In today’s Wall Street Journal, the great George Melloan weighs in on the question of whether or not last-week’s Japanese earthquake and tsunami will prove to be good for the Japanese economy. Here’s a key passage:
Larry Summers, President Obama’s former economic adviser, has postulated that post-earthquake reconstruction may even stimulate the rate of economic growth, as was the case after the Kobe earthquake in 1995. Well, maybe, although that is not certain given the damage to Japan’s electric power grid from the nuclear facilities that had to be shut down because of earthquake-related cooling problems. Greater GDP growth also would hardly compensate for the massive losses in lives and national wealth. As the great 19th-century economist Frederic Bastiat taught in the “fallacy of the broken window,” the GDP growth that comes from reconstruction brings no net gain in society’s wealth. It just replaces, over time, what was lost. “Destruction is not profitable,” he wrote.
Some economists have hoped that the disaster, by unifying the Japanese people and the political class in the task of bringing about recovery, will lead to necessary policy reforms, like a slimming of the government bureaucracy. Such can be hoped. Disasters do create new unity and resolve.
But the opposite case can be made as well. The Japanese political class, as with the current regime in Washington, is heavily influenced by Keynesian theories that see a government solution for every problem. For example, it seems unlikely that Japan will alter its postal savings system—which victimizes small savers with low returns—at a time when the government will face large new expenditures for infrastructure repairs. Nor is it likely to embark on a reduction of the massive national debt.
