When libertarian economist Javier Milei was elected as Argentine president to fix the results of decades of mismanagement, he proposed a series of economic reforms dubbed by his critics as “shock therapy" – including slashing government spending, cutting bureaucracy, and devaluing the peso.

Critics warned these measures would be disastrous, and many took it for granted that the remedies would deepen Argentina’s recession. But as Jon Miltimore explains in this guest post, a year on and it's becoming clear that the reverse has happened ...

Did Javier Milei Just Lift Argentina Out of Recession? 

by Jon Miltimore

During his first year as president, Javier Milei has been waging a bitter but largely successful campaign against inflation.

Now, Argentines received more welcome news: their economy is growing again.

“Economic activity rose 1.3 percent from April, above the 0.1 percent median estimate from analysts in a Bloomberg survey and the first month of growth since Milei’s term began in December,” Bloomberg reported on July 18. “From a year ago, the proxy for gross domestic product grew 2.3 percent.”

The positive economic report, based on data from the Argentine government, is a surprise to many.

The 2.3 percent year-over-year increase defied expectations of a decline of similar magnitude, Bloomberg reported. As Semafor notes, the Argentine economy was projected to have the least economic growth of any country in the world in 2024, according to the International Monetary Fund.

A ‘Wrecking Ball’?

Argentine economists I spoke to said that the numbers are encouraging, but the country’s economy is far from being out of the woods.

As most people know, Milei inherited an economic mess decades in the making. When the self-described anarcho-capitalist assumed office in December, Argentina was suffering from the third highest inflation rate in the world—211 percent year over year. The poverty rate was north of 40 percent, and Argentina’s economy was declining.

With his country’s economy in a full tailspin from decades of Peronism, Milei proposed a series of economic reforms dubbed “shock therapy” that consisted primarily of three components: slashing government spending, cutting bureaucracy, and devaluing the peso.

Critics warned that these measures would be disastrous, and many took it for granted that the remedies would deepen Argentina’s recession.

The former head of the International Monetary Fund’s Western Hemisphere Department, Alejandro Werner, said Milei’s strategy could tame inflation, but at great cost.

“A deep recession will also take place,” Werner wrote, “as the fiscal consolidation kicks in and as the decline in household income depresses consumption and uncertainty weighs on investment.”

Felix Salmon, the chief financial correspondent at Axios, concurred, comparing Milei’s policies to “a wrecking ball.”

“Milei’s budget cuts will cause a plunge in household income, as well as a deep recession,” wrote Salmon.

Despite these warnings, Milei delivered his “shock therapy” plan in the first few months of his presidency. Tens of thousands of state workers were cut as were more than half of government ministries, including the Ministry of Culture, as well as the Ministries of Labor, Social Development, Health, and Education (which Milei dubbed “the Ministry of Indoctrination”). Numerous government subsidies were eliminated, and the value of the peso was cut in half.

Even before Milei’s policies were given a chance to succeed, many continued to attack them.

“Shock therapy is pushing more people into poverty,” journalist Lautaro Grinspan wrote in Foreign Policy in early March. “Food prices have risen by roughly 50 percent, according to official government data.”

Yet the official government data Grinspan cited was a report from December 2023, before Milei had even assumed the presidency.

Contrary to the dire predictions, the results of Milei’s policies have been better than even many of his supporters had dared hope.

During the first half of 2024, inflation cooled for five straight months in Argentina, the Associated Press reported in July. Though consumer prices were up 4.6 percent in June from the previous month, that’s down from a 25 percent month-over-month increase in December, when monthly inflation peaked in Argentina. Meanwhile, in February the government saw its first budget surplus in more than a decade. And just days ago, an economic report was published showing a massive decline in poverty in Argentina.

Many doubted that these successes were possible, and the conventional wisdom said that wringing inflation out of the economy and slashing government spending could only be achieved at great cost: a deepening recession.

Escaping Recession?

The data suggest that, contrary to what so many people predicted, Argentina may not be slipping deeper into recession following Milei’s shock therapy. Instead, its economy is healing.

“Argentina is officially out of recession after 7 months of Javier Milei’s economic reforms,” Daniel Di Martino, a University of Columbia student pursuing his PhD, tweeted. “Remember, the economy was in recession since mid-2023, half a year before he got into office.”

Others, however, warn that it’s premature to say that Argentina is out of its recession.

“I will be careful of claiming ‘out of the recession,’” Nicolás Cachanosky, a native of Argentina and Associate Professor of Economics at the University of Texas at El Paso, told me. “Maybe the Argentine economy is getting out of a recession. Maybe not. All I’m saying is that it is too early to confirm, given these numbers.”

Cachanosky notes that interannual figures can be misleading, and that the data in question are relative values and not technically growth rates. While it’s still unclear where Argentina’s economy will go from here, it bears exploring why so many people, including many economists, doubted that its economy could be growing again already. There are two primary reasons, one of which is legitimate.

The first reason is a legitimate concern that sharp reductions in government spending will likely result in short term pain, even though it’s a necessary step toward economic healing.

“The government spends a bunch of money and keeps people employed,” one economist I spoke with told me. “When that slows down, you’re going to be able to measure the impact of that.”

This is why some free-market economists I spoke with expressed doubts that Argentina had already escaped recession. Cutting tens of thousands of jobs, even unproductive ones, and slashing hundreds of millions in subsidies is bound to have an impact on economic activity. Long term that impact will be positive because it will result in a more efficient allocation of resources, but it’s not unreasonable to assume it will first result in economic pain.

A second reason is a poor understanding of economics.

In the Keynesian school of economics, it’s taken as gospel that government spending fuels economic growth. This is why you’ll find so many Keynesians who argue that even destructive phenomena like war and hurricanes are actually good for the economy, because they stimulate government spending.

This was the argument economist Paul Krugman made several years ago when he said that an alien invasion, real or fake, would be good for the economy, since it would mobilise a massive amount of military spending, similar to World War II.

The idea is simple: government spending is good even if it’s producing goods that are unnecessary, such as weapons created for an alien invasion that is not even real.

The idea that Argentina would be slashing government spending during a recession runs counter to Keynesian orthodoxy, which teaches that recessions are precisely when “fiscal stimulus” is needed the most, since negative economic conditions often result in a predictable market failure: a decline in spending.

Broken Windows and Economic Growth

In other words, Argentina is flipping the macroeconomic script. In a world in which government spending hikes are deemed “a perfect solution in battling recessions,” Milei is providing the opposite: he’s slashing government outlays.

Yet a Mercatus Center study conducted by Tony Caporale and Marc Poitras, titled “The Trouble with Keynesian Stimulus Spending,” points out the obvious problem with such stimulus schemes:

[The Keynesian] approach fails to account for several significant sources of cost. Besides the cost of waste inherent in government spending, financing the spending requires taxation, which entails an excess burden, the reduction in output resulting from workers’ reduced incentive to work. Furthermore, the employment of even previously idle resources involves lost opportunities to invest in alternative uses of these resources.

Caporale and Poitras are talking about an elementary economic concept: opportunity costs. These costs refer to what one foregoes or gives up to purchase a good or service, an idea the economist Frédéric Bastiat explored in his famous “broken window” parable. Economist Jonathan Newman offers a tidy summary of the story, which appeared in Bastiat’s 1850 essay 'That Which Is Seen, and That Which Is Not Seen.'

