Larry Summers Claims Japanese Earthquake/Tsunami Disaster Will Boost Economy
By David J. Theroux • Saturday March 12, 2011 6:55 PM PDT • 37 Comments
Predictably, within days of the unmitigated disaster and massive loss of life (10,000 and counting) in Japan from the record 8.9-magnitude earthquake and tsunami, a major Keynesian economist has gone on the record in defending the “broken window fallacy” in economics by claiming that the Japanese disaster will actually boost economic growth. The economist is none other than Larry Summers (former Harvard University President and now Charles W. Eliot University Professor at Harvard’s Kennedy School of Government, former Director of Obama’s National Economic Council, former Chief Economist at the World Bank, and former Secretary of the Treasury under Clinton). In an interview on CNBC Summers actually claims that the disaster will:
. . . add complexity to Japan’s challenge of economic recovery. 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.
(For the record, the Kobe earthquake killed more than 6,000 people and left 300,000 homeless.)
Now in a superb article in The Daily Caller, “Tsunamis are not stimulus,” Ryan Young refutes the Keynesian nonsense from Summers:
Think about that for a second. The 8.9 magnitude earthquake was Japan’s largest in 100 years. The tsunami it spawned killed hundreds of people. Some of their bodies may never be found. Countless more people are now homeless. It tossed cars and buildings around as easily as a child tosses his Matchbox toy cars across the room. The wave was still seven feet tall when it hit Hawaii. Coastal areas were evacuated as far away as California and Oregon.
This is pure destruction. Even leaving aside the horrible human toll, destruction is bad for the economy.
Yes, construction will be a boom industry in the coming months. That’s why people like Summers can claim that the tsunami will create jobs and boost GDP. Better still, the workers will spend their wages and stimulate the rest of the economy, too. Japan will be better off for having endured a natural disaster.
If this were really the case, then the best possible way to boost Japan’s economy would be to level the entire country. Every building should be destroyed, brick by brick. The number of jobs that policy would create would dwarf any tsunami stimulus.
Then, in a few years, when the rebuilding is finished, workers can destroy their entire infrastructure again. Even more jobs will be created!
Economists call this line of thought the broken-window fallacy; if a kid hits a baseball through a window, it creates a job for the repairman. It does sound superficially appealing, which is probably why Summers fell for it. But it is clearly a fallacy. And it’s one that every economist has drilled into his or her head from day one.
Here’s why: if the tsunami had never happened, people would still have all the buildings and cars that they had in the first place. They would be able to spend their money on other, additional goods that they want.
And those new construction jobs the tsunami will create? Every last one of those workers could be making something else instead. They could be producing computers, televisions, almost anything.
People who were construction workers to begin with could be building new factories or new homes, in addition to the ones they already have. Instead, they will be working overtime just to get back what they already had. This is not stimulus, even if it does show up in GDP. It is better to build than to rebuild.
Summers, smart as he is, screwed up. Because he was reacting so quickly to a terrible tragedy as it was still happening, maybe he didn’t think before he spoke. It happens to the best of us.
The rest of us need to know that natural disasters are just that: disasters. As the Japanese mourn their dead and begin the painful rebuilding process, we should do whatever we can to bring them some comfort. Saying that the terrible wave that washed away so much will stimulate the economy offers no comfort, mainly because it isn’t true.
The “broken window” fallacy, one of the most pernicious in economics, has long been used to defend a wide assortment of government interventions, from urban renewal to “cash-for-clunkers” to “clean” energy subsidies to public works projects to war. For example, John Maynard Keynes argued in Chapter 10 of his book, The General Theory of Employment, Interest and Money, that it may make economic sense to build completely useless pyramids in order to stimulate the economy, raise aggregate demand, and encourage full employment. Keynesian, Nobelist, and prominent New York Times liberal columnist Paul Krugman has similarly claimed that the massive munitions and other spending and public works projects of World War II ended the Great Depression (see here and here), a view that Independent Institute Senior Fellow Robert Higgs thoroughly refutes in his seminal book, Depression, War, and Cold War.
However, the “broken window fallacy” was first refuted many years earlier by the French economist Claude-Frederic Bastiat in his 1850 essay, “What Is Seen and What Is Not Seen,” which can be found in his book, Selected Essays on Political Economy. And one of the very best critiques of the fallacy is found in Austrian School economist Henry Hazlitt’s bestselling book, Economics in One Lesson.
