Wednesday, October 31, 2012

If you think a professor at a top-tier university said something ridiculous, sometimes the best thing to do is email him

Shared here with permission. This took about two minutes of my morning.

"Hi Professor Morici -
I'm an economics doctoral student at American University, and I've recently been involved in some discussions around the economic effects of disasters. I was wondering if you could clarify a point you were making at Philly.com. My understanding of the economics of natural disasters is that as long as they don't severely damage the capital stock or introduce some other strong negative shock, they tend to have a positive effect on GDP, especially at a time when factors of production are underutilized. As you point out in your article, you also don't usually rebuild the same structures that you had before; you produce better structures. But that doesn't imply, of course, that society is wealthier as a result of a disaster. Wealth is destroyed by the hurricane, and some of the resources used to rebuild come out of society's wealth, so there is no reason to think society is wealthier even thought the capital stock may be much improved qualitatively and GDP gets a boost.

Is that a good summary of your opinion on the issue?

Thanks
Daniel Kuehn"

*****

[Emphasis is mine]

"Wealth is a stock, income (GDP) is a flow.

Merely rebuilding as before would leave the society less wealthy--wealth would be reduced by the size of the damage. Rebuilding better would mitigate some of that effect, but not necessarily all--likely not. Economic activity (GDP) is initially depressed by the storm but then boosted, and will likely be higher several quarters from now.

Peter Morici
Professor Department of Logistics, Business and Public Policy
Robert H. Smith School of Business
3413 Van Munching Hall
University of Maryland College Park, MD 20742-1815"

*****

I was thinking a little about "likely not" vs. "never". I suppose you could imagine some extremely advanced innovations that had never actually been build because existing infrastructure was decent enough. With the opportunity to apply those innovations, scale economies would kick in and we'd be living in some fantastic world that would have taken decades to emerge otherwise. It's the basic idea of leap-frogging. It's possible, I guess, but as Morici says "likely not".

Anyway, this seems to squarely confirm my read and not Don and Bob's read of Morici.

19 comments:

  1. have you ever sat down and tried to tally how much of your time is spent writing about economics versus writing about other economists?

    it would be an interesting exercise.

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    1. I don't think I really write about other economists except to write about their ideas on economics.

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    2. And please don't comment anonymously.

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  2. That's kind of what I'm getting at. Half your blog posts lately could fall under the category "What Liberal Economist X really meant when he said...".

    I guess if you think it is fun to write those sorts of posts, more power to you. I know I would get bored.

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    1. I like to get back to substantive - rather than imagined - differences, yes.

      I find the imagined differences boring, personally.

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    2. None of this has to do with my post and you're still commenting anonymously. If there's any more of this I'm going to delete the whole thread. Can we try to stay on topic?

      One would think the people weeping and gnashing their teeth over Morici would be interested in his clarification. Let's focus on that.

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  3. Daniel,

    I think you are making a good point here, but I wonder if it's not lost on the target audience or, for that matter, who that target audience could consist of. Ever since the sh*itstorm when this idiot set up a fake Krugman twitter account to tweet how it would have been a good thing if the catastrophe in Japan had been more severe, anybody willing to listen or read words must have gotten the point. And for Boudreaux: an economics professor who makes fun about the distinction between stocks and flows is arguing in bad faith and I somehow cannot imagine that people who think that he does valuable work in communicating economic ideas are willing to listen what you have to say. It's a closed universe.

    But I might well be a pessimist and the continuous effort is necessary. Here is Matthew Yglesias making a related point again, too:

    http://www.slate.com/blogs/moneybox/2012/10/29/hurricanes_and_gdp_at_the_zero_bound.html

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  4. Daniel, obviously he confirmed what you said about his position, so I won't be churlish and say, "No he doesn't really mean that." But allow me to at least say that he is using "wealth" in a different sense from what I was. He wrote:

    "Merely rebuilding as before would leave the society less wealthy--wealth would be reduced by the size of the damage."

    That makes no sense to me. If we originally had 1000 cranes of a certain quality, then storm destroyed 100 of them, and then we "merely rebuild" 100 cranes of the same quality, then to me that says we are exactly as wealthy as before--we have 1000 cranes of a certain quality. How do you interpret what he is saying here? There's no way I can point to something that shows our net loss and make it equal to the "size of the damage," not even if he's treating our forfeited leisure as a stock variable (somehow).

    Do you get what I'm saying here? I don't expect you to say "Oh OK you were right Bob," but do you see how my understanding of what we mean by "wealth" doesn't line up with his response to you?

    ReplyDelete
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    1. re: "If we originally had 1000 cranes of a certain quality, then storm destroyed 100 of them, and then we "merely rebuild" 100 cranes of the same quality, then to me that says we are exactly as wealthy as before--we have 1000 cranes of a certain quality."

      But cranes don't grow on trees. There's an opportunity cost of some sort. You either crowd out something else that would have been built or you spend down wealth. If you rebuild exactly the same cranes you are less wealthy as a result, not just as wealthy.

      I get the impression my view lines up with his, so maybe your view doesn't line up with mine.

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    2. Bob,

      I don't understand you here. Over on your own blog you were just saying how this sort of replacement diminishes the stock of capital goods.

