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.

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December 2014

Unfortunately, educating people about phenomena that are counterintuitive, not-so-easy to remember, and suggest our individual lack of human control (for starters) can seem like an uphill battle in the war of ideas. So we sally forth into a kind of wilderness, an economic fairyland. We are myth busters in a world where people crave myths more than reality. Why do they so readily embrace untruth? Primarily because the immediate costs of doing so are so low and the psychic benefits are so high.
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