Hurricane Irene and Keynesian insanity

Soldie wrote: »

Krugman has previously hailed the economic benefits of the 9/11 attacks and said that the catastrophic earthquake and tsunami that hit Japan earlier this year could be "expansionary". It amazes me that an economic commentator with such esteem and clout can be unaware of a basic economic principle such as opportunity cost. In short, the $7 billion (or whatever the sum comes to) that is spent on rebuilding leaves people in the same situation they were in prior to the hurricane hitting and a $7 billion bill. Had the hurricane not hit, then people would have had intact properties and $7 billion to spend on other goods and services of their choosing. Saving and investment - not spending!

SupaNova wrote: »

More broken window fallacy.

What about all the destroyed production and capital, all those factories and houses, you are forgetting the endless costs demolishing a city and rebuilding would entail. Destroying a city, would mean destroying the complex system of labor in that city. All the workers have to be retrained to mine raw materials, build factories for producing the materials required for construction, build the roads, build the cities and build factories that they had before demolishing the city. Everyone would have to re skill once again to jobs in the new city, all this to get right back to where they started. Could this new city be that much better than the old city's continued evolution over that time period that it can replace the 20 yrs of lost production? The Keynesians would say we benefit by new building technologies we discover, but this again is at the cost of other technologies that would have evolved in the old city over that time period.

If we didn't facilitate traffic, while building roads you would be putting a lot of people out of work. Of course if we didn't facilitate the existing economy the road would be built quicker, but at the cost of all the production in the existing economy that was not facilitated.

The Keynesian view of emptying your wardrobe would be to empty it, destroy it, why not destroy all your furniture, get new furniture built that might better facilitate re-arranging your clothes, this would spur employment and technological advances in furniture production, not just improvements in wardrobes but tables and chairs as well.

20Cent wrote: »

If you want insanity check out the libertarian solution to a major disaster. Some pub quizes and a charity to fix billions in lost infrastructure.

ei.sdraob wrote: »

Added this piece of Krugmanite wisdom to sig

"Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble" - Paul Krugman 2002

Dubya's Double Dip?

By PAUL KRUGMAN

Published: August 2, 2002

If the story of the current U.S. economy were made into a movie, it would look something like ''55 Days at Peking.'' A ragtag group of ordinary people -- America's consumers -- is besieged by a rampaging horde, the forces of recession. To everyone's surprise, they have held their ground.

But they can't hold out forever. Will the rescue force -- resurgent business investment -- get there in time?

The screenplay for that kind of movie always ratchets up the tension. The besieged citadel fends off assault after assault, but again and again rescue is delayed. And so it has played out in practice. Consumers kept spending as the Internet bubble collapsed; they kept spending despite terrorist attacks. Taking advantage of low interest rates, they refinanced their houses and took the proceeds to the shopping malls.

But predictions of an imminent recovery in business investment keep turning out to be premature. Most businesses are in no hurry to go on another spending spree. And those that might have started to invest again have been deterred by sliding stock prices, widening bond spreads and revelations about corporate scandal.

Will the rescuers arrive in the nick of time? Not necessarily. This movie may not be ''55 Days at Peking'' after all. It may be ''A Bridge Too Far.''

A few months ago the vast majority of business economists mocked concerns about a ''double dip,'' a second leg to the downturn. But there were a few dogged iconoclasts out there, most notably Stephen Roach at Morgan Stanley. As I've repeatedly said in this column, the arguments of the double-dippers made a lot of sense. And their story now looks more plausible than ever.

The basic point is that the recession of 2001 wasn't a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance. To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.

Judging by Mr. Greenspan's remarkably cheerful recent testimony, he still thinks he can pull that off. But the Fed chairman's crystal ball has been cloudy lately; remember how he urged Congress to cut taxes to head off the risk of excessive budget surpluses? And a sober look at recent data is not encouraging.

On the surface, the sharp drop in the economy's growth, from 5 percent in the first quarter to 1 percent in the second, is disheartening. Under the surface, it's quite a lot worse. Even in the first quarter, investment and consumer spending were sluggish; most of the growth came as businesses stopped running down their inventories. In the second quarter, inventories were the whole story: final demand actually fell. And lately straws in the wind that often give advance warning of changes in official statistics, like mall traffic, have been blowing the wrong way.

Despite the bad news, most commentators, like Mr. Greenspan, remain optimistic. Should you be reassured?

Bear in mind that business forecasters are under enormous pressure to be cheerleaders: ''I must confess to being amazed at the venom my double dip call still elicits,'' Mr. Roach wrote yesterday at cbsmarketwatch.com. We should never forget that Wall Street basically represents the sell side.

Bear in mind also that government officials have a stake in accentuating the positive. The administration needs a recovery because, with deficits exploding, the only way it can justify that tax cut is by pretending that it was just what the economy needed. Mr. Greenspan needs one to avoid awkward questions about his own role in creating the stock market bubble.

But wishful thinking aside, I just don't understand the grounds for optimism. Who, exactly, is about to start spending a lot more? At this point it's a lot easier to tell a story about how the recovery will stall than about how it will speed up. And while I like movies with happy endings as much as the next guy, a movie isn't realistic unless the story line makes sense.

Democratic presidents create 2x as many jobs per year as Republican presidents.

8 of the last 9 recessions have been under Republican presidents

Republican presidents' deficits are 3x higher than Democrats' and 2x higher as a percent of GDP.

Most Libertarians like Ron Paul are Republican. Most Keynesians are Democrats. I know who I would prefer.