Friday, September 14, 2012

Maybe the Stimulus-Bearing Space Aliens will have iPhones

I believe I owe Paul Krugman an apology, for I have written in the past that Keynesians do not have a theory of capital. I was wrong; Keynesians do have a capital theory: it is called More Spending.

Now, this is not a theory of capital like that developed by the Austrian School, beginning with Carl Menger. Instead, it is a theory that says that the construction and addition of capital to the economy is useful mainly in the amount of short-term spending that it brings. Thus, the actual performance of new capital takes a back seat to the fact that when business enterprises purchase the capital, they spend money, and it is that short-term spending that is significant.

For those who might argue differently, Krugman lays out his view in his column that claims the new iPhone will provide "stimulus" to the U.S. economy. True, it seems that others also have drunk the Kool-Aide, and others seem to be even more enthusiastic about this latest rendition of the "Broken Windows Fallacy" than even Krugman (although he does seem to buy into the concept):
A recent research note from JPMorgan argued that the new iPhone might add between a quarter- and a half-percentage point to G.D.P. growth in the last quarter of 2012. How so? First, the report argued that Apple was likely to sell a lot of phones in a short period of time. Second, it noted that although iPhones are manufactured overseas, most of the price you pay when you buy one is domestic value-added — retailing and wholesaling, advertising and profits — all of which counts as part of G.D.P. Finally, it took some plausible guesses about the price of each phone and the number of phones sold, and used those guesses to make an estimate of the impact on G.D.P.

It’s all pretty straightforward. But the implications are wider than most people realize.

The crucial thing to understand here is that these likely short-run benefits from the new phone have almost nothing to do with how good it is — with how much it improves the quality of buyers’ lives or their productivity. Such effects will kick in only over the longer run. Instead, the reason JPMorgan believes that the iPhone 5 will boost the economy right away is simply that it will induce people to spend more.
 Once again, we see the most important element of economic thinking go missing: opportunity cost. The money that people will spend for new iPhones is money that will not be directed in the purchase of other goods. We do not have new "spending" arising from nothing; what we will have is a redirection of how people spend their incomes.

Not surprisingly, Krugman does not end at that point. If you believe in the "iPhone stimulus," he crows, then you believe that more government spending will boost the economy. But, hey, why even stop there?

Why not go whole hog and hope that the invasion of the space aliens comes complete with the Little Green Men stopping at the Apple Stores and elsewhere to buy the iPhones before they set out to destroy the earth. However, if that is their plan, then we should not resist the invasion because doing so would invoke "weaponized Keynesianism," and Mitt Romney supports that, so it must be bad. (Actually, it is bad, but not because Mitt likes it. Yes, Paul, there is more to life than partisan political thinking.)

No, we should not resist because after the Little Green Men With iPhones destroy the earth, we then will have the Ultimate Keynesian Stimulus of rebuilding just about everything. As Krugman writes:
Yet depressions do end, eventually, even without government policies to get the economy out of this trap. Why? Long ago, John Maynard Keynes suggested that the answer was “use, decay, and obsolescence”: even in a depressed economy, at some point businesses will start replacing equipment, either because the stuff they have has worn out, or because much better stuff has come along; and, once they start doing that, the economy perks up. Sure enough, that’s what Apple is doing. It’s bringing on the obsolescence. Good.
The Little Green Men With iPhones could accelerate that process, all to the better. In fact, I will slightly change Krugman's next paragraph to demonstrate exactly what I mean:
But why suffer through years of depressed output and high unemployment while waiting for enough obsolescence to accumulate? Why not have the government Little Green Men With iPhones step in and spend more, say on education and infrastructure, to help the economy through its rough patch? Don’t say that the government Little Green Men With iPhones can’t add to total spending, or that government spending can’t create jobs. If you believe that the iPhone 5 can give the economy a lift, you’ve already conceded both that the total amount of spending in the economy isn’t a fixed number and that more spending is what we need. And there’s no reason this spending has to be private.
So, all it takes for us to experience new stimulus is for E.T. to phone home. If he does it with an iPhone, all the better.

39 comments:

Zachriel said...

William L. Anderson: Once again, we see the most important element of economic thinking go missing: opportunity cost. The money that people will spend for new iPhones is money that will not be directed in the purchase of other goods.

Or saved in liquid assets or used to reduce debt, which is what happens in a steep recession.

It's not Krugman's analysis, but JP Morgan's, which says that iPhone 5 could add 1/4 to 1/2% to GDP. Do you disagree?

Anonymous said...

