Thursday, November 1, 2012

Disaster Keynesianism -- Say something responsive for once!

Last day in Budapest for now, leaving in a few hours. But it looks like the topic of the day is the economics of Hurricane Sandy, and, as with any discussion of economics during a natural disaster, whether it will be "good for the economy".

Needless to say, this is a discussion that has happened several times already. Still, engagement with the other side's arguments is always good -- as long as you're actually, well engaging, rather than extending and reinforcing a non-responsive (or no-longer-responsive) point.

Which brings us to pseudo-contrarian Steve Landsburg's latest pseudo-contribution to the matter. He thinks he has an even more devastating critique of the "hurricanes can be good for the economy" by posing this:

ask your opponent whether it’s “good for the ants” when you put a stick down their anthill, wiggle it around and destroy their infrastructure. Go ahead and acknowledge that this can sure put a lot of ants to work.

Or, for that matter….

Ask if spilling ink on the living room rug is “good for your household’s economy” because of all the cleanup work you’ll do.

Of course, this doesn't actually address the Keynesian's central point, because their claim is that normally such acts are destructive, but need not be so when there are idle resources (found after a quick search).

To make absolutely sure I'm not misunderstood, please read these caveats if you plan on responding:

- I don't agree with they Keynesian "idle resources" argument, and have said as much before.

- I realize that Keynesians (and their critics) acknowledge that there are always better ways to do economic stimulus than a natural disaster -- just employ those otherwise-would-be-disaster-response-resources to do something that's not completely wasteful.

And yet there's no mention of relevance of idle resources in Landsburg's post, or in the army of back-slappers or hangers-on that dominate the beginning of the discussion. When we finally do, it's from critics who offer surprisingly good analogies, like commenter "Brian", who compares a stagnant economy to laziness ("akrasia") in an individual:

Suppose Billy Joe has been in bed for years. He’s overweight and unmotivated. His life appears to continue to spiral out of control as he watches reruns of every horrible show made from the 1970′s on. But when that ink falls on the floor, this finally gave him a reason to get out of bed and clean up the mess, and the mere activity of it kick started him into action of doing thins again, and even being motivated [sic]

And the defenders of the post (I guess *not* surprisingly) miss the point that of course making new windows is better than fixing broken ones, but that's not an option here. Landsburg himself does that in this comment:

... this is ridiculous, on Keynesian grounds or any other. If you believe it’s important to hire idle resources in order to “stimulate the economy”, then you don’t have to wait for a hurricane — you can hire people to build *new* bridges instead of having them rebuild old ones. The hurricane does not in any way expand your set of policy options; it only destroys stuff.

Except, of course, that it does expand your options, since by supposition, policy makers won't allocate funds for public works projects that build new windows, but will gladly fund projects to restore the windows that were broken in the disaster. (To re-iterate: I disagree that such public works funding -- whether for building or fixing -- is a good idea for "helping the economy"; this is simply about appreciation of one's opponent's arguments and responsiveness thereto.)

***
My point here is that if you want a really hot one-line zinger for why the "hurricanes good for economy" meme (in its most intelligent form) is wrong, you're going to have to do a lot more than just say that destruction is bad. No -- you're going to have to show why destruction is not "better than nothing" if its effect is to put (only) idle resources to use, thus giving people the dignity of a job and practice of their skills, when you don't have the option (for e.g. political reasons) of simply employing those idle resources to build on top of existing wealth.

What's that, you say? It's hard to give a concise, fun explanation of why that thinking is wrong? Well, it should be. Two-sided political debates tend to be like that. My shortest debunking is at least this long

Can you do better? Perhaps. But it won't be by invoking the ten millionth permutation of "destruction is bad, m'k?".

17 comments:

Bob Murphy said...

Great post. I can only assume the Budapest authorities didn't allow you to see the wit and wisdom of my recent treatment of the subject.

Major_Freedom said...

I think I have a good one-liner that is informed:

"Define idle resource in a way that excludes non-idle resources."

