It all boils down to looking beyond the intended benefits of a choice to the unintended consequences that choice also carries
Good Economists and Bad Economists
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I was wondering as I finished your boy’s column if you’d post it.
As summation; Williams completely missed (or didn’t understand) the overarching points being made by both Summers and Krugman.
I’m increasingly glad I was never subjected to his “plain and simple” classroom explanations of macroeconomic theory.
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Actually, Summers had it right in saying that there would be a TEMPORARY (and local) benefit.
The underlying principle is simple and unavoidable.
Say an office building is destroyed, and replacing it costs SOMEONE $10million. So. that pumps $!0million into the local building trades and suppliers and they are happy. After the building is complete, you are back where you started with a $10million office building, but SOMEONE is out $10million.
The loss is whatever SOMEONE would have used that $10million for had the building not been destroyed.
If demand existed, he might have built a 2nd building, and you would have twice the productive office space, or he might have spent the money on a factory, or he might have simply paid off debt and thus been ready for another productive opportunity when it came along.
Whatever the money would have gone for, it is gone, and all you have is what you started with, the loss to society is whatever the money would have gone for had the building not needed replacement.
No one is really better off, not even the local tradesmen and they would have been just as well employed on the alternative use.
The opportunity cost might not be as visible as the new building, but it is just as real.
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“Whatever the money would have gone for, it is gone” Where did it go? Is this a closed system? Is economics really just zero-sum?
Suppose that building was a 1903 5-story brick and steel building complete with steam heat, 1903 wiring, and no insulation with single pane glass that costs $200,000/year to maintain?
You see where we’re going? The new building is more than the cost of reconstruction; it could also be the lynch pin of a new downtown economic boom — with a cheaper annual operating budget. Plus, now he can easily build one 3x the size on the old footprint and let someone else determine the value of that demand for a second building next door.
Yes, my 1967 GTO was a wonderful automobile, but would I really spend $30,000 for a fully restored gas-guzzling death-trap? Yes, if I had it today, I could say II lost a $30,000 automobile because of an accident. Sadly, the insurance company at the time didn’t go for that estimate.
Oh wait, did I interrupt the start of an argument for nuking New Orleans and resettling to Shreveport?
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Well, when Katrina flooded New Orleans, we would all have been better off had it been left flooded and renamed Lake Orleans. It was a cesspool of crime, corruption and dependence before the flood, and they rebuilt it exactly as it was, only less the productive people who found a home elsewhere.
My brother lives in Kenner, just outside NOLA, and is convinced it is not too late to flood it again.
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@Tabor
As always you ignore reality with your analysis of opportunity costs. So after the WTC is rebuilt we are back where we started? No, we are not. Particularly so when there is slack in the economy. The economic effects of such a project – that otherwise would not happen – are many and varied. More people with more money to spend encourages more economic activity. Homes built, new cars purchased, more travel purchased etc. etc. etc. The economy is not static. It is dynamic. Priming the pump is an oft-used metaphor and it is an apt one.
Both Summers (“some temporary increments”) and Krugman (“could do some economic good”) made reasoned and accurate statements. The criticism that Williams offers and you repeat is over-the-top doctrinaire rejection of reality-supported facts. Stating that recovering from a disaster can provide beneficial economic stimulus is NOT advocating disasters as an economic policy. It is stating a simple and provable fact.
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In isolation it is simple and provable, but somewhere, something else that would have been done won’t happen because those resources were used to replace what was lost.
Again, unless you believe that the money used for recovery would have simply been burned.
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@Tabor
Again, burned money? Your mind is trapped in the over-simplified imaginary world of the broken glass village. The real world is far more complex. And, as a matter of fact, Wall Street is sitting on literally mountains of money trying to find a profitable place to invest. The WTC rebuilding did not “crowd out” any project that would have been profitable for someone.
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Really? You keep making that claim.
In what form is that mountain of money?
Because if it’s not in cash buried in Mason jars, it’s already invested.
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@Tabor
Unlike you, I have spent months of my life traveling to the financial centers of the United States and Canada seeking capital for a good sized business from people who are managing Billions and Billions of dollars of OPM. That Other People’s Money in such hedge and investment funds is constantly replenished by trade deficits and untaxed income of billionaires. This fact of economic life is another reason why your simplistic models are not the final word you think they are.
