Thursday, November 1, 2012

Don Boudreaux thinks it is misleading to point out that wealth, GDP, and well-being are not the same thing

No, I'm serious.

He quotes a passage where an economist explains the difference between these things and the implications of that difference for the economics of disasters and then he says that:

"For these business-economist sorts, then, to write that “The cleanup, repair and reconstruction of these damaged properties do add to GDP, however, and will likely provide a modest boost to economic growth in 2013″ misleads uninformed or careless thinkers and pundits - and, hence, misleads the general public - into believing that experts predict that hurricane Sandy will make our economic lives better than our economic lives would have been had Sandy instead headed harmlessly out to ocean."

Differentiating between wealth, welfare, and GDP is freshman economics class stuff.

Let's please dear God not call this "fancy" or "sophisticated". Please. Please don't pander like that. It is easily explained to college freshman. The bar is not high at all.

But when Don sees this explained again in the Wall Street Journal he considers the very act of explaining the difference (a difference we expect college freshman to digest with ease) to be "misleading".

There is only one reason why the public is "mislead" into thinking that there are lots of people out there who think that disasters improve our well-being. The only reason why anyone could be confused by that is because people like Don go around telling everybody that there's lots of people that think this.

David Henderson is apparently talking about this on Fox tonight - a major news network. Steve Horwitz is too, although he's talking about FEMA specifically. Please stop the misleading. People can understand that there's a difference between weatlh, welfare, and GDP. To make sure they understand, explain it to them David and Steve. Please don't try to convince them that there are lots of people out there who say that disasters are good for society.


  1. I think Boudreaux point is that there are three parts to the process. Initially we have a fall in GDP caused by the immediate aftermath of the storm, coupled with a fall in welfare. Then we have a rise in GDP caused by the rebuilding efforts, coupled with a fall in wealth because of the destruction of the storm. After that though we have a GDP that's permanently reduced from the trend it would have taken otherwise because of the destruction in capital due to the storm. Boudreaux's point is that the commentators have missed the third stage.

    1. I don't think that was his point at all. I think his point was that he was worried it would mislead people into thinking that "experts predict that hurricane Sandy will make our economic lives better than our economic lives would have been had Sandy instead headed harmlessly out to ocean".

      But nobody says anything like that and all you need to know nobody says anything like that is the difference between welfare and GDP.

      And that's a really easy difference to understand.

      It's not hard at all.

      And the people Don is referring to made a point of reminding everyone of that difference.

    2. Let's look at what Jan Hatzius from Goldman Sachs wrote. He says in parenthesis "(They are therefore a poor measure of the impact of a natural disaster on the nation's well-being)". This is an important point it deserves to be outside of parenthesis in my view, and in Don's too, Hatzius doesn't make "a point of reminding everyone of that difference" he skims over the difference, though the other economists quoted are much better.

      Hatzius then goes on to say "... the positive longer-term impact on the growth rate of activity will exceed the negative short-term impact". So, what he seems to be saying is that although they'll be some pain right now in the long term things will be better than they would have been. But that's misleading isn't it. After the initial rise in GDP there'll still be the capital loss to contend with, so GDP in 10 years time (for example) will be lower than it would have been. Hatzius doesn't mention this at all.

      Don then directly addresses this:
      "Therefore, even if 'the positive longer-term impact on the growth rate of activity will exceed the negative short-term impact,' no one should interpret this claim as predicting that hurricane Sandy’s destruction will prove in the long-run to be an economic boon to Americans. Our long-run standard of living might well be made lower by Sandy even though that hurricane unleashed forces that rev up the rate of measured economic activity."

      Now you could say that of-course the public are aware that capital or wealth is different from GDP so the public will easily realize this. But, it not everyone thinks that even among people who think a lot about economics. See my debate with Roman P in one of the older threads, for example:

  2. Yeah... I was a little taken aback by his article as well. I think, though, that it might come back to his high level of disdain for the general public. After all, his belief that the majority of people are willful idiots is a pretty constant theme in his writing. So in that context, what he's basically saying is that presenting subtlety to the general public when it comes to this argument is going to mislead those idiot rubes into believing something that wasn't said.

