Monday, March 14, 2011

There is NO Silver Lining.

Not. Economic. Growth.
I honestly cannot believe that I'm taking the words I'm about to write and committing them to public memory. They should never have to be said, they should not have to be read, written or spoken. They should simply be understood by every single human on the face of the Earth.

Last Friday, as I'm sure you know, a massive earthquake and the resultant tsunami destroyed much of Japan.

Thousands are dead, hundreds of thousands and probably millions are now homeless. The devastation wreaked by these events is epic to the point of being simply incomprehensible. It is impossible to know yet the full extent of the material & human costs of this tragedy.

And just like Paul Krugman did in the wake of 9/11, some impossibly bad economists and a growing supply of tactless reporters have argued that in spite of the damage, this event will probably come with eventual economic "benefits".

In the Huffington Post, editor Nathan Garbels writes;
"But if one can look past the devastation, there is a silver lining. The need to rebuild a large swath of Japan will create huge opportunities for domestic economic growth, particularly in energy-efficient technologies, while also stimulating global demand and hastening the integration of East Asia.

Japan has been wallowing in stagnation for years despite massive government stimulus programs and zero-interest rates because, simply put, in such an advanced, mature economy there was too little demand to generate sufficient returns to attract private investment. Thus the famous "bridges to nowhere" and other projects that amounted to pushing a string."
From Fox Business, Dunstan Prial contributes:
"The earthquake and tsunami that struck Japan on Friday could ultimately spur economic growth as the recovery effort creates demand for goods and services needed to repair and replace devastated industries, buildings and infrastructure.
Now... You might forgive these two guys. Both are just writers and journalists, and perhaps it is just true that neither have thought through the ideas they're putting out very well. But... Prial cites Capital Economics, "the leading independent macroeconomic research consultancy", which is ostensibly a haven for professional (if thoroughly Keynesian) economists, so already we see professionals engaging in fallacious reasoning.

But it gets so much worse...

I don't normally make a big deal of credentials, or talk about people's awards and accomplishments when making points, because an argument is an argument regardless of who it comes from. It's either good or it isn't, and premises & facts are either true or they aren't - the person making the argument is irrelevant to that argument's value... However, I think I need to be clear here.

The person I'm now about to quote was the President of Harvard University. He is currently a professor at Harvard Business School. He was the director of Obama's National Economic Council. He was the Secretary of the Treasury during the Clinton administration and he's worked as an advisor to many sitting presidents and he is widely known and respected among political circles. He was the Chief Economist at World Bank, and he's got more ties to Wall Street and high finance than anyone you've ever met.

He is also winner of awards touting his various skills as an economist and he started college at MIT at the age of 16.

This is a man who has credentials and who is taken very seriously by people who impose their economic policies on all Americans... This man is Larry Summers.

And in this case, his credentials matter... Because, while I can forgive a few writers for making major mistakes in economic reasoning, Summers is a highly decorated pro, and I cannot forgive him for this kind of an error and lack of basic economic common sense. While speaking on CNBC on Friday, he said:
". . . add complexity to Japan’s challenge of economic recovery. 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."
Now... Seriously stop and ponder the implications of Summers' statement - and those of the other writers mentioned. Ask yourself how the extreme destruction of property can result in a net economic gain to Japan or the world? Ask how that could happen in your own life... I know you know full well that it cannot.

As my friend, Dr. Steven Horwitz - who is Professor of Economics at St. Lawrence University - put it when I asked him for a quote (for an upcoming video project) on this matter:
"The argument that cleaning up from destruction can be a source of economic growth is one of the oldest fallacies in economics. The devastation in Japan is not an opportunity for growth, it's a disaster that has impoverished millions and anyone who thinks there's a silver lining because GDP will rise during the cleanup should offer up his own house for destruction in order to reduce the unemployment rate."
The fallacy is so easy to grasp... so impossible to miss... that I suspect only an Ivy-league professor wouldn't be able to see it, which explains the likes of Summers and Krugman - though it doesn't explain why so many reporters seem to have failed to grasp the obvious here.

