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?