Wednesday, September 27, 2017

Paul Krugman: Destruction Worshiper

By Ivan Jankovic

Ludwig von Mises once allegedly tried to encourage his students to speak up more freely in class by saying: “Don’t be afraid to speak up. Remember, whatever you say about the subject and however wrong it might be, the same thing has already been said by some eminent economist” (PDF, p.50). One of the ideas that students should be least afraid to freely entertain in this regard is that natural disasters could be economically beneficial.
Every single year, hordes of eminent economists saturate the airwaves and newspaper columns with warnings that
however awful this particular natural disaster might seem, it is actually very good because it stimulates the construction industry. The construction industry in turn, by the well-known magic of the multiplier, stimulates all other industries. Natural disasters hence prevent the scourge of “excessive” saving and speculation by “mobilizing” resources and spurring economic growth.
A particularly passionate destruction worshipper, Professor Paul Krugman, is so impatient with waiting for real disasters to strike that he concocted a clever plan to simulate them artificially. Namely, the Nobel Laureate proposed a few years ago that the government should proclaim (falsely) that aliens are about to invade and destroy the Earth. As a consequence, a massive fiscal stimulus would be adopted, and people would start building all sorts of useless things to defend against the non-existent alien invasion, and we would be out of depression quickly. Even when destruction did not happen, we could pretend it did, so we could derive the full economic benefit of it.
When hurricanes Harvey and Irma hit within a few days of each other, I immediately started counting down days (or hours) until some very eminent economist would step up and explain to us why this carnage was actually very good. And sure enough, it did not take very long. Less than 24 hours after of Irma’s landfall in Florida, New York Fed President William Dudley told CNBC: “The long-run effect of these disasters unfortunately is it actually lifts economic activity because you have to rebuild all the things that have been damaged by the storms.” It was pure Paul Krugman stimmung.
The usual way free-market economists dismiss this kind of economic nonsense is the “broken-window fallacy”: people concentrating on obvious benefits of working to repair the damage while ignoring the long-term and invisible opportunity costs. We see construction in Florida, but we don’t see construction in Texas and Kentucky that would have materialized in the absence of the hurricane.
Yet, the true danger of this primitive way of thinking is two-fold: (1) it is deeply engrained among economists, and (2) it reaches far beyond this quirky, seemingly idiosyncratic soft spot in economists’ hearts for natural disasters and calamities. How many times have you heard that World War II “got us out of the depression”? It is virtually a dogma among economists. Yet, it is 10 times crazier than praising Irma’s wholesome effects on Florida economy. Sending hundreds of thousands of young American men to be killed in Europe and Pacific instead to work and raise families at home “got us out of economic depression”? And tying up the remainder to production of tanks, planes, guns, and ships to be destroyed by Hitler, Mussolini, and Tojo, instead of making cars, buildings, trucks, and machines to make consumer goods; that also “got us out of the depression”? That’s exactly what many economists expect you to believe.
It is difficult to imagine a better and more lucid illustration of the intellectual decline of Western civilization in the last 100 years from this calamitous loss of economic knowledge, this primitivization of economic science. It is now largely reduced to peddling the most egregious fallacies of people whom classical and neoclassical economists of the 18th and 19th centuries called “cranks” and “crackpots.” Those cranks and crackpots are now at the commanding heights of academia, preaching the same old Gospel of destructionism and irrationalism, dressed up as “modern macroeconomics.”
The above originally appeared at the American Institute for Economic Reserach.

1 comment:

  1. This is a consequence of obsession with econometrics. Economists observe a positive historical correlation between spending and prosperity, and mistakenly conclude that greater spending CAUSES greater prosperity.