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December 2001

Volume 19, Number 12

Is Terror Good for the Economy?

by Ben Powell

Paul Krugman's September 14 column in the New York Times contained more economic fallacies and hypocrisy than usual. It is a shame that a paper, where Henry Hazlitt applied Bastiat's wisdom so well now carries a column by Krugman, who, week after week, preaches that breaking windows will bring us greater wealth. 

In this particular column Krugman discussed the economic impact of the attack on the World Trade Towers. Krugman says, "the terror attack could even do some economic good." How could the death and destruction of September 11 do us some economic good? 

Krugman offered three assertions. 

Assertion one: "If people rush out to buy bottled water and canned goods, that will actually boost the economy." Krugman sees people spending money on one particular type of good, but he does not grasp what is unseen. If people were not spending their money on bottled water and canned goods, they would be spending it on something else or saving it. All that has changed are the particular goods that are bought, not the absolute level of economic activity. People buying bottled water and canned goods neither improved nor harmed our economic condition.

Assertion two: "The driving force behind the economic slowdown has been a plunge in business investment. Now, all of a sudden, we need some new office buildings. As I've already indicated, the destruction isn't big compared with the economy, but rebuilding will generate at least some increase in business spending." 

Will someone please beat this man over the head with a copy of Bastiat's Economic Sophisms! (Actually, if I were literally going to beat Krugman over the head I would probably use Rothbard's entire four volumes of Conceived in Liberty.) 

Krugman is committing the broken-window fallacy on a massive scale. Since the World Trade Towers were small as a percent of our economy, and their destruction will lead to a small amount of increased business investment, and this is good for our economy, all we need to do to really improve our economy is encourage lots of business investment by this method. 

So, knock down the Empire State Building and we can further increase our economic output. Of course Krugman would not want just New York City's economy to grow, so we should also knock down the Sears Tower in Chicago and the Hancock Building in Boston. If this does not revive the economy, we better start leveling entire cities; surely that will bring economic prosperity. 

Krugman sees only the business investment that takes place when these buildings are rebuilt. He fails to see that the resources that are used to rebuild could be used to do other things if the World Trade Towers had not been attacked. We can never become richer by destroying resources and then replacing them. After the attack, the US economy is worse off in real terms, by two office buildings, about 12 million square feet of office space and thousands of productive people. 

Assertion three: "The attack opens the door to some sensible recession-fighting measures. For the last few weeks there has been a heated debate among liberals over whether to advocate the classic Keynesian response to economic slowdown, a temporary burst of public spending."

He goes on to say, "there was also the certainty that conservatives would refuse to accept any such move unless it were tied to another round of irresponsible long-term tax cuts. Now it seems we will indeed get a quick burst of public spending." 

Possibly the only thing more permanent than a "temporary" tax increase is bad economic theory. These are the same Keynesian policies that have failed everywhere they were implemented over the past seventy years. 

Krugman himself has been advocating public spending to revive Japan's economy. But after eleven years of massive government spending projects that have now raised their government debt to over 100 percent of GDP and their total "off budget" debt to over 200 percent of GDP, Japan's economy has still not begun to recover. 

Increasing government spending through fiscal stimulus packages can never help an economy recover. Government spending must be paid for, either by taxation, inflation, or debt issue. Regardless of how it is financed, it crowds out private spending. There is no free lunch.

Krugman also demonstrated his appalling hypocrisy at the end of this article. After making the above political policy recommendation after this tragedy, he said: "Now for the bad news. After the attacks I found myself wondering whether some politicians would try to exploit the horror to push their usual partisan agendas. It seems you can't be too cynical; sure enough, the push is already on to sell tax breaks for corporations and a cut in the capital gains tax as a response to terrorism." 

He finally ended his column by stating, "This tragedy will only be magnified if it is exploited for political gain. Politicians who wrap themselves in the flag while relentlessly pursuing their usual partisan agenda are not true patriots, and history will not forgive them." 

After stating that these attacks might make his political objective of increasing government spending realizable, he has the gall to morally condemn someone for using them to advocate tax cuts! 

New Keynesian economists, who wrap themselves in flawed economic theories while relentlessly pursuing their socialist agenda, are not true intellectuals. Contemporary readers and history should not pay attention to them. 

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Ben Powell is a Ph.D. student in economics at George Mason University (gmubenpowell@yahoo.com).

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