Thursday, September 08, 2011

Broken Windows Blah Blah Blah

Bastiat's broken windows return to haunt us, this time in the form a colloquy among Krugman and a bunch of the usual rascals. As usual, I think the Austrian economists - in this case Murphy, Tabbarok, Cowen, and I presume Landsburg display their usual impossible thickheadedness when asked to try to reason beyond their simple minded parable.

The precipitating events here were Obama's decision to suspend ozone regulations and Paul Krugman's angry objection.

As some of us keep trying to point out, the United States is in a liquidity trap: private spending is inadequate to achieve full employment, and with short-term interest rates close to zero, conventional monetary policy is exhausted.

This puts us in a world of topsy-turvy, in which many of the usual rules of economics cease to hold. Thrift leads to lower investment; wage cuts reduce employment; even higher productivity can be a bad thing. And the broken windows fallacy ceases to be a fallacy: something that forces firms to replace capital, even if that something seemingly makes them poorer, can stimulate spending and raise employment. Indeed, in the absence of effective policy, that’s how recovery eventually happens: as Keynes put it, a slump goes on until “the shortage of capital through use, decay and obsolescence” gets firms spending again to replace their plant and equipment.

And now you can see why tighter ozone regulation would actually have created jobs: it would have forced firms to spend on upgrading or replacing equipment, helping to boost demand. Yes, it would have cost money — but that’s the point! And with corporations sitting on lots of idle cash, the money spent would not, to any significant extent, come at the expense of other investment.

Murphy starts with rhetorical nonsense, noting that Krugman:

...didn’t focus on kids suffering from asthma or other environmental issues, but instead looked at it from a liquidity trap perspective.

I mean holy crap - is it really too much for Professor Murphy to fit into his head the distinction between primary motivation and ancillary effects?

Eventually he gets to the core of his critique:

So it seems Dr. Krugman has forgotten a principle from basic economics. The new investment spending flowing from tighter ozone regulations would have largely come from cutbacks in spending in other areas, and only partially out of cash reserves. (The crucial point here is that cash reserves aren’t “idle”; they serve a function to the entity holding them.)

If that seems somewhat persuasive, it's only because it assumes the issue in question - begs the question in the classical sense of the expression.

Part of the point of the liquidity trap is that you get oversaving because everybody else is saving. If the economy really is in such a state, as overwhelming evidence suggests, the whole idea is to change the parameters to a state where spending is more desireable or necessary. Murphy assumes that what looks like excessive saving by corporations is motivated not by economic stagnation but by some deep endogenous plan. Yes ozone regulations will distort industry spending patterns in addition to saving us from the noxious effects of ozone, but, says Krugman, that's good too in current circumstances. Of course those with a purely religious faith in the market can't accept that, but they at least acknowledge that their objection is religious rather than logical.

Alex Tabbarok and Tyler Cowen further muddy the water with the usual inane prattle about broken windows - nobody is actually suggesting that we break windows, OK. I don't recall even Keynes or Friedman recommending it.

I probably shouldn't dismiss Cowen (or Tabbarok) quite so cavalierly, but the thing is that all their objection essentially boil down to assuming that there is no failure of demand, that there are no unused resources or employable workers, and that such a thing as a liquidity trap can't exist. I repeat - this is religion, not science, and a religion which is grossly abused by the facts.