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I have to laugh at you giving me an “economics” lesson…
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This article covers three topics.
That is the point repeatedly made by we “leftists” in connection with Trump’s trade war.
Taxes on corporations are really taxes on people. Yes.
We would be better off eliminating taxes on corporate income BUT we should adjust the taxes on people accordingly. For example, no reason for dividends or capital gains to get favorable tax treatment if corporate profits were not being taxed.
People saying that earthquakes and terror attacks have temporary positive economic effects are sputing “sheer lunacy.” No, they are not. This is a good example of the a priori oversimplification of the so-called “broken glass fallacy.” In THEORY all the effort going into, say, rebuilding the WTC could have gone into producing something new. In REALITY this “analysis” leaves that the disasters motivated economic activity that otherwise would not have happened.
Finally, and most tellingly, the assertion that economics is “simple” is, uh, simple. In reality, economics is complex. It may be based on simple principles but that does not mean that useful analysis is simple. The laws of thermodynamics are simple and very well understood. That does not make predicting the weather simple.
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In a nutshell; Williams appeared to use an entire editorial to be critical of two excellent economists and provide props for his GMU colleagues.
I found myself wondering if his department is thinking of giving him “Emeritus” status sooner rather than later and he’s trying to hold on to his position.
Regardless, his 18th century perspectives are increasingly out of step with the complexities of a global economy.
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RE: “In THEORY all the effort going into, say, rebuilding the WTC could have gone into producing something new. In REALITY this ‘analysis’ leaves that the disasters motivated economic activity that otherwise would not have happened.”
In REALITY there is no benefit. Before the disaster the relation between money and goods can be represented as x=y.
After the disaster, the relation is x=y-1. Had the rebuilding not been necessarye, the econmic activity it represents would have produced something else instead of a replacement WTC. The relation between money and goods would have been x=y+1. Instead, the rebuilding only restores the original relation (x=y).
There ain’t no such thing as a free lunch.
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@Roberts
“the economic activity it represents would have produced something else instead of a replacement WTC”
That is an assumption for which there is zero evidence.
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RE: “That is an assumption for which there is zero evidence.”
So is your claim that nothing else would been produced. Hence the need for Bastiat’s observation in the first place.
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@Roberts
Typically, you do not understand the oversimplified idea you are defending. Bastiat ASSUMES that SOMETHING else would be produced if broken windows were not being repaired. The fact is that OFTEN that is an assumption that is not supported by evidence or experience. I will say it again, a priori models can be useful, but do not mistake them for economic and political reality.
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Really?
Do you think that business owners bury their money in Mason jars in their back yards?
Even if they do nothing other than put it in the bank, it will be loaned out for something productive. No income goes unused.
If they but another yacht, people are employed to build and staff it. If they buy stock businesses use that to grow.
The only way money goes to waste is if it goes to the government in taxes for something non-productive.
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RE: “Bastiat ASSUMES that SOMETHING else would be produced if broken windows were not being repaired.”
It’s a good assumption, given that not-repairing the broken window reduces the totality of goods by one window in the relation between money and goods (x=y becomes x=y-1). The alternative is to assume that losses aren’t really losses.
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@Roberts
Mathematics is a self-contained a priori system. Economics is not. It is an a posteriori system based on evidence and observation, except, I suppose, in the widely discredited Austrian variety.
So in a posteriori economics a “good assumption” is one that corresponds with reality in some meaningful way. People and resources employed replacing the WTC MIGHT have gone on to produce something else BUT they might have found part-time work or they MIGHT have remained unemployed.
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RE: “So in a posteriori economics a ‘good assumption’ is one that corresponds with reality in some meaningful way.”
How does assuming that a broken window is not a loss correspond with reality in some meaningful way?
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@Roberts
A broken window is a “loss.” That is not the bogus assumption. That is a tautology – a statement that is true based solely on the meanings of the words.
