An Idea for Senators

Resident Fellow David Frum
Resident Fellow
David Frum

The U.S. economy is in freefall because Americans have suddenly discovered themselves to be much poorer than they believed.

Bruce Bartlett estimates that the 20% nationwide decline in housing prices has slashed household net worth by $10 trillion. Feeling poorer, consumers spend less--perhaps $500 billion a year less, perhaps even more.

The Democrats' stimulus plan aspires to substitute for that lost consumer spending. But there are a couple of bad things wrong with these ideas:

There may be 3 million or more surplus housing units in the United States. These excess units are glutting the market and squashing recovery. But what if these units could be removed from the market?

  • Unless we're prepared to tolerate a lot of waste, fraud, and abuse, that money cannot possibly arrive anytime soon. Government can spend honestly, it can even sometimes spend effectively, and of course it can spend fast--but it cannot do all three.
  • Democrats talk about "infrastructure" in grand and glowing terms, as if they were planning to deliver a new Interstate highway system or a second St. Lawrence Seaway. But we still have not got much reason to feel confident that the money will be spent well or intelligently. The early indications are that it will be spent very badly, supporting existing programs rather than producing valuable new assets.
  • Anyway, the stimulus even if effective will not address the core problem: the collapse of housing wealth. Consumers won't resume spending until they feel their wealth appreciating. So the priority should be figuring out some way to stop the decline in housing prices.
  • Happily, our old friend Econ 101 can come to our aid. A price decline indicates a surplus of supply over demand. Larry Lindsey estimates that there may be 3 million or more surplus housing units in the United States. These excess units are glutting the market and squashing recovery.
  • But what if these units could be removed from the market? Assume for argument's sake that the owners of these units would be glad to sell them for say $150,000 each--about the median house price in the United States. All 3 million would cost $450 billion, about half the stimulus package. Then--dismantle them, sell the parts for salvage. Offer owners of occupied homes in the vicinity the same deal, so that nobody is involuntarily left as the only occupied home on an otherwise abandoned and demolished cul-de-sac. Think of it as "exurban renewal"--a 21st century counterpart to the slum clearances of the 1940s and 1950s, only this time on the edge of the cities rather than at their core.
  • With the federal payments for their property, the owners--whether developers or foreclosing financial institutions--would retire the mortgages on the land, eliminating the "toxic paper" clogging the financial system. When a business makes a bad deal, it writes it off as rapidly as possible, takes the shock to the bottom line, and then returns to the search for better deals. This is the national equivalent--a colossal continental write-off, using wrecking crews as well as bookkeepers.

It's not cheap--but it's cheaper. It could be done very quickly. It would offer considerable employment to semi-skilled and unskilled workers: demolition is not rocket science. It would direct relief precisely to those sectors most in need, but indirectly benefit everybody who owns a home.

Good plan? I await objections!

David Frum is a resident fellow at AEI.

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

David
Frum
  • David Frum is the author of six books, most recently, Comeback: Conservatism That Can Win Again (Doubleday, 2007). While at AEI, he studied recent political, generational, and demographic trends. In 2007, the British newspaper Daily Telegraph named him one of America's fifty most influential conservatives. Mr. Frum is a regular commentator on public radio's Marketplace and a columnist for The Week and Canada's National Post.

What's new on AEI

In year four of Dodd-Frank, over-regulation is getting old
image Halbig v. Burwell: A stunning rebuke of a lawless and reckless administration
image Beware all the retirement 'crisis' reports
image Cut people or change how they're paid
AEI on Facebook
Events Calendar
  • 21
    MON
  • 22
    TUE
  • 23
    WED
  • 24
    THU
  • 25
    FRI
Monday, July 21, 2014 | 9:15 a.m. – 11:30 a.m.
Closing the gaps in health outcomes: Alternative paths forward

Please join us for a broader exploration of targeted interventions that provide real promise for reducing health disparities, limiting or delaying the onset of chronic health conditions, and improving the performance of the US health care system.

Monday, July 21, 2014 | 4:00 p.m. – 5:30 p.m.
Comprehending comprehensive universities

Join us for a panel discussion that seeks to comprehend the comprehensives and to determine the role these schools play in the nation’s college completion agenda.

Tuesday, July 22, 2014 | 8:50 a.m. – 12:00 p.m.
Who governs the Internet? A conversation on securing the multistakeholder process

Please join AEI’s Center for Internet, Communications, and Technology Policy for a conference to address key steps we can take, as members of the global community, to maintain a free Internet.

Thursday, July 24, 2014 | 9:00 a.m. – 10:00 a.m.
Expanding opportunity in America: A conversation with House Budget Committee Chairman Paul Ryan

Please join us as House Budget Committee Chairman Paul Ryan (R-WI) unveils a new set of policy reforms aimed at reducing poverty and increasing upward mobility throughout America.

Event Registration is Closed
Thursday, July 24, 2014 | 6:00 p.m. – 7:15 p.m.
Is it time to end the Export-Import Bank?

We welcome you to join us at AEI as POLITICO’s Ben White moderates a lively debate between Tim Carney, one of the bank’s fiercest critics, and Tony Fratto, one of the agency’s staunchest defenders.

No events scheduled this day.
No events scheduled today.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.