Yes, anything you do to muck with the economy will distort it. What I’m saying is that you should use the least-distortionary means you can. A general tax applied evenly is the best way to extract money out of the economy. Then you apply it in targeted ways to affect social justice. Now obviously this causes the market to change. An injection of cash into one part of the market will stimulate demand and divert resources. No question. It will probably drive up the overall cost of real-estate. It will cause people to live in areas they otherwise wouldn’t choose. There’s also a moral hazard in that the presence of a low-income subsidy may cause some people on the margin to work less or not try as hard to achieve. All those things are true.
But they are nowhere near as bad as having the government interject itself into the price system, or target specific groups with burdensome regulations to force them to become instruments of social justice, or in other ways attempt to micro-manage the economy.
It’s the economic version of the hippocratic oath - first, do no harm. Or as little as possible. Let the market do what it does best. Then take that efficiency and use some of it to do what the market doesn’t address.
What is often missed in these kinds of discussions is that the purpose of the dismal science is the maximization of social welfare. Whether this should occur by means of redistributive mechanisms or by existing market forces is an empirical question, not an ideological one. Both “market fundamentalism” and normative issues are, in my opinion, tedious non-starters. The former position assumes what it intends to prove (pareto optimality of a semi-competitive market status quo) and the latter is essentially a hijack that relieves economic debates of their rigor. The former often tries to ignore externalities, while the latter adds to them a totally unnecessary moral force.
What matters is what works, not what satisfies one person’s idea of social justice or another’s market preferences. Externalities must be internalized by market actors or the competitive market is neither efficient nor optimal nor particularly desirable. Fortunately, we have institutions that help us to force actors to eat their own pollution, as it were. The question is not whether “distortionary” corrections are necessary, but which corrections to use under which circumstances. Whether this Florida legislation is the correct response is a question for the data. Everything else is just cheap talk.
For those that preach economics, this is an awfully common contention that shows a lack of understanding for basic economic principles. The developer can not simply raise their prices to off-set the new tax. If he could do so he would have done so already and increased his profits 1.5 million. Assuming a market at equilibrium, price is set where supply meets demand, irrespective of the amount of profit the business makes.
What would happen in this case if a law increased the price for a developer? Well, it depends. If the law is designed in such a way where the supply is not dramatically effected, then the price will likely not be effected. Why is this? Remember, price is determined where supply meets demand, irrespective of profit. In this scenario, demand remains unchanged and supply is only slightly effected. Therefore, the equilibirium point and the price will not change much. In this case the cost of the low cost housing is essentially absorbed by the developer. Its not as though Trump will say “Screw this, I will only make 9 million dollars instead of 10 million.”
There are bad things that can happen from this sort of laws though. The worst case scenario is that this law makes it unprofitable for developers to build. That would drive supply down to almost nil, leading to a severe housing shortage. On the other end of the spectrum, the law could restrict supply too much leading to massive price increases. Done correctly, however, low cost housing initiatives can have their desired effect without any gloom and doom.
Another issue I have with these types of debates is that the market only works when its free. Free meaning, many buyers and sellers can enter and exit the market. In other words, for a market to be free buyers need to be able to say “F this” and not buy anything. For all pratical purposes a person can’t simply say, screw this I don’t want to buy/rent a house, apartment, condo etc. Everyone has to buy some sort of housing. This will tend to artificially drive up prices.
The second thing that makes the housing market not a free one, is that there are extremely high barriers to moving. In other words, the housing market is not like restaurants. There are tons of restaurants in any city. If one restaurant raised their prices to twice the market rate, everyone would start going to other restaurants and they would go out of business. On the other hand, if the price of housing in Seattle drops dramatically while rising in LA, its not as though people can simply pick up and move from LA to Seattle. In order to move a person would have to abandon family, friends, go through the ordeal of selling their own house, find a new job, and finally pay thousands of dollars to move. This lack of mobility leads to prices that are out of whack from what a free market would yield.
How meaningful is this sort of policy, anyway-- what % of the total housing units in the city are we talking about?
I think **Sam **has it slightly wrong in his justification, although I have advocated the same conlcusion he is advocating in plenty of other threads.
The developer can’t just raise his price to cover his cost. In a very tight market he can, but to some extent it’s probably going to eat into his profits. However, the net effect of essentially taking some units out of the market is to restrict supply. What happens when you restrict the supply of a scarce good? The price of that good increases until a new equilibrium is achieved. So, the very effort being put in place to address the “problem” of high housing costs makes those very costs even higher. What kind of solution is that? Basically, it sets up a lotery system so that some lucky poor guy can live in nice neighborhood-- and tough shit for the 99% (or whatever) of the rest of the poor guys.
