Perhaps the Queen Should Knight the U.K. Rioters

by Don Boudreaux on August 20, 2011

in Myths and Fallacies, Seen and Unseen, State of Macro

Here’s a letter to the New York Times:

Katharine Seelye reports that “The weather this year has not only been lousy, it has been as destructive in terms of economic loss as any on record” (“Year Packed With Weather Disasters Has Brought Economic Toll to Match,” August 20).  She’s correct.

But undoubtedly your columnist Paul Krugman disagrees with Ms. Seelye’s conclusion that destruction causes economic loss.

For example, on September 14, 2001, Mr. Krugman wrote in your pages that the 9/11 attacks would prove “favorable” for the economy by generating “at least some increase in business spending” and by forcing government to spend more on rebuilding.  (Here he sung the economic praises of destruction when America’s unemployment rate was only 5.0 percent.)  And just last week Mr. Krugman proclaimed that “this slump would be over in 18 months” if governments were forced to use resources to protect earth from invading space aliens.

Your Nobel laureate economist/columnist believes that destruction and the threat of destruction are economic boons.  And he dismisses as economically illiterate those of us (including, presumably, your reporter Ms. Seelye) who deny that floods, fires, terrorism, war, and other destroyers of resources promote economic growth and bestow the blessings of prosperity.

Donald J. Boudreaux

(HT to John Shonder for pointing me to Seelye’s report in the Gray Lady)

The speck of truth that makes Keynesian economics appealing to many people – a truth that no serious pre-Keynesian economist denied and that no serious non-Keynesian economist denies today – is, in the hands of Keynesians, transformed into a gargantuan blob that fills all Keynesian thought, crushes all other considerations, and, hence, renders Keynesianism a ludicrous monstrosity.

On this general point, see this superb post by Mark Perry at Carpe Diem.

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SB7 August 20, 2011 at 10:00 am

What is this speck you refer to it?

(Not a sarcastic question.)

Don Boudreaux August 20, 2011 at 10:09 am

The speck is simply the realization that if enough people reduce their spending on consumer goods and services, it is *possible* for total spending (“aggregate demand”) to spiral downward and to remain down for an indefinite period of time, with one result being extended unemployment.

Of course such a thing is possible; almost anything is possible. The question is: how likely is such a event in reality? What must we assume about reality to make concern with such an event one that we ought to take seriously?

It’s child’s play to develop a model in which there is an equilibrium with unemployment. And such models appeal to the man-in-the-street focus on demand – the man-in-the-street extrapolation from the correct realization that if demand for HIS services should shrink he will suffer to the incorrect conclusion that, therefore, the great economic problem facing economies as a whole is deficient demand.

Dan J August 20, 2011 at 11:36 am

Wasn’t this the FDR reasoning? Insufficient demand? Which led to price controls and wage controls and the rationing, unemployment that followed?

Harold Cockerill August 21, 2011 at 9:22 am

It was Hoover’s reasoning first and FDR actually ran against the policies of Hoover. Once you’re allowed to “do something” doing nothing is no longer politically possible.

vidyohs August 20, 2011 at 10:20 am

Hmmm, my neighbor decides not to buy that new freezer he has been talking to me about. So, I am encouraged to put off buying the new washer and dryer I have been saving and planning for?

Knowing both me and my neighbor, my good friend is encouraged not to trade in his 5 year old auto on a new model.

And, the next thing we know economic activity in the Houston area grinds to a stand still because of my neighbor?

I don’t think so.

SweetLiberty August 20, 2011 at 10:43 am

I admit to not really understanding “aggregate demand” very well. It seems to me, if a great many people stopped consuming, they would be saving and investing their money instead. Increased savings would then drive down interest rates for consumers and businesses who wish to borrow as well as increase the purchasing power of companies who receive the investing, allowing these businesses to increase their production and offer more goods at a reduced price due to economies of scale which creates incentives for those who stopped spending to re-enter the marketplace.

