Open Letter to Peter Morici

by Don Boudreaux on August 29, 2011

in Current Affairs, Myths and Fallacies, Seen and Unseen

Prof. Peter Morici
University of Maryland
Smith School of Business
College Park, MD

Dear Peter:

In your guest blog-post yesterday at CNBC you argue that the destruction caused by hurricane Irene will spark a “process of economic renewal [that] can leave communities better off than before” (“Economic Impact of Hurricane Irene“).  Central to your argument is your claim that, because of the rebuilding, “the capital stock that emerges will prove more economically useful and productive.”

In other words, whenever assets still in use are destroyed, wealth will thereby be created – that is, people whose assets are destroyed will be made richer – because these destroyed assets are replaced with ones that are newer and more productive.

I hereby offer my services to you, at a modest wage, to destroy your house and your car.  Act now, and I’ll throw in at no extra charge destruction of all of your clothing, furniture, computer hardware and software, and large and small household appliances.

Because, I’m sure, almost all of these things that I’ll destroy for you are more than a few days old (and, hence, are hampered by wear and tear), you’ll be obliged to replace them with newer versions that are “more economically useful and productive.”  You will, by your own logic, be made richer.

Just send me a note with some times that are good for you for me to come by with sledge hammers and blowtorches.  Given the short distance between Fairfax and College Park, I can be at your place pronto.

Oh, as an extra bonus, I promise not to clean up the mess!  That way, there’ll be more jobs created for clean-up crews in your neighborhood.

Sincerely,
Donald J. Boudreaux

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{ 180 comments }

Benj August 29, 2011 at 11:13 am

Well said, Don. Three thumbs up!

Mike M August 29, 2011 at 11:20 am

These are the same geniuses who believe that wars are good for the economy, i.e. that putting wealth into munitions and then destroying it increases one’s wealth. Not that all wars are “unnecessary” in terms of maintaining conditions (at least for the victor) that foster economic prosperity, but rather that wars, per se, necessarily destroy wealth.

Slappy McFee August 29, 2011 at 11:23 am

All I know is, I feel richer now that I had to replace the pump on my septic system last weekend. I guess I should have really waited until the sewage flowed back my home. EARLY RETIREMENT BABY!!!

I sure hope the Minnesota economy appreciates the stimulus I gave it.

jjoxman August 29, 2011 at 12:38 pm

You and me both, Slaps. With all the rain we’ve had, and subsequent pumping of water I’ve had to do, I’m stimulating the crap out of MN. Although, in your case, that’s a literal statement.

Dick Fitzwell August 29, 2011 at 12:52 pm

That’s because you had the purchasing power to buy the new system.

Have you ever read “That Which Is Seen, and That Which Is Unseen” or especially “The Broken Window” parable by Bastiat? In your case, you represent the shopkeeper and your new septic system represents the shopkeeper’s new shoes. The difference in your situation is that nobody broke your window.

Methinks1776 August 29, 2011 at 1:31 pm

Dick, that was sarcasm.

Dick Fitzwell August 29, 2011 at 3:50 pm

Sheesh! How did I miss that? It’s dripping!

Methinks1776 August 29, 2011 at 4:06 pm

I blame Monday.

morganovich August 29, 2011 at 1:33 pm

yup.

the new evaporator and compressor my freezer needs is really stimulating things.

never mind that i might have spent that money on somehting else..

ps.

don, if he takes you up on it, can i come?

Methinks1776 August 29, 2011 at 1:35 pm

Well, it looks like one needn’t understand economics to teach economics. And we wonder why there are so many economic illiterates who have taken at least some econ in college roaming the streets of America.

Dan J August 29, 2011 at 8:56 pm

Peter Morici has often been better than that. I have heard him interviewed often on a radio show for ten or minutes and has been a bit above the Keynes crap. Seems he sees a revolving door at White House and may want his turn.

Ryan Vann August 30, 2011 at 12:04 am

You should write that prediction down. Now that you mention it, that does seem very likely.

Dan J August 30, 2011 at 12:16 am

It is better than digging holes and filling them back in.

Darren August 30, 2011 at 6:04 pm

Well, it looks like one needn’t understand economics to teach economics.

Not just economics it sometimes seems.

Slappy McFee August 29, 2011 at 1:52 pm

Wouldn’t my new septic represent the new window? It is the shopkeepers new shoes that are unseen, just like whatever the $1500 I paid for the pump that I would have spent elsewhere.

Dick Fitzwell August 29, 2011 at 4:20 pm

Don’t know how I missed your sarcasm before! I must have been smoking something earlier!

It wasn’t clear from your earlier post whether your septic system was destroyed or whether it was just old and needed to be replaced. If it was needlessly destroyed then yes–it represents the shopkeeper’s window.

However, if it was old and its productive life had run its course then the broken window parable does not apply.

Slappy McFee August 29, 2011 at 2:04 pm

And what should really upset Keynes and Krugman, I rented the power tools and did all the work myself instead of robbing my sons savings account for more money to pay someone else to do the work.

Peter P. August 29, 2011 at 11:27 am

Great letter! I never understood the argument of Keynesians. By definition graffiti artists, robbers, and natural disasters should all be welcomed. Destruction doesn’t create prosperity.

Gil August 30, 2011 at 4:04 am

What of “creative destruction”? Statis sure doesn’t create wealth.

dsylexic August 30, 2011 at 9:05 am

there is no creative destruction.it is a misnomer.when pagers stopped being of value to people because of mobile phones,pagers were not “destroyed”.they just stopped being valued by people.
this type of “destruction” is what schumpeter was speaking of.you know better than that ,but trolling is fun,i guess

Gil August 30, 2011 at 10:47 am

Actually yes when a USB flash drive is thrown in the bin voluntarily it’s not much different if someone were to have stolen the flash drive and thrown it into the bin. Rather it a case of destruction being voluntary or not.