The other problem with this type of action is that it forces a particular solution rather than letting people find their own solutions. What is the problem that is trying to be solved, btw? Better to do as little harm to the economy (as Sam suggests) and let people do with any extra money they recieve (from social welfare) as they please. How do we really know that “lack of affordable housing” is the problem? Maybe people would rather live in a bigger house farther away, but what they really need is a fuel efficient car to get to work.
Bottom line, though, if only .1% of the housing stock is set aside as “low income housing” it’s a nit in both direcitons-- how much it raises housing costs and how much it helps the poor. But it probably does give som bureaucrat a nice cushy job making sure everything gets done “right”.
To have a real effect on the community, and to seriously address proverty (set aside, say, at least 20% of housing units for low income renters/buyers), you would have to introduce a significant distortion into the housing market. Then you’d see housing prices skyrocket, unless you could simply build a bunch more. But if you could “simply build a bunch more”, then you probably wouldn’t have the high housing cost “problem” in the first place.
BTW, let me add that I think the mayor is being a major asshole in this situation. Make a clear economic argument or a clear social justice argument or whatever, but insulting people just because they’re poor is not the kind of thing our public officials should be doing. I expect that kind of crap from Rush Limbaugh, not the mayor of a city.
I’m assuming that this new law applies to all developers. In which case you wind up with a higher-priced good, and somewhat smaller demand for it. Absent regulation, the developer doesn’t just increase his price because there are competitive pressures that prevent this.
If the 1.5 million is a small enough amount that the developer can just absorb it, then it’s possible that that’s what will happen. It’s also possible that it will cause the developer to seek out projects in areas that don’t carry this burden. Without knowing the exact financial situation of the region and the profit margins of the developers and the availability of other projects that don’t fall under this regulation, who knows?
In fact, often in these situations we don’t know what the ultimate effect will be until the law is passed and a new equilibrium is reached. It’s that law of unintended consequences again. You may find that putting a 1.5 million dollar tax on certain types of housing projects just causes them to not be built at all.
The assumption underlying this type of legislation is that the developer can just pony up 1.5 million out of profits and everything ticks along as before. But this is not the case. On the margins, where the changes happen, there will be an effect on development. Maybe some developers have especially lucrative contracts that allow them to swallow the added overhead. But others might not. Some developers may not have any other oppotunities, but maybe another developer had to choose between two projects, and they chose this type of housing project because it had an additional profit - but not 1.5 million worth. That developer may choose to now leave the market entirely.
Unless the supply/demand curve prices the product below the point where it can be made profitably. Then you get nothing at all. There’s a huge, untapped market for luxury cars that cost $5,000. But no one is catering to it. If you could provide a lawn care service that cost $10/mo, you’d get millions of people signing up for it.
And not all suppliers are equally efficient, or have equal profit margins. Some companies operate right on the margin. Raise the cost of doing business to them, and they’ll simply leave the market. Then you lose supply.
Demand remains unchanged? That would imply that there’s no one out there who needs the subsidy to be able to afford to live in these houses. The whole purpose of the subsidy is to bring new people in, isn’t it?
If more poor people can now afford to live there, but the price hasn’t increased, then you won’t affect demand at the higher income levels, and you’ll have an overall increase in demand.
And if he’s only making 1 million? And you put a 1.5 million tax on him? Or if he’s making 5 million, but another project in another state could have been done for a 4 million profit, where’s he going to go when you add 1.5 million to his costs?
The question is how to do it correctly, not whether it should be done. This is not a simple question. For example, is it better to heavily subsidize housing in nice areas so that low income people can live in them, or to use the same raw amount of subsidies in a low income neighborhood to improve it or provide twice as much housing? What about the moral hazard? What does the availability of subsidized housing do to the incentive to save, to work harder, to improve one’s economic position?
Here in Canada we’ve got a perverse incentive system for seniors in retirement. There are all kinds of social programs available for retired people including subsidized housing. But they’re not intended to apply to the wealthy, so any retirement income you make is clawed back one-for-one against these programs. Income, for instance, from retirement savings. The result is that people who save between 0 and 100,000 in RRSP’s are considered ‘futile savers’. 100% of their retirement income is clawed back to cover their seniors’ benefits, meaning they have no standard of living increases over those who saved nothing at all.
Then the government wonders why people aren’t saving for retirement…
[hijack]My grandmother took me to hear Stanley Knowles once, who spoke with great vim and vigor against such a means test, for exactly that reason.[/hijack]
What about public housing? Its been tried-the problem is that it usually goes to those who are connected-friends of politicians, people who pay bribes, etc. Plus, the cities usually don’t maintain it, so housing projects usually become slums in short order.