It's feeding frenzy time on the Wonderland blog. Krugman is talking about spending. Let the window breaking begin.

Publius said...

"Or saved in liquid assets or used to reduce debt, which is what happens in a steep recession." - Z

That's correct...but you say that as if it's a bad thing. It's a totally reasonable and logical response to years of misallocating resources. How can you argue otherwise? People and companies need to repair their balance sheets; that's just the way it is, and the government just prolongs the pain with its wasteful deficit spending and reckless monetary easing. The monetary easing just drives up the prices of hard assets and the deficit spending just diverts resources to non-productive spending.

Zachriel said...

Publius: It's a totally reasonable and logical response to years of misallocating resources.

Sure. People reduce debt, and hold onto cash for safety. In a deflating economy, they can even increase their wealth by avoiding risk. Indeed, it is one of the important governors of the business cycle. The economy slows, people save, the savings reduce interest rates spurring investment, and the economy begins to grow again.


The problem occurs when everyone withdraws from the market at the same time, especially if there is a financial panic. Then the decline feeds on itself. Even this will right itself—eventually—, but the problem is the long term structural damage that occurs during the collapse and aftermath. For instance, prolonged high unemployment causes a loss of morale and skills in the working force.

Anonymous said...

"The problem occurs when everyone withdraws from the market at the same time, especially if there is a financial panic."

This really isn't as much of a problem as it's laid out to be, for a variety of reasons. Firstly, most people do not understand the concept of a "bank run" - they simply "know" that it's very, very bad.

However, even in the case of the worst and most serious bank runs, I would just roughly estimate that a bank's assets might decline by 50%-assuming that all the bank's assets were (not cash but rather) illiquid or fluctuating value assets such as subprime mortgages etc. In that event, even at a poorly capitalized bank, of which we have a large number (read: almost all) now, this means that depositors, assuming that they were equal priority to all other creditors, would lose only about 40% of their savings. True this is a significant amount, however it's made with the worst assumptions in mind (ie poorly capitalized banks, not subordinating bondholders to depositors etc)

The obvious trade off of course, is that this enables a much faster, more efficient restructuring and the bad actors are also punished and weeded out of the system. In other words a market economy that rewards competence. Also, the surviving banks remember this nightmare scenario and become much more prudent lenders in the future, etc.

The US is unique though in that not only has it forgotten the lessons of the Depression it has forgotten the lessons of earlier times and the horrible costs associated with national bankruptcy, in other words excessive national debt. Most Americans including the President literally believe that there is no normal limit to the amount of debt the US can bear, essentially believing the debt can rise to 10X or 100X GDP etc.

Pulverized Concepts said...

Once again, we see the most important element of economic thinking go missing: opportunity cost. The money that people will spend for new iPhones is money that will not be directed in the purchase of other goods. We do not have new "spending" arising from nothing; what we will have is a redirection of how people spend their incomes.

That's the basically ignored situation with high gasoline prices. For people that drive a significant amount, paying for gas has eliminated their ability to purchase other things, like restaurant meals, replica Packers jerseys and New York Times subscriptions. Eventually the situation will change or people will adapt to it but none the less it's having a negative short term effect on other aspects of the economy.

CG said...

The funny thing is that if a business person was running the government, he'd be Keynsian.

Let me explain.

Assume that the job of government is to provide some fixed amount of public goods over a large time span, say 50 years or so.

If you do not agree that public goods exist in the sense that private enterprise won't provide them, please stop reading my comment, I don't wish to have that argument right here (and also think about spending some time in places where the military is private and see if you like it there).

So assume your job is to provide public goods, and over the long run you have to pay for them too via fees and taxes, then my claim is that an anti-cyclical strategy is optimal: you raise money when the private sector is booming, and you spend the money when the private sector is down.

Think of it: for the government, labor at this point in time is practically free. You pay for the folks in form of welfare or unemployment support, or you actually hire them to do something useful.

The trick is, of course, to remember to raise taxes and fees when the times are good again...

Geoffrey Transom said...

CG, you assert "public goods exist in the sense that private enterprise won't provide them" - that is the most extreme version of the externalities argument (that the market will not under-produce goods with public attributes, but will not produce them at all).

And if you want t oget into an argument about the core theory of Public FInance, let's get it on, yo. Once you finish drawing Harberger triangles and showing how to impose taxes with the appropriate Marginal Excess Burdens, I will take you back to the first chart and make you shift EVERY SUPPLY CURVE (inwards) to reflect the changes to production conditions wrought by .gov intervention in factor and intermediate markets, and then to shift every DEMAND curve (inwards) to account for the income effects from the requirement to tax to 'ameliorate' the public-goods problem.

