What Summers really really meant

by Russ Roberts on March 14, 2011

in Stimulus, Uncategorized

I recently wrote about Larry Summers’s statement about the economic impact of the tragic events in Japan. Here is what Larry Summers said:

“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. In the wake of the earlier Kobe earthquake, Japan actually gained some economic strength.”

The post generated 125 comments, a lively back and forth debating what Summers “really meant.” What did he mean by “temporary increments” in GDP. What did he mean by “economic strength?”

Let me try to help.

He meant it was a good thing for the economy. He wasn’t saying the tsunami was a good thing. He began his response to the interviewer by making it clear that this was first and foremost a human tragedy. But on the financial side, he was saying it had a silver lining, just like Paul Krugman concluded after 9/11 because there would now be some rebuilding and that would be good for the economy.

Read the Krugman piece. Tell me where the nuance is. There isn’t any. Read the Summers quote. It’s pretty straightforward. He does say “may lead to” not “will lead to.” He does talk about “adding complexity” but that presumably a reference to the human costs. He adds no caveats in his remarks, no qualifiers, about the Kobe earthquake or the increases to GDP.

Do you really need to look for subtlety or nuance? Summers and Krugman  believe that spending creates prosperity. It’s called Keynesianism. As I said in my original post, I don’t understand the logic because it implies that destruction is a good thing for the economy. Nothing Summers said (or Krugman) shows anything other than that.

You want subtlety? You want nuance? You can argue that comes into play because there’s unemployment. There’s slack in the economy. In the Keynesian world view, when there’s slack, it’s because there isn’t enough spending. So anything that boosts spending (digging ditches and filling them back in, a really big war (see Krugman’s piece), or a natural disaster) is good for the economy. Not just good for the construction industry–we’d all agree on that–but good for the economy overall.

It’s a particularly peculiar argument when we’re talking about an increase in private spending on rebuilding rather than a debt-financed increase in public spending. My eleven year-old understands that spending on rebuilding means less spending on something else. That was his reaction when I asked the family at dinner last night what they thought of Summers’s claim. What does Larry Summers understand that my eleven year old is missing? I really don’t get it.

BTW, when I asked my eleven year-old and thirteen year-old what they thought Summers was thinking with his argument, they both started singing from Fear the Boom and Bust:

Even a broken window helps the glass man have some wealth

The whole verse goes:

The monetary and the fiscal, they’re equally correct
Public works, digging ditches, war has the same effect
Even a broken window helps the glass man have some wealth
The multiplier driving higher the economy’s health

I think that’s how Larry Summers and Paul Krugman view the world. Can someone find me something they’ve said or written that suggests otherwise–that suggests there is something other than a free lunch or that suggests that destruction is bad for the economy?

Finally, I’d love to interview Larry Summers on EconTalk and let him give his side of the story. He’s a smart guy. He’s smarter than my eleven year-old and smarter than I am. But why he believes that spending on rebuilding destroyed buildings is good for the economy is a mystery to me.


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