. . . not for Paul Krugman, as the latest episode of the Contra Krugman podcast notes. Krugman begins his column by labeling the GOP “Enemies of the Sun:”

When it comes to energy policy, the G.O.P. has become fossilized. That is, it’s fossil fuels, and only fossil fuels, all the way. . . . While politicians on the right may talk about encouraging innovation and promoting an energy revolution, they’re actually defenders of the energy status quo, part of a movement trying to block anything that might disrupt the reign of fossil fuels.

Tom Woods and Robert Murphy, the folks at the new Contra Krugman podcast that refutes Krugman every single week, found a picture of Krugman’s house. How many solar panels does it have? You guessed it!

The podcast episode on this can be found here, or at iTunes or Stitcher. It is excellent. Woods and Murphy expose Krugman hypocrisy. They reveal ways that Krugman deceives with statistics. They refute illogical arguments. And they do it all with humor and clarity.

Here’s one more example of hypocrisy to whet your appetite. In this column Krugman suggests that the GOP opposes renewable energy because they’re in Big Coal’s pocket:

[Y]ou need to follow the money. We used to say that the G.O.P. was the party of Big Energy, but these days it would be more accurate to say that it’s the party of Old Energy. In the 2014 election cycle the oil and gas industry gave 87 percent of its political contributions to Republicans; for coal mining the figure was 96, that’s right, 96 percent. Meanwhile, alternative energy went 56 percent for Democrats.

It is certainly a fair argument that one’s views may be affected by the sources of the money one receives. In other words: we need to look at who is giving you money when we evaluate your arguments. But that wasn’t the position Krugman took when Jonathan Gruber was attacked in 2010 for making pro-ObamaCare arguments without disclosing that he had received money from the Obama Administration to work on ObamaCare:

Given that Gruber was providing this kind of technical consulting, should he have recused himself entirely from the public debate? Should he have stopped writing op-eds and, more important, technical papers read by the likes of Ezra Klein and myself? If he had, the public debate would have been much poorer; again, there aren’t many people in a position to do the kind of quantitative assessments Gruber does.

And one more thing: what Gruber has had to say about health reform in the current debate is entirely consistent with his previous academic work. There’s not a hint that he has changed views, or altered his model, to accommodate the Obama administration.

In other words, look at his arguments, not at who is giving him money.

Krugman will always adopt whatever position helps the leftist view, regardless of consistency or logic.

He is, after all, a Liberal with a Conscience — and a Friend, not an Enemy, of the Sun.

Go listen to the whole thing and subscribe. You won’t be sorry!

Last night marked the debut of the long-awaited Contra Krugman podcast. The podcast is hosted by Tom Woods and Robert P. Murphy. Tom Woods is a well-known libertarian and best-selling author with a daily podcast I listen to regularly. Murphy is the author of Choice, a summary of Mises’s Human Action which I have been summarizing in a series of posts you can read here. (12 down, just 5 to go. I will finish!)

The idea of the podcast is that they take on Paul Krugman, every single week, and refute his columns and blog posts in an entertaining way. I have already begun listening and have already learned things. More importantly, I have really enjoyed it.

There are three episodes up so far, all of which you can listen to at the Web site for the podcast, ContraKrugman.com. Go there, listen, and subscribe on iTunes or Stitcher.

Murphy has been reading Krugman for a long time. He describes reading Krugman as being like playing with a canker sore — it’s annoying, but you can’t stop. And he has been trying to debate Krugman forever. To whet your appetite, I am going to link a video that Murphy did years ago, when he was trying to get Krugman to agree to debate him. Murphy is a very funny guy (he says on podcast #1 that he has been told he is “pretty funny for an economist”) and this video shows the lengths to which Murphy was going to prepare for that debate, which never happened. I laughed out loud at this one.

How many economists do you know who would be willing to put out a video like this?

Well, at least not undeserving ones.

John Sexton’s post is classic John Sexton: hard-hitting, fair, and well-reasoned. I can’t do it justice with an excerpt. Go read it all.

UPDATE: Maybe they just come dangerously close?