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    3. I should clarify (and maybe this is what you mean): given the disaster, spending on cranes does not make you "less wealthy". It just turns one kind of wealth into another. Is that what you mean? But the disaster itself has clearly made you less wealthy, even if you rebuild all 100 cranes. I'd agree with that if that's what you mean.

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  5. "Rebuilding better would mitigate some of that effect, but not necessarily all--likely not."

    It's really very unlikely that it would be higher. The "leap-frogging" that Daniel discusses would have to be so beneficial as to fully counteract the consumption of existing capital used in rebuilding.

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  6. Daniel and Current: I'm not trying to be a jerk here. I really want to understand Morici's position. Daniel, you basically just answered me by saying that there is crowding out.

    OK, but the Keynesian (and yes it's a Keynesian perspective) response to libertarians on this stuff, is that we are idiots for assuming full employment. In a situation of idle resources, there isn't crowding out.

    So, when we find ourselves at 900 cranes and 10% unemployment, those unemployed people could crank out 100 cranes without reducing the output in other lines.

    Obviously in reality there will always be some crowding out. But that means the "naive" libertarian assumption isn't so bad after all.

    Do you get what I'm saying? If we take the two extremes as complete crowding out (associated with vulgar Austrians) and extreme crowding in (associated with vulgar Keynesians) then the storm would be a total loss from the Austrian perspective, and a total break-even from the Keynesian perspective, in terms of physical wealth. Plus, as an added kick for the Keynesians, it would have restored full employment so the recession is over, going forward.

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    1. Well there isn't as much crowding out. I don't know if there "isn't crowding out". I don't know about "idiots", but full employment does seem like a silly assumption right now, doesn't it?

      I feel like I may still be missing something. If we start from full employment, and ignore these leap-frogging effects (which when we're talking about some infrastructure probably are real - but won't make up for all the losses), we can figure there will be complete crowding out and something won't be built because all that stuff had to be rebuilt.

      It seems very reasonable to me to point out that in today's economy that is not as much of a worry.

      Even in a full employment economy, I'm guessing you'd get a GDP boost, it will just be at the expense of some capital consumption, and so impose other "unseen" costs.

      I really don't see this as a Keynesians vs. Bastiat argument. I see myself as arguing Bastiat's position, augmented by some Keynes. I think a lot of the confusion comes up because people think we're arguing that Bastiat was talking complete nonsense or that we ignore opportunity cost or something like that.

      In terms of your "extreme positions" that still doesn't sound right with Keynesians. It's still a total loss, even if we assume complete crowding in, right? People are still losing wealth from the storm. The crowding in point is simply pointing out that the opportunity cost of rebuilding may be lower when the economy is weak. Think of what a Keynesian would say would happen if for some reason people didn't rebuild: you'd lose 20 billion in buildings and then continue to sit on 20 billion in cash that you could have used to rebuild. So you lost 20 billion in wealth. We assume people will rebuild though. So in that case you'd lose 20 billion in buildings and then use 20 billion in cash to pay idle resources to rebuild. So you get a GDP boost but you still lost 20 billion from the storm. You've just turned 20 billion in idle cash into a 20 billion dollar building.

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  7. I have been reconsidering this and changing my mind about it. Disequilibrium can be so great that the losses due to destruction can be less than those due to it, and while there may be transitory effects on wealth, the result of restoration of equilibrium on wealth can quite quickly exceed this, whereas to remain in disequilibrium can result in stagnation and continued loss of income making us poorer. The thing to remember is our greatest asset of wealth is in human capital and when left to disuse, wastes away. Thus I have come to the conclusion WWII actually did enrich us, as startling as that idea can be.

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    1. This is similar to what Yglesias was saying, I think.

      I don't think it's obviously wrong, but I think it's very speculative. There's enough work just to get people to understand Bastiat and Keynes without having them accuse us of "celebrating" disaster. That's hard enough. I'm not prepared to explore this possibility myself - that sounds a lot harder to argue.

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    2. Thank you "Lord" for having the courage to come out and say that. I don't see why Yglesias and Daniel are running from this. It seems to me they could come back like this:

      "Yes if we were at full employment then the hurricane would be bad. But we're not. And you Dark Age economists are giving such awful policy advice, that the status quo under your recommendations would actually leave us worse off than what will happen with this hurricane. It's not that the hurricane is better than optimal policy, it's that the hurricane is better than what we'd get with your awful policies."

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  8. Hmmm. He does not address the question of a suboptimal equilibrium. Could the boost of rebuilding provide an escape? (Isn't that the main point of saying that WWII got us out of the Great Depression?)

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  9. http://www.youtube.com/watch?v=75oeOblJPQw At 2:16, Boudreaux gives Morici an out that he took in the e-mail above. Morici could have said: "You're right, overall the economy is poorer, but I'm just pointing out some of the good things that can happen". He didn't, he kept rambling on. He's not even that clear in the e-mail above, he still leaves open the possibility that overall the disaster can be a net positive. Either he's saying 1) the disaster is overall a net positive or 2) the disaster is overall a net negative but the rebuilding process helps mitigate it. 1) is precisely what you're taking pains to prove he hasn't said, and 2) is terribly obvious. So what's the point? Nuclear disasters are really bad for countries, but some hazardous waste material companies benefit. Cool, now someone publish me in a local paper.

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