Economy

War is Bad for the Economy

It seems to be common knowledge that war is good for the economy. After all, following World War II the US was no longer in a recession. However, this view is false. War is actually bad for the economy. The reasons that destruction is bad for the economy is explained in Economist Claude Frédéric Bastiat’s broken window fallacy. The broken window fallacy explains that destruction does not benefit the economy. Bastiat explains this by providing the example of someone breaking a window.

An excerpt from Bastiat’s work “That Which Is Seen, and That Which Is Not Seen:”

Have you ever witnessed the anger of the good shopkeeper, James B., when his careless son happened to break a square of glass? If you have been present at such a scene, you will most assuredly bear witness to the fact, that every one of the spectators, were there even thirty of them, by common consent apparently, offered the unfortunate owner this invariable consolation: “It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?

The spectators in Bastiat’s example are explaining that the shopkeeper’s broken window provides the glazier with an increase in income. The spectators believe that this increase in income benefits society. Bastiat goes onto explain that the spectators are ignoring the fact that the broken window causes the shopkeeper to lose money. What results from the broken window is an exchange of money between the shopkeeper and the glazier, as a result, society is no better off with the broken window. Society is actually worse off since the window lost value.

The belief that war is good for the economy is another version of the broken window fallacy. How can deaths of thousands of people and the destruction of infrastructure be good for the economy? It isn’t good for the economy. During wartime, the economy loses labor, resources, and infrastructure. These losses can never be recuperated.

When looked at from a global perspective, war in one country means that the global economy will be working less efficiently. While one country may experience a boom after war, another country will be experiencing the impacts of destroyed infrastructure and resources. In fact, all countries that were involved in war will at least have to deal with the impact of the loss of labor. Additionally, during wartime economies shift towards producing more wartime materials that do not promote economic well being, such as weapons. As a result, resources that could have been used to promote well being are wasted on the production of wartime materials. As Bastiat would say “if that which is not seen is taken into consideration,” then war would obviously be considered bad for the economy.

Image Source: Life Magazine

Climate Change Will Devastate The Global Economy

On September 27, 2016 a devastating typhoon caused Taiwanese highways, schools, and stock and foreign exchange markets to close. Taiwanese news agency Focus Taiwan, has explained that the Typhoon’s wind speeds reached up to 191 kph. This storm exemplifies the terrible consequences of climate change. In fact, climate change has caused tropical cyclones to increase in intensity for over the last 40 years. However, increasing world temperature not only affects weather patterns, it also affects the global economy.

The main problem that climate change creates in the world economy is the loss of resources. Due to climate change, sea levels are rising and the amount of flood, droughts, and wildfires are increasing. Wildfires have steadily increased in frequency and duration since the 1980s. Sea levels are rising at higher rates, 1.2 inches per decade. Rainfalls are much more intense than they were 50 years ago. And droughts have increased in length and extremity since the 1970s.

As storms, wildfires, floods, and droughts increase, highways, schools, and financial markets will be shut down more often and infrastructure will be damaged. This will result in the loss of time and productivity. Investment in certain areas will also decrease due to the perceived risk in areas that are severely impacted by climate change. This loss in investor confidence could even lead to more problems in the economy, such as more economic shocks.

But is it all really doom and gloom? Is there a way to reverse the deleterious effects of climate change? Well, unfortunately, no. There isn’t a way to reverse the effects of climate change. However, we can stop it from getting even worse by making greater efforts to lower our use of oil and other materials that hurt the environment. Companies could also participate in agreements to lower pollution, such as cap and trade and other market based approaches to improving the environment.

Image Source: The Daily Conversation

Why Does North Korea Isolate Itself?

Due to North Korea’s isolationism the world doesn’t know much about the country, however we do know a little about North Korea’s economy. The North Korean economy is rife with problems, such as the misallocation of resources and a reliance on”emergency” international relief. Many of the state’s citizens are also malnourished and the nation operates under total government control. Nearly every aspect of the North Korean economy is state owned, including property, domestically produced goods, imports, and exports.

North Korea’s government sets all production levels and nearly all of the state’s GDP comes from state owned businesses. The state’s resources are further drained by the country’s songun policy. Songun policy holds that the military is the first and most important part of the state. This policy leads to the issue of resources being drained by the military. North Koreans do not have any say in changing the government’s policies because there are only two groups in the state that hold any power, the Worker’s Party and the Korean People’s Army, while all being under the ultimate control and power of the totalitarian leader Kim Jong Un.

An examination of North Korea’s command and control economy easily reveals why the nation has difficulty feeding its own citizens. Setting production levels instead of using a free market that sets its own levels of production based on demand has led to the misallocation of resources. This missallocation of resources combined with North Korea’s songun policy has led to a decrease in the production of food and other goods and services that people in other states take for granted.

