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.
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.