It goes like this: a boy throws a brick at a baker’s window and a crowd gathers to discuss the economic consequences. They console the baker by pointing out that glass-repair companies need business, too, so it isn’t all bad news. After further reflection, they conclude that total employment and spending in the community has increased because of the broken window, and that this little spark of spending by the baker to repair the window sets off a chain reaction of spending. Now the glazier has extra cash to spend on various items, and the people who sold him those things now have extra income, and so on.

The crowd draws the conclusion that destruction is beneficial for the economy because it stimulates spending and employment.

Does this sound absurd and too good to be true? Well, it is. Bastiat’s parable revealed the absurdity of Keynesian economics before Keynesian economics existed.

Bastiat was challenging readers to see the unseen. Economists shouldn’t focus solely on the glazier’s profits that resulted from the rock thrown at the baker’s window, any more than they should focus solely on the jobs created by military spending. They must also focus on the costs of these actions, too.

This is the flaw that has long plagued Keynesians, and it helps explain why so many took it as gospel that slashing government spending in Argentina would deepen its recession.

When it came to Milei’s reforms, critics and prognosticators were focusing on the seen: tens of thousands of lost jobs, and billions in reduced spending. On one hand, this is perfectly rational. These cuts will come with easily measurable costs, and are likely to reduce economic activity in the short term. On the other hand, whether they are seen immediately or not, there are countless opportunities created by Milei’s reforms, which are dismantling the least productive parts of Argentina’s economy: its bureaucracy.

Whether Argentina’s burst in economic activity in May was a blip or the beginning of a long-term trend of economic recovery is something only time will tell. (Data indicate there was a sharp increase in agricultural production, which could be explained by favourable seasonal conditions or some other factor.)

It’s certainly possible that, after decades of economic pain from Peronism and mass money-printing, Argentina has more work to do before its economic recovery arrives. Yet Adam Smith once noted that the formula for prosperity is surprisingly simple, and it doesn’t contain government “stimulus”: just “peace, easy taxes, and a tolerable administration of justice.”

Milei knows this, fortunately. And he is showing no signs of relenting in his campaign to crush inflation and government spending to return Argentina to prosperity.

“What [is] the alternative?” he told the BBC. “To continue to print money like the previous administration that generates inflation and ends up affecting the most vulnerable?”

* * * * 

Jonathan Miltimore is the Managing Editor of FEE.org and a Senior Writer at AIER. His writing/reporting has been the subject of articles in TIME magazine, The Wall Street Journal, CNN, Forbes, Fox News, and the Star Tribune.

His article first appeared at the FEE blog.

WAR: "Does blowing up millions of dollars worth of resources sound like a good way to fix the economy?

"While it’s true that war can increase aggregate spending (and therefore GDP numbers), consider what happens with the spending. It purchases machines like tanks and artillery which are sent overseas and promptly blown up.
    "Does blowing up millions of dollars worth of resources sound like a good way to fix the economy? When you look past the temporary fluctuations in economic statistics, it’s clear that these policies can only be destructive. If that weren’t the case, the government could improve the economy by building drones which blow each other up over the ocean! ...
    "The mistake that increased spending in itself causes economic growth is known famously in economics as the broken window fallacy. When we spend money on a war, it’s easy to see the upsides such as income to steel manufacturers who build tanks. What we don’t see is the downsides (the alternative way we could have used the steel rather than blowing it up, for example)."

~ Peter Jacobsen, from his article 'Did FDR Create the Middle Class: What is (and isn’t) the Real Cause of Growth?'

The Political Hocus-Pocus They Call Modern Monetary Theory

 

Modern Monetary Theory claims to be both new and a theory of economics -- one that claims you really can get something for nothing as long as the bill is always sent to the government. But as Per Bylund explains inthius guest post, it is not a theory of how the economy works at all, and so does not concern itself with worldly things like production, innovation, entrepreneurship, scarcity (other than as potentially causing inflation), or time. It is instead a pseudoreligious conviction that anything is possible and that the one and only solution is always Glorious Government.

The Political Alchemy Called Modern Monetary Theory

by Per Bylund

The new kid on the economics block is something called modern monetary theory (MMT). The name is modern, but the "theory" is not. It comes from a time when folk still considered a perpetual-motion machine a scientific possibility. Like MMT however, it never was, or will be.

Proponents adamantly claim that it is both new and a theory of economics. To make it appear this way, they dress the ideas in unusual-sounding jargon and use rhetorical tricks. For example, instead of presenting actual arguments or responding to direct questions, they present a circular flow of deepities. To top it off, they, at least in my humble experience, usually lack fundamental economic literacy. This can make rebutting their nonsensical claims a challenge and, as a result, debates with this crowd typically go nowhere.

In order to figure out what exactly they are claiming—beyond the deepities—I decided to acquaint myself with the prominent proponents. I read "founder" Warren Mosler’s so-called white paper on MMT, but it’s not very helpful: there is little by way of theoretical explanation, other than redefining if not obscuring the meaning of common concepts in economics. Mosler also seems overly eager to move from explanation to instead argue for his preferred policies.

I hoped for (and got) more from listening to a TED Talk by Dr. Stephanie Kelton, an economist and professor at Stony Brook University who was the senior economic advisor to Bernie Sanders’ presidential campaign and author of The Deficit Myth (reviewed by Bob Murphy here). TED Talks are only fifteen minutes long, but it turned out to be a very painful experience.

It’s All about Spending

Judging from Kelton’s presentation, MMT simply boils down to a description of how the fiat currency system works under a central bank, while ignoring many of the effects of that creation. Kelton explains:

MMT provides an accurate description of how a fiat currency like the US dollar or the British pound actually works. It reminds us that we are no longer on a gold standard, so finding the money to pay for the things we need is never an issue for countries like the US or the UK.

The implication of having a monetary monopoly is that the “[t]he federal government can never run out of money” (all quotes are from Kelton’s talk unless otherwise stated). This is obviously true, but only because Kelton (and MMT) does not distinguish between money in the real sense (the valued medium of exchange, i.e., purchasing power) and the currency issued by government and banks (the dollars or pounds, whether physical or digital). But that’s not always true. For example, the government of Venezuela was not running out of bolívars, but from this it did not follow that the currency would retain its purchasing power (as, obviously, it didn’t) or even retain its status as money (which it also didn’t). Venezuela is one recent example, but the claim is universal. (For more examples, see Zimbabwe/Zimbabwean dollar or the Weimar Republic/papiermark.)

So, in a strict sense, it is certainly true that the federal government “can afford to buy whatever is available or for sale in its own currency.” However, while proponents of MMT often emphasize and extrapolate from the word “afford” to make it appear as if there were no end to government spending, it is really “for sale in its own currency” that is key. This means there is indeed a limitation. Kelton realizes this but fails to mention it until the very end. Her point here is to delink government spending and taxation:

If you got a $1,400 check from the federal government earlier this year, or if your company received money to help cover payroll and other expenses, then you received some of the newly minted digital dollars that were created to support our economy. No taxpayers were involved in that process. It was all done using nothing more than a computer keyboard.

