Krugman & The iPhone: Why The Times’ Econ Icon Should Be Deleted from Discourse

Paul Krugman has done it again:  From his lofty perch at The New York Times, the chief jester of the Keynesian court has wrapped a warped economic thesis in yet another comfortable quilt of misdirection.

English: Paul Krugman at the 2010 Brooklyn Boo...

Paul Krugman (Photo credit: Wikipedia)

Paul Krugman recently declared that the Apple iPhone—capitalists’ favorite example du jour of the power of free markets—somehow presents a compelling argument for higher government spending.  I give him full credit for achieving new heights of audacity, though perhaps we’d all be similarly audacious if we found that, no matter what sort of dubious logic we publicly embraced, our societal stock only continued to rise.  (Note to the mainstream media: Your de facto Economist Laureate has no clothes.)

A Sleight-of-Hand

Krugman begins his deftly deceptive economic foray by citing a JPMorgan research report that estimates the launch of the iPhone 5 could add between .25 to .50 percent to gross domestic product growth in the fourth quarter.

Noting that most of the iPhone’s price tag represents money spent on retailing, wholesaling and advertising, Krugman then observes that “these short-run benefits have almost nothing to do with how good (the iPhone) is.” Rather, he says, “the reason JPMorgan believes that the iPhone will boost the economy right away is simply that it will induce people to spend more.”  And if you agree that “more spending will provide an economic boost…you have to believe that demand, not supply is what’s holding the economy back.”

As Krugman dangles his Nobel Prize in one hand, he uses the other for a quintessentially Krugmanesque sleight-of-hand, in the form of his dismissive treatment of the money Apple spends on retailing, wholesaling and advertising—costs that are, like others, passed on to consumers in the final sale price.  He seems to imply that only the physical iPhone brings value to the economy, and that the other costs embedded in the final price are so much fluff.   They aren’t, and their role in boosting GDP shouldn’t be trivialized.  Apple spends significant sums on these functions in exchange for real-world benefits: enlightening the public about the features and benefits of its product, motivating them to take action and then closing the sale.

In many ways, these processes are as vital to the iPhone’s success as the design process. And what product’s price tag doesn’t include a host of costs that don’t convey a direct benefit to the consumer (from groundskeeping to corporate tax preparation)?  Of course, given his insatiable appetite for government spending no matter what the utility (this is the same Paul Krugman who said massive government spending under the guise of a hoaxed alien invasion would be a good thing), it’s easy to see why he might be blinded to the value of real service work when he sees it.

In Krugman’s World, Measures Are Ends in Themselves

Difficult as it may be, pretend for a moment that the service component of the iPhone’s cost offers only flimsy “short-run benefits” that are largely unworthy of consumers’ dollars.  Resting on that faulty foundation, Krugman’s conclusion that “the reason JPMorgan believes that the iPhone 5 will boost the economy right away is simply that it will induce people to spend more” is particularly telling.

English: Apple iPhone 3GS

An Apple iPhone: Exhibit A in the Case for Deficit Spending? (Photo credit: Wikipedia)

It’s telling because he derides the service contribution of the iPhone to GDP, and then declares this supposed waste is ultimately a success merely because it made the GDP needle move higher.  For Krugman, then, it seems GDP isn’t a diagnostic tool, it’s an end in itself. He embraces any phenomenon that inflates the measure regardless of whether the activity that drives it is beneficial to consumers or not.  In treating the patient that is the American economy, Dr. Krugman is a physician obsessed with altering the reading on the thermometer, without regard for whether his prescription fosters a healthy and lasting recovery.

Is summing the nation’s output of goods and services, GDP serves to measure the health of the economy.  However, a truly healthy economy is one where growth in the output of goods and services is driven by market forces—that is, the goods and services serve bona fide needs and offer real value that consumers and businesses are willing to pay for.

The iPhone 5 won’t “boost the economy” in the fourth quarter merely because it boosts GDP per se.  GDP is a measurement. Apple’s new phone will boost the economy because it represents a valuable good, as signaled by businesses and consumers making individual purchase decisions with their finite resources—decisions that are then reflected in GDP.

Bent solely on moving the GDP measure, Krugman advocates another debt-fueled federal spending spree, with little care for where the money goes.   As Robert Tracinski at RealClearMarkets notes in his own dissection of Krugman’s iPhone stimulus theory, “what Krugman is advocating is precisely the plain transfer of money from one person to another, as if that is the only economically relevant fact.”

An economy isn’t healthy merely because money trades hands or the GDP measure rises in a given quarter—if that were the case, the prescription for prosperity would be simple: Let the Federal Reserve print money and pay everyone to do nothing.   Offered sarcastically, that credo is uncomfortably close to the nation’s policy trajectory.

Forever mistaking spending per se and “aggregate demand” for real-world economic progress, Krugman’s views might be amusing if they weren’t deemed credible by the legions of politicians and pundits he and his fellow Keynesians have duped.  Krugman’s opinions are dangerous because they ultimately amount to an irrational call for Congress to pile on debt at an even faster rate than today—as we sit $16 trillion in the red—and they provide Ivy League intellectual cover for those who would shrink from administering the uncomfortable prescriptions our country sorely needs.   

For a more thorough dissection of Krugman’s iPhone stimulus theory, read Robert Tracinski’s piece, “In Krugman, Keynes Meets Orwell,” at RealClearMarkets.