This seems almost a teeter-totter effect: if people stop consuming in order to save and invest instead, the incentives to consume expand; but if people spend more money on consumption, interest rates rise and expansion loans are harder to come by, raising the cost of doing business and therefore the price of consumption.

While I recognize that there are myriad other factors which come into play, where am I off in my general understanding? Why fear a decline in aggregate demand (spending) if that means an increase in aggregate savings (production)?

ArrowSmith August 20, 2011 at 1:47 pm

Apparently an increase in aggregate saving is detrimental to our consumer-based economy and millions of retail jobs would be lost. This does make sense. My contention is why have to re-orient our society to a more industrial/infrastructure based one.

vikingvista August 20, 2011 at 11:04 pm

Not lost, but moved to where all the saved money is being invested.

PrometheeFeu August 21, 2011 at 2:38 pm

Well, it is technically possible for people to hold cash.

Bret August 20, 2011 at 11:02 am

Regarding Mark Perry’s post, humans are not infinite entities and therefore cannot have “unlimited wants”. While that paradigm has worked thus far, it may no longer continue to apply at some point.

Ron H August 20, 2011 at 1:29 pm

I believe “unlimited wants” in this context refers to the idea that we all want more than we have. No one is exempt, as it is apparently human nature to want more. On that basis, there will always be others willing to satisfy those wants, as a means of satisfying their own wants, so there can never be a time when there’s nothing that needs doing.

Krishnan August 20, 2011 at 9:44 pm

Ah yes. Bill Gates predicted that no one will need more than 640 K RAM (Kilo – not Mega or Giga). Now that we have iPads and iPods no one will need anything else. Now that we have all the medicines we will ever need, no need to make/discover any more. Now that we can fly in airplanes at almost the speed of sound, we can stop researching propulsion technologies – who would want to travel faster than sound?

So, yea, time to have a Moratorium on Brains – stop all development. Humans will not need anything else – they have everything they need OR will ever need.

SaulOhio August 20, 2011 at 11:05 am

Imagine how destructive an actual alien invasion would be. Oh wait, we don’t have to. Its been imagined for us. Cities left in rubble and a tiny fraction of the human race left to dig out and rebuild. And that’s a best-case scenario assuming the unlikely event that we actually win.

Dan Hill August 20, 2011 at 12:35 pm

yes, but imagine the jobs created in reconstruction!

Invisible Backhand August 20, 2011 at 11:14 am

Do read the link to the Sept 14, 2001 article. It’s prophetic about how the Bush admin would deal with the attacks.

“After the attacks, I found myself wondering whether some politicians would try to exploit the horror to push their usual partisan agendas. Then I chided myself for such an uncharitable thought. But it seems you can’t be too cynical; sure enough, the push is already on to sell tax breaks for corporations and a cut in the capital gains tax as a response to terrorism.

One hopes that the White House will distance itself from this disgraceful opportunism, that it will deliver the bipartisanship it originally promised. But initial indications are not good: the administration developed its request for emergency funding in consultation with Congressional Republicans — full stop. A Democratic contact says that his party received “no consultation, no collaboration, virtually no information.”

I didn’t want to mention this, but now is the time to draw the line. This tragedy will only be magnified if it is exploited for political gain. Politicians who wrap themselves in the flag while relentlessly pursuing their usual partisan agenda are not true patriots, and history will not forgive them.”

John S/ August 20, 2011 at 12:56 pm

Well, yes! Good thing the Obama administration — with political motives diametrically opposed to the evil Bushies — distance itself from this disgraceful opportunism and repealed all that legislation on day one.

Oh, wait …

Invisible Backhand August 20, 2011 at 1:07 pm

He traded an extension of the Bush tax cuts for an extension of unemployment benefits. I’m sure he’s sorry he’s not fixing all the damage caused by the Bush administration to your satisfaction fast enough for you though.

Dan J August 20, 2011 at 5:10 pm

It’s hard to get Marxism implemented.