This too is not false; however it only tells one side of the story. It ignores what is unseen. Kelton simply observes that government need not worry about deficits, because they are paid in the government’s own currency. And the government can make as much of this counterfeit capital as it likes. Yes, we have heard this before; it is nothing new. The problem is that it is based on a fundamental mistake: confusing the unit for its meaning to users; or, if you will, thinking that a currency is money. By talking about one, and the creation of more of it, yet referring to the other, thus assuming it remains largely unaffected, Kelton can state the following about deficits:

Here's what I see. I see what's happening on the other side of the government's ledger. When the government spends more than it taxes away from us, it makes a financial contribution to some other part of the economy. Their red ink is our black ink.

Yes, you read it correctly: when government runs a deficit it is (somehow) a contribution to society. It literally creates something (prosperity) out of nothing (its IOU). Government creates new money for its IOU, out of which it purchases infrastructure, teacher salaries, electric vehicles, etc. Thus, private businesses get the new money as revenue—they (presumably) earn a profit—while the government provides society with "needed services." The result is, if we believe Kelton, more jobs and income for people while they get more services from government. We get something for nothing. 

No wonder apostles of big government love it.

What about Price Inflation?

With deficits being a nonissue, being waved away by this hocus-pocus, the political problem then is not to balance budgets. After all, according to MMT logic, a balanced budget would deprive society of the benefits that the deficits offer. Instead, policymakers have a moral duty to maximise the “contribution” to society as long as doing so does not have negative consequences for society. As Kelton puts it,

Congress should be focused on keeping inflation in check. That's the real limit on spending, and it's the thing to watch out for if you're thinking of spending trillions on things like infrastructure, healthcare, and free college.

Observe that this is basically the same scheme as monetarists argue for, that the money supply should be increased to lubricate and support the growing economy—but not so much that it affects the price level. MMT takes this idea and greatly inflates it (pun intended) by adding that government deficits are not harmful—they are instead, if used wisely, a double benefit. As long as the price level remains largely unchanged (or, I presume, price inflation is kept at a “low” level, such as “only” 2 percent per annum), more can be squeezed out of the economy.

Government can and should do this to the extent possible, but the deficits also offer a means for reform, if not restructuring of whole economy, that should not be wasted.

[E]very deficit is good for someone. The question is, for whom? And what are those deficits used to accomplish? It matters how the money is spent and who ends up with the resulting surplus.

Indeed, money is not neutral, so it benefits whoever happens to receive it first, before prices go up. This is another MMT twist that they use to their advantage. The argument does not rely on increasing the money supply helicopter-money style, so they need not assume it has no effect on the structure of the economy. On the contrary, MMT argues that the money should be used first by government on specific investments—typically infrastructure, healthcare, schools. Because the money is spent on those things, businesses (they assume) will be incentivised to create supply that facilitates those investments. As a result, the economy is forced nudged to do the “right” things. (We are at this point deep into normative territory, i.e., ideology; there is no semblance of positive theory left.)

What about the Economy?

So far, the MMT story does not seem to relate at all to the real economy. It is pure magic: more currency means more jobs, greater government services, a higher standard of living. Abracadabra! Does this mean MMT simply ignores the fact that the actual economy is a matter of allocating scarce resources toward valuable ends? Of creating real production out of real capital? Not quite. It simply downplays this by ignoring the many implications.

Kelton refers to the problem of Congress's directing the “contribution” of deficits as resourcing. Here comes the real economy:

Congress should be asking, how will we resource it? To answer that question, think of people, factories, equipment, and raw materials like wood and iron. If we're going to build high-speed rail, fix crumbling infrastructure, and green our economy, then we’ll need concrete, steel, and lumber; we’ll need construction workers, architects, and engineers; we’ll need companies that can fill thousands of orders for solar panels, EV charging stations, and electric school busses. If our economy has the productive capacity to quickly supply all of those things, then we can easily resource it. Or take healthcare or free college. Paying the bills to expand Medicare to include dental, vision, and hearing is easy. The challenge is making sure we have enough dentists, optometrists, and audiologists to treat everyone who needs care. And if you want to resource free college, then you need the faculty, the classrooms, the dormitories to teach and house more students. In a full employment economy, all of the resources you need are, well, fully employed. There is no spare capacity anywhere in the system.

So, finally, we get to the real issue and the reason why proponents of MMT believe they can get something for nothing: in a full economy, those resource are already being used and you'd need to bid them away (which means they would no longer be able to be available for those previous uses, and their price would rise); but all the MMTers see are are idle resources, assets that are not currently used in production processes. Because those resources are not productive, at the moment, government’s deficit investments will (they think) incentivise those sitting on the resources, whether individuals or businesses (or government agencies?), to surrender them to the productive efforts so that society can make productive use of them.

But this poses several problems that those arguing for MMT seem unaware of. 

First, that idle resources are not actually just sitting there, but are idle for a reason. They are idle because this is what their owners consider to be their highest-valued use. All capital is part of a production plan. It is a mistake to assume that an asset that is not right at this moment used in some production process is not part of a greater production plan. In fact, most production includes some degree of waiting, maturing, or search for the proper timing.

Consider a newly distilled whiskey that sits “idle” in a cask for a decade. This is not waste, but part of the production process of ten-year-old whiskey, which is a different good with much greater expected value to consumers. Production takes time, which means we cannot at any specific moment determine what would be the best use of resources. This includes resources that do not appear to be used at all but are in fact owned and therefore directed toward some end. Timing is an important aspect of production that proponents of MMT, in their urgency to maximize only the present, fail to realize. Much entrepreneurship fails not because there is no value in what they offer but because the timing is not right—they are either too early or too late.

It is also true that we want resources to be held in reserve for future uses. If we use everything to 100 percent in the present, there is no possibility of attempting new and more valuable productions. After all, government investments in infrastructure (or anything on the MMT wish list, for that matter) are not an effective way to generate innovations. Valuable innovations are created by entrepreneurs seeking new ways to satisfy consumers and thereby earn profits. MMT’s shifting of resources toward public works means we may not get the solutions to those grand challenges that we have no solutions for today. The quest to maximise the present, whether or not it turns out successful (and it likely will not), sacrifices both the near and distant future.

Joseph Schumpeter put this clearly in Capitalism, Socialism and Democracy (p. 83):

[W]e are dealing with a process whose every element takes considerable time in revealing its true features and ultimate effects, [so] there is no point in appraising the performance of that process ex visu of a given point of time; we must judge its performance over time, as it unfolds through decades or centuries. A system—any system, economic or other—that at every given point of time fully utilises its possibilities to the best advantage may yet in the long run be inferior to a system that does so at no given point of time, because the latter’s failure to do so may be a condition for the level or speed of long-run performance.

I doubt Schumpeter’s genius will sway any proponent of MMT, however. To them, nobody is alive beyond the immediate present.

It Is Not about the Economy, but about Glorious Government

Kelton’s argument also, inevitably comes down to believing that whatever government does is right. Yes, she argues that it is important that the deficits end up in the "right" hands, but simply notes that this is the real task for Congress. Okay, but what if politicians do not invest in the “right” things? Or what if those things are right for some but wrong for others? Kelton doesn’t say, but I suppose she would refer to some vague notion of public good or what society “needs.” But this question cannot be avoided, because it strikes at the core of MMT’s failure.

