Economics, Energy and the Environment

Paul Krugman: A broken window equals economic strength

Image Credit: commonwealth.club (Flickr) (CC BY 2.0)

Image Credit: commonwealth.club (Flickr) (CC BY 2.0)

It truly is amazing. That a Nobel prize-winning economist can believe utter nonsense, write utter nonsense, and defend utter nonsense, all in the service of a “climate” policy agenda that is remarkably weak in terms of the underlying peer-reviewed science, and that would have virtually no effect on temperatures under any set of mainstream assumptions. I refer to the latest from Professor Paul Krugman, who actually argues, presumably with a straight face, that a forced closure of some coal-fired electric generating plants would force new investment in power plants and increase average power prices, thus yielding “an increase in spending” and a “positive effect” on the economy.

Wow. Remember the broken window fallacy? If a window is broken, the result is more employment and economic activity, because, obviously, someone has to pay someone else to replace the window. Sadly, this story leaves out the spending on something else that the first someone would have undertaken had the window not been broken in the first place. The broken window results in a reallocation of resources and not an increase in aggregate wealth; that is a reality that any student in Economics 101 should learn. The spending forgone on something else offsets the dollars spent replacing the window, but in Mr. Krugman’s world, the investments in new power plants and the higher spending on electricity represent new spending that otherwise would not have been made, because without the climate rules the dollars would have remained hidden in mattresses. Or something.

That the promulgation of new rules imposing large costs but yielding no benefits might have the indirect effect of increasing uncertainty and decreasing “spending” is a possibility not considered by Mr. Krugman. Nor is the larger effect of wealth destruction by regulation a parameter that he considers. One wonders why there is any “spending” at all in the absence of federal actions. What is clear, however, is that promises of a free lunch are as old as politics. And it is politics rather than economics that Mr. Krugman is practicing. Would the economy suffer if people spent less for access to the New York Times? The question answers itself.

33 thoughts on “Paul Krugman: A broken window equals economic strength

  1. When your employer is the New York Times, you are likely to repeat every fallacy they advance.

    So, to complete his logic train, if we blow up the Times building, they will have to build a new one, and we’ll all be better off, right?

  2. I agree that Krugman is practicing politics, rather than economics. I doubt if there is anyone on the planet whose level of respect is greater than what he has earned, with the possible exception of Barry Hussein himself. Since politics is what he is crafting, I say we go to the poor and middle class people that Dr.K and Barry bleat for, and tell them point blank that their heroes want to dip deeper into their pockets. Who will be hurt worse than those who are already barely making it? WHy should the demagogues continue to enjoy electoral success based on the votes of those they most severely punish? Cheap energy = jobs and prosperity.

    • How very true. The left’s climate and energy agenda is bound to most hurt the people the left claims to champion. Although, I have to say, the left seems to have done a good job of out maneuvering pro-growth fiscal conservatives at every turn by labeling them fat-cat trickle-down free-market too-big-to-fail monopolists with pointy white hoods hanging in their closets. If this is going to be countered the GOP needs to find an ivy league Sarah Palin. I’ve had it with candidates like Mit – Couple of Cadillacs – Romney and John – hundred years in Iraq McCain.

  3. I believe he _is_ claiming that currently too much money is hidden in mattresses – well, in bank accounts, at least – and is not being spent on anything, either by the owners or by other businesses borrowing pieces of those cash piles. If that is indeed true, then it’s not the broken window fallacy _if_ the new spending comes from money that is sitting in those mattresses.

    Forcing them to invest that cash _now_ would divert _future_ spending, yes. But I understand him to be arguing that we have a chicken-and-egg problem of nobody being willing to spend until the economy improves, but the economy being unable to improve until spending picks up.

    Whether coal-fired utilities specifically are among those businesses sitting on piles of unused cash is a question I don’t see that he’s even tried to answer, however.

    • You lump bank accounts and mattresses together? What do you think banks do with their deposits? What do you think coal utilities do with their cash? Do you know any corporate treasurers who use mattresses for their cash assets?

