Paul Krugman is at it again: He advocates destruction of happiness:
According to marginal productivity theory, this does in fact shrink the economy: Wheelerdealer adds $10,000 worth of production for every hour he works, so his semi-withdrawal reduces GDP by $10 million. Bad!
But what is the impact on the incomes of Americans other than Wheelerdealer? GDP is down by $10 million — but payments to Wheelerdealer are also down by $10 million. So the impact on the incomes of non-Wheelerdealer America is … zero. Enjoy your leisure, John!
According to this argument, if everyone worked less (i.e. produced fewer goods and services others value), there'd be no effect on the wealth of the nation.
Forget about the rich and the poor for a second. Just think about the following example to see where Krugman is being deceptive.
When you go spend a couple of bucks on a cup of coffee that's because you've decided that, among all the things you could have spent your two dollars on, that cup of coffee was the thing that made you happiest.
You bought that cup of coffee because it was worth more than two dollars to you and it cost the coffee shop owner less than two dollars to provide it for you. The shop owner made a profit and you got the most happiness possible out of the money you spent.
Like every freely entered economic transaction, this was a win-win: You both gained from the transaction, otherwise, as free people, you would not have engaged in it.
Now, imagine somehow you're prevented from getting that cup of coffee. Maybe it's because the tax rates on the coffee shop owner get so onerous after a certain level of revenue that she no longer finds it profitable to remain open late.
According to Krugman, no harm no foul: You still have two bucks in your pocket. And, the coffee shop owner didn't have to expend resources to provide you with your coffee.
But, you both lost: The coffee shop owner lost the profit she would have on the sale, and you lost the happiness you could have gained by consuming the coffee.
Sure, you can buy something else with your two bucks. But, obviously, any other alternative is worse than that coffee. We know this quite simply because you chose to spend your money on the coffee when you had the option to spend it on anything you wanted.
This John Wheelerdealer Krugman is making fun of is making that money because somebody is willing to pay him that money for the products and/or services he provides. Mr. Wheelerdealer does not have the power to compel anyone to pay him that money (as opposed to politicians who can threaten you with violence to get in your pocket).
When Mr. Wheelerdealer is unwilling to provide those services because of the additional tax burden,the people doing business with him are hurt, too. Sure, they still have their money, and they can spend it on other things, but, remember, they had the option of not paying him in the first place, yet they chose to do so, because that was what made them happiest.
That is deadweight loss: Economic gains and increased happiness that could have been, but was blocked by the increasing burden of government at all levels on individuals who are on their way to being demoted to subjects status from citizenship.