Can't believe I missed this one. Krugman 2008: https://t.co/rCAZkm8ScA

— John Sexton (@verumserum) September 2, 2015

Krugman brings up this babysitting co-op example all the time and referred to it again on March 25:

And by the way: if you want a simple, homely example of how demand shocks can happen and cause unemployment, there is the baby-sitting coop.

The link goes to a famous, and ridiculously flawed, Krugman article in Slate from 1998. Since Krugman constantly brings up this babysitting co-op example, I think it’s about time a modern, conservative/libertarian blog not narrowly specializing in economic theory took on this canard. I am at your service!

I’ll let Krugman describe the problem at length, and then I will reveal what he didn’t tell you. Finally, I will ask you if you can figure out the solution — which seems to me to be perfectly obvious.

Here’s 1998 Krugman:

Twenty years ago I read a story that changed my life. I think about that story often; it helps me to stay calm in the face of crisis, to remain hopeful in times of depression, and to resist the pull of fatalism and pessimism. At this gloomy moment, when Asia’s woes seem to threaten the world economy as a whole, the lessons of that inspirational tale are more important than ever.

The story is told in an article titled “Monetary Theory and the Great Capitol Hill Baby-Sitting Co-op Crisis.” Joan and Richard Sweeney published it in the Journal of Money, Credit, and Banking in 1978. I’ve used their story in two of my books, Peddling Prosperity and The Accidental Theorist, but it bears retelling, this time with an Asian twist.

The Sweeneys tell the story of—you guessed it—a baby-sitting co-op, one to which they belonged in the early 1970s. Such co-ops are quite common: A group of people (in this case about 150 young couples with congressional connections) agrees to baby-sit for one another, obviating the need for cash payments to adolescents. It’s a mutually beneficial arrangement: A couple that already has children around may find that watching another couple’s kids for an evening is not that much of an additional burden, certainly compared with the benefit of receiving the same service some other evening. But there must be a system for making sure each couple does its fair share.

The Capitol Hill co-op adopted one fairly natural solution. It issued scrip—pieces of paper equivalent to one hour of baby-sitting time. Baby sitters would receive the appropriate number of coupons directly from the baby sittees. This made the system self-enforcing: Over time, each couple would automatically do as much baby-sitting as it received in return. As long as the people were reliable—and these young professionals certainly were—what could go wrong?

Well, it turned out that there was a small technical problem. Think about the coupon holdings of a typical couple. During periods when it had few occasions to go out, a couple would probably try to build up a reserve—then run that reserve down when the occasions arose. There would be an averaging out of these demands. One couple would be going out when another was staying at home. But since many couples would be holding reserves of coupons at any given time, the co-op needed to have a fairly large amount of scrip in circulation.

Now what happened in the Sweeneys’ co-op was that, for complicated reasons involving the collection and use of dues (paid in scrip), the number of coupons in circulation became quite low. As a result, most couples were anxious to add to their reserves by baby-sitting, reluctant to run them down by going out. But one couple’s decision to go out was another’s chance to baby-sit; so it became difficult to earn coupons. Knowing this, couples became even more reluctant to use their reserves except on special occasions, reducing baby-sitting opportunities still further.

In short, the co-op had fallen into a recession.

Since most of the co-op’s members were lawyers, it was difficult to convince them the problem was monetary. They tried to legislate recovery—passing a rule requiring each couple to go out at least twice a month. But eventually the economists prevailed. More coupons were issued, couples became more willing to go out, opportunities to baby-sit multiplied, and everyone was happy. Eventually, of course, the co-op issued too much scrip, leading to different problems …

If you think this is a silly story, a waste of your time, shame on you. What the Capitol Hill Baby-Sitting Co-op experienced was a real recession. Its story tells you more about what economic slumps are and why they happen than you will get from reading 500 pages of William Greider and a year’s worth of Wall Street Journal editorials. And if you are willing to really wrap your mind around the co-op’s story, to play with it and draw out its implications, it will change the way you think about the world.

Oh, Good Lord. Krugman’s solution: print more money and everything is fine!!!!!

