Monday, August 29, 2011

"Economist" vs. Economist Smackdown

From University of Maryland "economist" Peter Morici (emphasis mine):

"Rebuilding after Irene, especially in an economy with high unemployment and underused resources in the construction and building materials industries, will unleash at least $20 billion in new direct private spending-likely more as many folks rebuild larger than before, and the capital stock that emerges will prove more economically useful and productive

This is not to discount the direct costs to individuals by temporary and in some cases permanent displacements; however, when government authorities facilitate rebuilding quickly and effectively, the process of economic renewal can leave communities better off than before."

From what can only be described as a brilliant economic smackdown from George Mason economist Don Boudreaux, in his open letter to Peter Morici:

"I hereby offer my services to you, at a modest wage, to destroy your house and your car.  Act now, and I’ll throw in at no extra charge destruction of all of your clothing, furniture, computer hardware and software, and large and small household appliances.

Because, I’m sure, almost all of these things that I’ll destroy for you are more than a few days old (and, hence, are hampered by wear and tear), you’ll be obliged to replace them with newer versions that are “more economically useful and productive.”  You will, by your own logic, be made richer.

Just send me a note with some times that are good for you for me to come by with some sledge hammers and blowtorches.  Given the short distance between Fairfax and College Park, I can be at your place pronto. Oh, as an extra bonus, I promise not to clean up the mess!  That way, there’ll be more jobs created for clean-up crews in your neighborhood."

MP: Don, can I offer to help? 

33 Comments:

At 8/29/2011 10:28 AM, Blogger morganovich said...

that is a fantastic letter.

bravo don.

 
At 8/29/2011 11:02 AM, Blogger MMR said...

Perfect! I love it!

 
At 8/29/2011 11:39 AM, Blogger David Andolfatto said...

This reminds me of John Stossel's brilliant report on Cash for Clunkers; see: http://www.youtube.com/watch?v=yabCzpXoGTQ

 
At 8/29/2011 12:06 PM, Blogger Michael Hoff said...

By that theory, Johnstown, PA would be a paradise, having been flooded three times.

Seen it lately? Paradise it ain't.

 
At 8/29/2011 12:29 PM, Blogger Paul said...

This comment has been removed by the author.

 
At 8/29/2011 1:13 PM, Blogger Dan Morgan said...

Hmm. However, if the government replaces your house and car with a new house and new car - wouldn't you actually be better off? In fact, I'd take that offer!

 
At 8/29/2011 1:20 PM, Blogger Walt G. said...

A lot of people burn their property or have their car stolen to be personally better off. I could take Boudreaux up on his offer and be OK as long as I don't leave any evidence to legally implicate myself. In fact, he could be in prison while I enjoy my new house, trailer, and car.

 
At 8/29/2011 1:23 PM, Blogger morganovich said...

walt-

you might, but your insurer would not be.

there is still a net societal loss.

also: unlike your house, you car would be paid for at appraised value, not replacement cost.

if you took good care of it and it was better than average by the blue book, you would still be worse off there.

 
At 8/29/2011 1:39 PM, Blogger Walt G. said...

morganovich,

The risk should be built into the premium for insurance companies who profitably stay in business, and the premiums are paid by the people in the risk pool. Correct? So, it is a wealth transfer from them to me. I call that personally better off strictly using dollar signs as the measurement. We can let someone else figure the morals of that out.

I think I would take a loss on my truck, but be way ahead on my house enough to make up for it. I personally don't want to go through the hassle a loss would cause. I won’t even collect unemployment or take a layoff with almost full pay because I would rather work than be paid for sitting at home.

 
At 8/29/2011 2:18 PM, Blogger Ten Mile Island said...

When, under what conditions, do transfers ever increase GDP?
.

 
At 8/29/2011 2:19 PM, Blogger Buddy R Pacifico said...

Stimulus posing as a disaster. Sledge baby, sledge. Happy days are here again.

 
At 8/29/2011 2:32 PM, Blogger Dr. Tax in Sacramento said...

Has Morici never read Bastiat?

 
At 8/29/2011 2:44 PM, Blogger West said...

The phrase that stuck out the most for me was the following, with the emphasis reversed:

"when government authorities facilitate rebuilding quickly and effectively, the process of economic renewal can leave communities better off than before."

Allow me to rephrase:

When the government gets the hell out of our way, etc., etc.

Notwithstanding the fact that the whole concept doesn't hold any water, anyway.

 
At 8/29/2011 3:00 PM, Blogger Larry G said...

well.. people clearing trees, restringing power lines and rebuilding bridges and roads - don't work for free, eh?

so who will pay them to do the clean up and repair?

the "private sector"?

investors?

:-)

 
At 8/29/2011 3:24 PM, Blogger Methinks said...

