You might recall the scene in The Social Network where the Winklevoss brothers take their case against Mark Zuckerberg to then Harvard president Larry Summers. In the scene, Summers is rude, arrogant, and dismissive, which by all accounts is exactly how he is in real life. Summers, who has also been Secretary of the Treasury under Clinton and Obama’s Director of the White House National Economic Council, is known for his confidence in his own great intellectual prowess. In a recent interview on CNBC, Summers claimed that the devastation in Japan could actually temporarily boost the economy as rebuilding takes place.
Other economists have argued that the destruction will provide a long-term benefits: “This is a Keynesian stimulus program that nobody can argue with: just rebuilding the city of Sendai,” said Marcus Noland, deputy director of the Peterson Institute for International Economics in Washington.” The Wall Street Journal reports that: “Some economists [unnamed] have argued that a quake could actually lift the economy in the long run.”
I find these predictions offensive. The suffering of the Japanese population is far beyond the experience of most of us. I wonder if Summers and Noland would consent to having their homes and hometowns destroyed in the name of stimulating the economy.
Last night I asked my 15-year-old children, sophomores in high school, whether they thought destruction could stimulate the economy? My daughter was puzzled, “Why would you even ask such a question?”
“How could it?” my son challenged. He correctly explained that resources going into rebuilding towns that were once perfectly usable are resources that would no longer be able to satisfy other needs. My son gets an A in my economics course; Summers and Noland earn Fs.
Of course, official GDP data may indeed show the stimulating effect of government spending; but this is simply how GDP is counted. Any money government spends is counted dollar for dollar in GDP. If government hires workers to dig holes and then fill the holes again, GDP may increase. But surely no one would argue that the economy has improved by such a measure. Having workers dig holes and fill them up again is not contributing anything to satisfy the urgent needs of consumers.
Currently in Japan, “evacuation centers have half a million people in centers and schools that don’t have water, electricity and oil”. Government efforts to resupply the population are of course necessary. Those efforts will cost more than the displaced population would ordinarily spend on their own food and shelter. GDP will thus increase, but in no real sense has the economy grown.
Similarly, government cleanup efforts in the failed nuclear reactors will cost far more than energy companies would’ve spent generating power. Again GDP may increase, but that is simply a problem with how this statistic is calculated.
In 1848, the great French economist Frédéric Bastiat first published his essay “What Is Seen and What Is Not Seen.” Bastiat distinguishes for us the bad economist from the good economist: “There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.”
Next, Bastiat dismantles what has come to be known as the “broken-window fallacy”:
Have you ever been witness to the fury of that solid citizen, James Goodfellow, when his incorrigible son has happened to break a pane of glass? If you have been present at this spectacle, certainly you must also have observed that the onlookers, even if there are as many as thirty of them, seem with one accord to offer the unfortunate owner the selfsame consolation: “It’s an ill wind that blows nobody some good. Such accidents keep industry going. Everybody has to make a living. What would become of the glaziers if no one ever broke a window?”
Now, this formula of condolence contains a whole theory that it is a good idea for us to expose, flagrante delicto, in this very simple case, since it is exactly the same as that which, unfortunately, underlies most of our economic institutions.
Suppose that it will cost six francs to repair the damage. If you mean that the accident gives six francs’ worth of encouragement to the aforesaid industry, I agree. I do not contest it in any way; your reasoning is correct. The glazier will come, do his job, receive six francs, congratulate himself, and bless in his heart the careless child. That is what is seen.
But if, by way of deduction, you conclude, as happens only too often, that it is good to break windows, that it helps to circulate money, that it results in encouraging industry in general, I am obliged to cry out: That will never do! Your theory stops at what is seen. It does not take account of what is not seen.
It is not seen that, since our citizen has spent six francs for one thing, he will not be able to spend them for another. It is not seen that if he had not had a windowpane to replace, he would have replaced, for example, his worn-out shoes or added another book to his library. In brief, he would have put his six francs to some use or other for which he will not now have them.
Let us next consider industry in general. The window having been broken, the glass industry gets six francs’ worth of encouragement; that is what is seen.
If the window had not been broken, the shoe industry (or some other) would have received six francs’ worth of encouragement; that is what is not seen.
And if we were to take into consideration what is not seen, because it is a negative factor, as well as what is seen, because it is a positive factor, we should understand that there is no benefit to industry in general or to national employment as a whole, whether windows are broken or not broken.
Now let us consider James Goodfellow.
On the first hypothesis, that of the broken window, he spends six francs and has, neither more nor less than before, the enjoyment of one window.
On the second, that in which the accident did not happen, he would have spent six francs for new shoes and would have had the enjoyment of a pair of shoes as well as of a window.
Now, if James Goodfellow is part of society, we must conclude that society, considering its labors and its enjoyments, has lost the value of the broken window.
From which, by generalizing, we arrive at this unexpected conclusion: “Society loses the value of objects unnecessarily destroyed,” and at this aphorism, which will make the hair of the protectionists stand on end: “To break, to destroy, to dissipate is not to encourage national employment,” or more briefly: “Destruction is not profitable.”
“Destruction is not profitable.” What can be simpler to understand? Apparently it takes a keen intellect to think otherwise. But, by behaving badly, Larry Summers is doing us a great service. Through his prediction he is exposing the utter intellectual and moral vacuity that is behind Keynesian economics. In his world, governments need not be concerned about the effects of its policies on individual citizens or, for that matter, the real impact on the economy. All government needs to do is spend and say it has increased GDP. If the understanding of Summers and others like him is limited to measurable but problematic statistics, their understanding is shallow indeed.