On March 11, 2011 tragedy hit Japan. A massive tsunami hit the island killing nearly 16,000 and leaving nearly 3,300 unaccounted for. As the world mourned, Keynesian economists saw the events in a positive light.
Larry Summers, the former Harvard University President and former Secretary of the Treasury under Bill Clinton proclaimed that tsunami would bring economic renewal to Japan. “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,” he said. Don’t forget, the Kobe earthquake killed 6,000 people and left over a quarter of a million homeless.
This was not the lone raving of a madman. Paul Krugman after the terrorist attacks on 9-11 wrote that ” like the original day of infamy, which brought an end to the Great Depression — could even do some economic good.”
The common thread of this thinking is the belief that economic destruction, death and despair creates economic wealth by forcing the government to spend money it might not otherwise. This is also known as the “Broken Window Fallacy.” The great economic writer Henry Hazlett described the fallacy as:
A young hoodlum, say, heaves a brick through the window of a baker’s shop. The shopkeeper runs out furious, but the boy is gone. A crowd gathers, and begins to stare with quiet satisfaction at the gaping hole in the window and the shattered glass over the bread and pies. After a while the crowd feels the need for philosophic reflection. And several of its members are almost certain to remind each other or the baker that, after all, the misfortune has its bright side. It will make business for some glazier. As they begin to think of this they elaborate upon it. How much does a new plate glass window cost? Two hundred and fifty dollars? That will be quite a sun. After all, if windows were never broken, what would happen to the glass business? Then, of course, the thing is endless. The glazier will have $250 more to spend with other merchants, and these in turn will have $250 more to spend with still other merchants, and so ad infinitum. The smashed window will go on providing money and employment in ever-widening circles. The logical conclusion from all this would be, if the crowd drew it, that the little hoodlum who threw the brick, far from being a public menace, was a public benefactor.
Now let us take another look. The crowd is at least right in its first conclusion. This little act of vandalism will in the first instance mean more business for some glazier. The glazier will be no more unhappy to learn of the incident than an undertaker to learn of a death. But the shopkeeper will be out $250 that he was planning to spend for a new suit. Because he has had to replace the window, he will have to go without the suit (or some equivalent need or luxury). Instead of having a window and $250 he now has merely a window. Or, as he was planning to buy the suit that very afternoon, instead of having both a window and a suit he must be content with the window and no suit. If we think of him as part of the community, the community has lost a new suit that might otherwise have come into being, and is just that much poorer.
The glazier’s gain of business, in short, is merely the tailor’s loss of business. No new “employment” has been added. The people in the crowd were thinking only of two parties to the transaction, the baker and the glazier. They had forgotten the potential third party involved, the tailor. They forgot him precisely because he will not now enter the scene. They will see the new window in the next day or two. They will never see the extra suit, precisely because it will never be made. They see only what is immediately visible to the eye.
Sadly, the fallacy has become the foundation of every economic theory out there. If government spends, it creates wealth, the Keynesians argue. But where is government getting the money? From taxpayers, of course, who could put the dollars to better, more efficient use.
The union bosses, the politicians (of both parties) and many businessmen looking for a fast buck only see what is immediately visible to the eye — a construction job, a green company and a sign on the highway proclaiming this project was funded by some government stimulus grant. They fail to see the damage their program does to the economy over the long-term and ignore the debt that is created by their shortsightedness.
This brings us back to Japan. Since the government was forced to spend billions to clean up after the tsunami, one would think their economy would be booming. It isn’t. Some Keynesians still argue that the rebuilding effort will lead to a short-term boost but recent signs suggest the opposite. As Rueters recently reported, “Japan’s manufacturers’ mood dips, outlook gloomy.” Seems like death and destruction is not the course for economic recovery.