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I was asked in another thread to refute the notion that Hurricane Sandy is “good for the economy” because at least it will create a lot of construction jobs.
I — and so many others — have so thoroughly debunked this notion in so many venues over the years that I fear I can find nothing new to say, so I’ll leave you with this:
If you find yourself in an argument about this, ask your opponent whether it’s “good for the ants” when you put a stick down their anthill, wiggle it around and destroy their infrastructure. Go ahead and acknowledge that this can sure put a lot of ants to work.
Or, for that matter….
Ask if spilling ink on the living room rug is “good for your household’s economy” because of all the cleanup work you’ll do.
Of if a flu epidemic is “good for the economy” because it keeps doctors working overtime.
Or if a knee injury is “good for your economy” because of all the work you’ll do at physical therapy.
Or….. let’s have a contest. What’s your favorite response to this canard?
Its good for the economy to post daft questions, because many people will actively respond to them.
A bad economy is good for the economy because it channels efforts and resources toward improving the economy.
Hmmmm, too bad no individual is the aggregate.
Let’s see: If I am a third party repairing the damage you cite and do not suffer the damage myself – go spill ink, go get the flu, go injure your knee. I could use the work.
You might want to consider how I, and everyone else, could gain more by making suitable arrangements that would lead to less damage, but, unfortunately, we seem not to have a well functioning market in this kind of arrangement.
Thanks for delivering Steve!
You can always combine two of these canards. War (or at least military spending) is good for the economy. (You may not here the war version that much anymore, but they certainly argued it during Vietnam and the post-Vietnam era.) And, of course, Sandy is good for the economy. So, why wait for a storm. Create a segment of troops who regularly go around and destroy villages. We don’t need Sandy, just reactivate the battleships and have them sit of the coast of New Jersey and treat it like Iwo Jima (but not the U.S.S. New Jersey; that would be a cruel irony). The only difference is that we would, I hope, make sure there was no loss of human life. That is, unless, of course, we need people to be killed to have the economic benefit.
Don Boudreaux does a nice job debunking this myth, challenging anyone who believes that destruction is actually good for the economy by “offer[ing] [his] services to you, at a modest wage, to destroy your house and your car.” After all, if destruction of property is so awesome when done by nature, imagine how much more efficient it can be done with a little forethought and planning, rather than by the dumb luck of just happening to be in the path of a storm.
Thanks, ants. Thants.
What they mean is “A hurricane happening to other people is good for MY economy. After all, I will still have my stuff, and I can charge them to replace *their* stuff.”
Suppose Billy Joe has been in bed for years. He’s overweight and unmotivated. His life appears to continue to spiral out of control as he watches reruns of every horrible show made from the 1970’s on. But when that ink falls on the floor, this finally gave him a reason to get out of bed and clean up the mess, and the mere activity of it kick started him into action of doing thins again, and even being motivated
I’m not keynesian by preference, but I think that this scenario describes what they are arguing. Devote resources that otherwise would be idle, so that the opportunity cost is low in diverting them to these “clean up” efforts. At full employment there is clearly a much larger trade-off, and these “canard” examples are more appropriate there.
Sandy is good for some segments of the economy (Lowes, Georgia Pacific), and bad for others (Allstate, State Farm). For most companies in the NY area, it must be bad, because of lost productivity.
Using last year’s Japanese earthquake, tidal wave, and nuclear disaster as a guide, I would expect that Sandy would be a net drag on the economy, but not as large as one might predict. The Japanese economy shrank 2.4% from the 1st through 3rd quarters of 2011, when Japan experienced a larger disaster than that created by Sandy. Thus, I would expect Sandy to bring down GDP growth slightly for the 4th quarter, but not much – one or two of tenths of percent, on an annualized basis, perhaps? Modern post-industrial economies are pretty resiliant.
Fine, it’s OK not to believe in Keynesianism, but at least give some evidence that you understand the argument. Care to comment on why we have 8% unemployment?
ed: This has nothing to do with Keynesianism. With or without a storm, you can always set people to digging holes and filling them in. The storm itself can only make things worse.
My favourite *was* the Broken Window. It is now the scrambled ants.
The only suggestion I can make, and in comparison it looks palid, is this: If the dog eats your homework, do you rejoice that you get to do it again?
