Paul Krugman and Keynesian theory got one thing right about hurricane Irma, but it’s not what you think

To paraphrase a Louis CK comedy bit, let’s assume you were a billionaire. You decide to buy all the pants in the world, and then just burn them. Does this have a positive impact on the economy?

Let’s assume you spent $1 billion to buy all the pants. This represents $1 billion of savings, or stated differently, $1 billion in goods and services produced in the past to be bartered later for all the pants in the world.

Now you just burned all those pants. You just destroyed the equivalent of $1 billion of goods and services already produced.

Somehow Keynesian economists like Paul Krugman believe that the new lack of pants will stimulate the economy beyond the $1 billion loss. The demand for pants is high and the supply is zero, so this should create jobs for pants-makers.

Would it not be better to have the extra $1 billion to invest in new innovative pants while keeping the old? Or just be happy with the old pants and invest in other sectors where supply does not keep up with demand, thereby creating jobs in those sectors and advancing civilization as a whole?

Now replace pants with everything and you with hurricane Irma and it is obvious that natural disasters and other forms of destruction are a net negative on the economy. Keynesian economists like to think otherwise and fallaciously emphasize that natural disasters are positive economic stimuli.

Because society doesn’t push back on faulty Keynesian theory and continues to be taught in academia, it gives the Keynesian economists at the central banks the power to inject artificial stimulus through lending and low interest rates. Decreasing supply (such as the aftermath of natural disasters) and artificially increasing demand (such as increased money supply through central banks) are two sides of the same economically destructive coin. Both are putting society in an immediate deficit, like burning $1 billion worth of pants or issuing $1 billion of debt for which no goods or services have been produced yet.  In either scenario there is no guarantee the $1 billion will be made back and we’d be better off without the deficit at all.

The one thing Krugman and Keynesian economists get right is that it will create more clean-up jobs in the short term. It’s like putting off cleaning the garage until something terrible happens to it, like a fire. Your time could have been spent elsewhere more productively but now you must devote more resources to it when it became a necessity. It went from a 90 minute chore to a one-month multi-thousand dollar renovation. But the fire created lots of (unnecessary) work, and finally made you clean up the garage, right?

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