Russell Roberts's Blog, page 1466

What Summers really really meant

I recently wrote about Larry Summers's statement about the economic impact of the tragic events in Japan. Here is what Larry Summers said:

"If you look, this is clearly going to add complexity to Japan's challenge of economic recovery," Summers said. "It may lead to some temporary increments, ironically, to GDP, as a process of rebuilding takes place. In the wake of the earlier Kobe earthquake, Japan actually gained some economic strength."

The post generated 125 comments, a lively back and forth debating what Summers "really meant." What did he mean by "temporary increments" in GDP. What did he mean by "economic strength?"

Let me try to help.

He meant it was a good thing for the economy. He wasn't saying the tsunami was a good thing. He began his response to the interviewer by making it clear that this was first and foremost a human tragedy. But on the financial side, he was saying it had a silver lining, just like Paul Krugman concluded after 9/11 because there would now be some rebuilding and that would be good for the economy.

Read the Krugman piece. Tell me where the nuance is. There isn't any. Read the Summers quote. It's pretty straightforward. He does say "may lead to" not "will lead to." He does talk about "adding complexity" but that presumably a reference to the human costs. He adds no caveats in his remarks, no qualifiers, about the Kobe earthquake or the increases to GDP.

Do you really need to look for subtlety or nuance? Summers and Krugman  believe that spending creates prosperity. It's called Keynesianism. As I said in my original post, I don't understand the logic because it implies that destruction is a good thing for the economy. Nothing Summers said (or Krugman) shows anything other than that.

You want subtlety? You want nuance? You can argue that comes into play because there's unemployment. There's slack in the economy. In the Keynesian world view, when there's slack, it's because there isn't enough spending. So anything that boosts spending (digging ditches and filling them back in, a really big war (see Krugman's piece), or a natural disaster) is good for the economy. Not just good for the construction industry–we'd all agree on that–but good for the economy overall.

It's a particularly peculiar argument when we're talking about an increase in private spending on rebuilding rather than a debt-financed increase in public spending. My eleven year-old understands that spending on rebuilding means less spending on something else. That was his reaction when I asked the family at dinner last night what they thought of Summers's claim. What does Larry Summers understand that my eleven year old is missing? I really don't get it.

BTW, when I asked my eleven year-old and thirteen year-old what they thought Summers was thinking with his argument, they both started singing from Fear the Boom and Bust:

Even a broken window helps the glass man have some wealth

The whole verse goes:

The monetary and the fiscal, they're equally correct

Public works, digging ditches, war has the same effect

Even a broken window helps the glass man have some wealth

The multiplier driving higher the economy's health

I think that's how Larry Summers and Paul Krugman view the world. Can someone find me something they've said or written that suggests otherwise–that suggests there is something other than a free lunch or that suggests that destruction is bad for the economy?

Finally, I'd love to interview Larry Summers on EconTalk and let him give his side of the story. He's a smart guy. He's smarter than my eleven year-old and smarter than I am. But why he believes that spending on rebuilding destroyed buildings is good for the economy is a mystery to me.

Collectivist Notions So Easily Distort Thinking

Here's a letter to the Washington Post:

E.J. Dionne's case for why governments in the U.S. aren't financially strapped is that America has lots of wealthy people who could be more heavily taxed ("What if we're not broke?" March 14).  The existence of yet-to-be collectivized wealth prompts Mr. Dionne to conclude that "we're not broke."

While the word "broke" is an overstatement (given governments' abilities to reduce their spending), Mr. Dionne's collectivism shines through in his use of the pronoun "we."  If I can't pay my bills, I'm properly described as being "broke."  This fact changes not one bit if I discover that my neighbors have more than enough money in their bank accounts to cover my net liabilities.  "We" are not broke, but I am.

So, too, with government.  Just because it's a creature of popular sovereignty and has the muscle to confiscate assets doesn't mean that every cent of every citizen's property belongs to a collective pool of assets owned by "us," or that more private property is game to be confiscated simply because government's books are in the red.  They – many politicians over the decades – ran up huge debts and unfunded liabilities as they overspent and overpromised.  Their doing so reflects a politically convenient discounting of the ill long-run consequences of their actions – convenient because those ill consequences were left to be dealt with in the future by others.

Well, the future is arriving.  And the agency that allowed some people to irresponsibly accrue huge liabilities in the name of "us" is urged by Mr. Dionne to confiscate more of the wealth of persons who, by and large, accumulated net wealth by taking longer-run, more responsible views than did those persons who created this fiscal mess by spending and promising to spend other people's money.

Sincerely,

Donald J. Boudreaux

And Yet the Western Left then Celebrated the Glories of the U.S.S.R.

When the Soviet authorities during the 1940s exhibited the 1940 movie The Grapes of Wrath as evidence of how miserable the poor were in capitalist America, it backfired.  What amazed the Soviet audiences was that the Joad family fled starvation by car.

This passage – with original emphasis – is from page 54 of Deirdre McCloskey's monumental and path-breaking 2010 book Bourgeois Dignity.  Read it.  Twice.  Even thrice.

Some Links

EconLog's David Henderson appropriately takes my colleage Tyler Cowen (and Tyler's co-author Jayme Lemke) to task for overlooking the role of minimum-wage legislation in promoting the unemployment of low-skilled workers.

Here's Ryan Young – and, here, David Theroux – taking on the imbecility of arguing that natural disasters are, or can be, good for the economy.

In the New York Times, Joshua Hammer reminds us of Japan's 1923 Great Kanto earthquake.