The whole argument, as Kelton presents it, asserts that government needs to get idle resources into production. Whatever the reason they currently appear idle to Kelton and others is of no concern: government, they assume, will put those resources to better use. True to form, proponents of MMT tend to focus on only idle resources, which makes a cleaner point. But they overlook that changing the incentives will also shift resources from already productive uses to those productions that are on the MMT wish list. Which are things that, economically speaking, without the backing of this tidal wave of government largesse, are currently money-losing dogs. (Green jobs, green new deals, red and blue welfare projects...)

What they are really saying here, when you boil it right down, is that entrepreneurs, investing their own property for the chance of earning profits, but at the risk of losing everything if consumers dislike their offering, overall do a worse job allocating productive resources than politicians investing deficits that need not be paid off. This is a very problematic assumption. Just noting the different incentives for entrepreneurs and politicians is enough to fundamentally question what MMT proposes.

Add to this that government’s track record in creating public goods that are of actual value to people and that do not waste resources is nothing short of dismal. Then add the public choice aspect to the whole thing, that politicians have their own interests and therefore may not pursue the public good even if they know it. The assumption that government will fix the economy and increase our standard of living beyond what entrepreneurs can do is unbearably naïve.

I do not think these problems matter much to proponents of MMT, however. Because [like the proposed creation of a trillion-dollar coin] MMT is not actually a theory of how the economy works all, and so does not concern itself with worldly things like production, innovation, entrepreneurship, scarcity (other than as potentially causing inflation), or time. It is a pseudoreligious conviction that anything is possible and that the one and only solution is always Glorious Government.

* * * * 

Per Bylund is associate professor of entrepreneurship & Records-Johnston Professor of Free Enterprise in the School of Entrepreneurship at Oklahoma State University. His website is PerBylund.com. His post first appeared at the Mises Wire.

Research: infrastructure "stimulus" spending has no positive short-term effect on jobs

Garett Jones asks, "Have wonks widely discussed the finding that U.S. infrastructure spending appears to have no positive short-term effect on jobs?" Since infrastructure spending is widely used by governments under the guise of "economic stimulus" and "job creation," you'd think wonks everywhere would be. Or should be.

The finding has been reported by multiple researchers, and summarised by Valerie Ramey (advisor to the Central Budget Office and member of the NBER Business Cycle Dating Committee) as "puzzling." As it would be to an insider's inside like her -- the chief finding being that more infrastructure spending predicts no change or a decline in jobs.

Couched in Keynesian jargon, and ringed around with nonsense though it is, Ramey's key paragraph however is probably this one from the conclusion:

Fourth, cross-section and panel evidence on U.S. states or counties that focuses on bridge, highway, and road infrastructure spending suggests that the spending leads to either no change or a decline in employment in the first several years, even during ZLB periods. There is no obvious explanation for these puzzling results, though the disruptive effects of construction on existing infrastructure might play a role.

What she calls "puzzling" is simply economic common sense. If existing resources called are already part of existing business plans, then those existing resources are simply bid away instead for these "stimulus" projects (causing those "disruptive effects of construction on existing infrastructure" she mentions). And if they're simply sitting idle, then there's probably a good reason (that is, they're sitting idle because in the current circumstances it would probably make no economic sense to use them).

In either case, to call it puzzling indicates how far stimulunacy is from economic common sense. But at least it's being reported: now to see the lesson absorbed.

>> John Cochrane has more. Tyler Cowen's commenters comment.

Does looting really make us all rich?

French economist Frederic Bastiat must be rolling over in his grave because there are still people who think you can boost an economy by destroying wealth. 

The latest ignoramus, as observed by Dan Mitchell, is one Felix Salmon who, in a piece for Axios,  "reveals he still believes in this primitive form of Keynesian economics."

There’s one big non-political reason why luxury stores were targeted by looters [says Salmon]: Their wares can now be sold for top dollar, thanks to the rise of what is often known as the “circular economy.” …Instead of stealing goods they need to live,looters are increasingly stealing the goods they can most easily sell online. …Economically speaking, looting can have positive effects. Rebuilding and restocking stores increases demand for goods and labor, especially during a pandemic when millions of workers are otherwise unemployed. …The circular economy helps to reduce waste and can efficiently keep luxury goods in the hands of those who value them most highly.

As Mitchell responds, it would have been more correct (though thoroughly immoral) to say that the looting had a positive effect on the looters.

But it definitely doesn’t have a positive effect on merchants (who lose money in the short run and probably have higher insurance payments thereafter), on consumers (who are likely to pay more for products in the future), or on the overall economy (because of the unseen reductions in other types of economic activity).
Let’s wrap up with a cartoon on the topic:

.

‘Broken Window Fallacy’ on Radio NZ

 

I was heartened to discover through RNZ podcasts that Frederic Bastiat’s Broken Window Fallacy made an appearance back on the 17th. Shamabeel Eaqub was there to begin a regular appearance on the afternoon programme talking economics, and for his first visit he talked about the fallacy of disaster economics:

The idea there is an upside to natural disasters – that they are good for the economy - is ‘a figment of our imagination’, economist Shamubeel Eaqub says.
    We shouldn’t celebrate natural disasters or war or things that are destructive because ultimately what we find is the net impact is we are worse off than we would otherwise have been.
    Eaqub told Afternoons there is a tendency to think there is a net-economic gain as a result of natural disasters such as earthquakes, because they prompt lots of visible economic activity such as cleanup, construction and repairs.
    He says it's akin to digging a hole and then filling it up again.
    “It frustrates me a great deal because it is a figment of our imagination.”

Great to hear good sense and Bastiat on the local wireless.

LISTEN HERE: The fallacy of disaster economics [audio] - RNZ

Who writes this shit?

Reading the commentariat slagging off the shouting match Joyce v Robertson on this weekend’s The Nation – the interview show that’s only shown at the time when most decent people are either in bed being hungover, or at least not spending their Sunday morning in front of a bloody  television – I headed over to the website to enjoy the blood sport, and stayed to lament the idiocy.

The blood sport was ill described, purportedly a debate about “the wealth of the nation” – Joyce and Robertson going “head-to-head on their parties' prescriptions for prosperity.” It wasn’t that at all; it was a slanging match about Chinese buying farms.   The idiocy started with the show’s very introduction and write-up, not challenged by either debater, which began:

As a country we are worth around $227 billion – not bad for a small country, but how do we grow that pie?

Do you see the problem?

The country’s wealth is not around $227 billion. It’s perhaps around ten to twenty times that  -- a nation’s wealth being, as Carl Menger once described it, the entire sum of economic goods at the command of the nation’s individual’s.

What I imagine the idiot is trying to say however is that GDP is around $227 billion, which is essentially the amount consumed every year on the basis of that wealth.

Do you see the problem?

Good for you if you do. Because most economists don’t see it either.

Team New Zealand: Sailing in Subsidised Waters

Did you see a government department released a report yesterday informing us that government spending our money supporting Team New Zealand made us all $50 million richer? Yeeha! If only they’d spent even more.

