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Wednesday, September 29, 2010 - 9:39pmSanction this postReply
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The always-odious Paulie Krugnuts (aka Paul Krugman) gets the linked column's Orwellian premise ripped apart by Steven Horwitz at TheFreemanOnline.org:

"The Newspeak of Paul Krugman"

For anyone who claims that Ayn Rand's villains are cartoonishly unreal characters, Krugman's columns should be sobering evidence that her characters are, if anything, understated compared to some real life thugs.



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Wednesday, September 29, 2010 - 10:23pmSanction this postReply
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Good column (Horwitz's not Krugman's). This is about the low economic literacy level of the average American.

Henry Hazlitt popularized the The Broken Window fallacy in his great little book, "Economics in One Lesson" back in the mid forties. It was taken from Bastiat's essay from 1850.

The knowledge that you can't increase wealth by destroying things has been around for a long time. There is no excuse for Krugman and the other progressives to get away with these foolish assertions.
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Bastiat and Hazlett actually said much more in this area. They talked about the unseen consequences. Government spending that secures or maintains individual rights is positive, but all other spending will necessarily be destructive. If government takes money from producers with taxes, or takes money from those who would have borrowed by consuming so much of the debt market, or prints so much money as to diminish the value of the dollars of the producers and consumers, value is destroyed. Even if they take away $100 from a window producer, and give the money to another window producer who needs a bailout they are subsidizing a lower level of efficiency - again, a form of destroying value.
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Horwitz wrote, "Employing people to dig holes and fill them up again, or to build bombs that will blow up Iraqis, will certainly reduce unemployment and increase GDP, but it won’t increase wealth."

It's certainly true that there will be no increase in wealth. Wealth will be destroyed because of the unseen consequences. But I think he is wrong to say that it can decrease unemployment or increase GDP. Long term, net-net it must increase unemployment (excluding government employment which has its own problems) and it must decrease the GDP.

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Thursday, September 30, 2010 - 9:01amSanction this postReply
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Steve -- excellent post #1. Sanction!

Re this: "It's certainly true that there will be no increase in wealth. Wealth will be destroyed because of the unseen consequences. But I think he is wrong to say that it can decrease unemployment or increase GDP. Long term, net-net it must increase unemployment (excluding government employment which has its own problems) and it must decrease the GDP.

Actually, he is right that it is possible that destructive government policies can decrease unemployment and/or increase GDP -- as those terms are defined by government. The whole point of his rebuttal of Krugman is that the government statistics showing an end to the Great Depression during WWII are due to this sort of fake unemployment and fake GDP numbers that don't comport with economic reality.

For example, North Korea has "solved" the problem of unemployment by saying that everyone MUST be employed, almost invariably by their government. Anyone who dissents and refuses such work is either shipped off to a slave labor camp, or has to flee the country. So everyone is "employed", though oftentimes at make-work jobs that don't create value and oftentimes actively destroy value.

And, the federal government's definition of "GDP" defines government SPENDING as adding to GDP, while private GDP is defined differently. That is, the formal definition of GDP does not measure value created, or even necessarily anything being produced or created at all. So, technically, the government can "goose" the GDP numbers by employing people to break windows, or dig holes and fill them up, or just pay people salaries for no-show jobs, and drive up the GDP even though real economic activity is declining.

Thus, the suspiciously timed recent announcement just before the November elections that the recession ended over a year ago based on technical measures of GDP, when those GDP numbers jumped up due to brain-dead value destroying things like Cash For Clunkers. But, in real life, the recession might not have actually ended, since the actual value created by everyone in the U.S. may have fallen despite the government GDP numbers rising due to massive "stimulus" spending.

Essentially, the announcement of the end of the recession is Obama's version of Bush's "Mission Accomplished" moment, with control of the House and possibly the Senate depending on whether enough voters fall for this subtle economic prevarication instead of observing what's actually going on around them in real life.



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Thursday, September 30, 2010 - 10:33amSanction this postReply
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Jim,

Thanks for the sanction.

GDP was intended to measure a nation's average standard of living. The formula is GDP = private consumption + gross investment + government spending + (exports − imports). The big cheat in this is government debt. GDP will go up when government spends the money China or Japan sends us for newly printed bonds. But reality will put something on the books down the road - there really is no free lunch. If this weren't true, we could achieve the highest standard of living by an infinite increase in debt sold to foreigners, distributing the proceeds to our citizens. Check kiting in only a valid way of making a living if you don't look at where it ends up, or pretend that it can go on forever. So, yes, the GDP goes up with government spending, that year, but then it will come down further than it went up at some point in the future because the government interference will always cost more than it brings in. Note that in my post, when I talked about GDP and employment I said "Long term, net-net."