Darren August 30, 2011 at 6:06 pm

It seems to me it’s a matter of net value. Something that had less value was destroyed to create something of more value. On balance, then, value/wealth was created.

Mikenshmirtz August 29, 2011 at 11:32 am

Perhaps a missing component to your scenario is the Keynesian’s government intervention. He stated, “when government authorities facilitate rebuilding quickly and effectively, the process of economic renewal can leave communities better off than before.”

On a more personal side… in the land of this logic of government intervention, isn’t it a pain in the ass that the “process of economic” renewal will have no positive impact on those of us who didn’t lose anything…

Darren August 30, 2011 at 6:08 pm

Certainly, if funds are poured into one area from other areas you can generate wealth for that particular area. However, this requires a reduction of wealth from other areas. There would still be a net reduction of wealth, even if it was a vast improvement for the area hit.

Nickolaus August 29, 2011 at 11:34 am

The broken window fallacy has been all over the place this last week. What’s the deal?

The Other Tim August 29, 2011 at 2:15 pm

The broken window fallacy is always all over this place. As long as there are Keynesians there will be people who need their teeth knocked in with a heavy volume of Bastiat.

kyle8 August 30, 2011 at 8:08 am

rampant ignorance

Thomas A. Coss August 29, 2011 at 11:43 am

If Morici is correct then perhaps a good blood-letting is in order as well.

Krishnan August 29, 2011 at 11:52 am

You should send this to him directly (if you have not) – send it to CNBC (whoever interviewed him) – and any other place – and ask – if destruction causes increase in wealth and if so why not periodically deliberately destroy

EG August 29, 2011 at 12:03 pm

Isn’t New Orleans better off now that Katrina destroyed it? Maybe Detroit needs an earthquake to save it…or a high speed train

Chris O'Leary August 29, 2011 at 12:14 pm

Or a monorail?

Kirby August 29, 2011 at 1:04 pm

Nah, detroit’s crime rate means they will soon be the richest city on earth.

EG August 29, 2011 at 1:10 pm

It did wonders for Shelbyville

Vito August 30, 2011 at 8:02 am

Hey, there are monorails in Brockway, Ogdenville, and North Haverbrooke, and by gum, it put them on the map!

Don August 29, 2011 at 3:49 pm

The answer to you question is “yes”, but the reason has nothing to do with rebuilding, and everything to do with the relocation of much of the criminal class to Texas (were they quickly wound up making big rocks into little rocks at the various State Penitentiaries).

Take a look at the Houston Crime stats before and after Katrina. And remember, that “small” rise (per 100K) is because Houston MSA is about ,IRCC,10 times the size of NOLA MSA.

It also helps that Texan’s shoot back ;^). Since Katrina, there was a rash of home invasions in San Antonio for about 2 years, then the part of town where they were mostly taking place (which has a similar demographic to the high-crime areas of NOLA pre-Katrina) started arming itself and they invaders started dying by the hand full (I think the peak was 4 or 5 in one night) and the problem has died down drastically.

I’m curious if the crime rate in NOLA increased as it decreased in Houston and San Antonio? That would be interesting to know.

txslr August 29, 2011 at 5:18 pm

As a Houstonian, I remember the stories of the Katrina refugees standing in line down by the Astrodome to get their FEMA ATM cards, and the stories about the amount of that money that was subsequently used at area strip clubs.

The seen and the unseen, indeed!

EG August 29, 2011 at 6:59 pm

So you’re saying that it helped the strip clubs? Sounds like it helped the economy then! FEMA ATM cards must have a multiplier even higher than welfare checks!

Matthew August 29, 2011 at 9:29 pm

Rotterdam was clearly made better off by the German firebombing. You should see all of the cool modern buildings they have now.

veritasrex August 29, 2011 at 12:13 pm

I argued with a friend this weekend when he brought up the same point as Prof. Morici. I responded with Bastiat’s Broken Window Fallacy story and his retort was that since I was referring to “that which is not seen” then it doesn’t really count because you really don’t see it. [sigh]

Slappy McFee August 29, 2011 at 12:26 pm

Awesome, simply awesome

Eric Hammer August 29, 2011 at 2:31 pm

I wonder if he would have the same reaction if he found out you were “breaking some windows” with his wife without his knowledge. I suspect that even if he didn’t see it, he would be rather upset.

veritasrex August 29, 2011 at 4:08 pm

LOL…nice! Also reminds me of when I roll through a stop sign ever now and then: cop didn’t see it…I didn’t do it!

Brian August 29, 2011 at 7:51 pm

If a tree falls in the woods and no one is there to hear it, does it make a sound?

Richard Stands August 29, 2011 at 11:46 pm

Yes, a barking sound.

…especially if it’s dogwood.

Brian D. August 29, 2011 at 12:29 pm

And this, right here, is why Don Boudreaux is a hero.

It’s rather sad that a professor at a school of business can write up something this awful and not only get publicity from it, but still keep his job.

The Other Tim August 29, 2011 at 2:13 pm

Unfortunately, business and economics are two separate fields. Understanding one doesn’t require one understands the other. But the bulk of Americans will listen to a businessman opine on economic policy as if he were an expert.

cf. Warren Buffet, Donald Trump.

Methinks1776 August 30, 2011 at 8:08 am

They’re not really two separate fields at all. Finance, for instance, is just a branch of economics. The trade-offs you make in business are economics. But what do you expect from business folks if you have economics professors who don’t understand economics?

And, btw, people in business from large to small are not all as dumb as Warren and Trump’s combover (I’m convinced that thing runs the show). Among the big guys, Steve Wynne comes to mind and neither are most people in the world of finance – unless they are openly rent seeking. Oh, excuse me! As Lloyd Blankfein put it, “doing God’s work.”

Fred August 29, 2011 at 12:31 pm

“people whose assets are destroyed will be made richer – because these destroyed assets are replaced with ones that are newer and more productive.”

