OK kids, this broken window stuff is really getting out of hand. The problem here is that we’re not even arguing over economics anymore, we’re arguing over who said what and getting really huffy. (As usual, I am totally right and everyone who disagrees with me is either stupid and/or lying, but I’m used to that by this point in my life…)
Here are some possible positions that people might have. Note that in the following, I am going to assume for the sake of argument that it makes sense to quantify “economic benefits” to particular individuals in dollar terms, and that these benefits/harms are interpersonally comparable. I don’t want to argue about the legitimacy of such a move (feel free to do so in the comments); I’m just trying to clarify everybody’s arguments so we can resolve this dispute, and let Miller Time commence.
POSSIBLE POSITIONS ON DESTRUCTION AND THE ECONOMY:
(A) It is good on net. E.g. an earthquake wrecks a $1 billion building, this causes the owners/insurers to spend $1 billion repairing it (so they are that much poorer). However, because there were originally unemployed workers, they benefit $800 million from that round of spending–they valued their leisure at $200 million but now have $1 billion more in income. However, there are further rounds of spending and income generation because of the famous multiplier. When all is said and done, the original $1 billion in extra spending generated $1.84 billion in extra income in the economy. When you subtract out the 20% because of lost leisure, the gain (disregarding the loss of the building) is $1.47 billion. Subtracting the original loss of the building, there is still a $470 million net social gain. The economy truly is that much better because of the earthquake. Some people lost and some people benefited, but in general people are richer–all things considered–because of the mild earthquake.
Note that this approach isn’t susceptible to exaggeration. If the earthquake had caused $10 trillion in damage, the effect would flip, because once we hit full employment the multiplier would drop to 1 (instead of 1.84), and also because the opportunity cost would jump to 100%, not 20%. (I’m not sure if these are two sides of the same coin, or two separate considerations. I’m going on 5 hours of sleep and 9 hours in the car today, and remember, I’m not a Keynesian. But I think a Keynesian could fix up the above to be “right.”)
(B) It is bad on net, but because of originally unemployed resources, it isn’t as bad as the original gross damages would suggest. E.g. an earthquake wrecks a $1 billion building, this causes people to spend $1 billion repairing it, so the owners/insurers are $1 billion poorer. However, after all the rounds of new spending, the originally unemployed workers gain (say) $300 million over and above their foregone leisure. So society on net is worse off–by $700 million–but it’s not out the gross tab of $1 billion as a libertarian would have naively thought.
(C) It is bad on net, just as the gross damages would suggest, because the economy was originally at full employment. (This should be obvious; the economy is down $1 billion because of the earthquake.)
(D) It does $1 billion in gross damages, and net damages, even though there were initially unemployed resources, because the Keynesian “multiplier” is goofy. (This is the position I was arguing for in my Mises article and in the comments here at this blog.)
So I claim that tons of casual statements in the media fall under (A) above. Further, I claim that Krugman has been slippery and it’s not at all clear whether he agrees with (A), or the weaker claim (B). For sure, if Krugman thinks (B), then (A) should just be a matter of empirical case studies; there’s no theoretical reason to think (B) is possible but (A) is not.