How can enormously wasteful enterprises be good for an economy?

Great Debates
21

It wouldn’t have been true if the US hadn’t participated in the war…for one thing, I seriously doubt the outcome would have been the same. The other thing, however, is that we wouldn’t have ramped up our own industrial production and put millions back to work had we not participated. Sure, we would have had a healthy increase in production due to supplying our allies, but nothing like what actually happened. Then there is the post-war period, where we would have missed out. After all, we wouldn’t have been in any position to dictate terms in a peace agreement, or in the same position to supply former enemies or allies with all the stuff they would need. Based on the cluster fuck agreements coming out of post WWI, I’d rate the chances of the allies (assuming they won) imposing similar peace agreements on Germany as the US did at about nil…same with Japan, assuming they were an active participant. Russia, for one, didn’t want a peace such as we agitated for, and they would have been the major factor in any sort of allied victory without the US along for the ride. And, as I said, all of this assumes the allies would have won…what would have happened if the axis won instead? What effect would that have had on US trade post war?

Depends. :wink: As it turned out, it wasn’t safer for us to sit it out and sell to the participants. The US wouldn’t have been the dominant economy post war that we were by participating…at least not IMHO.

No, of course not. That’s not the point. The point was that by stimulating our economy, an economy that was pretty flat prior to the war, we got it back up and spinning at capacity. That also had the effect of putting people back to work and into the work force. Post war, we had huge debts, but we had this industrial engine ready to produce. Now, factor in what the world looked like in the immediate post WWII period and you see a marriage made in heaven (for us)…a fully spun up industrial Juggernaut, lots of workers ready to produce, and a vacuum world wide in countries able to fill the huge void in industrial production. Plus, the US was in a position to dominate due to the fact that we were one of the major players in the war and could produce so much in the post war period. THAT was worth the debt.

Every situation is different though and attempting to use WWII as a guideline for any future economic play would be silly. It was unique, and produced a unique environment in it’s wake. Simply putting us on a full war footing tomorrow, ramping up our industries and putting a ton of workers back to work tomorrow building tanks and planes wouldn’t have a similar effect because the conditions today aren’t the conditions that existed prior to or post WWII.

-XT

22

Didn’t a lot of the debt we took on during the wars come back to haunt us in the present?

23

During which wars? If you mean WWII, then no. We enjoyed the greatest economic expansion in history immediately after incurring that debt, and managed it very well for decades thereafter.

24

I think Keynes would be amazed if he saw what the US is doing. First, because we don’t make anything much here anymore, we have shifted to a “defense economy”-we have giant firms like Raytheon, Lockheed-Martin, etc., that making nothing but weapons. We cannot cut their contracts, because the people laid off have no job alternatives-this has been the case since the 1960’s.
Meanwhile, China lends us money (so we can buy consumer goods from them). How long can this last? Who knows-its all we can do, however.
When interest rates rise, the whole thing will collapse. Do defense contractors provide jobs? Yes-but its the equivalent of digging holes and filling them in.

25

But, at the start of the scenario, some entrepreneurial islanders could have said, “There are a bunch of unemployed people, and I bet that the employed people would buy vegetables if they were available, so I’m going to hire some of the unemployed people and start up some vegetable farms” and get to the same end scenario more efficiently.

Or the entrepreneurial islanders could have said, “There are a bunch of unemployed people, and I bet that the employed people would go bowling if that opportunity was available, so I’m going to hire some of the unemployed people to start up some bowling alleys”. Those entrepreneurs would fail (islanders hate bowling) but would serve the same role as the government funding alien wars, and eventually get to the same solution as the money they spend on bowling-alley construction finds its way to vegetable-seeking consumers who spend it on vegetable farms, prompting them to expand.

The problem is that the entrepreneurs, both the ones with good ideas and the ones with bad, tend to be few and far between when there’s 50% unemployment, so the government steps in to be the entrepreneurs, since governments can act with a lot less risk than individuals. Keynes’ comments about ditch diggers are not meant to be say, “government should engage in stupid projects”, just that, “even if government makes bad choices in how to allocate money, and ends up investing in stupid projects, it’s sill doing good in this situation”.

26

After 1946, the amount of debt relative to GDP decreased almost every year (from roughly 130% of our GDP down to about 43%) until a guy whose name rhymes with “Monald Meagan” took a job in the “Bright Mouse.”

27

I think it is necessary to note that Krugman is simply using the alien war as a substitute for spending on infrastructure, education, health care, security (and anything else that the Republicans will not permit Obama to spend money on) in order to get the economy moving again. It is an established part of Keynsian economics that the occasion of WWII effectively ended the depression. What is not so obvious to the current generation is that during that war goods and services were allocated, not unlike a socialist economy. This worked because every member of the population had a direct interest in the outcome of the war and the effectiveness of these practices. Price gougers and black marketeers were ostracized. Contrast this with the Iraq war where taxes were actually cut and noone was asked to sacrifice.

No effort was made to pay for the Iraq war (in my mind because the public would not have tolerated a pointless war if it were seen to be costing us money) and now we are suffering the consequences and they will only get worse as more and more fighting men and women come home to a shell of an economy.