They will as long as someone else is force to pay for it.
But then the person or people who were forced to pay for it will be poorer, and the whole of society as a result.
Even if they are those evil rich people we are supposed to hate and envy.

Speedmaster August 29, 2011 at 12:36 pm

Hehe, we’ll done, Sir. :-)

Speedmaster August 29, 2011 at 12:37 pm

Darn it, undone by a typo.

T Rich August 29, 2011 at 6:20 pm

You should keep your comments shorter to avoid misspellings.

;-)

Chris O'Leary August 29, 2011 at 12:49 pm

Don,

While you’re at it, I’d love to see you go after him for his invoking the mysterious multiplier effect.

How exactly can $1 in spending yield $1.50 in benefits except through double-counting?

Kirby August 29, 2011 at 1:03 pm

And when me and my friend exchange $1 for a pen about 100x, why doesn’t it turn into $1.99 because of the multiplier effect?

morganovich August 29, 2011 at 1:35 pm

kirby-

$1.99? according to keynes it should be at least $100. you are setting your sights too low.

rbd August 29, 2011 at 1:09 pm

Has this man never read Frederich Bastiat?!

I can only pray that just one of his students is a loyal Cafe patron and will take him to task on this issue. If I were there, I’d stand up in class and read the whole darn post – out loud. And if I were really feeling brave, I’d start reading the comments too!

kyle8 August 30, 2011 at 8:12 am

well of course not, nor has he read any economist except perhaps Keynes or Galbraith.

Invisible Backhand August 29, 2011 at 1:13 pm

Tucker Carlson used to have a show on CNN. His one and only rhetorical trick was putting words in people’s mouths. He would also play a clip and then go to the guest, “aren’t you really saying”, “isn’t that just another”, “what you really mean is”, “why can’t you just say that” every. single. time.

So when wrote “In other words, whatever assets are destroyed..” you just Tucker Carlsoned.

vidyohs August 29, 2011 at 2:09 pm

Your comment illustrates to the inth why looney leftist are so despised for their duplicity, disingenuousness, and outright lies; as well as their broken brained inability to comprehend anything deeper than “me got gun, you give me your money”.

Don is correctly quoted as saying, “In other words, whenever assets still in use are destroyed,”.

Just quote them out of context and then denigrate the out of context wording, you looney leftist are the dregs of humanity.

Now please tell us why you called JohnS a simpleton for saying that beating a team of dead horses is not more productive than beating one dead horse.

Do you call him a simpleton because like the typical looney lefty you actually believe that the only reason beating a team of dead horses isn’t really productive is because the team of dead horses hasn’t been beaten by the right socialist?

Pathetic stupidity, IB, which you share with our resident village idiot muirduck.

Invisible Backhand August 29, 2011 at 2:39 pm

You really get wound up over a typo-you should switch to decaf.

I find the lecture about accurate quotes quite rich (simplistic=simpleton) coming from you.

Invisible Backhand August 29, 2011 at 2:40 pm

How are you going to reply to this now that…

Invisible Backhand August 29, 2011 at 2:40 pm

I’m using up all the replies?

Subhi Andrews August 29, 2011 at 2:41 pm

it was not a misplaced or misspelled alphabet. Copy and paste has existed for many years. It is called deliberate distortion – which you were trying to falsely accuse Don off. Caught you red handed there.

Invisible Backhand August 29, 2011 at 3:40 pm

Some people type things. Plus, this blog has an antique commenting system that doesn’t allow corrections, say, reddit: http://www.reddit.com/r/CafeHayek/.

It wasn’t intentional, and it’s a distinction without a difference anyways as this picture shows:

http://i.imgur.com/QlVbw.png

I think someone who types something like “misplaced or misspelled alphabet” should be more forgiving.

Don August 29, 2011 at 3:56 pm

IB:

Dude, you got something on your face… Did you eat eggs this morning?

Kevin H August 29, 2011 at 2:05 pm

Destroying wealth can’t create wealth directly, but it could disrupt the equilibrium of the system such that a new, more productive equilibrium is achieved. There is difference between a stock and a flow.

Steve_0 August 29, 2011 at 2:17 pm

Whence cometh the funds to pay for the new equilibrium? Where would they have been spent otherwise? Whatever you answer for question 2 cannot now be done.

rbd August 29, 2011 at 2:44 pm

I smell a MMT’er.

kyle8 August 30, 2011 at 8:20 am

no, anything that destroys wealth makes everyone in the aggregate poorer. If it forces people to act, and those people create something better to replace it, then that is good, but the wealth they used to produce the new item is wealth that could have been used for something else.

Let me put it this way. If a man had to pony up $20,000 for a new car because of an unforeseen accident. Is he better off because now he has a new car even though he cannot afford to pay for his child’s first year of college now?

Darren August 30, 2011 at 6:15 pm

Depends on the college.

PrometheeFeu August 29, 2011 at 2:48 pm

I believe I may have a more competitive offer for Dr. Morici. After breaking down your house, shredding your cloths, smashing your computer, not only will I not clean-up, I offer at no additional charge the installation of a large mine underneath your house. That way, a few minutes after your new and better house is constructed, I can detonate the house allowing you the opportunity to clean-up and rebuild again.

PoliteEdward August 29, 2011 at 3:25 pm

Don Boudreaux:

I especially enjoy your letters where you offer to put their broken window fallacy beliefs to a direct and personal test. What type of responses do you get from the letter recipients? What are some of their explanations about why BigDisasterX is beneficial but SmallPersonalDisasterY is detrimental?

Thanks.

Don Boudreaux August 29, 2011 at 3:39 pm

Thanks.

Alas, mine is an insignificant voice. Although I actually send my open letters (whenever I can find e-mail address) to the addresees, I almost never hear back. Peter Morici is far more well-known than I am; I’m sure that, should he actually read my letter, the insignificance of the the letter writer would immediately persuade him that the letter isn’t worth paying any further attention to.

