31 Oct 2012

“Hurricanes Are Nature’s Keynesianism”

Daniel Kuehn, Economics, Shameless Self-Promotion 65 Comments

I didn’t choose that title for my latest article at The American Conservative–it’s a bit too provocative for my tastes–but I don’t think it’s out of line. I don’t see why our Keynesian friends here (and even in the comments of my article) bristle so much at linking the two. Look at this earlier piece criticizing Bastiat from Matt Yglesias (HT2 Bob Roddis). Yglesias writes:

[YGLESIAS WRITING:] Similarly, Bastiat’s alleged broken windows fallacy involves simply assuming that there’s no such thing as genuinely idle resources or an “output gap.” In that context, yes, it’s a vibrant intuitive depiction of crowding out. But this doesn’t counter any Keynesian or monetarist points about the viability of stimulus during a recession induced by nominal shocks, it involves assuming that no such recessions can occur even though they plainly do.

So would it make everyone feel better if, from now on, I said, “Only Keynesians and monetarists think that natural disasters can be good for the economy?”

(As an aside, I had forgotten just how much I disliked that Yglesias piece. He misspells Bastiat’s first name–and Caplan’s too, but not a big deal–and actually thinks “The Petition of the Candlemakers” is a satire about rent-seeking [!], that may or may not be useful in our current understanding of rent seeking.)

Anyway, back to my article today at The American Conservative. Here’s the news you can use:

[MURPHY WRITING:] Now a sophisticated Keynesian economist might respond to my above arguments along the following lines: “Yes, generally speaking a natural disaster confers no economic benefit whatsoever. However, in the case of idle resources and high unemployment—such as we currently face—the artificial jolt to demand really does raise GDP, rather than simply changing the composition of what is produced. The extra people put to work repairing storm damage don’t simply come from other lines of production, because there was a giant pool of unemployed people on the eve of the storm.”

Even on its own terms, this proposition is debatable. The people unemployed across the country on the eve of the hurricane’s landfall were not perfectly equipped to repair damage on the Eastern seaboard. In other words, much of the labor, glass, wood, steel, rubber, and other resources used in the wake of Sandy will indeed come at the expense of other employments….

However, let us concede for the sake of argument that there is, say, $10 billion in total reconstruction spending, and that this money sucks only unemployed workers back into production; no other output suffers. Just for a specific example, suppose that the $10 billion ends up going to 1 million previously unemployed workers, who each earn $10,000 over a few months repairing the damage. Official GDP goes up, because (by assumption) the output on other items follows the same path it otherwise would have, and now in addition we have the “finished goods and services” of the new window panes, shingles, telephone lines, etc. being produced over the next few months. Can we say in this case that the storm “helped the economy”?

We might say this, if we take “the economy” to be the same thing as “official GDP,” but in so doing we have totally severed the connection between conventional metrics of economic health and actual human welfare. For in this hypothetical case, the boost to GDP would go hand-in-hand with a demonstrable reduction in aggregate economic well-being. In particular, the people spending the $10 billion would be out $10 billion. By construction in this example, their consumption and accumulation of other durable goods is the same, but they are also spending an extra $10 billion just to repair storm damage. So their savings is necessarily lower by $10 billion, and they have nothing to show for it.

In contrast, the previously unemployed workers are up by $10 billion. Yet it’s not a simple transfer or redistribution—these people had to work for a few months to earn that money, so they didn’t actually gain a full $10 billion, as if they had just been handed the money for free. Thus, to the extent that we want to engage in aggregate measures of human well-being, the only sensible conclusion is that “society” or “America” or “the economy” is poorer on net. To repeat, this is because one group of Americans (those suffering storm damage) are down $10 billion and have nothing new to show for it, while another group of Americans (the 1 million previously unemployed who now get hired to fix the damage) are up, but not the full $10 billion, because of the value of their forfeited leisure.

The “macro” case of an economy with idle resources, suddenly being jolted out of its rut by a hurricane, is analogous to a “micro” case of a man who was laid off, agonizing over what to do with himself. Should he go back to school, apply to work at fast food restaurants, start his own lawn-cutting business…? Then, in the midst of his indecision, he realizes his house is on fire! The man suddenly knows exactly what he needs to do with himself—he has to run to the kitchen and grab the fire extinguisher. Yet would anybody dare argue that the fire, notwithstanding the property damage to the house, at least solved the man’s problem of idle labor?

