It’s embarrassing, really, having so many softballs lobbed my way by one person. Thanks again, Paul Krugman. His latest diatribe is yet another scolding of those who think the deficit is a problem. He wants instead to spend money on government projects to stimulate the economy, deficit be damned. Wars work too, but of course nobody wants a real war, right? So what if (this is Krugman speaking) we were to prepare for an invasion by aliens?* And then the invasion never happens? We would all, according to Krugman, be better off because of the renewed economic activity–just like after WWII.
A blog is too short a space to deal with the whole error of Krugman’s thinking, but the heart of it is called the Broken Window Fallacy. Henry Hazlitt, building on an idea put forth by Bastiat, explains that we might think a broken window in a shopkeeper’s store would stimulate the economy. After all, think of all the people we could put to work fixing the window, cleaning up the glass, etc. Think of how well off the glass seller will be and the people who work for him. Come to think of it, why don’t we just break the window ourselves?
Hazlitt explains that this analysis ignores the hidden effects of the destruction. In short, the money spent on fixing a window cannot now be spent on, say, a new suit, or hiring another employee, or a pair of shoes. These are economic losses, and they amount to more than any apparent increase in activity due to the broken window. The window was perfectly fine and needed no more economic attention. Money that could have spent productively was instead spent making up for a loss.
If we were to prepare for an alien invasion, we could build all kinds of things, and yes, we would have something to show for it–maybe some new technology, for example. But our efforts would be focused on things that people likely do not need and do not want if the invasion fails to occur. We don’t need the pretense of an invasion, in fact. We could outlaw 18-wheelers and deliver goods by backpack. It would employ many more people, solving the unemployment problem. We might even come up with some valuable shoe or backpack technology. Does this make sense to you as an economic strategy, though? Me neither.
Keynes thought, and Krugman agrees, that demand drives the economy. Sluggish economy? Increase demand. How? Give people money to spend. This point of view runs counter to the Austrian School, whose adherents for the most part rely on Say’s Law. Say’s Law suggests that the production of a good will open up opportunities for others to trade for it, using things they have produced. The gist of it is that the creators drive the economy more than consumers.
Here is the critical difference. The producer has to deploy his/her resources wisely, anticipating consumers’ needs. If he/she gets it wrong consistently, the business fails. A Keynesian is not much concerned with whether the thing produced through a government stimulus is itself needed or wanted (like alien-paralysis ray guns or window repair), but the activity that produces the unwanted thing. Their theory states that the new activity “jump starts” demand that is there, but not active. In the end, we get more than we paid for. And if they get it wrong? Tough bananas, taxpayer.
And that, my friends, is why we are here today looking at each other and wondering how anyone could screw up an economy as robust as the US. It took decades, but the idea that deficits are not really a problem has put us in a situation where they are a huge problem, one that now threatens our whole system. In large part, it stems from this one fallacy.
The government produces things that cost many times over what they are worth (rail subsidies, support for airline routes and bridges to nowhere, etc.). It favors one business over another, one industry over another, and one class of people over another. All of these distort market signals, signals that tell producers what they should make and at what price they are worth making. Government resources and the private resources that are affected by government intervention are funneled toward harebrained ideas consistently with no mechanism to correct the mistakes.
If aliens were to invade, maybe it wouldn’t be so bad. Maybe they would they have the good sense to put Congress (minus Ron and Rand Paul) and Krugman in a cryogenic container for us?** That would do more to stimulate the economy than fighting them. After a few millennia, we might develop a way to make use of them and thaw them out.
*Aliens are not really going to invade.
**Advocating disintegration would be in bad taste and would get me on even more government lists.