In short, I’m not important enough to matter to most of the people to whom I address my missives.

Methinks1776 August 29, 2011 at 4:13 pm

I’m sure that, should he actually read my letter, the insignificance of the the letter writer would immediately persuade him that the letter isn’t worth paying any further attention to.

Right. Because it’s not the argument but who is making the argument that’s important. Which, I suspect, is why the Moricis of the world never learn.

Fred August 29, 2011 at 8:42 pm

This is what separates politics from science, and why much of what we know as “science” is in fact politics.

It takes a single experiment to prove a hypothesis to be wrong.
Just one.
For example a hypothesis might be “this substance does not burn.”
Setting it on fire proves the hypothesis to be false.

Unless the scientist is unpopular or unknown. What authority does he have to say this substance can burn? Who does he think he is? And that stuff that’s on fire? It can’t be the substance that is in question because we stated that it cannot be set on fire. The hypothesis cannot be questioned because it came to a vote. We have a consensus. Anyone who sets this substance on fire did not set it on fire because we voted and determined that it cannot be set on fire.

Keynesianism wins.

JS August 29, 2011 at 4:20 pm

I think you’re building a nice reputation for yourself. The open letter method is good. When you’re done, you’ll be the one remembered, not him.

There are two sad things in all this.

1. Half the time you are arguing with economists over simple theory. That’s not good for the economics profession. Because economics leads to political economic policies, the profession has been corrupted, and most likley, will remain so.

2. The fact that public personalities, businessmen, celebrities, and even comedians are given serious media forums to express their views on economics. There’s a difference between being able to post here, like I do, and being asked to opine on prime time TV.

The other day I was watching The O’Reilly Factor and was shocked at Dick Morris’s opinions on money and the gold standard. He was arguing for moneycrankism and O’Reilly was taking him seriously. I couldn’t believe it.

veritasrex August 29, 2011 at 5:19 pm

I’m sorry, but that really ticks me off. As one who champions open, free trade Prof. B, you gladly explain and clarify concepts, to economic morons like me, because, IMO, it’s worth enlightening the average Joe since we’re the ones going to the polls to elect the political class and we can correct our children when they come home from school spouting that kind of nonsense from Prof. Morici. I mean, you obviously can’t reach out to everyone but if you care enough about sound logic and truth, wouldn’t you care enough to defend what you publish? I bet Prof. Morici teaches one of those business classes where they talk about a coporation’s duty to society and their ethical responsibilities.

Fred August 29, 2011 at 8:46 pm

If you can explain something in a way that it can be understood then you’re not an expert and not very smart. Experts make things intimidating and complicated. This proves that they are experts. You can’t understand it because you’re not an expert. They are the experts they prove this by making it too complicated for you to understand. This is how you lead stupid people.

vikingvista August 29, 2011 at 6:24 pm

Yours is a significant voice to a less confused class of people.

kyle8 August 30, 2011 at 8:15 am

That is very sad, but you are very well known in economic circles. I came to your blog because I had read your opinion pieces and had seen your name listed as a reference in books.

What is sad is that a fairly well known free market Economist is not as well known outside of the profession.

PoliteEdward August 30, 2011 at 12:39 pm

Thanks for your reply. Too bad, I would really like to hear their excuses/reasoning. I guess I’ll try to do my own probing and post a question to one of the message boards at reddit.com.

Ian August 29, 2011 at 5:10 pm

Actually.. I think this particular letter is a poor one. Indeed, less-than-ethical business/home owners DO pay people to burn down their dwellings to collect insurance.

ArrowSmith August 29, 2011 at 3:31 pm

Once again another numbnut confusing activity with wealth. Remember the digging hole/filling it analogy? We all learned that from ‘pa on the farm.

Atticus August 29, 2011 at 3:39 pm

I agree with the article because he is talking about the National economy. The broken window parable fits. But in the case of a region, I am not convinced. In MS there was an INFLUX of $30 billion after Katrina. This came from the Federal Government and insurance companies. So while the national economy was certainly worse off, the State of MS enjoyed a boom. I am sure if we go down to the individual level, some were better off, some worse depending upon their insurance level, federal assistance, and personal loss. Am I faulty in my logic?

Bruce August 29, 2011 at 3:43 pm

If the government / insurance companies acquired that 30 billion by harvesting it from one of their many money trees then you are not faulty at all. If, on the other hand, they acquired it from another source (taxpayers, premium payers, the government printing press) then you have to wonder what things were NOT done with that 30 billion.

Atticus August 29, 2011 at 3:50 pm

I know there are no money trees. I am just thinking this through from a regional perspective. MS is a poor state, I suspect that both the Federal Government and the Insurance companies took a hit from the state in terms of net premiums/tax revenue.

Don August 29, 2011 at 4:05 pm

So you’re good with it as a redistibution-of-wealth scheme?

So you’re good with paying for the houses that were damaged along the shores of Long Island? How about the Jersey Shore? Or the Outer Banks? I don’t know about you, but most of the homes in these areas, particularly the ones that got seriously damaged (e.g. right on the coast line) are worth WAY more than my house, yet I’m getting to pay for their flood “insurance” and the FEMA “relief” and the low-interest/no-interest loans to rebuild the damned things in the EXACT SAME PLACE!!!

Set up the pens again! Let’s see how many we can knock down NEXT time!

Atticus August 30, 2011 at 10:08 am

I am not advocating anything friend. I am merely pointing out that while disasters cannot produce economic gain to a National economy, they can to a region. That doesn;t mean it is a viable economic development tool. I agree completely that we are all subsidizing homes built in hish risk areas. I don’t like it anymore than you do. My point was a technical one. MS’s economy was struggling following the 2001 recession. Katrina, more than anything else of the decade, created growth. It’s not something that we wanted or care to repeat. But it is an economic reality.

Kirby August 29, 2011 at 4:20 pm

The money came from the taxpayers.
Look at it this way:
If the fed had simply GIVEN 30b to MS in 2004, then the same amount of money would have changed hands without the need for a catalyst.

