Yesterday Apple announced their fancy new iPhone 5. Earlier in the week there was speculation about whether or not the rush of new iPhone sales would actually be enough to noticeably stimulate the economy. Paul Krugman says that’s just another version of the broken window theory, “in which destroying some capital can actually be a good thing under depression conditions.”
It’s cute that Krugman almost recognizes here that spending for the sake of spending doesn’t necessarily stimulate the economy (though he still says it’s “a good thing”) because of the unseen effects of the opportunity cost of what else that money could be spent on, but it’s ironic that he only seems to notice it in cases where the government isn’t the one spending the money. I actually don’t think iPhone purchases qualify for the broken window theory because of the voluntary nature of the transaction; in broken window situations, whether it’s a shopkeeper repairing a store or a nation recovering from an earthquake, the purchaser is responding to an involuntary destruction of capital and choosing the best option in the new scenario.
If you destroy your iPhone to buy a new one, that’s a completely voluntary decision you made only because you thought it would improve your standard of living. Smashing your own window because upgrading it is the best thing you think you can do with your money is completely different from someone else smashing your window and forcing you to shift your priorities to repair a window that you didn’t think was worth upgrading otherwise. Besides, a lot of people probably won’t “junk” their old iPhones anyway but will resell them in another voluntary transaction.
But regardless of whether or not iPhones have anything to do with Bastiat, I am skeptical that new iPhone sales could provide an overall boost to the economy. A lot of people who might have bought iPhones recently have been delaying their purchases in expectations of a new one; they’re just pushing their purchases into the future, sort of like a reverse cash-for-clunkers that pretty much just pulled purchases forward.
Even here, though, I see a reason for optimism. Overall the iPhone 5 may simply shift some consumption from the last couple of months into the next couple months. But if we’ve been looking at the economic activity of the last couple months as indicating the “real strength” of the economy, without considering that it might be “artificially suppressed” to make way for an “artificial boost,” then the economy might actually be ever so slightly stronger than we think.