I love competition!

Mike Munger links to Axel Leijonhufvud's interview of F.A. Hayek.  Thanks Mike (but I've always found the works of both of these scholars to be remarkably accessible…..)

Pearlstein on Dani Rodrik

Here's a letter to the Washington Post:

Steven Pearlstein is insufficiently critical of Dani Rodrik's latest brief against free trade ("Review: Dani Rodrik's 'The Globalization Paradox'," March 13).

For example, while it might be true that countries most open to trade today also tend to be countries with the largest governments, this fact doesn't prove Prof. Rodrik's claim that free trade can be successful only if its consequences are managed by a large, activist state.  Hong Kong remains today the most open country in the world, trade-wise, yet its government is also the world's smallest.  Singapore – the world's second-most open country – also has one of the world's smallest governments.  Yet citizens of these countries are among the wealthiest people on the planet.

Or consider America before the New Deal.  Although relatively high national tariffs were the norm during that period, America itself was a vast and vibrant free-trade zone.  Textile-producing innovations in the Carolinas "disrupted" (to use Prof. Rodrik's term for economic change) the economy of New England; meatpacking innovations in Illinois "disrupted" the economy of Texas; transportation innovations in Michigan "disrupted" economies everywhere.  Yet there was no government, at any level back then, imposing – on all Americans freely trading with each other – "the same set of rules" that Prof. Rodrik fancies is necessary to make free trade both successful and accepted.

Sincerely,

Donald J. Boudreaux

RSS fixed at the Cafe

For those of you who were having trouble reading the Cafe via RSS, it should be repaired now. Sorry for the confusion.

And a thank you for the reports. Please keep us posted if you have any further difficulties.

Happiness

Water likely does nothing to make a fish consciously happy – but take that water away from him and you'll witness a most miserable mackerel.  Here's a letter to the New York Times:

Roger Cohen writes that "British research has suggested that money itself does not confer happiness, although wealthier people tend to be happier; that employment is critical to self-esteem; that women tend to be happier than men; and that people need something beyond the material for fulfillment" ("The Happynomics of Life," March 13).

No doubt.  It's too long a leap, though, from these (unsurprising) facts to Mr. Cohen's conclusion that we would be just as happy living in an economy that is less materially productive, but that has more leisure, than the economy that we live in now.

Economist Dwight Lee, who studies happiness research deeply, speculates realistically on "what conditions would prevail if no one possessed the ambition to work hard to achieve an illusory … happiness.  In such a world, everyone would choose to occupy the slow lane."  While it's true that we'd spend more time enjoying our families and friends, this "easy life would not be nearly as attractive"* as Mr. Cohen and other denizens of today's world imagine it would be.

One example: the reduction in medical research would cause mortality to rise.  It's not at all clear that a salesman who lives in a more leisurely world but whose child dies of pneumonia would be just as happy as a hard-driving salesman living in today's world in which physicians, researchers, and profit-grubbing pharma executives – motivated by personal ambition – stress themselves out and work long hours to supply the medical care that relieves parents of the constant worry that diseases such as pneumonia and influenza will kill their kids.  Likewise for many other features of our daily lives that we take for granted but that we enjoy only because of the ambitious striving that capitalist incentives promote – features whose disappearance from our lives would make us most unhappy.

Sincerely,

Donald J. Boudreaux

* Dwight R. Lee, "Who Says Money Cannot Buy Happiness?" The Independent Review, Vol. 10, Winter 2005, pp. 385-400; the quotations in the letter are from page 388.

The economics of Japanese earthquake insurance

Here is one interesting bit:

…very few people in that region of Japan held earthquake insurance, and also because of strict loss limits imposed by the Japanese government. For instance, residential buildings and furniture can be covered, but very expensive jewellery and artwork cannot, and there are rules that ban people from taking out insurance once an earthquake warning has been issued.

Mr. McGillivray said the Japanese government protected domestic insurers by limiting foreign participation in the system and, to keep the risks manageable, limited the payouts.

Are the capital requirements on Japanese insurance companies well-designed?  Probably we will find out.  Can anyone recommend readings on this and related questions?

*Understanding Cairo*

The author is David Sims and the subtitle is The Logic of a City Out of Control.  It is interesting throughout for anyone studying urban density or informal land titles or urban sprawl or Third World mega-cities.  This passage is off the central topics of the book, but I found it an interesting corrective to the usual picture:

There is a misconception held by many Egyptian professionals, especially engineers, that informal housing is haphazardly constructed and liable to collapse.  However, such precarious housing is almost unknown in informal areas.  Since informal housing is overwhelmingly owner-built without use of formal contractors, it is in the owner's own best interest to ensure that care is taken in construction.  In fact, one of the main features of informal housing construction is its high structural quality, reflecting the substantial financial resources and tremendous efforts that owners devote to these buildings.  It is worth noting that in the 1992 earthquake in Cairo, practically all building collapses and the resulting fatalities occurred not in informal areas, but either in dilapidated historic parts of the city or informal areas…where apartment blocks had been constructed by (sometimes) unscrupulous developers and contractors.

Paging John Lott

CNN: A man who broke into a house in Portland, Oregon, called police — afraid the homeowner may have a gun.

The suspect, Timothy James Chapek, was in the bathroom taking a shower when the homeowner returned to the house Monday night…[He] locked himself in the bathroom and made an emergency call, police said. He said he had broken into the house, the owner had come home, and that he was concerned the owner might have a gun.

Why he was taking a shower I do not know.

Hat tip: Radley Balko.