Tuesday, March 22, 2011

Japan Earthquake "Economic Stimulas" ?

Earthquake May Boost Economy Short Term: Summers says, (Is this Economic Stimulus?)
View the link above to read Summers comments.

Larry Summers the former director of the White House National Economic Council for President Obama and a strong believer in Keynesian so-called “stimulus”, commenting on the economic impact of the tragic tsunami which has struck Japan last week.

…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…

This is a shocking statement, or at least it should be. Though he takes pains to wrap this preposterous claim with concern about the loss of life, there is simply no getting around the fact that Mr. Summers is equating destruction with “economic strength”. He is, however, simply following directly in the footsteps of John Maynard Keynes himself who, in his 1936 treatise The General Theory, wrote:

Pyramid-building, earthquakes, even wars may serve to increase wealth, if the education of our statesmen on the principles of the classical economics stands in the way of anything better.

Keynes repeated the “destruction as stimulus” fallacy often. In a 1940 issue of The New Republic, he wrote:

It is, it seems, politically impossible for a capitalistic democracy to organize expenditure on the scale necessary to make the grand experiments which would prove my case — except in war conditions

Keynes was renowned for his sharp tongue and quick wit to be sure. But destruction-as-stimulus is not a mere shock-value rhetorical device for expounding the Keynesian doctrine of aggregate spending. No, it is at the absolute CENTER of the ideology. Paul Krugman, ultra-partisan pundit, was and remains so committed to destruction-as-stimulus that he was willing to actually break partisan ranks and agree with former President Bush (another Keynesian):

Hate to say this, but [Bush] is right when he says:

“I think actually the spending in the war might help with jobs…because we’re buying equipment, and people are working. I think this economy is down because we built too many houses and the economy’s adjusting.”

In fact, I’d say that the sources of the economy’s expansion from 2003 to 2007 were, in order, the housing bubble, the war, and — very much in third place — tax cuts.

Krugman also infamously declared the following on September 14th, 2001, regarding the destruction of the 9/11 terror attack:

These aftershocks need not be major. Ghastly as it may seem to say this, the terror attack — like the original day of infamy, which brought an end to the Great Depression — could even do some economic good.

If that doesn’t turn your stomach, it should. It IS as horrible and misguided as it seems. Still, none of this is new for Keynesians. World War II is, almost without fail and as Krugman alludes to above, THE example of Keynesian-style government spending “working”. I can, in fact, recall no other example which is brought out in support of Keynesian economics by its supporters other than WWII.

It’s wrong, of course. Wars only destroy and only stimulate war-related industries at the expense of everything else in the process. And it should be noted that as WWII was ending there was consensus by Keynesians that the economy would fall back into a depression due the enormous drop in spending. In 1943, Super-Keynesian Paul Samuelson wrote:

…were the war to end suddenly within the next 6 months, were we again planning to wind up our war effort in the greatest haste, to demobilize our armed forces, to liquidate price controls, to shift from astronomical deficits to even the large deficits of the thirties–then there would be ushered in the greatest period of unemployment and industrial dislocation which any economy has ever faced.

He couldn’t have been more wrong. Instead, the economy grew and unemployment remained low even with millions of soldiers returning home and getting back to peaceful work. Keynesian economics should have been relegated to the dustbin of crackpot and crank economics fifty years ago. Instead, it lived on to help cause the 1970s stag-flation (another event deemed impossible by Keynesian doctrine) and other boom and bust cycles around the world… including Japan.

Going back to Japan and its economy, one of the many irony’s in this entire tsunami episode in keynesian follies is that the Japanese government remains perhaps the single biggest peace-time experimenter in Keynesian economics, with nothing but nation-crushing, debilitating debt left as the result. In the 1990s, after an easy-money fueled stock and real estate boom and bust, one virtually identical to our own this past decade, Japan embarked on massive Keynesian “stimulus”, paving the country in concrete including many unnecessary “infrastructure” projects like trains to nowhere. What followed was a malaise known as “the lost decades” or, as I like to call it, the Keynesian hangover.

The lesson here is as simple as it is old. Waste is waste. Destruction is destruction. Costs are costs, not benefits.

We live in a world of scarcity and choice. The resources which must go into rebuilding after war or natural disaster are resources which could and would have gone into other things. The costs associated with this process are not offset through some magical “mutiplier” into net benefits. Prior to 9/11, the US had two sky scrapers and a pile of raw materials. After 9/11, they lost the buildings. At some point they may have new buildings completed there, but the net loss to their society should be obvious. Destruction is destruction.