Paul Krugman apparently has either forgotten or has never bothered to read his Bastiat and, thus, falls prey to the broken windows theory. According to this theory, if a miscreant goes around town breaking windows, this will improve the economic activity in a society as people spend money to repair their windows. Instead, the miscreant does no such thing because he is, in fact, destroying wealth (i.e. accumulated assets) and thus forces people into doing something they otherwise would not do.
Don Boudreaux of Cafe Hayek catches Paul Krugman making the same mistake in arguing for "green" investments.
Here's a letter that I sent yesterday to the New York Times:
Paul Krugman makes the
astonishing claim that "a commitment to greenhouse gas reduction would,
in the short-to-medium run, have the same economic effects as a major
technological innovation: It would give businesses a reason to invest
in new equipment and facilities even in the face of excess capacity"
("An Affordable Salvation," May 1).
Technological innovations benefit society not by giving firms "a reason to invest in new equipment and facilities," but by reducing costs - not by making resources scarcer (by artificially increasing demands for them) but by making resources go farther in their capacity to satisfy human desires.
If "a reason to invest" were sufficient to restore economic vigor, then war and natural disasters would do the trick even better than would government restrictions on greenhouse-gas emissions.
Technological innovations benefit society not by giving firms "a reason to invest in new equipment and facilities," but by reducing costs - not by making resources scarcer (by artificially increasing demands for them) but by making resources go farther in their capacity to satisfy human desires.
If "a reason to invest" were sufficient to restore economic vigor, then war and natural disasters would do the trick even better than would government restrictions on greenhouse-gas emissions.