Japan and the Broken Window Theory

There are some out there now saying that the devastation in Japan is going to be a good thing for the nation’s economy. To say the least, this is counterintuitive, but some smart people are making the point including former Treasury Secretary Larry Summers. The problem is that the idea is totally wrong.

Bastiat, one of the greatest economic writers of all time, made the point succinctly in his pamphlet “The Broken Window.” Matt Kibbe from Freedomworks also does a nice job applying Bastiat’s points directly to Japan. So does Peter Schiff in this video.

The ultimate point of all this is that over the next months and years, we’ll plainly be able to see the rebuilding efforts in Japan. What we won’t see is what individual Japanese would have done with their resources in terms of both investment and consumption that would have raised their own living standards (and ours) at the same time. Also worth noting is that Japan’s government is already in bad shape in terms of debt (worse than even the US). How will this debt burden hinder Japan’s rebuilding? Only time will tell.

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