I understand what you are saying, but I'm not accepting the governments attempt to redefine what employment means such that it no longer means anything intelligible.

When a private party employees someone it is only because they will profit by doing so. And that person only accepts that job because they see it as net-net benefit to their life. This principle, the same one that guides all private economic transactions, all else remaining equal, must generate wealth. All that is required is an assumption that self-interest will be more likely than not to guide choices and that the environment allows for more free, than not free choices.

The simplest way to view government employment in this situation is to imagine that government forces you to hire extra people, people that you would not have hired, and these workers' efforts are directed by someone else, towards some ends other than your own. (This is a reasonable way to frame this since the government is using taxpayer money to hire government workers.) Under this new situation, your profitability is a direct reflection of how much you were making before and how much of your workforce is made up of other-directed employees. If you previously had a workforce of 100 and were required to hire 1 other-directed, maybe you will still be profitable. If you have to hire 25, maybe you won't be in business for long.

Now, if real employment is always based upon productivity and freedom to hire or not, then each of these other-directed employees is better thought of as an unemployee since they will reduce the wealth of the nation which is the engine of all future economic activity and employment. When the unemployee rate gets high enough, all real employment will stop.

Unless someone believes in magic there is no way to take money from those who hire and then claim that unemployment has been reduced. I know that you have pointed at N. Korea with it's 100% unemployment, but I'm saying that is NOT employment. Slave labor isn't employment. New government jobs cease to be net increases in employment when each new addition of a government position results in one or more private job being lost. The only way to pretend otherwise is to hire a bunch of government workers, quickly add them to "New Jobs" numbers, and then quit looking at the numbers so that you don't see the resulting jobs lost in the private sector from the money that was creating jobs, but will now have to be confiscated in taxes. It is the simple fact that government by nature will be less effective, even if it tries to produce competive goods or services that result in net loses however you measure it.

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Thursday, September 30, 2010 - 12:04pmSanction this postReply
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Steve, I'm agree with most everything in your post #3 -- sanction. Obviously, if the government GDP numbers are fake, and the government is destroying wealth and making people poorer, then eventually, over the long term, even those fake GDP numbers will drop -- unless they are tweaked and redefined again and again to distort what is actually going on, in an effort to satisfy political goals.

You are right that the biggest cheat for the GDP numbers is the government spending category, but there are other ways that the GDP numbers are divorced from reality. One of the bigger additional problems:

Economic value is necessarily subjective and can't really be captured with great precision by statistics trying to measure objective numbers.

For example, a few days ago I bought a loaded 2007 Toyota Avalon from a private party. The seller was dissatisfied with the car because she lives in an insanely crowded urban part of Honolulu where a big car like that is hard to drive and park, and because she is used to driving fancy cars like Mercedes.

I'm really happy with the car, though, because I live in suburbia where ample parking and light traffic makes a big car more practical, and because it is a huge upgrade to the battered 12 year old Camry I've been driving. Thus, a great deal of value was created by transferring this car to a different owner, even though the car itself remains unchanged.

But, the government statistics don't capture any of that increase in value at all. The addition to GDP, in the eyes of the government, is the cost of the salaries of the government workers who charged me some fees related to the paperwork they required to record the transaction, plus the cost of the gasoline I bought to drive to the government office, even though these activities DESTROYED value as I subjectively experience it due to the waste of my time and the cost of driving to the office and the aggravation of dealing with a unionized government employee.

I could go on all day giving examples of the fundamental disconnect between GDP numbers versus actual value created or destroyed.

Basically, GDP is such an unreliable and inaccurate measure of anything meaningful and real that I personally ignore it and concentrate on other numbers if I want to determine what I think is going on in an economy.

One minor quibble: You said, "Slave labor isn't employment." Well, actually it is employment, albeit an immoral and inefficient form of employment that destroys productive potential and violates rights.

When the government temporarily enslaves me by forcing me, under the threat of fines or imprisonment, to fill out tax forms or serve on a jury or drive to the DMV to register a car and pay fees on it or, until recently, serve in the military as a conscript (thankfully that finally ended!), that is employment (though not all such forced labor is counted in government statistics of employment).
(Edited by Jim Henshaw on 9/30, 12:14pm)


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