Tuesday, June 15, 2010

Chumming the waters for confused devotees of Bastiat

This should produce quite a few confused blog posts. My bet is Cafe Hayek will be first.

This is actually a tough article to parse in terms of its economics. It only discusses flows, not stocks, until the last paragraph where it discusses economic damages (which presumably include stocks as well). But it also gets into employment. Employment is tricky because you have to consider the counterfactual: where would these people be employed otherwise? Just because the clean-up creates X jobs doesn't mean that the economy adds X jobs. There's nothing inaccurate about the statement, but it's just something to keep in mind. Since there's a lot of excess labor, the impact probably will be positive for the entire economy. The statements about GDP, though, are unambiguous. Some production will be displaced by the clean-up, but that is already taken into account in GDP forecasts (otherwise it wouldn't be a GDP forecast!). This is also why people are wrong when they criticize forecasts of the impact of the stimulus on GDP as not considering the "seen and unseen". It does. Multiplier estimates are produced by comparing to a counterfactual, and therefore already nets out the production that is displaced by stimulus. The estimate may be inaccurate, but it does incorporate concerns about what has been called "the seen and the unseen".

For a review of why I think a lot of people are going to get confused about this WSJ article, see my recent post on Bastiat.

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