In his latest column, Paul Krugman talks about the Apple iPhone 5 and argues that its sales will add measurably to economic growth, and draws the further conclusion that the government should spend more. He asks:
Do you find this plausible? If so, I have news for you: you are, whether you know it or not, a Keynesian — and you have implicitly accepted the case that the government should spend more, not less, in a depressed economy.
Well, no, I don’t find it plausible, but let’s set that aside for now and come back to it later and first continue to examine his argument, which is that the iPhone 5 will boost the economy simply because it will induce people to spend more. And then he comes to this:
Yet depressions do end, eventually, even without government policies to get the economy out of this trap. Why? Long ago, John Maynard Keynes suggested that the answer was “use, decay, and obsolescence”: even in a depressed economy, at some point businesses will start replacing equipment, either because the stuff they have has worn out, or because much better stuff has come along; and, once they start doing that, the economy perks up. Sure enough, that’s what Apple is doing. It’s bringing on the obsolescence. Good.
So if “obsolescence” is “Good”, then why don’t companies like Apple just design their products to fail after a certain time? And then people will have to go out and buy more of them again, which will help the economy! It’s funny, I’ve owned several iPods and that’s pretty much what happens with them. The batteries wear out over time and for the cost of sending it in to get it replaced, it just makes more sense to upgrade to the latest model. Does Apple design its products that way on purpose? After all, even if it can’t design a battery to last the lifetime of the product, it could design it so you could just easily open the thing up and replace just the battery instead of the whole thing. So is this planned obsolescence?
And, if we follow Krugman’s argument through to its logical conclusion, wouldn’t planned obsolescence be “Good” for the economy? Conversely, if a company was to produce light bulbs that lasted a lifetime, so that you never had to replace them, that would be bad for the economy because people wouldn’t have to go out and spend more money to replace their bulbs regularly? Doesn’t this mean that if we could all own homes and furniture and electronic goods and cars and appliances, etc., that lasted a lifetime and never needed maintenance or replacing, that must mean the economy would be in a very sorry state, since there would obviously be so little spending since there was no need?
Wouldn’t it follow from Krugman’s logic that if computer companies deliberately designed computers to fail after only a month or so of use, so that every month people had to go out and buy a new computer to replace their obsolete model from the previous month, then that would be “Good” for the economy because it would mean people would be spending more? In fact, if obsolescence is so good for the economy, why don’t we just design everything to fail after a short time? We could manufacture cars to expire after you drive them 10,000 miles! What a tremendous boost to the economy it would be if everyone had to buy a new car every single year! Think of all that spending!
But, now, hang on just a minute here…. Where would the money come from for all this spending? And what about the vastly greater resources that would be required to constantly replace everything we buy on a regular basis because it becomes “obsolete” quickly and relegated to the trash bin? Don’t we live on a planet with finite resources? And because of the scarcity of resources, wouldn’t real economic growth come from efficiently directing resources to the most productive ends? And wouldn’t planned obsolescence mean resources are just being directed wastefully?
Hmm…. Let’s think this through a bit more. Can it really be true that economic growth comes from people spending money? Doesn’t growth actually come from people deferring spending and saving so that capital is available to invest in capital goods and such in order to advance productive capacity and more efficiently produce better consumer goods at lower costs in order to meet the demand for them? Isn’t it really saving, then, and not spending that drives economic growth?
Hmm… And shouldn’t we measure economic growth not in terms of how much everybody in a society spends money, but in terms of what quality of life people in a society have? And wouldn’t having to spend more money just to replace goods all the time be wasteful and lower everyone’s standard of living since it would mean scarce resources aren’t directed to the most productive ends and people wouldn’t be saving to invest capital into effecting more efficient means of production to produce better goods for lower cost, rather than cheap crap needing constant replacing for higher total cost to consumers? If nobody ever had to replace another light bulb in their house, wouldn’t that just mean all that money could be saved and capital made available to focus on similarly improving other goods to make our lives better, as well? If everyone actually had to spend very little money to maintain a very high standard of living in a particular year, wouldn’t that by definition, mean the economy was doing very well; and yet, under Krugman’s paradigm, wouldn’t that mean, by definition, that the economy had done very poorly that year? Does Krugman’s argument make any sense at all?
Let’s go back to Krugman’s argument. It’s worth repeating:
[E]ven in a depressed economy, at some point businesses will start replacing equipment, either because the stuff they have has worn out, or because much better stuff has come along; and, once they start doing that, the economy perks up. Sure enough, that’s what Apple is doing. It’s bringing on the obsolescence. Good.
So Krugman sees how investment in capital goods leads to economic growth. But he doesn’t attribute that growth to people having created capital to invest in those capital goods by saving, by deferring consumption. He doesn’t even consider where companies get capital to invest in this manner at all; the only thing he sees is that people then go out and buy the resulting new products, and he thinks that is the point in the process where the economic growth comes from. He doesn’t consider where people get money to buy these new products, such as whether they are just racking up credit card debt; he just defines any and all spending as “growth”.
But why suffer through years of depressed output and high unemployment while waiting for enough obsolescence to accumulate? Why not have the government step in and spend more, say on education and infrastructure, to help the economy through its rough patch? Don’t say that the government can’t add to total spending, or that government spending can’t create jobs. If you believe that the iPhone 5 can give the economy a lift, you’ve already conceded both that the total amount of spending in the economy isn’t a fixed number and that more spending is what we need. And there’s no reason this spending has to be private.
Hmm… But where will the government get the money from to spend?
Taxes? Then that means the assumption is that government bureaucrats know better than you do how best to spend your money, and that politicians in Washington know better than the free market how to most efficiently direct scarce resources to the most productive ends. Is that really a reasonable assumption?
Borrowing, maybe? But isn’t it plain nonsense to count government spending as “growth” when it means the the accumulation of even greater debt?
Printing money? But can wealth really come from a printing press? Doesn’t inflation and artificially low interest rates just mean people lose their purchasing power, savers are punished, and people are incentivized to borrow and spend more, which in turn just means more debt and less capital available to invest, which in turn has a detrimental effect on economic growth?
My final question: Should we really be listening to the guy who advocated that the Federal Reserve create a housing bubble to replace the dot-com bubble for advice on how to get out of the mess the policies he advocated created in the first place?
Read more about Krugman’s abysmal record in my book Ron Paul vs. Paul Krugman: Austrian vs. Keynesian economics in the financial crisis.