The Locker Room

No, Keynesians, widespread death and capital destruction is not good for the economy

Posted by Jon Sanders at 11:38 AM

Depend upon it, after a natural disaster there will be people willing to state that the rebuilding process will be good for the economy. It is, after all, a very visible process. What the soothsayers miss are all the unseen alternative uses of all that money and capital being used in rebuilding -- that is, what that money and capital would be building if the disaster had not wrought such destruction and forced rebuilding to replace societal wealth, rather than add to it.

Larry Summers, former director of the White House National Economic Council, is one:

Friday's massive earthquake is yet another challenge to Japan's recovery but it may provide a jolt to the economy over the short term, Lawrence Summers, president emeritus of Harvard University and former director of the White House National Economic Council, told CNBC. ...

"If you look, this is clearly going to add complexity to Japan's challenge of economic recovery," Summers said. "It may lead to some temporary increments, ironically, to GDP, as a process of rebuilding takes place."

If you can see hints of the White House's stimulus fallacy behind such thinking, you're on the right track. Summers confuses good for GDP with good for the economy, but good for GDP doesn't take into account capital destruction, although it does favor spending -- including spending by government. Also notice his concern with the short term, bearing in mind Keynes' famous retort, "In the long run we're all dead!" (We've reached the long run with the stimulus; we have spent ourselves into far worse unemployment than the White House's worst-case-scenario-without-a-stimulus prediction, and now we are flat broke.)

Even as Japan begins to rebuild, this devastation cannot be said to be good for their economy. Electrical, water, and transportation infrastructure has been destroyed. Businesses have been destroyed. Cars and homes have washed away. Fields have been covered in sea mud. And most horrific of all, tens of thousands of people have been killed.

No, the tsunami was not good for the Japanese economy, short term or long.

P.S. My colleague Dr. Karen Palasek wrote about the exact same fallacy with respect to the Indonesian tsunami; I recommend her column "Tsunami and the Broken Window."

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