Incidentally, I may have gotten that “micro” analogy from Silas Barta; we were both thinking along the same lines, last time this issue arose, and it’s possible he crystallized it before I did.

Finally, Daniel Kuehn emailed that Morici guy, and Morici said that he doesn’t think a hurricane can make us wealthier. I know it sounds like I’m being stubborn, but if you care, look at my comment to Daniel on Morici’s response. It makes no sense to me; we must be using “wealth” in different ways, or he is using the relevant baseline to be, “What would society’s wealth be in the month after the hurricane, if instead of the storm we had had optimal fiscal and monetary policy?” But on a commonsense meaning of what it would mean for the storm to make us wealthier (not counting human tragedy), I don’t see how Morici gets around the conclusion that his position implies it. I’m being serious, if someone can explain to me what Morici means, I will be grateful; I genuinely don’t understand the sentences he sent to Daniel over email.

65 Responses to ““Hurricanes Are Nature’s Keynesianism””

  1. Daniel Kuehn says:

    I think this hits most of the major points for me, and I think I basically agree with Morici and Yglesias. This is why I hate that these discussions go on with (some people on) one side insisting that the other side “celebrates” the benefits of disaster, or that one side tries to pretend the other side is missing something.

    – Even in a depressed economy there’s bound to be some crowding out – I agree
    – It will be a boost to GDP in a depressed economy – I agree
    – GDP is definitely not a measure of welfare – I agree, and have made this point w.r.t. a lot of issues besides this one.
    – We are on net worse off from a disaster – I agree.

    I think Morici, Yglesias, Krugman, etc. are with me on all of this. See my response to your comment on how I read Morici’s email.

    So I’m really struggling to see where the difference of opinion is. Certainly it’s not a difference that justifies saying Krugman “celebrates” terrorist attacks! The most I can imagine is that your side thinks GDP is so unimportant that it’s not worth talking about. But other than that this post is pretty much on target IMO.

    When someone says something that sounds off-the-wall crazy a good rule of thumb is to consider that maybe you misheard. [I’m using “you” in the general sense… you, Bob Murphy, while emphasizing different things from me have been pretty good on these issues].

    • Ken B says:

      I don’t see Morici arguing the storm makes us better off. I see him using the storm to make what is to him a compelling point about unused resources lying fallow. The goal of making this point is to advocate for more government stimulus to use the resources lying fallow.

      “Look the storm made us worse off, but not by as much as was destroyed. Why? Because (insert analysis of idle resources here). But wait! If we (insert stimulus idea here) we will see a true gain because (repeat analysis of idle resources here)”

      • Bob Murphy says:

        “Look the storm made us worse off, but not by as much as was destroyed. Why? Because (insert analysis of idle resources here). But wait! If we (insert stimulus idea here) we will see a true gain because (repeat analysis of idle resources here)”

        It’s just amazing to me that you guys find “the point” of someone (Krugman, Morici) that doesn’t exist in the original article. He didn’t say a single one of those sentence fragments in his article, did he?

      • Arthur Krolman says:

        Are you saying that resources lying fallow is sub-optimal? I guess you don’t know much about farming for one thing. And there are many other good business reasons to leave resources unspent in “fallow”. Even the Fed often says “we still have plenty of firepower left”. Doesn’t that imply their firepower has been “lying fallow”?

        • Ken B says:

          Are you saying I am saying what Morici is saying?
          I’m not.

          Just saying.

          • Arthur Krolman says:

            Do you agree or disagree with Morici about the inadvisability of allowing resources to lie fallow? Full disclosure: I disagree.

            • Ken B says:

              I can agree or diagree and it won’t affect my characterization of his argument. But to quote Milton “They also serve who only stand and wait.”
              The fireman dawdling in my local firehouse are not in fact doing nothing.

            • Arthur Krolman says:

              Just saw your comment below:

              “Even if Morici is right about fallow resources having no opportunity cost”

              …so I guess I have my answer. Oops.

              • Ken B says:

                Then you might reasonably conclude I used the word “fallow” judiciously. Just sayin’.

    • Major_Freedom says:

      How can you agree with all these points AND agree with Yglesias? The points in this post contradict what Yglesias wrote.

