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March 2011

The Fallacy of Disaster Keynesianism

Written by , Posted in Economics & the Economy

Whenever a massive disaster strikes, it’s inevitable that misguided, big government economists will pop up to assure that the coming reconstruction boom will provide a silver lining. Paul Krugman, the modern intellectual leader of this type of disaster Keynesianism, opined three days after the 9/11 attacks that the tragedy “could even do some economic good.” In the wake of Japan’s tragedy, many are following in his fallacious footsteps.

Larry Summers, former White House director of the National Economic Council, stated:

“If you look, this is clearly going to add complexity to Japan’s challenge of economic recovery,” Summers said. “It may lead to some temporary increments, ironically, to GDP, as a process of rebuilding takes place.”

After the Kobe earthquake in 1995 Japan actually gained some economic strength due to the process of reconstruction, he added.

Walter Brandimarte at Reuters trumpets a future “boost from reconstruction.” An International Business Times article similarly looks to “government spending on reconstruction” to lift growth. According to the disaster Keynesians, all the economic activity to rebuild in the aftermath of natural disasters or war strengthen the economy.

It is easy to demonstrate how nonsensical is this proposition by taking it to its logical conclusion. If 9/11 was an economic boon, than why not recreate the effect all across the country? Why not simply blow up the biggest buildings in every city? Why should only New Yorkers share in such destructive wealth?

The fallacy of such thinking probably does not elude you. The Keynesians focus on increased economic activity to sustain their absurdities, but they ignore the preceding loss of wealth. It is simply the broken window fallacy as originally explain by Bastiat. Sure, a broken window will spur economic activity to replace it, but at the end of the day all that has happened is a shifting of resourcing out of other productive activities and into producing something that leaves you no better off than before the destruction. It is a net economic loss.

Look at this way. The Japanese will spend millions of labor hours, and hundreds of billions (or more) worth of resources rebuilding their nation. At the end of the process, they will have approximately what they had before. All of those hours that could have been spent doing something else, and all of those resources that could have been used for making something else, are pure waste. Destruction is destruction and loss is loss, no matter how much the Keynesians talk of aggregate demand and other fuzzy accounting gimmicks.

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Update: One more…