Guest Post: The iKrug

Tyler Durden's picture

Submitted by Pater Tenebrarum of Acting Man blog,

A Cell Phone Will Save the US Economy

It appears it is after all not Scott Sumner who 'saved the US economy' by urging the helicopter pilot to create even more money ex nihilo than hitherto. What will save us instead is Apple, or rather, its latest product, the iPhone 5. Who needs Bernanke when this wondrous device stands ready to pull the economy up by its bootstraps?

A story has made the rounds lately – propagated by 'economist' (we should use the term loosely…) Michael Feroli at JP Morgan, that sales of the iPhone "could potentially add from one-quarter to one-half of a percentage point to the growth rate of U.S. gross domestic product in the final quarter of the year”.

If we were to assume that he is correct, then what this would mainly tell us is how useless a statistic GDP actually is. However, there are some reasons to doubt the results delivered by his abacus. According to a Bloomberg article:




“Here’s Feroli’s math: Assume sales of previous-generation iPhones continue “at a solid pace,” while the new model from Apple (AAPL) sells about 8 million units in the last three months of 2012. Assume the average selling price for the new models is about $600. (True, people who get the new phone as part of a calling plan pay less than the sticker price, but the sale gets reported to the government for what it would have cost on a stand-alone basis.)

Out of that $600, about $200 is the imported cost, leaving $400 as the value captured in the U.S. Multiply $400 times 8 million and you get a pop of $3.2 billion, which is enough to boost the annualized growth rate of the economy by one-third of a percentage point. Feroli, the bank’s chief U.S. economist, expects the U.S. economy to grow at an annual rate of about 2 percent in the fourth quarter, and says the iPhone will “limit the downside risk” to that projection.“


Now, before we continue, a few words about the iPhone 5. It is undoubtedly a marvel of engineering (as a friend and card-carrying Apple fan told us, the aluminum unibody alone is a stunning achievement of modern-day milling methods). However, many observers seemed to agree that apart from a sleeker design combined with lower weight and a somewhat bigger screen than the predecessor model, it offers only incremental improvements.

Its new map application is generally regarded as a letdown compared to the previous Google map app. All in all, the phone allegedly lacks, as one journalist at Reuters put it, a 'wow' factor.  Mind, we are not trying to put the new iPhone down – we merely want to make the point that its release has not exactly made the iPhone 4 (or previous models) completely outdated or unusable.



The iPhone 5 – will its release add to economic growth?

(Image via



Another somewhat more famous economist has chimed in on the topic, the man who has forever destroyed what was left of the nimbus attached to the Nobel Prize for Economics by somehow winning it, namely Paul Krugman.

Not surprisingly, Krugman used Feroli's line of argument regarding the iPhone  to fashion a screed designed to convince readers of his column that more government spending is called for. We kid you not.


Broken Windows, Carts and Horses….

Krugman's article on the topic in the NYT is entitled „The iPhone Stimulus“. Below are a few excerpts:


„So is the new phone as insanely great as Apple says? Hey, I’ll leave stuff like that to David Pogue. What I’m interested in, instead, are suggestions that the unveiling of the iPhone 5 might provide a significant boost to the U.S. economy, adding measurably to economic growth over the next quarter or two.

Do you find this plausible? If so, I have news for you: you are, whether you know it or not, a Keynesian — and you have implicitly accepted the case that the government should spend more, not less, in a depressed economy.“


Wow. So if that is what it really means, then some readers may already decide on the spot that Feroli's theory has just been disproved. Seemingly unwittingly, Krugman is shooting his whole intellectual house of cards down in this first paragraph. However, you will be surprised just how deluded this political hack actually is. Bear with us.


„The crucial thing to understand here is that these likely short-run benefits from the new phone have almost nothing to do with how good it is — with how much it improves the quality of buyers’ lives or their productivity. Such effects will kick in only over the longer run. Instead, the reason JPMorgan believes that the iPhone 5 will boost the economy right away is simply that it will induce people to spend more.

