Italy’s Earthquake: Will It Revive Their Economy?


On the night between the 23rd and the 24th of August, panic hit the central cities of Italy in the wake of an earthquake of magnitude 6.0 on the richter scale.

295 deaths, 293 severely damaged medieval churches, and semi-destroyed cities (including Amatrice, Accumoli, and Pescara del tronto) were the result.

In light of this tragedy, instead of reconsidering the role of free markets and property rights — thereby questioning the economic and social implications of keeping the security of an entire population in the hands of the most byzantine bureaucracy in Europe (it costs the Italian public 30 billion euros per annum) — politicians and journalists have clung to another question: “who’s to blame for the disaster?” Just as every other question formulated by the political-intellectual elite, it was soon to be followed by: “how much more to spend?”

Anxious of finding “the bad guy,” newspapers and different public figures have embarked upon some witch hunting. Among them were some conspiracy theorists — like Gianni Lannes — who blamed NATO and its the secret program of aerosol chemotherapy, as the real homo faber of this natural calamity. Another absurdity came from Daniela Martani — a particularly respected figure in the vegan movement — who went as far as to say that the earthquake was just the karma revolting against Amatrice (epicenter of the earthquake) for being the birthplace of the “meaty” pasta all’amatriciana. Particularly significant were the words that the Bishop of Rieti pronounced during the funeral of the victims, “Earthquakes do not kill, Man’s works do.” Other journalists, instead, have pointed their fingers at tax evasion on the side of the citizenry, which, in their opinion, subtracted the necessary funds from the government which should have gone into the building of anti-seismic infrastructures.

The intellectual climate which has dominated in the aftermath of the earthquake, can therefore be said to have oscillated between those who blame the government for having too few resources, and those who see the earthquake as a product of man’s evil actions. Yet this distinction is only superficial, since both groups use different expedients in order to arrive at the same objective: the expansion of public control, through more spending and more regulatory programs, across the private sphere. In fact, while reds advocate a restraint on individual liberty for the purpose of curtailing monopolies and exploitation, the greens do so in the name of avoiding the “destruction of the ozone layer and global warming.”

It comes not as a surprise then that the same people who have identified themselves as protectors of the environment have been, especially after this earthquake, the most constant advocates of government intervention. Among the most prominent has been comedian Beppe Grillo: cofounder of a political movement centered around environmentalist objectives. He immediately declared that the 50 million euro fund allocated by the government for the emergency situation was clearly insufficient. He and his 5-Star Movement have since been asking the EU for greater financial assistance along with President Renzi, who continues to beg Brussels for granting Italy a greater flexibility on its deficit — approximately 0.5 percent of GDP — in order for the government to finance the new rebuilding project called “Casa Italia.” This project that aims at protecting the country from further natural calamities and has been defended by many, like Bruno Vespa, on the grounds that the destruction brought about by the earthquake has given an entire region a terrific opportunity for economic growth.

Again, the Broken-Window Fallacy

Here, again, the friends of the state fall prey to one of the most recurring economic fallacies: the fallacy of the broken éwindow. First elaborated by the nineteenth century philosopher Frédéric Bastiat in his essay “That Which is Seen and That Which Is not Seen” and later popularized by Henry Hazlitt, the broken window fallacy sheds light on the problems involved in looking only at the short-run effects of any act or policy and in judging the effects of such a policy by looking only at some groups of society, while ignoring others. How can re-building increase a society’s living standard if no additional output is being produced?

It would seem, if one were to look simply at what catches the eye, that the new investments in housing that will occur in the regions of Lazio, Marche, and Umbria, will reflect an increase in real demand. However what is not seen is that this new investment will substitute the pre-existing plans of the old property owners. The need for new houses and the subsequent investment in reconstruction, will thereby, have to come at the expense of those pre-existing demands which, in accordance with the time preferences and the voluntary plans of action of those individuals, would have been directed to higher valued uses.

One of the main reasons people approve of government plans like “Casa Italia” is that it is believed that such a program will create new jobs, and as a consequence increase societies living standards. If one looks carefully, however, since government programs always entail taxation, and taxation means the diversion of resources from one sector to another, what really occurs is not an increase but a transfer of employment.

Hence, the new employment of home builders is the indirect cause of the unemployment of shoemakers, car sellers, or other tradesman. In the long run, however, the well-being of the “new employee” depends not on how much land, factories, houses have been destroyed and on how many “new jobs” he or she will be assigned, but rather on the level of production that exists beyond his or her scope of activity. The sole act of working in fact, far from representing an end in itself, implies an inherent demand for other products, which a worker engages in acquiring by trading future goods (products of his manpower) in exchange for present goods (money with which he will buy the products he prefers).

Therefore, as destruction involves capital loss, and as capital loss translates into a contraction of a nation’s productive capacity, how can the new home builders then be said to be better off if, despite their increased monetary compensations, there will be fewer things to buy? In other words, how can they be better off when their purchasing power is diminishing? If welfare really increased as a result of this destruction-reconstruction scheme which Italian politicians seem to love, western societies would have long ago turned to acting like Penelope, who wove and unwove her cloth while waiting for her beloved Ulysses.

As long as the Italian public will believe in “the blessings of destruction,” and in government-led recovery, which diverts capital from productive to nonproductive uses, earthquakes will continue to be, quoting Giovanni Birindelli “the health of democracries.” Meanwhile, politicians will have the intellectual power of using the broken-window scheme as an expedient to extend their tentacles over the private sector, in the form of more public debt, increased deficits, and higher taxes.

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