Subsidies For Us All

The Wall Street Journal reports that, in certain cities, rents are so high, and “middle-class” housing is so scarce, that cities are providing assistance to middle-class families looking for affordable housing.

In New York City, Cambridge, Massachusetts, and San Francisco, among others, high constructions costs have caused developers to focus on providing more profitable, luxury accommodations for the wealthy, creating a shortage of middle-class housing that has caused rental prices to surge — and cities are responding by requiring developers to contribute to funds to build new middle-class housing, or set aside certain units for middle-class citizens, or hold lotteries to allow qualified individuals and families to obtain lower-cost, below-market-rent apartments.

shutterstock_131458289The city programs are specifically geared toward people who are middle-class — or even more so — by any measure.  The article reports that, in Cambridge, the city recently held a lottery for 15 units in which a family of four earning as much as $118,000 could qualify.  In New York City, a bank employee who earns “well over” than the NYC median income of $53,000 and who formerly lived in a “cramped, outdated” but “rent-stabilized” walk-up in Manhattan, won a housing lottery to get a brand-new apartment in Queens with a nice waterfront view of Manhattan where the rent is “roughly the same” as his former “rent-stabilized” place.  Elsewhere in the Big Apple, New York City officials agreed to contribute $225 million to preserve 4,500 housing units that will be available for families of four making as much as $142,000.

These cities, and their citizens, don’t seem to recognize they are in a spiral that is not going to stop until some form of economic rationality returns.  Why are construction costs in these particular cities so high that building housing affordable for people earning six-figure incomes — which private developers are perfectly happy to do in cities like Columbus — must be specifically subsidized or otherwise required by city officials?  What special costs, or taxes, or fees, or regulatory burdens have those cities imposed that have hampered housing construction?  And has the city done anything to make management of affordable housing once it has been built so unprofitable that there is no long-term incentive to construct such units?   The New York City bank employee, for example, formerly lived in a “rent-stabilized” apartment before luckily getting a brand new unit that costs about the same as the crappy “rent-stabilized” place.  Let’s see . . . could the existence of rent stabilization ordinances and requirements have distorted the marketplace, causing landlords to spend less on upkeep of existing housing stock and discouraging the creation of new units?

Rather than shelling out millions of tax dollars to subsidize construction, or imposing new requirements on developers that inevitably are going to have other economic impacts, the cities with a middle-class housing problem should take a fresh, ground-up look at their regulatory structure, their tax structure, their housing cost laws, and their wage regulations and get rid of the regulations that are causing the economic distortions they are experiencing.  Subsidies and set-asides obviously aren’t a solution.

There’s a bigger issue lurking here, too.  Everyone wants to help the “truly needy” get back on their feet, but when you are actively subsidizing families earning more than $100,000 you have gone beyond the point of rationality.  Our federal, state, and local governments have created so many “assistance” programs that virtually everyone receives some form of governmental benefit, whether it is in the form of a tax loophole available only to the very wealthy or special programs for housing for middle-class families.  Providing benefits to everyone obviously is not sustainable.  Is it any wonder that, at the federal level, we have built-in, assumed annual budget deficits of hundreds of billions of dollars stretching as far into the future as the eyes can see?

I’ve got a message for those middle-class folks in New York City, Cambridge, and the other towns:  move to places like Columbus, or Louisville, or San Antonio, or countless other towns where economic and governmental rationality still prevails. You’ll be able to find a nice, affordable place to live, without having to be on the subsidy rolls.

Hard To End

The Washington Post has an editorial today urging Congress to end corn ethanol subsidies.  The subsidies cost $6 billion, and their value in encouraging corn ethanol use is questionable in light of other government requirements.

What the Post editorial does not say is that these kinds of subsidies, and other government programs that seek to encourage or discourage other forms of economic activity, distort the market and have a much broader ripple effect than Congress typically intends.  If government subsidies encourage a farmer to grow corn when he otherwise would grow something else, the result will be an outflow of government money and, because the farmer is not growing the other crop, less competition and therefore higher prices in the market for that other crop.  If the subsidy encourages maximum production of corn, the farmer may use special fertilizers and other forms of chemicals to increase yield that may have an unexpected environmental impact.  The farmer may buy otherwise unnecessary types of equipment and build otherwise unnecessary silos or other structures, thereby making him and his farm economically dependent on the continuation of the subsidy and increasing the risk of an unsustainable debt burden and foreclosure if the subsidy is ended.

Once subsidies are started, they are difficult to end.  The alliances that caused the subsidy to be created in the first place grow stronger as subsidy money flows in and part is then contributed to politicians to encourage them to keep the subsidy in place.  In the case of the corn ethanol subsidy, the alliances presumably would be between farming states, large corporate agricultural concerns, and groups seeking to end our dependence on foreign oil.  Any effort to eliminate the corn ethanol subsidy — or any similar subsidy — therefore would likely face very stiff political opposition.  Occasionally, however, forces coalesce that make the elimination of such programs possible, such as happened when President Reagan was elected and Depression-era farm commodity price support programs were ended.

For anyone serious about deficit reduction, a careful examination of government subsidies, tax breaks, and other methods of interfering with the economy would be a good place to start.  We don’t need the government to pick winners and losers and to waste our tax dollars in doing so.