I recently wrote about Larry Summers’s statement about the economic impact of the tragic events in Japan. Here is what Larry Summers said:
“If you look, this is clearly going to add complexity to Japan’s challenge of economic recovery,” Summers said. “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.”
The post generated 125 comments, a lively back and forth debating what Summers “really meant.” What did he mean by “temporary increments” in GDP. What did he mean by “economic strength?”
Let me try to help.
He meant it was a good thing for the economy. He wasn’t saying the tsunami was a good thing. He began his response to the interviewer by making it clear that this was first and foremost a human tragedy. But on the financial side, he was saying it had a silver lining, just like Paul Krugman concluded after 9/11 because there would now be some rebuilding and that would be good for the economy.
Read the Krugman piece. Tell me where the nuance is. There isn’t any. Read the Summers quote. It’s pretty straightforward. He does say “may lead to” not “will lead to.” He does talk about “adding complexity” but that presumably a reference to the human costs. He adds no caveats in his remarks, no qualifiers, about the Kobe earthquake or the increases to GDP.
Do you really need to look for subtlety or nuance? Summers and Krugman believe that spending creates prosperity. It’s called Keynesianism. As I said in my original post, I don’t understand the logic because it implies that destruction is a good thing for the economy. Nothing Summers said (or Krugman) shows anything other than that.
You want subtlety? You want nuance? You can argue that comes into play because there’s unemployment. There’s slack in the economy. In the Keynesian world view, when there’s slack, it’s because there isn’t enough spending. So anything that boosts spending (digging ditches and filling them back in, a really big war (see Krugman’s piece), or a natural disaster) is good for the economy. Not just good for the construction industry–we’d all agree on that–but good for the economy overall.
It’s a particularly peculiar argument when we’re talking about an increase in private spending on rebuilding rather than a debt-financed increase in public spending. My eleven year-old understands that spending on rebuilding means less spending on something else. That was his reaction when I asked the family at dinner last night what they thought of Summers’s claim. What does Larry Summers understand that my eleven year old is missing? I really don’t get it.
BTW, when I asked my eleven year-old and thirteen year-old what they thought Summers was thinking with his argument, they both started singing from Fear the Boom and Bust:
Even a broken window helps the glass man have some wealth
The whole verse goes:
The monetary and the fiscal, they’re equally correct
Public works, digging ditches, war has the same effect
Even a broken window helps the glass man have some wealth
The multiplier driving higher the economy’s health
I think that’s how Larry Summers and Paul Krugman view the world. Can someone find me something they’ve said or written that suggests otherwise–that suggests there is something other than a free lunch or that suggests that destruction is bad for the economy?
Finally, I’d love to interview Larry Summers on EconTalk and let him give his side of the story. He’s a smart guy. He’s smarter than my eleven year-old and smarter than I am. But why he believes that spending on rebuilding destroyed buildings is good for the economy is a mystery to me.
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Oh, come on. It’s not that tough.
“My eleven year-old understands that spending on rebuilding means less spending on something else.”
Now introduce savings into your 11 year old’s model. Either that people will do less saving because they are rebuilding or that they will draw down their savings to rebuild.
We now have more economic activity *now* than we would have done without the rebuilding. Thus the rebuilding activity is stimulative. Because we have more economic activity now.
That this doesn’t help in the longer term is of course entirely true. We lose whatever else might have been financed with those savings (perhaps other buildings, perhaps other productive investment, perhaps just the higher human utility of a well funded retirement).
And of course everyone is less wealthy (we should be careful to distinguish here between wealth, a stock, and income, a flow) than they would have been without the destruction of already extant buildings and infrastructure.
My rejection of the stimulative effects of spending comes not from the first part, for I can see that drawing future consumption into the present by dis-saving (or less than would otherwise have been the case) will stimulate current economic activity. My rejection rather comes from my inability to see that more such activity now makes us better off in the long run. Most especially when the reason for more activity now is that we’ve got to rebuild what was previously built so as to make us better off in that long run.
Bastiat and Keynes can coexist, as long as each is allowed to work on different time scales.
Russ – I thought the nuance was that GDP does not count aggregate the value of the assets destroyed (not to mention the present value of the future production of the lives lost). Or does it?
Which, btw, I think is one reason why GDP is not a good measure for the health of the economy.
Oops! Didn’t mean to reply to TW’s comment.
But now that I have, Tim, what time scale does the time value of money work on?
Tim,
I appreciate the addition of savings to this “model.” But can you help me understand where my thinking is going wrong here: suppose the spending on rebuilding did come out of saving, just as you indicate could result in moving consumption forward. But savings do not just sit around. They are invested. And the investment is nothing other than consumption of different lived goods than consumers generally consume. But I simply do not see how businesses building factories and relationships and the like is any less “economy activity” than a consumer rebuilding a home or office. This is an honest question.
And a good question. Savings isn’t just future consumption, but is, as you say, investment.
And investment isn’t just planning for people’s future consumption, although it is that. It is also a complex network integrated into the economy to produce the higher order goods that we associate with a developed economy, and productivity advances that are the essence of economic growth. Diverting funds from investment into current consumption, disrupts and wastes complex long term capital structures, and actually POSTPONES economic growth, rather than promoting it, as keynesiacs believe.
Keynesiacs do not understand capital. They do not understand growth. To the keynesiac, more “economic activity” is the goal. But economic activity is NOT desirable. We strive for, and want, to accomplish the same goals using LESS economic activity. That is wealth. That is what savings and investment gives us. And that is what keynesiacs deprive us of every time they force us to squander our capital to stimulate economic activity.
And that is why it is a TRAGEDY, not an irony, that the Japanese will be increasing their spending on rebuilding.
Well, in Keynes’ model (which we do have to assume in order to see what Summers is getting at) savings do not equal investment, do they? It is possible to have dead cash sitting around in bank acounts, sitting on the balance sheets of companies.
But companies do not hold actual cash, and to the extent the funds are in accounts at “shadow banks”, actual banks, they end up as fractional reserves, to be loaned out. They may sit “idle” especially when the fed is paying interest on reserves, otherwise those loans must be funding productive investment projects.
The only missing “subtlety” from this post is that less-crude (sounding) Keynesians argue that this kind of spending “increases velocity”. So that if MV = PT and PT (Aggregate Demand/NGDP) = C+I+G… then, assuming everything else is fixed including the money supply, an increase in AD will drive up velocity. This is, from what I can tell, a misunderstanding of what these “equations” are able to tell as and what they are not. It is, much like Mark Zandi’s “it would have been worse” calculus, a mathematical model which assumes that keynesianism is true and thus tautologically arrives at Keynesian answers.
MV = PT is not pure truth or a short-run rule of causality. I thought that was a point Keynes had understood. Hume surely did.
But beyond all of this macro model nonsense, is a simple idea being posited. Rebuilding will “increase confidence”. When “people” become more confident, they demand less cash balances. So destruction, in the keynesian framework, can elevate monetary disequilibrium by allowing the demand for money to fall back to the level of the supply of money.
Of course, if we assume that this monetary equilibrium theory approach is valid… there’s an easier way to deal with increased demand for money than national tragedy: increase the money supply to meet demand.