Except, not so much. That last sentence of Krugman’s penultimate paragraph (the ellipsis is in the original) should cause you to raise an eyebrow. So printing more scrip worked, but then there was too much . . . leading to “different problems” . . .

. . . which we won’t discuss, but will simply allude to with an ellipsis . . . and then we’ll move on to elaborate about how great printing money is. Woo-hoo! Printing money!

If you’re thinking: “maybe someone should Google the original article to find out what these mysterious ‘problems’ were that were caused by too much scrip” . . . then I’m one step ahead of you. Here is the article (.pdf), and here is what happened:

Whatever the cause, the golden age lasted only a couple of years. (Golden ages are like that.) Maybe morals deteriorated-or perhaps the scrip was again out of whack. Now the problem was that more people wanted to go out than to sit.

In fact, the ten-scrip reform has moved the co-op from a position where there was too little scrip and the amount was shrinking, to a position where there was just about the right amount of scrip but the amount was growing. After a while, it naturally followed there was too much scrip and more people wanted to go out than to sit.

What a shock.

So: it turns out that Krugman’s little money-printing solution was not the ideal solution after all. It ended up leading to inflation and excessive demand (for babysitting services). Who could have guessed?!

Krugman’s description of the co-op’s initial reaction is hilarious, and says so much about how government responds to economic problems.

Let’s remind ourselves what the problem was; too much supply (of babysitting services) and not enough demand. And look at what the co-op did to try to address this problem: “They tried to legislate recovery—passing a rule requiring each couple to go out at least twice a month.”

In other words, faced with low demand . . . they tried to pass a rule ordering demand to increase! You vill go out and consume der babysitting services!

I’m wiping tears from my eyes at how much this reminds me of government.

After listening to an episode of the Tom Woods podcast that briefly alluded to this, I spent a little time Googling some discussion, and (especially because this seems like a very simple problem to solve) I was very amused at some of the bizarre reactions. Here’s an Austrian economist who says we’re not talking about money at all, but barter. (Brian Doherty at Reason.com seems to agree.) And this fellow thinks the problem was “consumer confidence” — and that the members of the co-op simply needed to be rational, put their heads together, and agree to stop hoarding scrip! And here’s a guy (at Forbes, no less! Forbes!) who says: Krugman is exactly right — and that Krugman’s amazing observational skills prove that Bitcoin is doomed. Doomed!

Oh. My. God. Is this really that difficult, folks? Really?

Again: let me remind you what the problem was: too much supply and not enough demand.

Can you imagine a possible solution to this incredibly difficult conundrum?

Please leave your suggestion below in the comments before reading the extended entry — which you can read from the main page by clicking “more.”

(more…)

Paul Krugman has a piece titled Death by Typo: The Latest Frivolous Attack on Obamacare. It’s typical Krugman: lazy and dishonest. I decided to pick it apart anyway, as a way to review the Halbig issues in a (hopefully) straightforward and clear fashion, so that you don’t start falling for these sorts of arguments.

Krugman’s key distortion comes early in the piece:

But if you look at the specific language authorizing those subsidies, it could be taken — by an incredibly hostile reader — to say that they’re available only to Americans using state-run exchanges, not to those using the federal exchanges.

Naturally, he doesn’t tell you what that specific language is that could be twisted and misinterpreted so badly. But never fear: I will tell you.

The provision for subsidies says they are available when a health plan is purchased on an exchange “established by the state under section 1311.” There is no corresponding language stating that subsidies are available on an exchange established by the federal government. To make it even more clear, a “state” is defined in the law as “each of the 50 States and the District of Columbia” — not the federal government.

Krugman says it takes “an incredibly hostile reader” to reach the following conclusion: when the law says subsidies are available only to those who buy a plan on an exchange “established by the state,” that means subsidies are available only to those who buy a plan on an exchange established by a state.

Non-partisans might say: gee, I don’t think it’s a terribly hostile reading to, you know, read what’s there. (Side note: Krugman’s use of the phrase “state-run exchanges” shows he doesn’t understand the basic argument. It doesn’t matter who “runs” the exchanges. Under the law, what matters is who “established” them.)

