Krugman: Don’t Rebuild — Reload

The first time I heard Paul Krugman talk about the “stimulating” effect of military spending on the economy, I was reminded of the slogan of my high school basketball team after our entire starting squad graduated: “We Don’t Rebuild — We Reload.” This seems to be Krugman’s theory in a nutshell. Instead of emphasizing the need to rebuild key industrial sectors, remove trade barriers, close the long-run fiscal gap, or stabilize the financial markets, he focuses–almost obsessively–on the need to “stimulate” the economy (as though the US economy was a sleeping hobo that needs to be prodded with a stick).

Almost every day on his blog, Krugman accuses his opponents of oversimplifying economics and paving over complexities in pursuit of ideological ends, while strenuously arguing that spending a metric-f*ckton of money on anything will end the recession, fix unemployment, solve our financial crisis, and decrease the deficit. When asked for empirical evidence for these dubious assertions, he gestures to a single data point: World War II.

This has led some libertarians to assert that Krugman is a war-monger, itching for an excuse to start a conflict. They correctly point out that the idea of war creating prosperity is merely the broken-window fallacy writ large, but I think that this is to largely miss Krugman’s point. He does not believe, as some have claimed, that destruction per se leads to growth, but rather that the massive mobilization of idle resources (like, say, labor) that is precipitated by war will lead to economic development by increasing aggregate demand, thus stimulating production and employment.

Krugman subscribes to the Keynesian explanation of economic stagnation, which states that depressions are caused by a “liquidity-trap,” where uncertain economic conditions lead to more saving than can be allocated through lending, causing a fall in demand, leading to a fall in output, leading to unemployment, causing more uncertainty, and so on. The solution to all this “leakage” is, in Krugman’s view, the insertion of massive fiscal stimulus by the government, which can mobilize these slack resources through taxation and borrowing, boosting demand, creating economic activity, pulling the sluggish economy out of its depressed state.

Rather than relying on the appropriating power of markets, which in this view fail in liquidity-trap conditions, fiscal policy can be intelligently guided to create demand when the private sector fails to deliver. War, of course, just happens to be the perfect government stimulus project, since it creates spending an order of magnitude or more greater than traditional infrastructure projects. Although death and destruction are unpleasant side-effects of war, economics, Krugman chides us, is not a morality play.

If this strikes you as simplistic, you’re right to be skeptical. Krugman is not calling for the destruction that is the output of war, but for the production that is its input. The problem is that the Keynesians’ focus on metrics like aggregate demand makes them lose sight of what is actually being demanded–and by who. The flaw in his theory is that, from the perspective of wealth creation, there is little difference between making tanks with your resources and just taking a pile money and burning it.

When Congress uses taxes to demand tanks and submarines, it will create employment, which is the metric most people are concerned about when it comes to economic health. What war preparation will not do is create wealth, since there is effectively zero private demand for cruise missiles and steal bombers. Economically speaking, the difference between manufacturing cars and manufacturing tanks is the difference between digging irrigation ditches and digging holes in order to fill them in: the two activities look similar, but functionally they are a world apart. Imitating production is not the same thing as producing–it is cargo cult economics.

In fact, war is actually much worse than traditional stimulus projects, like building roads, bridges, and dams, which have some economic benefit. There is no economic value generated by bombing a foreign country. The supposed upshot of war spending is that it tends to be massive, easy to pass, hard to oppose, and socially popular. Krugman believed that the $800 billion stimulus package should have been more than twice as big as it was, but that was politically impossible to sell. What, exactly, you may wonder, should the government have spent another $1 trillion on? Krugman’s answer is that it doesn’t matter, as long as it is spent.

He highlights the short term benefits workers will receive by getting paid, and stresses that waste or efficiency is irrelevant: the key to economic growth is not investment in productive enterprises, but spending. Economists used to say that you only needed to know two words to understand economics: supply and demand. In Krugman’s opinion, you only need one: stimulus. War is politically useful for generating the kinds of massive government outlays that are difficult to achieve in peacetime conditions. In his mind, war spending would be the shot of demand that would pull the US out of its liquidity-trap. Don’t rebuild–reload.