  2. David Beckworth says:

    Bob, I agree with you. An economy at less than full employment has idle resources sitting around. A natural disaster hits and those idle resources get put to use in the affected areas. On the surface it seems like a win-win situation. However, there is still a lost opportunity for those resources. For example, if formerly idle materials are used to rebuild a destroyed library, they can’t be used (when the economy returns to full employment) to build another library. Instead of having two libraries (the one destroyed and the one that would have been built when full employment returned) we only have one now.

    • Bob Murphy says:

      No David Beckworth, I won’t take “yes” for an answer! I still think you are not getting the full brunt of my dogmatism. But I have a conference call and must return at a future date…

  3. Maurizio says:

    I have a related question. What happens to _prices_ when someone “breaks windows” during a recession and there’s unused capacity? Let us assume that wages do not rise until full employment. Ok, but do other prices rise? The prices of goods? Keynes says (I think) they don’t rise until full employment. But if prices don’t rise, what induces employers to hire more people? Could someone please explain this to me?

    • Matt Tanous says:

      People have invested in unprofitable lines. Ignoring why this is for the moment (as Keynes had no sensible answer), it is true that resources will become idle – that the labor and capital used to produce those unprofitable goods are now unused.

      Prices do rise under the “broken window” case – and the general increase in demand case (although looking at aggregate demand ignores the structure of production and the need for a shift to meet stimulus spending). This allows wage rates to continue at the unsustainable level that existed prior to the crash, to some degree. A healthy recovery, however, is instead founded upon having people shift to taking slightly lower nominal wages in other lines of production, as their current wages were not sustainably bid up in non-profitable production processes.

      Basically, the economy could sustainably support P (current production) + G (sustainable production growth). Something occurred (Austrians would say credit expansion) that caused people to try to produce P + G + U (unsustainable growth). The stimulus solution is to – instead of allowing an adjustment to the portion of P + G instead of U (which bid resources away from other production) – tack on S (stimulus production) to get P + G + S, and continue as normal. Needless to say, adjusting to meet the temporary demand for S actually hurts the adjustment to the actually demanded goods P + G. Not to mention the fallacy of having people that don’t produce goods for sale able to buy goods anyway, in contravention to Say’s law (which was NOT refuted by Keynes, any more than evolution is “refuted” by creationists that don’t understand the basic concept.)

      • Gene Callahan says:

        “Ignoring why this is for the moment (as Keynes had no sensible answer),”

        Sure he does. The lines appeared to be profitable under the old, optimistic assumptions. But pessimism has set in, and now they are no longer so. That answer may be right or wrong, but it is not unsensible!

        • Matt Tanous says:

          “That answer may be right or wrong, but it is not unsensible!”

          I don’t see how it is any more than a sidestep of the issue. He provides no explanation for why the entire system goes from being generally optimistic to deeply pessimistic, such that the optimists cannot just buy from the pessimists. The problem of the “cluster of errors” goes entirely unexplained by Keynes’ “animal spirits”.

          But what do I know? After all, “there are no inherent reasons for the scarcity of capital”, right? I learned that from Keynes.

  4. KPres says:

    I’m not an economist, but the way I see it, the very conditions that allow natural disasters to increase GDP (ie, price disequilibrium), also degrade the connection between GDP and real [economic] welfare, and to the same degree, because mere transactions only reveal increased utility to the degree that prices accurately reflect supply & demand. So it seems to me that they’re the one’s misapplying the concept of an idealized economy when they point to higher GDP as evidence of increased welfare. The actual welfare would be the same or decreased even if GDP rises in such a situation.

    • Matt Tanous says:

      Either government interference makes GDP a useless indicator of economic welfare, or the USSR was a fantastic place to live, with all sorts of economic riches. I’ll let you decide.

    • Daniel Kuehn says:

      That is fantastic!

      • Ken B says:

        He’s a master, the modern Bastiat.

      • Bob Murphy says:

        “The ants will emerge stronger and better because of the stick incident.”

        Oh wait, you thought I was saying it helped them? How could you possibly think such a thing? I was crystal clear that it was awful.

        • Ken B says:

          And I never said otherwise. And I never said otherwise myself. I was not citing Steve against you Bob. I’m citing it as a brilliant way to make the point. I even agree with you (and Steve and Bastiat) about destruction and Broken Windows. (Even if Morici is right about fallow resources having no opportunity cost the effect cannot make us better off, just partially redress damage.)