ChrisN August 30, 2011 at 12:54 pm

Take all the money, jewelry, cars, clothing, computer, etc from you house and give it to your neighbor. Then borrow ‘his’ computer and then post back here how much better off your neighborhood is.

Dan J August 30, 2011 at 9:37 pm

By that, we could take turns. Every 2 years, one state gets a ‘bonus’ from the federal govt to distribute amongst all those residents. The money would come from the other 49 states and in one hundred years we would end all of societies ills around lack of money.

LowcountryJoe August 29, 2011 at 5:44 pm

Enjoyed the $#!^ out of the money tree imagery.

grinless August 29, 2011 at 3:46 pm

No, you are not.

Trouble is your local stimulus is paid with national money.

Atticus August 29, 2011 at 3:52 pm

Agreed.

txslr August 29, 2011 at 5:31 pm

Like everything else, I think it gets a bit complicated. GDP measures the goods and service produced during a period at market value. So if your house is destroyed and you build a new one, the new house would be included in your GDP, but the destruction of the old one doesn’t show up. That’s part of the reason WWII looks like a boon to the economy. GDP did not include the depreciation in the value of consumer durables that could not be purchased during the war because of rationing.

So the measured GDP of Mississippi may go up for some period because of rebuilding, but if all that is going on is the rebuilding of things that were there before the storm, wealth has not increased pre-storm to post-storm. Indeed, I think that it would decline on a net basis because the replacement will not happen instantly and so benefits derived from assets will be lost, and there will be significant dead-weight losses from fraud and attempts to avoid fraud, among other things.

Of course, if you are a hardcore Keynsian, you would view the storm as an opportunity to dig holes and fill them back in again, resulting in wealth for everyone.

vikingvista August 29, 2011 at 7:23 pm

You said “market value”, but in WW2 goods were not only rationed, but their prices were fixed. A better definition for GDP is simply to refer to the number of dollars used in transactions and realize how that can be disconnected from any useful measure of wealth creation. If the government orders you to sell your house for $1, GDP gets a dollar increment. If the government pays you $1 billion for your nail clippings, GDP increments by $1 billion. Only the free transactions subset of GDP provides any insight to current economic health. And even then, who’s to say individuals don’t find more satisfaction at times by not spending?

True Liberal August 30, 2011 at 10:00 am

GDP is an arbitrary — and often times misleading — means to measure economic activity. It leaves a whole host of economic transactions unseen to myopic macroeconomists and statist shills like Krugman.

For example, new car sales count towards GDP, but resales of used automobiles don’t.

This provides the flimsy intellectual justification for politicians to engage in egregious boondoggles like the cash-for-clunkers program from two years ago.

Herman August 29, 2011 at 9:34 pm

I came here to say this. VT locally may have a boom as money is drawn from national sources and concentrated on it’s rebuilding. It’s not a net gain nationally, but it is locally.

Methinks1776 August 29, 2011 at 10:12 pm

Without a doubt, if I took money out of your pocket and put it into mine, I’d be better off. There’s no mystery there. But, on net, the two of us would not be better off. We’re even worse off if you consider the incentives this kind of activity creates.

Atticus August 30, 2011 at 10:27 am

I agree. The net effect is negative. I suppose The creation of funds which subsidize building in high risk area would be a perverse incentive that flows from this situation.

TMI August 29, 2011 at 3:40 pm

When, and under what conditions, do transfer payments ever increase GDP?
.

Paul August 29, 2011 at 4:56 pm

They lower it I think, if you are talking about overseas subsidiaries.

Ken Royall August 29, 2011 at 4:50 pm

Awesome. I needed a chuckle today.

Andrew_M_Garland August 29, 2011 at 5:03 pm

Future News: Keynesian Bankrobbers Save Local Economy
= = = = =
[excerpt] The biggest bank robbery in Kennebrokeport history has left the people stunned. Criminals stole $12 million dollars in cash and government notes, 12% of the town’s annual economic output.

The robbers offered an interesting bargain. In exchange for a pardon, they will spend all of the cash within the town on restaurant meals and consumer goods, thus stimulating the local economy. Town leaders are hopeful, and some are even pleased.
= = = = =

John Steinmetz August 29, 2011 at 5:31 pm

Don’t you just love those East Coast University Professors? They have lots of theories that just keep being blown away by reality. I thought Prof. Morici was more level headed than he showed with his letter. I’ll stick with Thomas Sowell and the late Milton Friedman (who never wanted to be called Dr.).

txslr August 29, 2011 at 5:48 pm

I just read the entire CNBC article referencing Dr. Morici. Sheesh! What a maroon!

Apparently his argument is that existing assets will be too large, or small, or old, or ugly or something. The destruction of those assets by the storm allows the owners to rebuild better than before (for some reason they couldn’t do that without a storm, but why not is never explained). Then, I suppose we get something like Say’s Law – supply of vacation capacity creates vacationers out of thin air, and everyone is better off.

Perhaps in years when we don’t get any really bad hurricanes we should just pick vacation spots at random and nuke them! We’d all be rich!!

Methinks1776 August 29, 2011 at 6:06 pm

Yes, the more destructive we are and the more government is allowed to spend, the richer we’re all supposed to be. Yet….it never happens. The outcome is quite the opposite Does that not strike More Itchy as odd or reason to examine his premise? Of course not!

Don Boudreaux August 29, 2011 at 6:10 pm

Keynesian notions are immune to both reason and data.

maximus August 29, 2011 at 6:51 pm

Don’t tell them that. They have chalkboards and graphs!!!!

