Creative Self-Destruction at the New Yorker

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James Surowiecki of the New Yorker is the latest writer to declare the broken windows fallacy invalid if the destruction is large enough:

In a study of eighty-nine countries, the economists Mark Skidmore and Hideki Toya, after controlling for every variable they could think of, found that countries that suffered more climatic disasters actually grew faster and were more productive. This seems bizarre: it’s close to the broken-windows fallacy identified by the nineteenth-century economist Frédéric Bastiat—the idea that breaking windows is economically useful, because it makes work for glaziers. But Skidmore and Toya argue that disaster-stricken economies don’t simply replace broken windows, as it were; they upgrade infrastructure and technology, and shift investment away from older, less productive industries. (After the Kobe quake, the city’s plastic-shoe factories never returned.) In Horwich’s somewhat ruthless phrase, disasters can function as a form of “accelerated depreciation.” Something similar often happens on the level of the individual consumer: homeowners rebuilding after a disaster take the opportunity to upgrade, a phenomenon known as “the Jacuzzi effect.” In ordinary times, inertia keeps old technologies in place; it may be easier to make dramatic changes when you have to start from scratch.

See also the epistemically-closed Paul Krugman declaring World War II to be the economic “Miracle of the 1940s.”

But note the double-bind argument also at work here as it was among those like Krugman who reflexively urged bigger and bigger FDR-style “stimulus” projects upon President Obama: if you’re as obsessed with global warming as the average leftist, isn’t “the jacuzzi effect,” not to mention the much larger components of this rebuilding effort bad for the environment, since it encourages additional electrical use and increases a homeowners’ carbon footprint?

Let’s ask John Kerry and Thomas Friedman!

(On the other hand, considering some of the worst of the legacy media’s coverage of Japan helps to place the above into context.)

Arguably, Keynes’ most famous bon not these days is that “In the long run we are all dead” — something that Japan knows first-hand considering its demographic woes, and Europe’s economy isn’t far behind, Robert Samuelson writes at Real Clear Politics, advising us to “Pray for Japan, Worry for Europe:”

Europe has arrived at this dismal juncture driven by three forces: (a) large welfare states that were too often financed with debt; (b) the financial crisis that led to recession and has pushed some countries (Ireland, Spain) to aid their banks; (c) the perverse side effects of the single currency, the euro.

The euro’s role is especially ironic. Adopted in 1999 — and now used by 17 nations — the euro was intended to promote prosperity and political unity. Countries could enjoy similarly low interest rates and the convenience of common money. It seemed to work for a while. But low interest rates in Greece, Spain and Ireland encouraged unsustainable booms or housing bubbles that, when burst, aggravated their recessions and budget deficits. Now unity has turned to discord. Countries that back the debt bailout — particularly Germany — resent the possible costs; countries being bailed out resent the harsh austerity that’s imposed as a condition of aid.

There is a fragile debtor-creditor consensus that could crumble, posing yet another danger to economic recovery. Already, unemployment rates in Greece and Ireland hover around 13 percent. How much budget stringency (spending cuts, tax increases) will countries accept before social unrest or national pride cause politicians to say “enough”? Even European countries not facing an immediate debt problem need to reduce budget deficits to retain market confidence. All confront a common dilemma. Too much austerity too quickly could create a recession, widening deficits. Too little austerity too slowly could unnerve investors, raising interest rates and deficits.

It’s understandable that the human suffering, physical destruction and nuclear hazards in Japan compel our attention. But we ought to remember that a greater menace to global stability and prosperity lies halfway around the world.

And caused by a similar conjunction as Japan’s fiscal woes: decades of Keynesian welfare state spending on steroids, ultimately combined with a graying and shrinking population.