          I don’t agree with what you said Morici meant.

          • Major_Freedom says:

            And I never said otherwise.

            Bob never said you said it was otherwise.

            • Ken B says:

              Bob asked if I thought he did. The “context clue” (in Bob’s lapidary phrase) was his use of this squiggle: “?”

              • Major_Freedom says:

                Bob asked if you thought he meant it helped them.

                He didn’t say that you said it was something other than awful.

    • Richard Moss says:

      I don’t get what’s great about Landsburg’s comment. Ants are always fully employed, stick or no stick, aren’t they?

      • Bob Murphy says:

        I don’t get why Ken B. is so smitten either, except for his general man-crush on Landsburg. I mean, Steve’s comment is fine, but it seems to be at Step 3 in the debate when Yglesias and I are at Area 51.

        • Richard Moss says:

          Please keep tabs on Yglesias while you are there. I don’t trust him not to spread any rumors about aliens …

        • Ken B says:

          Actually my man-crush is for Gene Callahan. I hope you’re not saying there’s anything wrong with it.

          Landsburg’s comment is great for the droll concluding line “Go ahead and acknowledge…” Some of us appreciate these niceties of language. It’s also great because it circumvents the big picture problem. A lot of people have trouble thinking about the seen and the unseen together. But with Steve’s example one can mentally see everything all at once. That helps. (Bob, you’ve taught undergrads; tell me I’m wrong.)
          So an effective, memorable, correct argument pithily and elegantly put. Sounds like a great comment to me.

          • Bob Murphy says:

            Again Ken, my purpose here is not to belittle Landsburg. But the Keynesian response to the “broken window!!” claim has been to say, “We’re not saying the activity per se is good, we’re saying that it’s better to mess with an ant colony that was originally unemployed versus one that was at full employment gathering food and pampering the queen.” So to say to such a person, “Go ahead and acknowledge…”

            I mean, look at the comments in the post where Steve wrote it up. He was getting way more pushback than I was in my posts here (perhaps because he has more Keynesian sympathizers whereas I’ve driven them away).

            I mean, suppose in the debt debate I said, “Go ahead and borrow $1 trillion to pamper the queen. Tell me if you haven’t just burdened the larvae, and go ahead and acknowledge that they owe it to themselves and haven’t borrowed it from the grasshoppers.” Would you find that droll and convincing?

            • Ken B says:

              More droll and convincing than your OLG example!

              I don’t think we’re really disagreeing here Bob. We both agree random or widespread destruction is not good for the economy, and understand Bastiat was right.

            • Ken B says:

              “I mean, look at the comments in the post where Steve wrote it up. He was getting way more pushback than I was in my posts here ”

              Count your blessings Bob! I am getting pushbackl there now on my assertion that … Jim Crow laws applied to buses and streetcars!!

    • Arthur Krolman says:

      OK, Gamble. I checked your link and I quote from it:

      “If we determine to have a new definition, said Malthus, in every case where the old one is not quite complete, the chances are that we shall subject the science to all the serious disadvantages of a frequent change of terms without finally accomplishing our object.”

      Here’s my attempt at a working definition of idle: A resource is idle if it belongs to a rich businessman who doesn’t really need it, perfectly ripe for wise government authorities to effectively command into service after a big wind storm and give a nice boost to GDP. /sarc

      Seriously, in my opinion every individual’s property, including and especially his body, is his own to decide when and if to utilize or preserve in idleness. He may choose to withhold utilizing his property to generate material gain when a violent thief is at large, for example. A violent storm or violence threatening state are both anathema to human welfare, regardless of what the US Dept of Commerce may publish to the contrary.

  5. Transformer says:

    – an economy has a GDP of $20Billion a year
    – low expectations for the future cause everyone to cut back spending and GDP falls $10B a year
    – sticky prices lead to 50% of labor being made unemployed
    – A storm hits and causes 20BN of damage
    – People increase spending to repair damage and GDP returns to $20B and unemployment also drops
    – People seeing their income increase raise their expectations about the future and continue to spend
    – GDP remains at $20B
    – the storm has cured the depression !