I like to ask, “At what point is the destruction not good for the economy? Would it be good if half the population was annihilated? Two-thirds? What if we were down to just one person left? Maybe it is only good to lose capital goods? What if we *only* lost all the manufactured capital resources instantly? What if everybody’s house burned down with them safely watching from outside? When does the destruction certainly become unambiguously bad?”
It’s good to go blind because your hearing (supposedly) becomes more acute. So really, people who lose their vision in violent accidents are the lucky ones.
at least give some evidence that you understand the argument.
Best unintentionally ironic comment of the day!
Brian,
Yes, the way I understand it is: the spilled ink brought Billy to use his idle resources. The problem is, inducing Billy to use those resources is necessarily offset by the cost of the lost ink.
Before spill, you had Billy’s untapped resources with value A plus the ink with value B. Whatever value we suppose is created by brining A to use is still offset by losing B. What if instead, we don’t spill the ink but find something new and nondestructive for Billy to do? Now we get the increased value of bringing A to work without having to subtract the loss of B.
Steve you say we “can always set people to digging holes and filling them in”, but I think Krugman argues that it is not always politically feasible to do so, and disasters make people more willing to spend money than at other times. For instance, see this post, where he discusses that only a destructive war was able to get us out of the Great Depression:
http://krugman.blogs.nytimes.com/2010/09/28/economics-is-not-a-morality-play/
“The point is that it would have been much better if the Depression had been ended with massive spending on useful things, on roads and railroads and schools and parks. But the political consensus for spending on a sufficient scale never materialized; we needed Hitler and Hirohito instead.”
“Before spill, you had Billy’s untapped resources with value A plus the ink with value B. Whatever value we suppose is created by brining A to use is still offset by losing B. What if instead, we don’t spill the ink but find something new and nondestructive for Billy to do? Now we get the increased value of bringing A to work without having to subtract the loss of B.”
You are just begging the question here though. Aren’t the economists that make these arguments (Krugman’s aliens, Summers with Japan earthquake) implicitly assuming that the increased in spending flows allow the economy to escape the recession and thus the disaster becomes a net gain overall, given that you weren’t going to stimulate investment via other methods? Since their argument assumes that the economy isn’t working at full employment initially, then it is clearly NOT a use of the broken window fallacy. The BWF is that any sort of spending = good for economy, whereas these economists are saying that spending during a demand shortfall MAY be good for economy after a cost-benefit analysis that includes the alternative of unemployment and underinvestment. Steve? Anyone??
Explain the broken window fallacy?
Too much work, you can just outsource the answer to Bastiat.
I was listening to NPR the other day and heard so many guest speakers commit this fallacy when speaking of the hurricane. Would it have killed them to get an economist? (Or maybe they did. I don’t know, I eventually turned the radio off and thought ‘I’ve reached my stupid limit for the day.’).
I don’t think anyone is claiming that the hurricane has no bad effects, or even that it is a net positive, merely that it has some good effects as well in terms of unemployment.
I’ll give an example: if it were possible to magically destroy 1 million randomly chosen automobiles in the USA, and this would bring the unemployment rate down by 2%, I would choose to do so. Why? It’s not because I hate automobiles, or because I’m too dense to notice that destroying useful things is bad. It’s because I think unemployment is an even bigger problem, both in terms of being wasteful itself and in terms of it’s extremely negative effects on the unemployed.
Now I doubt this would actually work, and I have no strong beliefs about the usefulness of Keynesian models in general. But at least I recognize that Keynesians have a serious argument, and so I get irritated by silly straw-man posts like this one.
(Also, I want to agree with Keshav’s comment. The problem with “you can always set people to digging holes and filling them in” is the word “you” and the word “can.”)
Correct me if I’m wrong but it would seem to be correct to say that disasters like this can indeed reduce unemployment and increase GDP, but it seems to me that both of these measures are measurement of ‘current activity’ and fail to take in account the destruction of wealth.
Is this right??
Did we do Japan a favor by nuking Hiroshima and Nagasaki?
@PatT: Bad example. For one thing, you can make plausible argument that the answer is yes: the shock of the bombing ended the war, saving lives and infra structure on balance. You don’t have to agree with this argument to see that it is reasonable and possible.
