First the great Larry Summers pronounced that the earthquake and tsunami will bring positive economic benefits to Japan. Now this morning’s New York Times greets us with the headline, “Japan’s Strict Building Codes Saved Lives”. Not property rights and the desire of property owners to protect the value of their property. Not institutions that awarded wealth creation over time — wealth that enabled the Japanese to make the trade-offs between safer construction and other goods they valued. Just better building codes. It’s as if the Times trumpeted food sales because of laws requiring people to buy food, or education because of laws requiring school-attendance, or any activity people do anyway — especially activities people tend to do more of when per-capita incomes rise.
One anticipates the economics papers coming out on Japan, similar to the many that followed Katrina in New Orleans, suggesting state regulations and codes had the effect of making the region less prepared for a disaster like this, if only due to the moral hazard created when the state ensures a minimum level of safety and promises to socialize losses in the event of a catastrophic event.
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The broken window fallacy is just that: a fallacy. Rebuilding activity will surely boost GDP in Japan, but it’s a false appearance of economic growth when you consider the actual wealth lost from the earthquake. It’s a false appearance because it hides the fact that many lost their homes, many are struggling to find food as we speak, and the negative wealth effect on consumption will be large. This is where Summers has it wrong. Growing GDP following a natural disaster does not in any way signal resiliency. Since the Japanese economy already appeared to be in the midst of a slowdown even before this disaster, this is going to be very bad for the economic well-being of the Japanese people.
A View to a Kill?
Rumor has it that California Governor Jerry Brown has been in talks with Christopher Walken and Zorin Industries to try to come up with a solution to California’s economic woes.
when 230,000 people died in the 2004 earthquake and tsunami, did anyone at the new york times decry the lack of building codes in countries that cannot afford to comply with them?
Good point.
Japan is the second-highest foreign holder of US debt, correct? They’ve also spent nearly 200% of GDP, and yet still are struggling to recover to where they were before the bubble popped (remember that lost decade in Japan? Not over yet). Finally, they don’t have a lot of natural resources – people currently struggle to find food and shelter in parts of Japan. Anyone who can look at these facts, and at what just happened, and predict robust economic growth in the clean up, is a lunatic.
If this is just such a great thing, then I can’t wait for the big one to hit the west coast of the USA! What a great day that will be to jump start California’s economy! Better yet, let’s have a naval contractor build a bunch of warships, sail them off the coast, and detonate all the bombs – instantly, we would need more warships! What a great thing! What a bunch of idiots…..
When I took freshman engineering classes, the first thing my professors said in almost every class was a simple truth: When you solve a problem, step back and think about whether your solution makes sense. If I calculated that a pulley system required several million pounds of force on one end to lift a piano on the other end, I knew I had to have screwed up. A similar principle would be useful to morons who look at massive destruction, plug it in their formulae, and come out with wealth gains. If the answer is obviously wrong, check your work. If you did the work correctly, change the theory.
This isn’t about the broken window fallacy, it is about the building code.
Indeed. I just have to imagine the reason that so many people died in the Haiti earthquake was because their government did not have many strict, costly building codes. Just like the reason more people don’t have good jobs there now is because there aren’t enough government programs mandating a minimum wage guaranteeing a decent standard of living.
I’m surprised they can even say this when I look at photos of entire neighborhoods razed to nothing, houses broken into small pices all over major highways, etc. Unless building codes mandated breakaway foundations, I doubt they did anything to help this situation.
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