Japan’s Supposed Silver Lining
Window-breakers are not benefactors.
Anyone familiar with Henry Hazlitt’s classic Economics in One Lesson (pdf) knows about the “broken window fallacy” in economics. The fallacy lies in thinking that the destruction of wealth that occurs in natural and manmade disasters has a silver lining: the economic activity prompted by the need to rebuild. What is overlooked is how the resources used in rebuilding would have been used had the destruction not occurred.
Frédéric Bastiat exposed the fallacy more than 150 years ago, and yet many people who should know better apparently never got the memo. One of the latest examples of “the blessings of destruction” analysis comes from Paul Krugman, the 2008 Nobel winner in economics:
[T]he nuclear catastrophe could end up being expansionary, if not for Japan then at least for the world as a whole. If this sounds crazy, well, liquidity-trap economics is like that — remember, World War II ended the Great Depression.
So Japan is hit with three catastrophes, a massive and powerful earthquake, a tsunami, and radiation-spewing meltdowns at a nuclear power plant — and this is considered “expansionary”? If one wishes to understand the intellectual bankruptcy of modern macroeconomic thinking, Krugman provides material.
Krugman Not Alone
However, what the great Walter Williams calls “economic lunacy” is not limited to Krugman. Others are following suit, claiming that the destruction of property in Japan actually is a positive thing, economically speaking. Williams first points out what other “respected” economists have written:
Economic lunacy abounds, and often the most learned, including Nobel Laureates, are its primary victims. The most recent example of economic lunacy is found in a Huffington Post article titled “The Silver Lining of Japan’s Quake” written by Nathan Gardels, editor of New Perspectives Quarterly, who has also written articles for The Wall Street Journal, Los Angeles Times, New York Times, and Washington Post.
Mr. Gardels says, “No one – least of all someone like myself who has experienced the existential terror of California’s regular tremors and knows the big one is coming here next – would minimize the grief, suffering and disruption caused by Japan’s massive earthquake and tsunami. But if one can look past the devastation, there is a silver lining. The need to rebuild a large swath of Japan will create huge opportunities for domestic economic growth, particularly in energy-efficient technologies, while also stimulating global demand and hastening the integration of East Asia…. By taking Japan’s mature economy down a notch, Mother Nature has accomplished what fiscal policy and the central bank could not.”
Harvard University’s Professor Larry Summers, former Obama economic adviser and Bill Clinton’s Treasury secretary, said the disaster “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.”
Williams quotes Bastiat:
There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.
Williams then asks:
Would the Japanese economy face even greater opportunities for economic growth had the earthquake and tsunami also struck Tokyo, Hiroshima, Yokohama and other major cities? Would the 9-11 terrorists have done us an even bigger economic favor had they destroyed buildings in other cities? The belief that society benefits from destruction is lunacy.
Impeccable Logic
Williams’s logic is impeccable, yet time and again such wisdom is overlooked in favor of the folly of Keynesian “logic” on the alleged benefits of spending. As we have seen from those supposedly most learned in economics, formal graduate study of the discipline in some of our most august academic institutions is no guarantee that sound economics will be learned.
No, Japan is not experiencing the blessings of destruction. The Japanese people are going through sheer horror. To spin this tragedy into economic triumph is not just bad economics; it’s an obscenity.
Comment by Deefburger on 23 March 2011:
Of course it’s a gain. Look at all the paper that will have to be written to pay for all of that re-building! Roll the presses! We have a disaster bubble to fund!
The numbers will rise like never before. With so much wealth to be created, the people of Japan should be dancing in the rubble! Just stand there with your hands up in the air and catch it as it rains down upon their blessed heads. To think for even one moment that this disaster is anything but a blessing to the banking system, er, I mean, economic system is ludicrous! Prosperity abounds when the printing presses roll, doesn’t everyone know that?
Look how happy Wall Street was (for a day) when Libya was attacked. Disaster breeds wealth people! All you need is trouble to spend on. Who needs real production when a disaster is all it takes to generate big numbers in the currency mill?
I’d burn my own house down today if I had lobbied for the bailout yesterday….
Comment by George Leef on 23 March 2011:
Excellent article, Bill. It isn’t surprising in the least that people (perhaps we should say “pseudo-economists”) who constantly tell us that it “stimulates the economy” when government seizes more wealth and resources from the private sector to devote them to whatever the politicians want also believe that natural disasters that destroy property are really economically beneficial.
Comment by Joseph on 23 March 2011:
I don’t think this is similar to the “broken window fallacy” at all. In that case, the window was purposefully broken in order to create the need to replace it. In this instance, I think they are saying “Well the window was broken through no fault of our own. We might as well replace the old single pane with a more efficient double pane.” No one advocated intentionally destroying property just so they could rebuild it.
Comment by Iggy on 23 March 2011:
The only question that need be asked is, “Would the people or nation, Japan, be materially better off from the event & ensuing rebuild than before it happened? Obviously, the answer is no.
Comment by Dan on 23 March 2011:
Joseph, it isn’t different just because of willfulness. If the boy had broken the window in a game of baseball, the shop owner would still be poorer. The point of the “broken window fallacy” is that destruction doesn’t produce wealth. It isn’t really a statement on intentional vs unintentional destruction.
If Japan is really better off (or will be) then wouldn’t they have been better off to have Tokyo also destroyed? Shouldn’t the US get itself out of this terrible financial situation by dynamiting cities? Dynamite is cheap!