My favourite comes from Don Boudreaux over at Cafe Hayek
(http://cafehayek.com/2012/10/vulgar-keynesianism-at-full-gallop.html)
“If Prof. Morici is correct, then surely he also applauds, say, the economic consequences of drunk driving. As with hurricanes and earthquakes, he can bemoan the loss of life caused by drunk driving and then get on with explaining how, paradoxically, the economy benefits from drunk driving. After all, drunk driving creates unnecessarily large numbers of destroyed automobiles to replace, damaged automobiles to repair, dead victims to bury, and injured victims to be cared for by first-responders, doctors, nurses, physical therapists, and hospital administrators and clerks.”
ed:
I’ll give an example: if it were possible to magically destroy 1 million randomly chosen automobiles in the USA, and this would bring the unemployment rate down by 2%, I would choose to do so. Why? It’s not because I hate automobiles, or because I’m too dense to notice that destroying useful things is bad. It’s because I think unemployment is an even bigger problem, both in terms of being wasteful itself and in terms of it’s extremely negative effects on the unemployed.
So what happens exactly when, say, you finally recreate all those destroyed automobiles? How are you going to prevent all those people who worked temporarily on building automobiles from going out of work in the long run. You didn’t fix anything, there are no net jobs created, and you just recreated what was lost. In fact, we are now poorer because resources used to rebuild automobiles could have been diverted to other uses that would have increased our wealth.
Now I doubt this would actually work, and I have no strong beliefs about the usefulness of Keynesian models in general. But at least I recognize that Keynesians have a serious argument, and so I get irritated by silly straw-man posts like this one.
You don’t really understand the Keynesian argument or model. There are two forms, the first has to do with idle resources and the other has to do with avoiding hysterisis. In both cases it has to do with ameliorating an even worse possible outcome.
To give an analogy, morphine doesn’t ‘heal’ a broken leg. It just prevents it from getting worse.
Ken (#6) linked to a clever retort of Don Boudreaux’s. But Don has offered an even better one today on Cafe Hayek, involving drunk drivers…http://cafehayek.com/2012/10/vulgar-keynesianism-at-full-gallop.html
“To give an analogy, morphine doesn’t ‘heal’ a broken leg. It just prevents it from getting worse.”
Ummm … Is this some deep thought about being and seeming, or is it just an error?
Did we do Japan a favor by nuking Hiroshima and Nagasaki?
Ooooh, that’s a tough one to beat. We might have a winner.
Is a Godzilla and giant robot attack on Japan good for construction jobs?
The post entirely ignores the context of 8% unemployment. The example with the ants doesn’t work, because ants don’t have involuntary unemployment.
If we were in a period of full employment, and someone suggested that a hurricane was “at least good for the economy,” THEN I’d agree that it is a ridiculous statement. Or, if someone claimed that hurricanes(or broken windows) IN GENERAL are “good for the economy,” I’d disagree with that as well. The argument here is that a disaster can stimulate a distressed economy, with good effects that somewhat offset the direct bad effects.
Ummm … Is this some deep thought about being and seeming, or is it just an error?
No, not an error. Painkillers allow your body to focus on the recovery process and less about managing pain.
“The post entirely ignores the context of 8% unemployment.”
Oh heck ed, more than that. It completely ignores the context of my son’s birthday too. There’s no end to the irrelevant context Steve ignores. He’s notorious for it.
ed:
“The argument here is that a disaster can stimulate a distressed economy, with good effects that somewhat offset the direct bad effects.”
My thought is that it is only the ‘good’ effect that is measured (GDP, unemployment), not the wealth destruction.
It’s like saying you now can work overtime and earn a little extra, which is ‘good’, but the reason you need to work extra is because your house burned down and you don’t have insurance. We can’t just measure the first part and conclude the fire was ‘good’.
Ed,
Resources aren’t idle and there is no risk of hysteresis. You’re still incorrect because ‘stimulating’ isn’t the same as being better off.
Obviously, with 8% unemployment we should stimulate the economy by hiring terrorists to fly airplanes into tall buildings.
I always ask my students if we should we level the city of Chicago to create jobs? They balk at that for the strange reason: “No, it doesn’t work if it’s on purpose.”
I’m also reminded of the parable of the economist who visits China. An official takes him to a construction site for a dam. All the workers are using shovels and the economist asks “Why don’t they use heavy construction equipment? It would go much faster.” “We want to make sure our citizens have jobs,” the official says proudly. “Oh,” says the economist. “I thought you were trying to make a dam. If jobs are your goal, you should switch to spoons.”
I think the challenge for many people is that the positive economic effects of a disaster are localized, and thus obvious to people. However, the negative effects are dispersed, and thus people don’t see that the negative effect outweights the positive.