You are wrong Mark Perry. It's an economist (Boudreaux) vs. Keynesiac (Morici) smackdown. in other words, it's not a fair fight. The feeble minded Morici doesn't stand a chance.

 
At 8/29/2011 3:36 PM, Blogger Regan said...

@Dan Morgan

Of course YOU would be better off.

If I took one dollar from a group of ten people and gave that money to you, you would be better off right? Would the ten people be better off?

 
At 8/29/2011 4:18 PM, Blogger $9,000,000,000 Write Off said...

Today, Taranto lists some similar Krugman pronouncements.

 
At 8/29/2011 7:00 PM, Blogger Sean said...

For giggles, I'm going to take the opposite tack of Walt G: if someone broke your stuff, you might have to take a second job to replace all of it in a timely manner. Thus, your *measurable* economic output might be increased. And maybe, out of habit, you might keep that second job after you had replaced your initial stuff, showing a *measured* economic net gain. You're welcome.

 
At 8/29/2011 8:53 PM, Blogger Dan Morgan said...

Regan writes:

"If I took one dollar from a group of ten people and gave that money to you, you would be better off right? Would the ten people be better off?."

But that is not the question. The article said "when government authorities facilitate rebuilding quickly and effectively, the process of economic renewal can leave communities better off than before."

So people are reading more into this than what was stated.

 
At 8/29/2011 9:41 PM, Blogger Hydra said...

Both sides could be right. These are not mutually exclusive positions.

 
At 8/29/2011 9:41 PM, Blogger moneybagzz said...

Just my two cents...
Certain events, such as replacing capital equipment, are inevitable. Natural disasters, however, are unpredictable.
Getting the benefits and the costs of 'new, improved' capital sooner may make one better off, just not as ideal as having it fit one's preferred schedule.

My car is not quite 4 years old (83500 miles) and I should be able to get maybe 2 more years out of it before needing a replacement.
If a boulder demolishes it (entirely by chance), I am pulling that replacement forward, experiencing the (presumed) increased efficiency of a new vehicle that much sooner (despite experiencing the cost earlier, and the insurer paying out the claim).

If I INTENTIONALLY destroy it in order to justify a new purchase then I will not experience a net benefit, simply because I loose that two year window in which to accumulate assets for the down payment (not to mention the insurance and legal implications).

Ideally, if you are replacing your car on your own schedule, you benefit the most; if entirely by accident you need a replacement then you will pull costs and benefits forward, just not on your preferred timetable.

I think the same dynamic is at work w/r/t the hurricane damage and the demand that it stimulates. No hurricane, no damage; replace @ your own preference, for maximum utility.

The hurricane removed that element of choice. The consequences should be improved efficiency in the future, but at a cost that is sub-optimal.

 
At 8/29/2011 10:44 PM, Blogger Hydra said...

If I took one dollar from a group of ten people and gave that money to you, you would be better off right? Would the ten people be better off?

====================

Maybe. I can easily think of circumstances under which the ten would be better off. Especially since he is probably going to have to spend that dollar, and they will get it back anyway.

 
At 8/29/2011 10:52 PM, Blogger Hydra said...

Your preferred s hedule for replacement may not be the optimal one. Depends on how much more efficient the new model and the cost of capital. You may choose to hang on to your capital for reasons of retaining the choice of what to spend it on, in spite of the fact that you have a good choice now.

 
At 8/30/2011 1:24 AM, Blogger OBloodyHell said...

LOL.

Classic Broken Window Fallacy argument.

How can anyone claim any expertise in Economics and ever make this mistake?

The man should have his degree taken away, burnt in a blast furnace, the slag/ashes encased with high level radioactive waste in tempered glass, and buried under Yucca Mountain.

On the bright side, the world will probably actually BE a richer place for this example of destruction...

 
At 8/30/2011 1:27 AM, Blogger OBloodyHell said...

>> "when government authorities facilitate rebuilding quickly and effectively, the process of economic renewal can leave communities better off than before."

Allow me to rephrase:

When the government gets the hell out of our way, etc., etc.


Uh, sorry, West, but I would lay good odds that, while completly correct in principle and function, your translation is utterly opposed to everything this idiot intended to mean by that.

Jus' sayin'...

 
At 8/30/2011 1:32 AM, Blogger OBloodyHell said...

.

.

.
Sean, in your honor, I bring you...

Anthony works in the grocery store
Savin his pennies for some day
Mama Leone left a note on the door
She said "Sonny move out to the country"
Ah but working too hard can give you
A heart attack, ack, ack, ack, ack, ack
You ought-a know by now
Who needs a house out in Hackensack?
Is that all you get for your money?

