against subsidized housing

the correct amount of subsidized housing (or “affordable” housing) is zero. there are a number of reasons for this, but here are the most clear and obvious.

  1. cash transfers are better than subsidies. subsidies create deadweight loss.

i’ll unpack this below, but let’s start with a familiar counter-example: food stamps. when someone uses food stamps to buy groceries, the funding for that comes from ordinary taxes of all shape and size. no one ever argues that it should come from a tax on grocery stores. that is, no one demands that grocery stores be forced to eat the cost of food stamps by simply selling their food below the market rate. if you can at least kind of grok what i’m getting at here, then read on.

cashism > subsidism

imagine you could have either 100$ cash or a 100$ gift certificate. virtually anyone would take the cash over the gift certificate, as it provides everything the gift certificate provides, and then some.

this can even be quantified by asking how much less you’d be willing to pay for the gift certificate. for instance, if someone offered me a 100$ gift certificate to starbucks, i might be willing to spend 60$ on it. thus if someone were to gift me a starbucks card, there would be 40$ worth of waste, which economists refer to as deadweight loss.

another way to think of this loss is to realize that such a gift would lead to overconsumption. i would spend more money at starbucks relative to the scenario in which i’m given cash. this leads to a misallocation of resources. i’m depriving other people who like starbucks of whatever i consume, or my added demand drives up the price a bit. true starbucks fans may still be able to get the same quantity, but only if they’re willing to pay slightly more. at the level of the individual, this effect is too tiny to notice, but multiply it by thousands or millions of people, and it adds up to something significant.

housing too

this same phenomenon applies to housing. imagine you can receive a 1000$ check in the mail every month, or a 1000$ subsidy on your rent provided you live at 123 plum avenue. plum avenue might rent for 3000$/mo, but it’s not in the neighborhood you’d ideally pick for yourself, and so you only value it at around 2500$/mo. but given you have this subsidy, the rent artificially feels to you like it’s 2000$/mo—far below your 2500$ estimate. thus the subsidy would cause the same misallocation of resources. someone else might experience a full 3000$ of value out of that unit, but instead you consume only 2500$ worth of value, making for a deadweight loss of 500$/mo.

whereas if we were to simply give you the 1000$ cash, you’d then rent a unit whose market value matches your own personal preferences. no more deadweight loss. goods and services going to the people who actually derive the most utility from them.

housing is not a negative externality

another huge fallacy in how “affordable housing” is often implemented is that the developer is charged with building a certain number/percentage of “affordable” units. from the point of view of a housing developer, this feels identical to a tax. indeed, many programs allow developers to pay an in-lieu fee to fund “affordable” units elsewhere.

but taxing developers is profoundly irrational. there are three fundamental types of rational tax:

  1. pigovian taxes taxing negative externalities (e.g. carbon emissions) so as to internalize their cost and rationalize consumer behavior (e.g. stop overconsumption of fossil fuels). the goal is to eliminate deadweight loss.

so while it’s fine to tax developers’ profit at whatever the standard rate is set to across our society, it’s profoundly wrong to institute a higher rate than we would for the production of other types of goods and services, as this drives investment dollars into producing other goods and services instead of housing. this reduces housing options, i.e. drives up housing costs. yet this is exactly what we’re effectively doing when we demand some percentage of units be rented below market rate.

just like with food stamps, any assistance should come from ordinary taxes across society, rather than a tax on the people who happen to be building/selling the good or service you (ironically) are trying to make more available to more people.

divisability

the other nice thing about cash is that it’s divisible. suppose bob and alice are each in a lottery for a specific subsidized housing unit, and alice wins. now she gets the 1000$/mo subsidy, and bob gets nothing. but suppose we could instead just give each of them 500$. that would create a better net improvement to their welfare due to the decreasing marginal utility of wealth.

that’s not to say that subsidies cannot be divided. in principle we can give subsidies to an arbitrary number people. but in practice, so called “affordable housing” tends to be implemented as a quota of specifically earmarked housing units. this creates the aforementioned lottery problem.

conclusion

the optimal public policy is to:

  1. optimize the free market to create as much wealth as possible (e.g. houses, food, clothes, etc.)

the best way to maximize the production of housing is to eliminate zoning, and “development taxes” like the subsidized housing requirements or in-lieu fees. the best way to minimize inequality and create a welfare floor is via universal basic income. give people cash, not subsidies.

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Clay Shentrup

advocate of score voting and approval voting. software engineer.