In @ed’s example, if we destroy 2 million cars, and require people to buy replacements, obviously there would be a positive impact of those people buying cars. But there would be two negative effects:
1. Presumably those people own a car for a reason, so during the period where they are without cars, they would experience some loss of productivity. For example, their commute would be longer, or they couldn’t get to work at all.
2. The cars aren’t free to them, so they would have to divert resources to the new car, which would reduce spending on other items food, vacation, clothing, etc.) where they would otherwise choose to spend.
It’s obvious that the negative impact of losing a car must outweigh the benefit of replacing it, otherwise rational actors would regularly throw away functioning cars.
In the same way, it’s illogical to argue that destroying homes is good for the economy. If that were true, then people would regularly burn down their own homes.
Ed:
The argument here is that a disaster can stimulate a distressed economy, with good effects that somewhat offset the direct bad effects.
But this is ridiculous, on Keynesian grounds or any other. If you believe it’s important to hire idle resources in order to “stimulate the economy”, then you don’t have to wait for a hurricane — you can hire people to build *new* bridges instead of having them rebuild old ones. The hurricane does not in any way expand your set of policy options; it only destroys stuff.
Will:
The BWF is that any sort of spending = good for economy, whereas these economists are saying that spending during a demand shortfall MAY be good for economy after a cost-benefit analysis that includes the alternative of unemployment and underinvestment. Steve? Anyone?
See my reply to ed directly above.
If spending during a demand shortfall is “good for the economy” then so be it. You don’t need a hurricane in order to spend.
Ken #6:
Don Boudreaux has made 3 excellent posts in as many days, which I’m sure you and Prof. Landsburg will probably have seen.
For the benefit of other readers they can be found here:
http://cafehayek.com/2012/10/destroying-property-does-not-promote-economic-prosperity.html
http://cafehayek.com/2012/10/vulgar-keynesianism-at-full-gallop.html
http://cafehayek.com/2012/10/disastrous-economics.html
Dr. Landsburg–
“But this is ridiculous, on Keynesian grounds or any other. If you believe it’s important to hire idle resources in order to “stimulate the economy”, then you don’t have to wait for a hurricane — you can hire people to build *new* bridges instead of having them rebuild old ones. The hurricane does not in any way expand your set of policy options; it only destroys stuff.”
Agreed. I think what separates the two is that a natural disaster, or a foreign invasion, can create the uniform political will to result in a huge increase in spending that stimulates/hires idle resources. You may have theoretically achieved the same benefit anyway, but would have been unable to do so.
I’m not arguing that a hurricane or a major war is necessarily expansionary for the economy. And I also don’t believe the government can create resources in a static timeframe. But I do believe the government can distribute resources in a more or less optimal way than they currently are. I guess that’s economics, right there.
Steve, you say “If you believe it’s important to hire idle resources in order to “stimulate the economy”, then you don’t have to wait for a hurricane — you can hire people to build *new* bridges instead of having them rebuild old ones.” But what if the people are not willing to build new bridges, but are willing to rebuild old ones? Then if you’re a Keynesian, doesn’t the destruction of the old bridge provide you with a political opportunity to enact the policies you think are anyway best for the economy?
Steve: I’m not sure who you mean when you say “you can hire people” or “your set of policy options.” You mean me personally, or the government?
Yes, obviously, those who (like Krugman) believe the Hurricane can provide Keynesian stimulus would PREFER that the government instead stimulate the economy by building useful projects, or cutting payroll taxes, or by the Fed doing more expansion, or whatever.
But many would argue that this has not been done, or not been done to a sufficient degree (for whatever reason, political, regulatory, or otherwise). In this world, a hurricane could still provide valuable stimulus.
Which, again, is not to say that it is on balance a good thing, just that it has some good effects in lowering unemployment and thus is, in some sense, “good for the economy,” while being bad overall.
Al,
I like those articles too, but I really like to see if people will put their money where their mouth is, which is why I prefer the link I provided. Don offers his services at a reasonable price (TBD during negotiations) to destroy people’s property in order to stimulate their local economy. That no one, even the people peddling the non-sense Steven talks about, will definitely NOT buy Don’s services. This makes you wonder why. If these people think this destruction is so good, why isn’t there a market for it with people being paid to go around destroying things? And in particular, why aren’t they themselves buying this service?
Don’s other examples are good, too, but I like arguments that make it personal. I like them to hit close to home. If person A really think scenario X is economically good, is person A willing to pay for X? If not, you have to question whether they really believe what they are saying or if they are just peddling non-sense because it’s cool to be contrarian.