    It falls inline with his generally bullying nature, but the side effect here is that he's basically saying no one should ever attempt to enlighten the general public because they'd be too stupid to understand it anyway. (See? I can take an argument to an absurd conclusion too!)

    1. It is funny, isn't it, how Don oscillates between saying basic economics is either "man of the street reasoning" and unscientific and saying that it is super-sophisticated and so hard to understand that it's "misleading" to even present the argument, isn't it?

  3. Anything Boudreaux writes is useless. For example, he complains that the government prevents price gouging, showing he is totally out of his depth (and dishonest). The gov't prevents price gouging because there are values that trump profiteering.

    For example, both A and B must have gas to get to work. If not at work, either will be fired. In a emergency, why should A, with greater wealth, be able to buy gas and shift the loss of job to B? This creates an incentive for A to be concerned about emergencies in good times.

    In sum, Don is an ignorant ass.

    1. Ah, but you see, preventing price gouging means that you're not letting the magical pixie dust of the price mechanism control rationing in a completely fair way free of those evil government looters!

      Just once, I would like to see some subtlety in a post by Don Boudreaux. I see occasional glimpses of subtlety from some of the other guys at Cafe Hayek, but he seems to be especially prone to hyperbole and polemics.

    2. You are as bad as Daniel, wholly lacking in judgment. You are never going to see subtlety in a post by Don Boudreaux. He is a narcissistic greedy libertarian.

      In a very few sentences I have explained why Daniel ought to drop all association with Don, Austrians, etc., but he won't

      Further, my few sentences have added more insight than all the other comments I have ever read on this blog, but it won't get any respect from Daniel for he cannot admit just how wrong he happens to be.

      He needs to stop blogging and just start reading DeLong and a few others hoping that some judgment will rub off

  4. Also, I came across this story today, about a subway tunnel plug system that's under development... it's apparently getting a lot of attention all of a sudden because this kind of thing could help prevent future problems:

    So, let's say this new system gets a massive influx of funding because of Sandy. Let's say there's all manner of future upgrades to infrastructure that happen. No, it doesn't make the disaster "okay". People lost wealth. But I honestly do not see how someone could look at technological improvements like this plug system and say "nope, sorry, nothing good comes out of disasters, and frankly, anyone who says otherwise is a vulgar Keynesian".

  5. 'there are values that trump profiteering'

    So what? Who is proposing to ban charity or acts of kindness?If an even more effective mechanism is allowing prices to rise and increased supplies of goods to flow to where they are most urgently needed you're against it because.... it's morally distasteful to you?Seems like you're more worried about people making a profit in an emergency than people getting what relief they need

  6. I have to agree with John P and not Dave Churvis on price gouging.

    I could imagine weird exceptions - if lives were at stake and someone truly couldn't pay. Then you ration. But we're talking about water, gas, things like that. The major concern in these cases for me is not that someone will be unable to pay, it's that someone who comes earlier will buy up all the supplies. I'm very amenable to "five per household" type rules - much more so than restrictions on price gouging. Raising prices signals where more supplies need to go, and compensates for the very real risk that suppliers face.

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    2. Daniel,

      You miss the main points, which are two

      1) Where there is no vision, the people perish. A society where there is profiteering in a emergency lacks vision and is driving itself toward being amoral.

      2) If you create the expectation that the rich will be able to buy their way out of an emergency, then you give them an incentive not to participate in per-emergency efforts. "If we are all in this together" will get a different out come than, I can buy the food and water I need, regardless of how high prices go.

      IOW, yet another clear case of your showing lack of judgment, altitude, and perspective

  7. John and Daniel,

    You both make very good points. To be honest, I go back and forth on this kind of thing - on the one hand, I really don't like the idea of someone taking advantage of someone in distress, but on the other hand, the price mechanism exists specifically to manage the allocation of resources. I think Daniel's point about "five per household" restrictions is important: I suppose a consumption quota would be much more effective than a price floor in this situation.


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