The true flaw in all of this is the aggregate view which keynesians take. There is no group called “people” with some aggregate level of “confidence”. Some people are more confident and others are less and there is no reason to believe that Keynesian spending of any sort can target the people who are hoarding money rather than those who are not. During the rebuilding, the construction workers may feel better about their situation. Were they hoarding money before? How could we possibly know? And what about the people who lost everything? Are they more confident? Probably not. But lets say they’re covered by government spending and private insurance? The resources must come from somewhere. The people losing out are surely less confident after the devastation.
Keynesianism sees none of these issues and has no means to answer the questions. Instead, they’re hand-waved away.
Destruction makes us poorer. The set of assumptions needed to make it such that the rebuilding will bring an end to monetary disequilibrium is preposterous… and that assumes that monetary equilibrium theory is true. In a world with central banks, I’m unconvinced of MET.
re: “The true flaw in all of this is the aggregate view which keynesians take. There is no group called “people” with some aggregate level of “confidence”. Some people are more confident and others are less and there is no reason to believe that Keynesian spending of any sort can target the people who are hoarding money rather than those who are not.”
Ever heard of the price mechanism?
So fiscal and monetary policy expands the money supply. Individuals do demand money at different rates – and not only that, the same individual will demand different amounts of money at different prices. That’s why we have a demand schedule or curve rather than a single thing called “the demand for money”. Increasing the supply of money shifts the market equilibrium down the demand curve, lowering the interest rate and allowing more investment at lower and lower levels of marginal return to capital. The price mechanism efficiently allocates the created money – you don’t have Ben Bernanke saying “so who wants this the most!”.
Again, I must give the Devil his due, and thank the Devilish Daniel for the best explanation of a demand curve that I have ever seen. That has been a big help to me. So, thanx, Devil, old boy.
The key to understanding Keynesian economics is to understand that it isn’t economics at all but anti-economics, “economics” against economization.
Don’s 11 year old understands that, in his own affairs, he cannot spend his way to prosperity. But, according to the Keynesians, the economy of a nation was different from that of an individual, and thrift, a private virtue, was a public vice. Hence, the two different kinds of economics, Micro and Macro, the economics of the individual, and of the nation.
So Keynesian “economics” is characterized not just by the notion that the market economy is inherently unstable and in need of government action to stabilize it, but by the division between micro and macro, and, most especially, anti-economics.
For Macro Schmacro, and, following it, The Cause and Cure of the Depression, see
http://econotrashtalk.org/#Macro_Schmacro_
Pardon me. I should have said Russ’s 11 year old, not Don’s.
What is the price of money, Daniel? The answer is not “interest rates”. Money has no market of its own or price of its own in the way you are describing.
Where is the market process for this “price mechanism” you are referencing?
The closest thing you get to the “price” of money is “purchasing power”, which is what people seek to preserve when then hold cash balances.
Am I missing something?
You have a Keynesian answer to this and a Hicksian answer to this, both of which do the trick for explaining underemployment. The price of money is the interest rate. Keynes says interest rates equilibrate the money market and impose a price floor on the loanable funds market. Hicks says the interest rate is jointly set by the money and loanable funds market. I’m agnostic on this point and not sure exactly how we can decide between them, but both produce the possibility of stable equilibria below full employment.
So yes, if I were to assume money is just a measuring stick and a market for money doesn’t exist, and that interest rates are determined in the loanable funds market, I suppose I’d agree with you. But that’s trivial for me to admit. I’m not arguing that you’re being illogical given your assumptions. I’m simply arguing that what you claim to be unintelligible in Keynesianism isn’t unintelligible at all – it’s easily explained by the price mechanism.
Daniel,
The price of money is NOT the interest rate. The interest rate is the price of loanable funds – which sometimes may take the form of money. If you think interest is the price of money, then tell me a fair interest rate? 10%? Great. Then I will buy your $100 bill for $10, the fair price of money.
The “price” of money is simply the inverse of the price level – it is how much other goods and services you must part with to get a particular unit of another good we call money.
I’ll address the rest of your comments elsewhere.
The keynesian model of interest rate determination is nonsense. There IS a liquidity effect on interest rates in the form of a supply effect in the credit market. If people hoard cash, there is less supply of loanable funds for loans, stocks and bonds. But the market process for interest rate determination is quite clear. There are individuals which lend the money, seeking the highest rate of return they can within the parameters of their timeframe and risk tolerance… and individuals which seek funds for their activities and are looking to get them as cheaply as possible.
I don’t see how there is any room for confusion on this at all.
As for the alleged “unemployment equilibrium”… it’s nothing more than an assertion. Equilibrium itself isn’t really a thing. There is no equilibrium. There is only a process under a set of institutional arrangements and rules.
The Keynesian framework absolutely requires a set of assumptions so specific and unnatural (infinitely sticky wages and an unlimited demand for liquidity) that they are essentially useless.
The one insight, which is that demand for money can depress output as well as prices, isn’t a new insight at all.
If keynesians REALLY believed their framework, they would be the most outspoken enemies of everything which makes prices and wages more rigid. They don’t. I’ve never seen it. The degree of wage stickiness is either assumed as if it’s some cosmic constant or actively encouraged by other policies which fall under the broader progressive banner like unionization, indebtedness, high minimum wage laws, etc.
wintercow20 -
The argument is that time preference and liquidity preference act like bundled goods. Nobody says “I’ll sell you X amount of time preference and Y amount of liquidity preference for $Z”, so we investigate what theory produces more accurate predictions. The idea that money is just some numeraire – the inverse of all other prices – does not seem to make very good predictions.
johnpapola –
You say Keynesian interest rate theory doesn’t make sense and then you proceed to describe Keynesian interest rate theory (well, Hicksian). No Keynesian requires infinite sticky wages or unlimited demand for liquidity that I’m aware of. Can you name someone that relies on this? I can’t think of anyone. Do you mean perfectly elastic demand for liquidity? That’s a special condition in some models, but Keynesianism doesn’t rely on that at all. Just because the Keynes in your video said that wage stickiness was the major problem does not mean that Keynes actually said that, John. Krugman’s been yammering on about how sticky wages miss the point so much lately I’m surprised you missed that. Skidelsky – who you sought out – has expressed frustration at several points with Keynesians that promote sticky wages as the Keynesian story.
@Daniel,
You haven’t answered my question regarding your statement about the “price mechanism”. I have no idea what you meant by that at all. There is no price of money save for it’s purchasing power in terms of good. Money is a medium of exchange, not an end to itself. Money does have utility but only through it’s purchasing power and that value is inextricably tied to the market for goods and services.
But, please, educate me. Seriously. What did you mean by the “price mechanism” and what market process is determining this price you are alluding to?
I haven’t seen the Krugman posts on sticky wages. I know that Skidelsky views “uncertainty” as the greater force in matter, but I find that unconvincing. The future is inherently uncertain.
The fact of that matter is that Keynesianism rests on sticky wages and the liquidity trap, which are both the points I was making. The liquidity trap asserts an “infinite” demand for money at the zero bound on interest rates. But this is nonsense. There is no such thing as a liquidity trap except as an explanation of the particular quirks in central banking.