Economic Development Minister Steven Joyce says the $36 million of taxpayers' money pumped into the last America's Cup challenge directly benefited the New Zealand economy to the tune of $87 million.
    Joyce … released two evaluation reports, both an independent evaluation [sic] of the Government’s investment in Emirates Team New Zealand… and an evaluation of New Zealand Trade and Enterprise’s leveraging programme in San Francisco.
    "The economic benefit from our investment in Team New Zealand is considerable. From a $36 million taxpayer investment,” Joyce said, “the evaluation shows an estimated positive impact of $87 million to the New Zealand economy."

Yeah right.

First: reports prepared for, and and paid for by government departments, are not independent – no matter what their press releases say.

Second: Even if you believe the figures, the “us” that was allegedly made much richer is a different group of folk to the “we” who were plundered on their behalf. But if you think a net gain to Grant Dalton makes up for your net loss, I invite you to knock on his exquisite front door and invite yourself in as if you own the place. You’ll find You’ll find that’s a form of redistribution Mr Dalton et al is unwilling to contemplate.

Fact is, only in government accounts, where (as our sailing-brother’s keeper) all our wealth is measured together, can a forced redistribution from long-suffering taxpayers to high-earning subsidised sailors be measured as a net gain to all of us.

Third: neither the report on subsidised sailing nor the other on corporate welfare, both touted as “cost-benefit” analyses,” properly address the cost to taxpayers. Or to put it in a way the report’s authors wouldn’t, the benefits that might have accrued to taxpayers if the the $36 million of taxpayers' money pumped into subsidising sailors had been left instead in taxpayers’ pockets. 

It estimates the “value added” by the spending of every one of those $36 million, but estimates not at all the value that might have been added by taxpayers themselves if it hadn’t been taken from them and distributed as high salaries and high-tech yachting equipment.  As if, you know, government subsidy is all benefit, whereas if they’d kept their own money Jack and Jill Taxpayer would have just, like, baked it into pies or something.

The alleged “economic impacts” of sailors’ spending their $36 million building and racing boats, buying houses, and paying restaurant and hotel bills is ramped up in the report by the international sponsorship it attracted and spent here by the even bigger spending in NZ of Oracle and Luna Rossa sailors (every dollar of which it explicitly assumes was only spent here because of every taxpayer dollar), and by a “multiplier effect” that inflates the effect of every dollar spent by the amount of “re-spending” of that dollar – while ignoring whatever “multiplier” might have applied to whatever productive spending you and I might have done with our own dollars if left in our own pockets. ¹

That spending on restaurant and hotel bills by the way is significant. Despite the talk of boatbuilding benefits and the like, the report informs taxpayers that “the sector receiving the greatest share of [Team New Zealand]’s domestic operational spend was ‘cultural and recreational services.’” And they don’t mean the cost of Maori concert parties.

We’re rock stars

Sex, Drugs and Rock'N'Roll 13 by chrismaverick on deviantART

WELL, LOAD UP ON drugs and bring your friends, because New Zealand is being talked up as the “rock star” economy for 2014.

Hee haw!

This, by the way, is predicated on three things underlying what economists call “growth” that these groupies see as fairly foregone conclusions:

1. The dairy boom.
2. The housing boom.
3. The Canterbury Rebuild^TM

But there are problems with each of these—the first problem being in the way these alleged economists measure growth.

YOU SEE, IF IT is to mean anything at all, then “growth” must surely mean a process by which we all get wealthier. And while this has certainly been true of the dairy boom—local dairying having increased production to try to keep up with rapidly increasing Chinese demand—the same cannot be said of either the housing boom or The Rebuild*. Here instead, we’re not selling commodities to an increasingly willing seller, we’re simply consuming them ourselves.

The housing boom represents consumption based on debt. The Rebuild* represents the downside of what’s called the Broken Windows effect.  What that means is that instead of using our accumulated wealth and capital to produce increasing real prosperity (an on-going process of accumulation producing more wealth and capital) in Canterbury at least this accumulated wealth and capital is being consumed simply to try to get the place back to where it was before (and to help pay the hugely inflated insurance premiums that have leapt up everywhere as a consequence of the earthquakes’ massive destruction of wealth and capital).

It is only by the miscalculation grotesquely called Gross Domestic Production that this wealth-consuming gross domestic consumption is regarded by economists as “growth.”

It’s like measuring the popularity of a rock star by the number of lines he puts up his nose.

SO THAT LEAVES OUR rock star relying for groupies on the continuing dairy boom. A boom based on selling commodities to an increasingly wealthy China, a China undergoing an historic, world-changing Industrial Revolution.

A change we all have our fingers crossed continues. We all hope.

China’s prosperity has increased so rapidly that while world production of the dairy commodities being demanded by China’s new middle classes has increased, so too—unusually—have prices and profits. But with increasing profits  comes increasing participation, and ever-increasing supply from both here and overseas. And to increase that supply many new dairy farmers have not only endured the costs of converting from sheep and beef, but existing dairy farmers have been adding to their costs of production – by buying in supplemental feed for their cows, for example, instead of just relying on grass.

If China’s demand continues, this is no problem at all for our rock star beyond keeping our rivers clean and finding new ways to find and pay for ways to irrigate all these dairy farms. The productive consumption endured by farmers will be repaid in spades.

But what if Chinese demand doesn’t continue.

If it doesn’t continue, there will be a lot of farmers left standing around like that young rock band after their difficult second album has bombed, all those paternity suits are coming in, and they’re in hock up to their skinny necks to their dealers and record company.

Like Keith Richard’s dealers, this continued and even increasing demand is utterly reliant on prosperity continuing. But as the likes of George Soros are beginning to notice,

To Soros, the main risk facing the world isn't the euro, the US Congress or a Japanese asset bubble, but a Chinese debt disaster that's unfolding in plain sight.
    "There is an unresolved self-contradiction in China's current policies: restarting the furnaces also reignites exponential debt growth, which cannot be sustained for much longer than a couple of years," Soros wrote…
        "There are some eerie resemblances with the financial conditions that prevailed in the US in the years preceding the crash of 2008," Soros wrote. "But there is a significant difference. In the US, financial markets tend to dominate politics; in China, the state owns the banks and the bulk of the economy, and the Communist Party controls the state-owned enterprises." He added: "How and when this contradiction will be resolved will have profound consequences for China and the world."

And, too, for our rock star of 2014.

Here’s Patti Smith:

* The Rebuild^TM : a phrase that reveals the top-down thinking of central planners, who move with glacial pace their wonders to under-achieve; used by planner-types instead of rebuilding, a word describing a process in which people just get on with it. (Or would have been allowed to just get on with it.)