Invisible Backhand August 20, 2011 at 11:32 am

“But the stimulus failed! Well, I told you in advance — based on the same model — that it was much too small. So that’s not evidence against fancy theories.

The truth is that recent events have been a stunning confirmation of the usefulness of hard thinking in general, and the Keynes-Hicks model in particular. And the WSJ has been wrong every step of the way.

So now they’re tuning to anti-intellectualism. Well, of course they are; it’s all they have left.”

John S. August 20, 2011 at 1:03 pm

Krugmanian logic: Beating one dead horse didn’t work. Let’s hitch up an entire team of dead horses and flog them good and hard this time!

Invisible Backhand August 20, 2011 at 2:24 pm

I notice a tendency towards simplistic absolutes in your thinking. How would you compare Boudreaux’s criticism of destruction to Schumpeter’s notion of creative destruction?

vidyohs August 20, 2011 at 5:20 pm

Go ahead dipstick, tell John S. why beating a team of dead horses will be effective where beating one dead horse wasn’t. Don’t run from his pure logic, defeat it with better logic.

But, yes I know I am talking to a looney lefty about having better logic on his side. Bwa ha ha ha ha ha ha ha! Fat F’ing chance a looney will have better logic.

Invisible Backhand August 20, 2011 at 5:59 pm

Are you 12?

vidyohs August 20, 2011 at 6:24 pm

Go ahead dipstick, tell John S. why beating a team of dead horses will be effective where beating one dead horse was not.
You’re a looney leftie with the imagined intellectual superiority, should be a piece of cake for you.

Bwa Ha ha ha ha ha!

Hide behind your bullshit, looney.

John S. August 20, 2011 at 6:10 pm

Are you looking for an essay? My consulting fees is $250 per hour, but I really think you should write your own homework.

Fred August 20, 2011 at 3:07 pm

Gotta love the Irrefutable Hypotheses.
Heads I win, tails you lose.
Premise: stimulus helps the economy.
If the economy improves credit goes to the stimulus, and if not then the stimulus wasn’t big enough.
The premise cannot be refuted.
Premise: human activity is causing the climate to change.
If world temperatures rise it is due to greenhouse gasses, and if not it is because of greenhouse gasses.
The premise cannot be refuted.

That, my friends, is not science. It is pseudoscience.

Invisible Backhand August 20, 2011 at 3:29 pm

Not everything is binary, and he calculated how big it should be with real numbers. He said (beforehand) it was less than half the size needed, and then they turned over half of the direct stimulus into tax cuts instead. All this is public record, should you care to learn what you are talking about some day.

Greg Webb August 20, 2011 at 4:25 pm

If they knew that the stimulus would not work at half the size, why did they push insist on passing it anyway? And, at that time, the progressives had the votes so why did they whittle it down to half the size?

Invisible Backhand August 20, 2011 at 6:06 pm

Krugman knew, not “they”. The progressives did not have the votes. Seriously, you have to do a little of your own research. Try the google news.

Greg Webb August 20, 2011 at 8:13 pm

Invisible B, you did not answer the question. Apparently, you don’t want to discuss the answer because it does not support you or Paul Krugman. But, et me answer it for you. The stimulus cannot be proven to work at any level. That’s why progressives cannot agree on how much is necessary. They simply don’t know and pretend at knowledge just like you do.

BTW, apparently your google app is not working properly or you would have discovered that he progressives did have the votes to pass as big a porkulus as they wanted. But apparently, even progressives get embarrassed when the thievery exceeds comprehension.

Fred August 20, 2011 at 4:28 pm

In science a hypothesis can be refuted. You propose an idea, come up with an experiment to test it, and let ‘er rip. If it fails then you come up with a new hypothesis.

In pseudoscience you come up with an irrefutable hypothesis. When it is tested it explains both success and failure. This way you do not need any new ideas, because yours is irrefutable.