Here’s Krugman on liquidity preference and loanable funds:
http://krugman.blogs.nytimes.com/2009/05/02/liquidity-preference-loanable-funds-and-niall-ferguson-wonkish/
It’s garbage. He paints graphs with fabricated assertions about the interaction between GDP, so-called “full employment” and the zero bound. This isn’t economics. It’s a graphing shell game, designing graphs that prove your theory by definition. The very fact that savings and investment are merged into IS destroys the market process for interest rate determination. It’s just hand-waving.
But there it is. At the zero-bound, demand for money is effectively infinite. This, of course, is the ONLY reason why fiscal stimulus is advocated instead of having monetary policy meet the demand. Strip away the liquidity trap, and Keynesianism becomes monetarism… which is why “New Keynesians” = “New Monetarists”. There is no reason whatsoever for “fiscal policy” without the “liquidity trap”.
“Sticky Wages” is the whole deal overall, though. It’s the problem Keynes was seeking to solve. After all, unemployment is the price of labor not clearing the market, leaving a surplus of labor. This, again, is why “New Keynesians” as a research program are all about studying what makes prices and wages sticky. I know Skidelsky has his problems with this, but that doesn’t make him right.
Take away sticky wages from Keynesianism and there’s nothing there at all. There’s no market process whatsoever on which to base the reasons for unemployment in terms of aggregate demand. Of course, I doubt that relationship anyway, and persistent stagflation blows up the AD approach in and of itself.
John I did answer your question you just disagreed with my answer.
re: “very fact that savings and investment are merged into IS destroys the market process for interest rate determination.”
Of everything in that blog post it’s the IS curve that you have a problem with???? That is the one part of the whole damn model that’s commensurate with Austrian economics!!!
i = a(LFs)
i = -b(LFd)
LFs=LFd
This is totally Austrian-compatable so far. All the IS curve does is say LFs is a function of Y and LFd is a function of Y (I’ve never heard an Austrian challenge that!), solve for i as a function of Y and you’ve got the IS curve. What exactly are you refering to when you say that it “destroys the market process for interest rate determination”? The IS curve is the set of equilibrium points in the market for loanable funds! How on earth can you look at the price mechanism and say it destroys the market process? You might not like where Krugman takes it from there – our disagreement on that is the whole source of this debate. But for God’s sake, you’re looking at a loanable funds market determination of the interest rate and telling me that Krugman has destroyed the market for loanable funds!
Daniel,
I don’t understand that second graph where the vertical axis is r (interest rate), the horizontal axis is GDP, and there is a line called IS where some intersection point is “full employment”.
Every element of that graph appears to be asserted. There is no market process being described in that graph at all. None that I can see at all. This graph may indeed be taught in econ 101, but that doesn’t help me with believing it’s anything but a drawing of keynesian theory. No Austrian asserts that there’s some graphable relationship between GDP and the level of employment.
So explain that graph to me, please. Remember. I am self-taught. I gather that the single IS curve is some sort of derivation. I’m a decade plus out from having done any calculus at all. Still, I see nothing but hand-waving for getting GDP and “full employment” into this thing.
I see no price mechanism. Explain it in a way that involves people bidding for something, which is what happens in the credit market. S is people. I is people. They negotiate and compete. R emerges.
GDP can’t bid. It isn’t a thing or a person. It’s a summary. And the labor market has nothing to do with GDP or I and S unless you bring in wage rates and prices. So I don’t see any market process in the IS curve over GDP.
It is taught in econ 101, and it is just the loanable funds market that you keep going on about. If you don’t understand that, that’s fine. I suppose Krugman was right to label that “wonkish”. But that doesn’t give you the license to suggest that he just made it up or that it ignores the market process. Don’t say things like that if you don’t know what you’re talking about. I explained the derivation of the IS curve without calculus in my last comment. If you’re still not understanding, google it. Krugman also explains how he gets from his first figure to his second figure in his post. I’m sick of this John. You did this on econlib to. I answer question after question and then you come back and said I haven’t answered any questions. Over there you accused me of only caring about serving the interests of politicians. I’d rather cut this off before it gets to that here again.
Daniel,
Isn’t this a catch-22?
Wouldn’t the confidence be necessary for the pricing mechanism to allocate efficiently (assuming that confidence is what the money should be following), but wouldn’t the pricing mechanism (from monetary stimulus) already need to be functioning to generate the confidence.
Ultimately, to my amateur reading, you are arguing that the price mechanism will react to conditions that are dependent upon the reaction. What am I not catching?
Not sure I understand the question – could you say it differently. Certainly feedback loops go on, and sometimes that leaves things indeterminate – but I don’t think that’s what’s going on here. So usually when Keynesians talk about confidence/certainty the refer to its impact shifting (1.) the demand for money, and (2.) the subjective valuation of the marginal efficiency of capital, the first of which influences the interest rate, which combined with the second influences the level of investment in the economy. The price mechanism is functioning the whole time. If the price mechanism isn’t functioning you don’t really have a theory of a market economy which is what Keynesianism is! Swings in confidence shift the relationships I mentioned above – the price mechanism is operable if people are more confident or if they are less confident.
MV=PT is an identity. For a properly conceived system, it is necessarily true. The problem is that it really isn’t useful unless its three degrees of freedom are constrained. But people constrain them with assumptions that provide the conclusions they desire.
This slight of hand then takes on the aura of truth and objectivity, because it uses equations and algebra. The whole mathematical process is essentially a transformation mapping mere opinion to mathematical “truth”. That “truth” is then reasoned circularly to defend the opinion.
Or to put it another way, it’s all horseshit.
There may not be any nuance in what Larry said, but there are people who frequent this blog who will tie themselves in amazing knots to concoct it.
Larry may be more knowledgeable, more experienced and older than your kid, Russ. I don’t for a moment believe he’s smarter.
For myself, I am not so willing to give the looney left an automatic wash on what their attitudes towards large loss of life might mean to over all wealth of the living. There is a substantial portion of the looney left that prays for something to wipe out 50% or more of humanity because we are a blight on nature. Follow that thought to the other thing we know about the looney left, their idea that all wealth is already created and therefore for some one to get some he has to prevent someone else from getting any, or steal it.
Just think of it! If 50% of humanity died out overnight, then the survivors have the potential to become twice as rich automatically. In their minds the size of the pie doesn’t change, but everyone’s slice can be twice as big. Great deal for the living, too bad about the dead.
I think it comes back to not understanding (or ignoring) the difference between money and wealth.
My understanding of the Keynesian view is that as long as money is being moved about, the economy is doing great. It doesn’t matter if that movement is a result of the destruction of wealth (earthquake), borrowing against the future creation of wealth (deficits and debt), or no wealth being created at all (digging holes and filing them back up).
Just keep the money moving.
I think that we are finally getting down the the real question here. The problem we are having is that the mere spending of money does not equate to “wealth” Imagine a country where 50% of all income needed to be spent on personal protection. That spending would all presumably count towards GDP but would we necessarily say that the country is “wealthy” because of that spending? (Assuming no argument that such spending was somehow a proxy for the value of the “wealth” being protected?).
