The Berger Memoranda

Dollars for Dumps

Borrowing from the combined genius of Jonathan Swift and the guy that came up with “Cash for Clunkers,” I would like to make my own modest proposal for “stimulating the economy.” Initially I suggest that we call it “Dollars for Dumps,” but I believe that the clever people who write the legislation to fund this program will devise a more lyrical label.

Following on the heels of the wildly successful “Cash for Clunkers” program, I think we can apply the same concept to solve the “housing problem.” Like the CARS or “Cash for Clunkers” program eliminated wasteful autos, this one would get rid of unwanted, energy consuming, houses, while, at the same time, creating jobs and improving “the environment.” And, although it will require a lot of paperwork in its final form (another plus for the economy), everyone will see the benefit of this program and jump on the bandwagon.

The plan would require that banks destroy houses that they foreclose. In return the government will reimburse them the amount of the outstanding loan.

Think of the benefits:

• Banks will remove “toxic assets” from their balance sheets with no loss of capital.
• Employment will jump in the demolition industry.
• Foreclosures will no longer drag down house prices in effected neighborhoods.
• Cities could turn house sites into parks—also adding to employment and improving the environment.
• Cities would hire more police to keep gangs out of the new parks.
• Eliminating uninhabited houses would reduce neighborhood blight.
• The reduced supply of “distressed” houses on the market would cause house prices to rise.
• Rising prices would allow banks to make the loans they have been reluctant to make during the “housing slump.”
• Government could set up a new regulatory agency to control abuse of this amazing program—also good for employment.
• Builders would soon start to build again—encouraged by rising prices, the result of artificial shortages, and more artificial monetary expansion.
• Rising prices would also generate a new wave of the “wealth effect,” causing consumers to spend money they don’t have, again.

The list of benefits could go on and on. You probably could think of some of your own.

Based on the initial success of this program—an inevitability—Congress could “reform” it into a more permanent program. For example, when you house reaches a predetermined age a demolition crew would show up and tear it down. Then a builder would arrive to rebuild it (just like before or better). During this process you would stay in a swank hotel. And, all this activity would provide a perpetual stimulation to the economy.

And the government would pay for all of it.

Of course, we don’t ask where government gets its money.

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We have waged many wars in this country against ideological foes. We have fought the “War on Terror” for nearly ten years, with limited success. The “War on Drugs,” which has gone on for decades, has met with probably less success. We have not heard much lately from the front of the “War on Crime,” but I doubt that I missed the victory celebration. I cannot say for certain whether the WIN (Whip Inflation Now) campaign of Gerald Ford meets the war criteria. But, war or not, we certainly did not win that one (as they say, “Pun intended.”)

Recently we have reinvigorated a war that we have waged against ourselves (like most of these ideological wars) for a century or more: the War on Prosperity. (The official beginning of this war depends on whether the income tax amendment, the Federal Reserve Act, the New Deal, or something before any of these, marks the start.) And this war stands apart from those others.

This war we might actually win.

The triple onslaught of inflation (expansion of the money supply), government spending, and government regulation brought our prosperity to its knees roughly a year ago. Then, according to the rules of war (hit the enemy again before he recovers), we launched a secondary three pronged attack. The Fed nearly tripled the excess reserves in the banking system (that’s money, not production or consumer goods.) The Congress started handing out money with few strings attached (the recipients used that money to divert real resources from more productive uses.) The third prong of the attack, increased regulation, takes a bit longer to implement, but it’s coming.

Good war-time strategy recommends giving the enemy a false sense of hope. Get him to lower his guard, so you can hit him again when he relaxes his vigilance. We have done that with give-aways, phony projects, and the false hope of free medical care for all. In the meantime the enemy continues to bleed to death.

During this campaign we have not had the good sense of a cartoon character (I refer to Pogo) to look at the bleeding enemy and see ourselves. We fail to see that the prosperous enemy we want to bring down belongs to us.

The person who earns more than the rather arbitrary $250,000 per year does so because he provides to the rest of us goods and services that we value more than $250,000 per year. The person who earns much more $250,000 per year probably also employs several other people. Unlike the military enemy, we depend on this person. He has wealth only because he has what we want. In a way he is us.

When the government (with the help of the Fed) gives us money that does not represent legitimate saving, it amounts to giving us loaded (economic) weapons we use upon ourselves. We buy houses and cars that we cannot pay for, because we saved nothing to get them. We cheat the seller without even knowing it. Yet, we have become addicted to using this nasty weapon.

Then, mistaking the disastrous results caused by government actions for maliciousness on the part of fellow citizens, we send politicians to Washington to regulate their behavior. (I need to clarify the pronoun. They regulate the behavior of citizens. Never themselves.) This regulation causes more misallocation of time and resources.

For those who think the actions of the Fed, the Treasury Department, the Congress, or the Presidents actually diverted an impending catastrophe, think again. While they take credit for an unsubstantiated success (ask them what specific consequences would have occurred if they had not acted), they have succeeded in diverting your attention for one simple fact: you’re bleeding to death (financially.)

When the government wins the war on prosperity, it will not create a winner. It creates one loser:

You.

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No matter what the Congress and the President do, “healthcare” reform will fail. It not only will not succeed, it cannot succeed, for a very simple reason: government cannot calculate.

I don’t mean that as a criticism of the government education. The people in congress may suffer from mathematics handicaps because to their experience in the government education system. But, regardless of the math skills of its people, government cannot make economic calculations because it simply cannot know the cost of the resources it attempts to reallocate. Without cost figures they simply cannot calculate the net benefit of any of their economic intervention.

Cost represents what an economic actor must sacrifice to get what he wants. To buy your iPod you had to give up something else, maybe a pair of shoes or 30 trips to Burger King. You had to give up something that you own. You expressed your preference for the iPod for whatever you gave up. But government cannot make that calculation.

Government owns nothing. Every resource it uses or redistributes it must take from someone else. Government does not have to make the difficult choices made in the market, which determine real cost. If government wants something, it takes it. It does not have a cost when it takes from someone who did sacrifice.

Government’s inability to calculate has one of two results. It either drives market prices too low, causing shortages; or it drives prices up too much, causing waste. In the case of something like “healthcare,” to which politicians feel so committed, government will tend to push prices too high. The evidence lies in the high medical care prices they claim to abhor.

Government efforts to reform a system that does not work well will only create one that works worse. Congress cannot avoid failure in this endeavor anymore than you can avoid having a rock you drop from falling to the ground.

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People in favor of any “healthcare” reform should face the ethical question: should this country engage in massive theft in order to misallocate the medical resources available to its citizens?

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