Krugman certainly does not war, but if we could somehow promote the togetherness and purposefullness that was present during WWII we could get the country behind the government and get everyone moving in the same direction with a unanimity of purpose. Thus he has created the imaginary invasion, since it would get everyone moving together in a spirit of sacrifice which is necessary to restore our economic footing. At the same time, noone would actually be hurt, since it is imaginary.

Unfortunately, as Krugman knows, if you tell everyone it is imaginary, noone really believes in the necessity of their own sacrifice. Better to try and elect some adults to the Congress who are united in their desire “to promote the general welfare” even if it means raising taxes, cutting social security, investing in education and police, controlling health care costs, taxing those transactions which serve no benefit to the economy (day trading), and anything else necessary regardless of whether you can compare such activity to communism, socialism, Zionism, or any other ism you can think of. We don’t have to discover who was directly responsible for ruining the economy to fix it. We just have to be serious about preventing it from happening again. Right now enormous spending on the social and economic good coupled with increased taxation at all levels is our best option.

28

They did expand their market, to the formerly unemployed.

Why not? Why would they stop buying fish after a while? People buy stuff when they have money to buy it. Especially food.

Of course not - that’s why it needed a boost.

It does, however, keep itself moving once the labor of the unemployed is being used to power it again.

Nope. War spending by the U.S. is what did it.

Why? The farmers, who were once unemployed and not working or buying, is now their market.

Your theory doesn’t work because the whole world is an economy, and therefore a finite market. Unless we start trading with aliens, the world can’t expand its markets. Those foreign markets need money to buy our stuff, so they need markets too.

29

I think we’re both right. And I don’t think your answer and mine are incompatible.

30

No they couldn’t because they didn’t have the cash to hire them. They have to produce, and be paid, BEFORE their goods are sold. And it’s a risk that they won’t sell.

That’s why the government can come in and stimulate the economy - it can take risks others won’t or can’t. And it can raise the cash for it.

Would you put up a bunch of your money to hire a bunch of unemployed people to sell something that’s not being sold in a weak economy? I wouldn’t.

Businesses don’t take risks like this in weak economies. That causes unemployment and the weak economy to continue. It’s a self-fulfilling prophecy. It’s a closed loop that the unemployed are left out of. The government can go in and disrupt the loop. The economy is at an equilibrium, and something outside it is needed to push it to a new, higher one.

Exactly. Well, I was going through your post to respond, thinking you were arguing with me, but turns out you agree. Oh well, nice way to end it.

31

Unless they were always unemployed and not eating anything before I can’t see how this could be possible. You can’t simply expand your market by fiat, which is what you are suggesting…simply borrowing all of the money and capital you need, hiring everyone that’s not working, and then expecting to pay back the money you borrowed for capital expenditures, increased recurring costs and for the salaries of the folks you are putting to work (while they spin up and start buying fish) as well as make a profit, which is the whole point of getting into business. If you could do this then all we’d have to do as a country is borrow a boatload of money, put everyone to work and magically expand our economy, never having to worry about unemployment again.

What were they doing while they were unemployed? WHY were they unemployed, if there was always a market for more folks to eat fish? The trouble with your example is there isn’t enough detail, but on the surface of it, it simply doesn’t make sense. If it DID make sense then that’s exactly what companies or nations would do…simply borrow money, employ everyone and watch their economies expand.

Sure, sometimes that’s the case. And, to be sure, internal markets that were, for whatever reason, unexploited before (or had stopped being exploited for some reason) could be with a capital injection. Infrastructure could be expanded, for instance, which would provide some temporary jobs and some relief while markets reformed. But that’s not sustainable. You can’t just hire a bunch of people to fish in the expectation that they will now be your perpetual market…you’d need to do something else, otherwise your market would contract and you’d be left with the debt and still have those folks unemployed and not eating as much fish.

Sort of. You are speaking in absolutes for something that was only one aspect of why we did well. PART of the reason was our war spending. Part of it was, well, all the other things I mentioned. The key though was our ability to expand our markets post war. Had we not been able to do this our markets would have contracted in the post war period and unemployment would have risen back up to where it was (assuming we didn’t expand our trade at all post war).

Working to do what? They aren’t building tanks anymore…what are they building and for whom are they building it? We would have all that debt from the war and an expanded industrial machine, but what would we be making with it? Internal, domestic consumption only takes you so far, especially with that sort of debt racked up. You’d get a huge compression if we didn’t rapidly expand our market in the post war period…which is what we DID do, btw, and why we had an unprecedented economic golden age in the post war period that catapulted this country into hyperpower status. It wasn’t domestic consumption that caused that (alone), it was the US selling basically every sort of good and service on a global scale, rebuilding much of Western Europe and Japan.

Except the world isn’t really a closed system…whereas a country, or a small island is, to a certain extent. Unless there was only one government and one magic bank it won’t be like a closed system, regardless.

-XT

32

Food makes a bad analogy, but the point is that the unemployed are not spending on products others make.