What I find interesting is that free market fundamentalists tend to insist that the market is not “closed” in that when someone makes more money that cannot be at the expense of another. Yet when we are talking about this situation suddenly everyone turns all “closed system/” That the spending on reconstruction “necessarily” must be taken from some other purpose.
Frankly I think you are all ignoring the very real impact that insurance has on this situation. There is certainly some past “savings” in the form of insurance reserves that are being used to re-build the “wealth.” What fascinates me the most is that you should be using this as a reason to praise the ability of the free-market through the use of such insurance mechanisms to stabilize the situation. However, instead you have your ideological blinders on and are deathly afraid that admitting that such spending has any sort of positive effect constitutes an admission that Keynesianism is somehow valid.
In short. Destruction is never a good thing. However the market has evolved some mechanisms for dampening what is a horrible loss. In the short run, such “capital” spending does result in some increased economic activity in the location where the “loss” occurred. However it certainly seems that the increase in economic activity is a poor substitute for the loss of wealth.
However, think about this scenario. What about situations where there has been a serious imbalance in capital expenditures? For example, South Florida overbuilding of housing. What if a hurricane were to suddenly remove the excess housing stock? Plus, what if the insurers were nevertheless going to pay for that loss? I guess the question might be whether such excess stock was really “wealth.”
money savings or resource savings?
” it certainly seems that the increase in economic activity is a poor substitute for the loss of wealth”
It is not just a loss of wealth. The direct loss of productive capacity – due to the destruction of factories and commercial businesses – and the indirect curtailment of production due to infrastructure loss will have significant impacts on economic activity. See my comment below.
Are you shitting me, GeorgeNYC? What the f.ck do you thing people have been talking about but insurance money doing the rebuilding? Of course the people here understand that the rebuild money is not going to be a gift. You’re just not up to speed enough to know that that is irrelevant, money to rebuild is not money making profit like the infrastructure and manufacturing/business that was there before it was destroyed. While the rebuilding is going on. everything productive and profit making is at a standstill, nay, worse than that, because it is not going forward it is slipping backward.
For instance, does a millpress operator make any money during the time of a rebuilding process of his milling plant? No. He is living off insurance, savings, and perhaps charity, consuming reserves instead of making a profit. How can that be a benefit to the economy, short term or long term? How can that be a benefit to the individual people who are sitting around waiting for the rebuild to finish and full production resumed?
Spending massive amounts of money on rebuilding benefits no one but the ones doing the rebuilding, and that ain’t all the little guys that need to make money.
Its pretty easy once you see the perfect-substitute, perfectly-specific , immutable idle resources that can be deployed without search and transaction costs to offset the loses of perfectly precise destruction to encourage the property owner of the destroyed resources to once again enter the labor force which he was marginally sitting out of.
you see, these property owners were selfishly saving their labor, now they will engage in mutually beneficial trade to pay off their expenses.
Maybe Summers and crazy old uncle Paul are stockholders in Pittsburgh Plate Glass. -Or- Maybe they are still waiting for the French-to-English translation of Frédéric Bastiat.
There is certainly some past “savings” in the form of insurance reserves that are being used to re-build the “wealth.”
“My eleven year-old understands that spending on rebuilding means less spending on something else…What does Larry Summers understand that my eleven year old is missing? I really don’t get it”
Russ, allow me to explain:
First, I think everyone should avoid ambiguous terms like “prosperity”, and also avoid describing what is “good” or “bad” for the economy.
Now, with that said, to believe that spending on reconstruction after some natural disaster means less spending elsewhere, one must make certain assumptions which we simply do not witness in the shortrun.
Primarily, one must assume that liquidity preference is infinitely inelastic with respect to interest rates (actually, nominal interest rates) and infinitely elastic with respect to income.
In effect, one must make a very bold assumption that people do not alter the composition of money in their portfolio when interest rates change. But, of course, they do, and this is precisely why targeting money aggregates has been such a failure (because velocity is neither stable nor predictable) and why, even though Milton Friedman was one of the greatest economists, his k% money growth rule betrayed him.
And so if and only if these assumptions above regarding the elasticities of interest and income demand for money, then yes, reconstruction on, say, new buildings to replace the collapsed ones does mean less spending on other stuff.
But macroeconomists know that liquidity preference is indeed interest sensitive. In fact, the issue really is how elastic.
So provided that the liquidity preference is not infinitely inelastic (that is, velocity is not constant) then rebuilding need not reduce other spending. In an extreme case where liquidity preference is infinitely elastic, then spending on reconstruction would not affect other spending at all.
How can this be? Again, as most economists believe that the liquidity preference is not infinitely interest inelastic and not infinitely interest elastic, rebuilding would reduce only some other spending. Most macroeconomists believe that this spending would increase both income and interest rates because the public would economize on money in their portfolio and therefore velocity would rise and more spending would result from any given money supply.
If we make the assumption that liquidity preference is infinitely interest inelastic, then the public would not economize on their money balances (in fact, they would be indifferent to either increases or decreases in interest rates) and in such a case, then yes, spending to rebuild would completely reduce spending elsewhere.
This is called crowding out, and it really is a shame that too many economists manage to screw up the difference between an accounting identity and a behavioral relationship.
Of course, in the longrun, using this framework, yes, spending does completely crowd out other spending and it is real factors, not money factors (remember, monetary nonneutrality only occurs given sticky wages and prices in the shortrun), that would eliminate spending on other stuff.
Hope that helps, but if not, check out the link below in which Brad DeLong explains the same thing using an interesting example to build the intuition.
http://delong.typepad.com/sdj/2009/01/time-to-bang-my-head-against-the-wall-some-more-pre-elementary-monetary-economics-department.html
–Pingry
And let me just add one more thing.
I think many people make the mistake of equating partial and general equilibrium.
It’s easy to think of a partial equilibrium situation in which you, me or your son increases spending on something, that it must reduce our spending on other things. And that’s correct, all else aside. If someone buys an iPad2, for example, then that means he or she cannot spend that same amount on the next best alternative (perhaps a vacation)
But for the economy as a whole, this is not correct unless the above assumptions are met. If society must reconstruct after a natural disaster, then there is no reduced spending (no crowding out) if liquidity preference is infinitely interest elastic, but total crowding out if liquidity is infinitely interest inelastic, and only partial crowding out if it is neither of the two.
–Pingry
Could you explain how your got from “GDP will increase” and “investment will be boosted” to your claim that they are saying “destruction is a good thing for the economy“. That’s the part of your logic that I don’t understand – how you get from point A to point B here.
If an individual got wiped out financially, they’re presumably going to put off retirement, skip vacations, and try to work extra shifts. Their output will increase, but who in their right minds would say that getting wiped out “is a good thing” for them? You seem to be taking this observation that someone who is financially wiped out will have higher output levels and leveraging a lot out of it. And in doing that, you seem to be attributing a lot of nasty sentiments to other people. That is the concern.
