Spending Isn’t Production

A recent NYT column by Paul Krugman showcases exactly what is wrong with mainstream Keynesian economics. Krugman takes a JP Morgan note claiming that the iPhone 5 would boost economic growth, then concludes that the analysis proves that bigger government deficits are a good thing. As we’ll see, the only thing Krugman has proved is that he’s committed a basic error, in confusing actual economic growth with a mere statistical artifact.
Let’s first establish Krugman’s case. After telling his readers that analysts have suggested that the iPhone 5 might provide a “significant boost to the U.S. economy,” Krugman went on to argue:

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.
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A recent research note from JPMorgan argued that the new iPhone might add between a quarter- and a half-percentage point to G.D.P. growth in the last quarter of 2012.…
The crucial thing to understand here is that these likely short-run benefits from the new phone have almost nothing to do with how good it is—with how much it improves the quality of buyers’ lives or their productivity. Such effects will kick in only over the longer run. Instead, the reason JPMorgan believes that the iPhone 5 will boost the economy right away is simply that it will induce people to spend more.
And to believe that more spending will provide an economic boost, you have to believe—as you should—that demand, not supply, is what’s holding the economy back. We don’t have high unemployment because Americans don’t want to work, and we don’t have high unemployment because workers lack the right skills. Instead, willing and able workers can’t find jobs because employers can’t sell enough to justify hiring them. And the solution is to find some way to increase overall spending so that the nation can get back to work.

Read more: http://www.theamericanconservative.com/articles/spending-isnt-production/