Krugman claims that this interpretation would violate the “three-legged stool” of ObamaCare: 1) guaranteed issue, 2) the individual mandate, and 3) subsidies. Why would the drafters have removed one of the legs of the stool? The answer is: they didn’t think they were. Everyone assumed at the time that all the states would set up an exchange. And why make the states do it rather than the feds? To get the critical 60th vote of Ben Nelson, who claimed to be concerned about the law taking freedom from the states.

As for this being part of a political compromise, don’t take my word for it. Listen to ObamaCare architect Jonathan Gruber:

Through a political compromise, it was decided that states should play a critical role in running these health insurance exchanges. . . . And that is really the ultimate threat, is, will people understand that, gee, if your governor doesn’t set up an exchange, you’re losing hundreds of millions of dollars of tax credits to be delivered to your citizens.

This was one of two “speak-os” in which Gruber accidentally told the truth about the law before the Halbig controversy blew up. In the other, Gruber told one audience in 2012: “if you’re a state and you don’t set up an exchange, that means your citizens don’t get their tax credits.”

Krugman does not mention Gruber’s comments when he says:

[E]verything else in the act makes it clear that this was not the drafters’ intention, and in any case you can ask them directly, and they’ll tell you that this was nothing but sloppy language.

Sure, they say that now. Prepare for a shock: the people who drafted the law (and made a bad assumption about the states setting up exchanges) now give a self-serving account of their contemporaneous intent! You don’t say!

Gruber had compared his original “speak-o” to the “typo” made by Congress: “Congress made a mistake drafting the law and I made a mistake talking about it. . . . My subsequent statement was just a speak-o—you know, like a typo.” It turns out that this comparison was remarkably apt. Like Gruber, Congress said what it meant. Like Gruber, Congress said it more than once (the phrase “established by the state” appears again and again in the law). And, like Gruber, it appears that Congress’s statement is coming back to haunt them.

So, like Gruber, Congress is now lying about it. And Paul Krugman is here to help spread the lie.

But don’t be fooled. No matter how many Paul Krugmans and Michael Hiltziks and Brian Beutlers tell you, with Serious Furrowed Brow, that there is Absolutely No Reasonable Way to Interpret the Language This Way, the fact remains that the plaintiffs in these cases are simply reading the law as written.

For conservatives to win, all they need to do is resist the leftist call to substitute “intentionalism” for textualism. As I noted this weekend, “intentionalism” as a theory for reading legal texts is dead. This here blog tried to explain this for years, but Halbig has made it clear in a way I never could. Using “intentionalism” to read laws allows leftists can twist the clearest language into anything they want it to say.

Say it with me: Only textualism preserves the rule of law.

Take that, Krugman!

Thanks to F.H.K.

Paul Krugman has a silly piece out called Yes He Could. The deck headline: “Health Care and Climate: President Obama’s Big Deals.” It’s his typical partisan hackery and I won’t bore you with most of it, but this part caught my eye:

A larger answer, I’d guess, is Simpson-Bowles syndrome — the belief that good things must come in bipartisan packages, and that fiscal probity is the overriding issue of our times. This syndrome persists among many self-proclaimed centrists even though it’s overwhelmingly clear to anyone who has been paying attention that (a) today’s Republicans simply will not compromise with a Democratic president, and (b) the alleged fiscal crisis was vastly overblown.

When Paul Krugman says it’s “overwhelmingly clear” that “the alleged fiscal crisis was vastly overblown” . . . it’s time to buy gold.

It’s the perfect way to round out a week of posts documenting the flaws in GDP as a measure of the health of the economy.

The news report below opens: “Workers at a Missouri company are telling their story, after the government paid them to do nothing.”

You’ve probably heard about this before. The story broke a month ago. The company was supposed to process a giant influx of ObamaCare applications — but the expected flood never came. So the office was filled with employees who got paid to sleep and played games. The story today is that nothing has changed. In fact, they’re still hiring! And they pay overtime!

