1. Rizzo didn't choose to get a new roof to begin with
2. We lose the wave of resources to repair the roof. If you ignore the money resources job
3. What if the roofer was unemployed? this creates job displacement (will help the roofing industry, but will hurt other industries)
We're worse off as much as Rizzo didn't want a new roof. We are worse because if he wanted to buy a bike with the money that he used to get a new roof, he'd rather have the new bike. Preferences matter. Society is poorer since Rizzo would have gotten more pleasure by the bike. We are poorer by the value of the thing you are replacing.
Before the storm Rizzo had $1000 and a roof
After the storm Rizzo had $0 and a roof
lost $1000
15,000,000 deaths in WW2. The cost of lives is not worth anything to Rizzo. This is horrible for the economy.
The stimulas bill is a good idea because materials are cheaper during recession. This is bad though because funds come from somewhere. Usually it comes from tax revenues. We as a country have fewer dollars to spend from taxes because of this. To borrow means taxes tomorrow. People in the future have less income. People trade old jobs for new jobs in stimulus. The jobs created are not free. They are an expense at the future. This all means that there are job losses somewhere else.
If you ignore the money part of it, resources matter. We need wood to build houses. By using wood, prices of wood goes up. Someone who would have a better use for the wood now can't use it. If it costs $8,000 before the storm for the new roof, then it will cost $10,000 after the storm for a new roof.
As economists ask what's going on, banks hold money. By the banks not having a capital cushion it caused problems. Banks try to recapitalize. Try to get more cash. Try to give out loans or get loans.
Jobs are not a benefit. They are a cost. We work to get goods and services that we want to provide our family with. Rochester has to pay Rizzo to come to class.
During WW2, it wasn't stimulating because you can't eat a bomb. There are empty shelves at stores. We couldn't buy certain products. All resources were shipped overseas. We wiped out cities (destruction is always bad). We don't need war to get technology. We could've just gave people paychecks rather than go to war. We want to keep resources, not destroy them. War did stimulate the economy, but it didn;t raise living standards. GDP goes up by producing bomb, blowing it up does nothing.
Costs are subjective. Costs that matter for economies are never costs for influential behavior. This doesn't exist.
Marginal analysis- Should I do x or y. How we make decisions. Water has a really high value of use. It is very cheap, so low exchange value. Diamonds worth a lot but useless. High exchange value. IF there are 200 plane seats with a total cost of $100,000 and the the average cos per seat is $500, should they ever sell a ticket less than $500? 180 passengers on place leaves in 2 mins. Airlines will sell tickets for cheaper.
Marginal costs- change in costs from taking an action
Marginal benefit- Change in benefit from taking an action.
Up front fixed costs are important in economic.
Jobs are a cost.
ReplyDeleteKeep this in mind when you hear a policymaker remark, "We are creating jobs!" Always ask, "At what cost?"