Methinks1776 August 29, 2011 at 7:45 pm

Worse. They have tenure.

tdp August 29, 2011 at 7:07 pm

The broken window fallacy still lives, I see. It should be blindingly obvious to anyone who is not deluded beyond all hope that someone who loses his home to a hurricane and rebuilds it, stimulating the economy with his spending, now has less money left over than if he had not had to rebuild his house. Or, if his house had never been destroyed, he could have spent the money on something else and thus obtained more material wealth and more possessions (or used it for some sort of trip or other experience) with the same amount of spending.

“Society loses the value of objects needlessly destroyed.”

-Frederic Bastiat

muirgeo August 29, 2011 at 7:11 pm

It actually makes more sense than the idea that paying off a trade imbalance by selling off assets makes us wealthier. Of the two goofy ideas Morici’s makes more sense because the production ( productivity ) is done state side creating local jobs and cash flow.

Gandalf August 29, 2011 at 7:50 pm

Most people I know sell assets for cash.

cmprostreet August 30, 2011 at 1:35 am

So destroying our assets is better for us than selling them?

Next time you buy a car, you’ll have a trade imbalance with the dealer (you give him cash, he gives you a good). Maybe he’ll offer to mitigate this by buying one of your assets (your used car). If that happens, call me. I’ll gladly protect you from his greed by destroying your car before he can trick you by paying you for it.

I work at a retailer. I never realized how badly we were impoverishing ourselves by selling our assets. At our next meeting, I’ll advocate burning everything instead. Will it make us rich faster if we say space aliens did it?

Jon Murphy August 29, 2011 at 7:18 pm

Let me know when you are going, Don. I’ll bring some axes and pickaxes. I got some good baseball bats, too. We can have a grand ole time!

Brian August 29, 2011 at 7:57 pm

I wonder if he’s a fan of Jean-Baptiste Emanuel Zorg (Fifth Element)

http://www.youtube.com/watch?v=krcNIWPkNzA

Fred August 29, 2011 at 9:14 pm

I have heard it argued that textile manufacturing jobs left this country because when we bombed the competition during various wars, they rebuilt with more efficient factories that out competed ours.

Methinks1776 August 29, 2011 at 9:49 pm

I’ve heard some people have been aboard spaceships and received anal probes from green aliens. I don’t take them seriously either.

SheetWise August 30, 2011 at 1:43 am

Green. Hah!

kyle8 August 30, 2011 at 8:28 am

Textiles and low price consumer goods left our shores to go to poor nations where they had a comparative advantage. Meanwhile we grew more wealthy.

You should not want those type of jobs in your country because that means you are a poor nation.

Christi Montgomery August 29, 2011 at 9:43 pm

As it pertains to Prof. Morici’s comment, “when government authorities facilitate rebuilding quickly and effectively, the process of economic renewal can leave communities better off than before.” – I would submit this headline…”FEMA almost out of disaster funds” (http://money.cnn.com/2011/08/29/news/economy/fema_funds_hurricane_irene/index.htm?iid=Lead). I’ve never known government to be quick or particularly effective.

Methinks1776 August 29, 2011 at 10:08 pm

Yes, we all saw how well government did rebuilding in post-Katrina New Orleans. The houses were built by private citizens. The maze of paperwork to eventually, hopefully, but probably not ever get government facilitated rebuilding was facilitated by government. Does Morici know that 600 applications churning through government bureaucracy is not “rebuilding”? Of course not! Silly little man.

Ken August 29, 2011 at 10:29 pm

Perzackly. In fact, we can improve the lesson by no longer leaving matters to the vagaries of nature. I propose we carpet-bomb selected neighborhoods with Mk 82 iron bombs. Not only will the capital stock be improved in the long run, work will be created in the short run for emergency responders, health-care providers, undertakers, and defense workers.

Kirby August 30, 2011 at 8:21 am

Also, the jobs that those dead used to have will now be open, allowing new workers to fill the gaps.

Greg Webb August 29, 2011 at 10:30 pm

It appears that Keynesianism still infects the economics department at the University of Maryland.

Ryan Vann August 30, 2011 at 12:02 am

Keynesianism? No. It’s plain stupidity. Sometimes it seems one can’t get into a Ph.D program in the US unless you believe in certifiably insane ideas.

Greg Webb August 30, 2011 at 12:33 am

Stupidity is another name for Keynesianism.

Dan J August 30, 2011 at 12:39 am

Morici is under intense pressures from his university and peers to be less adverse to the prevailing wisdom of Obama admin as he as stated in a radio show before. I wish he would not succumb to those pressures. He has been in opposition to most Obama policies and their negative effects. A natural disaster does stimulate economic activity, just not positive growth or sustained activity. Most money will come from govt and insurance providers.

Ryan Vann August 30, 2011 at 12:01 am

Ex Obama staffer, and heralded economist Austan Goolsbee does not concur with Professor Morici.

http://www.thegatewaypundit.com/2011/08/former-obama-economic-adviser-blames-dc-earthquake-for-failed-obama-economic-record-video/

Jason August 30, 2011 at 12:13 am

If you take the argument at face value, than this letter is spot on. The public investment on new infrastructure in the short term will boost economic growth, but cause long term pain via higher taxes, etc. However, comparing old bridges and interstate highway systems with shirts is not a fair argument; It is tough to argue public goods with personal goods. For example, the interstate highway act was one of the greatest investments in America because it allwoed people to have access to new jobs that were not previously attainable because of the difficulty in traveling to the locations. And our current infrastructure is pretty awful. It would also be nice to know that when I drive across teh George Washington Bridge, I don’t have to fearit will collapse, or get another flat tire from a pot hole on the Bruckner Expressway.

kyle8 August 30, 2011 at 8:37 am

While I agree that some government spending, if done on infrastructure or to facilitate education or research, can be an actual investment there are two big problems.

Problem one is that type of spending is only a very very small fraction of what government does spend money on, most government spending is either transfer payments, defense, or paying for a ever growing regulatory bureaucracy.

The second problem is that even when spending is for infrastructure government is notoriously inefficient, and bureaucratic, also the priorities and location of the spending are not made for economic reasons but for political reasons .