Comment by Tom Langley on 23 March 2011:
What Dan mentioned about the destruction of cities is basically what’s happening in Detroit, but with a bulldozer. If we can get Detroit to use dynamite instead of bulldozers, then the Nobels might be able to afford larger prizes for economics.
Comment by Heath on 23 March 2011:
Often the replacement property is more valuable than what was destroyed. Suppose the dog steals your half eaten hamburger and you replace it with a steak. You still are out half a hamburger. Besides, the resources used to obtain the steak are no longer available to produce something else.
Comment by mark on 23 March 2011:
Joseph, broken widow fallacy does not hinge on purposiveness. it rests on the notion that waste is good. ‘acts of god’, accidents, or on purposive, doesn’t matter. remember that these economists are agents of the state, apologists for the state, and that the state is a destructive force wielded by people who profit massively from destruction, and then profit massively again from rebuilding…it is a gigantic insiders make-work self-dealing program.
Comment by bionic mosquito on 23 March 2011:
Of course, the government approved measures of wealth will all likely rise, because government measures “spending” and calls this “wealth.”
For those of us in the real world, wealth is not measured by what is spent. Wealth is measured by the value of what is left over: that which is earned and NOT spent.
Wealth is a balance sheet item; government measures it as a P&L item.
So, it will likely be correct: this will boost Japan’s “wealth”, as measured by GDP….
Comment by Dan on 23 March 2011:
Heath, still not quite right. You are out a half-hamburger AND the cost of a steak, money you would have used on something else. You have just bought 1.5 meals (and based on the cost of steak vs hamburgers you may as well say you’re out the cost of 4 hamburgers to satisfy 1 meal) rather than 1 meal and internet access for a month. You are poorer.
Comment by MarkB on 23 March 2011:
Heath, in the end you may have a steak but you still have to pay for the steak and the hamburger that the dog stole from you.
Comment by Heath on 23 March 2011:
Dan, MarkB. No disagreement. I though that was what I said. Apparently it wasn’t what you read. The age old problem of words meaning different things to different people.
Comment by Dr. T on 23 March 2011:
Larry Summers was correct when he stated that Japan’s Gross Domestic Product will rise this year. However, he forgot to mention that the GDP measures annual spending, not wealth. The money needed for repairs, rebuilding, and replacements will deplete savings and investments and force many people and businesses to borrow. The interest payments from borrowing will deplete available capital for years. Cashing in savings and investments today means that there will be lost opportunities for expansion, modernization, and consumer spending in the future. Japan’s GDP rise will be transient, and its future annual GDPs will be significantly lower than if the disaster had not happened.
Comment by BillS. MD on 23 March 2011:
Obviously destruction does not create wealth. The “cash for clunkers” program destroyed autos which could have been available cheaply for a workman who needed to get across town to do a job. Someone made money, but overall we are poorer and a less efficient economy. HOWEVER, Japan may end up as a more efficient economy. Every biologist knows that any biologic population, whether bacteria on a petri dish, amoebae in an Erlenmeyer flask, elk on the open range, or big trees in an old growth forest, if it comes to contain too many elderly, sickly, non-productive individuals, that population will die out or be driven out of its habitat by a younger, more vigorous population. This is a severe stress test in which many elderly, demented, sickly, dependent individuals will die. Please do not react viscerally to this statement. Try to think with pure intellect, not emotion. Our society is in deep trouble because we have too many old, sickly people who no longer contribute anything to economic efficiency. They are sucking resources from the young people just starting jobs. Think of big trees sucking up nutrients from the ground and blocking the sun. Yet they are sickly and have worms in their roots. Unless we can free our young people just starting their lives with new jobs and young babies from the obligation of supporting too many sickly, non-productive demented old folks, our nation will go bankrupt and the whole culture will die out. Japan will actually rebound vigorously, not because destruction is good, but because their average national age will drop by 20 years and they won’t be wasting resources on low-yield elderly.
Comment by tomcotom on 24 March 2011:
The “Broken Window fallacy” holds true no matter how the window is broken, whether on purpose or by accident, or by natural disaster. The money to replace the broken window is the same money that could have been spent differently – say on a suit of clothes. The owner of the business is worse off after the window is broken. If the window was not broken (by whatever means), the owner would be wealthier. He would have a perfectly good window and a suit of clothes. Now he must use the money for a suit of clothes to replace the window. The glazer gets the money instead of the tailor. There is no increase in GDP. In fact the wealth of the nation is decreased by the amount of what is destroyed. I would love to hear your responses.
Comment by Scott on 24 March 2011:
The insurance companies are going to be hit hard paying for a lot of this damage, assuming people had coverage. They will have to increase premiums to cover this expense, or adjust future rates to account for increased possibilities of another huge claim like this. Neither outcome is good for policyholders.
Accusing the elderly of creating a drag on the Japanese society that is “cured” by the disaster is inhuman, antisocial, and very disturbing to say the least. “Cleansing” a society of its sociological responsibilities in the spirit of improving the younger members opportunities might work for trees and elk, but for humans should be seen as repugnant. We will all be elderly someday, and deserve the honor and respect of our age and wisdom as well as credit for the lives we lived contributing to our society for decades previous.
When individual wealth is measured by how much one can preserve, save, invest or use efficiently we will see thriving fully capitalized growth and a broader sense of well-being across more layers of demographics, instead of the current appraisal as debt-ridden, pop-culture obsessed consumers and supporting governments, with the highest praise going to the person with the most bling.
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