And to believe that more spending will provide an economic boost, you have to believe — as you should — that demand, not supply, is what’s holding the economy back. We don’t have high unemployment because Americans don’t want to work, and we don’t have high unemployment because workers lack the right skills. Instead, willing and able workers can’t find jobs because employers can’t sell enough to justify hiring them. And the solution is to find some way to increase overall spending so that the nation can get back to work.“


The short version of the above paragraph is: we can consume ourselves to prosperity. And if you accept that premise, then you must of course  accept what comes next. After bemoaning the reluctance of businesses and consumers to engage in an orgy of mindless spending (except of course when there's a new i-gadget released), Krugman reminds us of  his solution: the government must jump into the breach.


„Why not have the government step in and spend more, say on education and infrastructure, to help the economy through its rough patch? Don’t say that the government can’t add to total spending, or that government spending can’t create jobs. If you believe that the iPhone 5 can give the economy a lift, you’ve already conceded both that the total amount of spending in the economy isn’t a fixed number and that more spending is what we need. And there’s no reason this spending has to be private.“


Yes, why not, indeed? We'll explain that in just a moment, but let us first point out what the fundamental error in this whole iPhone/GDP story is.

It is actually a variation on the 'broken window fallacy' – it completely ignores a basic economic concept that we would normally expect every economist to be aware of, namely opportunity cost. We mentioned above that the predecessor of the iPhone 5 remains perfectly serviceable in order to underscore this crucial point.

By buying the iPhone 5, the buyers will no longer be able to buy something else. Every buyer of the new iPhone has a personal scale of valuation that ranks the items he wants to spend his funds on. Obviously, for all those who actually go out to buy the new iPhone, some goods or services that are ranked lower on their value scale will end up not being bought.

Would people cease to buy smart-phones if there were no new iPhone? Of course not – but it is a good bet that at least some users of the predecessor model would not yet junk it. It is highly questionable given the incremental improvement the iPhone 5 represents that they are really gaining much more than the satisfaction that comes from owning what is held to be the latest and greatest gadget (but we are not arguing with that – they want it, and that means they feel it is useful to them). It seems likely though that absent the new iPhone, they would spend the funds on something else instead – so the argument that “total spending” in the economy  will increase is standing on a very flimsy foundation.

Let us assume though that instead of spending the funds on consumption, they were to decide to save instead. Would that be 'bad'? According to Keynesians like Krugman, the answer is yes.

However, we would not even have this discussion if no-one had first produced the iPhone. How do things get produced? To make production possible, one must invest in capital goods. And savings are what funds these investments – they are the sine qua non.

Note here that it is not money created from thin air by Ben Bernanke that can fund production. What funds production is the pool of real funding.  Unless at least some people refrain from consuming their entire economic output, no new additions to the economy's capital structure will be possible. In fact, there must be savings to merely maintain the existing production structure (for a brief overview of capital theory, interested readers might want to check out our previous essay on the production structure that summarizes the essential points).

In other words, when Krugman insists that more spending and consumption will bring the economy back on track, he is putting the cart before the horse. Increased consumption is an effect of economic growth, not the cause of it.

What about his suggestions regarding government spending? Is there not something to be said for 'infrastructure' or 'education' spending'?  Are these not worthy causes?

The problem with this line of argument is that the government is the one organization that is the least able to decide what types of spending are economically sensible. Since the government has no profit motive – it ultimately obtains all its funding by means of coercion – it has no way to engage in proper economic calculation (although the people it hires to implement the spending can up to a point make inferences by observing the private sector).

In other words, once again the main problem is opportunity cost. Say for instance that government decides to finance the building of a bridge. How can it possibly know if the resources expended on building the bridge would not have satisfied more urgent consumer wants if they had been employed differently? The answer is, it cannot possibly know that. Without a profit motive and without economic calculation enabling it to compare input costs to expected income, there simply is no way to know.

