Print Window   
 
The Independent Institute
Commentary

Larry Summers Claims Japanese 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:
“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. . . . But it is clearly a fallacy. . . . 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.”
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 the Founder, President and Chief Executive Officer of The Independent Institute and Publisher of The Independent Review.