http://butwhatthehelldoiknow.com/2011/03/11/about-tsunamis-as-stimulus/
It THIS "stimulus"?
Larry Summers thinks so. Here's Larry, the former director of the
White House National Economic Council for President Obama and a strong
believer in Keynesian so-called "stimulus", commenting on the economic
impact of the tragic tsunami which has struck Japan…
…It may lead to some temporary increments, ironically, to GDP, as a
process of rebuilding takes place. In the wake of the earlier Kobe
earthquake, Japan actually gained some economic strength…
This is a shocking statement, or at least it should be. Though he
takes pains to wrap this preposterous claim with concern about the
loss of life, there is simply no getting around the fact that Mr.
Summers is equating destruction with "economic strength". He is,
however, simply following directly in the footsteps of John Maynard
Keynes himself who, in his 1936 treatise The General Theory, wrote:
Pyramid-building, earthquakes, even wars may serve to increase wealth,
if the education of our statesmen on the principles of the classical
economics stands in the way of anything better.
Keynes repeated the "destruction as stimulus" fallacy often. In a 1940
issue of The New Republic, he wrote:
It is, it seems, politically impossible for a capitalistic democracy
to organize expenditure on the scale necessary to make the grand
experiments which would prove my case — except in war conditions
Keynes was renowned for his sharp tongue and quick wit to be sure. But
destruction-as-stimulus is not a mere shock-value rhetorical device
for expounding the Keynesian doctrine of aggregate spending. No, it is
at the absolute CENTER of the ideology. Paul Krugman, ultra-partisan
pundit, was and remains so committed to destruction-as-stimulus that
he was willing to actually break partisan ranks and agree with former
President Bush (another Keynesian):
Hate to say this, but [Bush] is right when he says:
"I think actually the spending in the war might help with jobs…because
we're buying equipment, and people are working. I think this economy
is down because we built too many houses and the economy's adjusting."
In fact, I'd say that the sources of the economy's expansion from 2003
to 2007 were, in order, the housing bubble, the war, and — very much
in third place — tax cuts.
Krugman also infamously declared the following on September 14th,
2001, regarding the destruction of the 9/11 terror attack:
These aftershocks need not be major. Ghastly as it may seem to say
this, the terror attack — like the original day of infamy, which
brought an end to the Great Depression — could even do some economic
good.
If that doesn't turn your stomach, it should. It IS as horrible and
misguided as it seems. Still, none of this is new for Keynesians.
World War II is, almost without fail and as Krugman alludes to above,
THE example of Keynesian-style government spending "working". I can,
in fact, recall no other example which is brought out in support of
Keynesian economics by its supporters other than WWII.
It's wrong, of course. Wars only destroy and only stimulate
war-related industries at the expense of everything else in the
process. And it should be noted that as WWII was ending there was
consensus by Keynesians that the economy would fall back into a
depression due the enormous drop in spending. In 1943, Super-Keynesian
Paul Samuelson wrote:
…were the war to end suddenly within the next 6 months, were we again
planning to wind up our war effort in the greatest haste, to
demobilize our armed forces, to liquidate price controls, to shift
from astronomical deficits to even the large deficits of the
thirties–then there would be ushered in the greatest period of
unemployment and industrial dislocation which any economy has ever
faced.
He couldn't have been more wrong. Instead, the economy grew and
unemployment remained low even with millions of soldiers returning
home and getting back to peaceful work. Keynesian economics should
have been relegated to the dustbin of crackpot and crank economics
fifty years ago. Instead, it lived on to help cause the 1970s
stag-flation (another event deemed impossible by Keynesian doctrine)
and other boom and bust cycles around the world… including Japan.
Going back to Japan and its economy, one of the many irony's in this
entire tsunami episode in keynesian follies is that the Japanese
government remains perhaps the single biggest peace-time experimenter
in Keynesian economics, with nothing but nation-crushing, debilitating
debt left as the result. In the 1990s, after an easy-money fueled
stock and real estate boom and bust, one virtually identical to our
own this past decade, Japan embarked on massive Keynesian "stimulus",
paving the country in concrete including many unnecessary
"infrastructure" projects like trains to nowhere. What followed was a
malaise known as "the lost decades" or, as I like to call it, the
Keynesian hangover.
