Thursday, September 8, 2011

Libertarian Hackery - Gregg Easterbrook, Vol 2

Easterbrook writes a blog post on Reuters today and proves that he doesn't know how to calculate GDP, but that doesn't stop him from writing about it nonetheless (there are a lot of things wrong with Easterbrook's post, but I'll concentrate on just this one most glaring of mistakes).

Firstly, let me explain the calculation of GDP. It's an easy calculation and shouldn't intimidate anyone. GDP equals C+I+G+NX.

What that means is that GDP equals private consumption (C) plus investment (I), plus government spending (G) plus net exports (which is imports minus exports). This is an accounting equation which means it must balance. I'll repeat that again. The calculation of GDP is an accounting equation that must balance (it's also an equation that anyone who's taken a Macro 101 course would have learned on the first day).

I highlighted government spending above because, as Libertarian Hacks are wont to do, Easterbrook tries to claim that federal government spending (in this case, construction spending) doesn't contribute to GDP. He says federal government construction spending is wasteful and slow, which means (obviously) that it cannot contribute to GDP.

But for Easterbook to be right, that would mean that any money the federal government spends on construction just disappears into thin air. Literally, it just disappears. I'm not sure if space aliens or magical wizards took it, but it's gone. And seriously, this is what Easterbrook is claiming.

What he insinuates (but doesn't prove, by the way) is that federal government construction money goes into the pockets of contractors who work slowly, inefficiently and come in over budget, and might even be outright crooks. But even if that were absolutely true and Easterbrook proved it were true, the money still wouldn't have magically evaporated. It would have been paid to someone. And economics (and the GDP calculation) don't care whether the people who take government money are inefficient workers, crooked cheats or pathologically lazy contractors. They're still people and they're still economic actors. So economics (and the GDP calculation) only care that another dollar has been put into circulation. And government spending, therefore, contributes to GDP, no matter where the money goes or who it goes to.

I can illustrate this most plainly with the end of the Great Depression. WWII pulled the country out of the Great Depression and it did so because it forced the country into a massive round of federal government spending (some of which started with the New Deal, but really the depression was wiped out completely and totally by government spending on the war effort). So if you're a Libertarian Hack, and you want to claim that government spending doesn't contribute to GDP or can't pull us out of the current recession because government spending is "wasteful", you have to willfully ignore the fact that the federal government didn't spend a dollar on anything economically useful in the run up to the war. All those tanks, planes and bombs could have been built and dumped into the ocean for all the economic good they did.

WWII was quite possibly the greatest example of Keynes' "money hole". It was wasteful government spending that pulled the country out of a depression. Should we repeat that now? Probably not. Keynes advocated spending money on economically useful projects (bridges, roads, dams etc.), but in the absence of that, even burying money in jars at the bottom of a hole and getting workers to dig it out would work. And WWII proved him right.

But Easterbrook dismisses history, macroeconomics and accounting in service to being a Libertarian Hack of the First Order. And we're all worse off for having to read whatever he spews. 

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