Many of North Korea’s problems also come from the state’s decision to isolate itself. For example, North Korea’s isolationism means that the nation can’t trade with most other states. As a result, North Korea can’t take advantage of the economic benefits that come with free trade, such as decreased prices of goods and services. This leads to the question of why would a state choose to shut itself off from the rest of the world during today’s time of increasing globalization. Much of this deals with Kim Jong Un and the state’s ruling Worker’s Party.

While members of the ruling Worker’s Party may have a privileged position in North Korean society, they are unlikely to promote change in North Korea due to fear of Kim Jong Un. Much like his father, Kim Jong Un keeps North Korea under tight control. In fact, during 2014 Kim Jong Un ordered the killing of 10 senior Worker’s Party officials. The Kim family’s historically tight control over the North Korean population shows that many of the state’s problems are largely a result of the Kim family’s leadership. That’s not to say that if Kim Jong Un came out of power that anyone better than him would take his place. Someone outside of the Kim family may be just as bad or worse than Kim Jong Un. However, the Kim family’s psychology is a great factor in the state’s poor performance.

When we look at Kim Jong Un and his fathers we can see that they all conducted similar activities and likely shared similar traits. They all conducted purges in order to kill anyone they suspected of being a potential rival or threat. Sometimes they even claimed that the victims of their purges were foreign spies. The Kim family also pushes a propagandistic ideology that peddles the narrative that the Kim family is divine. From looking at the purges and the North Korean ideology, one can see that historically the Kim family has been insecure and has felt a need to be worshiped. While in an average individual insecurity and the longing to be worshiped have a small impact on society, when manifested in individuals that have large amounts of power this can have a huge impact on a nation and can create terrible problems that are incredibly hard to solve.

Image Source: CNN

Oil Prices and the Global Economy

The European Central Bank provided some interesting information about today’s oil prices and the global economy. The report basically explains that low oil prices may not be positively effecting the global economy because oil prices have been driven lower due to a decrease in demand rather than a decrease in supply.

During the beginning of 2015, oil prices were decreasing due to decreases in supply. It was predicted that a supply driven decrease in oil prices would positively effect the global economy. However, in late 2015 oil prices fell due to decreased demand. Simulations have suggested that demand driven decreases in oil prices negatively effect the global economy. For example, it is estimated that a 10% supply driven fall in oil prices increase world GDP by 0.1% to 0.2%. On the other hand, a 10% demand driven fall in oil prices decrease world GDP by more than 0.2%. Simulations also suggest that the impact of both of these forces in one year would cancel each other out and result in nearly a zero percentage effect on GDP.

While world GDP may not be positively effected by demand driven decreases in oil prices, these lower oil prices do benefit oil importing states, such as the US. However, the benefit has been small and has not outweighed the negatives that are brought onto the world economy. These negatives include oil exporting states experiencing significant declines in GDP growth and currency depreciation. These problems faced by oil exporting states cause spill over effects that impact trading partners and global economic activity [1].

When viewed from a macro perspective, the current decrease in the price of oil is not good. A demand driven decrease in oil prices means that the economies of oil producing states are not growing as quickly. As a result, the world economy suffers. The following charts provide further information about oil exporting states, GDP growth, and oil prices.

ECB_Pic

Read the European Central Bank’s report: ECB_Economic_Bulletin

The Danger in Trump’s Trade Proposals

Are Donald Trump’s international trade proposals really that bad? Yes, yes they are. Let’s take a look at a few of Donald Trump’s international trade proposals.

  1. 20% tax on imports
  2. 15% tax for outsourcing jobs
  3. Donald Trump appointing himself as the United States Trade Representative

20% tax on imports
A 20% tax on imports is a tariff. Tariffs may sound like they would protect American jobs and industries, but tariffs are actually harmful. High tariffs decrease foreign competition and protect inefficient industries which leads to industries becoming even more inefficient. This means that tariffs basically bail out inefficient industries. This bail out is paid by Americans through the increased costs of goods and services. The increased costs of goods and services could lead to a decrease in the demand of goods which could cause people to lose their jobs.

15% tax for outsourcing jobs
A 15% tax on companies that outsource jobs may sound like a good idea. After all, it would help to ensure that people don’t lose their jobs to outsourcing. However, this tax would have effects similar to a tariff. It would promote inefficiency and keep prices high.

Donald Trump appointing himself as the United States Trade Representative
If Donald Trump became president, it would be a terrible idea for him to appoint himself as America’s trade representative. Besides him not having enough time to be the United States Trade Representative due to various presidential duties, Donald Trump does not have the expertise to be the United States Trade Representative. The current United States Trade Representative, Michael Froman, has extensive experience in international economics and public policy. Donald Trump on the other hand is a business man, he does not have much experience in international economics or public policy.

Image: Mr Donald Trump New Hampshire Town Hall on August 19th, 2015 at Pinkerton Academy in Derry, NH by Michael Vadon https://www.flickr.com/photos/80038275@N00/20724485306