Kinda like creationism or conspiracy theories. Absolutely nothing can prove the idea to be wrong. Nothing.

In that respect I liken Keynesianism to religion, for its followers require no evidence. They don’t need evidence. They have faith.

Invisible Backhand August 20, 2011 at 4:46 pm

Not everything is binary, and he calculated how big it should be with real numbers. He said (beforehand) it was less than half the size needed, and then they turned over half of the direct stimulus into tax cuts instead. All this is public record, should you care to learn what you are talking about some day.

Fred August 21, 2011 at 4:19 pm

I’ve still to figure out how removing money from the economy, taking some off the top to pay federal employees, then returning that reduced money to the economy based upon political considerations, provides anything stimulative.

It just defies common sense.

vidyohs August 20, 2011 at 5:23 pm

Not everything is binary, dipstick, but it certainly seems:

Stimulus good
Stimulus bad

is binary. And so far stimulus has been badddddddddd for the people.

Invisible Backhand August 20, 2011 at 6:09 pm

It’s like I’m talking to a cave man.

vidyohs August 20, 2011 at 6:26 pm

Oh yeah, looney, definitely intellectually inferior to you for sure. Bwa ha ha ha ha ha!

You and your kind want desperately to cement a social system that has nothing but a 100% track record of devastating failure and you want to call me a caveman.

Bwa ha ha ha ha!

Greg Webb August 20, 2011 at 8:15 pm

Socialism fails every time it is tried, and it is the pretense of knowledge that keeps “applause”-seeking politicians selling these idiotic ideas.

James N August 20, 2011 at 4:16 pm

Fred, for the most part I agree with your analysis, except that my position on Krugman is slightly different. I argue that Krugman knew all too well that regardless of the size, the stimulus would fail. Therefore, no matter what the government did, Krugman would have argued it should have been bigger. The fact that he used “real” numbers is irrelevant, because he knew they’d never do what he suggested and therefore, his reputation was safe.

Ironically, Krugman stood with the Austrians on this issue, albeit for different reasons. The Austrians knew it would fail, because it made no sense. Krugman knows this, but would never have given any credence to the other side, hence his ridiculous contention that “it wasn’t big enough”.

Fred August 20, 2011 at 4:33 pm

Krugman is not an economist anymore. He’s a Democrat shill.

jb August 21, 2011 at 8:03 am

Three things about Krugman’s model

1) Yes, I do agree that he said the stimulus would be too small, and sure enough we are struggling. It does not necessarily follow that his model is correct.

2) Krugman’s stimulus model is impossible to disprove. Which means it’s not scientific, it’s just blathering.

3) If the amount of stimulus required is politically impossible to achieve, then it’s not a useful theory. It’s like me saying ‘all we need to do to end this recession is build that replicator thing from Star Trek.’ It may be technically true, but it’s not possible.

Bonus thing:
4) That Creative Destruction vs. regular Destruction thing sure does sound like a homework assignment.

Jo August 20, 2011 at 11:51 am

Small but important point: there were no UK riots, only English riots .

Greg Webb August 20, 2011 at 11:54 am

Excellent letter, Don. It correctly points out the despicable and disingenuous behavior of Mr. Paul Krugman, a former economist currently employed to write a column as a big-government ideologue and advocate.

muirgeo August 20, 2011 at 12:19 pm

While it may be true that destruction does decrease our net wealth its completly concievable the stimulus effect of rebuilding filters idle dollars back into the economy stimulating jobs and growth.

Likewise, public building and creation of things like Hoover Dam, an improved electric grid and things like renewed infrastructure likely adds much more wealth, jobs and true growth then allowing a bunch of financial paper-pushing speculating non productive idle Wall Street Jackasses to keep so much money of which they didn’t truly earn.

