Krugman, Keynes, and war

by Russ Roberts on October 31, 2011

in Stimulus

Krugman writes:

First things first: Military spending does create jobs when the economy is depressed. Indeed, much of the evidence that Keynesian economics works comes from tracking the effects of past military buildups. Some liberals dislike this conclusion, but economics isn’t a morality play: spending on things you don’t like is still spending, and more spending would create more jobs.

Interesting that Valerie Ramey’s work that concentrates on military build-ups (because they are reliably exogenous) often finds a multiplier that is less than one, meaning that government spending crowds out private spending rather than spurring it on. Barro and Redlick’s work is similar. Where is the evidence that military spending stimulates the private sector? What does Krugman have in mind?

As the Hayek character in The Fight of the Century says in response to the claim that WWII ended the Great Depression:

Wow. One data point and you’re jumping for joy
The last time I checked, wars only destroy
There was no multiplier, consumption just shrank
As we used scarce resources for every new tank

Pretty perverse to call that prosperity
Rationed meat, rationed butter… a life of austerity
When that war spending ended your friends cried disaster
Yet the economy thrived and grew faster

 

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{ 236 comments }

dsylexic October 31, 2011 at 11:55 am

assassinating krugman’s idiotic posts provide jobs to austerians ;-) . stimulative with multiplier of 50

Dan S October 31, 2011 at 11:59 am

Even if Krugman were right (he’s not), always beware of the guy selling ‘the end justifies the means’ argument.

Bill October 31, 2011 at 12:33 pm

If the end doesn’t justify the means, then what does?

Anotherphil October 31, 2011 at 1:17 pm

If the end doesn’t justify the means, then what does?

Propriety.

Sam Grove November 1, 2011 at 1:36 pm

The means produces the ends.

Price B October 31, 2011 at 3:23 pm

(Loosely quoting Friedman)

“The real end is to reach the end using acceptable means”
-Capitalism and Freedom

SaulOhio October 31, 2011 at 7:06 pm

If you use means that need justifying, they usually don’t achieve the stated ends. Holocausts do not create utopias, and expropriation does not bring economic justice, and war does not bring prosperity.

Mattheus von Guttenberg November 1, 2011 at 12:50 pm

The means justify the ends.

dsylexic October 31, 2011 at 12:01 pm

america should start a 50 state war.fight to death.blue vs reds.libertarians can keep score.

vidyohs October 31, 2011 at 12:10 pm

Good idea! Very good idea!

It is logical. If the USA needs a war, and warring against other nations is generally thought of as a no-no (or should be), why not declare a true war between the states, like a cage battle in professional wrestling.

Last state standing gets the nation. God how rich we will all be by then!

Montani Semper Liberi October 31, 2011 at 12:53 pm

Actually, a war with ourselves is even better for the economy than a war with another country. If we fought the Chinese, we would be destroying Chinese infrastructure, and killing Chinese people. They would then have to spend money rebuilding that infrastructure, and finding people to take the jobs of those who were killed. Sounds like a big win for China. If we still to blowing up our own stuff and killing each other, then WE get to spend on rebuilding infrastructure and we solve our unemployment problem by killing 10% of the working age population.

LowcountryJoe November 1, 2011 at 1:10 am

Yes, absolutely! With the net multiplier being less than one the economy would take off. And killing 10% of the population should really provide a boost to that aggregate demand, shouldn’t it?

Roland November 1, 2011 at 11:30 pm

Absolutely! Remember in the movie Catch-22 when the Army Air Force bombed their own base because the supply officer signed a contract with the Germans? After all, the Germans were going to bomb the base anyway, and the AAF could do it cheaper. Everybody wins. We should have the USAF bomb the Pentagon. It’s the untimate broken-windows argument.

Ken November 2, 2011 at 3:44 pm

Yep. A Serbian allegedly told some columnist much the same joke during Bill and Madeline’s Excellent Adventure. “I heard it cost $12 billion or some such to bomb Belgrade. We’d have done it ourselves for half that — all you had to do was ask.”

brad November 1, 2011 at 2:21 pm

RollerBall

Angry Birdetarian October 31, 2011 at 1:06 pm

I know a lot of libertarians that would like to participate. We’d let Red vs Blue calm down, then sweep in and decimate our wounded opponent. Ron Paulqaeda anyone?

Anotherphil October 31, 2011 at 1:19 pm

Cats don’t hunt in packs, they are innately antisocial.

Angry Birdetarian October 31, 2011 at 1:47 pm

Herding libertarians doesn’t end well either.

Anotherphil October 31, 2011 at 2:11 pm

That was my point, sorry it wasn’t clear.

And let me add, fantasizing about acquiring political power by being so small and inconsequential in the political ecology that one can thrive only after larger entities engage in a mutually catastrophic conflict ignores the fact that the major parties are really a duopoly engaged in tacit mutual survival pact or even market sharing, not a war and something of an admission of impotence and insignificance.

Sam Grove October 31, 2011 at 2:16 pm

Do libertarians fantasize about acquiring political power?

Count me out.

vidyohs October 31, 2011 at 2:08 pm

Think Pride.

Depends on the cats.

Anotherphil October 31, 2011 at 2:17 pm

The statist cats are the lions, in the sense that unlike the rest of the political cats, they are social and hierchical. They also love to support a showey maned alpha male that lives off the rest of the pride.

When there is a change, the replacement might be younger and stonger, but will be another alpha male.

The cubs, not being the sire of the new king are in real danger and the lionesses still do the work and serve as an outlet for a king’s carnal pleasures.

The lion is the king of the jungle because he lives off the labor of others, despite the fact that tigers are bigger, stronger and antisocial.

brotio October 31, 2011 at 10:49 pm

I watched a program on lions a few years ago that was very interesting. The program pointed out that lions do have at least one (very important) duty: Defense of the pride.

Over several days, a pack of hyenas had been attacking the pride while the lion was away, and several lionesses and cubs had been killed because they were no match against that many hyenas. However, one lion was more than a match. The lion waded into the middle of that pack, and within minutes there were a bunch of dead hyenas, and the fight was over.

It was a very interesting program. :)

Patracolous October 31, 2011 at 1:42 pm

Please, DO NOT give the government any ideas. They tend to have a hard time with sarcasm.

cmprostreet October 31, 2011 at 3:08 pm

Don’t forget- Krugman would say that in an ordinary recession, we want to convince everyone there will be a civil war but then not actually have one, but in a liquidity trap we want the war to actually occur (and to cause as much damage as possible).

This is because (per Krugman) in a liquidity trap, the broken window fallacy no longer holds- breaking things is actually good for the economy. Since we can always force ourselves into a liquidity trap, the path to prosperity is to purposely create a liquidity trap, and then destroy things.

LowcountryJoe November 1, 2011 at 1:13 am

No need for war. Just introduce real tax competition through decentralization and watch the political economy shake out something better.

Mark T October 31, 2011 at 12:05 pm

Seymour Melman (1917 – 2004) spent his career arguing that the US’s level of military spending harmed the economy because it was surplus to what was needed and thus wasteful, inflationary and laeding to mal investment. I was fortunate to be exposed to his views. How the Left has changed.

vidyohs October 31, 2011 at 12:08 pm

I see where Krugman is going.

NASA will be fully funded and defense contractors will begin building that massive space fleet to beat back those aliens Krugman postulates as our economic savior.

Anotherphil October 31, 2011 at 2:19 pm

Maybe publicly Krugman sees aliens as saviors, but that’s not based on economic theory, but familial ties.

Dan H October 31, 2011 at 12:09 pm

“but economics isn’t a morality play”

So why do you name your blog “The Conscience of a Liberal”, Mr. Krugman?

Speedmaster October 31, 2011 at 12:13 pm

Hehe, great point. It seems like an oxymoron. ;-)

Dan H October 31, 2011 at 12:14 pm

Also, economics may not be a morality play, but there are restrictions to what we do based on morality.

Since Keynesians are so concerned with unemployment, why not kill all those currently unemployed? We’d be to full employment in a heartbeat, and per capita income would increase sharply!

Richard W. Fulmer October 31, 2011 at 1:38 pm

Also, why does Krugman believe that everyone who disagrees with him is evil?

Anotherphil October 31, 2011 at 2:44 pm

Pychologists call it “projection”.

Nikolai Luzhin, Eastern Promises October 31, 2011 at 3:31 pm

because they are

Anotherphil October 31, 2011 at 4:05 pm

Really?

Greg Webb October 31, 2011 at 5:32 pm

Nah. Nikki is just a paranoid schizophrenic who is off his medication.

Anotherphil October 31, 2011 at 7:29 pm

Oh, that would make him Nikki Sick.

Josh S November 1, 2011 at 9:39 am

The people he runs with really are a motley crew.

LowcountryJoe November 1, 2011 at 1:16 am

Coercive statist good. Liberty extolling minachists evil. Got it! And it make perfect sense, too.

Mattheus von Guttenberg November 1, 2011 at 12:54 pm

Minarchists are statists, too.

LowcountryJoe November 1, 2011 at 6:09 pm

When push comes to shove, yes, they are. Are we anywhere close to shove at all? I will welcome the day you can call me a statist with a straight face — the day where we could actually find ourselves on the opposite ends of the political spectrum. I won’t hold my breath for that day because it’s sure to occur sometime after pigs have flown and slightly before Hell has frozen over.

Kevin November 1, 2011 at 12:29 am

He names it that way so nobody could confuse its contents with economics. Unfortunately his audience isn’t sharp enough to get the message.

Daniel Kuehn October 31, 2011 at 12:14 pm

Can you speak to my point in an earlier post about how your interpretation of the low Barro/Ramey/Redlick multipliers differs substantially from most peoples’ interpretation of why they are low.

You throw this at Krugman as if he hasn’t addressed the point and it’s important for Cafe Hayek readers to recognize that he and many other people have.