Natural and man-made disasters are tragic enough on their own. Must mankind also continue to suffer from the government measures based of the crackpot views of Keynesians who disturbingly consider such calamities economically beneficial and refuse to learn the simple lesson of the “broken window fallacy”?
Tags: Austrian School of economics, Bailouts, Budget and Tax Policy, Disaster Management, Economics, Government subsidies, Great Depression, Japan, The State, Unemployment, War 
Larry Summers is a one-man tsunami, wiping out everything he touches. It wasn’t enough to practically bankrupt Harvard. He had to be part of Obama’s pathetic economic team. The results speak for themselves.
Hasn’t this man done enough damage for one lifetime?
Steve Hogan | Mar 12, 2011 | Reply
It seems “insensitive”, dare I use that word, to make those comments while they are still finding survivors in the rubble, and digging up fresh corpses. While nuclear power plants are on the verge of leaking radiation that will get caught up in the jet stream, and easily make it the the west coast of the U.S. His comments were wrong on two levels. One, the broken window theory is wrong, and sounds like a labor union train of thought. Two, I think sometimes we want to be the first ones to say something profound, without thinking all the way through, what we say, or when we say it. In this case, when he said it was poor timing, or taste. I guess that is for you to decide. At least wait for most of the bodies to be cleaned up, and the fires to be put out.
Shawn | Mar 13, 2011 | Reply
No this is more foolish than the broken window fallacy. Economists like Summers see only GDP. What increases GDP is good; what decreases it is bad. Destruction of capital goods? Nothing to see here.
It is like a man who is so foolish as to measure his wealth solely by the amount of cash in his wallet. For him every trip to the ATM is vastly productive. If it wasn’t for that darned $200 transaction limit, untold wealth could be his in mere moments.
D. F. Linton | Mar 13, 2011 | Reply
We should pay people to break windows. Think of how much GDP rises if we create an entire new window-breaking industry. All those new jobs. And create a Department of Window-breaking to oversee it. Even more jobs!
T M Colon | Mar 13, 2011 | Reply
Summers shows just a bit of the ignorance of our economic and political leaders. They have their heads buried in computer models which happen to support their give-away policies.
Fred: How many jobs have we created?
CBO: Just a second (runs computer program model) 2,343,458 jobs.
Fred: Did this scan a detailed database of collected information?
CBO: No. It always says that.
CBO Creates Jobs On Paper
03/17/10 – Cato@Liberty – Daniel J. Mitchell [edited]:
=== ===
Doug Elmendorf is Director of the Congressional Budget Office (CBO). He basically agrees with me, that their employment model simply spits out pre-determined numbers, regardless of what happens in the real economy. The CBO recently estimated that so-called stimulus spending generated jobs and growth.
Someone asked if the CBO model would be unable to detect whether the stimulus failed. After hemming, hawing, and a follow-up question, he confessed “that’s right”.
(See this at 39:00 on the C-Span video at the link.)
=== ===
AMG: Our economic future is being analyzed by CBO models that are entirely theoretical and are not compared to the reality that they are supposed to predict. It is the CBO that “scores” Congressional legislation, telling us what it will cost and how much we will save by “reducing the deficit”.
Does this inspire in you a warm feeling of trust?
Andrew_M_Garland | Mar 13, 2011 | Reply
Summers is speaking as a member of the power elite, which benefits from wars and other national disasters, at no risk to them. As for the masses, he has no regard or concern.
ralph | Mar 13, 2011 | Reply
Knock on Summers’ door and, when he answers, present him with a hammer and ask him politely to break his own damn window for the sake of the economy.
Sam Cox | Mar 13, 2011 | Reply
They did this already: Cash for Clunkers.
Robert Calvert | Mar 15, 2011 | Reply
Summer’s comment aptly illustrates the complete bankruptcy of mainstream economics. Despite years of exceedingly difficult study,reams of research publications, and a series of seemingly prestigious positions, economists like Summers, Bernanke and Krugman still don’t have the very basic building blocks of economic understanding. It’s a real embarrassment to governmentally supported and directed establishment education to produce “professional intellectuals” like these—and they aren’t even aware of their deep ignorance. Civilization desperately needs a free market in education.