Keshav,
But what if the people are not willing to build new bridges, but are willing to rebuild old ones?
Then these people are not really idle. If in the current situation, people aren’t willing to work, i.e., NOT involuntarily unemployed, then by definition, they are not idle resources.
Similarly, I am not idly not buying colon removal surgery. However, if I got colon cancer, shockingly, I would buy this surgery. I don’t think by anyone’s definition that my current lack of colon removal surgery this fits with the idea of “idle” resources.
@Steve: I’d also add that the storm and rebuilding ends up distorting price signals throughout the economy. If we care about infrastructure spending elsewhere being “cheap” now, as some folks claim, then this increase in demand for infrastructure repair in NY beyond what they would otherwise be will change those prices.
@Steve Landsburg: You don’t NEED an emergency in order to spend money, of course. But a spending bill might not pass under ordinary circumstances, while it’s at least a bit easier to pass one if parts of New York are underwater. So if you accept the Keynsian story that, say, Krugman tells, then one minor upside to Sandy is that it will get the government spending more than it otherwise would. Obviously, whether we should accept that story is another question.
Steve:
You said,
“The hurricane does not in any way expand your set of policy options; it only destroys stuff.”
The argument has never been that destruction expands policy options. The argument is that it forces peoples’ hands, causing the right policy option to be chosen when it would not otherwise.
I do not happen to agree with this argument, and I believe that it is easy to dispute. You are disputing a different argument that nobody is making.
Ken: When I said “people”, I meant the electorate/policy makers. I was asking, what if the hurricane changes the political feasibility of doing Keynesian policies?
No duck, but : ….. it really could be good for GDP, since asset write-downs don’t count against GDP. Assuming GDP wants to be bigger.
…. and, it could be good for employment, if it means that otherwise unemployed people get jobs in reconstruction. Assuming employment wants to be bigger.
and… If spending during a demand shortfall is “good for the economy” then so be it. You don’t need a hurricane in order to spend. … logically true, politically false. Alas.
The Keynesian argument goes like this. In a demand-led recession, spending is good, for reasons explained in depth elsewhere. Multiplier bla bla.
So, if spending is good, it would be of net benefit to the economy for the government to go around smashing stuff, leaving behind cheques and newly employed work crews to fix the damage, paid for through cheap borrowing or QE. Likeiwse, a hurricane, accompanied by a big injection of cash to help fix it, can be “good for the economy” during a demand-led recession.
Steve rightly points out that this is idiotic, you don’t need to smash stuff to spend, you can build new stuff. Keynesians agree fully, and point out that if even idiotic things like smashing stuff and paying to fix it turns out to be “good for the economy”, how much better would be stimulus spending on proper infrastructure? And how much more idiotic does opposition to such spending become?
See : http://en.wikipedia.org/wiki/Building_the_Education_Revolution for an example.
I like the broken glass fallacy from the 5th Element:
Keshav,
When I said “people”, I meant the electorate/policy makers.
So nearly everyone over the age of 18? How does restricting your discussion to nearly every adult change the thrust of your argument?
And don’t forget that “people” is a collection of individuals. Individual choice always drives aggregate choice.
I was asking, what if the hurricane changes the political feasibility of doing Keynesian policies?
Does it? Seems that over the last four or five years, hurricanes were not needed to enact trillions of dollars of spending on “stimulus”, “cars for clunkers”, “quantitative easing”, etc.
Asking your question also ignores the point of Steve’s post, which is: how does wealth destruction make people better off?
It’s good for the economy for folks, especially those without talent, to breed, because it gives work to all kids of workers who will be needed to tame, educate and incarcerate them.
If we instead just imported ready and willing potty-trained workers from Mexico, what would we do with all the superfluous women?
Perhaps all those no-good vandals out trick-or-treating and lobbing T.P. all over houses, egging cars, tagging walls and wooden fences, etc. are excellent for the economy! Think of all the mess to clean up!
Happy Halloween.
Don’s offer to come and smash my stuff is not a good parallel.
Pretend I believed it would be good for everybody generally if Don went around and smashed a few things. It would be bad for the victims, but on balance it would be more good for everybody else, with the balance positive. Obviously I would not pay him to smash my stuff, because that would be bad for me, and I would have to pay him as well. Why should I make that sacrifice? So I could club together with a few pals and pay him to go and smash up some other peoples stuff – force them to take one for the rest of us. Then Don refuses to do it, perhaps recognising a risk or two, going round smashing up peoples’ stuff without their permission. So how could we acheive this destruction which I (hypothetically) believe is such a good thing? Oh look – here’s Sandy!