To quote Krugman on Barro: “I can’t quite imagine the mindset that leads someone to forget all this, and think that you can use World War II to estimate the multiplier that might prevail in an underemployed, rationing-free economy.”

(http://krugman.blogs.nytimes.com/2009/01/22/war-and-non-remembrance/)

This has been brought to your attention numerous times Russ and yet you keep acting like there’s some inexplicable, wide range of multiplier estimates that suggests we’re totally clueless. Even if you disagree with Keynesians on this, could you at least stop acting like nobody’s addressed the point?

Daniel Kuehn October 31, 2011 at 12:17 pm

If you want to argue with someone who thinks that government spending is always good and always has a high multiplier, go out and find someone or some theoretical tradition that actually thinks that.

Randy October 31, 2011 at 12:52 pm

Show me a politician who doesn’t think that.

Daniel Kuehn October 31, 2011 at 12:54 pm

If we are to believe Ron Suskind (and many have confirmed the transcripts of the meetings are accurate), President Obama.

Anyway – certainly not Krugman and Russ knows this because it’s been pointed out to him numerous times, including in the very recent past.

Randy October 31, 2011 at 1:58 pm

Oh, I see. So Obama is calling for more political spending regardless of the multiplier. Actually, that makes more sense. Its only the synchophants who haven’t figured out that economic theories are useful to politicians if they they can be used to rationalize more spending. Facts and measurements are irrelevant as these can easily be pulled out of someones… thin air.

Anotherphil October 31, 2011 at 1:20 pm

“go out and find someone.. that actually thinks that.”

Open your eyes.

House of Cards & Economic Freedom October 31, 2011 at 6:02 pm

go out and find someone or some theoretical tradition that actually thinks that.

What a naif!!

It makes no difference what some tradition, academic, or politician thinks. It only matters what they do. A politician might claim that he doesn’t believe government spending is always good, but if he always votes in favor of government spending policies, then that action is what we judge him on.

How old are you?

Seth October 31, 2011 at 12:56 pm

Russ asked this:
“Where is the evidence that military spending stimulates the private sector? What does Krugman have in mind?”

Daniel Kuehn October 31, 2011 at 1:01 pm

Right, and Daniel Kuehn asked “Can you speak to my point in an earlier post about how your interpretation of the low Barro/Ramey/Redlick multipliers differs substantially from most peoples’ interpretation of why they are low.”

The answer to my question may be “no”, of course, but if it were “yes” then I think readers would be able to navigate the issues raised in this post a lot better.

Keith October 31, 2011 at 1:59 pm

Daniel,

You can’t be serious. I read through the Krugman piece you linked to, and the ‘backup’ material he links in that article. There is nothing of substance in any of those posts.

In one he simply says ‘rationing’ … as if simply saying it proves his point.

In the other he picks out 4 economists whom he disagrees with, calls their ideas ‘disturbing’, and then points to this as proof that Keynesian stimulus is having “a weird effect on conservative economists” …. implying that all politically conservative economists are offering up ‘disturbing ideas’.

And, keeping with Russ’ point on bias, mentions that he knows not a single liberal economist who are writing about ‘bad economics’.

“Consumer goods were rationed; people were urged to restrain their spending to make resources available for the war effort.”

Yes. And you could easily argue the cause for the rationing was the government spending for the war. If one confiscates all the steel and builds tankers instead of whatever else could be built (refrigerators, cars, dishes, etc), you are clearly having real impacts in the private sector growth, productivity, and individual wealth. Now, the spending might be worth it, in the case of survival, but it is still a directed allocation of resources.

Likewise, even now when unemployment is ~9%, every dollar the government spends has hidden costs. It takes away (or makes more expensive) the resources available to private enterprise to make things that people want.

Daniel Kuehn October 31, 2011 at 2:12 pm

You think the economy’s operation at full employment during WWII isn’t a substantive reason to say that the Ramey and Barro multiplier numbers might be saying something different from what Russ is suggesting they’re saying??? You can’t be serious.

Keith October 31, 2011 at 5:12 pm

Daniel,

I’m not sure I understand what you are trying to say.

I think your post is exactly the point Russ continues to make. We can all look at the same data, yet imagine many different stories (models) to fit that same data set. It is not an exact science.

Sure, you can make the case that the full employment during WWII might be ample enough reason to reject (or dispute?) the analysis Ramey and Barro used to define the effects of Government spending on GDP.

Then what? What policy or principle would you suggest? I think the slant on this blog is to limit Government spending because it has real impacts on private growth options.

Do you agree or disagree that resources consumed by government directive are taken from the private sector, and thus unavailable for allocation by private industry?

House of Cards & Economic Freedom October 31, 2011 at 6:09 pm

You think the economy’s operation at full employment during WWII isn’t a substantive reason to say that the Ramey and Barro multiplier numbers might be saying something different from what Russ is suggesting they’re saying??? You can’t be serious.

LOL! Almost 12 million men were drafted during WWII, and Danny thinks that counts as part of “full employment” for the U.S. economy.

Keynesianism is like ‘shrooms: completely screws up the rational faculty.

tkwelge October 31, 2011 at 7:30 pm

Daniel, you’re usually smarter than that. The unemployment rate dropped during ww2 because a massive chunk of the working age population was drafted. Otherwise, they would have demanded higher and higher wages as the hiring proliferated, and a lack of rationing would have led to incredibly high inflation. You aren’t really helping your point.

Seth October 31, 2011 at 2:03 pm

Just to make sure I have this straight, are you saying that evidence that military spending stimulates the private sector lies in the interpretation of the evidence that suggests it doesn’t?

Daniel Kuehn October 31, 2011 at 2:15 pm

I don’t understand the question.

What I’m saying is that Russ keeps acting like there is a single number floating around in Platonic space and it is “The Multiplier”, when people have told him regularly and recently why Ramey and Barro’s estimates are considered quite reasonable as an estimate for averaged post-war multipliers, particularly since a lot of the exogenous variation in military spending happened during a period of full employment.

I don’t think this should be hard to understand, so I don’t understand why he keeps treating it as if this is something that Krugman has left unaddressed.

Sam Grove October 31, 2011 at 2:22 pm

If Krugman is pointing at military spending as a stimulus, then he must be of the conviction that the multiplier in such a case is >1.

It may be for Keynsians that economic activity for its own sake is a social good. In that case, we can increase the category of crimes and look at the increase in police and prison guard employment as a big win for society.

What is the point of economic activity?

Daniel Kuehn October 31, 2011 at 2:27 pm

re: “What is the point of economic activity.”

Consumption is the sole end and purpose of all production

Seth October 31, 2011 at 2:43 pm

“I don’t think this should be hard to understand, so I don’t understand why he keeps treating it as if this is something that Krugman has left unaddressed.”

My guess is because he’s asking for evidence that supports his claim that military spending can have a multiplier > 1, not an interpretation of data that says the multiplier <1. That's a red herring.

Sam Grove November 1, 2011 at 2:49 am

Consumption to what end?

Keith November 1, 2011 at 2:27 pm

“Consumption is the sole end and purpose of all production”

This does not answer the question that was asked.

Economic activity is more than just consumption. Economic activity includes efficiency improvements, material shortages, new methods, new products, changing desires, etc.

Obviously, we can only consume what we are able to produce. Produce more, we are able to consume more. Produce less, we are forced to consume less.

This is why excessive government spending can have a negative effect on output. If the directed spending is less efficient at allocating the available resources for production, then the total amount of stuff available to all for consumption is less than what it otherwise could have been.

Its interesting that Sam asks about economic activity, and Daniel responds with and only with consumption.

The point of economic activity is (with the least amount of effort) to aquire that which satisfies our needs, quenches our current wants and desires, and makes tomorrow a more desirable place to live than today.

Anotherphil October 31, 2011 at 2:26 pm

“You think the economy’s operation at full employment during WWII….”

Lets just conscript millions to storm Normandy and Iwo Jima again. Probably a lot more fun than just digging holes and filling them, since the French will never fight like the Nazi’s.

Never knew the “Department of Labor” and Keynesian cult economists were so superfluous before. Thanks.

Anotherphil October 31, 2011 at 4:43 pm

re: “What is the point of economic activity.”

Consumption is the sole end and purpose of all production

That is an unsettling proposition with regard to nuclear weaponry.

Ken October 31, 2011 at 4:48 pm

Anotherphil,

That is an unsettling proposition with regard to nuclear weaponry.

Why? The product of nuclear weapons is peace. Fear of extinction forces opponents to consider diplomatic solutions, rather than direct confrontation.

Regards.
Ken

Jon October 31, 2011 at 4:51 pm

I’m not sure I agree, Ken. It cuts both ways. Reagan and Gorbachev saw the dangers of nuclear weapons and decided not to use them.

Kennedy and Khrushchev came within hours of firing them.

Ken October 31, 2011 at 6:10 pm

Jon,

It cuts both ways.

So far it’s only cut one way. For the reason I stated above.

Kennedy and Khrushchev came within hours of firing them.

But they didn’t. Hmmm… ever wonder why?

Regards,
Ken

Jon Murphy October 31, 2011 at 6:38 pm

True, Ken. I’m just not comfortable with nuclear weapons. But this is a discussion for another time :)

Invisible Backhand October 31, 2011 at 1:22 pm

Can you speak to my point in an earlier post…

Daniel, Daniel, Daniel. that challenge was three whole days ago. Time to move on. Russ has.

Invisible Backhand October 31, 2011 at 2:07 pm

That challenge was never adequately addressed. Daniel, Daniel, Daniel, please continue to comment on it.

Invisible Backhand October 31, 2011 at 2:29 pm

You forgot a link to my blog, faker. That’s why your nic isn’t blue.

Invisible Backhand October 31, 2011 at 3:04 pm

I forgot nothing, moron. You’re the faker. You stole my username.

