Krugman: Alien invasion will save economy

[UtwigMU]

World has really gone nuts. A guy with Nobel prize said buildup to prevent fake alien invasion will save the economy.

http://globalpublicsquare.blogs.cnn.com/2011/08/12/gps-this-sunday-krugman-calls-for-space-aliens-to-fix-u-s-economy/

[Umfriend]

And he is right. Mind you, he did not say an alien invasion was coming.

[Dr Mordrid]

Paul Krugman has been teetering on the edge for a few years. While always a leftist ideologue, which is fine, he at least made some sense. Problem is of late his stuff has been increasingly out there.

[Umfriend]

Such as?

[VJ]

While he is right in economical terms (it is the same reason why some economists say that the Fukishima earthquake may be beneficial for the Japanese economy), I think there are better mass-spending schemes that would be more interesting. This one would not be of any use after completion, schemes such as building fast railroads or other major infrastructure works would have a benefit after completion.

[UtwigMU]

Is anyone here aware of the broken window fallacy? I quote the parable here.


Have you ever witnessed the anger of the good shopkeeper, James Goodfellow, when his careless son happened to break a pane of glass? If you have been present at such a scene, you will most assuredly bear witness to the fact that every one of the spectators, were there even thirty of them, by common consent apparently, offered the unfortunate owner this invariable consolation—"It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?"

Now, this form of condolence contains an entire theory, which it will be well to show up in this simple case, seeing that it is precisely the same as that which, unhappily, regulates the greater part of our economical institutions.

Suppose it cost six francs to repair the damage, and you say that the accident brings six francs to the glazier's trade—that it encourages that trade to the amount of six francs—I grant it; I have not a word to say against it; you reason justly. The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child. All this is that which is seen.

But if, on the other hand, you come to the conclusion, as is too often the case, that it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, "Stop there! Your theory is confined to that which is seen; it takes no account of that which is not seen."

It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented.


So if we were to spend massive amount on preventing phony alien invasion, we would simply reallocate resources from other things that might actually be beneficial. How will this create economic growth

[VJ]

But what if the shopkeeper expands his shop, and thus needs new windows? Nothing gets broken then... and the shop would attract more customers... employ more people, ...
The point is: it is better that he spends his 6 francs rather than keep it and do nothing with it.

But as I said, other things would be more interesting to spend the money on then this alien invasion example.

The problem I see as that to spend money you need to have money. And most countries already have a very high debt, so the initial spending of money should come from the people. But people also don't have that much to spend (loans, ....). Basically, everybody has been living above their financial means, then spending more would only give people more debts.

[degrub]

yes, and it it that belief that creates positive economic activity, most times a bubble, as peoples greed and credulity kick in. When that belief falters, we have a "run" and contraction. All a normal part of the psychology.

One reason the fiscal conservatives say the government should keep its hands out of the economy. Let the winners win and the losers lose rather than spread the pain to try to soften it.

[KRSESQ]

Is anyone here aware of the broken window fallacy? I quote the parable here.


Have you ever witnessed the anger of the good shopkeeper, James Goodfellow, when his careless son happened to break a pane of glass? If you have been present at such a scene, you will most assuredly bear witness to the fact that every one of the spectators, were there even thirty of them, by common consent apparently, offered the unfortunate owner this invariable consolation—"It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?"

Now, this form of condolence contains an entire theory, which it will be well to show up in this simple case, seeing that it is precisely the same as that which, unhappily, regulates the greater part of our economical institutions.

Suppose it cost six francs to repair the damage, and you say that the accident brings six francs to the glazier's trade—that it encourages that trade to the amount of six francs—I grant it; I have not a word to say against it; you reason justly. The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child. All this is that which is seen.

But if, on the other hand, you come to the conclusion, as is too often the case, that it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, "Stop there! Your theory is confined to that which is seen; it takes no account of that which is not seen."

It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented.


So if we were to spend massive amount on preventing phony alien invasion, we would simply reallocate resources from other things that might actually be beneficial. How will this create economic growth

The point is not that if he spends 6 francs on a new window he cannot spend six francs on new shoes; the point is that he has spent 6 francs on something. Whether he pays it to the glazier or the cobbler is irrelevent. The point is that the money has been spent. The cobbler or the glazier now has it to spend on their needs. Perhaps the glazier uses it to buy shoes from the cobbler. It continues to circulate through the economy until it comes back to the shopkeeper when the beekeeper's wife comes to buy honey jars.

I oversimplify, of course, and it isn't a zero-sum game. The point Krugman was trying to make is that money the government spends on infrastructure projects is money spent on wages and materials that for the most part must be obtained locally and generally cannot and should not be outsourced to foreign lands. To do so would defeat the entire purpose, which is to put money in your own people's pockets and get them spending it on local goods and services.

[UtwigMU]

Yes but for the most part people don't keep money in a mattress or gold bullion in a safe, they either keep it in a bank, bonds or shares. Thus a bank can lend that money to someone, a state/company issuing bonds can use it on investment or company can use capital it gains from issuing shares. Thus if shopkeeper kept his 6 francs in a bank, the glazier could have borrowed them to expand business. Glazier can either pay with work or in interest for the money.

Now state spending has to come from somewhere:
- savings - this is purely academical since few states have savings but if they had them, it would be well to spend them on infrastructure during recession
- borrowing - this money has to come from somewhere and interest for it has to come from state budget, thus the money paid for interest cannot then in the future be spent on infrastructure projects. It depends, what is the borrowed money spent on. If the infrastructure brings lasting advantages and creates growth, thus reducing debt as part of GDP, it's good. If it gets spent on useless infrastructure or dictator's yacht, then there is no benefit
- money printing - this impoverishes all holders of currency, the buying power of their money is lessened due to new money printed by the state and now they can afford less goods and services. Thus inflation is a hidden tax.

