If hostile aliens invade the planet, “this slump would be over in 18 months,” according to New York Times columnist Paul Krugman. It’s a bizarre way to express a bizarre idea: that war is good for the economy.
He draws an analogy with World War II, where the massive military buildup — conscription is left unmentioned — reduced unemployment and caused GDP to skyrocket.
The Independent Institute’s Mary Theroux points out:
The World War II years were a time of shared privation, with virtually every item that we take for granted today either rationed: e.g., meat, gasoline, sugar, clothing; or not available at any cost: e.g., new cars, appliances, etc. The American standard of living throughout World War II remained at an excruciatingly low level that no 21st century American would accept.
War does not create. It can only destroy. True, aggregate numbers like GDP can thrive during such troubled times. Workers were cranking out munitions like nobody’s business. But those workers’ actual standard of living was not high; everyday essentials were being rationed.
That’s the peril of relying on GDP as an economic barometer. It certainly has its uses. But over-reliance on it has made Krugman ignore other, harsher aspects of war. The fighting. The dying. The separated families, in some cases made smaller by the economic stimulus. The privation at home. The lost opportunities, economic and otherwise.
Krugman’s claim that an alien invasion would stimulate the economy is as alien to the economic way of thinking as our new overlords are to us.
Fortunately, not everyone is taking him seriously. A satirical Twitter account, @KrugmanAliens, is poking devastating fun.
Some readers might also be interested in this working paper I wrote a few years ago about the economics of war.
A little government can do a lot of good. A lot of government can do little good.
Rules protecting life, liberty, and property can create the stable conditions that entrepreneurs need to flourish. It works best when these rules are simple, clear, and few. But problems emerge when government takes on other missions.
Rules that are complicated, opaque, and numerous create instability. Entrepreneurs are less likely to invest or innovate if they fear the rules of the game might change tomorrow on a whim. Complying with regulations takes up time and effort that could be spent creating wealth. When governments get involved in business, businesses will involve themselves with government. This is an invitation to corruption, rent-seeking, and regulatory capture. Many backs get scratched, but economic growth suffers.
Dan Mitchell‘s latest video introduces the Rahn Curve, named after top-notch economist Richard Rahn, to illustrate that concept visually. Most academic studies on the subject estimate that governments that take up 15 to 25 percent of GDP is about the right size. The U.S. government consumes roughly 40 percent of GDP. That wide range is because different government policies have different effects, and because the complexity of even the smallest economies makes any macro-level study uncertain.
The academics might be guessing too high, though. Historical data from the 19th century show that the best-performing economies had governments around 10 percent of GDP. That includes the U.S. and most of Europe.
Returning to that size government wouldn’t even be particularly austere. the U.S. government would have a $1.4 trillion budget. Roughly what we had during the Clinton years.
I hope you’ll take a few minutes to watch. The Rahn curve contains valuable insights.
It is also disheartening that the two major contributors to GDP growth in the third quarter were housing construction and auto sales, both of which were propped up by government subsidies. Auto sales were boosted by the Cash for Clunkers program, and housing construction was driven by the $8,000 first time home buyer tax credit.
In addition to phony GDP growth, there are other signs that the recession is not yet over. Employment during the third quarter fell by over 750,000, and it is expected to fall further still. Employment has been called a lagging indicator of economic health, but when economic health is measured in terms of the financial well-being of the population, employment is not a lagging indicator, it is the indicator.
The CIT Group bankruptcy comes on the heels of nine more bank failures on Friday, which brings this year’s total to 115. These bank failures came at a cost of $2.5 billion to the FDIC deposit insurance fund.
There is a clear political incentive for Geithner and others to make efforts to convince us that this economic slump is over. It is unfortunate that these efforts include no actual facts.
Your host Richard Morrison welcomes returning guest co-host William Yeatman and special guest commenter Ryan Radia to the program for Episode 61 of the LibertyWeek podcast. We start with the FCC’s just-announced proposal for “net neutrality,” Treasury documents that reveal the true cost of cap-and-trade legislation and the plan for getting over California’s great depression. We then move on to the G20 Summit’s potential path to prosperity and the ever-expanding scandal that is ACORN.
Here’s a letter I sent recently to The New York Times:
To the Editor:
Eric Zencey’s article “G.D.P. R.I.P” (August 10) correctly points out that GDP has limited usefulness in measuring well-being. But his case is muddled by confusing money with wealth. Money is a unit of measure, like a mile or a ton. But it is not itself wealth.
He writes, “If you get into a fender-bender and have your car fixed, G.D.P. goes up.” It actually stays the same. If I don’t get into the accident, I’ll just spend the repair money on something else. While the accident may have no effect on GDP, it does have an effect on wealth; I am inarguably poorer. Instead of a working car plus a new tv, I can enjoy only the car.
Zencey’s confusion is itself an example of why GDP does a poor job of measuring well-being.
RYAN YOUNG Fellow in Regulatory Studies Competitive Enterprise Institute Washington, Aug. 10, 2009
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