[ABC News] Why disasters like the bushfires and coronavirus can turbocharge GDP
Posted February 17, 2020 05:47:05
Thomas Carlyle, a 19th Century historian, first coined the phrase. Economics, he argued, was the "dismal science".
He had a point. Most economists are obsessed either with "black swan events", on the lookout for "unknown unknowns", or constantly searching for the catalyst to the next big crash.
Carlyle was particularly incensed with claims by Malthus that population always would grow faster than food production, thereby ensuring a future of poverty and starvation for humanity.
Mind you, Carlyle was a big fan of slavery and lobbied for its reintroduction into the West Indies as a way to fix the economy. So, his track record as a social scientist is sketchy to say the least.
But there's one thing Carlyle overlooked. Even the most dismal practitioners of the dismal arts often extract joy from plumbing the depths of despair.
When it comes to mainstream economists, there's nothing they enjoy more than a good old-fashioned disaster.
It's here the dark clouds evaporate, leaving nothing but silver linings.
Cast your minds back just a little. Remember Fukushima? Economists across the globe were quick to point out that the disaster may help lift Japan out of its ongoing economic slump.
How? Rebuilding Japan's power sector and rehabilitating the toxic countryside, not to mention reconstruction from the devastating losses wreaked by the tsunami, would boost activity.
How about the Christchurch earthquakes? Again, they were banging on about how all those house rebuilds and construction jobs would turbocharge GDP.
Now, finally, we have our own and, already, we've been hearing just how this may help us down the track.
If you believe most of our mainstream economists, including the Reserve Bank, the bushfires - while a terrible tragedy - will provide a boost later on.
Take this argument to its logical and ludicrous extreme and you could argue we could be the poster-child economy for a new and exciting growth model.
If we are subject to increasingly horrendous fire seasons, according to this perverse logic, we might just be able to tap into a new economic growth paradigm.
What's wrong with GDP?
The idea that there are benefits to a disaster like our fire crisis tells you there's something horribly wrong with the way we measure economic growth and performance.
As Victoria University's Janine Dixon pointed out recently on The Conversation, measuring the economic impact of disasters through GDP is a deeply flawed strategy. As she points out, in cases like these, GDP captures short-term growth but ignores many of the longer-term costs.
For a start, what about all the pain and suffering, all the heartache and trauma from communities stretching from Queensland right across NSW, Gippsland and South Australia and various parts of Tasmania and Western Australia?
The psychological impact and physical injuries of those caught in the inferno will take years to play out and will only be measured through a loss of output from those individuals. But increased health care, in the immediate aftermath of the fires, will be counted as a positive.
Even the accounting is flawed. GDP measures productive activity. It measures the changes in our output. But it doesn't put a value on what we already have.
It might well be a good way of measuring how the coronavirus will impact our economy in the next few months, as tourism with China drops and as China's economy stalls, but when it comes to catastrophes like the recent bushfires, it's hopeless.
When fires consume hard assets - the houses, the infrastructure, the businesses, the livestock - there is no recorded loss of value. It instead records the loss of income those assets produce.
But when those houses and infrastructure are replaced, that's considered economic activity and output, and so that is lodged as a gain. And that's why you'll repeatedly hear in coming months how our economy has been given a lift by the rebuilding efforts.
What is ignored is that all that effort, investment and time could have been devoted to something far more constructive and positive than simply replacing what we already had.
Coronavirus to the rescue?
When it comes to "black swan" events, they don't come much darker than the current coronavirus, or COVID-19 as it's now called.
Not that anyone seems particularly perturbed by it, at least on financial markets. That's despite predictions that it could put our economy into reverse in the March quarter.
Reserve Bank governor Philip Lowe last week admitted it was having an immediate impact, particularly on the education sector, as almost half the usual 200,000 Chinese students were prevented from starting their courses here.
But, unlike many of his professional market-based counterparts, the RBA boss remained positive about the future.
"There are still a lot of people getting infected but the infection rate is coming down, so if that continues, I think we can have reasonable optimism that the number of cases has stabilised," he told the Australia Canada Economic Leadership Forum.
In any case, he reckoned Beijing could be forced to inject even more stimulus into its economy and that would be good for us. Ah yes. Silver linings.
Others reckon the RBA could be the one providing the stimulus. UBS modelling based on the 2002 SARS outbreak suggests that if the China crisis results in a global downturn in manufacturing, this will hit us, given we are a tiny, trade-exposed nation.
That could prompt the RBA to jettison hopes that we are in the midst of a "gentle turning point" and start slashing interest rates.
At this point it is difficult to get a handle on just how accurate the information flowing out of China is regarding infections and fatalities, let alone the economic impact.
But Alibaba, China's biggest company, on Friday signalled that it will suffer a significant earnings downturn this quarter, the first in its history.
Chief financial officer Maggie Wu told analysts that while this would be a one-off event, the virus outbreak had shut down almost two thirds of the economy and the company was hurting.
Still, that did little to dent the enthusiasm on Wall Street, which ended the week a touch lower, just off record highs.
Nothing dismal about that.
Topics:business-economics-and-finance, bushfire, economic-trends, diseases-and-disorders, infectious-diseases-other, australia, china
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