This is also the reason why socialism is literally impossible: a socialist community has no market for the means of production, and hence lacks the very basis of economic calculation, as calculation without money prices is obviously not possible. Chaos is the inevitable result, or as Ludwig von Mises pointed out (in 'Calculation in the Socialist Commonwealth'):


“Without economic calculation there can be no economy. Hence, in a socialist state wherein the pursuit of economic calculation is impossible, there can be—in our sense of the term–no economy whatsoever. In trivial and secondary matters rational conduct might still be possible, but in general it would be impossible to speak of rational production any more.”


Of course we are luckily not living in a command economy. Ours is still a market economy, if a severely hampered one. And yet, the basic problem of being unable to calculate confronts every government agency, regardless of the fact that the problem is even more acute in full-blown command economy.

Therefore, Krugman is wrong when he asserts that “there's no reason this spending has to be private”. There is a very good reason: government spending is extremely likely to waste scarce capital and liable to induce intra-temporal discoordination in the production structure – in other words, its spending will create a configuration of the economy's capital structure that is not in accordance with consumer wants.

Apple's iPhone offering is certainly different in this regard: it obviously does conform to consumer wants. Apple's profits provide ample proof for this assertion – in fact, it is the most profitable company in the world. However, this does not mean that one  can safely ignore opportunity cost when arguing that spending on the new iPhone will add to overall economic growth.



The performance of Apple's stock price speaks for itself – click for better resolution, chart by StockCharts.



Krugman Discovers A 'Theory'

However, what really takes the cake is a small posting of Krugman's on the same topic that we discovered incidentally when searching for the article discussed above on Google. Apparently Krugman felt the need to address the topic of obsolescence in more detail and on this occasion lets us in on the fact that he has indeed heard about the 'broken window' before. The post is entitled “Broken Windows and the iPhone 5”.

When seeing the headline, we at first thought that Krugman would attempt to refute that the broken window fallacy appealed to him. Far from it!


“The key point is that the optimism about the iPhone’s effects has nothing (or at any rate not much) to do with the presumed quality of the phone, and the ways in which it might make us happier or more productive. Instead, the immediate gains would come from the way the new phone would get people to junk their old phones and replace them.

In other words, if you believe that the iPhone really might give the economy a big boost, you have — whether you realize it or not — bought into a version of the “broken windows” theory, in which destroying some capital can actually be a good thing under depression conditions.”


(emphasis added)

Once again, this man has actually won the Nobel Prize for Economics. Perhaps it is time for the prize committee to consider demanding its return. 

So it is the 'Broken Window Theory' now, is it? Actually, as noted above, the concept is known as the 'Broken Window Fallacy'. It was originally formulated in the form of a parable by the great French economist Frederic Bastiat, who explained that in economics, one must not only consider that which is immediately seen, but also that which is not seen.

It is a fallacy to believe that destruction can make us richer –  in fact, Krugman admonishes us to simply deny that opportunity costs exist in what he refers to as 'depression conditions'. The implication of this assertion is that fundamental economic laws magically cease to apply whenever the economy suffers a downturn.

This view is erroneous – economic laws are not dependent on economic conditions. This is akin to arguing that the laws of nature will cease to be operational on Wednesdays. Not surprisingly, Krugman is also a supporter of the view that 'war is good for the economy' – even if it is war against imaginary space aliens, or what we might call Krugman's version of  'Plan 9 From Outer Space'.



Paul Krugman: getting ready to break some glass to save the economy. In Krugman's capable hands, a fallacy becomes a 'theory'.

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whatsinaname's picture

I suppose we could have the government buy some iPhones ? That might help GDP growth ?

TwoShortPlanks's picture

I posted this on ZH last week, that QE3 was used to assure success of the are sales going???

"This isn't QE3...this is QEi5

Everyone needs to understand as to the REAL REASON why QE3 was launched last night....APPLE!!!!


Bernanke's focus was on Market/Public sentiment...yeah?