This stuff that Summers and Krugman are saying isn’t new. Bastiat said it. Semi-Austrians like Ropke said it. Keynesians have said it. Under the right circumstances, destruction can boost output. This isn’t a new claim. Why do people have such a hard time understanding that nobody is saying “it’s a good thing we had that disaster – the economy is better off for it”? You’re right in pointing out that Keynesians and non-Keynesians may differ about the extent to which other work is displaced. Keynesians will say that when there’s a lot of slack, there’s a good chance that other work won’t be displaced as much as if you were in Bastiat’s full employment example (where the glazier displaces the shoe maker). But that strikes me as a side issue. The extent of activity may range depending on circumstances, but it seems terrible to accuse people like Summers and Krugman of saying that people are better off with destruction when all they have said is that production will likely be boosted or investment will likely be boosted.
And further – I don’t see how you’re saying that we’re trying to be nuanced. I’m trying to take what Summers said at face value. He seems to me to be talking about GDP. I am the first to say that in this unscripted interview “strengthen” wasn’t a very good word, but I think it was clear he was refering to his earlier point about GDP (Methinks, in the previous thread, agreed with me that that seemed to be what he was refering to).
OK – we all know what GDP means. There’s no great mystery to it.
Why are you taking that and turning it into “destruction is a good thing for the economy”??? I’m reading the plain English… I’m wondering what you’re reading.
Oh, I love how you’re trying to drag me into your frothy concoction of nonsense.
I was trying to be very very very generous to Larry. Like you, I wanted, to believe that the former head of the Harvard economics department just misspoke or the journalist got it wrong. He didn’t. I was wrong. Wrong.
He said two things: 1.) It is ironic that GDP will increase as a result of this earthquake. and 2.) the Kobe earthquake strengthened the economy. Any one statement can be taken as poor wording, but not the two of them together in the same interview.
Your transparent and intellectually bankrupt attempts to paint Larry as a maligned hero to whom Evil Russ attributed heinous and inhuman intentions is (I hope, but my hope is faded to almost nothing) beneath you. It is certainly beneath contempt. Nobody is maligning Larry. Larry’s logic is being tested at the limit. Ever heard of that exercise? This obnoxious behaviour is what earns you all your knocks on this blog.
OK, then count you out. I think the first statement was a sensible one and the second statement was just plain vague. Since he is a smart guy, since he doesn’t have a history of claiming that disasters are good, and since nobody has ever argued that disasters are good I figured it was safe to assume that that vague second statement was saying the same as the first – GDP increased. And I hereby acknowledge you changed your mind.
I never said Russ was evil or that he had heinous or inhuman intentions – there’s no need to impute that to me. I do think he’s attributing a really, really horrible sentiment to Summers and Krugman and I’m at a loss for understanding why.
I think the first statement was a sensible one and the second statement was just plain vague.
Cool. Maybe you can explain it to a dummy like me, then.
What is ironic about more spending increasing GDP?
What is vague about “After the Kobe earthquake in 1995 Japan actually gained some economic strength due to the process of reconstruction.”?
I do think he’s attributing a really, really horrible sentiment to Summers and Krugman…
Do you suppose that because you are convinced by your lies to yourself you somehow convince others with the same nonsense? You can repeat this crap all day. It still isn’t true. I know you’re not as stupid as Muirdiot, so I expect you to understand plain English.
We’ve been over this before, Methinks. What’s ironic is that something as awful as a natural disaster could show any uptick in anything we normally consider “good”, like GDP figures. It’s not intuitive. It’s ironic. What’s “vague” is that “economic strength” could refer to just about anything.
re: “You can repeat this crap all day. It still isn’t true”
“Horrible” is a subjective assessment and you’re entitled to your opinion, but I think someone who thinks destruction is a good thing is saying something pretty horrible.
I love the knots you twist yourself into. Maybe the goofy look on your face in your photo adds to my amusement.
Of course it’s intuitive. GDP is spending. There’s nothing ironic about it.
What’s “vague” is that “economic strength” could refer to just about anything.
Just about anything – Like destruction, for instance. It could be referring to the destruction caused by tje Kobe earthquake, which – according to Larry – really boosted (made stronger) the Japanese economy. Why wouldn’t Larry want more destruction for Japan then (other than the loss of life)? Oh well, hell, a loss of life is fewer mouths to feed by the newly strengthened economy, so that’s probably good too.
You are becoming a parody of yourself, Danny boy.
I have to say that reading this one thread, the contrast between Daniel Kuehn’s patient explication and Methinks1776 cascading spittle, has made me wonder how times previously the former has spanked the latter’s butt on this very site. My guess is quite a few.
Dweller Ysul -
You made my night – I feel like I owe you a beer or something.
He is very generous to comments made by only a certain group of people.
Generous enough to change their meaning entirely.
That’s the part of your logic that I don’t understand – how you get from point A to point B here.
GDP increase is good for the economy, no?
Boosted investment is good for the economy, no?
They are saying that this earthquake will result in both of those things.
earthquake (aka destruction) -> gdp + investment -> good for the economy
Catch you later, I’ve got some windows to break. The economy needs some stimulatin’!
I’m not sure if you’re being facetious or what.
You do realize, don’t you, that lots of BAD things for the economy happened along with that boost to GDP and that boost to investment. You do realize, don’t you, that no economist claims that GDP is the be-all end-all measure of economic goodness. It’s just a production figure.
DK,
If you used your approach to people like Summers and Krugman for Don and Russ, you’d have a lot less to say.
I’m not sure if you’re being facetious or what.
‘course not. John K is dead effing serious. Everyone on this blog takes themselves as seriously as you take yourself. Dontcha know?
Umm. This is not theory maybe that is why it is causing so much hysteria. Insurance companies take your premiums and hold on to them in what are called reserves. it is true that they may invest those reserves but they also keep quite a bit in liquid assets that are like cash. They can and do invest some of these reserves in longer term investments but they need to have a lot of their reserves in shorter term investments because of the possibility that they might need to make payments somewhat quickly. They determine these reserves based on complex actuarial calculations which reflect the best guess at their risk.
When a loss such as this occurs, they pull on these reserves. They spend money in repair, replacement and rebuilding. In the grand global investment scheme I would assume that these billions of dollars may register in a slight shift away from such short term investments.(one estimate of cost to insurers of the earthquake is $35 billion.) However, given the trillions invested by others for other purposes the few billion probably do not have much of an impact.
This is 35 billion that would not have otherwise been spent on construction. it would have been held onto.
I fail to see what any of this has to do with getting people to “re-enter” the labor force. It would certainly have an impact in the construction industry, But I doubt whether such a positive impact would make up for the loss of jobs in other industries while the rebuilding occurs. However, to take you “closed system” a bit further, the survivors would still need to eat and they would presumably try to work. It is just that this economic activity would be taking place in some other location. Some of this economic activity will also be paid by insurance.
Again, I am desperately trying to understand the incredible ire that these remarks have drawn. Your real problem is that the GDP calculation does not take into account the destruction of wealth. So maybe there should be some kind of negative charge? But then how would you deal with the situation where someone demolishes a house to build a new one? (although frankly housing is probably better considered as a long-term consumption item that as “wealth” but that is another issue altogether. )
I guess the only thing I am convinced of is that GDP does not really measure wealth. I will certainly agree with that.
“This is 35 billion that would not have otherwise been spent on construction. it would have been held onto.”
Nonsense, money isn’t “held on to” stop thinking in terms of circular flows. Its useless and results in bad results. Use marginal effects of changes and incentive changes instead.
