One quick note before I turn on my Internet-blocking software and retreat to my writing cave: yesterday’s earthquake naturally prompted a lot of snarky comment that the earthquake would at least create jobs … the absurdity of which illustrates Bastiat’s broken window fallacy (a topic of great interest to both of us at KP). Paul Krugman claims that the Google+ page with his name and this post is not his:
People on twitter might be joking, but in all seriousness, we would see a bigger boost in spending and hence economic growth if the earthquake had done more damage?
Steve Horwitz explores why such a spoof is so persuasive from “the Krugman who cried stimulus“. He also expands on a conversation we were having on Facebook about how the “government spending to create jobs” argument focuses solely on flows, and ignores the destruction of the stock of wealth that arises from exogenous shocks like this. Repairing damage creates a flow of economic activity, but our accounting has to include the cost of the destruction of the stock of wealth. The flow of economic activity devoted to replacing that stock does not create any net new value.
Or, as one of my physics colleagues said in a different context, don’t confuse activity with accomplishment.