Economic ignorance in the Wall Street Journal shouldn’t be too surprising. After all, these are the guys that forget the law of supply and demand applies to labor markets. But the scale of ignorance in “journalism major” Holman Jenkins’ recent editorial is staggering. He says:
No wonder economists of diverse ideological stripes are lining up behind a taxpayer bailout of homeowners and lenders, fearing the alternative is a global inflation crisis. But another option has hardly been considered in Washington, though it’s old hat in the sticks: Using tax dollars to buy and demolish foreclosed, unoccupied or half-built houses in selected markets.
This isn’t as wild-eyed as it sounds. Ben Bernanke pointed out in a footnote to a recent speech that such programs already are at work in the Midwest. “In highly depressed housing markets, the worst-quality units are often demolished to mitigate safety hazards and reduce supply.”
This is a variation of the hoary idea that a “war is good for the economy,” itself a species of the broken window fallacy. Consider his reasoning. Home prices are too high. Existing homes have value. But that value is stagnant or declining because of too much inventory is on the market. Some people–like young people and renters–benefit by lower prices. Other people–home owners and banks–benefit from higher prices. Therefore, the government should destroy homes to raise prices. That’s his argument.
Lateral economic transfers–in this case from home owners to would-be home owners through falling market prices–usually do not concern economists. Economists are concerned with wealth maximization for the whole society, which generally consists of getting willing buyers and sellers together at some price: any price.
Destroying homes to raise prices is senseless and, as the destruction itself visibly attests, not wealth maximizaing. Underused and foreclosed home assets still have value. Of course, as asset values drop, some banks and holders of mortgage-backed securities will be under-securitized and left holding the bag for bad notes. But no bank would willingly destroy its own security in the form of an undervalued home. Such a hair-brained scheme would cause the bank to lose not only the differential of the home value and the face value of the mortgage note, but the value of the underlying security as well.
Government-created artificial scarcity is an old trick long denounced by economists as wealth-reducing on net. Since when can assets not be sold at a loss? What principle says that banks and speculators who made bad bets can’t be held to account for their improvidence (or bad luck)? Who said that home owners are more worthy of their wealth than would-be homeowners and renters? Why does the Journal only cheer the law of Supply and Demand when it raises the prices of things that the Journal’s staff and customers already own? (Well, that last question answers itself.)
The author cites housing destruction in Baltimore as this enlightened process in action, but the example is a bad one. It’s one thing to say a vacant, old home is a nuisance that should be bulldozed for the common good, but it’s quite another to destroy a perfectly good assets to affect market prices. A new home, unlike a crack house, takes minimal investment to be maintained. It can always be sold at a loss or even given away if the cost of maintenance is too high. The faster housing prices drop, the faster people waiting in the wings with capital can get a home mortgage and buy both a home the old fashioned way, acquiring housing and an appreciating asset in the process.
The idea of destroying assets to raise prices comes in part from the mistaken view that deflation was the big threat during the Great Depression and that assets had to be destroyed to “keep up prices.” In fact, the liquidation process is a key to economic recovery after an inflationary bubble, such as what occurred during the 1920s. This correction requires such drops in prices, and artificially propping up inflated prices through such means as price floors and cartel pricing only delays the inevitable, as witnessed by the elongated depression of the 1930s, where such measures were commonplace.