Thursday, October 21, 2010

Keynes in Theory and Practice: Digging Holes

Keynes claimed it would be stimulative to tax or borrow money to pay people to dig ditches and fill them up again. Nothing is created, no one is better off for the labor, but there are incomes where there was unemployment and so multipliers kick in and growth happens.

Roberts is skeptical that WWII provides a good example of this:
Suppose the Federal Government in WWII decided to stay out of the war. Strict isolationism. But they decided to build the tanks and airplanes and bombs anyway. Instead of delivering those weapons to Europe and Pacific Fronts, they secretly blew them up at night and destroyed them. The people working in the factories never knew. ... The soldiers who would have fought in the war were given uniforms (and there were of course all kinds of factories making the uniforms, full of workers). They trained. But they never fought. ... So all the soldiers had jobs and the tank factories and bomb factories are full of workers, many of whom had been unemployed.
Full employment. 100%. Not just that. ... Not only are all the people who had been unemployed now working, but a lot of people, women for example, find it worthwhile to work. Lots of people have more money to spend than ever before.
So what would happen to the private sector of this economy? Would it grow or shrink? ... [I]t wouldn’t thrive. And it didn’t thrive in the 1940′s [which we can see because of the massive rationing and lack of consumer goods].
Newmark points out to an actual application of hole digging. We started building a super hadron collider larger than the one in Switzerland. Then in 1993
Well, what happened? Many things happened, but on the last day of hearings in Congress, one Congressman asked a physicist, "Are we going to find God with your machine? If so, I will vote for it." Well, the poor physicist didn't know what to say. So, he collected his thoughts and said, "We will find the Higgs Boson." Well, you could almost hear all the jaws hit the floor of the United States Congress. $11 billion for another ... sub-atomic particle. Well,
the role was taken a few days later and the machine was cancelled. Congress gave us $1 billion to dig this gigantic hole in the ground outside Dallas, they cancelled the machine, and they gave us a second billion dollars to fill up the hole. I can't think of anything more stupid than giving us $2 billion to dig a hole and to fill it up again. But hey, that's the government.
Yes, ex post, that was stupid. But I can think of something more stupid: spending $10 billion--$9 billion net--to finish a project if it had a marginal benefit of a lot less than $9 billion.
Has anyone looked at the stimulus effect of the project? Compared the "growth" from digging a hole and filling it to what else would/could have been done with the $2 billion?

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