NB: That graph above accompanies some excellent analysis of NZ’s growing dairy exports by Rodney Dickens:

• Insights into the dairy export boom and some interesting implications – RODNEY’S RAVING

And for more on China…

• “The failure by Chinese banks to recognize misallocated investment must overstate past GDP growth, in the same way that this overstatement must be reversed in the future…
      “The failure of many economists to recognize that wasted investment has a cost – even as they recognize that investment has been wasted – has caused them both to misunderstand the relationship between wealth creation and GDP and to understate the future impact of this overstated GDP.
      “Debt matters, and the only time it can be safely ignored is when debt levels are so low, and the borrower is so credible, that it creates no financial distress costs and has a negligible impact on demand. Neither condition applies in China…”
  Will the reforms speed growth in China? – Michael Pettis, THINKING MACHINE BLOG
• “To further your continuing and evolving story that China has major un-used infrastructure that puts loads of unsustainable debt [that] could cause major problems…”
  A [Further] Report on China's Ghost Infrastructure – EPJ
• “The "eerie resemblances" - as Soros previously noted - to the US in 2008 have profound consequences for China and the world - nowhere is that more dangerously exposed (just as in the US) than in the Chinese shadow banking sector...”
  The Real China Threat: Credit Chaos – ZERO HEDGE
• “You may have missed it, but China had no less than three minor liquidity crises last year…”
  The Shadow Cast Over China’s Banking System – Dan Denning, DAILY RECKONING AUSTRALIA
• “What has been surprising to me is that many analysts – some of whom, but not all, recognize how difficult implementation is likely to be – expect that the reforms will unleash such a burst of productivity that growth rates in China will be maintained or even raised from the current GDP growth target of 7.5%…
      “This, I think, is extremely implausible.”
  Michael Pettis Warns China Bulls "It Is Almost Impossible For Growth To Remain This High" – ZERO HEDGE
• “So while global markets celebrated the taper, China’s central bank was trying to keep the credit ship from keeling over. Expect more such activity, because this relates to China’s attempts to rebalance its economy. ‘Rebalancing’ is a sanguine way of looking at it. More realistically, the Chinese economy will experience a rather harsh economic ‘adjustment’ in 2014 as it tries to move away from investment-related economic growth, without popping its credit bubble, which this year inflated to historic levels.
      “That’s going to be very hard to do, because part of the adjustment process is to let insolvent firms go bankrupt. It’s these bankruptcies that cause the credit crunch…”
  The Bear Stearns Moment for China’s Economy? – Greg Canavan, DAILY RECKONINING AUSTRALIA
• “On balance, the news from [top Chinese leaders after the annual Central Economic Work Conference to set policy goals for 2014, and a Central Urbanization Work Conference] is good for current and future residents of Chinese cities—but bad for those investors who may still be bullish on commodity prices.” [Emphasis in the original.]
  The Hangover From China’s Urbanization Boom – ZERO HEDGE

Uni research recognises Bastiat’s ‘broken window;message

A friend just sent me the news that the message about Frederic Bastiat’s ‘broken window fallacy’ is finally getting through.

Contrary to popular perception, the Canterbury earthquakes have not had a pronounced short-term effect on New Zealand’s economy, Victoria University research shows.
    This lack of macroeconomic impact to date is not entirely surprising, given that previous research on large disasters in high-income countries has reached similar conclusions,” say the researchers, Professor Ilan Noy and Ms Lisa Doyle, from Victoria’s School of Economics and Finance…
    The increased economic activity is due to the need to replace assets New Zealand had before. This is not very different from the ‘broken windows fallacy’ identified two centuries ago by a French economist, Frédéric Bastiat, who pointed out that breaking a window will lead to increased production and income for the glassmakers and installers who receive their payments, but does not lead to any increase in welfare or wellbeing.

Congratulations Ms Doyle and Professor Noy.  Good to hear more explicit recognition of Bastiat in the academies.

[Hat tip Callum McP]

ECONOMICS FOR REAL PEOPLE: Broken Window Fallacy

Here’s the update for this Thursday’s econ session from our friends at the Auckland Uni Economics Group:

Hi all,
This week we’ll be talking about the most prevalent fallacy in economics, which (when committed) leads to the biggest economic errors, and (when spotted) starts you thinking like a real economist.
We’re talking about what is seen and what is not seen—most popularly known as The Broken Window Fallacy.
       Date: Thursday, March 14
       Time: 6pm-7pm
       Location: Case Room 3, Level Zero, Auckland University Business School, Grafton Rd, Auckland
As always, all are welcome to attend.
Look forward to seeing you there.

Is there anything good about #Sandy?

The only good thing about a storm that killed at least 39 people, disrupted millions of lives and caused around $20 billion of damage is the chance to talk about Frederic Bastiat’s lesson in his seminal essay "That Which is Seen, and That Which is Not Seen".  And the only reason we have that chance is because there are so many alleged economists out there—the same trolls who emerge after every disaster—who leap into print to insist the destruction will actually be “good for the economy.”

Alleged economist and professor at Smith School of Business Peter Morici, for example, who took immediately to the Philadelphia Inquirer and elsewhere to argue:

in an economy with high unemployment and underused construction resources, Sandy will probably unleash $15 billion to $20 billion in private spending directly related to reconstruction.
    That figure could grow as many rebuild larger and better than before. Consider a  struggling restaurant, for example, whose owner invests his insurance settlement in a new and more attractive business. In areas like the Jersey Shore, older, smaller homes on large plots may be replaced by bigger dwellings that can accommodate more families during the tourist season. The Outer Banks of North Carolina saw such gains several decades ago after rebuilding from a storm of similar scale.

Equally moronic is Panos Mourdoukoutas at Forbes.com, Derek Thompson at The Atlantic, Moody’s Analytics Ryan Sweet writing in the Wall Street Journal,  Chris Isidore at CNN Money, and AP “economic writers” Christopher S. Rugaber & Martin Crutsinger writing everywhere ---all of them saying, as summarised by the idiotic Bo Peng writing in The Street,

In an economy not constrained by resources, such as that of the U.S., limited crisis means only two things at the statistical level: stimulus to individual and government spending; and stimulus to jobs.

That’s a whole asylum full of morons, to which only a moment’s Googling would be needed to add dozens more. And Paul Krugman hasn’t even had the chance to post yet.  Or Bernard Hickey.

Blogging at the Acton Institute, Joe Carter asks

Frederic Bastiat provided the ultimate rebuttal to this spurious thinking 162 years ago in his essay ‘That Which is Seen, and That Which is Not Seen.’ So why do we people make the same claim that destruction is economically beneficial? Could it be that people are simply unaware of Bastiat’s “parable of the broken window?

Either unaware, or too blinded by lousy economic thinking.

No wonder the sane, dry and sober Don Boudreaux “is far less worried about the actual consequences of Sandy than about the additional battering that Sandy's winds, rains, and flood waters will prompt economically uninformed reporters and pundits to inflict upon the body politic.”

Fortunately, sane and serious commentators are educating bodies both public and politic.

Writing at Bloomberg, Caroline Baum has

a standard response to such nonsense: If wealth destruction is such a good thing, why wait for natural disasters to occur when we could nuke and rebuild our cities on a regular basis?
    Yes, housing starts will increase, but the stock of homes won't be any larger. Businesses will replace the lost capital stock, but drawing on scarce resources to rebuild isn't an efficient use of them.
    Our old friend Frederic Bastiat explained it best -- the parable of the broken window --  in his 1850 essay, "That Which Is Seen and That Which Is Not Seen." He tells the story of a shopkeeper whose son breaks a window in his store. The shopkeeper has to pay the glazier six francs (no euros back then) to repair it. The glazier then has money in his pocket to spend. This is "that which is seen," or the Keynesian multiplier decades before John Maynard Keynes was even born.
    What if the shopkeeper didn't have to spend six francs to repair the broken window, Bastiat asks? He could have bought a pair of shoes, or spent it on something else. "Neither industry in general, nor the sum total of national labor, is affected, whether windows are broken or not," Bastiat writes. "Or, more briefly, 'destruction is not profit.' "
    Even a Ph.D. economist should be able to grasp that principle.

