Larry Summers Claims Japanese Earthquake/Tsunami Disaster Will Boost Economy

Predictably, within days of the unmitigated disaster and massive loss of life (10,000 and counting) in Japan from the record 8.9-magnitude earthquake and tsunami, a major Keynesian economist has gone on the record in defending the “broken window fallacy” in economics by claiming that the Japanese disaster will actually boost economic growth. The economist is none other than Larry Summers (former Harvard University President and now Charles W. Eliot University Professor at Harvard’s Kennedy School of Government, former Director of Obama’s National Economic Council, former Chief Economist at the World Bank, and former Secretary of the Treasury under Clinton). In an interview on CNBC Summers actually claims that the disaster will:

. . . add complexity to Japan’s challenge of economic recovery. It may lead to some temporary increments ironically to GDP as a process of rebuilding takes place. In the wake of the earlier Kobe earthquake Japan actually gained some economic strength.

(For the record, the Kobe earthquake killed more than 6,000 people and left 300,000 homeless.)

Now in a superb article in The Daily Caller, “Tsunamis are not stimulus,” Ryan Young refutes the Keynesian nonsense from Summers:

Think about that for a second. The 8.9 magnitude earthquake was Japan’s largest in 100 years. The tsunami it spawned killed hundreds of people. Some of their bodies may never be found. Countless more people are now homeless. It tossed cars and buildings around as easily as a child tosses his Matchbox toy cars across the room. The wave was still seven feet tall when it hit Hawaii. Coastal areas were evacuated as far away as California and Oregon.

This is pure destruction. Even leaving aside the horrible human toll, destruction is bad for the economy.

Yes, construction will be a boom industry in the coming months. That’s why people like Summers can claim that the tsunami will create jobs and boost GDP. Better still, the workers will spend their wages and stimulate the rest of the economy, too. Japan will be better off for having endured a natural disaster.

If this were really the case, then the best possible way to boost Japan’s economy would be to level the entire country. Every building should be destroyed, brick by brick. The number of jobs that policy would create would dwarf any tsunami stimulus.

Then, in a few years, when the rebuilding is finished, workers can destroy their entire infrastructure again. Even more jobs will be created!

Economists call this line of thought the broken-window fallacy; if a kid hits a baseball through a window, it creates a job for the repairman. It does sound superficially appealing, which is probably why Summers fell for it. But it is clearly a fallacy. And it’s one that every economist has drilled into his or her head from day one.

Here’s why: if the tsunami had never happened, people would still have all the buildings and cars that they had in the first place. They would be able to spend their money on other, additional goods that they want.

And those new construction jobs the tsunami will create? Every last one of those workers could be making something else instead. They could be producing computers, televisions, almost anything.

People who were construction workers to begin with could be building new factories or new homes, in addition to the ones they already have. Instead, they will be working overtime just to get back what they already had. This is not stimulus, even if it does show up in GDP. It is better to build than to rebuild.

Summers, smart as he is, screwed up. Because he was reacting so quickly to a terrible tragedy as it was still happening, maybe he didn’t think before he spoke. It happens to the best of us.

The rest of us need to know that natural disasters are just that: disasters. As the Japanese mourn their dead and begin the painful rebuilding process, we should do whatever we can to bring them some comfort. Saying that the terrible wave that washed away so much will stimulate the economy offers no comfort, mainly because it isn’t true.

The “broken window” fallacy, one of the most pernicious in economics, has long been used to defend a wide assortment of government interventions, from urban renewal to “cash-for-clunkers” to “clean” energy subsidies to public works projects to war. For example, John Maynard Keynes argued in Chapter 10 of his book, The General Theory of Employment, Interest and Money, that it may make economic sense to build completely useless pyramids in order to stimulate the economy, raise aggregate demand, and encourage full employment. Keynesian, Nobelist, and prominent New York Times liberal columnist Paul Krugman has similarly claimed that the massive munitions and other spending and public works projects of World War II ended the Great Depression (see here and here), a view that Independent Institute Senior Fellow Robert Higgs thoroughly refutes in his seminal book, Depression, War, and Cold War.

However, the “broken window fallacy” was first refuted many years earlier by the French economist Claude-Frederic Bastiat in his 1850 essay, “What Is Seen and What Is Not Seen,” which can be found in his book, Selected Essays on Political Economy. And one of the very best critiques of the fallacy is found in Austrian School economist Henry Hazlitt’s bestselling book, Economics in One Lesson.

Natural and man-made disasters are tragic enough on their own. Must mankind also continue to suffer from the government measures based of the crackpot views of Keynesians who disturbingly consider such calamities economically beneficial and refuse to learn the simple lesson of the “broken window fallacy”?

David J. Theroux is Founder, President and Chief Executive Officer of the Independent Institute and Publisher of the quarterly journal, The Independent Review.
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