And it seems such a waste of time
If that's what it's all about
Mama if that's movin up then I'm movin out
Mm I' movin out, mm oo oo uh huh mm hm

You should never argue with a crazy mi mi mi mi mi mind
You ought-a know by now
You can pay Uncle Sam with the overtime
Is that all you get for your money
And if that's what you have in mind
Then that's what you're all about
Good luck movin up cause I'm movin out
Mm I'm movin out Mm oo oo uh huh mm hm

Sergeant O'Leary is walkin the beat
At night he becomes a bartender
He works at Mister Cacciatores
Down on Sullivan Street
Across from the medical center
And he's tradin in his Chevy for
A Cadillac ack ack ack ack ack
You ought-a know by now
And if he can't drive with a broken back
At least he can polish the fenders
(repeat chorus)


--- Movin' Out, Billy Joel

 
At 8/30/2011 2:01 AM, Blogger OBloodyHell said...

This comment has been removed by the author.

 
At 8/30/2011 2:02 AM, Blogger OBloodyHell said...

OK, for ANYONE stupid/ignorant enough to actually NOT get what is wrong with Morici's argument, here:



The Parable of the Broken Window

 
At 8/30/2011 8:56 AM, Blogger Sean said...

OBloodyHell,

I'm familiar with the song :) I'm just saying that if you make the argument that people aren't rational (or don't know what's good for them), you can find niches where all kinds of weird thing make sense, situation ally.

 
At 8/31/2011 1:09 AM, Blogger OBloodyHell said...

Sean, was just having fun with the idea... you comment made me think of it immediately.

There are always tradeoffs. Some will work for those "extras", to the extent that they don't actually get to enjoy them, which is... foolish, I'd argue.

But there's a balance, and it's always your life you're dealing with, so it's your choices to make, not someone else's.

Viva Libertarianism!

 
At 8/31/2011 8:56 AM, Blogger Jon said...

Yuck, yuck, yuck.

Morici is pointing out what is true. In an economy where resources are underused (we have a lot of unemployment) it's just true that a hurricane can lead to economic growth. GDP goes up, right? WWII did lead to massive growth, right? Nobody is suggesting we run around and destroy things. Better to have growth that increases overall wealth. But this doesn't change the fact that this destruction will produce economic growth.

So in swoops Boudreaux with his "brilliant economic smackdown." I guess Morici WANTS ME TO BREAK STUFF. Well no. We didn't say that. We'd rather stimulate an economy by doing something useful. Fix already broken roads, build schools, etc. But that doesn't change the facts. If you smash windows you will put idle resources to use and you will produce economic growth.

 
At 8/31/2011 4:07 PM, Blogger Sean said...

Jon,

If you smash windows you will put idle resources to use and you will produce economic growth.

As I was pointing out in a tongue-in-cheek way, this argument is somewhat equivalent to "we'd work harder if someone broke our stuff", which is only a positive thing if we assume irrational market actors (we'd be healthier or happier if we worked harder, but won't get off our butts without outside incentive) or apply utility to a wealth transfer.

In other words, a positive Keynesian multiplier assumes some party (government) can know that individuals would be better off spending (or investing) than saving (there is not a full equivalence) and thereby forcing them to do it. Or else that the government can know better what money should be spent on.

These situations can occur because people don't have great information and are not always rational (especially about public goods): but I don't trust our government to do better.
So while it's actually possible a broken window can have a positive outcome in some cases, I wouldn't bet on it.

 
At 9/09/2011 11:20 AM, Blogger Jon said...

Sean, the claim is not necessarily that the government is smarter and knows more. The claim is that the government has different incentives.

Let's suppose the top 1% had 50% of all the wealth (that's pretty close to true in the US). The government can see that the economy is slowing because the poor don't have any money to spend. Lack of aggregate demand. The government can see that if the rich were charitable this would actually spur the economy.

The rich can see the same thing. The government doesn't necessarily know more than people. The difference is that the government, more interested in the public good, knows that if the rich gave some of their money to the poor this would make things better. The rich might be able to see the same thing. But they don't want to give money away.

If suddenly all the windows of the rich were broken people would have to be employed to fix them. When they've been fixed you've had no change in total wealth. You've just redistributed some money from rich to poor. Does that make the situation better? In the case where the rich are hoarding everything and the poor have little it does. Now the poor spend that money. That spurs demand and creates more jobs.

You could do it other ways of course. You could put the poor to work digging ditches and then re-filling them. Make those with money pay for the work. Would that help our economy in our present situation? Yeah, it actually would.

Not that we're suggesting people dig ditches and re-fill them. Might as well do something useful. But this does work. What did we do in WWII, which ended the depression? Created demand for ships which were then sunk by the Germans. Tanks blown up by the Germans. Planes shot out of the sky by the Germans. That ended the depression. There's better ways to create demand, but destruction does work.

 

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