    This example assumes sticky prices and no crowing out but you could easily build that in and and end up with the same results.

    • Bob Roddis says:

      What’s the big deal with “sticky” wages and prices? Are people going to hold their breath until they turn purple or starve to death before accepting a market wage or price? If they do, why should I care?

      FYI I don’t. Especially, since the entire predicament would have been caused in the first place by government funny money and/or deficit spending on either wars and/or buying votes.

      If people are too stupid to know what wage or price to charge, they’re too stupid to be allowed to vote. Or reproduce.

      • Transformer says:

        While your views on sticky wages are fascinating in a scary kind of way it does not address the question of whether a depression caused by sticky wages could be cured by a shock that increases aggregate demand and in the process lifts expectations about future aggregate demand.

        • Major_Freedom says:

          i think pointing guns at people in order to bring about these magical “shocks” is what is kind of scary, but hey, that’s just me. I get more scared with guns than I do with people who don’t set prices for their own property in accordance with what some random non-property owners declare is efficient, or optimal, or what have you.

          • Transformer says:

            Where do the guns come into it ? The shock is the storm.

            • Richie says:

              Went totally over your head. Typical.

              • Bob Roddis says:

                My impression of statists is that they cannot or will not comprehend that by definition state action requires a threat of a SWAT team, chains, a paddy wagon and a cage. At the very least. As opposed to being asked and having the option of saying no.

        • Matt Tanous says:

          ” a depression caused by sticky wages”

          In other words, a depression caused by people’s voluntary refusal to work for a reasonable wage rate.

          Voluntary unemployment should be ignored. Unless we want to start impressing women and children back into the workforce because you aren’t allowed to refuse, voluntarily, to work for low wages.

          And “aggregate demand” means nothing in the economy. Specific demand for specific things is what matters. The producer of cars isn’t going to start investing a ton because demand for TVs went up.

          And most of the new employment from “aggregate demand shocks” is actually due to price inflation dropping real wages without dropping nominal ones. Drop real wages enough, and then not only can everyone work (being paid very little) they have to, as you just destroyed the purchasing power of their savings, which was tiding them over while they looked for a job they were willing to take.

          Another problem? Subsidized unemployment. Makes it really easy to remain voluntarily unemployed until you get the unrealistic high wages you really want.

    • Richie says:

      the storm has cured the depression !

      Yay! Wait, what about the wealth that was destroyed after the storm? That must be replaced, right? So, the resources devoted to replacing the destroyed wealth cannot be used to add to the wealth that existed before the storm. Uh oh.

      • Transformer says:

        The storm destroyed $20B. Nothing can bring that back.

        But the extra spending that the storm induced led people’s expectations about the future to be set hire, which led GDP to increase by $10B per year and end the recession. It it would otherwise have gone on for 3 years its costs would have been $30B, but the storm only cost $20B so we’re $10B ahead (minus a bit for crowding out, lost leisure etc)

        • Matt Tanous says:

          Why do you presume that people are not smart enough to realize that the rebuilding of bridges and roads due to storm damage will only provide temporary jobs for people? Why do you presume to believe that people make their decisions based on some lump sum number economists put in front of them, and not their real-world business situation?

          • Transformer says:

            “Why do you presume that people are not smart enough to realize that the rebuilding of bridges and roads due to storm damage will only provide temporary jobs for people? ”

            In a free market all jobs are temporary and depend upon other people have a need.

            What individuals and businesses spends depends upon the current situation plus expectations about the future.

            In this example the storm forces a change in the current situation and gives people a need to hire other people , and this ends up changing expectations about the future.and increasing GDP.

            BTW: There is no govt involved.

    • Tel says:

      People seeing their income increase raise their expectations about the future and continue to spend

      Ahhh, so the storm is really the confidence fairy in disguise?

      Well that makes a lot of sense.

      • Transformer says:

        The storm forces additional spending. And this additional spending awakes the confidence fairy.

        • Transformer says:

          BTW: I know how Bob Murphy loves counterexamples.

          The storm story could easily be the basis for a model showing that a natural disaster has a net benefit to the economy.

          This would be a counterexample to his apparent view that this could never happen.

          • Major_Freedom says:

            If it’s easy, you should be able to give one.

        • Major_Freedom says:

          That makes no sense. Spending, including investment, never dropped to zero. The confidence fairy was not asleep.