Granted at the time of the building of most of the interstate highway system the government was probably more efficient and less bothersome than it is now. But it has only gotten worse over the years. I shudder to think of what the IHS would cost if built today.

Paul Andrews August 30, 2011 at 1:01 am

Keynesianism:

Destruction of non-productive assets is bad.

Destruction of productive assets is good.

Truly astounding.

Dream House August 30, 2011 at 1:13 am

Unforturnately, libertarians buy into the “broken window” argument day in and day out. If a billionaire decides to tear down a 100 million dollar mansion in order to build a 200 million dollar mansion, libertarians will cheer him on. Libertarians will shout the loudest about the number of jobs created in the process of destroying a perfectly good and opulent mansion to build an egotist’s monument to obscene wealth. Sadly, libertarians are notorious for being hypocrites of the first order. Keynesian stimulus is only stimulus if a private party chooses to do something clearly vain and wasteful. If the government improves the roads, they’ve merely dug a ditch and filled it back in again.

Dan J August 30, 2011 at 1:30 am

Where is the $100 million dollar mansion?

Dream House August 30, 2011 at 7:08 am
Economic Freedom August 30, 2011 at 2:46 am

If a billionaire decides to tear down a 100 million dollar mansion in order to build a 200 million dollar mansion, libertarians will cheer him on.

Really? Name one.

Dream House August 30, 2011 at 7:19 am
muirgeo August 30, 2011 at 7:49 am

Yeah and a hedge fund manager no less. As if he did anything actually productive to earn his billions. The guy added not one cent of wealth to our nation and likely took billions out of the economy that regular people could have been paying people to do something productive.

Libertarians think somehow when the government builds a bridge or invents something like the internet its a waste of dollars but some jack ass hedge manager bilking money from the equity in peoples homes or from 401 K’s must be adding to our productivity.

The only way you can believe such illogical things is to surround yourself with a bunch of re-enforcing like minded “thinking” people…yeah it’s a cult… they all read this one book when they were teenagers and now its their reality.

Methinks1776 August 30, 2011 at 8:18 am

That’s not hypocrisy, that’s a lack of understanding on your part.

If I get utility out of a larger and tackier house, then there is value in tearing down my smaller house and building what I want. If I can build a more efficient office space by tearing down the one I have, then there is value in doing so. In fact, every year I decommission and either destroy or donate computers in favour of faster computers. They are both wealth creating activities – the first increases my personal welfare and the second increases the cash flow from my business.

Simply destroying things for any other reason does not increase wealth.

I’m certain if I were to examine your life, I would find you to be a self-centered, vain little man. You are in no position to judge other people’s tastes and preferences. You are certainly in no position to dictate them. And since government is filled with vain, useless little people slobbering over power, neither are they.

Dream House August 30, 2011 at 11:54 am

From what I’ve seen of your comments, you are the most insulting, hypocritical troll around here. And, your above nasty comment proves my point.

Methinks1776 August 30, 2011 at 12:55 pm

So, you’re saying that I’m correct about you. I thought so.

Don Boudreaux August 30, 2011 at 2:45 pm

As it happens, Methinks is one of very favorite commenters here at the Cafe.

Methinks1776 August 30, 2011 at 8:53 pm

Well, there’s no accountin’ for taste.

That’s very nice of you, Don. Thank you.

kyle8 August 30, 2011 at 8:42 am

It might very well be wasteful, but there is one thing you are forgetting, It is HIS MONEY! not yours, not the governments. So if he wants to waste it then he gets to.

What people like you advocate is stealing other peoples money so that the government can waste it. That is quite different.

SweetLiberty August 30, 2011 at 10:49 am

If you spend your money on an object that you desire (ex. new car), your personal wealth goes up because you freely trade your money for the object in a transaction which you value. Likewise, if a billionaire chooses to increase his value by tearing down the old mansion and rebuilding it with an improved version, then he freely trades his money for an object he desires, improving his wealth. Just because the scale of the transaction is bigger doesn’t alter the underlying principle.

However, when government spends my tax money on something the collective decides is desirable, it’s true that I may indeed find it a useful use of my money (like a repaired road I travel), but more likely I may find it wasteful (like failed public housing, unnecessary wars, Dept of Education, etc.). If I were to add up all the money I’ve spent in my lifetime on things designed to improve my life, I’m made very few bad choices. When I add up all my tax money government spends to “improve” my life, I give them very poor approval ratings.

Liberals don’t seem to fathom the difference between value vs. waste, freedom vs. coercion. However, elect a Republican like Bush, and all of a sudden liberals aren’t so pro-government anymore and begin seeing waste and coercion everywhere. Public choices made by people you disagree with but are forced to go along with decrease your own personal wealth – however incrementally. This is the difference between the billionaire and the hurricane, wealth creation vs. rebuilding from destruction.

MattW August 30, 2011 at 1:39 am

Forgive me for coming to the conversation late; I’m not going to read through 100+ comments. Here’s my take on the stimulative-destruction versus wealth-destruction back and forth:

With a disaster wealth is destroyed, but current year gdp goes up with rebuilding.

If there had been no hurricane, then ACME Construction bldg would be intact, and ACME Constr would have money in the bank, and the bank would not be lending that money. Wealth remains high, spending low.

With the hurricane the bldg is destroyed or needs repairs, and so ACME Constr spends their money repairing, employing people, taking out a loan, and wealth goes down, but employment, spending and current year GDP all go up.

I suppose the natural disaster results in a transfer from those whose wealth was destroyed to those who are employed in rebuilding.

Dan J August 30, 2011 at 1:47 am

And, the middle class man loses his belongings and must spend future earnings and/or savings for accommodations or replacements. So he loses, too.

Simon August 30, 2011 at 3:48 am

Last time I looked, GDP was only a means for measurement of economic strength, not an end itself. Atrificial boosting of “current year GDP” does not create any real economic strength, nor does it contibute to well being of people. It´s just playing with numbers.

