the basic idea seems to me to be that if we can get people to be really busy doing something–never mind if it doesn’t produce anything of value–then it can somehow help the economy? The interviewer in the video quotes Keynes as saying that if we could employ people to dig a ditch and fill it up again, that would be somehow “good”. (He uses the word productive, but it isn’t really productive, is it?)
Then Krugman says something about WWII getting us out (of the depression, I assume).
This sounds like madness to me. How can a war help an economy? (I assume he doesn’t mean the opportunity for looting the enemy.) In principle, how can that even be possible?
How can taking millions of people out of the productive work force to build bombs and then blow up those bombs, instead of producing something of actual value, be good for an economy?
An economy of 300 million is hard to picture. Let’s scale down Krugman’s space alien invasion. Picture an island community of a few thousand being invaded by a mainland force. How can having a quarter of the population give up fishing, building, growing, etc to fend off a year long siege possibly leave the community overall wealthier at the end of the siege than when it began?
Maybe I don’t know what is meant by an “economy.”
I put this in Great Debates because maybe this question in case this question does not have a certain factual answer.
You can keep someone employed by paying them to fix your broken window, but you could have also spent that money on other things that actually give you utility (whether it be paying for a movie, or investing it in a venture that ultimately adds value/gives a return) and so forth.
I think the only way war and that sort of thing helps is if the infrastructure that is built to deal with it winds up being really useful later. For instance, if an asteroid were coming to Earth, that sucks – but it forces us to beef up our space programs and technology to deal with it. After the asteroid is dealt with, we suddenly find that we have a bunch of space tech we might as well utilize, which turns out to be a blessing in disguise.
How can enormously wasteful enterprises be good for an economy? Answer…it depends.
Haven’t read the article (on the road so kind of hard atm), but I’d say the interviewer is taking liberties with quotes from Keynes…I seem to recall the bit about employing people to dig ditches, but I think it’s being taken out of context here.
He’s sort of right. Certainly post-WWII we weren’t in a depression/recession anymore and the economy was booming, despite our rather large debt at the time. Part of that was that we were one of the few relatively unaffected industrial nations left on the planet…a planet made smaller by the war wrt trade and international commerce. Also, you had many of the formerly powerful industrial nations needing, well, pretty much everything, which gave us unprecedented market penetration world wide. But part of it, as with a lot of things concerning the economy, were psychological…people (and businesses, which are run by people) who are confident are going to spend, hire and do business differently than people who are afraid, or uncertain. At the start of WWII and prior to the war (from the US’s perspective) people were afraid and uncertain, economically speaking, about the future…after, we weren’t. We were too busy working and celebrating the end of the war (and buying stuff…houses, cars, motor cycles, clothes, chocolate, etc etc etc) to worry about worrying about the economy and the future.
Well, a couple of things. First, it created tons of jobs and injected tons of (borrowed, to be sure) capital into our system. Industries that had been idle or partially idle were back producing stuff needed for the war. People who had been idle or partially idle were back either working or in the military fighting, instead of sitting around unemployed or underemployed. Also, as I mentioned earlier, just about every other major industrial nation besides us had been hurt or crippled, economically, by the war…we had either blown the crap out of our competitors industrial production capabilities (in German, Italy, Japan, etc) or helped support others with large injections of goods and services. Post war, of course, we just had ready markets in former enemies trying to pick up the pieces and allies doing the same…which meant a continuation of jobs for Americans and a boom for our economy, despite the debt we had racked up (EVERYONE had racked up a large debt during that war).
Depends on what their economic problem was before the invasion as to whether said invasion would help or hurt them. Also depends on whether they win or not, how they win, and how their enemies lose. You can’t really do a comparison like you are trying to do here as it’s not going to be analogous to either WWII (from the US’s perspective) or a hypothetical alien invasion…especially without a lot of details.
Well, first of all, bombs are something of actual value. They are used for something, and therefore the government pays money for them. But the value of what is produced at first isn’t the issue.
Any kind of employment helps the economy. The people who build something, or dig ditches, or whatever then SPEND their money. This, in turn goes into someone else’s pocket for something of value, and that money is spent again, and so on.
This is usually necessary when the economic engine is slow and lots of people are out of work, neither producing nor spending. The government has the means to take a risk and spend cash to give the economy a kickstart. Usually it spends it on something like roads or bridges, which are certainly of value, but it doesn’t matter that much. The worker has money in his pocket now, and spends it, and the cycle repeats.
Suppose the island has fishermen, but half are unemployed.
They are unemployed because people aren’t buying much fish. People aren’t buying much fish because half are unemployed.
So when the aliens come, the government pays the unemployed to go fight. They now have spending money, and they start spending it on fish. The fishermen now have lots of cash, so they start buying vegetables. The unemployed, as they arrive home from the alien wars, find there are job openings on vegetable farms. They make money and spend it on fish. And so on. The economy is back up to speed.
