If hostile aliens invade the planet, “this slump would be over in 18 months,” according to New York Times columnist Paul Krugman. It’s a bizarre way to express a bizarre idea: that war is good for the economy.
He draws an analogy with World War II, where the massive military buildup – conscription is left unmentioned – reduced unemployment and caused GDP to skyrocket.
The Independent Institute’s Mary Theroux points out:
The World War II years were a time of shared privation, with virtually every item that we take for granted today either rationed: e.g., meat, gasoline, sugar, clothing; or not available at any cost: e.g., new cars, appliances, etc. The American standard of living throughout World War II remained at an excruciatingly low level that no 21st century American would accept.
War does not create. It can only destroy. True, aggregate numbers like GDP can thrive during such troubled times. Workers were cranking out munitions like nobody’s business. But those workers’ actual standard of living was not high; everyday essentials were being rationed.
That’s the peril of relying on GDP as an economic barometer. It certainly has its uses. But over-reliance on it has made Krugman ignore other, harsher aspects of war. The fighting. The dying. The separated families, in some cases made smaller by the economic stimulus. The privation at home. The lost opportunities, economic and otherwise.
Krugman’s claim that an alien invasion would stimulate the economy is as alien to the economic way of thinking as our new overlords are to us.
Fortunately, not everyone is taking him seriously. A satirical Twitter account, @KrugmanAliens, is poking devastating fun.
Some readers might also be interested in this working paper I wrote a few years ago about the economics of war.
A little government can do a lot of good. A lot of government can do little good.
Rules protecting life, liberty, and property can create the stable conditions that entrepreneurs need to flourish. It works best when these rules are simple, clear, and few. But problems emerge when government takes on other missions.
Rules that are complicated, opaque, and numerous create instability. Entrepreneurs are less likely to invest or innovate if they fear the rules of the game might change tomorrow on a whim. Complying with regulations takes up time and effort that could be spent creating wealth. When governments get involved in business, businesses will involve themselves with government. This is an invitation to corruption, rent-seeking, and regulatory capture. Many backs get scratched, but economic growth suffers.
Dan Mitchell‘s latest video introduces the Rahn Curve, named after top-notch economist Richard Rahn, to illustrate that concept visually. Most academic studies on the subject estimate that governments that take up 15 to 25 percent of GDP is about the right size. The U.S. government consumes roughly 40 percent of GDP. That wide range is because different government policies have different effects, and because the complexity of even the smallest economies makes any macro-level study uncertain.
The academics might be guessing too high, though. Historical data from the 19th century show that the best-performing economies had governments around 10 percent of GDP. That includes the U.S. and most of Europe.
Returning to that size government wouldn’t even be particularly austere. the U.S. government would have a $1.4 trillion budget. Roughly what we had during the Clinton years.
I hope you’ll take a few minutes to watch. The Rahn curve contains valuable insights.
Posted onApril 9, 2010|Comments Off on Government Is a Third Bigger Than You Think
Today’s Washington Times briefly quotes me making that point:
“A regulatory monster is eating America’s economy. Not only do federal regulations cost Americans more than the income tax, they cost about as much as the entire GDP of Canada,” analyst Ryan Young tells Beltway. “Since regulatory costs don’t show up in the budget, more than a trillion dollars of government’s cost go largely unnoticed. The burden of government is actually about a third larger than most people think.”
Wonderful news if he’s right. We won’t know for sure until the GDP figures come out for the third quarter. Or the fourth quarter, depending on when the growth started and how fast it is. But leading indicators have been looking good for some time, so Bernanke’s guess seems reasonable.
Just beware of any declarative statements that come out before the data do.
Comments Off on Bernanke Says Recession Likely Over