These people are contributing absolutely nothing to the economy. All they do is drain taxpayer money.

But their services are included in GDP.

If this company were being paid directly by consumers, they would go out of business, because consumers don’t pay money for nothing. But the government does.

This is the kind of stuff Paul Krugman wants more of. Won’t someone please give him another Nobel Prize?

This is Part Four of my continuing series on GDP, or, Why Paul Krugman Is Wrong About Almost Everything.

The lessons learned from the Great Depression continue to influence the way we manage the economy today. Understanding why it ended, therefore, is of paramount importance even today — because it affects how we manage crises such as the bursting of the housing bubble. Historians used to argue that FDR ended the Great Depression with the New Deal; they are now starting to concede that this argument is not only wrong but ridiculous: the New Deal both intensified and prolonged the economic slump during the 1930s.

But it’s only within the last year that I learned that the historians’ fallback argument is also totally wrong. They claim World War II ended the Great Depression. It did not.

I will now turn over the microphone to Tom Woods, who does a tremendous job of explaining why this claim is patently absurd — and does so in about 7 minutes.

If you don’t have time to watch the video, let me summarize Woods’s main points, and add a few thoughts of my own.

It’s true that unemployment plummeted during World War II. If you wanted a job, you could have a job. But does that represent a normal healthy business expansion? Not hardly. Ten million people were drafted, and many others volunteered, for patriotic reasons (and to stay out of the infantry, which is a pretty rotten assignment if you like staying alive). A mere reduction in unemployment numbers does not tell the whole story, if you don’t explain how you got there. After all, as Woods notes, you could simply execute ten million jobless people, and that would reduce unemployment too. So, sure: when the government drafts people by force, and threatens them with prison if they do not comply, unemployment goes down. But as Robert Higgs dryly notes: “that’s not how we normally reduce unemployment in this country.”

The claim that the wartime itself was a prosperous time — with government rationing, price controls, and other forms of austerity, is laughable. (What’s more, the price controls distort the data regarding true purchasing power.) There were no new cars, and virtually no consumer appliances that required metal, which was gobbled up by the government to manufacture war equipment. Food, clothing, gasoline, and other basic items were sharply rationed, and living space was cramped and overcrowded. The war was a time of deprivation, which the populace viewed as a necessary sacrifice, to be sure — but sacrifice does not equate to prosperity.

Nor does it make sense that sending the most skilled sector of the labor force off to fight, leaving a workforce with much less work experience and skill (women and elderly men) would logically lead to giant growth rates of 13% a year. Something must be wrong with this measure.

And the problem is . . . using GDP as our measure. Woods also notes that World War II was a time of supposed prosperity because GDP shot up during the war. But if you fall for the idea that GDP is the only meaningful measure of prosperity, then you will be forced to conclude that 1946 was a depression year. Seriously. 1946.

This page provides GDP growth numbers per year since 1930, and lists the best and worst years. The best years for GDP were, admittedly, during the war. And the second worst year for GDP in the last 84 years was 1946, a year in which GDP shrunk by almost 11%. 1946 is second only to 1932 in having a dismal GDP — and 1932 was the absolute depth of the Great Depression.

And yet —

And yet, do you remember the Great Depression of 1946? The stories of people starving in the streets? The reason you don’t isn’t because you’re young. It’s because 1946 was a boom time for the United States. As Tom DiLorenzo explains:

Far from creating a depression, prying all of that money from the hands of politicians and bureaucrats and returning it to its owners – working Americans – created the largest increase in private sector economic growth in all of American history in 1946. According to statistics found in the 1995 Annual Report of the U.S. Council of Economic Advisors, based on Commerce Department data, real inflation-adjusted private sector GDP increased by 29.5 percent in that year. In no other year has the U.S. economy ever grown even half that fast. Private investment skyrocketed and stock prices soared, in complete and total contradiction of what every Keynesian economist in the world had been predicting.

So, 1946 was the best year ever for the U.S economy — and yet the GDP numbers would suggest that 1946 was a year of depression.

So what’s going on here? If you have been following my series on GDP all week, you already know the answer.