Invisible Backhand October 31, 2011 at 3:14 pm

I would have gotten away with it if it weren’t for those meddling kids.

Henri Hein October 31, 2011 at 3:31 pm

Daniel,

If I remember and understand you correctly, you are saying that studies such as Barro’s are not the whole story, because they included fiscal expansions both during recessions and normal conditions.

Your defense of Krugman implies there are studies available that only looks at wars (military spending) during recessions. Is such a study available?

I think most of us agree that military spending and recruitment will lower unemployment in the short-term. The problem is more that the boon is not fundamental and in the long run generally hurts the economy. Even in the short-term, the nation does not become wealthier in a meaningful sense.

Russ Roberts October 31, 2011 at 3:46 pm

It has been brought to my attention numerous times by you. I saw that. I appreciate the thought. Hope to write on it in more detail soon.

Daniel November 1, 2011 at 8:19 pm

Yeah, I remember that post, I thought it was a little cheap of Krugman to merely address WW2 when the article he was commenting on covered other eras of war as well. Were there price controls during the Korean conflict?

John Barton October 31, 2011 at 12:15 pm

All “G” is not created equal. Would you apply a blunt multiplier in forecasting the economic impact of $1 billion of tax money dropped into biotech research conducted by top scientists as equivalent to the same dropped on a class of 8th grade biology students?
Aren’t we, basically, arguing over expected ROI, and immediately in the category of activities better conducted by the market? Military spending is necessary, but can’t be analyzed with an ROI, and therefore is conducted by government.

spencer October 31, 2011 at 12:25 pm

In 1943-44 US real civilian GDP fell 7 & 8%, respectively — a drop comparable to the real GDP drop from 1929 to 1933.

Will October 31, 2011 at 12:26 pm

How does spending money on defense having anything to do with creating jobs for the economy as a whole? How does spending on military having anything to do with building bridges? I understand how both create jobs. Clearly people are hired to do the work, whether military or infrastructure spending, but how either stimulate the economy I must confess I do not understand. Yes, sometimes roads and bridges need to be repaired. However, I do not understand how spending for the sake of spending increases economic output when it is taking much needed resources from other sectors of the economy by setting artificial demand. The more the government spends and uses the less resources their are for the rest of those in the economy especially since the government does not create only takes in the form of taxes. Whether spending is appropriate for either military or infrastructure should have nothing to do with whether or not jobs are created but whether scarce resources are being used efficiently.

Price B October 31, 2011 at 12:57 pm

“Clearly people are hired to do the work, but how either stimulate the economy, I must confess I do not understand”

The Keynesian multiplier is the alleged instrument by which government spending stimulates an economy. As I understand since the workers employed by government spending turn around and spend some (but not all) of their pay, one dollar of government spending can produce more than one dollar of private demand.

Hypothetical: Gov’t pays for $100 for a bridge. All the workers save 20% and spend the rest. All workers spend $80 to buy haircuts. The barbers save 20% and spend the rest. The barbers buy (80*.8)=$64 of food. The grocers buy $51.2 of clothes. The tailors buy ~$40 of housing. One man’s expense is another’s income, so this carries on until the amount spent goes to zero. In this case, the multiplier is 5, meaning that the $100 of government spending produces $500 of aggregate demand.

The example above is textbook vulgar keynesianism. Most of Russ’s criticisms center around the implications of this, and argue that since the workers who built the bridge weren’t demanded by private demand, it’s economically inefficient, so the workers bought more haircuts than they really wanted, and the story goes on from there. It states that the demand produced by each dollar doesn’t actually improve material welfare- it just makes wallets fatter and prices higher.

Another argument Russ is fond of making is that the multiplier is less than one, meaning that the money pulled from the private sector produces less demand than the private sector, so it’s measurably inefficient. That’s what he’s saying here.

The textbook example is an oversimplification, and this kind of vulgar Keynesianism is pretty dead outside of econ 101. There are (allegedly) updated versions from Hicks and Samuleson that are more nuanced. Daniel Kuehn is also a very talented Keynesian. Personally I try not to take sides because Macro is just politics/philosophy/science-ism.

Anotherphil October 31, 2011 at 2:29 pm

“Personally I try not to take sides because Macro is just politics/philosophy/science-ism.”

You are to kind. Alchemy or sorcery perhaps, but nearly as honorable as politics (yuk, yuk).

As an aside, wouldn’t be being truly talented include posession of enough skepticism to see through Keynesian phantasms?

M.P. October 31, 2011 at 3:46 pm

Hayek was brilliant, Keynes was brilliant, and there are brilliant economists on both sides.

I don’t mean this as an attack, but what leads you to see through Keynesian phantasms?

Anotherphil October 31, 2011 at 4:24 pm

I don’t mean this as an attack, but what leads you to see through Keynesian phantasms?

Not what, who. Bastiat, Hayek, Hazlett, Friedman and several college econ professors including one Robert Rossana. formerly of Penn State.

http://141.217.212.112/cv.pdf

You know a teacher made an impact when you remember an exam question and the simple but then elusive answer decades later.

Later, due to my “excursion” through government, I began to see that even if Keynes was right, government is neither infallible or impeccable enough to implement his theories.

The DNA that Keynes shares with other theorists of the left is to reduce people “aggregate, instead of the working classes” to fungible irrational abstractions that require some external omiscient force to act correctly or at least rationally, and that force is the government.

There’s a logical incoherence there. No matter what form of government you have, it is composed of fallible and frail humans, for whom power is an “intoxicating spirit”.

vidyohs October 31, 2011 at 8:09 pm

@Anotherphil

Well done, sir! Like +1.

Greg Webb October 31, 2011 at 8:14 pm

Anotherphil, that was an excellent analysis!

Will October 31, 2011 at 3:53 pm

That is pretty much the argument as I understand it from the pro-spending side, but I have never understood how the government spending will stimulate the economy as a whole. Governments don’t produce, they tax. Therefore, any dollar spent on the economy is taken from someone else, even if it is not taken today, it will have to be taken in the future (one way or another). This uncertainty in the future does more harm than any benefit received from a stimulus today.

EG October 31, 2011 at 12:36 pm

Well strictly speaking, he is not wrong. War creates…jobs.

But the intention shouldn’t be to create…jobs. You all know the story of Friedman and the digging holes with spoons, etc.

So for an economist to say that the end result, or the desirable result, is simply to create “jobs”, its a little puzzling. Jobs can be created very easily. USSR had 100% employment. Mao’s China had 100% employment. North Korea has 100% employment. Whether you’re working in the army, in a Gulag, or in a factory making weapons for the army and the Gulag guards…does make a difference. And Krugman should know the difference between a job in the army, or for the army, and one elsewhere.

Anotherphil October 31, 2011 at 2:30 pm

“War creates…jobs”

Creates conspicuous jobs and invisible distortions and lost opportunity costs.

Greg Webb October 31, 2011 at 12:44 pm

Russ said, “Where is the evidence that military spending stimulates the private sector?”

Military spending does not stimulate private sector spending. That is just nonsense. Military spending just leads to more political cronyism. That is why politicians who otherwise advocate against more defense spending will change their views just to advocate to keep government funding of weapons systems that the military does not want just as long as the contractor keeps the plant open in the politician’s district. Any stimulative effect is just stolen from more productive employments of such spending has the funds been left with the taxpayers.

Vuk October 31, 2011 at 12:46 pm

ah yes, the classical ‘broken window’ paradox – let’s just start destroying capital because after a war (or whatever) we’ll see huge economic growth because everything has to be rebuilt. Not quite a liberal argument is it?

I wonder if anyone wrote similar things before WWII? That we have to increase military spending in order to boost the economy out of Depression? I wonder what the people back then would think of such an idea..
I believe it was hitler that used the exact same strategy in order to rebuild the German industry. Didn’t quite work out did it?

LoneSnark October 31, 2011 at 12:46 pm

War created a need for cheap borrowing and cheap government spending…so the government imposed a price freeze throughout the economy and the federal reserve printed money to drive down the cost of federal borrowing. Lots of new money chasing fixed price goods means full employment…and a dysfunctional economy with widespread shortages and the privation it causes.

Jim October 31, 2011 at 12:51 pm

Obviously our wars were not large enough. For the government was conducting 2 wars and supposedly still cleaning up Katrina, and we had one doozy of a recession anyway.

Oh yeah. The rejoinder is that it could have been worse. Never mind.

Frank33328 October 31, 2011 at 1:12 pm

Does this mean that Bush (Jr) did a great job of stimulating the ecomony by starting wars in Afghanistan and Iraq? I don’t recall any cheering about how these were great for the economy, but I may have missed it.

Karl Smith October 31, 2011 at 1:32 pm

Russ:
These claims are not contradictory.

From a theoretical perspective unless crowding out is 100% government spending increases both the measured size of the economy and in all likelihood employment.

Empirically we can take directly from Valarie Ramsey’s last paper

“The bulk of evidence just presented suggests that a rise in government spending tends to lower the unemployment rate. Given the earlier discussion about how much of government spending is actually compensation of government employees, it is useful to decompose the employment effects into rises in government employment versus rises in private employment.”

She goes on to explain that depending on the specification you can get a rise in employment solely due to government employment or one due to private employment.

However, neither of these contradicts the claim that Krugman makes which is that government spending creates jobs, especially in a depressed economy.

To be clear I am not saying that you are wrong and Krugman is right simply that these claims are not opposing. It is entirely possible – and indeed likely the case – that both are true at the same time.

Bill October 31, 2011 at 2:57 pm

“From a theoretical perspective unless crowding out is 100% government spending increases both the measured size of the economy and in all likelihood employment.”

I’m not buying that. It could be true, but from what we know about government projects, I’d doubt it.