The same argument applies to all the other examples – spilled ink etc. It is hypothetically possible for the effects to be good overall, but bad for the victim.
The only way this can happen is by changing peoples attitudes and motivations. Economics is not very good at dealing with that sort of stuff. Failure of rationality is enough for the best outcome to fail to materialise, but it does not require a failure of rationality. The prisoner’s dilemma illustrates this. Given rational participants, you cannot get the best outcome overall. Only an external imposition of some kind can acheive this. I suppose the “hurricane is good for us” brigade believe that something of this sort is happening here. The result overall is best for everyone if spending is increased, but it is irrational for any individual to actually increase spending unless everyone else does also. Something needs to force the individual to go against the rational response in order to acheive the best outcome. If a politician tries it, they are unpopular, because people do not want to be forced to behave “irrationally”. So there is no imposition, and everybody ends up worse off than they could be. Then along comes Sandy…
Yikes, I hope I’m not too late to this thread. Somebody over at econlog posted a possible way that a wrecked infrastructure *could* improve the economy:
Suppose that due to ligitation/environmental restrictions/labor unions/gov’t policy, it’s close to impossible to build or improve anything. (A lot of cities have gotten like this.) So even if it were optimal to improve the Lincoln Tunnel, you couldn’t, since it would disturb some species of ants.
Then a storm comes along, floods the tunnel or destroys part of it, and now you’re forced to rebuild. That’s a better outcome than what you had before! Yes, you would’ve been better off approaching the whole thing rationally with no storm, but sadly that’s often not an option.
I thought this was pretty interesting.
Steve says: This has nothing to do with Keynesianism. With or without a storm, you can always set people to digging holes and filling them in. The storm itself can only make things worse.
To which I say: No, you CAN’T set people to dig holes and filling them in because the GOP won’t allow it.
The storm opens up a venue for Keynesian stimulus which otherwise didn’t exist for political reasons.
In a perfect world, the storm an only make things worse. In the real world, options are constrained by an obstructionist opposition, so there is a bright side to the storm. The question is only how big its impact is.
@Advo
My guess is the effect will be minor. Once the lost stuff has been replenished, the economy would go back to its previous state and the jobs temporarily gained would be lost. Unless there was a sustained continuous need for this labor, I dont think it would make a difference. At best you would just have the broken stuff rebuilt, but no more. I doubt a natural disaster is enough of a catalyst to kick-start an economy out of a slump
Ed writes, “I’ll give an example: if it were possible to magically destroy 1 million randomly chosen automobiles in the USA, and this would bring the unemployment rate down by 2%, I would choose to do so.”
The average age of a US car is now over 10 years old. So, a random sample of cars destroyed would be on average 10 years old. What do you suppose the value of 1 million 10 year old cars to be? Assuming the average value of a ten year old car to be $6,000, then 1 million randomly chosen cars would cost $6 billion. But let’s say that it would end up costing more than that and perhaps as much as $18 billion. Ed, you are right to doubt that this would work. It would not work. The government spent over $3.5 trillion last year alone and yet despite all of this spending all of these idle resources the unemployment rate remains stubbornly highly. What you would have after destroying one million cars is high unemployment and less wealth. Some might consider the destruction of wealth a serious argument to end unemployment. I would not.
Ken: “So nearly everyone over the age of 18? How does restricting your discussion to nearly every adult change the thrust of your argument?” My point was that whoever is responsible for policy making is likely to spend more money if there is a natural disaster.
“And don’t forget that “people” is a collection of individuals. Individual choice always drives aggregate choice.” I agree with that, but I’m not sure what it has to do with anything.
“Does it? Seems that over the last four or five years, hurricanes were not needed to enact trillions of dollars of spending on “stimulus”, “cars for clunkers”, “quantitative easing”, etc.” But Krugman is arguing that we could have had even more Keynesian policies if there were a natural disaster.
“Asking your question also ignores the point of Steve’s post, which is: how does wealth destruction make people better off?” If you’re a Keynesian, then the wealth destruction could lead to greater political feasibility of spending policies which could and should have been pursued even without the hurricane, and which may make people better off even after factoring in the cost of the hurricane. You can disagree with the Keynesians, but they have a coherent position.