In Part One of the series, I noted that GDP takes into account government spending. GDP represents the prices of finished goods. But the only meaningful prices in our society are prices that are determined through voluntary exchanges in the free market. By contrast, government spending is often inflated and bears no relationship to satisfying consumer preferences. This was especially true during the war, when much of the economy consisted of government purchases from firms manufacturing war materiel.

In Part Two, I noted how GDP does not fully take account of capital spending. During the war, government spending went up for production of war-related goods, but private investment cratered for consumer goods. But the freefall in capital investment gets masked by GDP’s failure to fully account for capital spending.

In Part Three, I noted how GDP is boosted by activity even if it does not contribute to consumer well-being. Almost no economic activity during the war benefited consumers. Woods notes that fully 40% of the labor force was employed in some form or fashion in the armed forces, and were thus not producing consumer goods. Consumers don’t buy tanks, so while those goods might have been necessary for the war effort, they were a waste from the consumer’s point of view. So, if the government was spending a ton of money on tanks, and nothing on consumer goods, this hurt consumers — but it was great for GDP.

The Paul Krugmans of the world argue, not just that the war provided the economy with a shot in the arm, but that the war itself was a time of great prosperity. Hopefully this post has caused you to rethink that silly assertion. Makers of tanks do well in wartime. As Robert Higgs has noted, the undertaker does well. But most people are miserable in war. Perhaps nobody has put it better than Austrian economist Ludwig von Mises, who said: “War prosperity is like the prosperity that an earthquake or a plague brings.”

So what did get us out of the Great Depression? I don’t mean to sound flip, but I think that the end of the Great Depression had a lot to do with the fact that Franklin Delano Roosevelt had finally died. He had mounted a war on business for 13 years, and thrown businessmen into a state of complete uncertainty about their future. In a future post, reviewing a book about the Great Depression, I will detail some of FDR’s atrocities, but suffice it to say that businessmen never knew what was coming next. The end of American’s war against Japan and Germany mattered — but to businessmen, it mattered almost as much that FDR had ended his war on them.

As regular readers are aware, I am spending time this week attacking GDP as the ultimate benchmark for measuring the strength of the economy. On Monday, in Part One of the series, I noted that GDP includes government spending even though government spending does not necessarily benefit consumers. Yesterday, in Part Two of the series, I addressed another problem with GDP: it overemphasizes consumer spending to the detriment of capital investment.

Today, I want to show how an overemphasis on the GDP measure can encourage less efficient ways of satisfying consumers’ preferences — and indeed, can encourage destruction of resources. In this way, GDP favors busywork over an actual improvement in consumers’ standard of living. As we will see, this nonsense leads the Krugmans and Keyneses of the world to say it would be a great idea to dig pointless holes — or to prepare for a Martian invasion that will never happen — as long as people are busy!!!

In this post I am borrowing heavily from this excellent blog post by Alex Zorach, which makes the points I want to make quite effectively. I recommend clicking through and reading it, since my post is little more than an attempt to summarize the points made by Zorach.

Zorach’s first point is that a less efficient way of doing something can lead to a higher GDP:

It is also worth noting how GDP counts goods or services when they are sold and resold. Shipping and storage of goods are almost always counted in GDP, as these are considered services that are produced. So a product that is sold directly to the end user, at the point of production, will result in less of a contribution to GDP than a product which is produced, shipped, stored in a warehouse, and shipped again to the same end user for the same price plus shipping costs.

In other words: let’s say that a car manufacturer comes up with a way to sell cars direct to consumers for $20,000, as opposed to selling it through a dealer for $25,000.

It could be that the dealer adds sufficient value to justify that extra $5000. After all, the dealer handles shipping and storage costs that make it more convenient for the average consumer to purchase the car. He provides customers with a way to service their cars and enforce their warranties. In an unhampered market economy (which we don’t have in the case of auto sales; we have discussed here before how government puts its thumb on the scale), consumers can determine whether the value produced by the dealer is worth the extra cost. Some manufacturers would utilize dealers and others would sell direct, and the best sales model would win out.