Sam Bostaph | Mar 15, 2011 | Reply
Theroux’s excerpt from L. Summers does not support his allegation that Summers is defending the broken window fallacy. The quote says the disaster “...may lead to some temporary increments ironically to GDP as a process of rebuilding takes place.” And Summers notes that this actually happened once before in the wake of Japan’s Kobe earthquake. The words “temporary” and “ironically” indicate that he is not under the illusion about the impact of the disaster on real wealth. The historical fact that GDP rose briefly after the KOBE earthquake does merit an explanation. Once such explanation is offered by basic accounting and the difference between the perspective of the Balance Sheet and the Income Statement. There is a difference between “economic activity” and “accumulated wealth” that parallels the difference the two accounting statements. A disaster destroys accumulated value and wealth (Think “Balance Sheet”). Rebuilding after a disaster may require an increase in the level of economic activity (Think output and sales in a quarterly “Income Statement). The loss of accumulated wealth is real, undeniable and irreversible. Also destroyed or crippled may be the capacity to work productively to repair and recover, so post-disaster economic activity may NOT be as strong as it was prior to the disaster. But in some cases, enough unharmed capacity exists to undertake recovery efforts that may boost overall national economic activity to a level higher than levels prevailing prior to the disaster. This is a temporary, ironic result [Good choice of words by Summers] that does not mean real wealth has improved above what it would have been in the absence of the disaster. The excerpted quote from Summers does not ignore or contradict Bastiat’s logic; it does explain the odd behavior sometimes seen in GDP measures after a disaster. The explanation using the two financial statements is worth knowing because explains an odd behavior in GDP stats that less seasoned observers might otherwise interpret as evidence supporting the Broken Window fallacy.
John Varley | Mar 15, 2011 | Reply
John, Summers has indeed embraced the “broken window fallacy” and your defense of his remarks shows that you similarly do so. Part of the problem here is that the aggregation figure of GDP itself is a meaningless macroeconomic concept. Here and here are critiques by Robert Higgs of some of the fallacies inherent in macro-aggregations.
Your claim is simply wrong that “enough unharmed capacity exists to undertake recovery efforts that may boost overall national economic activity to a level higher than levels prevailing prior to the disaster.” The capital stock is partially destroyed from a disaster and economic coordination has been seriously disrupted as productivity must work to replace both the destroyed capital and then work to resume normal activity. There was no “temporary result” that has produced net real wealth. Such views are Keynesian mythology.
David Theroux | Mar 15, 2011 | Reply
My 10 year old could see through the lack of common sense in the Keynesian philosophy.
Mary Larkin | Mar 16, 2011 | Reply
David, I think you are over generalizing the broken window fallacy:
Foreign investment will flow into Japan. Some of this will come from off-shore insurance companies, some might come from foreign aid, and just generally, Japan will be a major destination for foreign investment in the next few years to fund the rebuilding. The only condition for this inflow is that it would not have otherwise gone to Japan—an entirely reasonable requirement. Concretely, there will be a reallocation of global capital into Japan.
While globally the broken window fallacy of course applies (the world is no better off), you need to view Japan as the shopkeeper and window glaziers combined, and the rest of the world as the shopkeeper’s other vendors.
Now, I didn’t listen to the full Summers’ quote, so I don’t really know what he was arguing... but it’s entirely possible for Japanese GDP to rise as a result of this catastrophe without any of Bastiat’s feelings being hurt.
david gomel | Mar 17, 2011 | Reply
Also, one other consideration. Some of the Japanese’s savings (that were otherwise siting in bank accounts—largely allowing the US to spend more) will be spent domestically. This will reduce the outflow of capital.
david gomel | Mar 17, 2011 | Reply
David, The viewpoint you are defending is yet again the “broken window fallacy” and has formed a major basis for government military and economic interventions in both developing and developed countries. You believe that “Concretely, there will be a reallocation of global capital into Japan”, a claim we have heard time and time again in the futile quest of national-building schemes. But aside from governments, why would a special inflow of private investment occur beyond what was occurring prior to the disaster? Is there now some additional economic productivity in Japan, especially when an enormous number of skilled workers there have been killed and capital goods have been destroyed? If a building or a city or a country has been destroyed, the economic operation of this locale has been destroyed and the result is to make this area less competitive as a place for investment and economic growth. In addition, you apparently further belief that “foreign aid” will produce a windfall for Japan, when the evidence is clear that such aid has been a major handicap elsewhere.