The assumption that does not conform to reality is that the “unseen” will always come into existence absent the effort to replace the broken window when, in fact, it might or it might not depending on many factors that are not included in the a priori modeling that you are providing. Reality is not so simple as this approach makes it out to be.
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RE: “The assumption that does not conform to reality is that the ‘unseen’ will always come into existence absent the effort to replace the broken window when, in fact, it might or it might not depending on many factors.”
You are misstating the assumption, and it is therefore confusing you. The actual assumption is that the broken window represents a current loss and cannot in any meaningful way be described as a potential gain. If it is replaced, it is at most the restoration of a lost good, not a pure gain.
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@Roberts
As I noted above, you do not actually understand the idea you are defending. The key assumption is that the “unseen” is a loss that should be added to the repaired window. We are worse off because we have had to give up the “unseen” to get the window back to its original state. The assumption there is obvious – the “unseen” WOULD have been produced. THAT is way oversimplified with respect to the real world. An assumption that may or may not be true is a shaky foundation for analysis. And based on such an “analysis” it is simply stupid to hurl out accusations of “lunacy” against those noting the predictable economic stimulus that re-building after a disaster provides.
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Perhaps if the owner of the window was going to burn the money if he didn’t have to pay the glazier, Paul might be satisfied.
But if he was going to buy something for himself, expand his business, bank or invest it, or give it to charity, those are lost opportunities due to having to fix the window.
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RE: “Perhaps if the owner of the window was going to burn the money if he didn’t have to pay the glazier, Paul might be satisfied.”
Well put, and very succinct.
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@Tabor
Burn the money . . .
Simpleminded analysis might work in over-simplified a priori hypotheticals. I will stick by my original point. In the real world the statements by Summers and Krugman were accurate and the opposite of “lunacy.” I will go further. Williams and anyone who takes him too seriously is delusional if they think what he does is “economics.”
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What Krugman does is little more than mathematical masturbation with no real meaning or utility.
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RE: “Williams and anyone who takes him too seriously is delusional if they think what he does is ‘economics.'”
Does that include his peers in the Economics department at GMU? After all, if you are going to claim superior knowledge for yourself, why not claim to be superior to more than just one man?
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@Tabor
Masturbation?
Your “criticism” of the Nobel Prize winning work of Paul Krugman rings a little hollow subscribing as you do to a sort of “economics” that amounts almost literally to nothing more than navel gazing.
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@Roberts
“Does that include his peers in the Economics department at GMU? ”
It is not a question of superiority. It is about labeling. An a priori system that is not subject to the inconvenience of evidence is not “economics.” It should be labeled as – maybe – Economic Philosophy or something similar.
And speaking of the faculty of GMU, you may believe this fellow since you will never believe a “leftist” or a “commie” like me.
https://econfaculty.gmu.edu/bcaplan/whyaust.htm
From that essay . . .
“[Austrian economists] both emphasize the primacy of economic theory over economic history; theory is derived from the necessary truth of the “axiom of action,” and therefore economic history merely illustrates rather than “tests” economic theory.”
In other words, evidence does not matter.
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Spoken like someone who believes Paul Krugman could make a pencil.
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@Tabor
I see your allusion to the parable of the pencil, but what has that got to do with anything? I think it is safe to say the Paul Krugman understands how markets work. But, unlike you, it is safe to say that he also understands that they do not always produce the best of all possible worlds.
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No, the problem is that Krugman thinks he is smarter than the market. And, while he may be smarter than many individuals in the market, he is not nearly so smart as the collective wisdom of the market, and he does not know that.
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“[Austrian economists] both emphasize the primacy of economic theory over economic history…”
Blah, blah, blah. The problem for you is that ideas in most formal disciplines, like economics, are good or bad based on their merits, not based on their origins. Besides, in this case you are barking up the wrong tree because Bastiat was a classical economist, not a so-called Austrian school economist. His development of the principle of opportunity cost is grounded in classical theory.
Krugman writes about it in his own textbook, Economics: “Remember that one of the basic principles of economics that the true measure of the cost of doing something is always its opportunity cost. That is, the real cost of something is what you must give up to get it.”
Bastiat never said it better.
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“No, the problem is that Krugman thinks he is smarter than the market.”
