Broken Windows, Hurricanes and Alien Invasions. There is a lot of chatter about Bastiat versus Keynes. However, I think the conversation could benefit from two quips. First by James Tobin

It takes a heap of Harberger triangles to fill an Okun’s gap

The second I am still working to refine but it would go something like this

To an economist with supply and demand everything looks like a surplus problem

The heart of both phrases are the issues like unemployment are much bigger deals than traditional market distortions. However, we have this really powerful set of tools for analyzing market distortions and that mistakenly leads people to believe that the key to all problems lies in market distortions.

I’ve tried to show this in pointing out that the US today is significantly wealthier than either the US in 1998 or Australia today. However, if you said the economy was “better” in 1998 or that the economy is “better” in Australia everyone would know what you mean and its hard to find someone who would disagree.

Indeed, no small number of Americans believe that the economy was better in the 1960s and its not hard to understand what they mean. If you really stop and ask whether they willing to give up your iPhone for the 60s they would say no. Now, if they paused further and gave serious attention to the externality effects of 60s glam they might change their mind again.

But still, the point is American markets are more liberalized. Trade is freerer. Technology is more advanced and because of all of that consumption is much higher in the United States now than ever before, but it doesn’t feel better than ever before.

In fact it doesn’t clearly feel better than when things were much worse – decades ago.

What’s going on here?

Part of the problem is that unemployment is awful. Its awful on many levels. First, the raw drop in production is a huge loss to human welfare. Human time is the fundamental asset in our society and the time that wasn’t spent building or creating new things is time that is lost forever.

Unemployment is awful in that it concentrates the economic losses on a few households. I think we all accept declining marginal utility of income. That implies that if everyone in the economy where to lose 6% of his or her income that would be bad. However, if 6% of the people in the economy were to lose all of their income that would far, far worse. Unemployment is the latter scenario.

Lastly, unemployment is horrible because it creates a sense of fear that is paralyzing to the labor market. One of the key facts we should always keep in mind is that as unemployment rises labor turnover goes down.

That is, fewer jobs are destroyed in periods of high unemployment. This is because the main way that jobs are destroyed is through quits. People leave for greener pastures. When unemployment goes up this stops happening and the churn of creative destruction slows down.

All of this is to say, it shouldn’t be hard to imagine that we can do things that make the economy less wealthy but make people feel better about it. One easy thought experiment would be to simply transport ourselves back to 1998. However, another might be breaking windows.

Is the world less wealthy with broken windows, no doubt. But, West doesn’t have a wealth problem. It has an unemployment problem. If you think about the alternatives available throughout recent history many if not most Americans would trade away their wealth to relieve their unemployment.