If the world was flat, we could make those measurements. But I want to know where the money came from – even if it is not crowding out in the current period. What are the opportunity costs. What is the ROI that was foregone from the projects that don’t happen 5, 10, 20 years into the future, because that money was taken and used for a politically directed objective (which would far more often than not, have a lower ROI than privately directed projects). In my mind, it wouldn’t matter whether this opportunity cost is incurred due to government borrowing, or debasing the currency. I don’t think these calculations can be made, and if you can think beyond the current period,the claims of lowered unemployment are empty.

dsylexic October 31, 2011 at 3:01 pm

is unemployment rate more important than the kind of jobs created? it is obvious war creates ‘jobs’ by conscripting everyone into the war effort.but how does that add to prosperity?

do empirical studies like this one take into account jobs lost in the future -the unseen jobs lost? because of future debt or tax payments ? i bet not.econometricians dont analyse the unseen data.

Russ Roberts October 31, 2011 at 3:48 pm

See the lyrics to Fight of the Century:

Creating employment’s a straightforward craft
When the nation’s at war, and there’s a draft.

It’s easy for the government to create jobs. The challenge is to create prosperity. Creating government jobs that don’t stimulate or produce value is a bad idea. That’s just welfare.

Daniel Kuehn October 31, 2011 at 3:50 pm

And even calling it “welfare” seems like an abuse of that meaning-laden word. It’s waste.

Grinless October 31, 2011 at 4:02 pm

I disagree on this.

“Creating government jobs that don’t stimulate or produce value ” is the very essence of “Welfare”.

Methinks1776 October 31, 2011 at 4:08 pm

I agree with DK on this one (check the temperature in hell). “Waste” seems more accurate.

Anotherphil October 31, 2011 at 4:50 pm

Would you prefer vote-buying, economic fuedalism or electioneering, perhaps?

All government spending is made with an eye to its ability to enhance the prospects of the incumbents making the expenditure, if not explicitly and directly, it will at least it will be designed not to diminish those prospects-no matter what theoretical justification applied to its existence.

Karl Smith October 31, 2011 at 7:14 pm

Well, its not necessarily easy for the government to create net jobs.

In a RBC model for example this is not possible. Or at least not possible through the means we are describing here.

It is also not possible if the Fed offsets government purchases by contracting the money supply.

However, most importantly of all these are claims about separate issues. One is a claim that government spending does indeed effect the overall level of employment. If you accept that then from a theoretical perspective there is not necessarily much difference from you and the rest of the Keynesian community.

The next question is whether welfare is increased by doing this. This is a separate question we can discuss but I think there are good reasons for supposing that it is.

Randy October 31, 2011 at 8:30 pm

A job is a cost, not a benefit.
Job = Cost
Creating Jobs = Creating Costs
Bet we don’t here any politicians bragging about creating costs any time soon.

Randy October 31, 2011 at 8:31 pm

make that “hear”… damn it.

Invisible Backhand October 31, 2011 at 1:35 pm

Wikipedia thinks crowding out is because of higher interest rates. Since interest rates aren’t high, and since even mold spores have noticed the economy isn’t running at full capacity, that’s not it. I underlined the parts about interest rates in red:

http://i.imgur.com/ZqHE6.png

Russ should read a post at CafeHayek about how ideology affects your…oh right.

Invisible Backhand October 31, 2011 at 2:21 pm

Mises.org thinks crowding out is because of government borrowing. Since government borrowing is very high, and since even mold spores have noticed the economy isn’t running at full capacity, that appears to be it. See:

http://mises.org/daily/589

Invisible Backhand October 31, 2011 at 2:22 pm

Robert Murphy thinks crowding out is because of government borrowing. See:

http://mises.org/daily/3290

Invisible Backhand October 31, 2011 at 2:23 pm

Lew Rockwell thinks crowding out is because of government borrowing. See:

http://www.lewrockwell.com/north/north871.html

Invisible Backhand October 31, 2011 at 2:24 pm

Cafe Hayek thinks crowding out is because of government borrowing. See:

http://cafehayek.com/2010/02/crowding-out.html

Invisible Backhand October 31, 2011 at 2:32 pm

Phony IB, it can when the economy is at full capacity. It isn’t.

P.S. The mods can see your IP address.

Invisible Backhand October 31, 2011 at 3:11 pm

You don’t understand what you’re talking about, having mastered nothing but copy/paste from Wikipedia. The economy is not at “full capacity” precisely because of the crowding out caused by government borrowing. Your prescription is like asking a drunk to cure his alcoholism by drinking more alcohol — “after all”, you and Krugman say, “it’ll help alleviate the symptoms of detox.” Right.

P.S. The mods can see that you’re a know-nothing twit. In fact, everyone on this board can see it. You’re not exactly making it a secret.

Invisible Backhand October 31, 2011 at 3:15 pm

You should try not to type like methinks1776

Invisible Backhand October 31, 2011 at 3:27 pm

You should try not to type like methinks1776

You should try not to type like Invisible Backhand. It’s obvious to everyone here you’re a fraud. Go back to your handlers at Anonymous.

Methinks1776 October 31, 2011 at 3:41 pm

That wasn’t me. That was someone much smarter than me. And I’m taking Irritable Bowel’s mistaking my friend for me as a compliment.

Chris O'Leary October 31, 2011 at 1:47 pm

Obviously contemporary military spending (and all government spending) creates jobs. The question is how EFFICIENTLY it creates jobs. How much does the government have to spend to create one job? How does that spending compare to the private sector? What is the cost per job? What is the return on investment?

Karl Smith October 31, 2011 at 1:54 pm

This is actually not obvious.

Indeed, most New-Keynesians would argue that away from the zero bound government spending has no effect on the unemployment rate or net job creation because these quantities are determined by the Federal Reserve.

Daniel Kuehn October 31, 2011 at 2:21 pm

I’ve never quite understood this claim of “no effect” outside the zero lower bound.

What you mean is that at the zero lower bound it is necessary, but above the zero lower bound it is unnecessary and could be counter-acted, right? You don’t really mean it “has no effect on the unemployment rate”. And there are good reasons not to engage in fiscal policy when it is unnecessary – I agree. But I want to make sure I’m understanding exactly what you’re saying.

Karl Smith October 31, 2011 at 7:56 pm

Daniel,

I mean we presume that it will be counter-acted. Presumably, the Fed has chosen the level of Aggregate Demand that it desires.

If the government attempts to expand Aggregate Demand the Fed will simply drag it back to where they wanted it to begin with. The result will be a shift from private production to government production, but no net increase in production.

Darren October 31, 2011 at 1:58 pm

“Economics is not a morality play?” From Krugman? 90% of this guy’s arguments against Austrians have been related to the idea that they’re “mean-spirited.”

Fred October 31, 2011 at 2:02 pm

The national debt is what, $14 trillion?

Imagine if that money had never been removed from the economy through taxes, bonds and devaluing the currency.

How many more jobs there would be if there was $14 trillion more invested in the means of production?

Henri Hein October 31, 2011 at 3:20 pm

Devaluing the currency does not create debt.

That actually makes your point stronger. The real accumulated cost from overspending is more than the $14 trillion if you add the cost of inflation.

Fred October 31, 2011 at 3:26 pm

Devaluing the currency does not create debt.

The currency is devalued when the Fed buys government debt, is it not?

Henri Hein October 31, 2011 at 4:43 pm

If they buy it using printed money, presumably yes. They do normally print money to do that, but it is printing the money that devalues the currency, not the debt itself.

Fred October 31, 2011 at 9:45 pm

it is printing the money that devalues the currency, not the debt itself.

I didn’t say that devaluing money created debt.
I said that devaluing the currency removes money from the economy.

Anotherphil October 31, 2011 at 7:34 pm

Anotherphil October 31, 2011 at 4:43 pm

re: “What is the point of economic activity.”

Consumption is the sole end and purpose of all production

That is an unsettling proposition with regard to nuclear weaponry.

Ken October 31, 2011 at 4:48 pm

Anotherphil,

That is an unsettling proposition with regard to nuclear weaponry.

Why? The product of nuclear weapons is peace. Fear of extinction forces opponents to consider diplomatic solutions, rather than direct confrontation.

Regards.
Ken

Jon October 31, 2011 at 4:51 pm

I’m not sure I agree, Ken. It cuts both ways. Reagan and Gorbachev saw the dangers of nuclear weapons and decided not to use them.

Kennedy and Khrushchev came within hours of firing them.

Ken October 31, 2011 at 6:10 pm

Jon,

It cuts both ways.

So far it’s only cut one way. For the reason I stated above.

Devaluing the currency does not create debt.

No, it’s theft from the owners of private debt stated in that currency.

Anotherphil October 31, 2011 at 7:40 pm

Sorry, something went kerflouey there.

The thing with nuclear weapons was a coy economic comment-they derive almost all their value from their existence and assured response-have negative value in “consumption”.

Therefore the comment that the “purpose of ALL economic activity is consumption: is false. There are other produced items that aren’t mean to be consumed as well. (Monuments & Statuary)

Darren October 31, 2011 at 3:27 pm

Yes, but think of the foregone spending and subsequent improvement if that money were wasted in the private sector.

Fred October 31, 2011 at 9:46 pm

sarcasm?

Dallas Weaver October 31, 2011 at 2:03 pm

In modern times, the military is not cost/effective and is just a parasitic sink for the wealth of a society. In history, the military could steal enough land and assets to actually make sense for the ruling classes in a society, but now days it is even cheaper to buy land or trade for an asset that it is to use the military to steal the asset.

For example, the cost of our wars on terror could have rebuilt all the damage possible from terrorists while providing the victims of terrorism and their friends and families with lifetime multi-million dollar incomes. Terrorism kills far fewer people that automobiles and does far less physical damage ( 9/11 equals about one month of auto fatalities and a few minutes worth of health damage and less than a weeks worth of physical costs).