Tim Worstall on this post and others on the first post seem to be arguing that Summers is correct. Their explanation is that the flows from released savings – savings to be used for rebuilding – will result in an increase in Japan’s GDP. I can see their point that such flows will be included in Japan’s GDP. However, it is not clear to me that such flows will offset the loss of production during the rebuilding period.
If three nuclear reactors are out of service, that’s a tremendous hit to Japan’s GDP – both directly in electricity production and indirectly if the supply of electricity to Japan’s industry is curtailed. Likewise, the many businesses which were wiped out along the 600 km of Japan’s coastline will not be productive while they are being rebuilt. The commercial ships destroyed will not be in service – will not be adding to Japan’s GDP.
One more likely productivity hit for Japan: the several thousand workers who were killed by the tsunami are not going to be contributing to GDP – ever again. Many of their families and friends are likely to suffer productivity losses as they deal with grief.
It is not just the loss of wealth which will burden Japan in the future. The nation is sufferring a real and significant loss in productive capacity right now. Larry Summers and those who defend his statements seem to be ignoring that loss in their Keynesian arguments that the stimulus of rebuilding will be positive in the short run.
So it is just a measurement issue? That is is the insurance payout > or < the immediate hit to production?
I would note that there are many types of insurance that would apply to the losses you mention. There is straightforward property insurance that repairs or replaces all of the items you have mentioned – factories and ships. There is business interruption coverage that reimburses companies for lost income. They can even use this to keep paying their employees.
I would have to agree that, in the long run, the loss in productivity would likely outweigh the immediate expenditures. The sort run may not be true. Think of the absolutely enormous effort that will be required to rebuild an area such as that. It took years to build it in the first instance and all of that building will be done in a much shorter time frame.
Again, we are just talking about measurement here. No one is suggesting, not even Summers, that the best way to get the economy moving again is to blow stuff up.
GeorgeNYC,
63 thousand buildings have been completely or partially destroyed. CTV News reports that over a million people are without food, water, and shelter. Hundreds of km of roads upon which commercial activity depends have been wiped out. It doesn’t matter whether some businesses have “business interruption coverage” right now. Economic activity in this section of Japan has been halted.
The idea that rebuilding will temporarily result in more economic activity than the economic activity which has been halted or permanently eliminated by the destruction seems absurd to me. It’s not a matter of whether people have money to spend – money released by insurance companies from savings. The productive capacity of 600 km of coastline is basically gone.
George,
You do realize the insurance will have to be repaid with higher premiums, right? Insurance doesn’t eliminate the cost of a disaster, it just smooths out the payment for it.
“Think of the absolutely enormous effort that will be required to rebuild an area such as that. It took years to build it in the first instance and all of that building will be done in a much shorter time frame.”
Perhaps we should consider the workers who are displaced and the workers who will rebuild.
The port of Sendai has been destroyed, and with it many ships and tugboats. While that port is being rebuilt, it seems unlikely that the displaced dockworkers, tugboat operators, ship crews, customs brokers, harbor police officers, and other specialized port workers are going to be employed rebuilding the port. Some may. But rebuilding infrastructure will require trained construction workers.
The Sendai airport has also been destroyed, according to news reports. The workers of all types at this airport – aircraft mechanics, gate agents, restaurant workers, baggage handlers, etc – were all contributing to the economy of Japan. It seems unlikely that these workers will be prepared to perform the construction tasks required to rebuild Sendai’s airport.
Sendai may import workers and equipment from outside Japan to rebuild its seaport and airport. It seems unlikely to me, though, that all this construction work will be enough to offset the contribution lost from all the displaced seaport and airport employees. Furthermore, there is a limit on the number of available construction managers and trained construction workers. My guess is that number is far less than the number of displaced workers.
Does he mean public, common, property is superior to private property? Is it measured differently? My Picasso that hangs in my house has no multiplier effect on the 95 Billion Metro economy of Las Vegas. The Picasso sculpture that sits in Daley square in Chicago is a city asset and revenue it generates is part of the 515 Billion Metro economy of Chicago. If all privately held art appraised above $100,000 is simultaneously confiscated and put in public museums for a small fee, isn’t the wealth of 307 million people increased while only a handful of rich people are inconvenienced?
1) Again, you are confusing money movement with wealth. If the value of the painting hanging in his living room is worth more to him than it would be to make some money (and gain some notoriety, etc) hanging in a museum, then he will keep it on his wall.
2) Once you start confiscating the art, it destroys much of the incentive to create new art, or to buy and protect old art, as you know the state will just confiscate it.
3) You arguments for collectivization have been used in the past but invariably they have had disastrous effects.
Okay that helps. I don’t really want the Fed Mafia to take anything from me, wouldn’t I be better of having to surrender my luxuries to the crips or ms13s outside my gates who at least have some elements of spontaneous order and market pricing?
I meant small fee to see your new national treasures. Children can see the art for free of course.
In DeLong’s comment section, a poster asks the question: Isn’t the ending of the first scenario–simply repaying the 500 dollars (velocity of 1)–an arbitrary ending? Well, isn’t it? DeLong simply created an arbitrary A to B, and in the first example the movement was direct , and in the second it was a 4-step convolution . DeLong didn’t have to stop after 1 exchange in the first example. He could have gone back and forth 100 times or more, with a resulting velocity of 100. He artifically constructed a 1-step exchange to create a velocity of 1, and artificially constructed a 4-step exchange to create a velocity of 4. And then said, “See?!” I made something out of nothing. In other words, while the 4 step exchange was taking place, why do we assume that in the first example, the 500 dollars remained idle? After one excange, does it become unusable?
Sorry, no magic took place.
In reply to Pingry
Its pretty idiotic thinking on his part. Increasing inefficiencies doesn’t generate wealth. People need to stop arguing from circular flows as it gives wrong answers, you can always play with a circular flow in such a way as to give incoherent answers. They need to argue from marginal effects and incentive effects if they want to get something meaningful. I thought we answered this debate in the 1800′s, seriously people wtf is wrong with these economists nowadays.
Such an elementary point; it’s amazing how many of our politicians ignore it. Or, given their incentives, perhaps it isn’t so amazing.
With that said, while I love my parents, it must be interesting to be raised by economists.
Then call him up and ask him for an interview. He’s probably got more time nowadays than he did last year.
The “multiplier” from government taxes and spending is actually less than 1. The government wastes resources collecting more tax, and the citizen wastes resources trying to minimize his tax. Then, the government spends the tax revenue wastefully, achieving less production of useful goods and services than the citizen would have created with his resources.
An absurdity. If government spending of $100 creates $150 in wealth, then why doesn’t this apply to ALL spending? The $50 you spend for groceries should produce $75 in wealth. In fact, all money spent each day should produce 1.5 times in wealth the current day’s spending (sometime in the near future). This would lead to a wealth explosion, as total wealth increased by 50% every few months. Heck, even if it increased by 5% every few months.
There is no wealth multiplier greater than 1. If there were, we would all be living in Aruba by now as a result of huge government borrowing and spending.
Why Spending Stimulus Plans Fail
Government spending merely transfers jobs and income from one part of the economy to another.