Andthen we will discuss the fact that the .gov production function for any arbitrary public good IS NOT the same as the private produciton function (.gov having no market test to ensure optimal use of resources), and then we can discuss .gov's tendency to ramify beyond its theoretically-defensible bounds (at least, when the theory is purely utilitarian, which is what is assumed at the very core of the theory of Public Finance: that utility is measurable and interpersonally-comparable).

How many Harberger Trangles does a cruise missile destroy? how many TRILLIONS of man-hours were obliterated by the State in the 20th century? Hint: the State's pissing contests killed a quarter-BILLION people. Give the dead and their pre-aborted descendants 40 hours a week even at a 20% unemployment rate and zero population growth and you get "the which is not seen" on the debit side of the State's ledger.

The costs of permitting the existence of a State FAR outweighs any benefits from intervention in public-goods markets.

Geoffrey Transom said...

Gah... typos abound in my prior rant.

If only Blogger had a decent comment system that included the ability to edit one's comment (I have been spoilt by Disqus, JS-Kit and IntenseDebate, both of which permit same).

Plus, it's 7:30 a.m. on a Saturday here in "Straya", and I have a hangover.

Zachriel said...

Anonymous: This really isn't as much of a problem as it's laid out to be, for a variety of reasons. Firstly, most people do not understand the concept of a "bank run" - they simply "know" that it's very, very bad.

We weren't talking about bank runs in particular, but the rush to liquidity.

Pulverized Concepts: That's the basically ignored situation with high gasoline prices.

The vast majority of economists do not ignore the opportunity costs associated with rising gas prices. In the case of the iPhone 5, it is conjectured that people will increase their overall consumption with the purchase.

Geoffrey Transom: The costs of permitting the existence of a State FAR outweighs any benefits from intervention in public-goods markets.

Unfortunately, large, non-state systems have been found to be inherently unstable.

Mike said...

Zac is an intellectual fraud. He should be ignored.

Richard said...

Zachriel said, "Unfortunately, large, non-state systems have been found to be inherently unstable."

Another word for that type of instability is 'progress'.

macroman said...

The case that Bastiat did not consider was if the shopkeeper happened to be a miser, with a large store of money hidden under the mattress. In that case the money on the new window could come from the hoard rather than displace other spending. It is true the shopkeeper is worse off (his hoard is reduced) and this is immoral, illegal, thin end of the wedge, etc etc but this is a different argument from the stimulus effect of the new spending.

macroman said...

Reducing debt is the logical and market preferred thing to do. Similarly, when a ship sinks everyone wants to rush to the lifeboats and fight over their place in it. One view is: they should be allowed to do this and if it sinks some life-boats and destroys others and many people are crushed in the stampede, and boats are launched without anyone capable of navigating or operating them, at least the people freely choose their actions. Outside an insane asylum, we accept the restriction on freedom built in to the central plan of allocated lifeboat places, roster of crew among the boats, dictatorial authority of crew and security guards to impose an orderly process more likely to save everybody. And every worse for the libertarian, there may be compulsory life-boat drill, disrupting everyone's planes to be doing something else. I suppose it depends on how great an emergency one thinks a recession is.

Jeremy R. Hammond said...

Just before reading this, I posted my own take on Krugman's iPhone 5 "stimulus":

http://www.jeremyrhammond.com/2012/09/15/paul-krugman-iphones/

I think we pretty much make the same points, though in different ways.

Jeremy R. Hammond said...

Just before reading this, I posted my own take on Krugman's iPhone 5 "stimulus":

http://www.jeremyrhammond.com/2012/09/15/paul-krugman-iphones/

I think we pretty much make the same points, though in different ways.

Jeremy R. Hammond said...

(Sorry for the double post. I was having a difficult time with the captcha and it kept coming back failed.)

mr3 said...

I read that Krugman article today, and he's even topped himself with it. It looks like the frustration from leadership not doing exactly as he's saying is finally taking its toll. He's not even bothering to explain the leaps he makes from basic mechanics to Keynes anymore. He could have rewritten that article with just four words and some arrows ("Jobs -> sales -> demand -> Keynes"). I don't think you even have to go into discussions of capital to show the sheer dissociation at this point. You can just return to basics. He's missing a fundamental tenet regarding public presence in economies: nothing can provide adequate control over human psychology. It renders everything he says and anything similar as long term risk for temporary reward.