However, the DOD is now a major part of the “bread and circuses” of our political class to keep us fearful and dependent.

Economic Freedom October 31, 2011 at 2:35 pm

“economics isn’t a morality play”

Ethics “should” infuse most important things that humans do.

Capitalism is unethical, unfair and destructive, so it should be abandoned in favor of radical environmentalism.

Anotherphil October 31, 2011 at 2:49 pm

“Capitalism is unethical, unfair and destructive, so it should be abandoned in favor of radical environmentalism.”

Why stop there, why not just continue on to the complete institutional lunacy you advocate for here?

Fred October 31, 2011 at 2:57 pm

That’s got to be a joke.

Darren October 31, 2011 at 3:30 pm

I take took as sarcasm.

Anotherphil October 31, 2011 at 4:54 pm

I those it was posted by the imposter who occasionally appropriates “Economic Freedom”, but whose prose bears no commonality with the original user of that name.

House of Cards & Economic Freedom October 31, 2011 at 5:50 pm

but whose prose bears no commonality with the original user of that name

Multas gratias, O magne amice!

(from the original Economic Freedom)

House of Cards & Economic Freedom October 31, 2011 at 3:21 pm

The EPA was started by Richard Nixon, and it was no coincidence that it started at about the same time as the Bretton Woods system collapsed.

The true purpose of the EPA has nothing to do with clean air and water, because those goals were being approached incrementally through better technology just by the normal operation of the market and profit-seeking. The true purpose of the EPA is to choose winners and losers in the private sector for the purpose of creating and maintaining an economy that has been thoroughly politicized; a rent-seeking market rather than a free one.

Nikolai Luzhin, Eastern Promises October 31, 2011 at 3:38 pm

your comments are assine.

Here is a powerful photograph showing what pollution does to children.

Because of the EPA the photograph is from Russia, not Cleveland or Pittsburgh

http://conservationreport.com/2008/06/05/recommended-images-once-soviet-landscapes-poisoned-by-human-pollution/

Ken October 31, 2011 at 4:02 pm

Nicki,

Yeah, Soviet Russia, where government bureaucrats controlled even more parts of people’s lives.

Regards,
Ken

House of Cards & Economic Freedom October 31, 2011 at 5:48 pm

Because of the EPA the photograph is from Russia, not Cleveland or Pittsburgh

What you meant to say is that the photograph is from Russia because Cleveland and Pittsburgh have capitalism and private property rights and Soviet Russia did not.

The EPA is worse than irrelevant; it’s an actual impediment to the development and deployment of better technology in the U.S.

House of Cards & Economic Freedom October 31, 2011 at 11:24 pm

http://thehill.com/blogs/e2-wire/e2-wire/190641-second-energy-dept-backed-company-goes-bankrupt

Second Energy Department-backed company goes bankrupt

By Ben Geman – 10/31/11 08:04 AM ET

A Massachusetts company that received a $43 million Energy Department loan guarantee last year filed for bankruptcy Sunday, a step certain to fuel criticism of federal green energy financing in the wake of the solar company Solyndra’s collapse.

Beacon Power Corp., which develops energy storage systems, filed for bankruptcy protection in the U.S. Bankruptcy Court in Delaware.

Hooray for government spending, the EPA, and “green jobs”!

House of Cards & Economic Freedom October 31, 2011 at 3:23 pm

Ethics “should” infuse most important things that humans do.

Whose ethics? Yours?

“Ethical” by what standard? Yours?

Nikolai Luzhin, Eastern Promises October 31, 2011 at 3:39 pm

we know you have no ethics

here is what you want for our Children, the Children of the World

http://conservationreport.com/2008/06/05/recommended-images-once-soviet-landscapes-poisoned-by-human-pollution/

Ken October 31, 2011 at 3:54 pm

Nicki,

You mean the children of Russia, who were damaged by well intentioned Soviet bureaucrats.

Regards,
Ken

Methinks1776 October 31, 2011 at 4:04 pm

You’ve obviously never met a Soviet bureaucrat.

Nikolai Luzhin, Eastern Promises October 31, 2011 at 5:47 pm

Ken

you idiot, how did goverment lead to pollution in the USofA?

Ken October 31, 2011 at 6:02 pm

Nicki,

You idiot, you’re showing pictures of children hurt by Soviet Russia, a place that had more government control than the US at any time in the US’s history. You bring forward this picture as an argument for more government intervention. Your claim is, and really I’m not sure how you reach this conclusion, that since government environmental regulation in Soviet Russia lead to disfigurement, the US government should become even more involved in environmental regulation.

Well the US did get involved. Under Nixon, the EPA came into existence and one of its first actions was to ban DDT, which caused the death of tens of millions of people. After all this damage done by government environmental regulations, why do you still call for even more government environmental regulation?

Regards,
Ken

Ken October 31, 2011 at 6:06 pm

Methinks,

I’m surprised at you for thinking that a Soviet bureaucrat wasn’t well intended. You of all people should know better. They had nothing but the Worker’s Paradise in mind, even as they caused pollution so poisonous that children lost their limbs.

Regards,
Ken

Slappy McFee October 31, 2011 at 4:13 pm

You’re using pictures of the failures of top-down, central command and control to advocate for more top-down, central command and control?

Jon October 31, 2011 at 4:32 pm

Yeah, we’ve called him on this several times, but he keeps using the Chewbacca Defense.

Ken October 31, 2011 at 4:42 pm

Ladies and gentlemen of the supposed jury. I have one final thing I want you to consider. Ladies and gentlemen, this is Chewbacca.

Anotherphil October 31, 2011 at 4:56 pm

You’ve obviously never met a Soviet bureaucrat.

Is there something unique about a SOVIET bureaucrat?

Nikolai Luzhin, Eastern Promises October 31, 2011 at 5:48 pm

no Slapy, my pictures are of what people will do to other people if permitted to do whatr= they want

Methinks1776 October 31, 2011 at 7:28 pm

Anotherphil,

Yes, there is something unique. Soviet life turned people into animals. Soviet bureaucrats were and still are among the worst kind of animals. So Soviet bureaucrats were and still are much worse than American bureaucrats.

Methinks1776 October 31, 2011 at 7:32 pm

no Slapy, my pictures are of what people will do to other people if permitted to do whatr= they want

Your pictures are, first of all, proof only that these children were born with a deformity. The source of the deformity is as yet unknown.

Second, people left to their own devices do not want to mangle each other. You’re projecting the rot that is within you onto every other living person. The only reliable way to turn people into dumb, vicious animals like yourself is to keep them caged and silenced by a big, strong government with strong jails.

House of Cards & Economic Freedom October 31, 2011 at 5:54 pm

we know you have no ethics

We know the ethics you follow results in massive poverty and death for millions of people.

The only reason dupes like you continue to kill countries, economies, and people, is that you’ve convinced yourselves that you’re going “good.”

Anotherphil October 31, 2011 at 8:38 pm

Methinks:

I made the SOVIET bureacrat quip tongue-in-cheek.

I have first & second hand accounts of Soviet bureaucracy, with relatives in Eastern Europe and a Cuban emigre as a grade school teacher. I was permanently inoculated against the communism (and socialists/statists of all other parties, once I understood excrement is odious and filthy, no matter what animal purged it) by Mrs. D.

My grandmother visited her cousins in late 70′s. Since her parents had the “old language” and she was (is) bilingual, she was readily accepted and her relatives spoke freely of the suppression, monitoring and control.

On the other hand, I think this an extremely dangerous administration, can you imagine if any other proposed infecting children with Anthrax?

http://www.washingtonpost.com/national/health-science/federal-advisers-endorse-testing-anthrax-vaccine-in-children/2011/10/27/gIQA95i7PM_story.html

So Soviet bureaucrats were and still are much worse than American bureaucrats but we are never more than one generation from descending from here into the barbarity of Hammer and Sickle or Swastika.

Methinks1776 October 31, 2011 at 8:42 pm

Sorry I didn’t catch that, Anotherphil. You’re right, of course.

Dave October 31, 2011 at 3:31 pm

You cite one study and, as Karl Smith noted above, it is a little more nuanced than you let on. Funny you don’t mention other studies that explicitly make the case for stimulus, such as this -http://www.imf.org/external/pubs/ft/spn/2009/spn0903.pdf
Going by your post attacking Krugman from a week or two ago, and which was criticised by a numbered of bloggers, you really don’t care how economies actually work, you just want what you want and facts be damned.

Russ Roberts October 31, 2011 at 3:44 pm

Yes, and I am the only one that lets the facts get in the way. That is why Krugman provided all those links and explained patiently why the studies that disagree with his claims are wrong.

I have provided nuance in different places. Sorry I can’t do it in every post. Look at the category called “stimulus” here at the Cafe.

Charlie October 31, 2011 at 3:33 pm

“First things first: Military spending does create jobs when the economy is depressed.”

This statement and the rest of the paragraph doesn’t require a multiplier greater than 1. It just requires a multiplier greater than zero.

Methinks1776 October 31, 2011 at 3:36 pm

So what happens when you multiply something by 0.5?

Dan H October 31, 2011 at 4:44 pm

“So what happens when you multiply something by 0.5″

You get… ummm…. uhhh…. ummm…. but, ummm…

Corporations are stealing our democracy! RABBLE RABBLE RABBLE!

Jon October 31, 2011 at 4:45 pm

THEY TOOK YUR JERB!

Sorry for all the South Park references today, but they just work so well!

Charlie October 31, 2011 at 6:05 pm

The multiplier is stated as an increase in GDP for a given increase in government spending. Thus, if a multiplier is .5, then an increase in government spending of $100 billion raises GDP by $50 billion.

GDP is greater with any multiplier above zero. If output and employment are correlated, employment also increases with multipliers above zero.

I realize math is hard. Please ask more questions if you don’t understand.

Ken October 31, 2011 at 4:50 pm

Methinks,

It’s not nice to use math.

