A quick post on disasters and growth

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The economic news of 2011 has been the news of disasters. Australia was buffeted, the US and Europe had bad winters, Christchurch’s earthquake and then there is Japan. There has been lots of discussion regarding the economic impact of all of this. Here and here are excellent summary posts. The take-away is that for politically stable economies, growth rates recover to their long-run rates. It turns out that the tendency for economies to withstand recessions, disasters and the like is pretty robust. But it is also the case that there is no silver lining to these events. That is why a short-run economic disaster like hosting the Olympics doesn’t buy you long-term gains. You get back on track but you don’t get more.

What is interesting is that this puts to pay the suggestions that going in to debt to pay for recovery (either from a recession or anything else) is a bad thing. Debt is what increases following natural disasters. It is how the future pays for the present recovery. The amazing thing is that the debt does not dampen long-run growth as so many claim these days. Nor is it is likely to be neutral. Countries that do not have the institutions to allow the future to share the costs of rebuilding, do not recover.

This, by the way, also has impacts on how we should think about responses to climate change. A carbon tax is held to be an economic disaster until firms re-tool towards more carbon efficient capital, etc. But the long-run rate of growth is a pretty robust animal. We should not expect long-term harm nor should we expect some long-term gift from dealing with climate change today.

5 Responses to "A quick post on disasters and growth"
  1. So much is determined by the naming of things. For example, the future is paying for the cost of recovery.
    The future, at the same time, is investing in their own standard of living being maintained.

  2. I think in Japan’s specific case, they do have a real problem with debt – it’s over 200% of GDP. At their rate of increasing debt, Japanese society will be soaking up those oft-quoted domestic pensioner savings at the Postal Bank in no time.

    A good chunk of Japan’s infrastructure “investment” over the last decade of recession went into propping up construction companies – not really a great example of an efficient reallocation of resources.

  3. I don’t think that dealing with climate change is the same as the other disasters/events mentioned in the post. A tsunami/earthquake/flood is a one-off disaster, whereas climate change (or the economic impacts of both mitigation and adaptation) are continual. In some sense we are always facing new ‘short run’ effects of climate change, even in the ‘long run’.

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