02 Sep 2011

Daniel Kuehn: We Keynesians Have Always Been at Peace With Bastiat

Economics, Shameless Self-Promotion 11 Comments

I realize I should be more selective in my blogging. I shouldn’t keep focusing on some guy’s blog who just started in a PhD program three days ago. A man of my prominence… heh a little Friday humor for you all.

I’m not going to take the time to bring everyone up to speed on this Broken Window debate. Suffice it to say, the more I thought about it, the more I thought that if you believed that there are currently idle resources, and you believed that there is a “multiplier” effect from additional spending when we are in a liquidity trap, then you just might have to agree that a small disaster (so long as nobody got hurt and everything that was destroyed could be replaced) was good on net, in economic terms. It would be an empirical matter, relating to the size of the premium placed on leisure versus the size of the spending multiplier.

So here’s how I made my case to Daniel Kuehn on his blog:

Daniel, let me try it this way. (I’m not trying to trap you, I’m really trying to think this through.)

Suppose John Boehner was visited by the ghost of Keynes Past and realized he was being a jerk. So he capitulates and lets the government run a $1 billion higher deficit this year, by building (say) a bunch of bridges with a market value of $1 billion.

However there is an additional $840 million in economic activity. Let’s assume it creates $840 million worth of new cars.

(I know it’s unrealistic to say it’s all in durable stuff; just trying to keep it simple.)

The only real opportunity cost here–assuming no crowding out–is the forfeited leisure of the unemployed workers.

So it seems to me that if the extra $1 billion in government investment is due to Boehner’s guilty conscience, then society is $1.84 billion richer.

So, if it takes a $1 billion disaster to get Boehner off his duff…aren’t we still up $840 million?

The crucial thing (to me) are the twin Keynesian ideas that there are (a) currently idle resources and hence no opportunity costs in eliciting output from them, and (b) multiplier effects from an initial burst of spending.

Then in the next comment I tried to boil it down even more:

So I guess what it comes down to (possibly) is yes, it’s an empirical matter, but I think the issue is, should the penalty due to forfeited leisure be higher or lower than the gain from the multiplier?

If workers didn’t care whether they were idle or not, and if there were no multiplier, then a disaster would have no effect on society. It would just be a wealth transfer from the victims of the disaster to the previously unemployed workers. After the disaster, the victims would be out the amount of the disaster, but the workers would be up that amount. Total wealth would be the same (because the workers would have repaired the actual damage).

In reality, of course, the workers on net wouldn’t have benefited from the full amount of their paychecks, because it’s a hassle to have to actually build stuff. But if you think that there are sticky prices blah blah blah, then the new spending by the victims has spillover benefits. Thus other unemployed workers can be mobilized, creating net new wealth over and above just replacing the destruction. So if the spillover effect is bigger than the construction workers’ preference for leisure…net gain.

Right?

Now here’s Daniel’s response from two comments (here and here). I’m combining the two things and editing out a lot, to show you (what I consider to be) the crucial rhetorical move. By all means, click the links to see if I’m leaving out anything important. But I think most of you at least will see what Daniel has been forced to do, to continue insisting that disasters aren’t good for the economy:

So if a store owner has to spend money on his window rather than shoes we all agree there’s an opportunity cost, right?

The same is true today. If my stuff got wrecked in a disaster I would have to divert money from other uses to replace it. Sure we’ve got idle resources, but that doesn’t mean people have a billion dollars sitting around – we’re still purchasing things….

No, [your accounting Bob] seems to miss Bastiat’s whole point.

1. You have a reduction of wealth due to the disaster itself.

2. As you say here, workers who do the rebuilding get more income, but

3. The shoemaker gets less income.

2 presumably cancels out 3 when there’s no multiplier (which you stipulated), and then you still have this big gaping hole from 1.

So no, I would not say it’s “just a wealth transfer” in the absence of the multiplier. As Bastiat points out – it’s a loss.

So, to do my best impression of Matt Yglesias, let’s review the argument:

(1) Keynesians say that a natural disaster might do “some economic good” when there are idle resources.

(2) Austrians say that’s nuts, it ignores Bastiat’s Broken Window Fallacy.

(3) Keynesians say Austrians don’t understand Bastiat; he was talking about a case of full employment. When there are idle workers, there isn’t full crowding out, and in fact the disaster’s gross damages are mitigated. However [Kuehn adds] no Keynesian ever said that the disaster would lead to net benefits.

