Here we go again…. I just posted about the broken window fallacy on Saturday, and here comes Eric Zencey writing in the NY Times trying to claim that “If you get into a fender-bender and have your car fixed, G.D.P. goes up” and that “Hurricane Katrina produced something like $82 billion in damages in New Orleans, and as the destruction there is remedied, G.D.P. goes up.”
According to the blurb at the end of the article, Eric Zencey is “a professor of historical and political studies at Empire State College”. Now I don’t know where Empire State College is (I’m guessing New York) or what it may have as a claim to fame, but basic economics – or common sense – evidently isn’t a prerequisite in order to be a professor at the institution.
According to Mr. Zencey “If you get into a fender-bender and have your car fixed, G.D.P. goes up.” The only way that makes sense is to assume that the person who got the bent fender just happened to have the money to repair that fender lying around. And by “lying around” I mean that literally.
If it happens to be invested in company stock, it’s already in the GDP. If it happens to be in the bank in a savings account, it’s already part of the GDP. Only if it’s in a mason jar buried in your backyard (or the equivalent) could the money you spent repairing a fender be included in the GDP. Here’s why.
From Wikipedia – The GDP is calculated as: GDP = private consumption + gross investment + government spending + (exports − imports)
The money to fix the fender HAS to come from somewhere. Let’s say it cost $1000 to fix. If that $1000 came from your savings account, it decreases the investment amount by $1000 and the net change to the GDP is zero.
Does this change if you have insurance and the insurance company pays to repair your fender? No. Where did they get the money? It was invested – insurance companies call the money you’ve paid them (but that they haven’t yet had to pay out) “float” and Warren Buffett got to be a billionaire by investing that float in places other than your fender. All his billions are invested somewhere, so when Geico pays to fix your fender, it’s still subtracting from the overall investment total. The NET EFFECT IS ZERO.
The same is true if the government spends more money with a “stimulus package”. The only way GDP can increase via government spending is if the money didn’t come from another category. But government money comes from higher taxes – which reduces the “private consumption” part of the equation – or it can come from borrowed money, which reduces the “gross investment” and/or increases the “import” (depending on where you borrow the money from) part of the equation.
Government spending only appears to increase GDP if it was previously collected but not spent. In that case it transferred the spending from one time frame to another. Government spending can increase the current GDP only at the expense of decreasing the GDP at another time. If the government spent money it had saved, it decreased the earlier GDP. It the government borrowed money and spent it, it’s decreasing future GDP. This ain’t rocket surgery.
Money was simply moved from an investment where (it hopefully) could be used to create something valuable – to somewhere where it HAD to be used in order to repair an asset which had already been purchased.
It’s a bit crass, but think of it this way – if destroying an asset (via fender bender or hurricane or earthquake or nuclear war or whatever) CREATED wealth, here’s a solution to all our problems.
Why wouldn’t that work? Got an answer for that Professor Zencey?
Cash for clunkers is the same concept. Taking money from one part of the economy and spending it in a different part has a net effect of ZERO. It may appear that you’ve got a bump in GDP for awhile, but that’s simply because you haven’t had time to see the effect of the loss in the other area. Every government dollar spent buying a clunker is a dollar that isn’t spent providing health care, or building bridges or highways, or defending the country, or building a subway, or whatever you think the government should be spending money on.
The net effect is still zero, because every dollar the government spends has to come from somewhere – and “somewhere” means taxpayers. And that’s why government spending (unless it’s from unspent tax surpluses of which the US has none) doesn’t actually do anything.