Think about it. If this week's launch of the iPhone5 were to fail and not meet and/or exceed sales targets, THAT  ladies and gentlemen, would potentially be the rudest awakening to the Western World, that we really are in a Global Recession, bigger than anything else! Food & Oil can go up in price, but don't take away our toys.


Apple's revenue contributes to what percentage of the US GDP figures, and how much of Apple's revenues are attributable to iPhone sales??? (Rhetorical, I know the stats).


iPhone sales affect both GDP numbers and sentiment.


iPhone (Apple) has a greater effect on Market/Public sentiment than any other factor.


After FaceBook went FacePlant and then FaceEgg, there was no way Apple was going to be allowed to go the way of the Lawn Dart.


It's Extend and Pretend via the iPhone5 vehicle…It's that simple.


QEi5 lives!"

e-man's picture

Krugman looks like he's drinking his own kool-aid.

iDealMeat's picture

Wiki OT:  "The 1989 Hillsborough disaster was a human crush which occurred during the FA Cup semi-final match between Liverpool and Nottingham Forest football clubs on 15 April 1989 at the Hillsborough Stadium in Sheffield, England. The crush resulted in the deaths of 96 people and injuries to 766 others. The disaster remains the worst stadium-related disaster in British history and one of the world's worst football disasters.[1]"



On the 20th anniversary of the disaster, government minister Andy Burnham called for the police, ambulance, and all other public bodies to release documents which had not been made available to Taylor in 1989.[4] This led to the formation of the Hillsborough Independent Panel, which, in September 2012, concluded that no Liverpool fans were responsible for the deaths, and that attempts had been made by the authorities to conceal what had happened, including the amendment of 164 statements relating to the disaster by the police.[5][6] The report prompted immediate apologies from Prime Minister David Cameron, the Chief Constable of South Yorkshire Police David Crompton, Football Association Chairman David Bernstein and Kelvin MacKenzie, then-editor of The Sun, for their organisations' respective roles.[7]

In September 2012, the Hillsborough Independent Panel concluded that up to 41 of the 96 who had died might have been saved had some failings been addressed.[8] The report revealed "multiple failures" by other emergency services and public bodies which contributed to the death toll. In response to the panel's report, Attorney General for England and Wales, Dominic Grieve MP, confirmed he would consider all the new evidence to evaluate whether the original inquest verdicts of accidental death could be overturned.[9]"




Same as it ever was..

ba dum tiss's picture

Paul Krugman is a Buttboy Extraordinaire.

Thomas's picture

In case you didn't see this, In my January blog I added to Krugmanology by assigning the unit of $5 trillion the much simpler unit of one Krugman". So now you can simply refer to the bailout costs, not as $25 trillion but rather 5 Krugmans.

camaro68ss's picture

Brake a window, save the world... Bawhahaha

economics9698's picture

Tony Montana: What you lookin' at? You all a bunch of fuckin' assholes. You know why? You don't have the guts to be what you wanna be? You need people like me. You need people like me so you can point your fuckin' fingers and say, "That's the bad guy." So... what that make you? Good? You're not good. You just know how to hide, how to lie. Me, I don't have that problem. Me, I always tell the truth. Even when I lie. So say good night to the bad guy! Come on. The last time you gonna see a bad guy like this again, let me tell you. Come on. Make way for the bad guy. There's a bad guy comin' through! Better get outta his way! 

Manthong's picture

Just Ordered on eBay for $81, straight from China, unlocked.
If the damn thing works, it's time for a few more AAPL P490 for next year.