Econ 201: The Myth of the Economic Multiplier
Government spending doesn’t multiply anything. It takes resources from taxpayers and applies them to government projects. You get a bridge or some paperwork, that is it.
“The ironic thing is that GDP will increase” – yes, of course it will. GDP is a production measurement for the current year in that GDP (Y) = C + I + G + NX. A country can be filthy rich and then go on vacation for a year – it’s GDP would be zero. Why is that so hard to understand. There is no W (for Wealth) in the GDP equation.
Rebuilding may cause GDP to increase from where it is today – three days after the tsunami. But it seems unlikely GDP will increase in the short term, as a result of rebuilding, relative to where it was just four days ago. Much of the productive capacity of Sendai and of the 600 km of nearby coastline has been destroyed. The contribution to GDP of that productive capacity will not return until the rebuilding is complete.
Rolling blackouts caused by the meltdown of three nuclear reactors have reduced Japan’s production not just in the Sendai region but elsewhere as well. Until that generating capacity is restored, it is likely that some part of those reductions in production will continue.
The earthquake and tsunami did more than simply reduce the wealth in Japan. It reduced productive capacity.
I agree. I’m thinking more of the effect on GDP over the next several years. The Japanese economy has been pretty flat for a while now, but this rebuilding phase will probably boost their economy especially as they get their productive capacity back on line.
They have 53 nuclear reactors which provide 35% of the country’s power so the loss of one station shuts down, they should still be able to generate enough electricity. I would imagine that the rolling blackouts are due to downed transmission towers but I don’t really think this will be a big issue for them.
I don’t know enough about Japan to estimate what the effect on their production capacity will be. A quick look at google maps makes me think that this is a more rural part of the country though with most of the major centers being to the south of Tokyo. So overall, it’s not clear to me that the loss of production capacity will out weigh the rebuilding process which will spur Investment and Government spending.
“it’s not clear to me that the loss of production capacity will out weigh the rebuilding process which will spur Investment and Government spending.”
It’s not the entire nation of Japan being rebuilt. It is precisely the parts which are damaged and destroyed which will be rebuilt. Regardless of how much industrial capacity exists in this region, the question is whether the lost industrial and commercial capacity for that region is more or less than the increase in construction as that capacity is rebuilt. Given that this is a logistics center for northern Japan, I do not see how the rebuilding expenditures can possibly match the lost output and the inefficiency losses.
I think you are mistaken about this area being primarily a rural region. Greater Sendai has a population of nearly 1.5 million. Sendai Airport is not one of the largest in the nation, but it is served by half a dozen airlines. According to Fox News, the seaports destroyed last week by the tsunami handled 7 percent of the nation’s industrial output. Lloyd’s List Intelligence estimates that the closure of these seaports will cost Japan $3.7 billion in lost sea trade each day.
The lost generating capacity is greater than you imply in your response. It is not one nuclear reactor but three which have been destroyed.
Finally, the big issue for Japan over the next few years is whether they can actually increase government spending. With national debt already at 200% of GDP, the capacity of Japan for even more borrowing is constrained. While there is no question that Japan will rebuild the lost infrastructure, it is not clear that all this spending can be incremental spending.
Surely Japan has other seaports which they can use for exports. As roads and train networks are rebuilt, and power is restored, industries in the north part of the country can use ports in other parts of the country.
In my response I referred to one nuclear station – all three reactors in trouble are in one station. I assume they shut down the forth reactor too. Still 4 reactors out of 53 which produce 35% of the power to the country – a large part of which is not consuming electricity at this point – is not going to have much of an impact. I maintain that their electrical issues must be related to downed towers and probably other power stations being offline until they are checked for damages.
The money for rebuilding does not just come from the government. Initially, much of the money will come from insurance claims as well as increased government debt, as the economy improves, people’s willingness to hold money will decline which will also help fuel recovery.
It’s certainly not a slam dunk though. It’s probably still way to early to get a sense of what has to be done to reconnect the country and get firms moving again. Today’s WSJ has a quick summary which would indicate that most of the industries in the region expect to be back on line anywhere from weeks to six months on the long side.
wylex,
It was not four reactors which were shut down by the tsunami. According to Bloomberg, Tokyo Electric Power closed eleven reactors. Four reactors have been destroyed.
It does not matter whether Japan has “other seaports” which can be used for exports. The seaports near Sendai were the most efficient for those exporters who used them. When the roads are rebuilt and those exporters can access the other seaports, the loss of efficency in transport will either reduce exports or increase the transport costs for those exporters. (increased transport costs means more energy imports)
That undamaged industries will resume operations in few months is irrelevant. The issue was whether rebuilding the damaged industries will result in an increase in GDP. The question is whether the GDP impact of rebuilding the damaged industries and infrastructure exceeds the many losses to GDP:
- the many thousands of commercial and industrial facilities which are not operating;
- the electricity which is not being produced by the four destroyed and seven shutdown nuclear facilities;
- the loss of seaport and airport economic activity in and around Sendai;
- the permanent loss of GDP contribution of the few thousand workers who have perished;
- the temproary shutdowns of industrial operations due to the rolling blackouts;
- the loss of output from workers who will be redeployed from other activity in order to perform the rebuilding.
I do not understand how anyone can argue that the results of the earthquake and tsunami will result in a GDP increase.
Hi Dr. Roberts,
An Econtalk with Larry Summers would be fantastic listening.
By the way, how many Econtalk listeners are there? How many listens (or downloads) are you measuring for each of your podcasts?
I’m trying to understand how effective Econtalk is at teaching free market economics. I notice that when you try changing your guest’s worldviews its almost always a polite and level headed conversation. I believe your goal with the show is to persuade your listeners, not change the minds of your guests. Assuming that a large percentage of economics students are listening and are persuaded by your arguments, then I can see Econtalk being effective at changing the economics profession.
This assumes that the people you want to interview (Keynesians, or welfare economists) will come on your show. If they are political savvy economists they won’t come on your show however.
Scott
Econtalk was essential to my conversion from Democrat Keynesian (a Krugman reading one at that) to a more Hayekian-style libertarian.
Dr. Roberts gets a few Keynesians on. I find their arguments lacking, especially Fazzari on the Paradox of Thrift. I think that podcast did more, for me at least, to discredit Keynesian thinking than anything else. I didn’t like Fazzari’s explanation, so I did some reading on my own and came to the conclusion that the whole idea of a paradox of thrift is absurd.
I think at the margin, Econtalk does a great job at showing free market ideas in a very simple way. Even my wife likes the Munger-casts, and to have her listen says a lot about Russ as an interviewer and the kind of people he gets on the show.
“whole idea of a paradox of thrift is absurd”
Utterly.
“… I’d love to interview Larry Summers on EconTalk and let him give his side of the story. He’s a smart guy….”
Please provide evidence for that claim. I cannot think of anything he’s done or said in the past few years that indicated lots of smarts. Summers reminds me of Krugman: both started out well and made names for themselves in the field of economics; both turned into blithering idiot panderers for stupid economic policies supported by left-wingers.
