If you pay close attention to politics you have probably heard this but for more casual observers I have included the video. Basically Paul Krugman says that a fake alien invasion would fix our economy. While the assertion is downright laughable, I want to address the fundamental keynesian theory that underlies the statement rather than make fun of the particulars. It is important because Krugman is not some fringe wacko making up shit in his basement. He is a very prominent keynesian economist and held in high regard by our president. It is keynesian theories that have been a main driving force of our economic policy for decades.

The point I would like to focus on is the belief that actual productivity does not matter. Keynes exact quote that was referenced in the above video

Well, the rate of interest can't fall anymore because the keynesians have driven it to rock bottom. So now we dig holes... Keynes mistake is being completely fixated on money. Money is not true wealth, true wealth and a better standard of living are obtained through the production of desired goods and services. In other words, our government could simply decree that everyone in the country has a billion dollars. Yay, we are all billionaires, we don't need to work anymore because we can buy whatever we want. Everyone quits their jobs and retires because we are all rich. Are you hungry yet? The farmers all retired too, they are billionaires. Well the farmer isn't going to work for a few thousand a year. If you want to encourage him to work, you would have to pay a lot more. The result of simply declaring everyone a billionaire, would be rapid inflation and since you can't eat money and money in and of itself does not improve your standard of living, you have not actually improved anything.

Put another way, suppose you are on a deserted island with three other people. You decide to divvy up the duties and assign one person to collect water, one person to collect food and one person to build shelter. Being keynesian, you decide that the fourth person ought to dig holes and fill them up again because you can't think of anything else useful for them to do. Now if Zeus throws a lightening bolt, which person do you want it to hit? If it hits the person collecting water, food or the person building shelter, someone else in the party will have to work harder or you will live without an essential (ie your standard of living will go down). If it hits the person digging holes, no one has to work any harder and no one will experience a reduced standard of living. In fact, the remaining three will not have to work as hard because they won't need as much food, as much water or such a large shelter. Your micro economy is actually being slightly hindered by the person contributing nothing.

Whether you pay the person digging the holes in money which is then used to purchase shelter, water and food from the other three changes nothing. The three workers are not having their standard of living improved by the person digging holes. Nor does the size of the economy matter except for the number of unproductive workers it can support. The island economy might only support one non-productive worker before serious problems/shortages occur while our economy can easily support millions before the effects are even noticeable. 

That doesn't change the fact that any given person is either productive or non-productive. Either you are providing/creating/supplying/collecting a good or service that people need/desire or you are not. If a worker is the former, they are improving the standard of living, if they are the latter, they are not. From a personal level, it might be better for you to have a non-productive job than to have no job at all. But if you are essentially just "digging holes" you might as well sit at home doing nothing and at least you might consume fewer resources and be less of a drain than if you drove to work every day. Putting people to work digging holes would help the unemployment rate but if it isn't actually improving anyone's standard of living and may even detract from it, why would you? To get out of the recession we don't need people doing "make work", we need people doing things that actually improve the lives of people around them. The question we should be asking is not "how do we employ the most people?", We need to be asking "how do we increase the production of goods/services that improve peoples lives?"

Whether money is spent by government or a private individual, what it is spent on does matter and it does have an effect on our standard of living. On the macro level, no one decision has a big effect. If someone decides to freeload, their individual decision has such a small effect that it isn't noticeable. When you are dealing with billions and trillions of dollars being spent without regard to whether it is encouraging products that are beneficial the effects can be extremely harmful and lead to a long drawn out recession and a substantial drop in our real productivity.

Back to the alien invasion, suppose we actually believed one was coming so we borrow a shit ton more money and hire everyone who is unemployed to build huge missiles, rockets, guns etc. In the short term, a lot more people would be working and would have more income. Good for them. Our GDP would rise because more things were being created. Then what? We find out the aliens were fake, we pack all the missiles and guns away in an underground bunker and everyone who was employed building the things now need new jobs and in addition to that, we have a huge pile of debt that has to be paid back. Is your standard of living better? Do you have any more luxuries in your life because of those missiles and guns in a bunker somewhere? No. You probably have fewer luxuries overall because you now have to pay a larger percentage of your income to pay off the debt.

If all those workers who built the missiles were building something that improved your life, you could have purchased those goods instead of the missile you paid for. Maybe a better computer or new tv. A comfy sofa. Whatever it was, I am sure that you would agree almost any product is better than a missile that will never be used. The missile is only useful when you actually intend to use it or if it is effectively used as a deterrent. Even then, you are sacrificing some other luxury you could have purchased in exchange for the protection. So while an alien invasion might make the numbers look pretty for a time, in the long run it doesn't actually improve your standard of living.

It is scary that the people in our government think that it doesn't matter what money is spent on. That simply spending is going to somehow magically make everything wonderful for us. Government spending is inefficient enough as it is, when the people controlling where that spending goes believe that it doesn't matter and treat government spending so cavalierly, it is downright scary.