Operation System:  Android 4.0.3
CPU:  Allwinner Tech BOXCHIP A13 Cortex-A8, 1.2GHz
RAM:  512M DDR2
Flash Memory:  4GB (system will use more than 1GB)
Extend Memory:  Support Micro SD (TF) card (max 32GB)
G-sensor:  4-dimensional G-sensor
Screen Size:  7 Inch
Screen Pixels:  800 * 480
Screen type:  5-point capacitive Touch Screen
WIFI:  Built-in IEEE 802.11b/g/n WiFi
3G:  Support external 3G:E220,E230,E180,E1550,E1630,E1750,E1782,E1820
Audio format:  MP3?WMA?APE?FLAC?OGG?WAV
Software install:  Download from market or setup from TF card
Camera:  2.0M front camera
Battery:  Lithium-ion 2600mAH (2 – 3 working time)
I/O Port:  1 * USB Port
:  1 * DV-5V in
:  1 * 3.5mm Earphone Jack
:  1 * TF card slot
Buttons:  1 * Power Key
:  1 * Volume Key
Size:  183 * 122 * 8mm
Weight:  271g
Power Input:  AC 100-240V 50/60Hz
Power Output:  5V,2A
Package:  1 * Android Tablet
:  1 * Power Adapter
:  1 * User Manual

fourchan's picture

so apple pays the red chinese 200 per phone to make them then they make 600 on em

so apple pockets that. um what the fuck does any of this have to do with the united states or its people?

Manthong's picture

It's all about the technology transfer.

Western technology goes in.. then it’s duplicated or emulated.. and reproduced like popcorn.

They get the jobs and the technology and we get to watch our competitive advantage slip as the technology gets rapidly commoditized.

They see improvement and we see deterioration.

With over 500,000 new engineers graduating every year, centers of innovation there are likely to provide a substantial challenge to Western leadership.

If that little tablet I ordered does it’s job, even if it lasts only a year (it’s only 80 bucks), then it, and similar products can be game changers which correspondingly will do no good for Apple or our GDP,  nominal or otherwise.

Bobbyrib's picture

It's what corporate America gets for betraying their country.

GetZeeGold's picture




Dude....if you can't hold your Koolaid.....don't shoot your mouth off and show the world.


dubbleoj's picture


Since the government has no profit motive outside of individual bribery for and no-bid contracts – it ultimately obtains all its funding by means of coercion – it has no way to engage in proper economic calculation.



GetZeeGold's picture



But they'll still try....count on it.


Mine Is Bigger's picture

Hence the violent protest in China.

Now, it all makes sense.  Thank you!

economics9698's picture

Krugman is a waste of ink.  He is the poster boy of failure.

Element's picture

Yes, all true, but he does drink his own urine from a wine glass.

Sofa King's picture

...and he can't act. Did anyone else see him in "Get him to the Greek". Funny stuff but he sucked ass. I pose a question. If the iPhone will actually lift the US GDP number by that much. What will it do for China's GDP, being that they actually manufacture and export the toy?

Hugh_Jorgan's picture

Indeed, the poster boy for the cultural insanity that we are all now enjoying.


Krugman is a sophist, nothing more. He must be ignored in reference to anything related to actual reality.

Thomas's picture

None of this is as bad as his "space alien theory" of stimulus.

gwar5's picture

I was thinking along the same lines. Except my theory is that Paul is about a Helix shy of being human and is trying to make money playing both sides in a false flag.


We Gwarians just know these things:



PhattyBuoy's picture

Krugman's opportunity cost dilemma:
purchase an Iphone5 or the latest Ibuttplug?

theprofromdover's picture

The tradition in those days for an all ticket soccer match (FA Cup semi-final) played on a neutral ground, was for fans of well-supported northern city teams to turn up en-mass without tickets, and storm the turnstiles where they could best gain entry. Generally these fans had been drinking for most of the day. Liverpool fans had a very bad reputation for being drunk, ticketless, and self-righteous, in their thousands.

It is disingenuous to say that Liverpool fans were not the root cause of the deaths. If only ticket-holders had gone to the match, then presumably no-one would have been crushed. If treble the number of fans appeared, then people would likely be injured.

This does not excuse the manipulation of witness statements by police, or cover-ups of emergency services shortcomings, but the citizens of Liverpool might still feel they share some of the blame.

