Economist Paul Krugman, who writes a progressive political column for the New York Times sees some gold in the death and destruction in Japan. The rebuilding, he suggests, will be an economic boost. He admits it sounds like a “crazy” notion but points out that “…liquidity-trap economics is like that”.
The observation is stupid on its face. Taken to its logical extension, if death and destruction have hidden economic benefits why not keep on destroying and rebuilding things? Only government elites and their advocates could come up with such cynically stupid ideas. The hidden costs, the things that could have been invested in without having to recover from death and destruction have not been considered in the pipe dreams of Keynesian economists and central planners.
This genius Krugman, a Nobel laureate, follows the defunct economic theory of John Maynard Keynes. Keynesians advocate consumption and spending as the cure for economic malaise.
Liquidity refers to the amount of cash and credit in an economy. Supposedly, a “liquidity trap” occurs when those holding liquid assets stubbornly do not consume and spend in response to government efforts at currency and interest rate manipulation. During recessions and depressions, individuals who possess more common sense than the typical professional economist will tend to curtail spending, live within their means and set aside more savings.
To overcome the “liquidity trap”—when people are hoarding instead of spending—the Keynesians advocate that the government should spend more to compensate for the lack of “aggregate demand,” borrowing heavily to finance deficit budgets. This is the foundation of all government efforts at “stimulus”.
How does this apply to Japan? The Japanese have a high savings rate so the so-called “liquidity trap” is a major problem for central planners in that economy. Stimulus efforts by government in Japan have resulted in a national debt burden that is double the country’s Gross Domestic Product.
The natural disasters of the massive earthquake and tsunami have also caused a nuclear energy crisis in the wake of damage to reactors. This is supposedly going to compel the Japanese economy into expansion by springing the “liquidity trap,” thereby accomplishing what the government could not.
Krugman also reminds us that “…World War II ended the Great Depression”. This is a cultural platitude. In an historical or literary sense he may be correct, but he is writing as an economist.
World War II ended the Great Depression in the same way as night ends day. In the science of logic, just because one thing follows another in sequence does not mean that the law of cause and effect has been observed.
During the war the industrial base was devoted to the war effort. Absent war, that effort would have been directed at making things people actually wanted.
The economic recovery which followed World War II undoubtedly had more to do with the return of young warriors to the labour force. To the extent government no longer held them in conscription they could pursue their economic self-interest.
There is never good news in the death and destruction of human lives and the values they require for life. No amount of alchemical spinning will change this fact.
©Copyright 2011 Edward Podritske