Greg Webb August 20, 2011 at 3:04 pm

George, you said, “While it may be true that destruction does decrease our net wealth its completly concievable the stimulus effect of rebuilding filters idle dollars back into the economy stimulating jobs and growth.” You defend ideology against reality. You cannot create a wealthy society by destroying it. That’s the same sort of stupidity as “we destroyed the village in order to save it.” This viewpoint is despicable and disingenuous.

You also said, “Likewise, public building and creation of things like Hoover Dam, an improved electric grid and things like renewed infrastructure likely adds much more wealth, jobs and true growth then allowing a bunch of financial paper-pushing speculating non productive idle Wall Street Jackasses to keep so much money of which they didn’t truly earn.” Then, why do big-government advocates such as yourself keep advocating that taxpayers bail them out when their poor business plans cause the investment banks to be on the verge of failing. Wouldn’t it be better just to let them fail?

dsylexic August 20, 2011 at 3:32 pm

idle dollars? are you crazy- nobody stuffs the money under their mattress. your friend the fed makes it seem so however, by making returns close to 0% .
and what about opportunity costs? if bankers and lawyers and house construction workers got laid off how does it help if an electric grid (or defense cos) are built. one needs electrical engineers or some other engineers for that. the unemployed lawyers and construction workers arent going to be absorbed here..that is why your guru keynes says it is not about any asset creation at all .it is about mere ditch digging… anyone could do that

muirgeo August 20, 2011 at 6:17 pm

Yeah they do stuff money under mattresses. The corporations are sitting on trillions of dollars or hiding them off shore because there are no investment opportunities here because demand has dried up with wages and unemployment.

ArrowSmith August 20, 2011 at 1:39 pm

Krugman doesn’t understand net wealth creation. He thinks if you smash stuff and rebuild it, that is wealth. No, it’s just activity. Keynesians confuse activity with wealth creation.

Invisible Backhand August 20, 2011 at 2:25 pm

The stuff was smashed already. Note the date.

Sam Grove August 20, 2011 at 2:36 pm

Yes, but to laud the smash for the following reconstruction activity is dumb.

Our goal is to keep moving forward, not to get to where we were before, but to a greater level.

ArrowSmith August 20, 2011 at 4:58 pm

Keynesians can’t be bothered with reality. Activity is their god.

Invisible Backhand August 20, 2011 at 6:13 pm

We worship Satan actually.

Greg Webb August 20, 2011 at 8:17 pm

No. Keynesians worship themselves as gods because only they have secret knowledge about how to make an economy work.

SMV August 21, 2011 at 9:20 am

The goal to politicians who advocate Keynesian policy is not wealth creation. It is redistribution and increasing political power. It moves money from the wealthy and the savers through the politicians and transfers it to the unemployed and indebted.

Political alchemy turns wealth destruction into power.

jorod August 20, 2011 at 2:39 pm

Well, you know, Muirgeo, starvation was an accepted economic policy in Stalin’s Russia and Mao’s China.

muirgeo August 20, 2011 at 11:43 pm

Yeah because that’s what I am advocating, Stalins Russia or Mao’s…GTHYBDDASOB!

brotio August 21, 2011 at 1:23 am

It was also an accepted economic policy in Franklin Roosevelt’s America.

Don’t forget that, in order to prop up pork prices, Yasafi’s beloved St Franklin of Roosevelt ordered the slaughter and destruction of hundreds of thousands of hogs, rather than allow starving people to eat.

St Franklin was a Righteous Ruler who (like his Uncle Joe Stalin) understood that a few eggs had to be broken to make an omelet.

SweetLiberty August 20, 2011 at 4:29 pm

My problem with Invisible Backhand’s defense of Krugman (and thereby Keynes) – is that by pointing to one Keynesian (Krugman), he fails to acknowledge that those Keynesians in power who actually got the stimuli passed at amounts their calculations determined necessary to turn the economy around were obviously wrong.

So one group of Keynesians has already proved incompetent, now he wants to double down on a group which suggests even higher stakes. The analogy that comes to mind is, upon watching one guy jump off the roof of a two-story building insisting he can fly but failing miserably, those like IB want to follow another man who insists the building needs to be four-stories or higher before jumping.