Overfed's picture

Unfortunately cyanide-free.

smlbizman's picture

i bet he smells his own the smug people on south park

Muscletonian's picture

Or put it the other way around, you think it was a coincidence that i5 was released this date? The FED and Apple management had this panned out nicely...

dexter bland's picture

Perhaps the government could buy a struggling phone company (e.g. Nokia) and start making their own phones. We could get Los Alamos etc on to designing smaller, lighter phones as a new Manhattan Project. If we could manufacture 10 new models each year and get people to replace their old ones each time, GDP would be up around 5%.


ACP's picture

Nah, keep him alive in a cage as a case study for pseudo-intellectual insanity.

savagegoose's picture

think of the boost if they actually built them in ussa to.

SilverIsKing's picture

How much did the iPhone 4S contribute to 2011 GDP?

From a YoY GDP growth standpoint, the iPhone 5 may not have much of an impact at all.

Overfed's picture

So, if one were to call himself a Keynesian, does that mean he is also a pederast? Shouldn't Keynes' pedophilia be a sufficient reason to dismiss his economic theories? Ron Paul was (falsely, IMO) labelled a racist, and thus his ideas were considered looney and half baked, but Keynes was an admitted pedophile and his ideas are beloved throughout the Progessive world. I don't get it.

Moe Howard's picture

YOU demand rationality in an insane world. YOU won't get it.

 Remember the new American paradigm:







Hugh_Jorgan's picture

"Woe to those who call evil good and good evil, who put darkness for light and light for darkness, who put bitter for sweet and sweet for bitter! Woe to those who are wise in their own eyes, and shrewd in their own sight! Woe to those who are heroes at drinking wine, and valiant men in mixing strong drink, who acquit the guilty for a bribe, and deprive the innocent of his right! Therefore, as the tongue of fire devours the stubble, and as dry grass sinks down in the flame, so their root will be as rottenness, and their blossom go up like dust; for they have rejected the Torah of YHVH, and have despised the word of the Holy One of Israel."

~YHVH via Isaiah Ben Amoz

palmereldritch's picture

iFed  iDrank  iInflated

vast-dom's picture



Between this smirking fuckface's Nobel and that sociopath of a drone-killing-machine Prez, I think it's high-time to consider the Nobel useless until further notice.


"We don’t have high unemployment because Americans don’t want to work, and we don’t have high unemployment because workers lack the right skills." Hey fuckface with the smirk American's don't assemble that fucking iGadget, the Chinese do! Hey fuckface it's not about the right skills! It's about the exporting jobs due to COST SAVINGS ie dirt cheap foriegn labor, wholly independant of Agregate D, more at in spite of it! Keynes that fuckface! 


Acet's picture

Clearly the economic crisis is all because Americans don't want to work (for 3rd world salaries) and lack the right skills (to be able to survive on $10 a month).


Anusocracy's picture

"we can consume ourselves to prosperity." 

That was basically the idea of Krugman's high time preference, hunter-gatherer predecessors: they consumed what nature gave for survival.

The cost of producing wasn't part of their, or his, thinking.

Theta_Burn's picture

The stand up comic of economics

That glazed look should tell you all you need to know.


cxl9's picture

1930s Depression: hungry masses queue up in long lines at soup kitchens for something to eat.

2010s Depression: SNAP cards replace soup lines. Frenzied consumers queue up in long lines for the latest electronic fashion accessory.

adr's picture

When the iPhone 4 came out there were a few people camping out at my local Best Buy. Same thing for the iPad and iPad2.


Not a single person and it's 70 degrees tonight. There wasn't even anyone asking about it when I was looking at phones. Walmart, Target, and everywere else was exactly the same. The local AT&T and Sprint stores had hand written pieces of paper taped to the door saying "iPhone5 coming tomorrow". Wow, what hype.

dbomb12's picture

And rack up their credit cards buying the latest Iphones

Nobody had credit cards and all these other handouts in the 1930,s thats why this bullshit continues to go on. But when the nobody buys our debt and the dollar collapses because of the chairSATAN then people are going to really feel the pain