Fortunately, not all are quite so bad... As a point of pride, writing for my own brand-new, quite excellent employer, Ryan Young clearly explains what Summers is missing and fills in the gaps that I deliberately asked Professor Horwitz to leave out of his quote:
"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."
The thing is, Keynesian, broken window fallacy reasoning is everywhere in government... It's been what's kept Japan from escaping its "lost decade". It's why we're still in the shape we're in 3 years after the stock market crash in 2007. It's even why we have gotten increasingly painful boom & busts over the last 30 years.

"For the good of the economy", Larry Summers argument should compel you to take your TVs, your computers, your cars and everything else you own and smash them to pieces, as that would stimulate "economic growth" and "jobs" for TV, computer and car manufacturers.

Maybe that sounds extreme to you, but what in the world do you think Cash for Clunkers (a Larry Summers inspired idea, no less) was all about?

Setting aside the grotesquery of this whole affair, talking about the construction boom to follow in Japan as if that remotely makes up for the pain and suffering that nation is feeling right now, the economic argument employed here is just. plain. wrong.

Yet - like so many other abysmal ideas - it is popular among Keynesian economists because, as macroeconomists, they don't seem to grasp that the economy is not made up of numbers, but of actions & interactions between real human beings and natural resources.

Summers, sitting in his posh Harvard office, will look at GDP and employment numbers from Japan in a few years and he will be "vindicated" that there has been economic "growth" because those numbers may very well go up. He may see this as further evidence that he's the smart guy everyone has always told him he is.

But GDP numbers only factor in money which is being spent. It does not account for property which has been destroyed and it doesn't differentiate between what goods money is being spent on... So if you are looking at GDP, the money you spend replacing stuff you already own is counted as growth, when any sane person would count it as a loss.

Macroeconomists don't look at anything that closely though. GDP is GDP is GDP... Production is production, no matter whether or not what's being produced already exists, never existed, is used to kill people or is used to feed people. This is why people hate economists, though the irony is, it's always the ones who are most favorable towards using government to intervene in everything who are  the most divorced from reality in this way. And their ideas go into supporting all types of destructive programs like Cash for Clunkers, big stimulus packages, make-work programs and worst of all... Wars.

Consider that the idea of using war as a way to improve an economy can be inferred directly from Summers' argument. What's more - we have all been told this very argument in school. Do you remember when your US history teacher was telling you about how we got out of the Great Depression? What's the typical explanation: World War II.

But is that true? Of course NOT!

War, like the broken windows (and families, hopes, dreams and lives) all throughout Japan right now, is destructive. Nobody knows that better than the Japanese, thanks to us.

There is no economic "silver lining". It sets people back decades, and compels a society to shift all of their capital, labor and productive efforts away from improving the standards of living of their people and towards replacing bombs and bullets which have been consumed or exploded, and the homes and businesses blown up by enemy bombs.

All that effort going into replacing capital that got destroyed can never be regained.

This is why not only is all this talk about possible economic benefits to Japan in the wake of an almost unparalleled disaster insensitive, and tasteless, the arguments on display here are literally damaging to people across the globe. There's no silver lining in Japan... No economic benefit of any kind.

Don't - not for even a single second of your life - believe otherwise.

So instead of just waiting around for Japan's construction industry to rebound and save the day by providing "jobs" and "growth", DO SOMETHING. 

America is a fabulously charitable place, and the people here are arguably the most generous on the planet. So now's the time, my friends... Bad economists are everywhere, both amateurs & professionals, so do not let their foolish shallowly constructed views lead you to believe that anything is going to fix itself over there. If you can go to Japan and help, go. If you can give to a charitable organization to help the Japanese, do that.

If all you can do is encourage others to show their support... then... do that. Do whatever you can... Just don't act like this event is - or ever will be - anything but a nightmarish tragedy that has devastated a great country filled with good people.

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