You’re right if stimulus is effective than we shouldn’t have to spend money on war or natural disasters. We would be much better off hiring people to bury gold for treasure hunters. However, the republicans have made it impossible to argue for stimulus because “it can’t possibly stimulate the economy because it draws resources away from investment”. However hurricane Sandy makes hiring public workers politically feasible. On net I think it’s a huge loss for the economies wealth, but probably will still increase economic activity. You are an excellent economist and I very much value your opinion. However, I think your argument here goes back to one of your major failings. You often argue that subsidizing alternative energies is economically inefficient. Agreed. Like you state it would be much better to simply tax those goods which have negative externalities to bring them to a socially optimal level. But have you ever tried explaining this to a non-economist? It’s not a simple explanation that the average voter will grasp. So what we need to be arguing about is what are the alternatives? You’ve made good arguments that subsidizing alternative energy technology can have unintended effects and may not directly lower these negative externalities. The question should be is subsidizing alternative energy better than doing nothing? Since gasoline taxes are extremely unlikely to be passed in our lifetimes, I think this is the main question we should be answering.
“On net I think it’s a huge loss for the economies wealth, but probably will still increase economic activity.”
Daniel,
What is the point of economic activity if not to increase wealth? We could have people build entire cities and then have those cities destroyed, have them rebuilt, and then destroyed, and rebuilt again. Lots of economic activity would be created but for what purpose? Resources are scarce. This type of economic activity would only impoverish the nation.
Tom,
Agreed, we would rather not have to rebuild. We would rather there not have been a hurricane at all. The cost of the hurricane is a sunk cost now. My point is arguing about whether the hurricane is good for the economy is largely irrelevant. The question should be does rebuilding from a hurricane now that it’s already occurred also have a net positive effect on economic activity? Keynesian economists would argue yes, and republicans would argue no. Others are trying to argue that rebuilding from the hurricane might actually be a net positive because it would mobilize unused resources (mainly labor), but this too is largely irrelevant.
Daniel,
Considering that I already pay 40+ cents per gallon, I’m surprised to find out that gasoline taxes have not been passed.
On topic:
A malevolent diety (plausibly) threatens to kill all firstborn children in the world if one million buckets of water are not carried across the Sahara by hand each year. Is this good for the world economy (has this god done us a favor)?
The “end” is to utilize idle resources and make them productive in their profession and as citizens.
I fail in seeing how the weather (“the means”) makes those resources lasting, civil, efficient and happy.
cmprostreet,
Consumption of gasoline is still well above socially optimal levels given the negative externalities associated with it, so 40 cents a gallon is not adequate. Also, just because we raise taxes on gasoline does not mean you would be paying more in taxes overall. If you like the average amount of gasoline taxes collected could be returned in each tax payers income tax every year and it would still have the effect of lowering consumption of gasoline. On net society as a whole would be better off because the costs of negative externalities are now in line with what people are willing to pay for them.
As to your hypothetical, no it would not increase economic activity if interest rates are above the zero lower bound. During a liquidity trap it would though. Like Steve has pointed out many times we would prefer there not to be negative costs associated with moving idle resources. It would be better to pay people to dig and fill in holes, although I imagine a deity threatening to kill people’s first born son would go along way to setting political forces in motion to getting the economy moving. Would the deity stop threatening to kill our first born son when we are no longer up against the zero lower bound?
Babinich,
I don’t think anyone is arguing that it wouldn’t be better to move these idle resources in a way that makes them “productive”. But now that the weather damage has already occurred the question should be is it productive to move these resources to repair the damage?
Likewise, I don’t see how depressions makes those resources lasting, civil, efficient, and happy.
“But this is ridiculous, on Keynesian grounds or any other. If you believe it’s important to hire idle resources in order to “stimulate the economy”, then you don’t have to wait for a hurricane — you can hire people to build *new* bridges instead of having them rebuild old ones. The hurricane does not in any way expand your set of policy options; it only destroys stuff.”
Ah, but there’s a difference between policy-options and what policymakers will actually do. Will you concede, Professor, that there’s a possible world in which a hurricane creates stimulus that otherwise wouldn’t happen for political reasons, and the benefits of the stimulus outweigh the harms of the hurricane? Or do you have a reason to think this could never occur?
Daniel:
How do you know that “consumption of gasoline is still well above socially optimal levels given the negative externalities associated with it”?