But then everyone has to pay the government’s war debt, of course. But that’s okay - now they all have jobs so they can pay taxes to pay it down.
Not an economist or anything but it looks to me like the broken windows aren’t a net economic gain because of opportunity costs. Those aren’t a huge factor in a depressed economy since there is plenty of underutilized capital. So yeah, a buildup for an alien invasion scare wouldn’t be as useful as the same amount of investment in useful infrastructure but at least it is increasing economic activity.
Um, no…eventually they will just go back to being half employed and eating less fish, unless they have expanded their markets in some way. You can’t just borrow a ton of money, use it to employ people and then expect those people to pay off the debt AND perpetuate their fish eating habits. Money isn’t a perpetual motion machine after all. The reason the US was able to do what it did in WWII was because of circumstances that let us rapidly expand our markets throughout the world…we literally had the world over a barrel. They needed everything we could produce from Coke to steel to pantyhose…every type of item from the mundane to the profound. We were, for a time, a practical industrial monopoly. Your hypothetical fishermen would only have that if they were able to expand their fish markets to their former allies and enemies, plus expand new markets in other things besides fish (maybe they are the only ones who can make boats after the war as well, for example). If they can’t do that then they will be crushed by the debt they incurred during the war AND pretty much back in the same boat they were in before, but worse as they would have all that debt too.
Busy-work isn’t a sustainable part of an economy, but it can give the economy a jolt to get it back into a sustainable equilibrium. This is the whole idea of a stimulus, something that’s been in the news for a while now.
I don’t think this counts as an answer because this situation would have been true if the U.S. had not participated in the war. My impression is that the Krugman was coming from a position that the U.S. war effort itself helped the U.S. economy.
that said, this answer makes perfect sense as an actual reason why the post-war U.S. economy was better than pre-war.
This sounds plausible. If you have savings, why invest it if you suspect calamities ahead? Safer just to sit on it.
Debt is certainly worthwhile if ends up in productive capital. Sure, factories get built to make tanks, and then later they can be used to produce actual goods. But can the remaining capital at the end of the war have really come close to being worth the actual debt?
Yep, that’s what he’s saying. He introduced this as a back door idea of how we might get the government to focus on stimulated the economy by significant spending on infrastructure and not worrying so much about inflation. His point is that it’s not possible to do so in this political environment, so maybe we need an invasion from outer space to change the political landscape and allow a large amount of money to be pumped into the economy.
Doing useful work is better than doing useless work but doing useless work can be stimulative if the alternative is to be unemployed. The new employee, though useless, gets a paycheck increasing consumer demand; this can lead to an upward trend in confidence and prosperity.
Krugman would be the first to point out that repairing bridges is a better use of the unemployed than breaking windows, but useful government projects are not an option in the U.S.A.: Ronald Reagan proved that communism doesn’t work. Since repairing bridges or hiring more teachers is not an option for the U.S., perhaps War is our best hope. We needn’t wait for aliens of course; we can fight one of our natural enemies like Iran, the New Iraq, or France.
It didn’t take place immediately after the war…it took many countries years or decades to recover and start to prosper, especially in Western Europe. However, my non-economist answer to your question is that the war opened up global markets that didn’t exist, or were hugely stifled prior to the war. The US was able to take almost exclusive advantage of that initially, but slowly other nations were able to start to compete with our short term monopoly, and eventually out compete us in several sectors over time. Part of this was sort of modernization through massive destruction…much of the industrial infrastructure in countries like Japan and Germany were destroyed (or stolen in the case of Germany post war by the Russians). Putting in newer, and more efficient industrial infrastructure eventually gave them a boost. It helped that the US, for completely non-altruistic reasons of our own were willing to pony up capital and materials to help them rebuild (and thus providing us with new markets for our goods and services as well as jobs making all those goodies).
That’s my take on it, Hentor. What are your thoughts?
Yea, the point isn’t that a fake alien war would be better for the economy in general, its that it would be better for this economy. That is, an economy suffering from high unemployment due to lack of demand.
The Broken Window fallacy assumes that if the window guy wasn’t fixing your window, he’d be off making new windows, thus adding an extra window to the total wealth of the country. But in our current economy, the window guy is sitting at home watching daytime soaps and flipping through the classifieds, not adding anything at all to the economy in new or replaced windows.
He did basically say that. Of course, the context was the Great Depression and the alternative was ridiculously high unemployment.
Between useless busywork and unemployment, useless busywork is preferable. Unemployed in the Depression meant homeless and starving. Busywork at least means somebody is out there buying food, clothes, shelter, etc and helping to keep other people employed by buying necessities.
Well, that and we were presumably going to have to pay their support anyway. But further, there was at least some half-way useful; work people were willing to do to get paid. Manual labor wasn’t terribly foreign to most people, and big public works projects did have some utility at the end of the day. Whether they were worth the cost is something of a historical unknown.