Demolish houses to fight the recession?

Holman W. Jenkins, Jr. of the Wall Street Journal writes:

A great deal of housing debt was created in the last few years to give speculative buyers nominal title to homes that they no longer want. Any postmortem will also show that too much government subsidy for the creation of housing debt was an original sin at the root of today's mess.

Too true. But then he writes:

The result is not unlike pollution -- a market "externality" that imposes unfair costs on others as a result of some people's over-speculation in now decaying, market-depressing, neighborhood-degrading housing.

Wait, how does extra housing impose unfair costs on others? Are we thinking about the same others? If there is too much supply, prices fall—making housing more accessible to those who are looking to buy. This is not unlike the bust after the internet boom in 2000. A lot of great capital infrastructure was bought at low prices, and subsequently put to good use. Irrational investors lost, but the capital created was still put to use afterward. Extra fiber didn't impose "unfair costs" on others, did it?

Here's the Broken Window Watch winner of the week:

When politicians understand this, they may finally have something useful to contribute. The shortest road back from this perdition, as improbable as it may sound, would be to foreclose on and demolish some of the least-wanted houses, with taxpayer money if necessary.

That's right. Use taxpayer money to demolish houses to prop up their prices. What a great strategy! The immediate effect is to prop up prices (making existing homeowners happy) and create work for demolition teams. There is no way there would be any unseen effects, would there?

The Fed is always optimistic

Not quite standard broken window fare, but relevant still relevant to the law of unintended consequences.

Bernanke: Subprime hit could top $100B
July 19 2007: 4:44 PM EDT

NEW YORK (CNNMoney.com) -- Losses in the fast-unraveling subprime lending market could top $100 billion, but the Federal Reserve is taking measures to protect borrowers, according to Fed Chairman Ben Bernanke.

"The credit losses associated with subprime have come to light and they are fairly significant," Bernanke told the Senate Banking Committee in a second day of testimony on the Fed's twice-yearly economic report.

"Some estimates are in the order of between $50 billion and $100 billion of losses associated with subprime credit problems," he said, referring to a segment of the mortgage market that caters to borrowers with shaky credit.


Subprime losses won't top $500 billion: Bernanke
Thu Jan 17, 2008 11:52am EST

WASHINGTON (Reuters) - Federal Reserve Chairman Ben Bernanke said on Thursday that losses in the U.S. subprime mortgage market may have reached $100 billion so far and could climb, but would not top $500 billion.

A Broken Window classic: 911 was good for the economy

Any normal person would intuitively understand the absurdity of the proposition that 911 had beneficial consequences for the US economy. But Paul Krugman is not any normal person. He's a well known economist and columnist for the New York Times. He has a legion of acolytes who follow his words as if they were gospel. And he happens to be the most egregious sophist in the realm of economic commentary.



In a classic instance of the Broken Window Fallacy, Krugman claimed that 911 had potentially favorable economic effects.

So the direct economic impact of the attacks will probably not be that bad. And there will, potentially, be two favorable effects.

First, the driving force behind the economic slowdown has been a plunge in business investment. Now, all of a sudden, we need some new office buildings. As I've already indicated, the destruction isn't big compared with the economy, but rebuilding will generate at least some increase in business spending.

Second, the attack opens the door to some sensible recession-fighting measures ... Now it seems that we will indeed get a quick burst of public spending, however tragic the reasons.

We tip our hats to Paul Krugman for providing such a patent instance of the broken window fallacy, and for proving beyond doubt that the appellation "economist" should only be applied to him with a tongue firmly in cheek.

Bush on military spending and the housing bust

CURRY: You don’t agree [that the war is hurting the economy]? It has nothing do with the economy, the war — spending on the war?

BUSH: I don’t think so. I think actually the spending in the war might help with jobs…because we’re buying equipment, and people are working. I think this economy is down because we built too many houses and the economy’s adjusting. On the other hand, we're just about to kick out 157 billion dollars to our taxpayers, businesses, and other families so we can get this economy going.




[Ed: Tearing down houses would fix that oversupply, and even create more jobs!]

h/t Think Progress