We have all heard it before. There is nothing like a hurricane, earthquake, tsunami, or war to help spur economic growth. Politicians, reporters, Wall Street analysts, and economists (save for the Austrians) marvel at how natural and manmade disasters bring people together to rebuild homes, office buildings, factories, and infrastructure. Demand is kick-started for lumber, concrete, masonry block, electrical wiring, windows, asphalt, and the list goes on. Contractors, subcontractors, supply houses, and other businesses increase demand for labor; hence employment is stimulated as well. Heck, look how Japan and Germany emerged as economic powerhouses after World War II. By gosh, war, natural disasters, and general destruction do have a silver lining — it’s called economic stimulation. Of course, this is all bunk and amounts to nothing more than the broken-window fallacy. As Henry Hazlitt conveys in his masterful book Economics in One Lesson: "…the broken-window fallacy, under a hundred disguises, is the most persistent in the history of economics." And persist it does.
In Zimbabwe, this fallacy has taken on a novel disguise. Zimbabwe’s president, Robert Mugabe, has ordered the destruction of thousands of homes for the sake of cracking down on crime and spurring Zimbabwe’s economic regeneration. To economists, politicians, and Wall-Street types, President Mugabe must look like a genius — bring on the Nobel Prize for economics. In his prize lecture, Robert Mugabe can simply restate what he has already told his people: "We are constructing brand new houses, mending those which require to be mended, where it is necessary to destroy some. But the thrust is a reconstruction one, a positive thrust to rebuild things…" Additionally, there "…will be joy on the part of those who did not have homes, joy on the part of those who had homes which could not accommodate fully their families. Let’s bring about that joy and we shall erase this image of a Zimbabwe that is in ruins." Indeed, let us all embrace the joy of government-induced domestic destruction so that all may prosper. At this point, Nobel committee members leap to their feet and give Nobel laureate Robert Mugabe a standing ovation — as Paul Krugman watches with envy. The sheer genius of turning government forces against its own citizens, to destroy thousands of homes and leaving over 300,000 homeless surely will create the aggregate demand necessary — for housing, furniture, appliances, etc. — to put Zimbabwe back on the road to prosperity. Mugabenomics is legitimized by the Swedes.
So what if America’s housing bubble bursts, due to rising interest rates, and the economy starts slipping into an inflationary depression? Americans with interest-only mortgages, adjustable rate mortgages, and reverse amortization mortgages will be clamoring for relief. Freddie Mac and Fannie Mae will teeter on the precipice of insolvency. The banking system will find itself in a mortgage-default crisis which will make the S&L debacle look tame by comparison. Alan Greenspan will be tempted to flood the banking system with liquidity (in order to bring down short-term interest rates) but this may add fuel to the fire (i.e. driving up inflation) thus causing mortgage rates to rise even more rapidly. All the while, construction companies, supply houses, realtors, mortgage brokers, bankers, real estate developers, equipment dealers, etc. are all laying off employees…as it is a matter of business survival. Since letting the depression run its course and going back to the gold standard are not options any modern central banker or president will ever consider, perhaps the answer is Mugabenomics — Paul Krugman is writing scathing editorials imploring President Bush and Alan Greenspan to let the "productive destruction" begin immediately.
After consulting with Nobel laureate Robert Mugabe, President Bush declares a "War on Economic Depression." While addressing the nation, with Alan Greenspan and Donald Rumsfeld at his side, President Bush carefully lays out his plan to revitalize America’s economy. He has ordered the evacuation of San Diego, Los Angeles, San Francisco, Seattle, Tampa, Miami, New York, and Boston — much like a hurricane evacuation. Each city, consequently, will be carpet bombed until it is as flat as a pancake. Secretary of Defense Donald Rumsfeld chimes in and describes how every B-52, B-1, and B-2 bomber is at the President’s disposal. In turn, Alan Greenspan describes how the "creative destruction" of the free market will be supplanted by the "productive destruction" of government. President Bush takes another turn at the microphone and declares that the newly created Department of Homeland Reconstruction will oversee every aspect of the rebuilding effort — the head of this new department will be a cabinet-level appointee. George W. Bush closes his stirring speech with overpowering certainty that "…just as World War II pulled America out of the Great Depression, so will my newly declared War on Economic Depression!" Robert Mugabe, reportedly, was moved to tears by this speech.
The very next day, the New York Times, the Wall Street Journal, and the Washington Post’s editorial boards unanimously declare unwavering support for the "War on Economic Depression." The editorials wax eloquent as to how hotels, restaurants, defense contractors, steel fabricators, timber companies, building contractors, equipment manufacturers, realtors, developers, and so many other industries are going to benefit from the evacuation, the carpet bombing, and the reconstruction phases of this bold central plan. In fact, writing for the New York Times, Paul Krugman declares "…this program doesn’t go far enough in that we must not forget the Keynesian prescription of creating additional employment via building pyramids." Without hesitation, pyramid building is added to Bush’s plan — in order to enhance Dr. Krugman’s stature with the Nobel committee — after all, it was Krugman who pushed for governmental productive destruction all along.
As the carpet-bombing campaign begins, which was almost unanimously approved by Congress (only Ron Paul voted "no"), President Bush reasserts his confidence in his plan. Furthermore, he states: "Once this depression is over, we will see to it that President Mugabe’s likeness is carved into Mt. Rushmore. We no longer must wait for hurricanes, earthquakes, or tsunamis to bring economic well-being to our country; as Mother Nature is too unpredictable. Zimbabwe’s president is an international hero; he showed us the path to prosperity and we are eternally indebted to him." Secretly, $1 billion is wired to President Mugabe’s Swiss bank account.
Let the productive destruction begin! Broken-window fallacy be damned.
Eric Englund [send him mail], who has an MBA from Boise State University, lives in the state of Oregon. He is the publisher of The Hyperinflation Survival Guide by Dr. Gerald Swanson. You are invited to visit his website.