Yes. Being as smart as Krugman means you never have to say you’re sorry for being inconsistent and illogical.
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@Roberts
Your saying “blah, blah blah” is not a reasoned response to the point made by that GMU professor.
Bastiat was active before there was a split between real evidence based and a priori economics. But, the Austrians themselves take him as an intellectual progenitor. But go ahead. Just deny that too. It is what you do as in blah blah blah.
https://mises.org/wire/bastiat-austrian-economist-more-evidence-hk-asser
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@Tabor
“No, the problem is that Krugman thinks he is smarter than the market.”
Of course that is complete nonsense. Just more of the ad hominem response you offer to his reality-based economic work.
What Krugman believes – and you do not like to admit – is that markets are NOT “smarter” than everybody on every subject. Sometime markets are dysfunctional and need shaping by government. There is almost unlimited evidence for the truth of that, at least from the point of view of what most people think are good or bad outcomes. You do not agree because you define the “good” outcome to be that outcome determined in the market. So simple!
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And to included what Jimmie said above, “I’m increasingly glad I was never subjected to his “plain and simple” classroom explanations of macroeconomic theory.”
Having taught graduate and undergraduate Mathematics (also Physics), I was always amused by how many examples and problems in freshman Elementary Algebra and Functions came in the form of economics problems, e.g., “If a bushel of wheat costs $X to grow… and the farm is 40 acres…,” and also “given the curves of cost of production, and… find the breakeven point….”
In the mid-eighties, I had taken a passing interest in Economics (looking for something else to do), checked out a few textbooks, and copied some journal articles. What I found even more amusing was that the same assumptions, equations and formulas along with the same examples and problems appeared in senior/graduate level Economics and Business courses. I was just as surprised to see scholarly publications in economics again using elementary equations (as well as some really bizarre contrivances and ratios — some clearly wrong) to support or deny whatever claim they were making about the economy.
It lasted maybe a month.
Yes, the world of Economics is fully human-contrived; it’s rules and regulations are completely man-made and knowable. It’s a game, like chess or checkers. But, it’s not a simple game and simple mathematics only applies in extremely small, well manicured examples. The fact that someone, who should be knowing of this, would pen the opinion is distressing.
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RE: “It’s a game, like chess or checkers.”
I have come to the opposite conclusion after much, albeit less-credentialed, thinking about economics. I see it as a deadly serious science. What it lacks, however, is something comparable to the law of gravity in physics. Without such a starting point as a generally accepted framework, it is too easy to approach economics as though it were merely a branch of applied psychology, a social as opposed to a physical science.
But the origins of money are nearly the same as the origins of mathematics, and the laws of money are as predictable as the laws of nature. Take Gresham’s Law (“Bad money drives out good”), for example. It is so reliable that it can even be weaponized. Think CIA counterfeit operations which destroy a target economy.
Economics can be a game, except the phenomena under study are the very things which give us food to eat, clothes to wear, and houses to live in.
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Yes, human creations both so exactly the same. Well, all really. Mathematics, money, and chess or checkers are all human creations. You can’t turn over a rock and discover any of them. You won’t find ants playing grasshoppers on a 8×8 grid.
“What it lacks, however, is something comparable to the law of gravity in physics.”
What it lacks is ANY immutable laws. There are plenty of laws (rules to the game) and theories, but there are also loopholes bigger than a Mack truck through which the fun stuff passes.
Yeah, life is but a game.
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RE: “What it lacks is ANY immutable laws.”
That’s the very point I disagree with. I gave the example of Gresham’s Law as comparable to the law of gravity. Were it not so, it would not be reliable.
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“What it lacks, however, is something comparable to the law of gravity in physics. ”
“… the laws of money are as predictable as the laws of nature.”
I was going to leave the obvious contradiction alone, but since you insist…
So, you can PROVE Gresham’s Law?
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RE: “So, you can PROVE Gresham’s Law?”
Can you PROVE the law of gravity?
Gresham’s Law has been around for a long time. I can certainly illustrate it, and did, by referencing the economic effects of counterfeit money.