        • Tel says:

          OK, so if the ultimate object of the exercise is to “awaken the confidence fairy” then is fear and destruction going to achieve that?

          Krugman talks about the benefits of a simulated alien invasion, or pretending that climate change is a problem, or stuff like that, bit somehow I don’t think those things do must to improve the confidence of most people. Sure, they give an excuse to increase government powers, but most people just don’t trust governments any more.

          • Tel says:

            “do must” ==> “do much”

            I gotta learn to type straight.

  6. Bob Rooney says:

    What would happen if a natural disaster wipes out all (and onlye) excessive debt (killing the debtors) and idle ressources (killing the unemployed and destroying housing overhang)? Now the balance-sheet ist repaired and full-employment is achieved. Are we now poorer in wealth (obviously), but better of in policy because fiscal / monetray policy can now “return to normal”?
    Sounds like a keneysian-broken-window-austrian-liquidate-everything-win-win-combo-fallacy…

  7. Bob Roddis says:

    DK says:

    Does it say something about me or about Austrians that I lost respect for George Noory when I found out he thinks fiat money is a scam?


  8. Bob Roddis says:

    Hayek says:

    You see, another political element was that, of course, politicians just lapped the argument and Keynes taught them if you outspend your income and run a deficit, you are doing good to the people in general. The politicians didn’t want to hear anything more than that — to be told that irresponsible spending was a beneficial thing and that’s how the thing became so influential.


  9. Ken B says:

    I’m being serious, if someone can explain to me what Morici means, I will be grateful; I genuinely don’t understand the sentences he sent to Daniel over email.

    I already tried and you slammed me for paraphrasing. However let me try again, with a new analogy. So taking that email with DK:

    Water can flow slowly into a tank through a pipe. The pipe is below the surface. The rate at which the water can flow depends in part then on the water pressure and so on the level of the tank. We have reached equilibrium, and the flow is stopped. Now we lose a large amount of water suddenly. The level sharply decreases. The flow now increases. The flow, which was not possible at the higher level, will partly compensate for the lost water over time.

    I’m not endorsing this. I’m just saying there are lots of ways to make sense of Morici. You just have to accept he thinks that the increased flow will be *caused* by the drop in level. He isn’t thereby committed to saying we end up with more water.

    • Bob Murphy says:

      OK Ken, and then how do you reconcile that with him also clarifying, “Oh, if the water originally drops by 10 feet, then I’m saying the flow will increase, but if all that extra flow did was replace the original water drop, then we’d still be down 10 feet of water.” That makes no sense to me, and it’s what he seemed to be saying to Daniel over email.

      • Ken B says:

        Because he didn’t say that. Not in the exchange with DK you asked about anyway. Those were the sentences in my remit, right? if he said it elsewhere he might be contradicting himself. But not in that note, and not in what I have read (which I concede is a limited amount).

        He can say sensibly enough though “we’ll be down a time integral of a volume of water, that volume eventually diminishing to 0. So at first we’ll be down the whole amount but over time we” get some of it back because of forces unleashed by the drop.”

  10. Economic Freedom says:

    >>>>”Bastiat’s alleged broken windows fallacy involves simply assuming that there’s no such thing as genuinely idle resources or an “output gap.”

    Bastiat’s assumption rests on the tacit insight that there simply is no such thing as “idle resources.” In fact, the phrase itself — “idle” + “resources” — is an oxymoron. By definition, if something is a “resource”, it has a use, whether in the present or in the future. If you’re assembling a jigsaw puzzle, the pieces that haven’t been put in place yet are not “idle”; in fact, what makes them “pieces” (i.e., resources for the puzzle) in the first place is the very fact that they are *going to be used* in the puzzle at some point in the future — when the puzzle builder learns where they should be inserted. The only time something is truly “idle” is when it’s not truly a “resource” at all; e.g., iron ore on Mars is “idle” because, at present, it’s not a “resource” for mankind.

    Those who seriously use the phrase “idle resources”, seriously misunderstand what “resources” actually are.

  11. Silas Barta says:

    I just want to add that this is a beautiful sentence and criminally under-appreciated point:

    We might say this, if we take “the economy” to be the same thing as “official GDP,” but in so doing we have totally severed the connection between conventional metrics of economic health and actual human welfare.

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