Jon Sanders

Are widespread death and capital destruction good for an economy? Absolutely not. That's apparently news to one of Pres. Obama's top stimulus salesmen. Which makes sense because the stimulus was built on essentially the same fallacy.

Larry Summers, former director of the White House National Economic Council, saw some short-term economic good for Japan after the earthquake and tsunami:

Friday's massive earthquake is yet another challenge to Japan's recovery but it may provide a jolt to the economy over the short term, Lawrence Summers, president emeritus of Harvard University and former director of the White House National Economic Council, told CNBC. ...

"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."

Even as Japan begins to rebuild, this devastation cannot be said to be good for their economy. Electrical, water, and transportation infrastructure has been destroyed. Businesses have been wiped out. Cars and homes have washed away. Fields have been covered in sea mud. The capital destruction is harrowing.

Most horrific of all, untold tens of thousands of people have been killed. No tongue could tell -- no ear could bear to hear -- of the great, searing heartache felt by millions of friends, family, and loved ones. On the lower plane, in the economic context, people are the ultimate resource, as economic optimist Julian Simon explained. So even in mundane economic terms, their loss is staggering.

No, the earthquake and tsunami were not good for the Japanese economy, short term or long. How could someone get something so basic so wrong?

It starts by confusing good for GDP with good for the economy, but GDP doesn't take into account capital destruction. It does favor spending, however, including spending by government. Digging out from under a disaster requires a great deal of spending, and on that basis it's easy to see good for the economy.

After any natural disaster well-meaning people will inevitably state that the rebuilding process will be good for the economy. It is, after all, a very visible process, and that is one of the reasons for the persistence of the fallacy.


Jon Sanders

Jon Sanders is associate director of research at the John Locke Foundation in Raleigh, N.C.