Ryan Vann August 30, 2011 at 10:50 am

“With a disaster wealth is destroyed, but current year gdp goes up with rebuilding.”

No, just no. It is entirely possible that a disaster (real ones, not the Irene media sensationalism) displaces business, sometimes for months, which no amount of building can make up for in a year. Case in point, New Orleans. Even the GDP (which is the most overused metric in Economics) increase assumption is wrong.

Dan J August 30, 2011 at 1:44 am

Found it…..http://www.sfgate.com/cgi-bin/blogs/ontheblock/detail?entry_id=86119

Now, let’s see….. Private wealth dispatching millions of dollars worth of property to rebuild for a property valued at $200million or actually took $200 million to tear down the old and rebuild the new? There is a stark difference between private money and actual dollars spent as opposed to valuations.
Would love to read about a property (structure) valued at such high dollars, intentionally razed and then double the amount spent for a newer structure.
Vegas casinos is closest that comes to mind, but the razed structures had lost their values and allure. And, it is private capital invested as opposed to govt funding (taken from taxpayers across the land) or insurance dollars (which few companies are funded well enuf to cover all expenditures and subsequently have rates raised for all policies, including those outside of the affected areas) or govt takeover where insurance falls short.

Simon August 30, 2011 at 2:46 am

Don, I do not doubt that Prof. Morici will accept your offer, so I offer you a helping hand! I will be obliged to make him richer and moreover, by flying all the way from central Europe, I will stimulate both the European and American economy much more, than by doing anything productive with the time and money required…

Gil August 30, 2011 at 4:20 am

If wealth isn’t destroyed then how is there going to be new wealth? Historically, whole societies had been rather static and generations did what the generations did before them. Likewise, one big factor for the movitation for wealth creation is that after people grow old they then die. People tend to get risk- and change-averse as they grow older. So death in a sense is another Keynesian stimulus.

Simon August 30, 2011 at 4:54 am

New buildings and wealth can be created without destructing the old ones. In my city, there are some buildings more than a milenium old and they still do contribute to the wealth of my nation. Let the owner decide, whether or when to destroy his own property (and replace it by sthg. new), for when the alternatives of ownig or selling it will by more beneficial for him, he will do so – if not, he will probably spend on sthg. else and keep the old property too.

vidyohs August 30, 2011 at 6:04 am

You’re smoking funny stuff and using your keyboard again, Gil. Nothing good ever comes of that.

kyle8 August 30, 2011 at 8:47 am

your last sentence is true to some extent. Keyensianism is somewhat akin to death as it is a total loss, in the one case to life, and in the other case a complete loss of sanity.

But after all as Keynes said, in the long run we are all dead.

Babinich August 30, 2011 at 6:09 am

“If wealth isn’t destroyed then how is there going to be new wealth?”

It’s the manner that it’s destroyed.

Ken August 30, 2011 at 9:05 am

I knew I had undergone a sea change in my thinking this past spring, when watching episodes the old propaganda series “Victory at Sea” over breakfast. My most recurring thought was, “Look at all that hard work and productive capacity being turned to rubble.”

Nick August 30, 2011 at 9:06 am

Now I get it. Hurricane Irene was a Democratic Stimulus program.

Dr. Z August 30, 2011 at 2:59 pm

Well, the Obamassiah did tell us that he could lower the seas so maybe…. ;-)

Joey Donuts August 30, 2011 at 9:08 am

I love the letter. Ridicule, especially of those who should know better, always has better effects than argument. That said, I would have made a different proposition to Morici. As a business professor, he must have thought about the business proposition of selling tickets to the destruction of his house. After reading the comments here, I think a number of people (perhaps a large number) would pay to participate in the destruction of his home and car. He could become even better off by the proceeds of the ticket sale.

Many of the commenters have neglected to subtract from the losses (add to the gains?) of Irene’s destruction, the value of the entertainment provided to countless millions who watched as houses floated away. Furthermore, most of the commenters failed to recognize the value of schadenfreude. Perhaps the entertainment value exceeds the value of the property lost and thus no real loss occurred.

Of course if the entertainment value does exceed the loss, we would see people auctioning off the right to destroy their homes rather than abandoning them in the face of foreclosure. I think professor Morici has missed a great business opportunity. He should immediately go to the banks that still have huge amounts of properties and suggest that they destroy them all and sell the rights to the filming of the destruction. Housing and financial crisis solved in one stroke.

The fact that Morici holds the beliefs he has and he hasn’t made such a proposal to the banks doesn’t speak well of his business acumen either.

Dan J August 30, 2011 at 9:26 pm

Well, the media certainly benefitted from Irene. I am confident that viewership had increased dramatically for at least one week. And, the tv stations would have been wise to add a few extra 30sec. Spots to each hour for more revenue. So, a natural disaster is likely to generate wealth for one industry, without any losses.

Dr. Z August 30, 2011 at 9:20 am

Don,

I would like to offer my services as a sub contractor. I would be happy to assist you in the house’s destruction and I would be very happy to bring my children to assist. My children, especially my youngest, is extremely talented at destroying things. With our help, you will certainly achieve success.

Don Boudreaux August 30, 2011 at 9:23 am

Should Prof. Morici accept my offer, I will be delighted to subcontract the job to you and your young’uns!

Dan J August 30, 2011 at 9:29 pm

Peter Morici has a guest spot on Brian Kilmeade radio show. May I suggest checking once in a while the Facebook page of said radio and one of the commentators here email or send in a question n that day pertaining to his CNBC article. I not have access to a computer during those hours. Just a note and chance for someone to put the question forth.

Mohit August 30, 2011 at 9:30 am

Par excellence!

Gil August 30, 2011 at 10:49 am

The 2nd Law of Thermodynamics ensures wealth destruction and creation.

Ryan Vann August 30, 2011 at 10:54 am

Ok Georgescu-Roegen.

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