(4) Bob argues that it’s an empirical matter, and that with multipliers (touted by the Obama Administration on food stamps) of 1.84, it sure does seem that a disaster would yield net benefits, so long as it didn’t push us up against full employment.

(5) Daniel Kuehn argues that this is wrong, because we have full crowding out, as Bastiat taught us.

OK I have to leave this now, and go prepare for the Fight of the Quarter. Speaking of which, this Karl Smith guy is very clever–check out this post.

11 Responses to “Daniel Kuehn: We Keynesians Have Always Been at Peace With Bastiat”

  1. Mattheus von Guttenberg says:

    Daniel spends a fair amount of time correcting people on flows and stocks.

    My understanding of his understanding is that:

    A) A disaster reduces the wealth of a community (stock)
    B) A disaster stimulates increased employment because things need to be repaired (flow)

    And I would add, from my own knowledge:

    C) A disaster reduces the real income of all earners because capital goods were destroyed (flow).

    So the Keynesians are technically right when they talk about how disasters can stimulate employment, spending, and yadda yadda. But as Hazlitt said: “No man burns down his own home on the theory that the need to rebuild it will stimulate his energies.”

    The flaw is that the Keynesian argument doesn’t account for the enjoyment of a consumption good, leisure.

    • Daniel Hewitt says:

      The disaster caused some outflow, the repairs caused some inflow, and regardless of whether the stock was increased or decreased, DK can say “some economic good was done”!

  2. Rob R. says:

    It seems that Daniel looked a gift horse in the mouth by not accepting your version of his argument :

    “In reality, of course, the workers on net wouldn’t have benefited from the full amount of their paychecks, because it’s a hassle to have to actually build stuff. But if you think that there are sticky prices blah blah blah, then the new spending by the victims has spillover benefits. Thus other unemployed workers can be mobilized, creating net new wealth over and above just replacing the destruction. So if the spillover effect is bigger than the construction workers’ preference for leisure…net gain.”

    However what I think this shows is that given enough assumptions about unemployed resources, price stickiness, multipliers , market inefficiencies etc. the Keynesian argument holds up.

    Once we have acknowledged that we need to shift the discussion to whether those assumptions are valid and beyond that what are the reasons why there is unemployment , price stickiness and other things that Keynesian like to claim are market failures Also then , even if we grant all the assumption then the “cure” (breaking windows/stimulus spending) is still not a real cure because beyond short-term benefits it just moves resources away from their optimum areas and makes the eventual solution even more remote.

  3. Daniel Kuehn says:

    This is a very helpful post Bob. I think I explained some things wrong. I think there is still a difference (obviously) and I’m trying to write it up now.

    What is always odd is to have the reaction that the opportunity cost position is “not our” position just because it’s also Bastiat’s position… but I explained the multiplier poorly.

    I’m trying to get this restated more formally now – good luck on the debate (but not TOO MUCH luck) if I’m not back online before then.

    • bobmurphy says:

      Thanks (on all counts) Daniel. You’re right, I can’t look at your post right now. Must…defeat…Agent Smith.

  4. Daniel Kuehn says:

    Plenty of concessions to Bob, and plenty of disagreement left to chew on in my response here: http://factsandotherstubbornthings.blogspot.com/2011/09/bastiat-again-little-more-formally-and.html

    I would reproduce in comments here, but I’ve got a few diagrams.

  5. Chris says:

    I don’t know who’s posts make me want to break the non-aggression axiom more, Daniel Kuehn’s or Gene Callahan’s! (Just kidding)

  6. Chris says:

    Now, I know…it’s Daniel’s!

  7. Tom says:

    Money does not multiply. It is a medium of exchange used to facilitate the exchange of incommensurable goods and services. My per diem is $1200. A TV at Walmart costs $300. Walmart does not want 3 hours of my labor. It wants the $300. Walmart in turn uses the value of its floor space to get TVs from Sony. Sony does not want the floor space. It wants the money. The same dollar may be used over and over by different actors, but it does not multiply. The bogus multiplier theory is used to justify government spending. It is a fraud that should be permanently put to rest.

    • Daniel Kuehn says:

      1. You seem to take a bizarrely literal view of the multiplier. No one is saying if you leave it in a closet for an hour you’ll get a multiple of what you left.

      2. Interestingly, you’re literalism sounds a lot like the old arguments against usury.

      3. Money is a medium of exchange but it’s not just a medium of exchange.