2016-02-05

The Macroeconomics Of Good Thing Vs. Bad Thing

In which I explore the idea that economic analysis sometimes involves non-economic value judgments that color our conclusions.

Consider this a thought experiment. I'm not going to stake my life on the ideas contained in this post. Instead, I'd like to explore these ideas conceptually, and test them for weak points. In this post I'd like to think up instances in which a decrease in GDP might not be a bad thing. Can it ever be the case?

War

Suppose the nation is under attack from a despotic regime. The war is winnable, but not without some level of increased military spending. We need to equip and mobilize the troops, carry out strikes, and win the war.

The populace is ready and willing to help, so when the government announces that it will finance its wartime operations with some combination of war bonds, tax increase, and deficit spending, no one objects. In the classic national income identity of Y = C + I + G + nX, G definitely goes up - way up. Let's assume that consumer spending doesn't increase and that any changes to I are net (i.e. businesses perfectly reallocate their investments from "business as usual" to "we're in a war" purposes). At the expense of some (sustainable) inflation, national income goes up, up, up.

In a short while, and at minimal loss of life, we win the war! The nation briefly celebrates and then gets set to settle back into a new peacetime normal. 

The government has many options here, but what they decide to do is return military spending to pre-war levels and demobilize the wartime aresenal, etc. Ceteris paribus, G decreases, C might temporarily increase in the jubilation of triumph, but in the long run it remains the same, and I is as unchanged coming out of the war as it was going into it. 

GDP decreases. Bad thing?

Peace

Alternatively, consider a situation not unlike what the United States experienced in the wake of the September 11 terrorist event. U.S. consumers are said to have gone on a "spending spree," presumably because the violence of the attacks shocked us into a state of living for today. You never know when something terrible is going to end everything, so let's buy houses and vacations and luxury goods and live like we enjoy it for a while. 

Ultimately, however, the spending spree must come to an end. Either the consumers become so indebted that they are no longer solvent, or they simply deplete their savings and must replenish them. We could call this a "consumer-driven Austrian bubble" scenario, where an unsustainable boom occurs (although not for reasons of government interference). 

In this scenario, the economy is going to slow down, and it's not going to feel good. But the boom we've just experienced wasn't a "new normal," it was a temporary lift. Like a positive shock.

Should this kind of GDP decrease be viewed as "bad?"

Additional Comments

In the traditional view of things, the "war" lift is viewed as being good (in a weird way, even though it was a war), while the "peace" lift is viewed as being not good. 

Part of the reason I think people hold this point of view is that, when we're under attack, we have little choice but to defend ourselves. So wartime spending is seen as something that needs to be done regardless of economic considerations. Since it results in GDP lift, we tend to think of it as being good because "we had to spend the money anyway - at least national income went up."

To be clear, I don't think anyone consciously thinks that, I just think that this might be a subconscious reason why people view wartime spending as economically good.

By contrast, the peacetime spending is always viewed as an unsustainable boom. Long-range forecasts aren't built to assume that this kind of bubble will last forever, analysts know that it will eventually come to an end. It's not a question of "if," but a question of "when." Unlike wartime spending, we can't subconsciously view it as a "sunk cost" or whatever. It's not something we were going to do anyway, it's something we suddenly decided to do for reasons that made sense at the time, but which will not make sense in the future. Or at least, those reasons will be seen as unsustainable. 

In short, the first scenario seems to make the best of a bad situation, while the second scenario seems to make a perfectly fine situation, if not worse, at least confounding of long-term business investments. 

So think about investment for a moment. Suppose astronomers identify an asteroid headed straight for us, but with sufficient lead time that governments and private businesses can invest in research, development, and production capacity for devices designed to save the world. Here again, what we're actually doing is saving the world. The fact that this spells an increase in investment, and therefore national income, is icing on the cake. What we really want is for the world to remain intact and free of astronomical collisions. 

But the investment occurred for unplanned, unsustainable reasons - like, suppose it just became popular for every business to have a small zoo in their offices, for reasons of employee satisfaction - then we'd obviously see this as wasteful and harmful to the economy. 

I guess what I'm saying is that, when it comes to economics, "good" and "bad" often refer not only to the impact of shocks on national income, but also our subjective judgments of the wisdom those shocks for non-economic reasons. There's a value judgment baked into it that doesn't have anything to do with economics.