If people trying to channel Keynes had their way, government robots would come into our homes, force us to reach under our mattresses, and force us to spend some of that evil vile horde of cash we're all sleeping naked with at night. Any coincidentally timed positive economic blip would provide incontrovertible evidence to its benefit, regardless of how temporary it might be. And I forgot to mention that the robots wouldn't even bother to force our mouths into smiles, because consumer benefit from exerting demand isn't even part of the equation (you went for that throat right off the bat, good show). This is the kind of magical thinking that calls robot rape a good thing and rape by robots jamming to their ipods a great thing. You can even remove the temporary part: the government infusing the system with combinations of cash, goods, and services does nothing to change long term public psychology during depressions. If someone gives me a bunch of stuff I don't find very valuable in my current life situation, expecting me to react by undergoing a lasting campaign of spending is one step above free association. It just blows my mind that he is living this reality right along with the rest of us right now, and he's blinded by his own religion.

Zachriel said...

Richard: Another word for that type of instability is 'progress'.

Unstable, in that the so-called voluntary society ends, when conditions are conducive, either through consolidation of power or being subsumed within a state system.

Pulverized Concepts said...

Outside an insane asylum, we accept the restriction on freedom built in to the central plan....

Bad analogy. When one purchases a ticket for passage on a ship (or aircraft or Greyhound) one accepts the authority of the captain and his subordinates. It's part of the deal. One isn't required to make the trip at all, the transaction is voluntary. Central to the individual freedom that supposedly is the basis of western political thought is the right to own and dispose freely of property, which includes money. The idea that some individual or group of planners can determine the best course of action for the individuals that make up the community is preposterous on any level.

macroman said...

@Pulverised Concepts (or is that under-sized concepts?). Outside Galt Gulch, in the real world, you have to accept a certain amount of looking out for each other, a certain amount of social contract. It's part of the deal, even if you can't see it.

Pulverized Concepts said...

Your non-explanation doesn't validate the bad analogy. In at least my own personal case, I haven't signed any "social contract", maybe you have. While I'll admit that I'm a social animal and engage other humans in the course of day-to-day voluntary activity, that's not the same as accepting the mandatory behavior required by the state. Statists are always prattling on about freedom and liberty but when the rubber hits the road it's really all about the exceptions. But it's all for my own good, when the state makes the sale of unpasteurized milk illegal, murders people for the unauthorized ingestion of common plant material, confiscates funds without judicial process, requires legitimate businesses like bars and restaurants to be closed during certain hours, encourages gladitorial combat between high school boys but prosecutes those that allow cocks to fight, well their just trying to make things better for me, same as when they confiscate my money to give to others. Sorry, I ain't going for it.

TheRightRadical said...

Unfortunately, large, non-state systems have been found to be inherently unstable. "

Yeah right; tell that to the 150 million or so that have been murdered at the hands of the state.
You're just empty as per normal,you know that?

Zachriel said...

Pulverized Concepts: The idea that some individual or group of planners can determine the best course of action for the individuals that make up the community is preposterous on any level.

The U.S. Declaration of Independence is considered a pinnacle of "western political thought", yet it advocates government with organized powers.
http://www.archives.gov/exhibits/charters/declaration.html

Pulverized Concepts: While I'll admit that I'm a social animal and engage other humans in the course of day-to-day voluntary activity, that's not the same as accepting the mandatory behavior required by the state.

Whether you like it or not, social animals have many mandatory behaviors.

Pulverized Concepts: same as when they confiscate my money to give to others. Sorry, I ain't going for it.

Death and taxes.

Zachriel: Unfortunately, large, non-state systems have been found to be inherently unstable.

TheRightRadical: Yeah right; tell that to the 150 million or so that have been murdered at the hands of the state.

That doesn't answer the point.

Mike said...

Zac is an intellectual fraud. Ignore him

macroman said...

@Pulversised: You are right that an ocean liner is not a perfect analogy for society.

In any case, the important point, I think, is not how we go about fixing a problem caused by individual freedom of action, but the very fact that individual freedom of action can cause a problem. Everyone might try to do something that cannot be done by everyone simultaneously. Like everyone trying to reduce their level of indebtedness (don't forget the potential lenders who find they have no one who will borrow their now idle excess cash which has been paid back).

And by the way, of course its always about exceptions. Look at the common law, which has been evolving solutions to these sorts of problems for centuries, or millennia).

macroman said...

@Pulverised and Geoffrey Transom concerning lifeboats and externalities. I agree externality is the core issue and all right thinking Austrian economists have to insist externalities don't or can't occur, or that they are no problem.