------------------

I have an old car in my garage that I have been trying to sell for about a month, with no takers. Would a Keynesian say that it would be justified if the state sent me a check that is the difference between the market price and the price I desire?

Major_Freedom said...

I use the car to deliver groceries to old ladies once a once, so it's a means of production.

Seth said...

Mistaking an economy in the midst of repricing for an economy with slack resources.

My wife often mistakes me sitting on the couch as doing nothing. I'm not doing nothing. I'm resting so I can be more productive when I get to it.

When she interrupts me and puts what she thinks are my "slack resources" to work, she can make me less productive.

Tel said...

You could summarize by saying, "If only government had more power to fix the economy, then it would be easy to fix the economy. So never let a disaster go to waste."

Of course the counter-argument is to question exactly how government can understand so clearly why those resources were idle in the first place, and how government can have some great insight into a more rationally correct allocation of resources to projects than the free market does. The problem is not the amount of authority, the problem is knowing what to do with that authority.

Sometimes governments do pick winners successfully, so we can't argue it is impossible for that to happen. However, there are a number of well known problems with central planning, and Keynesian stimulus is exactly the same argument as central planning in disguise.

Silas Barta said...

Good point, Major_Freedom: if you can't produce a real distinction between idle and non-idle resources, then any argument grounded thereon fails. And indeed, Keynesians -- plus market monetarists -- are often forced to use extremely broad definitions of idle resources. Those definitions, as you note, assume away situations like a car that's not worth driving but has too much option value left to sell at the going rate.

Not surprisingly, that's but a subcase of the general problem of entrepreneurial search, and what I call the "price of thought" (compensation for the "fourth factor of production), which Keynesians tend to underappreciate.

Contra Seth, though, I think we see situations in recession more from the option value/uncertainty problem than due to the "resting overworked resources" problem -- so maybe try a different line with your wife? ("Well, sure I could take out the garbage, but what if our home were invaded in that time? You're giving up the option value of using me as a defense agency, you see ...")

Ken B said...

"Except, of course, that it does expand your options, since by supposition, policy makers won't allocate funds for public works projects that build new windows,"

This is wrong. You are talking about convincing policy makers to take up an option they already had. That is not a new option. 'Policy makers' are already part of the your in your options. (THey arguably *are* the your.)

You need something like, the hurricane tore the topp off the mountain making fraggle mining possible for the first time. That's possible but very unlikely.

Silas Barta said...

Ken_B, it's addressing the problem that Keynesians like Krugman are *worried about*, which is that policy makers today have effectively removed the option to just build more windows -- hence their insistence that we should do all this stimulus stuff without waiting for an alien invasion, hurricane, etc.

Whatever the meaning you want to extract from Landsburg's comment, he's not saying something responsive to the actual debate.

Ken B said...

"policy makers today have effectively removed the option to just build more windows"

Whatt does this mean, 'effectively removed'? It means they have decided not to. They are the policy makers by hypothesis. They have the option now, they choose not to exercise it. As I said, changing minds not creating new options from nothing.

But you are also missing one of Landsburg's points. You say he ignores unused capacity. He does not. He says concede it will 'put a lot of ants to work.' How does this exclude previously idle ants? It does not. In fact 'put to work' suggests a prior state of idleness, not thta it matters for the argument.

The case is inherently probabilistic. Destruction can be good. But destruction worthy of the name natural disaster will be so widespread and random that it is very unlikely to do good. Like a stick down an anthill.

Seth said...

@Silas - You've made the same mistakes as keynesians.

First, by calling my inactivity a problem you demonstrate that you think you know better than I the price (or 'option value/uncertainty') of my inactivity. It's actually not a problem at all. It's just a price choice. Just because I make a different price choice than you or my wife, doesn't make it a problem.

Recessions (and booms) are a bunch individuals making price choices. When keynesians call this a problem, they demonstrate that they believe they know better than those individuals about the price choices they're making.

