Ideas@TheCentre
There's no silver lining to Japan's tragedy
Japan’s north-eastern coastline was a bustling commercial hub early last week. By Saturday, it was a sodden wasteland.
For a country long mired in a recessionary funk, the giant tsunami that ravaged the Japanese coast last Friday was a cruel blow. The damage bill could be around $180 billion, about 50% greater than the cost of the 1995 earthquake in Kobe, which killed more than 6,000 people.
The Japanese people have been buoyed by a torrent of international support, both moral and financial. Yet some commentators, meaning well, are giving false hope to Japan.
Economic guru Larry Summers, a professor at Harvard and former US presidential adviser, has reminded the Japanese that they ‘gained economic strength’ after the Kobe earthquake, and their imminent reconstruction efforts will elicit ‘temporary increments ironically to GDP.’ A journalist at Reuters reckoned the devastation will ‘eventually help boost Japan’s economy.’
But to see any economic benefits from events so patently destructive of life and property is to subscribe to a stubborn economic fallacy.
To be sure, frenetic reconstruction efforts will soon bring about a surge in economic activity across Japan, especially in affected areas. But this is akin to repairing a broken window.
The French economist Frederic Bastiat lampooned the ‘broken window fallacy’ in the mid-nineteenth century. He rightly argued that repair efforts were public and benefited glaziers, who helped propagate the fallacy. But society as a whole was poorer. Had the window lasted, the money used to repair it could have bought a new pair of shoes, benefitting the shoe salesman and giving the window owner the pleasure of new shoes and a window.
In a few tragic days, Japan has lost vast chunks of its infrastructure, not to mention lives. The billions of dollars worth of purchases the Japanese could have made without sacrificing their road, rail and power systems will never be seen.
Unfortunately, Keynesian economics gave the broken window fallacy a new lease on life in the mid-twentieth century. Its obsession with ‘national accounts,’ GDP in particular, has blinded citizens (and the odd professor!) to the realities of wealth creation.
GDP ignores damage to public infrastructure and treats all expenditures, however frivolous, equally. Real wealth comes from people, their skills, and the public and private infrastructure that supports them: resources that are now tragically diminished in Japan.
The last thing the Japanese people need during this national trial is encouragement to ‘stimulate’ their economy further, which would only add to their already immense debt. They would do far better to rely on their renowned resilience and determination to prosper against the odds.
Adam Creighton is a new Research Fellow with the Economics Program at The Centre for Independent Studies. Click here to read Adam Creighton's complete bio.