Boudreaux himself  describes Morici’s flawed reasoning as Vulgar Keynesianism at Full Gallop:

There’s nothing surprising in Prof. Morici’s argument that the spending necessary to repair damaged buildings and other assets can help the economy. Predictions of economy-wide wealth springing from devastation are issued after every natural disaster. These predictions are examples of what the English jurist A.V. Dicey called “the idle contentions of paradox-mongers”* – predictions that are just clever enough to strike economically uninformed people as being profoundly insightful.
    But what appears to many to be profoundly insightful is, in fact, fallacious.
    If Prof. Morici is correct, then surely he also applauds, say, the economic consequences of drunk driving. As with hurricanes and earthquakes, he can bemoan the loss of life caused by drunk driving and then get on with explaining how, paradoxically, the economy benefits from drunk driving. After all, drunk driving creates unnecessarily large numbers of destroyed automobiles to replace, damaged automobiles to repair, dead victims to bury, and injured victims to be cared for by first-responders, doctors, nurses, physical therapists, and hospital administrators and clerks.
    If you sense – as you should – that the economy in fact does not benefit from drunk driving, then you should reject Prof. Morici’s argument that the economy benefits from natural disasters.

At National Review, Veronique de Rugy wonders aloud at those who argue

Being forced to spend money that people had planned to spend on something else or to save to prepare for harder days ahead in order to give an artificial boost to GDP in the construction business has benefits? No, it doesn’t other than superficially. That’s what French economist Frederic Bastiat called the broken window fallacy. Bastiat rightly noted that a country doesn’t benefit or get richer because of the destruction imposed by disasters (whether natural or man-made ones, such as wars). Destruction of wealth, buildings, streets, subway systems, houses, electric grids, bridges, and more doesn’t make a country richer even if it temporarily creates jobs in the construction business. All destruction does is destroy and divert to the reconstruction effort scare resources that could have been allocated to other things (things people actually really wanted). 

She attacks the standard Keynesian response to the broken-window fallacy argument:

Keynesians argue that the broken window fallacy applies if and only if the resources needed to fix the window were already fully employed before they had to be diverted. However, today’s economic conditions are such that there are plenty of idle resources lying around that can now be put to productive use. But … why are there so many idle resources lying around? (Especially after years of policies meant to put them to good use.) [On that, Robert Murphy has several good points in response to the Keynesian argument.]
    On that note I would add that what we have found out during the last episode of stimulus spending is that unemployment rates among specialists, such as those with the skills to build roads, bridges or schools, (basically the people who will be used during the reconstruction effort in the next few months) are often relatively low. Moreover, it is unlikely that an employee who specializes in residential-area construction can easily update his or her skills to include rebuilding bridges or electric grids and subway systems. As a result, firms receiving stimulus money tend to hire their workers away from other construction sites where they were employed rather than from the unemployment lines. This is what economists call “crowding out.” Except that in this case, labor, not capital, is being crowded out. In fact, the original work of GMU’s economist Garett Jones and AEI’s Dan Rothschild confirms that a plurality of workers hired with ARRA money were poached from other organizations rather than from the unemployment lines. The same will likely be true today with Sandy and the reconstruction effort that will follow its devastation. 

Writing at Forbes, Tim W0rstall reminds us the ignorant are only able to make their argument these days because of their GDP fetish allowing them to confuse our stock of capital with the flows that emanate from them.

[Here] is half the problem with the way we calculate GDP: government spending counts at what it costs, not what value it produces.
    The other half of the problem is that we are measuring the current activity, not the capital value. This is a common complaint when we talk about pollution. Cleaning up an oil spill counts as an increase in GDP. Which it is of course: we think that cleaning up an oil spill adds value so cleaning up an oil spill does add value. That’s why we clean it up and also why we count it in GDP: our measure of value being added.
    The problem is that we don’t count the loss in capital value of the original spill itself: nor of any other pollution. GDP measures the flows in the economy, not the stock…
    Imagine that the total wealth of the US is $100 trillion. All the buildings, the factories, the financial assets, the human capital, the natural resources, all add up to $100 trillion. The GDP of the country is around $15 trillion. That second is the flow that we get from the stock of the first.
    Now imagine that Hurricane Sandy does $20 billion of damage to that wealth [which is what disaster analysts Eqecat suggest]. The US is now worth $99.980 Trillion. GDP might rise to $15.01 trillion as we repair that damage. But we’re not in fact any richer at all: despite the fact that GDP has gone up. What has actually happened is that some of our stock of wealth has been destroyed and we’re having to do more work in order to rebuild it. This is exactly the same as our pollution example. We’re measuring what we produce but not the capital stock of what we have (or had).
    Yes, the rebound from Sandy may well provide a boost to the economy. But that’s a function of the way that we measure that economy, not a real boost in our general wealth.

It would be nice if some folk remembered that. Or learned it.

It is the difference in essence, as David Ricardo once pointed out, between Value and Riches.

To help them, let me conclude by quoting extensively from the great Frederic Bastiat himself—whose insights still cast an enormous shadow. Here below is the relevant excerpt from his seminal 1850 essay, around which the great Henry Hazlitt developed his “one lesson” of economics:  “There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.”

…Have you ever witnessed the anger of the good shopkeeper, James B., when his careless son happened to break a square 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.

Let us take a view of industry in general, as affected by this circumstance. The window being broken, the glazier's trade is encouraged to the amount of six francs; this is that which is seen. If the window had not been broken, the shoemaker's trade (or some other) would have been encouraged to the amount of six francs; this is that which is not seen.

And if that which is not seen is taken into consideration, because it is a negative fact, as well as that which is seen, because it is a positive fact, it will be understood that neither industry in general, nor the sum total of national labour, is affected, whether windows are broken or not.

Now let us consider James B. himself. In the former supposition, that of the window being broken, he spends six francs, and has neither more nor less than he had before, the enjoyment of a window.

In the second, where we suppose the window not to have been broken, he would have spent six francs on shoes, and would have had at the same time the enjoyment of a pair of shoes and of a window.

Now, as James B. forms a part of society, we must come to the conclusion, that, taking it altogether, and making an estimate of its enjoyments and its labours, it has lost the value of the broken window.

When we arrive at this unexpected conclusion: "Society loses the value of things which are uselessly destroyed;" and we must assent to a maxim which will make the hair of protectionists stand on end - To break, to spoil, to waste, is not to encourage national labour; or, more briefly, "destruction is not profit."

What will you say, Monsieur Industriel -- what will you say, disciples of good M. F. Chamans, who has calculated with so much precision how much trade would gain by the burning of Paris, from the number of houses it would be necessary to rebuild?