Regards,
Ken

Dan H October 31, 2011 at 5:12 pm

It’s some sort of sneaky Jew-trick!

Methinks1776 October 31, 2011 at 7:54 pm
Charlie October 31, 2011 at 6:03 pm

The multiplier is stated as an increase in GDP for a given increase in government spending. Thus, if a multiplier is .5, then an increase in government spending of $100 billion raises GDP by $50 billion.

GDP is greater with any multiplier above zero. If output and employment are correlated, employment also increases with multipliers above zero.

I realize math is hard. Please ask more questions if you don’t understand.

Dan H October 31, 2011 at 6:58 pm

he he he…. A keynesian doesn’t understand keynesian economics. Go figure.

I’ll let you take the time to google “keynesian multiplier less than one” and see what comes up.

Charlie October 31, 2011 at 7:47 pm

Dan H,

Here is the Concise Encyclopedia of Economics:

“Keynesian models of economic activity also include a so-called multiplier effect; that is, output increases by a multiple of the original change in spending that caused it. Thus, a ten-billion-dollar increase in government spending could cause total output to rise by fifteen billion dollars (a multiplier of 1.5) or by five billion (a multiplier of 0.5). Contrary to what many people believe, Keynesian analysis does not require that the multiplier exceed 1.0. For Keynesian economics to work, however, the multiplier must be greater than zero.”

Maybe you don’t use google well…

Ken October 31, 2011 at 7:06 pm

Charlie,

if a multiplier is .5, then an increase in government spending of $100 billion raises GDP by $50 billion.

HAHAHAHAHA!!!

Math fail.

First the government has to take that $100B from someone (reduce GDP by $100B), thus if the multiplier is less than 1, GDP is actually smaller with government spending than without. Or do you not know from where government gets its resources?

Regards,
Ken

Charlie October 31, 2011 at 7:32 pm

Ken,

The government gets the money from issuing debt. The cost of the debt is the cost of the interest on it. The cost of the interest on a on year gov’t bond is .11%.

So (for completeness) you can subtract, $110 million or .11 from the $50 billion above.

Methinks1776 October 31, 2011 at 7:46 pm

Charlie,

That’s fine except for one thing. All the debt, not just the interest must be repaid.

If the government were manufacturer and it borrowed $100 to create goods it could sell for no more than $50, then how will it repay the entire $100 (never mind interest)?

Ken October 31, 2011 at 9:51 pm

Charlie,

The government gets the money from issuing debt.

That’s it? The government doesn’t collect taxes or print money? The only way it gets money is by issuing debt?

HAHAHAHAHAHAHA!!

Of course, there’s direct taxation, simply taking from citizens. There’s the indirect tax by printing money, which drives up inflation, reducing the value of the dollar, transferring purchasing power from dollar holders to those doing the printing – the government. Then there’s the deferred tax, which is debt. As Methinks pointed out, that money has to be paid back. And the politicians running up that debt has kindly put me and the other 310,000,000 Americans on the hook for their irresponsible spending.

Knowing all that, do you really think it’s a good idea for the government to spend $100B only to get $50B in increased GDP (or any spending when the “multiplier” is less than 1)? If so, I have a nice savings plan for you. Whatever you deposit in this account I set up for you, you’ll get 0.5 of it back at the end of the year. After all, it’s greater than 0.0, so it must be good, right?

Regards,
Ken

Charlie October 31, 2011 at 11:12 pm

Ken,

Keynesian stimulus is backed by borrowing. If it instead comes from tax increases it isn’t Keynesian stimulus.

Also, “a savings plan” is not a good way to think about it. GDP is national income. When you get back a portion of what you spend as income, that’s a multiplier. A multiplier of .8 on shoes would mean for every dollar of shoes you buy, you’d get back 80 cents as additional income.

As Karl Smith says above, most New Keynesian think the multiplier is 0 most of the time. Some economists think its 0 or negative all the time. Ramey numbers don’t back them up.

Ken October 31, 2011 at 11:44 pm

Charlie,

Keynesian stimulus is backed by borrowing

What is backing the borrowing? The US taxpayers. After that money is borrowed, it has to be paid back. This is why borrowing is simply a deferred tax.

“a savings plan” is not a good way to think about it.

I wasn’t using a savings plan to demonstrate how to think about GDP. I was using a savings plan to demostrate rates of return. For a rate of return, r, to be positive, this means that 1+r, the “multiplier”, is greater than 1. It is calle a multiplier because if you supply X, then you expect to get back X * (1+r).

If 1+r is less than 1, this means that the rate of return is negative. If the multiplier is .5, this means that r = -0.5, a negative rate of return. Thus a savings plan with a multiplier of .5 has a rate of return of -50% (-0.5).

Hope you understand what a multiplier is now because your shoe example is wrong.

Regards,
Ken

Nikolai Luzhin, Eastern Promises November 1, 2011 at 6:09 am

First the government has to take that $100B from someone

wrong

this is the false ricardian equivalence

Charlie November 1, 2011 at 12:56 pm

Ken,

Maybe this post will help you understand:

http://modeledbehavior.com/2011/10/12/keynesianism-multipliers-and-stimulus/

Imagine someone who consumes only food and government spending. In the following amounts:

Food 80
Gov’t 20

GDP 100

If the multiplier is 0 and we increase gov’t spending by 10, then

Food 70
Gov’t 30

GDP 100

The multiplier did not increase, national income (GDP)

If the multiplier is 1.5, an increase of 10 in gov’t spending makes GDP go up 15:

Food 85
Gov’t 30

GDP 115

The gov’t spending created private spending.

If the multiplier is .5, the gov’t spending will cost (crowd out) some private spending, but still increase GDP by 5.

Food 75
Gov’t 30

GDP 105

The country is richer, but the private sector is smaller.

Hope this helps you understand.

Reverend Moon November 1, 2011 at 3:20 pm

the money must be, first, spent by governmewnt before it can be borrowed by government.
Go ahead do the thought experiment for yourselves. where did the government money come from if it weren’t spent into existence first by government.
government “borrowing” doesn’t crowd out borrowing by the private sector. it crowds out private sector bids for real resources increasing costs for businesses. the cost of government is the real resources it consumes.

Also I would like to point out to people here that you can increase deficit spending by government without increasing the size of government. in fact its possibble to shrink government spending and increase deficit spending at the same time.

Methinks1776 October 31, 2011 at 7:44 pm

That’s just my point, Chuck.

If I spend $100 to create something worth $50, then I have a failing business, don’t i?

If the government spends $100B to create $50B of output, then it’s wasted $50.

However, If you are willing to pay $100 to get obtain something worth only $50, please get in touch with me.

Methinks1776 October 31, 2011 at 7:45 pm

then it’s wasted $50. = $50 Billion, that is.

Charlie October 31, 2011 at 7:56 pm

Methinks,

I would first direct you to the PK paragraph and to my initial comment, which is about employment. My intent was/is not to discuss all issues multiplier related, just point out that Russ may not realize the paper he cites is actually evidence for the paragraph not against it.

To your other point, I’ll let you think about this. In normal times (or normal models), crowding out should be 100%. The multiplier “should be” zero. One might also say, “in the long run” the multiplier is zero. Yet, very few economists argue that we should have no government spending even though in the long run $1 of gov’t spending may cost $1 of private spending.

And to your comment above, the gov’t must pay the cost to service the debt. The debt itself actually goes to zero in present value terms.

Methinks1776 October 31, 2011 at 8:13 pm

Charlie,

Crowding out happens all the time at the margin. I crowd out my competitors, you crowd out yours and government crowds out us. Regardless of interest rate, if government were not competing for loanable funds the interest rates would be lower and more borrowers would be able to obtain credit.

I will concede that if the interest rate is very low, it’s possible that fewer would-be borrowers are crowded out by government. It’s possible, but it’s not a given.

I don’t know about the fantasy halcyon days of “normal times”, but I do know that any time one spends more than one makes it is a recipe for bankruptcy. I’ve tried it before. It doesn’t work.

Even in frightening, abnormal times, I don’t understand how exactly spending $100 to create something which is only worth $50 will lead to wealth. I understand you didn’t want to get into the sordid details and I do and always (since undergrad) did understand that Keynesians are under the impression that spending more than something is worth “works” (we tried it in the Soviet Union, it worked as expected), but can you please explain this magic to me? How does one get richer by spending $100 to create something worth $50?

Methinks1776 October 31, 2011 at 9:56 pm

And to your comment above, the gov’t must pay the cost to service the debt. The debt itself actually goes to zero in present value terms.

If the PV of the bond is zero, why would anyone pay anything for a bond? And yet, they do. Odd, no?

Actually, because the interest rate is so low, the discounted value of all the future cash flows is pretty close to the sum of those cash flows.

Charlie October 31, 2011 at 11:31 pm

Methinks,

As far as crowding out, you don’t have to believe the numbers Ramey gives, you can think the real multiplier is zero or lower. You can believe that the gov’t spending is only worth a fraction of its effect in measured gdp. There are smart reasons to be against stimulus. I’m just making a simple point about a what a multiplier between zero and one means. I can tell by responses most people don’t understand.

Maybe I should have said principle instead of bond. I thought it was obvious in context, but principle is more correct. Imagine paying the money back in 100 years. The cost of the loan is the interest. The PV of paying the principle back in 100 years is small and goes to zero as the time lengthens.

As far as how it can make you richer, maybe try the analogy I used above. Normally, if you spend some of your income on shoes, you expect to give up other things like hats or food. If the multiplier on shoes is .5 then for every dollar if shoes you buy, you get 50 cents more income to buy back some if the hats or food you’d otherwise give up. If your purchases increase your income, its like gettinga discount.

Charlie October 31, 2011 at 11:42 pm

Methinks,

“How can spending $100 billion on something worth $50 billion make you richer?”