  4. Christine Lagarde, the managing director of the International Monetary Fund, said Thursday that climate change will drive job creation. “Climate change will create jobs. It will create disasters before it creates jobs, but it will create jobs,” Lagarde said on the MSNBC program “Morning Joe.”

    via thehill.com

  5. why is the “broken window” fallacy not front and center in our defense spending in the Middle East?

    or for that matter in the US for immigration borders, the TSA or MedicAid?

    basically what the argument is about is whether citizens get to spend their money on what they want verses what govt thinks is a better purpose.

    I do not subscribe to the idea that citizens are “wiser”.

    Citizens will buy a Hummer or a 500k house or pornography or $500 tickets to rock star concerts instead of buying heath insurance or building up their 401K and later… taxpayers will rescue them.

    Individual mandates – FICA is an obvious “diversion” of citizens monies into something that ultimately benefits them but would not if they were not forced to pay into it.

    we’re not talking about one country here. We’re talking about 30 countries, or more, the most advanced countries in the world verses countries that don’t do this – 3rd word countries.

    the countries with the LEAST GOVT and MOST LIBERTY are, in fact, 3rd world countries!

    • “I do not subscribe to the idea that citizens are “wiser”.”

      The age-old argument for authoritarianism. It isn’t the servile mind, such as yours, that so much troubles me, as the fact that it insists on imposing that servility even upon the arbitrary and unwilling.

    • “The countries with the LEAST GOVT and MOST LIBERTY are, in fact, 3rd world countries” really, you don’t know the third world do you? Vast poverty caused by intrusive gov, high taxation, crony favoritism, complicated legal structures that make it almost impossible to make a biz legal, buy a property, dead capital due to all the bureaucracy etc. I recommend reading Vargos.

  6. If Krugman were consistent, he would have to agree that “doing nothing” with respect to climate change surely is the best policy. If climate change does occur and have the disastrous consequences that the alarmists claim it will have, then this will only lead to more investment and spur economic growth. On second thought, maybe subsidizing carbon-emitting processes would be even better!

  7. Utter nonsense. Simple but to the unflinching point. Every article he’s had published is a trove of unmitigated leftist politicized tripe. The man’s Nobel Prize carries as much legitimacy as Obama’s Peace Prize (to be read as: zero) He’s a handmaiden for the policies (Obama’s) that will do the common man the most harm as is mentioned.

  8. The broken window fallacy illustrates the basic microeconomic point that investment is made to satisfy consumer demand. There is no demand for a broken window. The fact that PK fails to understand this shows that he really doesn’t understand economics. Ditto for all Keynesians.

    • Well and succinctly said.

      PK believes that because a person prefers that his window be NOT broken, over the amount of hoarded cash needed to fix the window, that somehow breaking windows fixes the dearth of profitable investment opportunities.

      He should consider the possibility that it instead *increases* the incentive to hoard cash to account for the now greater anticipated outlays that will be needed to fix future windows, along with the further decline of new investment opportunities as resources are diverted and specialized to support a fixing-windows economy.

      Circular flow thinking is chicken-and-egg thinking. It fails to capture the essential underlying big picture of any economy–coordination and specialization of production and trade.

  9. It looks like you’re just preaching to the choir here. But who cares about Paul Krugman tell the politicians to not prematurely decommission the power plants just for a few construction jobs. Nevada already has passed a bill replacing all its coal plants and God knows how much rates will go up until the new plants are paid off. Expect to see the same where you live.

    The same holds true for stadiums and schools. They always get torn down and rebuilt for no good reason. Fenway Park built in 1912 will always be the best stadium for baseball because Babe Ruth played there. I recall my elementary school was a run-down slum and I loved it; I was so disappointed to find that it was remodeled. And the think that taxpayers paid to take away that building’s character.

    I think really our who construction industry is built with throw-away in mind. You have your home, then oops a home buyer on HGTV comes into a kitchen that’s better than yours and they say they could never live in an outdated hole like that. It works on your brain. So it seems this whole economy runs on the parable of the broken window.

  10. What you’re missing here, is that without a set of new rules aiming at reducing carbon emissions, industry and generally the private sector will never incorporate such goals in its policy-making. True, money spent on new facilities could be spent elsewhere, but that would still leave the initial problem intact. Unless you still believe climate change is just a liberal agenda…

  11. Ron H.
    The evidence is out there (http://climate.nasa.gov/evidence)
    Do you reject NASA because it is a government agency?

