The Bad News is Good News

I'm here in lovely Beloit, Wisconsin, where I'm going to give a talk down the road at Rockford College today and then two here at Beloit College tomorrow (followed by two music school auditions for my son at other, larger, schools in a 250 mile radius).  We were eating breakfast just now and Fox News was on.  The headline stories were all about the housing market.   The "bad news" was that new housing construction in January was at the lowest since records started being kept in 1959.  The other "bad news" was that half the housing sales in the Phoenix area were homes in foreclosure.  The anchors treated both of these as horrible news.

But in fact they aren't.  This is the economy healing itself.  We over/mis-allocated resources to the housing market for the last decade or more and now the time has come to both more accurately value those goods and to shift them into the hands of people who can use them more profitably.  (Of course the fact that many houses are for sale cheap from foreclosure might also explain the hesitance to build new homes!)  The necessity of microeconomic reallocation in order for there to be macroeconomic healing is a point that is frequently overlooked in current discussions.  Mario Rizzo, however, is an exception - see his talk from earlier this week.

This is also why Obama's plan to subsidize the interest for homeowners "underwater" is problematic.  It prevents the necessary healing from taking place by keeping assets in places where they can't be afforded.  Sometimes the symptoms of the healing process are themselves unpleasant, but they are also necessary if healing is to take place. 

Right now, any "bad news" about housing is probably good news for the economy as a whole.

Comments

[Peter Boettke]

Outstanding point Steve. This is why I find the naysayers disturbing. The "bad news" is actually the market reallocating resources. Really bad news would be if the market is not allowed to reallocate or the resources simply were sucked into a black hole.

Hayek has a great discussion of the importance of efficient adjustment that my class was just reading on Monday night in The Constitution of Liberty (chapter on Economic Policy and the section on price controls).

[Dave Prychitko]

Like we've said all along -- this isn't the crisis, it's the correction.

Steve: Northwestern? Wisconsin? Minnesota? Lawrence? DePaul?

[Peter Boettke]

Steve,

Make sure to fix the link because Rizzo's comments are exactly what needs to be stressed when one says there may be macroeconomic problems but only microeconomic solutions. Rizzo's discussion is very sharp I think.

[Steven Horwitz]

Link fixed.

Dave: Northwestern and Iowa.

[Ian Dunois]

I think its great that Professor Horwitz is heading to Gordon Tullock's old hometown.
Sad that most there do not know who he is.

[Greg Ransom]

Note well that Hayek includes housing as among non-permanent production goods, i.e. capital, in his _The Pure Theory of Capital_.

[Mario Rizzo]

I have been saying recently that the operative principle of resource allocation in a stimulus-bailout world is this: Resources move to those areas where apparent pain weighted by political muscle is greatest. We can call this "the anti-adjustment" principle. It is not entirely new but the scale upon which it is now being practiced is much greater than previously. Thinking through the implications is alarming.

[Steven Horwitz]

It is "the aristocracy of pull." Every day this crisis makes ol' Ayn look like a freakin' genius.

[Peter Boettke]

Ayn Rand does seem to have told this story 50 plus years ago.

[pmp]

I sincerely wish that someone close to Obama is telling him this. I think the chances that someone is actually doing this is < 1%

Another excellent point, expertly stated. Thank you, Professor Horwitz.