This seems to be your misunderstanding. The multiplier does not tell you what something is worth, it tells you how much the spending increases your income.

Methinks1776 November 1, 2011 at 2:02 am

Charlie,

I understand what a multiplier between of >0<1 means. Hence, my original response to you. I'm just stuck on why Keynesians think that pulling an economy out of depression (making the assumption that GDP is even a good measure of anything) means spending more than the output is worth. You're only looking at the benefit ($50B), but you're ignoring the cost ($100B). You're telling me that costs don't matter. Why? Does scarcity magically disappear if the GDP dips?

You said: The multiplier does not tell you what something is worth, it tells you how much the spending increases your income.

That’s precisely what I said. You spend $100 and you produce something you cannot sell for (increase your income by) more than $50.

The shoe analogy makes no sense at all. How is the discount generated? How is it possible to increase my income by shopping (this I really want to know because, as a woman, I tend to shop a lot)?

Maybe I should have said principle instead of bond. I thought it was obvious in context, but principle is more correct. Imagine paying the money back in 100 years. The cost of the loan is the interest. The PV of paying the principle back in 100 years is small and goes to zero as the time lengthens.

It doesn’t matter how you put it. A loan is principal plus interest. And, excuse me, you think the U.S. government is paying an interest rate of 11 bps for non-existent 100 year loans? Um…no. Try 3.16% for 30 year maturities.

http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield

You’re basically making a strange assumption that the U.S. government will be able to rollover all of its ever increasing debt at the same interest rate forever. Essentially, money is pretty close to free and the loans will never have to be repaid and because money is free, we can borrow and waste it. Why?

How long do you think Uncle Sam can erode its balance sheet with borrowing outstripping increases in GDP before the lenders demand increasingly higher interest rates to compensate them for the additional risk?

Not forever, say the Keynesians. Just until we’re out of the depression. But, how does one get out of a depression by creating losses?

Charlie November 1, 2011 at 12:42 pm

“means spending more than the output is worth.”

Again it doesn’t mean it’s worth $50 billion. It means it raises your income $50 billion. For instance, if you thought government spending was measured at $100 billion, but not worth anything ($0 billion), you could argue that a Ramey multiplier of .5 should really be a multiplier of -.5.

You still don’t really understand what a multiplier is.

“The shoe analogy makes no sense at all. How is the discount generated? How is it possible to increase my income by shopping (this I really want to know because, as a woman, I tend to shop a lot)?”

You don’t understand this analogy, because you don’t really understand what a multiplier is measuring. This question is basically, “what is Keynesian economics?” In classical economics, multipliers are always zero or negative. If you want to know how a multiplier can exist, I suggest you read about Keynesian economics or Monetarism.

Maybe this post will help.

http://modeledbehavior.com/2011/10/12/keynesianism-multipliers-and-stimulus/

Seriously, though, I’m not even a Keynesian. I just know the arguments. There are lots of smart reasons to be opposed to fiscal stimulus, and lots of smart people opposed to it. I know you spend a lot of time reading blogs. You should probably invest some of that time reading smart people that disagree with you. There are lots of resources out there, if you really want to increase your understanding.

Charlie November 1, 2011 at 12:57 pm

Methinks,

If you scroll up, I posted some numerical examples for Ken. Maybe that will help.

Reverend Moon November 1, 2011 at 3:26 pm

@ Methinks
i bet you’re all beta

Methinks1776 November 1, 2011 at 6:28 pm

Well, Reverend Moon, I guess you’ll have to make your bet and take your chances.

I’ll bet you’re perpetually short short vol, short gamma.

Methinks1776 November 1, 2011 at 6:38 pm

Charlie,

I spend most of my blog time here. I have however seen Karl’s blog and I appreciate the link you provided.

Here’s the key (from Karl’s post):

That’s because when the recovery hits the interest rate on t-bills is less that than nominal growth rate.

If a recovery hits. It’s an empirical question, is it not?

So even rolling in the interest payments continually will result in a declining debt-to-GDP ratio. Eventually the debt will just shrink away.

Now, that is magical thinking at its finest. You may want to look to look to Europe as the latest example of what really happens.

I thank you for that nice example you took the time to construct, but do you not see the flaw in that argument? I realize it’s not your flaw, but, still.

The conclusion that “we are wealthier” hinges on free money (no costs! I love it). What I’m asking is “is it correct” (not is it a correct representation of Keynesianism)? Does it strike you as logical?

Sam Grove November 1, 2011 at 3:18 am

Increasing GDP does not necessarily mean increasing human welfare. Very little, if any, military spending increases human welfare.

Inflation can increase GDP while people are made worse off thereby.

GDP is not a valuable metric.

Randy November 1, 2011 at 4:39 am

Exactly. I made a similar point in a macro class a couple of decades ago and got… silence. Now that I think about it, that was the point that I began to question the legitimacy of macro-economics. The last decade has confirmed my suspicions.

P.S. However, I did like Don’s classical definition of macro given a week or so ago. Too bad that isn’t the standard.

Will October 31, 2011 at 3:38 pm

“As the Hayek character in The Fight of the Century says”

Dude. This is at least the third time I have seen this blog quote that silly “rap battle” for support. Perhaps you could also let us know where “Weird Al” Yankovitch stands on the subject. It makes the whole argument hard to take seriously.

Russ Roberts October 31, 2011 at 3:45 pm

Sorry, Will. I co-wrote the lyrics and I have a bias in favor of them.

Will October 31, 2011 at 6:17 pm

Russ,

I didn’t know that you wrote the video. I apologize for the tone of my comment. Congratulations on the success of the videos; I have watched both several times.

Ken October 31, 2011 at 6:28 pm

First you say the rap battles are silly, then you say you’ve watched them several times? If they are so silly why watch them more than once.

Also, how does Russ, instead of Weird Al, writing the lyrics change the content of the song? If Weird Al had written the lyrics to the song, it wouldn’t have changed the truth contained in the songs, but it does change the “appeal to authority” logical fallacy many commit.

Regards,
Ken

Will October 31, 2011 at 8:44 pm

Ken: Weird Al was a bad example. Take instead Randy Newman’s song about the failure of Marxism. It’s a funny song and I like it, but it’s hardly a rigorous argument. It’s silly, and that’s a good thing: that’s why it’s enjoyable. If I did a post on the impossibility of central planning and quoted it, that would be totally normal. But if I then wrote several more posts and pointed to the same Randy Newman song each time, it would probably get old and somebody might ask why I’m not quoting Hayek or Mises or whoever. But if I were the author of the song, my continued invocations of it would be understandable because of my natural pride in my creation. That’s why Russ’s authorship of the rap battle changes my perspective.

Anotherphil October 31, 2011 at 8:43 pm

Will:

Get a grip, DUDE.

Grinless October 31, 2011 at 3:55 pm

You dont know what you are talking about, dont you ?

Will October 31, 2011 at 8:45 pm

Evidently not.

Jon October 31, 2011 at 5:11 pm

Will, if you ever get the chance, check out the videos. You can find them on youtube (jus search for hayek vs. keynes). There are two videos. They actually do a good job explaining both Hayekian and Keynesian economics without bias.

House of Cards & Economic Freedom October 31, 2011 at 9:29 pm

And while you’re at it, check out the two music videos by Dorian Electra. One is a love song to Hayek; the other, a breaking-up song to Keynes.

She’s a babe.

J. W. October 31, 2011 at 5:20 pm

There’s a difference between quoting something “for support” and quoting something to illustrate a point that one makes independently of the quotation. The latter is the case here.

Jon October 31, 2011 at 4:34 pm

Personally, Russ, I think these lyrics would have worked better:

Creating employment is a straight forward craft
when the nation’s at war and there’s a draft.
If every worker were staffed in the army and fleet
we’d have full employment and nothing to eat.

Anotherphil October 31, 2011 at 8:43 pm

LIKE!!!!

@decentralimprov October 31, 2011 at 4:55 pm

Krugman is correct when he points out that Military Keynesians on the right are hypocrites. He’s wrong about everything else in that article.

Any government spending (direct or indirect- through regulation) has to be paid by the private sector, to the extent that it is not offset by something achieved of value (which may be applicable long term training & output of an otherwise idle workforce, a new discovery, etc.) or the spoils of war. This pass along is subsequently passed to consumers in the form of prices higher than they would have otherwise been absent the government spending (compared to a free market without government involvement, which naturally deflates).

The government is crappy at centrally planning future output, compared to diverse knowledge of everyone. To the extent it uses talent or resources that otherwise would have been more productive, it expands the crowd out & private sector cost problem.

The summary: government spending- with the exception of fully financed transfers- causes valueless price increases (inflation) and dislocations of productivity. The illusion lasts until people wake up and realize (thanks to Mr. Market) the inflation has no value and driving 60 miles to employment at the Social Security Administration or a bomb factory is just as valuable.

Antonio Mendes October 31, 2011 at 5:13 pm

In the short run (during the military build up) Krugman is right. But, in the end, the multiplier effects of wealth destruction spending are inefficient. See here for a full list of the various categories of spending and their multiplier effects: http://marques-mendes.blogspot.com/2011/08/government-stimulus-and-expenditure.html

PrometheeFeu October 31, 2011 at 5:19 pm

“Military spending does create jobs when the economy is depressed.

That’s the response Russ. I don’t know that he is right, but in order to prove him wrong, you have to estimate the multiplier during economic downturns, not all the time

Methinks1776 October 31, 2011 at 7:57 pm

Promethefeu,

Why would government suddenly become better at planning the economy during economic downturns than at any other time?

Greg G October 31, 2011 at 8:25 pm

Methinks

Keynes did not claim that the government suddenly gets better at deciding how to spend money during an economic downturn. He did claim that a particular level of spending – with no change in the planning skills of the government – will have very different effects when the economy is growing than it will when the economy is shrinking. He claimed that deficits are beneficial when the economy is shrinking and harmful when it is expanding.