You can’t expand markets to people who weren’t buying your products before, but now have jobs, and therefore cash, and are willing and able to buy now?

Of course you can.

And that’s the point. You can’t do that. That’s why the government has to do it first, employing workers who can then buy your products.

You’re confused. I’m saying these businesses can NOT do that, as you say, so the government does it first.

Of course not. But once it’s done, it sustains itself. The economy once again includes the labor, and spending, of those unemployed workers.

No you don’t. Those people will keep buying fish.

Yes, the world is a closed system. Unless we start trading with those aliens.

33

Oh, and to answer the OP directly:

Look at our economy now! Look at all the useless crap we produce and sell or the services we provide! Our economy already depend on lots of wasteful junk.

34

I thought the broken window fallacy fell apart because instead of paying a guy to fix your window, you could have not broken the window in the first place and had money in your pocket to, say, buy a new television set.

Now you’ve spent the same amount of money, but also have a working window AND a television set, whereas before you just had a working window. Therefore society had more for the same value.

I don’t know how paying a man to dig a hole and then fill it in wouldn’t fall under the same fallacy. Instead, you could pay the man to landscape around a pond. In the former situation, you would have a filled in hole. In the latter, you would have a filled in hole and a beautiful pond.

35

Really? How do you figure that? Have you ever been unemployed? Assuming you were, did you never buy anything? My guess is you did, assuming you ever were.

I never said you can’t expand markets to those people. You seem to be twisting this debate into a pretzel. What I said, to condense, is that you can’t borrow a ton of money to build an internal market and expect that to pay everything back in any sort of timely manner. Simply putting people to work does not solve all problems…the caveat here is what was the problem in the first place that CAUSED the unemployment? Depending on that will depend on whether a stimulus would work or not work. It’s not a silver bullet that fixes all problems.

Presumably because you believe that the government can just make (or borrow) an infinite amount of money, and they can do it in perpetuity…and that this solution is a universal elixir of prosperity. Plus 6. And you seem to believe that this is sustainable in a self contained environment. To paraphrase the Mythbusters…well THERE is your problem. :stuck_out_tongue:

Certainly one of us is confused.

It won’t sustain itself in the scenario you laid out.

For a time they might, but eventually it will halt…JUST LIKE IT DID PRESUMABLY BEFORE WHEN THOSE PEOPLE BECAME UNEMPLOYED IN THE FIRST FREAKING PLACE. Sheesh…how did those folks BECOME unemployed? Were they born that way? Generations of unemployed in perpetuity dating back to the stone age or the foundation of the island nation?

Let me ask you something…why didn’t the Great Depression end right after FDR took control of the country? I mean, he did just what you are suggesting. Yet the GD went on for nearly a decade. Why? We put people back to work by fiat in various government sponsored programs to build US infrastructure, as well as myriad other things. Yet the GD endured…why? Why did, once we gave all those people jobs, it didn’t start up like a great machine and then run in perpetuity as you are suggesting?

Sure, and we have infinite resources as well. But for PRACTICAL purposes, in the past and to date, the Earth has been an open MARKET. That might change in the future, as every market out there is completely and fully penetrated…in which case we’ll either have to change the model or start trading with those aliens. But for now, we aren’t even close to this and you, I and that mouse in your pocket will not live to see the day where the Earth is a closed system and we have to trade with aliens.

Look, I can see you aren’t getting it, and I don’t have the ability, obviously, to explain it so you can. Maybe someone else will wander in and explain it better…or wander in and explain why I’m totally wrong (this is as likely an outcome as any).

-XT

36

XT, I’ve looked and I cannot confirm your claim that recovery lagged internationally to any significant degree after WWII. Can you tell me how much of a lag there was? All I can find suggests that ot occurred around the same time, but for some reason I’m having trouble finding the data. What were the GDPs of the various Asia and Western European countries, for instance?

37

I can say, with 100% certainty, that yes, they were born unemployed. What kind of world do you live in where people are handed jobs when they are born? :smack:

38

I’ve found a source with some data, and this suggests that recovery did not at all take “years or decades” to recover. In fact, the period from 1945 to 1973 appears to be a period of dramatic, remarkable economic growth in Western Europe, quite in opposition to your characterization.

http://econ161.berkeley.edu/econ_articles/ucla/ucla_marshall2.html

39

The point of the “paying people to dig holes” thing isn’t that its the optimal plan. The point is that its preferable to pay them to dig holes then to have them sitting around doing nothing, even though the actual holes are worthless. Obviously its even better to pay them to go build the Hoover Dam, or something else worthwhile.

Krugman would, of course, rather have the gov’t spend money to have people go build roads and trains and teach school children and fight crime and other economically beneficial activities. But his point is that even if we took that same money and did something stupid with it like prepare for a fake alien invasion, because demand is depressed in the current economy, it would still be beneficial, even if its not as beneficial as actually buying something worthwhile with the same money.

40

What Keynes really said in Chapter 10 of General Theory of Employment, Interest, and Money:

*If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.

The analogy between this expedient and the goldmines of the real world is complete.*

Genius!??