But assume that a car manufacturer finds a way to cut out the middleman in a way that most consumers prefer. In such a scenario, in an unhampered market economy, dealers will go out of business — and they should. The land used by the dealership will be sold to a company that can put it to better use. The people working for the dealership will have to go find new jobs that are more productive for the economy. But consumers will be far better off. They can get the car for less money, and if the manufacturer finds a more efficient way of delivering and servicing the car, consumers are ultimately in a better position.

The dealerships’ employees will temporarily be worse off — but that is the tradeoff we make in an unhampered market economy. The “creative destruction” of businesses that are not satisfying consumers’ preferences ensures that scarce resources are allocated in the manner that best satisfies those preferences. In other words, the dealerships’ employees will need to find something to do that delivers value — that consumers want. Once they do, they will once again be successful.

But whether a car dealership adds value or not, GDP will be larger if the dealer is involved. That’s because $25,000 is a higher number than $20,000. So if your only desire is to maximize GDP, you’ll pass laws to keep dealers in business — even if market forces dictate that direct sales are preferable, and that the resources spent on dealerships are best reallocated to different parts of the economy.

Ah, but it gets worse. As Zorach points out, GDP also increases when things are destroyed. Imagine a car accident. In its aftermath, GDP increases.

Between health insurance, car insurance, out of pocket expenses, a lot of money changes hands. . . . [T]he medical care, any car repair work, and new cars purchased, and any legal fees, is all included in GDP. Furthermore, the incremental rate by which everyone’s insurance premiums go up to pay for this accident results in more payments to insurance companies, which is also included in GDP. The net effect of the accident is to produce a substantial increase in GDP. Most alarmingly, the more destructive the accident, the greater the increase in GDP.

While it is necessary to have a section of the economy that deals with car accidents, we can all agree that it’s better for citizens when there are fewer car accidents. Yet more accidents equal a bigger economy.

Why is this a problem? Because when we analyze the economy, we’re doing so in order to create a better standard of living for consumers. But when your only incentive is to increase GDP, you don’t care whether eliminating the middleman benefits consumers (as in the first point above) or even your actions are destroying wealth (as in the second point above). All you care about is making people do busywork, even if it does not contribute to a net increase in people’s living conditions.

Do Keynesian economists recognize this fallacy? Nope, not even the Nobel prize winners. Paul Krugman believes that even pointless activity is a good thing, as long as it’s activity. For example, Krugman favorably cited this passage from Keynes in a 2008 blog post:

If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is.

Absurd. In a similar analogy, Krugman said that preparing for an invasion of space aliens would make the economy better off, even if the invasion turned out to be imagined:

If we discovered that, you know, space aliens were planning to attack and we needed a massive buildup to counter the space alien threat and really inflation and budget deficits took secondary place to that, this slump would be over in 18 months. And then if we discovered, oops, we made a mistake, there aren’t any aliens, we’d be better [off].

Ridiculous. As David McIlroy explains:

These people honestly believe that money spent — no matter why it’s spent or the effects of the spending — is the same as creating growth. They don’t understand that if the spending produces nothing of value, the amount of overall value in the economy is lowered and that the average standard of living must go down.

Krugman might tell you that having useless car dealers around would be good — if they would increase GDP. He might even tell you that car accidents are good — if they would increase GDP. He and the rest of the Keynesians think that any economic activity is good. They don’t care whether it makes your life better . . . or doesn’t.

And this has important real-life consequences, because Our Betters in Government listen to guys like this, and implement policies to further Krugman’s wrong-headed goals.

Now that you understand what is driving their warped thinking, you will be better prepared to spot the fallacies in these arguments.

Reject GDP as the be-all and end-all of economic analysis.

As I mentioned yesterday, I am spending time this week attacking GDP as the ultimate benchmark for measuring the strength of the economy. Yesterday, in Part One of the series, I noted that GDP includes government spending even though government spending does not necessarily benefit consumers.

Today, I want to address another problem with GDP: it overemphasizes consumer spending to the detriment of capital investment.

