turmoil in the Middle East and Northern Africa, the outlook for the world economy has been improving. A natural disaster in Japan set things back.
The Organization for Economic Cooperation and Development's Business Confidence Indicator rose to 103.2 in February from 102.8 in January. The BCI is calculated for the 33 member countries and measures whether business conditions are favorable or unfavorable, and whether or not businesses expect expansion or contraction. A value of 100 is considered normal, while values above 100 indicate a growing economy.
The index for the United States is at 103.6 for February. The number has risen steadily since it was last below 100 in July 2009. Of all OECD member countries, business confidence is below normal only in Korea.
The devastation in Japan is certain to zap the favorable outlook. Japan’s BCI has held steadily above 100 since May of last year. The 8.9 magnitude earthquake and resulting tsunami will undoubtedly push conditions below normal as many firms announced factory shutdowns and electrical power is in short supply.
Japan, however, is well suited to bounce back rapidly from this natural disaster. A developed country with strong building codes and extensive emergency services, Japan’s economy has historically rebounded well from disasters. The 1995 Kobe quake quickly became an afterthought in economic terms.
There is a danger, however, in thinking Japan’s economy may benefit from this disaster.
Some analysts look to natural disasters as economic opportunities. The thought is that the rebuilding efforts put more people to work, lowering unemployment and expanding consumption.
Such analysis suffers from the Broken Window Fallacy. Nineteenth-century economist Frederic Bastiat wrote a parable to explain why putting someone to work repairing a broken window does not help the economy.
This worker may benefit, but his or her skills and time cannot be put to work otherwise. Further, the owner of the window is out money that could otherwise be invested elsewhere.
In July 2008, the Chinese government announced that rebuilding efforts in Sichuan would increase economic growth, outweighing the losses from an earthquake there. As reported then in The New York Times, some economists argue that natural disasters provide a short-term economic boost and raise long-term growth with new and more efficient infrastructure.
But if such gains are there for the taking, why was infrastructure investment neglected in the first place? Further, the idea that growth will follow a disaster ignores the fact that rebuilding redirects resources from other productive uses.
In the first full trading day after the disaster, Japan’s stock market fell by 6 percent. Japan’s central bank spent more than 15 trillion Yen ($185 billion) trying to stabilize financial markets.
The loss to investor portfolios and the drain on government resources will have major long-term economic consequences. The damage to the nation’s nuclear power facilities will take years to repair. Energy costs will remain elevated for both businesses and consumers.
We can never let ourselves fall into the trap. Broken windows are not economic opportunities.
Peter R. Crabb is a professor of finance and economics at Northwest Nazarene University in Nampa. He writes weekly, alternating between IdahoStatesman.com and Business Insider magazine.