18 May 2012

Maybe I Can Help

Paul Krugman is having difficulty reaching a conclusion:
So Japan, which is spending heavily for post-tsunami reconstruction, is growing quite fast, while Italy, which is imposing austerity measures, is shrinking almost equally fast.
There seems to be some kind of lesson here about macroeconomics, but I can’t quite put my finger on it …
Krugman is, of course, referring to that well-known macroeconomic principle known as the “you-will-become-ridiculously-wealthy-if-you-dump-your-capital-in-the-ocean” principle.  It’s a close cousin to the “become-ridiculously-wealthy-by-burning-your-capital-to-the-ground” principle, which actually the basis of modern financial planning, wherein investors are encouraged to buy houses and land, then render them uninhabitable by completely scorching them, which then leads to wealth untold.

Oh wait; it doesn’t. In fact, increased GDP growth is not a good thing unto itself, especially if the growth comes on the heels of replacing destroyed capital (though it should go without saying that, ceteris parabis, it’s better to experience GDP growth in the aftermath of capital destruction than to experience non-growth or shrinkage).  Quite simply, it is always a net negative to have capital destroyed, and that the destruction of capital is indicative of a net loss of wealth.  Thus, replacing what was lost, while good for GDP growth, is a contra-indicator that simply implies that a great loss has taken place.

Krugman once again shows himself to be a complete idiot, and wholly undeserving of the Nobel prize in economics.  The broken window fallacy was debunked over 160 years ago, and yet Krugman has apparently never read it (which means he’s ignorant) or it means that his allegedly superior intellect is simply too undeveloped to draw the same conclusion on its own (which means that Krugman is stupid).  Either way, Krugman is not to be trusted for advice or analysis.

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