The total amount of circulating money in a fiat currency system should roughly reflect value of goods and services. Now if economy is contracting and state is printing money and spending it, it just creates inflation.


There is however some other "benefit" to inflation: A democratically elected government with limited term can hardly increase taxes and tax increase does not always increase revenue (see Laffer curve) and cut benefits or fire public workers with voting power. Thus they can print money to pay for welfare and to public workers and they can remain elected. Downside is holders of currency are impoverished and imported stuff gets more expensive.

[Umfriend]

Yes but for the most part people don't keep money in a mattress or gold bullion in a safe, they either keep it in a bank, bonds or shares. Thus a bank can lend that money to someone, a state/company issuing bonds can use it on investment or company can use capital it gains from issuing shares. Thus if shopkeeper kept his 6 francs in a bank, the glazier could have borrowed them to expand business. Glazier can either pay with work or in interest for the money.

I have always found the Keynesian analysis difficult. How can, assuming no government exists, the economy have an output below potential?

I guess the easiest way to look at it is as follows:
All Income (Y) is spent one way or the other, either consumption (C) or Investment (I). Obviously, if one invests, someone must save (S). What is important to understand though is that I is not limited to intentional investments. Any accumulation of stock is Investment as it is not consumed. So, if a shopkeer buys carrots which he does not sell, the accumulation of stock of carrots is Investment(!).

As the shopkeeper will not purchase even more carrots, the farmer will be confronted by an increase in his own stock of carrots. Again, that is Investment.

As the farmer does not need more carrots, he will simply produce less carrots. As he produces less carrots, Investment falls and so does Income => we are producing below potential.

To clear all this, the price of carrots will need to fall. However, the price of carrots can only fall if the cost of production falls, i.e., (real) wages fall.

And this is one of the causes why a laissez-faire market does not guarantee a full equilibrium.

Nominal wages and prices are sticky, wages especially. If nominal wages are sticky then the required price adjustements are hard to achieve in that way. Real wages may also fall however by inflation. This is where expansionary fiscal policy may have a role.

Obviously, how, when and to what extent expansionary fiscal policy is appropriate is an entire debate in and of itself. I think it is fair to say that the US has used such policy under Bush which, given that the economy was mostly close to potential, was unwise (combined with relaxed monetary policies). At such time, it would have been wiser to ensure a budget surplus and decrease federal debt. Under Bush, the combined fiscal and monetary policies have allowed huge imbalances to arise, both with respect to the internal position (federal debt) as to the external position (trade deficit). At some stage, such imbalances severly limit the flexibility that a sovereign has and that is what is seen today (in the US but far more extreme in PIIGS of course). In that sense, Obama has received a questionable inheritance.

In the Netherlands, we are "lucky" in the sense that we have been driving back national debt as a %-age of GDP in the good years. Although rising now (not even taking into account the amounts we're guaranteeing or are at risk for one way or another in connection with PIIGS), we still have a AAA-rating, not in the least supported by the fact that we would never come close to a situation where we would willfully default on obligations due to political bickering.

Of course, our highest marginal income tax rate is 52%. As of some euro 55K(!!) taxable income.

[cjolley]

Wag the Dalek

http://blastr.com/2011/08/nobel-prize-winning-econo.php

The alien "squid" from the Watchmen comic



In a recent interview, economist Paul Krugman reminded us that World War II helped play a part in getting the U.S. out of its economic troubles in the '40s. He drew a comparison to the present day and said that the fastest way out of our current turmoil would be an alien invasion. Sound familiar?
Krugman explained it this way:

"Think about World War II—that was actually negative social product spending and yet it brought us out ... If we discovered that space aliens were planning to attack and we needed a massive build-up to counter the space alien threat, and inflation and budget deficits took secondary place to that, this slump would be over in 18 months. And then if we discovered, "whoops, we made a mistake," we'd [still] be better... There was a Twilight Zone episode like this, in which scientists fake an alien threat in order to achieve world peace. Well, this time we need it to get some fiscal stimulus."

And you can give a listen to him here:

http://www.youtube.com/watch?v=E1Fzzs7oVaA

If that idea rings a bell, it's because that plot has appeared in several places. While it originally appeared in an episode of The Outer Limits called "The Architects of Fear," most of us remember this plot from the most-taught graphic novel ever—Watchmen. In it, Adrian Veidt (once the hero, Ozymandias) is willing to murder his former friend and fake an alien invasion in order to prevent nuclear war between the United States and Russia.
The end of Watchmen paints a complex picture in which [spoiler alert!] most of the "heroes" (save Rorschach, who, too, is killed) agree that the lie must persist. In the final pages, the truth arrives in the form of Rorschach's journal at a small, right-wing publication so that one day the truth might be known.
Krugman, ultimately, seems to side with Veidt's solution. The question is, would you? Can a lie of that magnitude be justified in the name of economic stability?
If Krugman is Veidt, then who is our Rorschach?

[UtwigMU]

The thing is inflation (EU and USA both have slight to moderate inflation) is providing incentive for the shopkeeper to invest or spend his 6 Francs. If he kept them in currency, they would slowly devalue over time.

[Umfriend]

Suppose that is true, isn't that what you'd want?