Another economic illiteracy alert, this one from Larry Summers, Ph.D.


Larry Summers is being roundly condemned for suggesting that economic activity in Japan could be given a boost by the earthquake.

I’m not sure but I think that national income accounting could also suggest a boost from the earthquake, but a more complete measure of all the impacts would never show earthquake’s as good thing.  An additional point may be that with unemployed resources Summer’s statement isn’t so of the wall.

Lynne Kiesling

What horrific events in Japan. I was very sorry to awaken to hear of such devastation, and the videos I’ve seen and the fact that the aftershocks and waves have been almost continuous for the past 12 hours sound completely terrifying.

As the tsunami waves rippled out, though, it didn’t take long for someone to commit the broken window fallacy; from a news story from Hawaii:

The natural disaster of a tsunami could actually provide a temporary boost to the global economy.

Larry Summers, former director of President Obama’s economic council and a former head of the World Bank, said rebuilding could temporarily boost the Japanese economy.

Summers suggested this in an interview Friday on CNBC. He added that the global economy is more resilient than most people think.

In Hawaii, disruptive weather events are good for some businesses but bad for others.

Stores that sell generators and hardware supplies experience a run on these items when a tsunami or bad weather approach; other retailers find their usual sales interrupted as people focus on evacuating and stockpiling essential supplies instead of their usual shopping.

This time it’s a “credentialed” economist who has been involved in policymaking for much of the past two decades. Larry Summers should be embarrassed to argue that the destruction of real resources can provide economic benefit, even temporarily. Even my intro macro students, who are studying for next week’s final exam, could tell Dr. Summers that the earthquake and tsunami are a negative productivity shock, shifting the long-run Solow growth curve to the left, and that any rebuilding consumption and investment will shift the aggregate demand curve out in the short run … but those resources have been destroyed and the lives of people have been devastated. That’s irreversible, although I hope that new productive activity in Japan leads to the kind of new knowledge and innovation that will shift that long-run growth potential back outward.

HT to Steve Horwitz on Facebook

UPDATE: Steve’s written more extensively about this, with some discussion of Bastiat’s articulation of the broken window fallacy, at the Nightly Business Report blog.

UPDATE 2: Here’s one from Fox Business, a news outlet whose writers should know better. HT: Radley Balko on Facebook.

Another economic illiteracy alert, this one from Larry Summers, Ph.D.
lkiesling
Fri, 11 Mar 2011 16:40:17 GMT

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