Can something good come out of the recent earthquake and tsunami in Japan, one of the worst recorded natural disasters in the country’s history? The Huffington Post’s Nathan Gardels certainly thinks so:
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.
Japan has been wallowing in stagnation for years despite massive government stimulus programs and zero-interest rates because, simply put, in such an advanced, mature economy there was too little demand to generate sufficient returns to attract private investment. Thus the famous “bridges to nowhere” and other projects that amounted to pushing a string.
Mr. Gardels is not alone in his optimism about the quake’s aftermath. Harvard professor and former president Larry Summers agrees with Mr. Gardels, stating that the disaster could actually produce a boost in Japan’s gross domestic product. And these statements are not simply limited to this particular disaster. Even Nobel economics laureates have offered similar thoughts about disasters such as the September 11 attacks. Surely many Americans recall the lesson from their social studies classes that the massive expenditures of the Second World War, and the subsequent destruction that followed, generated an exit from the Great Depression.
At the heart of these arguments lies the idea that destruction, paradoxically, can lead to economic growth: disasters such as the Japan quake stimulate aggregate demand for goods and services, spurring expenditure, and raising the level of employment and output in an economy. The resulting increase in production and labor thus boosts a country’s GDP.
This view rests upon what its detractors like to call the “broken window” fallacy. Former New York Times columnist Henry Hazlitt once decried it as “the most persistent [fallacy] in the history of economics.” Hazlitt drew inspiration from the writings of the undeservedly little-known French economist Frederic Bastiat, who forcefully argued against the broken window fallacy over 150 years ago in his landmark pamphlet, “That Which is Seen, and that Which is not Seen.”
Picture an act of destruction. For the sake of simplicity, let it be that the hooligan son of some random townsman, James Goodfellow, breaks his father’s window. His neighbors console him, telling him not to worry, because though he must indeed bear the cost of paying for a new window, he is nevertheless performing a valuable social service by extending the employment of the repairman whom he must hire to replace the window. The employee can now in turn spend that money on some of his own affairs, and the newly-injected money generates a multiplier effect throughout the broader economy.
All well and good, but one must also consider, as Bastiat astutely notes, not only the seen effects of any given policy, but also its unseen effects. Though the townspeople will certainly see the new window, and the new business provided to the contractor that replaces it, they will not see, to use Hazlitt’s example, the suit that Mr. Goodfellow could have purchased with the money instead used for the window. Rather than possessing both a window and a suit, society instead is left with simply a window, but with no suit.
Extrapolate this principle to the present day, whether the situation be Hurricane Katrina or the present devastation left by the disaster in Japan: in both cases, it seems commonsensical that these disasters leave countries poorer, not richer. Any sort of “growth” that follows in the wake of these events, for at least quite some time, simply serves to restore former levels of wealth and prosperity.
Perhaps some of the confusion here arises from the dependence on GDP figures as a measure of economic prosperity. But in cases such as these, this metric hardly serves as an adequate gauge of a country’s wealth. Any sort of consumption or government expenditure, no matter how destructive or inefficient, would serve to raise GDP levels. By Mr. Gardels’s logic, the Japanese government could have boosted GDP by pursuing policies with similar results to the actual earthquake – albeit ones with less of a humanitarian toll. The government, for example, could have decided to build massive housing projects, only to destroy them through controlled demolition. The construction and re-construction efforts would have produced a large opportunity for employment and economic “growth.” Or the government could have mandated that construction firms limit the productivity of their workers or their equipment, thus raising the amount of labor and other inputs required to finish projects. Any similar policy would have certainly raised expenditures, and, by extension, GDP, but surely few would argue that these destructive measures actually constitute an increase in the wealth of Japan.
We would do well to remember the distinction between actual wealth and figures that simply serve to measure national income. Actual wealth consists of products actually demanded by consumers – not simply those produced for the sake of production. Destruction is, as the word suggests, destructive. There exists no paradox of “productive destruction.” Destruction may make number-crunchers at the BLS happy, but it does not create greater well-being for you or for me.
Photo Credit: Tenth Amendment Center