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@Roberts
Gresham’s Law has nothing to do with counterfeit money. You can look it up, as I just did. Furthermore, it is more in the realm of a tautology than of an immutable law. In the statement of the Law the “good” money is the one that people covet and will take out of circulation.
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Yes, to within the limitations of the Law, and that is all that is necessary to accept it as a “law” versus just a theory with lots of observations. That is, it adequately and consistently describes the attractions of two bodies separated by a distance with measurable limitations on potentials and velocities without having to resort to Einstein’s stuff.
And that what makes it a physical law really; we know when and where to apply it so that it works first time, every time, and for all of time.
We can then use that Law to describe things that use it, e.g., the motion of a simple pendulum for keeping track of time, but again with known measurable limitations (small displacement angles <<20degs).
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RE: “In the statement of the Law the ‘good’ money is the one that people covet and will take out of circulation.”
Yes, because of the “bad money,” which in the classical formulation is a debased coin, in effect, a counterfeit.
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RE: “And that what makes it a physical law really.”
Agreed. I propose that the same is true of Gresham’s Law.
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@Roberts
Again, typical. You start by overstating the force of Gresham’s Law by comparing it to Newton’s Laws. And then you apply it wrongly. So now, rather than just say “whoops” and move on, you want to redefine the words. “Counterfeit” has a meaning. Gresham’s Law was about competing forms of legal tender. Counterfeit money is NOT legal tender.
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RE: “Counterfeit money is NOT legal tender.”
It passes for legal tender. That’s why it is dangerous. Same with debased coins in a bimetalic monetary system.
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@Roberts
Stubborn to the end.
Can’t just say . . “Whoops, I goofed.”
You should try it from time to time. it doesn’t hurt at all.
But, in the interest of good fellowship I will try one more time. Sure, counterfeit money can be harmful but that is NOT what Gresham’s Law was about. In fact, in the real world, it is not the good money that disappears it is the counterfeit money. Honest people don’t spend it. Careful people don’t accept it. Law enforcement confiscates it. Because, you know, it is counterfeit. Nobody wants to horde it. And the hording of something valuable was the motive force in Gresham’s Law.
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RE: “And the hording of something valuable was the motive force in Gresham’s Law.”
You apparently don’t understand what you read. Gresham’s Law was originally formulated to account for the flight of precious metals-based currency from the country of issue to other countries with which it engaged in trade. An explanation was needed, because it had long been understood that debased coins circulated as readily as non-debased coins in the economy of issue. The same should have applied to coinage used in foreign trade, but didn’t because different countries set different ratios of conversion between the various metals used for coinage.
This forced international traders to settle their accounts by weights and measures of the precious metal involved, but it was precisely because debased coins, where they existed, tended to remain in circulation in their country of issue that the non-debased coins tended to exit.
You can say that was a type of hoarding, but the mechanism is not the same.
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I do not disagree with you on taxing dividends and gains as ordinary income IF corporate taxes are eliminated. But I do object to having taxing income twice as corporate taxes AND as dividends and gains.
Opportunity costs cannot be ignored. The cost of replacing the WTC is the loss of the alternative use of those funds, even if that use was only to pay down debt to be ready for a future opportunity.
Finding and accounting for those opportunity costs can be very complex but it is very simple to acknowledge that whether we identify them or not, they are always there.
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@Tabor
1. Diplomatic tool? Gotta defend Trump’s expensive foolishness no matter your principles?
There is double taxation of corporate produced income. But that is not to say that it is taxed at too high a rate. A bigger problem with corporate income tax is that it is not progressive which it could be if it were taxed purely as individual income.
Finding and Accounting for those opportunity costs is NOT difficult. It is easy. For example, had the WTC not been destroyed we could instead have built a new public hospital for the people of New York or more modern incarceration facilities or a new airport etc. etc. etc. The problem is that NONE of those opportunity costs were ever going to happen. That is the obvious difference between economics based on a priori theory and economics based on reality.
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Some thoughts:
If corporate taxes are passed on to the consumer, and the prices are adjusted to cover the costs then is there really double taxation? Isn’t that like a consumption tax?
WTC was 40 years old and was determined after 9/11 to have been inadequately insulated to protect steel from heat damage. Would opportunity costs have made a difference used elsewhere over replacing an aging structure?
