Broken-Window Fallacy Alert

by Veronique de Rugy

Last Friday, my colleague Chris Coyne was the first to tell me that Larry Summers — former Harvard University president and former director of Obama’s National Economic Council, among other things — was claiming that the Japanese disaster may actually boost economic growth. In an interview on CNBC, Summers said 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.

(We can debate what Summers meant by “temporary increments” or “economic strength.”)

Then, over at the Huffington Post, Nathan Gardels followed Summers’s Keynesian steps and argued that there’s a “silver lining” to the earthquake:

. . . 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.

I am not sure I can believe my eyes. Did someone actually write this piece? It makes me wonder why Gardels didn’t conclude with some policy recommendation for the U.S. — maybe “I recommend that we send our military to destroy New York, and some bridges and roads along the way. That should ‘stimulate­’ our economy, too.” I also wonder whether the author would say that the devastation brought about by Hurricane Katrina in 2005 was beneficial to our country. I didn’t see much sign of economic stimulation from that disaster.

Of course, Gardels is not the only one suggesting that wars and natural disasters may be good for the economy. Here John Papola does a great job aggregating Keynesian defenses of war and destruction, including from Keynes himself.

In the Daily Caller, Ryan Young explains why this makes no sense. Sure, Japanese workers will have no choice but to rebuild, and people will have to spend their savings to rebuild their houses or replace possessions destroyed in the quake. That spending will be captured in GDP measurements and it will look like Japan’s economy is boosted. However, Ryan notes:

. . . 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.

It is a perfect illustration of what Frederic Bastiat called the broken-window fallacy. Here is Bastiat:#more#

Have you ever witnessed the anger of the good shopkeeper, James Goodfellow, when his careless son happened to break a pane of glass? If you have been present at such a scene, you will most assuredly bear witness to the fact that every one of the spectators, were there even thirty of them, by common consent apparently, offered the unfortunate owner this invariable consolation—”It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?”

Now, this form of condolence contains an entire theory, which it will be well to show up in this simple case, seeing that it is precisely the same as that which, unhappily, regulates the greater part of our economical institutions.

Suppose it cost six francs to repair the damage, and you say that the accident brings six francs to the glazier’s trade—that it encourages that trade to the amount of six francs—I grant it; I have not a word to say against it; you reason justly. The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child. All this is that which is seen.

But if, on the other hand, you come to the conclusion, as is too often the case, that it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, “Stop there! Your theory is confined to that which is seen; it takes no account of that which is not seen.”

It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented.

From “cash-for-clunkers” to subsidies for stadiums, to stimulus money for roads, and now earthquakes and tsunamis, the broken-window fallacy is one of the most pernicious and repeated mistakes in economics. It doesn’t make the Gardels article any less stunning.

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