Liam Dann: Finding nuggets of economic hope amid the rubble

An earthquake damaged building is demolished in Christchurch. Photo / Mark Mitchell

The idea that rebuilding after the Christchurch earthquake might stimulate the economy has caused a good deal of debate.

Despite the fact that the Finance Minister and Treasury have factored it in to their estimates, sceptics are unconvinced.

They point out that if destruction was good for the economy then blowing up Auckland would be a great way to boost GDP.

In other words, if one earthquake is good then what about two or three? Clearly we'd end up broke and homeless.

This argument is compelling because it is obviously correct. But it is also irrelevant in a debate about the stimulatory effect of the rebuild.

That's because no one is actually saying that earthquakes or any other kind of disaster will make you richer.

What economists are talking about here is the potential for a silver lining on what is clearly a dark cloud.

Certainly at a micro-economic level this has been a devastating event for thousands of business people - which is why that is where the focus of Business Herald coverage remains.

But as soon as the earthquake struck last Saturday the damage to our economy was done. In those few seconds the country became materially poorer. Whatever the final dent to GDP is, we are stuck with it.

The earthquake now forces us to unlock a large chunk of stored wealth and put it to work in the productive economy.

So at issue is how we handle the funding of the rebuild. Because if we do it wisely we can maximise the economic upside.

That this happened in a world where a global financial crisis had already stalled economic growth makes the case for stimulus all the more compelling.

All over the Western world cash for investment and construction is in short supply and there is already a furious debate in economic circles about whether governments should spend now to stop the crisis getting worse.

That remains an argument worth having. Spend too much and nations may sink themselves in a mire of national debt, too little and economies will find themselves trapped in cycles of low growth and deflation.

It's a finely balanced equation which Prime Minister John Key and Finance Minister Bill English have had at the forefront of their policy making. Now their hands have been forced on this issue.

Let's not hide from the fact that New Zealand will go deeper in debt to fund the earthquake clean-up. But that debt will be borne across the entire populace and by future generations, some of whom will hopefully benefit from newer and stronger infrastructure around Canterbury. Thankfully there is capacity there.

And in the short term, as we continue this torturously slow recovery, there are going to be plenty of people with work to do that might not have had work before.

Those people will have money to spend in the Christchurch shops, bars and cafes which right now feel like it is the end of the world.

Businesses up and down the country will sell supplies to the construction companies and the rest of the Canterbury economy.

The hope then is that the extra spending sparks some business confidence.

Employers may see the point in expanding again, banks may feel better about lending. That is when the real upside of the stimulus kicks in and it is then possible that we will see a secondary boost to GDP - one which would not have occurred had the Earth stayed quiet last Saturday.

* twitter.com/liamdann