Has anyone prominent actually made the explicit argument that on net, the earthquake is a positive for the economy? If they’re not willing to say that, then perhaps they are only guilty of sloppy phrasing. Despite the fact that I disagree with the Keynesian approach, I still think you have to give them the benefit of the doubt that they mean given where we are now, the rebuilding will be positive for the economy. Am I being too generous?
Yes, you are.
Assuming there will be a net positive effect on GDP, you must net that against the lost capital stock and anything else the resources now used to rebuild might have been used for.
I agree, that’s what makes it all the more unlikely that someone would really argue that it is a net positive.
They are preaching to, a largely, economically ignorant group of listeners, Wall Street….and voters. Is there any difference between a politician and a person that makes his living by rent seeking? (Yes, Summers by being a part of two Democratic administrations is a rent seeker of the worst kind.)
Hey hey hey! Not all of us on Wall Street make our living by rent seeking.
You’d think that. Then, you meet a Keynesian. John Maynard Keynes would tell you that digging ditches and filling them in again is a productive activity.
I agree with you Russ, Summers is a very smart man. He is smart enough to know that if he doesn’t tow the party line he won’t get a cushy job somewhere later. Summers says exactly what he thinks people like him, democrats, want to hear. If he doesn’t, where is he going to get a cushy paycheck?
I think Russ should get Bob Murphy on the show with Daniel Kuehn.
Hahaha – only if we can both talk like zombies.
Here’s the video link for the interview
http://www.cnbc.com/id/15840232?video=1837577735&play=1
We already have a language that describes what is happening in Japan. It is good old fashioned accounting.
If Japan is a ‘corporation,’ it will not increase employment or income (aggregate demand) rebuilding after the tragedy. It will merely shift Balance Sheet items rebuilding destroyed assets that it no longer has.
IOW, Japan will take insurance assets and redeploy them to rebuild lost assets. Some people will be taken off of productive assignments to rebuild those assets, so on the net, it will detract from the nation’s productivity. Notice that it matters little if some of those people were previously unemployed; they are still only redeploying previously deployed assets, including cash, to replace something that was lost.
To pretend otherwise with some strange economic measure of ‘gdp’ is silly. To pretend that somehow it will make people more confident and ‘stimulate’ the economy is an even stranger one. They will live with this tragedy for decades, and they will all be the poorer for it, emotionally, spiritually and financially.
I agree completely, Jim. It is especially relevant that redeployed workers will not possibly be as productive in their temporary tasks as they were in the previous pre-tsunami work they were trained to do.
One more point: several thousand workers have lost their lives. Their contribution to Japan’s GDP has been lost forever, regardless of whether their place of employnment is ever rebuilt.
I am sorry to say this Russ, but you are dead wrong about something in this post. You are in fact MUCH smarter than Larry Summers. You are smarter because you realize that the economic aggregates Summers bandies around are mere proxies for a more fundamental economic reality that they do not capture. Summers cannot see that these numbers are not always equivalent to the creation of economic welfare. The sooner you realize that you are in fact his intellectual superior the better. Though in the interests of impartiality it may prove expedient to continue to feign the possibility that you may not know better.
Perhaps another fallacy to be addressed is your very generous assessment of Summers’ abilities: ’He’s a smart guy. He’s smarter than my eleven year-old and smarter than I am.
The answer can be found in Hans Christian Andersen’s ‘The Emperor’s New Clothes’ where, one again, a little child did show them the way.
“Summers and Krugman believe that spending creates prosperity. It’s called Keynesianism.”
To be fair to Keynes, he never asserted throughout his career that destruction meant prosperity. He ONLY talked about government spending, intended to boost GDP and pick up lackadaisical consumer spending in a struggling economy. This theory of course is flawed; but, he NEVER once claimed construction and clean up jobs after a natural disaster were “good for an economy.” So, to call it “Keynesianism,” Dr. Roberts, is a bit unfair to Keynes’s theory.
It seems like modern day economists have “out-Keynesianized” Keynes himself. Keynes advocated for government spending when the economy was in trouble – NOT to run a deficit when the economy was doing well or following natural disasters. Paul Krugman and Summers are in a little world of their own where they practice “revisionist economics.” That, I feel, is a better way to describe the disillusions of the likes of Krugman and Summers. Be careful with your terminology, Dr. Roberts, Summers and Krugman have taken Keynes’s theory and are practicing something more like “neo-Keynesianism.”
Keynes: “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: “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”
(from John Papola’s blog)
The “multiplier” from government taxes and spending is actually less than 1. The government wastes resources collecting more tax, and the citizen wastes resources trying to minimize his tax. Then, the government spends the tax revenue wastefully, achieving less production of useful goods and services than the citizen would have created with his resources.
An absurdity. If government spending of $100 creates $150 in wealth, then why doesn’t this apply to ALL spending? The $50 you spend for groceries should produce $75 in wealth. In fact, all money spent each day should produce 1.5 times in wealth the current day’s spending (sometime in the near future). This would lead to a wealth explosion, as total wealth increased by 50% every few months. Heck, even if it increased by 5% every few months.
There is no wealth multiplier greater than 1. If there were, we would all be living in Aruba by now as a result of huge government borrowing and spending.
easyopinions.blogspot.com/2008/11/why-spending-stimulus-plans-fail.html
Why Spending Stimulus Plans Fail
Government spending merely transfers jobs and income from one part of the economy to another.
easyopinions.blogspot.com/2008/08/econ-201-myth-of-economic-multiplier.html
Econ 201: The Myth of the Economic Multiplier
Government spending doesn’t multiply anything. It takes resources from taxpayers and applies them to government projects. You get a bridge or some paperwork, that is it.
I haven’t read all these comments, but I did a search for ‘ironically’ and found it only in the original Summers quote. That word is, to me, what partially gets Summers off the hook. No matter where you stand on the broken window fallacy, measured GDP probably will increase. That’s one of the flaws of GDP, but it’s still a true statement.
The following sentence in the Summers quote, about ‘economic strength’, is less excusable. But in light of the previous sentence, it does seem like Summers is indicating a *temporary* boost in economic activity — which there assuredly will be. That doesn’t mean there won’t be a high associated cost in the future.
I do wish Summers had taken greater care to explicitly avoid the broken window fallacy, but it’s not totally obvious he’s committing it.
Great discussion. I am an admitted amateur compared to most of you guys. Reading this it did remind of the example of the aftermath of WWII. The only major industrial power who did not have their industrial infrastructure destroyed was the US.
That has been cited as a major reason for the post war boom, we were able to use our factories to supply goods while other nations could not compete effectively because they were in rebuilding mode. This allowed us to dominate industries for years afterward. So much so we actually allowed wages to inflate beyond market levels which eventually killed us as competitors like Japan re-entered the fray.
Krugman has cited the WWII example in support of his assertions in that war spending was akin to an enormous government stimulus. He credits this stimulus with the post war boom. However he ignores the fact other nations spent like crazy not only during the war but also in the aftermath rebuilding their infrastructure. Using his logic they should have been outperforming us as they were spending even more.
The reason that didn’t happen is obvious. They were spending money on rebuilding assets that were still usable before they were destroyed. They were forced to divert funds to less productive uses in order to get their house back in order. The US could finally *stop* spending on government stimulus and channel capital into more productive ends.
Make sense?