Second, you gave your made up problem an unhelpful name, "resting overworked resources". Again, my inactivity is a pricing choice, not a problem.

Keynesians package their made up problem as "slack resources".

Third, you could not resist prescribing solutions for what you perceive as my problem.

Keynesians can't either.

Here's keynesian stimulus, in one sentence: We’re not sure why you’re not spending your money, but we don’t like it, so we’re going to spend it for you.

Silas Barta said...

@Ken_B: Whatt does this mean, 'effectively removed'? It means they have decided not to. They are the policy makers by hypothesis. They have the option now, they choose not to exercise it. As I said, changing minds not creating new options from nothing.

It means, actually, that the *very reason* Keynesians say the things they do about disasters is because, for whatever reason, there won't be a stimulus another way, by direct political means. Certainly, you can assume away the problem, but only by rendering your point non-responsive.

But you are also missing one of Landsburg's points. You say he ignores unused capacity. He does not. He says concede it will 'put a lot of ants to work.' How does this exclude previously idle ants? It does not. In fact 'put to work' suggests a prior state of idleness, not thta it matters for the argument.

It makes a big difference, because if the ants would otherwise have nothing to do and (as suggested my the numerous unimpressed critics) would actually atrophy in their skills, then the rebuilding has cost them nothing -- the ants would otherwise be able to do nothing for the mound. Indeed, most of the problems disappear when you distinguish idle from non-idle resources, such as the supporter's comment about "well, how much destruction until it's bad thing?" -- obviously, when you start forcing non-idle resources into production.

Silas Barta said...

@Seth: First, most of that was a joke.

Second, it would only be a Keynes-type error if I were proposing a policy to direct resources away from their market allocation, on the grounds that there's an "option value" "problem" rather than an "overuse" problem. I wasn't doing that, though -- I was making a personal rough estimate about aggregate conditions.

Finally, you were the one that brought up the reason for your napping as resting overworked resources, not me. You didn't use the term (and we can bicker about "over-" here), but that was the phenomenon you were describing to account for sleeping. Don't bring it up an example and then criticize me for making reasonable assumptions when I reference it.

Ken B said...

"then the rebuilding has cost them nothing "

Eevn if this claim is true it doesn't prove your point. Integrate their net welfare from the end of the destruction to the completion of rebuilding. It is less than had they been left alone for that period. Contrary to your claim.

Seth said...

@Silas - "most of that was a joke"

I got that, but thought it was too instructive to pass up.

"you were the one that brought up the reason for your napping"

Whatever my reason, it's a price choice. I choose to rest because it's worth it. I told you why it was worth it to me.

By stopping at my reason, rather than pondering why I decided that it's worth it, you miss a whole lot.

Seth said...

'it would only be a Keynes-type error if I were proposing a policy to direct resources away from their market allocation, on the grounds that there's an "option value" "problem" rather than an "overuse" problem.'

There's no difference between an "option value" and "overuse" 'problem.'

The problem is that a third party is diagnosing it as problem, which is the first step to prescribing policy that distorts price signals.

Silas Barta said...

Ken_B:

Even if this claim is true it doesn't prove your point. Integrate their net welfare from the end of the destruction to the completion of rebuilding. It is less than had they been left alone for that period. Contrary to your claim.

If the claim were true, yes it would prove my point; your claim requires that it not be true.

And Steven E. Landsburg isn't providing insight with the ant example because ants (being what they are) are a case where the workers *don't* have disutility from labor, any more than your skin cells have disutility from repairing an abrasion.

With humans, you can have similar phenomena where the labor has disutility but not enough to exceed that of the money received for it. Yes, there are problems with destruction, but this argument doesn't show a flaw in the (strongest version of) the Keynesian argument.

@Seth: I made no such additional assumptions. Please re-read my post, and unread what you read into my claims about resource use.

Major_Freedom said...

Silas, where've you been?

I'm curious about how you're coming along Bitcoin-wise.