Is Arson a Good Economic Policy?

Alan Greenspan says that what the government should have done in response to the housing bubble is buy up a bunch of houses and burn them to the ground. Watch him here.

Greenspan was among Ayn Rand's inner circle. Here's a photo of the two of them along with Gerald Ford. But what he's advocating sounds more like Keynsian stimulus. It sounds like something you might here from a liberal. In this YouTube clip Paul Krugman makes the claim that from an economic perspective the attacks on the World Trade Centers were actually good for the economy. The video describes what is known as the Broken Window Fallacy. Sure, breaking stuff puts people to work. But now the owner of the window can't spend his money on other things. He might have bought a suit. Now he can't afford it. Buying a suit puts people to work too. And if the window hadn't been broken people would have been put to work AND he'd have a suit. That would have been better.

Fair enough. But what if the owner was so rich that he could afford both to buy a suit and to fix the window. Does breaking the window mean we actually get to enjoy more economic growth? It seems to me that we do.

Conservatives are generally very much prone to ridiculing this view. Recently University of Maryland economist Peter Morici said something similar regarding hurricane Irene. In reply Mark Perry points to Don Boudreaux, economist at George Mason University in what he calls a brilliant economic smackdown. Here's Boudreaux:

I hereby offer my services to you, at a modest wage, to destroy your house and your car. Act now, and I’ll throw in at no extra charge destruction of all of your clothing, furniture, computer hardware and software, and large and small household appliances.

Hardy har har. Seems Morici's point is kind of silly. I guess he wants us to destroy stuff.

Morici says that destruction does produce economic growth. That is it does lead to an increase in GDP. It comes at the cost of wealth. Wealth is destroyed. Economic growth occurs. Isn't that true? Seems it is. Then comes Boudreaux's fallacy. I guess Morici wants to destroy things.

No, he doesn't. But that doesn't change the facts. Destruction can lead to economic growth. Particularly when present resources are underutilized, as they obviously are in our economy today.

Isn't it true that WWII ended the Great Depression? The government created the demand for tanks, bombs, and planes. So everyone went to work creating them. Unemployment fell through the floor. GDP went up. And the stuff that was created was just destroyed. It does produce economic growth.

That doesn't make it wise. Why not rather create demand for things that are useful and won't be destroyed? Build bridges and schools. Fund research that can lead to improvements for all, like renewable energy and medical research. Rather than send people to war, why not send them off to provide medical care for the poor? That can stimulate the economy as much as war and destruction can.

Better still why not contrive an economic arrangement that doesn't demand escalating consumption, as ours does? Our system does in fact incentivize destruction. Hardware engineers and SW developers will tell you that really phones don't have to be designed such that they are obsolete so quickly. I-pod accessories don't have to be designed so that they are incompatible with future models. But they are. Computers really could be designed so they are easily upgradable instead of discarded. But that's not in the interest of short term profit.

But back to the system we have. We're not in favor of destruction. We prefer a better use of resources. But in an economy where wealth is concentrated in the hands of few and resources are underutilized, would breaking the windows in mansions produce economic growth? It seems to me that it would would.