You don’t have to agree with that to recognize that it is not a claim that there is a sudden change in the skill of the politicians.

Methinks1776 October 31, 2011 at 8:29 pm

….will have very different effects when the economy is growing than it will when the economy is shrinking.

Different? Different how?

Greg G October 31, 2011 at 8:37 pm

Different in that deficits will be harmful when the economy is expanding and beneficial when it is shrinking.

My point here is not to debate whether or not Keynes was right about that. My point is that it is not a claim that anyone will “suddenly become better at planning.”

Methinks1776 October 31, 2011 at 8:40 pm

Deficits for what? Why is the government borrowing money?

Anotherphil October 31, 2011 at 8:46 pm

And if they were good at planning, wouldn’t they see the downturn coming?

Methinks1776 October 31, 2011 at 8:59 pm

Oh, If they were good at planning, there would be no downturn.

PrometheeFeu November 1, 2011 at 2:41 pm

If they were good at planning they would be in business and make loads of money.

PrometheeFeu November 1, 2011 at 1:19 pm

I don’t think it would become better. I think the contention is that some amount of planning would become easier in the short term. In other words, it’s a whole lot easier to see that there are a bunch of unemployed people who just yesterday were building houses than to see the many opportunities made available in real time by technological developments, dynamic prices etc…

But really, all that I am saying is that Russ is not actually addressing Krugman’s point. Russ is saying that sometimes the multiplier is below 1 while Krugman is saying that in a depressed economy, the multiplier is above 1. It is possible for those two claims to be true simultaneously. I don’t have time to look at the papers myself, (I started but then got sidetracked) but it should be possible (and probably not that hard) to redo the paper’s calculations and see if there is any correlation between the multiplier and the real rate of growth. That would actually address Krugman’s claim.

I actually think that you will see such a correlation. I find it difficult to believe the government could successfully target its spending to avoid sectors that exhibit some slack. I think PSST and a bunch of other theories tell us some problems will rapidly show up, but real economic growth should still be roughly inversely correlated with the government spending multiplier.

Methinks1776 November 1, 2011 at 10:03 pm

I think the contention is that some amount of planning would become easier in the short term.

Why would that be the case?

In other words, it’s a whole lot easier to see that there are a bunch of unemployed people who just yesterday were building houses…

Do you want them put back to work building more houses? I’m guessing not. If not, then the government is stuck with the same problem of seeing the many opportunities made available in real time by technological developments, dynamic prices etc…

Just because everyone can see that there are more unemployed people and excess capacity doesn’t mean the government is better able to direct resources. Do you disagree?

PrometheeFeu November 2, 2011 at 12:58 pm

“Just because everyone can see that there are more unemployed people and excess capacity doesn’t mean the government is better able to direct resources. Do you disagree?”

Better able to direct resources for what? is the question. I assume you mean “towards productive uses”. Then I agree with you.

But we are talking about the size of the multiplier. The multiplier is simply the ability of the government to make the GDP number go up. Let’s take the example of digging ditches in 2 situations:
1) The government spends $100 to hire bakers and have them dig ditches. GDP will go down. Or at least, it won’t go up very much because you raise it by $100, but you also have to account for the loss in whatever the bakers were doing.
2) The government spends $100 to hire unemployed people and have them dig ditches. GDP goes up $100. Since those people weren’t doing anything productive, nothing gets substracted from GDP in the short term. Of course eventually, incentive effects etc kick in and you have problems, but in the short term, GDP goes up.

All I’m saying is that when there is more slack, it’s easier for the government to do something that looks more like 2 than when the economy is humming along. Again, I’m just talking multiplier which means short-term change in GDP numbers. To me that mostly shows the foolishness of just counting government expenditure without any further analysis in GDP. Furthermore, as I said above, beyond the short run, other effects kick in which will hurt GDP numbers.

And to answer your above question, I’m not saying that I want the government to put house construction workers back to work building more houses. I want those workers to go through the process of finding a productive place for themselves in the economy through market processes. I’m just saying that in recessions, the multiplier is probably higher than in good times. I agree with Krugman on that part. I however do NOT conclude that the government should do stimulus spending in recessions.

Methinks1776 November 2, 2011 at 1:27 pm

Prom,

My apologies. I see what you’re saying now.

My mind just went directly to requiring any activity undertaken to be more than meaningless (and costly) wheel spinning resulting in GDP increases measured in dug up and refilled holes, funding of shit-on-a-brick restaurants and production of hydrochloric acid toothpaste.

Yes, this exercise really underscores what a meaningless measure GDP is.

Henri Hein October 31, 2011 at 8:46 pm

Or prove that the whole notion of a multiplier is bunk.

Greg G October 31, 2011 at 8:45 pm

You are changing the subject, which was your caricature of Keynes as claiming a sudden increase in the planning skills of government in economic downturns. You cannot show where he made such a claim.

jorod October 31, 2011 at 8:51 pm

The economy makes defense spending economical. We should be thankful we can afford such a good defense establishment.

I’ve listened to demagogues demonize defense spending for over 40 years now. Meanwhile, they are stealing us blind with their social program giveaways.

MrV November 1, 2011 at 7:16 am

Krugman only posts these because he knows it will guarantee NYT traffic for his blog.

Per Kurowski November 1, 2011 at 7:44 am

Military spending in order to remain the absolutely strongest military force is quite different in generating results than military spending in order to not fall too far behind… At this moment the dollar’s reign has a lot to do with the world perceiving the US as the strongest… if that would change… the world might even go for some neo-drachmas instead… especially after the haircut.

Robert Dell November 1, 2011 at 9:57 am

According to a Wikipedia article on the Nazi economy, the massive rearmament policy of the 1930s did lead to full employment, but real wages in Germany dropped by roughly 25% between 1933 and 1938. The evidence suggests there was a draining effect, not a stimulative one, on the rest of the economy.

Kent November 1, 2011 at 11:01 am

As usual, Krugman misses the point on the one hand, and then claims credit for anything positive as Keynesian stimulus. He misses the real historical truth.

First, military spending is generally driven by national security considerations, not economic considerations. Hence there is nothing Keynesian about it.

Second, military spending is a very general term, and this is what enables Keynesians to claim it as just part of government spending. It overlooks the basic question of what the money was spent on. For example, that the economy strengthened in the 1939 – 1941 period is due to two factors: first, the British and French Purchasing Commissions came with check book in hand to buy planes and guns and such; and second, the effects of the Two Ocean Navy Bill were beginning to be felt.

Building battleships effected many sectors of the economy, from miners to steel mills to transportation to chemical plants (for propellants and explosives) to optics to electrical plants to shipyards. The benefits spread through the economy as workers spent their paychecks…and so on.

Compare that economic effect with the profligate wasteful spending of Keynesian Stimuli such as we have seen in the last 3 years.

Unfortunately there are no modern equivalents to building battleships. “Infrastructure” spending is a very poor step-child to economically beneficial projects, and hence cannot have the same broad impact. So too is military spending in and of itself.

Dan November 1, 2011 at 11:58 am

Perhaps it would be a helpful construct to suggest that not all jobs are created equal. We can hire people to dig ditches and pay them a wage, and that is a job. Similarly we can go to war and hire people to work in munitions manufacturing. Again, a job. But we can also encourage entrepreneurs to hire software engineers. Still, jobs. As pervasive (and important) as employment is as a metric for gauging economic health, aren’t we missing something by not tempering that employment by its productive worth? As these columns have pointed out many times, doing non-productive work won’t cure the economy’s ills. It isn’t the “job” per se that we should be concerned with, but rather maximizing productivity. I’d much rather see someone assemple an iPhone than build a tank.

Paul Marks November 1, 2011 at 7:23 pm

World War II G.D.P (and other) figures are, of course, meaningless (because of government price controls, rationing, and so on).

Yet “scientists” like Paul Krugman continue to treat these figures as if they had objective meaning.

Michael J Green November 2, 2011 at 10:41 am

A little late to be posting this, but the following bugs the hell outta me:

Some liberals dislike this conclusion, but economics isn’t a morality play: spending on things you don’t like is still spending, and more spending would create more jobs.

Yet Krugman takes for granted his preference, based on his personal values, for increased employment, regardless of the quantity or quality of output. The argument is still based upon a normative premise, and is no more objective than a liberal (or libertarian) who only wants employment in some industries and not in others. Krugman is still engaged in a morality play, he just snuck in his own moral objectives and assumed they were universally agreed-upon.

And of course, if he denies this, one can propose bringing back old-fashioned slavery as a jobs program. Legally mandated work would solve the employment crisis immediately. Can Krugman denounce that in purely descriptive terms?

Michael Wengler November 2, 2011 at 11:22 am

These comments are a complete waste. After listening to every econtalk podcast, I finally wander over to Cafe Hayek to see what is here.

Is there no way to keep all the useless angry thoughtlless posters out of the comments and have an actual intelligent discussion?

FWIW, I wanted to comment on Russ’ post that while the multipliers are low in a well-functioining economy, it wasn’t at all clear to me that the multipliers are that low in an economy in recession. Hypothetically, when labor is un- or under-employed presumably that would be a good time for someone with money to get a bargain hiring people to do stuff that was worth something. Does data bear this out, or reject it?

Methinks1776 November 2, 2011 at 11:32 am

Michael,

You say: Hypothetically, when labor is un- or under-employed presumably that would be a good time for someone with money to get a bargain hiring people to do stuff that was worth something.

If the something is worth more than what they pay for labour (as you imply), then any time is a good time. The fact that nobody is doing that implies that they aren’t finding positive NPV projects at the moment. They will in time. Do you really suppose that if the millions of eyes in the private sector can’t find non-negative NPV projects that the few in government who have no such motivation can?

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