The lesson here is as simple as it is old. Waste is waste. Destruction
is destruction. Costs are costs, not benefits.
We live in a world of scarcity and choice. The resources which must go
into rebuilding after war or natural disaster are resources which
could and would have gone into other things. The costs associated with
this process are not offset through some magical "mutiplier" into net
benefits. Prior to 9/11, we had two sky scrapers and a pile of raw
materials. After 9/11, we lost the buildings. At some point we may
have new building completed there, but the net loss to our society
should be obvious. Destruction is destruction.
The Failure of Aggregate Thinking
How is it that anyone believes this destruction-as-stimulus fallacy,
especially people who are considered by many to be brilliant minds?
I believe the public at large buys into the idea because the
experience of crisis on a personal level often does bring about a kind
of re-examination and renewal. And so a psychological sense of rebirth
makes these keynesian fallacies feel right. But good economics isn't
about what feels right. It is often, if not usually, the job of good
economists to explain why it is that something which feels right is
actually quite wrong. For example, mandating that a certain vital
good, like oil or healthcare, be sold at a low price (a price
control), often feels like the right thing to do. But economists
almost universally recognize that price controls have punishing and
negative effects including unnecessary shortages, rationing, wait
lists and the emergence of black markets as we've seen during the
1970s oil crisis and socialized healthcare systems. Economics isn't an
emotional nor a morality play. It's not about what feels right. It's
about how people respond to incentives and use information.
The keynesian economists I've quoted above are not likely guilty of
this emotional analysis. Rather, theirs is a peculiar failure of
methodology. They are trapped in their own mathematical models and
blinded to what economics really is all about. Summers conflates GDP,
and specifically Nominal GDP (NGDP), alternatively referred to as
"Aggregate Demand", with healthy economic activity and wealth
creation. NGDP is simply an accounting of the transactions over the
past quarter or year. Those transactions are, in normal times, signs
of exchanges for mutual gain. I trade my $500 for an iPad. I want the
iPad more than my $500. Apple wants my $500 more than their iPad.
Mutual gain. $500 gets added to NGDP.
Over the long run, NGDP does correlate strongly with real growth and
increased material well being, including happiness. But in the short
run, the period which is the focus of Keynesian analysis, the spending
which makes up NGDP accounting does not necessarily provide an
accurate measure of real wealth creation.
For starters, government spending is included in NGDP, even though the
funding is extracted from taxpayers in a zero-sum transfer. I
certainly don't want to fund wars and bailouts, yet that is what is
done with my money. That is a zero-sum transaction, not wealth
creation, and there is dead-weight loss involved which NGDP fails to
recognize or subtract. I am not better off for the government taking
my money and giving it to Goldman Sachs nor using it to occupy
Afghanistan. Governments can and do produce things of value, from
roads to schools, but the nature of the transaction is quite different
from voluntary trade, and yet it's just added in to NGDP.
Similar to government spending, the transactions/cost of rebuilding
after a catastrophe are also tallied up in NGDP. This is where the
fallacy finds its analytical root. Because the clean up efforts in
Japan are transactions (or 9/11, or the BP oil spill, or you name it)
they are added to NGDP. The destruction of wealth was never
SUBTRACTED, however. NGDP doesn't include the loss or the cost. It
also has no means of measuring what was never made instead. This is
the "unseen" loss. Instead of rebuilding destroyed schools and
neighborhoods, the same work and resources could have gone into the
building of NEW ones which would ADD to the existing supply, making
the society truly MORE wealthy.
And so, guided by a blind analysis of the economy in terms of
simplistic accounting aggregates like NGDP, Keynesians far and wide
conclude that destruction and war can, in the words of Larry Summers,
gain you "some economic strength". They're wrong. Economics is the
study of means by which human beings act and choose in pursuit of
their own ends within a world of scarcity. Economics isn't about
money. It isn't (bad) accounting or finance. Larry Summers, Paul
Krugman and their intellectual brethren aren't practicing economics at
all when they claim that tsunamis and war stimulate the economy,
they're propegating one of the oldest and most dangerous fallacies in
human history…
…but what the hell do I know?
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