I would recommend the following books:
Making Poor Nations Rich: Entrepreneurship and the Process of Economic Development, edited by Benjamin Powell, foreword by Deepak K. Lal
Opposing the Crusader State: Alternatives to Global Interventionism, edited by Robert Higgs and Carl P. Close
David Theroux | Mar 17, 2011 | Reply
David, Why would such savings be more likely spent where returns would be far lower than elsewhere? By definition, such funds exist to be utilized to achieve maximum returns and if both human capital and capital goods have been destroyed, investment would logically be less likely to be directed there.
David Theroux | Mar 17, 2011 | Reply
Foreign insurance companies alone will account for tens of billions of foreign dollars entering Japan that would otherwise not have.
Why would other private investment occur? Here’s an example: Apple Computer’s Japanese plant that makes parts (including batteries for ipads) is apparently damaged. This American company must now invest some of its large cash supply (that likely would have otherwise been used by banks to finance projects around the world) to instead repair the plant. This investment will harm the rest of the world but will increase Japan’s GDP.
None of this is an attack on the broken window fallacy.. It’s simply about recognizing that the benefit/harm allocation is lumpy.
david gomel | Mar 17, 2011 | Reply
David, You are making claims that are simply unfounded. Yes, Apple may well now invest to repair its damaged plant, but how is this a net gain for Japan or the world? There is no net increase in wealth here as Apple is simply seeking to restore capital to its previous level. Again, your claim is false.
David Theroux | Mar 17, 2011 | Reply
I have explicitly stated that the world is worse off, as is Japan. I’m merely stating that a gain in Japanese GDP and the broken window fallacy are not incomparable. You are incorrectly making assumptions about my argument just as you did with Summers’.
Looking at the Apple example, the bulk of the value created by the capital is enjoyed outside of Japan. Yes wages are paid and some of the producer surplus remains in Japan, but much of it leaves the country. It’s reasonable to conceive of a situation where, because of the damage, Apple has to put more money into the repairs of the plant, virtually all of which would go to Japanese construction workers, engineers, etc. Now, it’s possible that Japan’s share of the lost productivity from the damage is greater than the inflow of investment to rebuild the plant (in which case GDP would decrease), but it’s also entirely possible for it to increase.
Or think about another example: A Japanese web developer lived in Sendai but has clients around the world. His home is destroyed, but he goes to live with his cousin in Osaka. He continues to work on his clients’ projects and spends his money exactly as he had before. Fortunately, his home was completely insured by a subsidiary of AIG. Over the next year, Sendai is rebuilt—as is his home. Money flowed into the country, the web developer’s productivity never really decreased and Japan’s GDP increases a little. The US’ on the other hand decreases a little as instead of being able to recognize profits and pay its shareholders, the insurance company is funneling money out of the country.
Yes, this is a specific example, but it shouldn’t be controversial. Understanding the lumpiness created by this catastrophe is as simple as recognizing that the glazier is likely better off while Bastiat’s community is worse off.
david gomel | Mar 18, 2011 | Reply
Clear thinking on this issue must focus on capital creation and net increases in value produced, not on spending magnitudes. A focus on increased spending–from whatever source–leads right into the Keynesian trap of thinking that it is spending that drives the economy, not the production of increased net value.
Sam Bostaph | Mar 18, 2011 | Reply
David, There is no “gain in Japanese GDP”. It is of course true that the glazier who gets the business to replace the broken windows from vandalism gets a windfall, but so what? This has nothing to do with the issue being discussed here and Summer’s claim that wealth increased for the Japanese from the Kobe earthquake or will do so now is nonsense.
David Theroux | Mar 18, 2011 | Reply
Mr Summers, you’re a sad, sad man. It makes me wonder if you would consider any illness that you may suffer from any “unrelated, impossible” radiation contamination as a boost to yoour own economy?
Brisbane Accountant | Oct 18, 2011 | Reply
I agree with Sam Bostaph, so true!
glazier W2
Brian | Feb 24, 2012 | Reply
I totally agree to a lot opinions and yes it wasn’t enough to practically bankrupt Harvard.
London Glaziers
David | May 1, 2012 | Reply
certainly an event of this magnitude will have many consequences in the world economy for a few months!
Twickenham Glaziers
brian | Jun 14, 2012 | Reply
Really good description of keynes Theory!
Another point o view for Keynes ” breaking window” would be taht the person who have the window broken has a breaking insurance tahat is being paid every month so is not making any effect!
glazier london
Brian | Jul 26, 2012 | Reply