May 18, 2010
Cannibalizing CapitalBy John F. Di Leo
Mitt Romney's boyhood home, which sold for $645,000 as recently as 2002, is in the news: It's slated for demolition this summer. This fine old house, situated in a once-vibrant upper-middle-class neighborhood of Detroit, is one of 10,000 homes and other buildings that Detroit intends to knock down as soon as possible.
The city fathers have decided to accept the city's continued decline as unalterable fact, and since the current economic environment cannot fill those 10,000 homes with eager buyers, they assume that the future economic environment won't, either. So they may as well just knock them all down to "right-size" the city. Houses worth $100K, $200K, $500K, and more will be destroyed in support of this prevailing vision of irreversible defeat.
At the very same time that these wrecking balls start to swing, hundreds of miles north on Mackinac Island, a painter will be eyeing a tranquil scene. This artist will take $10 worth of paints, brushes, and canvas, and he'll capture that scene for posterity...producing a painting he can then sell to a tourist for a hundred, or two hundred, or maybe even a thousand dollars.
Elsewhere, as those same wrecking balls swing, a jeweler will take a shiny compressed carbon rock that his supplier pulled out of the ground in South Africa, and he'll cut and polish it until it shines, mount it in a metal band, and sell it as an engagement ring to some lovestruck young man for his fiancée to wear. From chunks of gold ore and diamond rock underground, human artistry will produce jewelry worth (as his jeweler hopes and the diamond supplier recommends) a good "two months' salary."
Also at that same moment, a master carpenter will walk through a lumberyard, perusing timbers that only a month ago were towering trees. They were cut, milled, and finished, stacked and ready to be selected for this craftsman's next project. Twenty dollars' worth of tree trunks and branches have become $100 in lumber, soon to become $1,000 worth of customized built-in cabinetry in the carpenter's capable hands.
What converts these worthless plants and minerals into paintings, furniture, and jewelry? What made it possible for our artist, our jeweler, and our craftsman to make a living out of processed plants and minerals? Hint: It's not government.
These artists may not have heard about the 10,000 homes being destroyed and the economic nihilism that inspired the project. These artists just do what they do, taking a few dollars' worth of raw materials and transforming them into goods worth ten, twenty, thirty times as much, all because of their ingenuity, their creativity, and the rewards dispensed by the invisible hand of a free market.
It happens every hour of every day, as manufacturers literally create wealth by creating valuable goods seemingly out of thin air.
Wealth isn't created by the Fed's interest rate structure or by the Bureau of Engraving and Printing's massive currency printing presses. The free market creates wealth, as the painter transforms raw materials into something that can be sold for much more than the purchase price of its parts. The market creates $90 if he sells those $10 in materials for $100; it creates $190 if he sells the painting for $200...and it creates $990 if he sells his masterpiece for $1,000.
But if fewer tourists visit the island, there's less demand, less competition to drive up his prices, so he'll sell for less, and less wealth will be created. If fewer people get married, fewer will buy those engagement rings...and if the grooms don't have jobs or budding careers to inspire wild purchases due to our stagnant job climate, then they certainly won't be risking two months' salary on that fancy ring.
And if you knock down 10,000 homes in Detroit, that's 10,000 fewer homeowners to remodel their basements, finish their attics, or renovate their kitchens with those custom cabinets.
Economies aren't based on building things, destroying them, and starting over again from scratch, time and time again. Economies are based on continued growth. Build a factory, then use it to produce things. Build a house, then add additions and improvements when you can...always adding, always decorating, filling the closets, the knickknack shelves, and the garages.
We have entered a new and frightened age, in which our government knocks down 10,000 homes rather than take the well-known steps that encourage economic growth. Our government pays people to destroy hundreds of thousands of perfectly good used cars (calling them "clunkers") in order to replace them with cheaper Japanese and Korean imports. We order our nation's car companies to close dealerships, throwing hundreds of thousands of mechanics, salesmen, and accountants out of work, rather than simply correcting the tax and regulatory burdens and destructive union contracts that caused those carmakers to be unprofitable.
Over the past year, we have seen an explosion of new startups, at strip malls and corner storefronts across the country: Every town now has a "Cash for Gold" franchise, or two, or three. Nothing against this franchise or its cousins, of course -- it's a legitimate business, meeting a perceived need -- but this explosion has a pernicious aspect to it. These shiny shops' principal tool isn't a paintbrush, or a machine tool, or a drafting board, but a simple scale. No matter how much talent originally went into an article of jewelry, how much value was added by the jeweler or artisan who conceived the necklace, ring, or brooch that a desperate debtor brings in, it is to be sold and melted down for the value of its raw materials, and nothing more.
How much wealth has been lost in the stock market in this recession? At least stocks can come back if the companies survive...the certificate that plummets from $100/share to $50 can recover it all in a year or two when the credit market recovers or taxes are cut or the right administration change occurs. But that $500 necklace that's melted down for its $30 worth of gold value isn't coming back. That $470 difference isn't just in limbo; it's been destroyed forever.
The unstable house, no longer structurally sound, must certainly be destroyed to start over. But the perfectly good house that's destroyed just because failed politicians have given up on their town -- pulverizing a $645,000 home to free up a $10,000 lot for a park or farm -- those hundreds of thousands of dollars in losses are avoidable, and are therefore unforgivable.
We live in sad times, in which economically illiterate politicians promise to deliver job creation and prosperity from the wanton destruction of currencies, real estate, and personal property, large and small.
This conflagration of willful demolitions must stop. There's not much the Republicans can do to slow it down (though they must of course continue to try). If our country is to make it to the next election with anything to wear besides a barrel, the president's own majority party needs to start standing up to its leadership. Amazingly, despite the blatantly obvious wreckage of current policies, even despite the worst polling in the history of polling, there are no signs that the Democrat rank and file have any such inclination to save themselves and their country.
They seem happy to sit by as their leadership makes empty promises that job creation will climb in the wake of business closures, that "green shoots" will arise from the broken windows of fallacious economics.
Today's Democrats have based their entire prayer of economic growth on the idea that if they cremate a phoenix in a funeral pyre, a new and healthy phoenix will magically rise from the ashes. Unfortunately for us all, that legend is a myth.
John F. Di Leo is a Customs broker and international trade compliance trainer. A former county chairman of the Milwaukee GOP, his articles regularly appear in the Illinois Review.