Point being that disasters are part of any economy. Always has been and always will be. Opportunities are not necessarily defined by newness or timing. But rather by a need that can be satisfied. In this case, a new WTC.
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If money moves TAX it. It’s just easier. I don’t have to try to tax it at one place and hope that I account for all the movement in between.
The problem is stagnant money. When it pools, it creates monsters like the Trumps. The French Revolution was the right idea.
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One-handed economists… they’re the best kind.
Scope, it’s all in the scope. Krugman was bang-on if you limit your view the the 12 blocks about the WTC, possibly even the City. But, you need to factor in unseen costs of 3,000 lives of lost life-time production.
But the Republicans are just as guilty. When Bush cut funds to the National Park Service in the early 2000s, they famously published a cost-benefit report. Of course, they didn’t include intrinsic values of a seaside park as a benefit to the lives of those who visited the park, just how much it cost to maintain it. They also neglected to include the real estate value of the seaside property, even a low estimate. Sure, a $50,000/year Park Ranger is a cost, so is a $50,000/year cop.
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RE: “But, you need to factor in unseen costs of 3,000 lives of lost life-time production.”
OK, if you want. But let’s not leave out the other “unseen”: 3,000 lives of lost life-time consumption.
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Absolutely. And therein lies the best excuse for M4A; a healthy person is better for the economy than a sick or dead one.
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RE: “And therein lies the best excuse for M4A; a healthy person is better for the economy than a sick or dead one.”
Only by assuming that the “seen” benefit of a healthy person’s production exceeds the “unseen” cost of his consumption. I would suggest that on balance a living person has the same net economic effect as a dead one.
To the extent that sick people represent a pure resource drain, M4A is just a way to monetize the losses before they materially happen.
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“I would suggest that on balance a living person has the same net economic effect as a dead one. To the extent that sick people represent a pure resource drain, M4A is just a way to monetize the losses before they materially happen.”
You don’t have any rope or loaded guns lying about, do you? How about them Chiefs?
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RE: “You don’t have any rope or loaded guns lying about, do you?”
Not to worry. I prefer life. I wouldn’t have to work if I were dead, but then I wouldn’t have a glass of wine, either.
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There are three men on a train. One of them is an economist and one of them is a logician and one of them is a mathematician. And they have just crossed the border into Scotland (I don’t know why they are going to Scotland) and they see a brown cow standing in a field from the window of the train (and the cow is standing parallel to the train).
The economist says, “Look, the cows in Scotland are brown,” the logician says, “No. There are cows in Scotland of which at least one is brown,” and the mathematician says, “No. There is at least one cow in Scotland, of which perhaps only one side is brown.”
Economic — a “social science”. Pfft, science.
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Funny, most Econ degrees are BAs for a reason….
I’ve always thought the the Econ BS degree was aptly named. The main academic between the two is the additional high(er) level calculus courses typically required for the BS.
I guess if you can explain a theory with additional math it must be science…
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Hey! Mathematics is an art.
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Williams tries to slam Krugman as being gleeful about disasters because the spur economic gains in recovery.
I look at it this way: disasters are a part of an economic system and always will be. How the response is handled is the question. But in any case, there will be an economic impact and some of it will be positive over the longer term. The implication that some economists “favor” disasters is just silly.
Natural disasters are not really disasters except as when they affect us. We build too close to forests, on earthquake prone faults, low lying areas on flood plains and oceans. We do that for economic progress and profit. When a catastrophic quake, fire or hurricane hits, we just need to redirect some of the economic gains from building in risky areas to recovery economics.
Which is why we have insurance. And also why running huge deficits and debt is really bad. At some point monies will be needed to recover from disaster and that should be coming from the profits in risky areas as through realistic taxes reflecting the true cost of living and working in danger prone areas. Or better yet, spread the cost nationally with the idea that risk prone areas are necessary economic engines for all.
And that brings us to the corporate tax. Yes, the tax is passed on to the consumer. But isn’t that a form of consumption tax? A tax that would be hard for anyone to avoid, particularly the underground cash economy.
Of course our present corporate tax system is a mess. The rates are not really what is paid.
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