Here in NY, we have seen substantially reduced consumption of gasoline over the past week. We also have thousands of people without heat or functioning automobiles. In general, people are unhappy with the tradeoff. It seems that the positive benefits of gasoline outweigh the negative externalities.
ZT:
Will you concede, Professor, that there’s a possible world in which a hurricane creates stimulus that otherwise wouldn’t happen for political reasons, and the benefits of the stimulus outweigh the harms of the hurricane?
I concede this. Though I think the latter part of your hypothesis —- that the benefits of the stimulus outweigh the harm of the hurricane — is extremely unlikely.
Edited to add: Actually, when I said “I concede this”, I meant to concede something a little weaker: Namely, I have no argument that definitively rules out such a possible world. That might mean there is such a possible world, or it might mean that there isn’t, but I’m not clever enough to prove it.
re 71 and 69.
The question at isue is really one of odds. I was asked on another blog if I denied someone could construct an example where a distaer makes us better off:
In ZT’s hypothetical: takes out the too narrow brdiges and leaves the wide enough ones; ripps up the street that needs new drainpipes, not the next one over.
Silas Barta put it well: A disaster cannot make you better off in expectation.
Well no-one knows, or can know, all that the storm did. So for now at least all we are really able to discuss is the expectation.
Ken B:
A disaster cannot make you better off in expectation.
I expect this is correct, but I imagine it could be wrong in a sufficiently contrived Keynesian model. (I’d be delighted to see a proof to the contrary.)
Steve and Ken,
This plays directly into Paul Krugman’s “space invaders” hypothetical. In the Krugman scenario, we have:
1) An external catalyst that prompts spending despite political roadblocks, and
2) No actual destruction because the external catalyst was a fake threat.
Therefore we end up with Keynesian stimulus spending that was previously [politically] difficult, and no offsetting destruction. If you buy into the Keynesian stimulus approach, the fake disaster scenario is clearly better than a real disaster.
Krugman’s hypothetical can be attacked with the argument that Keynesian spending is, on net, harmful. But it’s not as crazy of a hypothetical as I first thought.
@Economiser: Yup. I doubt it convinces Steve, and it doesn’t convince me. But neither of us can nail down a proof. My only response is “show me.”
Although I think both of us believe that the real issue is *what you spend it on*. But that’s no rebuttal to Krugman as he just says, “I’m illustrating an effect. A fortiori it’s even better to spend on infrastructure.”
It’s interesting that a hurrican is harder to despatch than a Broken Window. You can see quite clearly the fallacy in the broken window. But in Bastiat’s tale the destruction is unwanted. The shopkeeper wants his window. But sometimes we want to destroy wealth. A leaky roof has value, but you might want to rip it up and replace it. (When is is good to destroy wealth? When the destruction is desired by the owner.)So I don’t see anyway around this being an argument about probabilities. I can’t see any large scale random destruction not doing more harm than good, because we mostly want our stuff, and even if there’s stuff we don’t it’s cheek-by-lowel with the stuff we like, but other than common sense and experience I cannot see how a proof can be constructed.
Ken B wins the internets for today… so far…
Ken B: the broken window is easier to dispatch because it does not rely on collective anticipation of other peoples’ actions. The key phrase from Wikipedia:
“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.
The whole point of the Keynsian stimulus, I think, is that the shop-keeper was not going to spend his 6 francs on anything else. Because he is fearful of the future, he wants to hang on to it. Thus there is no opportunity cost.
@Harold: No, you are misreading Bastiat’s point. The ‘perhaps’ refers to uncertainty about which choice he’d have made. That he would have ’employed it in some way’ of his choosing — which could include saving or lending it — is clear. So in Bastiat’s tale all the alleged benefits would have flowed anyway in some form, leaving the world a pane of glass richer.
You are right about what Bastiat meant by “perhaps”, I think, but had he said “saved it” as an option, then it becomes less clear that there could not no a gain from the broken window. Or at least, it is not clear that there is not a gain now for an opportunity cost in the future. Since we care more about now than the future, this is a gain. But we can gain more than this.
Lets say the store keeper keeps his money under the mattress, and the glazier dies of starvation. If the window is broken, the glazier does not die of starvation, so we later have the benefit of his labors. An extreme example, but illustrative of how the damage could lead to a lasting gain.
I do not believe the storm will provide more benefit than cost, but the arguments are more complex than the broken window because they only apply if there is unemployment.