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Tuesday, July 30, 2013

Pacific Rim Economy

"If we discovered that, you know, space aliens were planning to attack and we needed a massive buildup to counter the space alien threat and really inflation and budget deficits took secondary place to that, this slump would be over in 18 months. … There was a Twilight Zone episode like this in which scientists fake an alien threat in order to achieve world peace. Well, this time, we don't need it, we need it in order to get some fiscal stimulus."

- Paul Krugman (Nobel Prize Economist) on CNN's "Fareed Zakaria GPS", August 21, 2011

Yes, the above is an actual statement which made its way out of a Nobel Prize winning economist.  The Keynesian economic logic or view that in a world wrought with war time policies, economies have no other choice but to ramp themselves up in order to keep up with what seems to be an incessant demand for the war machine as its violent appetite for more resources seems to never be sated.

To put this contemporaneously, let us imagine for a moment that the movie pacific rim transplants its fictional story arc into reality.  WARNING:  Spoilers.  The world is invaded by extra-dimensional creatures of giant proportions (Kaijus) which wreak havoc on large centers of population.  Conventional weaponry proved to be ineffective in taking down these beasts due to them lacking the necessary firepower to quickly quell these 'Kaijus.'

As a response to this inefficiency after the first victory and realizing that more of these monstrous beasts would appear intermittently throughout this [unconventional] 'war' the governments of all nations around the world got together and re-purposed several factories, engaged in ubiquitous research and development which required quite a bit of new resources in order to come up with the right weaponry to combat these invaders; thus the 'Jaeger' program came into being.

Giant mechanized units controlled by two pilots connected neurologically to the machine's AI in order to guide it through its battles was the solution presented and proven effective in subsequent Kaiju encounters.  However, as the Kaiju grew in strength some of the older generation Jaegers began to be destroyed.  This quick global demoralization led to new generations of Jaegers up until all nations decided to once again divert precious resources to the building of sea walls to protect the major coastal cities around the area in the pacific ocean where the extra dimensional rift was found.

In the above briefly described scenario, in Krugman's and many other modern economists' views, this would be a boon for employment and production for economies around the world partaking in the entire division of labor involved in the entire process of manufacturing a Jaeger and its maintenance.  Let us quickly put this fallacious argument to rest.

First of all, large cities endured the massive destruction that these encounters often brought.  Instead of a boon to the construction industry this put further strain in the economy as more resources had to be once again utilized in rebuilding efforts and repairs.  In essence, less resources were available than before.  Moreover, factories, business, or homes that were destroyed during these attacks put a halt to whatever productive measures those entities may have been engaged in at that moment.  The factory no longer will be producing (less goods available overall), the business stops its service, and the home owner(s) or resident(s) may lose their shirts entirely, thus decreasing the pool of capital that was hitherto in existence.

Secondly, factories were re-tooled and re-purposed to become dedicated manufacturing and maintenance facilities for Jaegers.  Ergo, whatever private goods that particular factory was producing before was no longer its final output.  Therefore, the amount of available consumer goods diminished causing a strain the the supply line which would result in an increase in prices as demand remained constant and [forced] rationing would more than likely be the most "rational" (pardon the word pun) action that the governments would undertake (as it did during the world wars).  The same would be applicable to commodity goods being diverted to these efforts such as metals, fuel, et al.  This would indubitably lead to a lower standard of living for all involved.

Thirdly, the precious resources diverted to the war effort were no longer being put towards the betterment of private society and voluntary exchange.  Instead it was being sent directly into the line of fire to their potential destruction.  This action would erase those carefully acquired resources from existence and what could have otherwise been used for an increase in the standard of living is instead squandered.

Lastly, more people would be employed by the public sector (or indirectly by private contract bidding) to work for these purposes.  Again, the labor pool would be constrained and working towards the ultimate resulting destruction of their own efforts.  This would be a wasteful job with non productive qualities.  These otherwise valuable professions which would certainly be involved in this vast project could have instead been focusing on private research for the betterment of society.

Now under the circumstances presented in this film, the Jaegers were borne out of immediate necessity and perhaps their existence justified.  This does not however cause the erroneous axiom that war brings prosperity to be true.  Even though humanity may have been able to protect itself and posterity in the movie, the economic consequences would still ring true regardless, but it is after all just a movie and not reality.  If such actions were truly beneficiary for sundry economies globally, wouldn't it just make sense economically to create a fake war scenario (or alien invasion) and start engaging in the aforementioned actions en masse in order to jump-start the current economic malaise into full production?  The simple answer; no.

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