I am sorry to disturb these ingenious calculations, as far as their spirit has been introduced into our legislation; but I beg him to begin them again, by taking into the account that which is not seen, and placing it alongside of that which is seen. The reader must take care to remember that there are not two persons only, but three concerned in the little scene which I have submitted to his attention. One of them, James B., represents the consumer, reduced, by an act of destruction, to one enjoyment instead of two. Another under the title of the glazier, shows us the producer, whose trade is encouraged by the accident. The third is the shoemaker (or some other tradesman), whose labour suffers proportionably by the same cause. It is this third person who is always kept in the shade, and who, personating that which is not seen, is a necessary element of the problem. It is he who shows us how absurd it is to think we see a profit in an act of destruction. It is he who will soon teach us that it is not less absurd to see a profit in a restriction, which is, after all, nothing else than a partial destruction. Therefore, if you will only go to the root of all the arguments which are adduced in its favour, all you will find will be the paraphrase of this vulgar saying - What would become of the glaziers, if nobody ever broke windows?

It is the same with a people as it is with a man …

Oh, Sandy [rolling updates]

It looks like Sandy is coming back to Asbury Park, New Jersey, today. This early Bruce Springsteen lament seems eerily appropriate.

PS: Just so you know, the Wall Street Journal has opened its pay wall and WorldStream so you can keep up with coverage of the looming hurricane.

Map from Wall Street Journal

UPDATE 1: In the wake of Sandy, be prepared for an onslaught of both enviro- and econo-silliness—both from economists arguing destruction causes prosperity (yes folks, sit tight for an onslaught of Broken Window Fallacies), and from warmists desperate to link weather to climate.  (“Even in the midst of hurricanes,” notes Anthony Watts, “these people don’t give up trying to tie weather to climate. It’s shameless desperation.”)

Here’s some first signs of the warmist schtick: US warmists Bill McKibben and Joe Romm were out of the blocks early with their Tabloid Climatology™. Our own Jim Salinger pitched in on State Radio this morning. And Mr Real Estate Martyn Bradbury tried to join the tabloid climatologists with his own contribution.

Meanwhile, Roger Pielke points out “Large, damaging storms are not unprecedented in the second half of October, with Storm 11 (1944, ~$54 billion), Wilma (2005, $26 billion) and Hazel (1954, $24 billion).”  Quite so, concurs Anthony Watts, who lists destructive October hurricanes making landfall in the north-eastern States all the way back to 1852—long before the first drop of carbon dioxide was emitted from an exhaust pipe.

Now, the alleged economists: Frank Stephenson points out some early alleged economics portraying Sandy as "stimulus.".  Meanwhile, Don Boudreaux and Tim Worstall fire the first salvoes on behalf of sanity: “Destroying Property Does Not Promote Economic Prosperity,” argues Boudreaux. And Worstall points out that if anyone does see prosperity in destruction, it is only because of the ridiculous way GDP is measured. “The problem is that we don’t count the loss in capital value of the original [destruction]: nor of any [further consequences]. GDP measures the flows in the economy, not the stock.”

These numbers aren’t accurate (no one really has an accurate number for the wealth of the entire US) but they’re in the right order of magnitude at least. Imagine that the total wealth of the US is $100 trillion. All the buildings, the factories, the financial assets, the human capital, the natural resources, all add up to $100 trillion. The GDP of the country is around $15 trillion. That second is the flow that we get from the stock of the first.
    Now imagine that Hurricane Sandy does $10 billion of damage to that wealth (for our purposes it doesn’t matter whether it’s $100 billion or $1 trillion. Although this obviously matters to everyone except for the purposes of this example). The US is now worth $99.990 Trillion. GDP might rise to $15.01 trillion as we repair that damage. But we’re not in fact any richer at all: despite the fact that GDP has gone up. What has actually happened is that some of our stock of wealth has been destroyed and we’re having to do more work in order to rebuild it. This is exactly the same as our pollution example. We’re measuring what we produce but not the capital stock of what we have (or had).
    Yes, the rebound from Sandy may well provide “a boost to the economy.” But that’s a function of the way that we measure that economy, not a real boost in our general wealth.

UPDATE 2: Don Boudreaux’s been busy.  He’s also taken the opportunity to send to the Washington Post the BEST LETTER EVER on speculation:

Have you noticed the enormous increase in greedy speculation in the northeast over the past two days?  It’s quite something!  In advance of hurricane Sandy, consumers are now artificially increasing the scarcity today of the likes of bottled water, canned goods, batteries, and medicines by stocking up on these goods.
    And all of this self-interested speculation – done merely in anticipation of staple goods being much more scarce after Sandy strikes than they are today – is applauded and even encouraged by the news media and government leaders!
    What gives?  Many of the same people who today publicly encourage us to speculate (“Make sure your family has ample supplies of batteries!”) are among the loudest critics of speculation at other times and in other markets.
    But in fact the oil speculator who, say, buys oil today in anticipation of oil becoming more scarce tomorrow does just what a consumer does today in a supermarket in anticipation of a disruptive storm: both persons usefully transfer resources across time.  They both stock up on resources that are today relatively abundant in order to preserve these resources for consumption at a time when they are relatively more scarce (and, hence, more precious).  Both persons transfer resources from today – when the consumption of any one bottle of water or gallon of gasoline provides relatively less benefit – to tomorrow when the consumption of that same bottle of water or gallon of gasoline will provide relatively more benefit.
    Anticipating the future and taking actions to allocate goods and services from times of relative abundance to times of relatively greater scarcity is an immensely useful activity.  And we all perform such speculation whether or not we are popularly identified as “speculators.”

Sincerely,
Donald J. Boudreaux
Professor of Economics
George Mason University
Fairfax, VA  22030

UPDATE 3: The first and longest boardwalk in the US is now floating through the streets of Atlantic City, New Jersey:

UPDATE 4: Hurricane Sandy death toll in Caribbean rises to 69, mostly in Haiti.

UPDATE 5: Storm surge and high tide put ‘lower’ Manhattan under water [pics from Zero Hedge]:

UPDATE 6: WSJ reports Governor Cuomo’s office “has confirmed at least five storm-related fatalities in New York.”

UPDATE 7:  CNBZ reports National Guard troops have moved into Lower Manhattan. Basement apartments, subway tunnels along the lower East River are under water. Water “rushing into” Battery Tunnel. Con Edison has begun shutting down all power in Manhattan … lights out in Greenwich Village … SoHo … Lower East Side …. Statue of Liberty…

UPDATE 8:  The East River continues to surge over its barriers. This is 34th St and First Avenue in Manhattan, almost in MidTown [pic by Robert Wenzel]:

UPDATE 9:  National Data Buoy Center reports winds are mercifully well below the 72 knots that would mark a hurricane, none of their stations recording over 50 knots.  Hat tip Willis Eschenbach who says, “Please note that the big damage from such storms is the flooding, so I am not minimizing the likely extent of the damage.  It will be widespread. However … not a hurricane.”

UPDATE 10: Still windy, however: “So The Front Of A Building Blew Off In NYC.”

UPDATE 11: Three feet of water on trading floor of NY Stock Exchange. May be shut down for weeks. [Hat tip @AmberLyon]  Oops. No. CNN (who had made the claim) redacts.

UPDATE 12:  Uh, Con Edision hadn’t been “shutting down” power. Turns out there was an explosion at the Con Ed Plant E14th and FDR Drive! [Hat tip Lyndon Hood]

UPDATE 13:  WCBS reports the storm surge at Battery Park (Lower Manhattan) has begun to recede.

UPDATE 14:  Salt Water Puts NYC Subway "In Jeopardy"