That, to me, is just too big a leap of faith.

ArrowSmith August 20, 2011 at 4:59 pm

Hell Krugman wants to triple-down on record-shattering levels of debt. I think he’s gone insane.

SweetLiberty August 20, 2011 at 5:09 pm

Nah. Insane would be wishing for aliens to come and start an inter-galactic war thereby putting most everyone to work for the Department of Defense in order to build an enormous war machine which can blow things up that the aliens happen to miss so that we can rebuild it again – and all this in the name of fixing the economy. Now that would just be plain crazy!

BTW, Krugman – a liberal – seems very willing to pump up the Defense Dept. to outrageous levels for his economy-saving war, yet aren’t liberals the ones who criticize conservatives for being hawkish and dedicating too many resources to military endeavors? I’d appreciate anyone who could untangle that logic knot for me – I really don’t get it.

Richard Stands August 20, 2011 at 11:10 pm

War is only good if it’s your war, for your purposes.

Henri Hein August 20, 2011 at 5:03 pm

My thoughts exactly. I would go a step further by asking the question, is there anything else in economics that works like this? If something has no effect, or a negative effect, applying more of it suddenly turns the effect not just positive, but with a whopping multiplier? I find this Keynesian claim extremely doubtful.

SweetLiberty August 20, 2011 at 5:16 pm

Well, to be fair, I think businesses work that way to some extent. Businesses which have insufficient capital often fail, whereas if the business has the necessary starting capital, it can be successful and grow. So I can’t completely dismiss Krugman’s calculations without first testing them, but again that’s one hell of a leap of faith.

And what if there is a Keynesian out there who thinks Krugman’s calculations are too low? Should we use his or her numbers? Must we search out the Keynesian who suggests the highest number in order to truly prove the theory false? I just don’t see an end to that argument that makes any sense.

Henri Hein August 21, 2011 at 2:31 pm

Businesses don’t work in that way. In business, if you don’t get any customers, you lose all your initial investment; if you get a few customers, you lost most of you investment, etc. I only see a smooth curve.

Sure, there may be an elbow in the curve if you reach an economy of scale or a virtous customer cycle. I would expect knees and elbows; a totally smooth curve would also make me suspicious. Krugman is not insinuating a regular run-of-the-mill old elbow. Reading him, it is as if there is going be a 90-degree elbow in the return curve of a stimulus. Such bends do not occur in graphs depicting real-world social relations.

John S. August 20, 2011 at 5:41 pm

Let’s not forget the brilliant economists (Keynesians all, I presume) who made this prediction.

I wish people would print this chart on placards and follow Obama around to every one of his campaign stops.

Krishnan August 20, 2011 at 10:14 pm

It was brilliant – just ask Obama.

The reason the plan did not work was

a) weather
b) earthquakes in Japan
c) Republicans did not vote for the plan
d) George Bush is still alive
e) Dick Cheney is still alive
f) George H.W. Bush is still alive
g) It should have been 50 trillion

if only Republicans had paid homage to Obama everyday, stopped criticizing him, it would have worked. It is all someone else’s fault.

There was a recovery summer – there was no depression, so there was a recovery. The unemployment rate is not 9.2% – it is a lie being spread by Republicans in the Department of Labor (or whoever publishes those numbers).

SweetLiberty August 20, 2011 at 6:17 pm

“…who made this prediction.”

But there answer is: just imagine how much worse things would be now if government and the Fed hadn’t stepped in!

SweetLiberty August 20, 2011 at 6:18 pm

er, make that “their answer”

Paulo August 20, 2011 at 7:46 pm

According to taxpayer-funded research, Aliens may “destroy humanity to protect other civilizations”. No kidding, it’s science….

Now, this has got to be a dream come true for Mr. Kurgman as he now has scientific justification not only to save humanity from alien invasion but also to stimulate the economy.

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