Tsunamis are not stimulus
There is nothing good about a natural disaster. The tsunami that hit Japan today is an unmitigated tragedy. Still, there is a certain optimism in the human condition that tries to find the upside even during the worst of times. This is one of our species’ nobler attributes. But sometimes it leads smart people to say dumb things.
Take Larry Summers. He entered MIT at age 16. He has an economics PhD from Harvard, where he became a tenured professor at age 28. He went on to become Harvard’s president. He was also President Clinton’s Treasury secretary and was the director of the National Economic Council under President Obama.
That’s quite a resume. Which makes what he said all the more shocking: this tsunami could boost the economy. He told CNBC, “It may lead to some temporary increments, ironically, to GDP, as a process of rebuilding takes place.”
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.
Ryan Young is Fellow in Regulatory Studies at the Competitive Enterprise Institute.