Please consider this hypothetical scenario, which is not excluded by any physical law I know of, so it could happen. Imagine that the cheapest most profitable way to produce the things we need has a side effect of ruining some communal good, like maybe poisoning the atmosphere with some, I don't know, maybe gases or radioactivity or whatever. The long term equilibrium might be that human population on "spaceship earth" would be reduced to pre-industrial levels (and the whole things starts over again perhaps). This might involve the death of countless millions of people, but it could be what the unfettered market requires.

I don't want this to be true, I hope it isn't true. I wish we could produce whatever we liked with no side effects.

But what if we knew for sure that pollution (in a very general sense) would have these disastrous effects? Would that justify collective interference in the market? Isn't some balancing of various rights required in that hypothetical, but possible, case?

Bala said...

strawman,

Rothbard had this covered ages ago. Looks like you don't read.

http://mises.org/daily/2120

Have a nice day.

Zachriel said...

Bala: http://mises.org/daily/2120

So if someone builds a factory on a small plot and destroys the entire region with pollution, if the region is currently unoccupied, they get to continue, even though the only 'improvement' they've made on the region other than the factory on the plot is the pollution itself.

On the other hand, you can't build new factories anywhere without getting the permission of every single person in the area, if there is the least amount of additional noise or pollution.

And if millions of people individually burn coal in their fireplaces, and pollute the atmosphere, then everyone sues everyone.

Zachriel said...

And what about CO2? We can show with reasonable scientific certainty that CO2 is causing climate change. (Whether you agree or not doesn't matter, only whether the courts do.) Does that mean we can enjoin the use of CO2 completely? Stop cold-turkey? According to the essay, if some poor farmer in Botswana is using a gas stove to cook his food, then he can be enjoined, along with every other person on the planet. In real life, of course, it is subject to political compromise and global planning for the transition.

Indeed, virtually every house, factory or commercial enterprise impacts the local or regional neighborhood in some way or other. It would become impossible to change anything without lawsuits, because every change has an impact on everything around it.

Bala said...

Zac,

Looks like you don't read even if the link is provided. Rothbard covered your gripes too.

Zachriel said...

Bala: Looks like you don't read even if the link is provided. Rothbard covered your gripes too.

"Is not" is not an argument.

Bala said...

Zac,

I don't have time for idiotic trolls. Giving you reading material for an education is above par for the course.

macroman said...

bala, I notice that Rothbard's "answer" to the pollution problem is many, many pages long, and has no abstract. (That is crappy academic practice, by the way). I gather that tort law is the answer, but I assume the Austrian school has its own ideas of what tort law should be or in.I seem to recall now we have been thru this before.

How about you help us understand it, by applying Rothbard's theory to the case I outlined. Just what should be done is enough, or what will happen - you don't have to justify it. If the answer is we all die happy that no one's rights have been infringed, just say so.

Zachriel said...

Bala: Giving you reading material for an education is above par for the course.

We read it, which is clear from our question concerning the 'homesteading' of pollution. We asked you a few questions about it, which you can't seem to answer.

Bala said...

strawman,

I just realised that I do indeed address you by the name most appropriate to your behaviour. Just see the strawman you created. You said

"Imagine that the cheapest most profitable way to produce the things we need has a side effect of ruining some communal good, like maybe poisoning the atmosphere with some, I don't know, maybe gases or radioactivity or whatever. "

Is it the cheapest AFTER all the costs imposed upon the producer on account of the violation of other people's property rights? Can you see how stupid you are to create a life-boat situation and expect me to answer it? You are the perfect strawman generator.

If an idiot can know beforehand that the technology will result in poisoning the atmosphere, so would every producer and every insurance company in the world. No insurance company in his right mind would insure such a big risk at a low premium. So, the answer is that insurance costs of such a manufacturing process would be so high that it would never be the cheapest source of power. Go figure.

Zachriel said...

Bala: Is it the cheapest AFTER all the costs imposed upon the producer on account of the violation of other people's property rights?

How are the costs of pollution imposed? If it gives your kid asthma, what is the compensation? Can we refuse compensation and insist upon clean air?

Bala said...

Zac,

Read before you shoot your big mouthses off. I said something about torts, insurance companies and premiums, didn't I?

Zachriel said...

Bala: Read before you shoot your big mouthses off. I said something about torts, insurance companies and premiums, didn't I?

Yes, and the tort system was apparently helpless to stop pollution. You didn't answer the question. What is fair compensation for your child getting asthma? Can someone insist on clear air rather than compensation?