The Story of the Dentist and the Toothache
Long ago there once was a man who had a terrible toothache. After a time he decided to go see an expert in teeth — the village dentist. The dentist had a distinguished career with many awards and degrees. After examining the man, the dentist decided to prescribe some pain medication for the toothache. He said, "Take one of these every time it starts to hurt, that will relieve the pain." The man left happy believing he had a solution to his toothache problem.
Within a day the man had to eat the pain medication like candy. It wasn't four hours after taking one pill that he had to take another. Soon after one pill wasn't enough, so he began taking two and then four at a time. On top of that the pain medication had all sorts of other side effects. He was unable to work or be productive to support his family. It was an awful mess.
So the man returned to the dentist. The dentist re-examined the man and decided that what was needed was a stronger medication to help alleviate the pain. The man was a bit skeptical but went along (while on pain meds, he also wasn't able to think very clearly). The new pain meds worked at first but then the same cycle happened — he needed to take more and more pills. What's more, the pain was not only in his tooth, his entire head hurt and his chest as well. He went to bed that night intending to see the dentist again, but died in his sleep due to a massive infection.
The morale of this story: When you focus on the wrong problem you always come up with the wrong solution.
Lessons to Understand
Just as the dentist was focused on the wrong problem — pain versus an infection — the economist who spoke at the Chamber of Commerce Academy of Business last Wednesday was focused on the wrong problem: a poor housing market. To be fair, everything the paper reported he said was correct. Housing, when doing well, can create an economic come back for this region. Housing was one of the key industries that fueled local builders, home improvement sales and also Jeld-Wen — the region's major employer. But to focus on housing as the problem is like the dentist who focused on pain. Our economic problem is not housing. Housing is merely a symptom of the root problem. We need to ask the following questions:
What is causing the housing market to be in such sad shape?
The housing market is in the doldrums because the number of houses available far exceeds the demand for housing. There are two fixes to this problem: decrease supply or increase the demand. Decreasing the supply of housing would be difficult. Very few people will destroy their house to help the housing market. Building more houses won't help either. That will just exacerbate the over supply. No the solution is to create more demand for housing.
So how do you create more demand?
WIth unemployment at over 12% in this area, we need to have more people employed. Employed people have disposable income to qualify for loans and buy homes.
So how do we create more employment?
Now here's the rub. At the local as well as the national level the answer has been to spend government money to "stimulate" the economy and pay for it by increasing taxes on "the rich". The problem is that doesn't work. Even if President Obama was able to get his "Jobs Bill" passed, when that money runs out, guess what? Those who were employed by the bill will be out of work again and another stimulus bill needs to be passed. Repairing bridges and schools does not create sustaining income for those who build them. So a new Jobs bill (aka stimulus bill) needs to be passed and then another and then another. In the real world, extra government spending only creates short-term jobs that aren't self-funding.
So the answer is . . .
The real problem with this economy is that the risk:reward ratio is out of whack. Those with money are being very cautious because the economic environment created by bureaucrats in Washington has made the risk too high for any potential reward. Therefore, the answer to our economic woes is to create an environment where capitalists are willing to invest their capital. As long as those with capital to invest are demonized, as long as there are threats of higher taxes and as long as regulations continue to mount at an unprecedented rate, do not expect housing — or any other industry — to rebound any time soon.