What’s wrong with Keynesians today?
The words of former Obama Chief of Staff Rahm Emmanuel must constantly go through the mind of every Keynesian economist: “You never let a serious crisis go to waste.” This is exactly what Paul Krugman and Nouriel Roubini are doing soon after the tragic events in Paris.
First, let’s take a look at Krugman’s comments, the man who is the poster boy for the broken window fallacy. He published an op-ed in the New York Times entitled “Terrorists and Aliens,” in which he tries to shuck and jive his way into presenting the case that the terrorist attacks would be great for the French economy. Although he doesn’t explicitly state terrorism is good for the economy, he does hint at it quite a bit in his blog post.
Here is his short article from Tuesday (emphasis mine):
The Great Depression wasn’t ended by the intellectual victory of Keynesian economics; in fact, the publication of The General Theory was followed by the great mistake of 1937, when FDR tried to balance the budget too soon and send the U.S. economy into a severe recession. What put a decisive end to the slump was World War II, which led to deficit spending on a scale that was politically impossible before.
This story is what led me to facetiously suggest that we fake a threat from space aliens, to provide a politically acceptable cover for stimulus.
Now France has been attacked, unfortunately by real terrorists instead of fake aliens, and Hollande is declaring that security must take precedence over austerity. Is this the start of something big?
OK, obligatory disclaimer that will do no good in the face of the stupidity. I am NOT saying that terrorism is a good thing, just as those of us who point to wartime fiscal stimulus aren’t saying that World War II was a good thing. (Don’t kill baby Hitler — we need him to justify stimulus!) We’re just trying to think through some side effects of the atrocity.
The question we should ask is whether the fiscal indiscipline caused by jihadists will make a significant difference to French performance.
Well, my guess is that the numbers will probably be too small. U.S. defense and security spending rose by around 2 percent of GDP after 9/11 — but that involved a much bigger military buildup than France is likely to undertake, plus the Iraq War. More likely we’re looking at fraction of a percent of GDP, which is small compared with the austerity Europe has imposed. Unless the French response is much bigger than I’m imagining, the impact on growth won’t be large.
Well, this is coming from the same guy who wanted a housing bubble, who predicted the Internet would become obsolete by 2005 and who said the Japanese nuclear catastrophe could be great for the economy (SEE: 8 Paul Krugman quotes to laugh at).
The Keynesian nonsense doesn’t end there, unfortunately. Nouriel Roubini is the next economist to argue economic stimulus following the Paris attacks.
Speaking in an interview with CNBC (via MarketWatch) on Tuesday, Roubini purported that the terrorist attacks could boost the eurozone economy if the European Central Bank (ECB) makes the decision to boost its monetary stimulus. He noted that the attacks would be modest, unless additional attacks took place.
Here is what I wrote in 2012 soon after the devastation of Hurricane Sandy:
It’s unfortunate to see, even after all these decades, economists purport the notion a disaster invokes economic growth. This herein lies the denunciation by 19th century French economist Frederic Bastiat and his 1850 piece “That Which is Seen, and That Which is Not Seen.”
In Part No. 1 of his articulate article titled “The Broken Window,” Bastiat talks about a shopkeeper, who has his window broken by some individual and he now must hire someone to fix the damage. The local townspeople are distraught by the news, but they make the case that this will benefit the economy because he must hire the window repairman.
However, if his window was never broken in the first place, he would have had money that he could’ve done something else with, such as go to the local cinema, dine out at the local jazz club or purchase clothing from a local tailor. There could’ve been countless other ways he could’ve spent his earnings.
This famous idea is now referred to as the Broken Window Fallacy. The notion that we should break everyone’s windows, create endless chaos and provide unimaginable damage is fantastic for an economy is foolishness.
It’s an absurd way of thinking to promote destruction and chaos as a way to stimulate the economy. Would Krugman and Roubini celebrate if their properties were destroyed? Hey, rebuilding or repairing their homes would create economic growth. Chances are, they wouldn’t appreciate it. And neither would Parisians and casualties of war.
–AM
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