For the second time in as many weeks Paul Krugman has pronounced the economic advantages of disaster. Last week the Noble winning economist made headlines for arguing that a fictional extraterrestrial threat would serve as an effective stimulus for the wobbly economy. Yesterday, after the 5.8 magnitude earthquake rattled the inexperienced east coast, Krugman regretted that the event was not larger and more destructive. He wrote on his twitter, “[I]n all seriousness, we would see a bigger boost in spending and hence economic growth if the earthquake had done more damage.” (NOTE: Krugman has since denied making this quote.)
If androids dream of electric sheep, then it seems Keynesian economists dream of alien attacks and devastating disasters. But does the Krug have a point? Wouldn’t both actions spur spending and boost GDP? Do we need a disaster to pull us out of the Krugman-dubbed “Lesser Depression”?
The answer is no. Krugman has instead demonstrated that having a Nobel Prize on your mantle does not make you immune from stumbling over basic illogic.
There is nothing revolutionary or unique about these proposals. Following Japan’s devastating March tsunami, a disaster far greater in scale than anything Krugman would ever conceive, former Team Obama member Larry Summers looked for a similar silver lining. “In the wake of the earlier Kobe earthquake Japan actually gained some economic strength,” he told CNBC.
These prominent 21st Century economists would do well to read the works of 19th Century French economist Frédéric Bastiat. In his essay That Which Is Seen and That Which Is Unseen, Bastiat writes of a much repeated situation involving a shopkeeper whose child breaks one of his store windows. Luckily a 19th Century Paul Krugman consoles the shopkeeper by asking him, “What would become of the glaziers if panes of glass were never broken?” The destruction was a blessing! Because the shopkeeper needs a new window, the glazier gets his business and the glazier will have more money, possibly to buy from the shopkeeper’s store. Everyone wins, right?
Not so, says Bastiat:
But if, on the other hand, you come to the conclusion, as is too often the case, that it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, “Stop there! Your theory is confined to that which is seen; it takes no account of that which is not seen.
It is not seen that as our shopkeeper has spent six francs upon [fixing the window], he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented.
Before the accident, the community had a shop with all its windows and a shopkeeper with six francs plus the rest of his money. After the window is fixed, we have a shop with all its windows, a shopkeeper without his six francs and a glazier with an extra six francs, minus the cost of replacing the window. When something of use is broken, the value of that object to all of society is lost. Economies grow, not when spending is up, but when the value of the overall economy is up.
The problem with the logic of Krugman and Summers is that it only takes into account what is seen, not what is unseen. This is the most common economic fallacy there is. It is on display when politicians point out the fact that spending a billion dollars created 5,000 jobs paying an average salary of $60,000. It is great for those five thousand newly employed people, but their jobs cost everyone else $200,000 dollars per position. Could that money have been put to better use elsewhere?
But what about the alien attack? No destruction, just spending. Wouldn’t that bring the best of both worlds? No. Spending on what sort of goods would correlate with an alien invasion? Weapons. So everyone goes out and arms themselves to the teeth, spending a quarter of their savings on firepower. The weapons industry is rolling in cash; their employment goes up – GDP rises high. But when the aliens don’t show up, we have a populace stacked with guns they have no use for. Americans would have sacrificed a quarter of their wealth on a good that now has far less utility. Spending may have momentarily gone up, but overall value in the economy has dropped dramatically.
If plots of fake alien schemes and advocating natural disaster seems awfully strange to you, consider that this sort of asinine logic is what has driven macroeconomic philosophy in this country for decades now. It’s the logic behind the stimulus plans of both Bush and Obama. Scariest of all, Krugman and Summers are both prestigious economic professors! The men shaping the minds of the best and the brightest in the economic field actually believe this dribble.
And we wonder why the American economy is where it is?