    In the site you provided, and others, I found that there is a consensus -among skeptics- that climate change advances in half pace after all. So, they do contend global warming isn’t a hoax. It’s only slower. Hooray!
    What does this mean?
    a) We can leave the problem for our grandchildren to solve
    b) We have the luxury of time to take focused action

    Why is time of such relevance? Because the CO2 and methane emission took years to create the problem. Many years will be needed for an agreed course of action. And many years will be needed before results are seen. (For example, the ozone layer hole was detected in the 70s, CFCs were banned in the early 80s, it’s been a few years that the hole is closing, and it will close by mid century). So whatever extra time we have, should be treated as a gift, not an excuse for looking the other way and stalling.
    Imagine if the OL hole had been dismissed as a hoax.

    About the car manufacturers. They had plenty of time and freedom to make what cars they wanted. They refused to make efficient ones but it didn’t matter as long as gasoline was very cheap. Once it stopped, they were not prepared to meet the demand for smaller and economic cars. Result: they went bankrupt. Was there a way to avoid such a development? Of course! If people had foreseen that because of China and other developing countries demanding oil like crazy after 2000, prices would skyrocket, the early demand for more efficient cars would induce car makers to adjust. Unsurprisingly it did not happen, people are no analysts.
    The point: Free market is a tool, not a brain.

    About the costs being passed to the consumer: so does the cost of every car part! Would you buy a stripped-down car?
    Seat belts cost little and have a meaning. They save lives. That’s why fatalities between 1945-1960 plummeted. (http://en.wikipedia.org/wiki/List_of_motor_vehicle_deaths_in_U.S._by_year). You said it yourself, initially consumers were not willing to pay the extra cost. But you fail to acknowledge the fact that cars in the same period were becoming a lot more dangerous (more and faster cars, more drivers, more miles) while the public had no way of realizing this timely.
    The point: Again, consumers were unable to foresee the future -how strange! The mandate saved thousands of lives.
    My point: a fatality (a possible result of one’s opposition to mandatory seat belts) passes an even bigger cost to his fellow citizens, not to mention his family.

    The same goes for the amount of fat, salt and sugar in food. No restrictions are in place, and now we have a serious obesity pandemic. That’s no surprise, people adore salty and sweet tastes, and they are understandably unable to foresee the implications down the road. Government should not dictate “how much” but rather, to imply what is “too much”. As far as your argument goes, plain poison could be legal to sell as food, provided it doesn’t kill immediately in order to avoid the correlation!

    About oil-company subsidies, 4 links:
    http://www.forbes.com/sites/energysource/2012/04/25/the-surprising-reason-that-oil-subsidies-persist-even-liberals-love-them/2/

    http://priceofoil.org/fossil-fuel-subsidies/

    http://oceana.org/en/our-work/climate-energy/offshore-drilling/learn-act/oil-gas-subsidies-myth-vs-fact

    http://www.progress.org/gasoline.htm

    You’ll see that they are quite balanced articles
    The point: THERE ARE such subsidies, apart from the military presence.
    My point: as i said in previous replies, either keep oil subsidies and stop complaining about incentives toward an alternative course, or get rid of ALL of them.

    About solar energy and hybrid cars: they are both underdeveloped technologies with negligible active commercial presence, compared to 100 years of coal/oil-based electricity and internal combustion engines. The main difference is that the latter created a market, while the former attempt to succeed them or at least earn a market share. Let them compete on an even field.

    Concluding,
    The way i see things, it’s all about a triple balance among the individuals, the companies and the government. I reject the notion that government is a de facto undesirable force. True, it should be kept small and in check, but laziness to do so doesn’t pass as libertarian principles.

    Government is only a tool, ideally an umpire. Usually, the market -also a tool- and the people will do fine, but in the scale of national policies the two can have different priorities. In such cases, a group of well-informed people, through government, should bring into discussion such aspects of an issue that an individual or a company cannot or will not.

    Holding the government from playing its role, regardless of the ideological pretenses, will leave individuals alone against corporate interests and cartels. Not that there is something de facto wrong with them, there just won’t be a balance, ever.

    • Correction

      …but laziness to do so, and instead dismissing government, doesn’t pass as libertarian principles.

      How do you insert a link in a word?

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