I am going to give you the same video I showed you yesterday, featuring Austrian economist Jeff Herbener, interviewed by Tom Woods. If you are short on time, skip to 4:55, where Prof. Herbener notes that GDP indicates only the value of the final goods and services produced.

GDP is generally defined as the market value of the final products of an economy, including goods and services. But GDP does not measure all economic production. There is an entire production process that goes into the production of any good, whether it be a consumer good or a capital good. This does not get included in the calculation.

For example, when a car is sold, the price of the car is included in GDP. Economists do not include, for example, the cost of the steps in the production process that provide the building blocks for the car — such as the mining of iron ore, the production of steel, or the machinery and computer modeling that serve to transform that steel into the skeleton of an automobile.

The reason is that the final price of the car is thought to represent the cost of all stages of production of the automobile, ideally together with a profit for the company. If one counted the value of the production process and the cost of the car, it is said, that would represent “double counting” of the costs of the production process.

That’s fine if your only goal is to learn the final value of the good. But leaving the production process out of the equation, and including only purchases of final goods and services, distorts the significance of the total. That’s because eliminating the work that goes into making the product gives an outsized significance to the act of purchasing that final product. As Professor Herbener has elsewhere explained:

If all one is interested in determining the the dollar value of all that has been produced in the economy, then, counting the steel, and other parts of the car along with the car would be double counting. But the dollar value of what has been produced in an economy is, perhaps, the least interesting thing we could know about it.

If we really want to understand an economy, we have to know how all the different resources people have get allocated into all the different production processes. The monetary value of all production tells us nothing about this.

. . . .

When we trace back the production of consumer goods to their sources, then, we see that the amount of demand entrepreneurs have for all the producer goods necessary to make some consumer good far outweigh the demand consumers have for it. In other words, the far greater portion of production in an economy is of producer goods, which is explained by entrepreneurial demands, which results in investment spending. Consumer demands and consumption spending are a far smaller portion of all demands and total spending and the production of consumer goods is a smaller portion of the production across the entire economy.

By excluding the cost of production processes from GDP, economists overemphasize the importance of consumer spending. Based on measures of GDP, we are told that consumer spending is 70% of the economy, and that investment is only 15% or even as little as 10%. But that is radically wrong. That may be true when it comes to the value of the final goods. But those goods did not come out of nowhere. They had to be produced.

Tom Woods recently interviewed an economist named Tim Delmastro who successfully lobbied the government to provide a number called “gross output.” This number measures spending at all stages of production — a concept central to Austrian economics. As Delmastro notes in the interview, the GDP number consists of consumer spending (70%) and government spending (20%) with business investment coming up as a distant third. This misleads people into thinking that increasing consumer spending is the most important thing to do in the economy. But when you measure “gross output” and get a more accurate picture of the economy, you learn that consumer spending is only about 30 to 40% of the economy, while business investment is actually over 50% of the economy. (The “gross output” number is actually quite poor under Obama, by the way. Shockingly.)

At 8:21 in the video below, Woods makes the killer point that drives this point home: we are always told we need more consumer spending. If we followed that advice and took it to its logical conclusion, everyone who receives money for a good or service should just go spend it on consumption. As Woods says:

But meanwhile, people are told, or are under the impression, that what we need is more consumer spending. Spend spend spend spend. But if we followed that advice . . . to a “T,” and everybody, as soon as he got money, just spent it on another consumer good . . . let’s say you buy ten gallons of milk from me, and I take that money and I buy a shirt, and the shirt guy buys a hat, and the hat guy buys a gallon of gas . . . then no wages get paid [and] all the production structure we just described grinds to a complete halt. But that would be Nirvana, because you have all the consumption you want!

Woo-hoo!

Tomorrow, in part three of the series, we identify the basic problem with GDP. Namely: it does not measure what we should be most interested in when we study economics: how to allocate scarce resources. See you then.

P.S. Once again: if you choose to sign up for Woods’s “Liberty Classroom” to learn more about concepts like this, please do so though this link. Do yourself a favor and at least check out Woods’s free samples to see what you think.