No, you don’t necessarily end up with a higher priced good. First off, you are assuming a free marketplace, which simply isn’t the case for real estate. Second, even after regulation competitve pressures still exist to keep the price down. I repeat, if developers could simply raise their price and get more money, they would have done so already. Forcing them to provide low income housing doesn’t simply give them a liscense to raise prices.
I think I know. South Florida is one of the hottest real estate markets in the country. Things would have to change drastically for any developer to consider leaving the area.
Well this fact certainly hasn’t stopped you from telling us exactly what would happen.
It certainly could be the case, and you have presented nothing to show that it can’t or isn’t.
Sure he might, but if you design the law intelligently you ought to know if he will or not. Its not as though real estate is an incredibly thin margin business where one nudge will send a developer to the poor house. Regardless, the point is not that this is a magic bullet that has no possibility for failure. The point is that your dire warnings about market distortion and the disasterous effect thereof does not necessarily apply.
Probably not. If there indeed is a developer teetering on the edge of bankruptcy, and this law sends him over the edge then one of the more efficient suppliers you mentioned will take over the defunct developers market share.
Of course not. The point of low income housing is to enable working class people to afford housing, not attracted new residents.
Anyways, like I said in that scenario the law is designed in such a way that the effect on demand is negligible.
If all your developers are at this point, then putting a 1.5 million dollar tax on them is a pretty silly thing to do. Again, the point is that these gloom and doom scenarios do not necessarily apply. If you design the law in such a way avoid these pitfalls then the end result will most likely be that developers simply continue on as they were, but at slightly reduced profits.
I don’t know why you brought up all of these objections becuase I went over them in my post.
What evidence do you have that people are actually following this perverse incentive? I seriously doubt anyone is saying “Screw saving for retirement, I want to be poor when I retire to take advantage of this Government program.”
If you were a developer, and you wanted to raise prices, what would you want the local government to do to help you out? You’d want them to reduce the number of new units on the market. That’s what laws like this do-- they take a certain number of units off the market. The thing that keeps prices down is an increase in supply relative to the demand. Housing markets can’t respond as quickly as the market for oil futures, but they are still subject to the basic laws of supply and demand.
You said before that if the developers could raise their prices, they would. So why don’t they? Because if they do, they’ll be undercut by someone else. The competitive pressure of the market. Companies compete on price until they reach a point where their profit margin is low enough that it’s not worth it to them to lower prices any more. If you force them ALL to absorb a 1.5 million dollar increase in costs, I see no reason why the price of housing wouldn’t go up. After all, it goes up whenever any other construction costs go up. When the price of lumber increases, do house prices stay the same? Do developers just absorb the increased price of lumber ‘out of profits’? NO. They raise the price of their houses to compensate. This cost is no different.
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I think I know. South Florida is one of the hottest real estate markets in the country. Things would have to change drastically for any developer to consider leaving the area.
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I don’t mean leave the area. I mean leave the market that has this regulation. If the regulation applies to multi-family housing, they’ll shift to single family housing. If it apples to all residentail real-estate, maybe they’ll move into commercial real-estate. If it only applies to one city, perhaps the suburbs will gain a competitive advantage and the new law will have the effect of creating less housing for poor people and more suburban houses.
You are acting as if companies operate with so much slack that 1.5 million dollars can be just absorbed into the bottom line with no changes in behaviour. If that’s the case, then competitive pressures would have already driven prices lower.
I’ve talked about many possible things that could happen. I said that predicting the exact result of legislation like this is damned near impossible, which is why so many government regulations start with good intentions and wind up screwing things royally.
Yes, the ‘but we’re smarter than all those other people who tried such regulations and failed’ angle. Every government flunky with a plan for how to spend someone else’s money always thinks he’s more clever than the last guy who tried. The problem is, he lacks fundamental information required to make such a decision. It’s hidden from him. He doesn’t know how much extra people are really willing to pay, or how much developers can really absorb. He doesn’t know what all the secondary ripple effects are going to be. This is the problem of central planning in a nutshell.
Or the lack of the units this developer would have brought to market causes supply to shrink and prices to climb. This gives the other developers their profit back that they lost paying the 1.5 million, and end result is a smaller, more expensive housing market.
I see. So where are these people coming from? If they don’t have housing now, but this program will enable them to have it, who are they displacing? If they aren’t displacing anyone, then wouldn’t you say the demand has increased?
Can you explain this? How can a law that’s whole purpose is to open up new housing markets to poor people have a negligible effect on demand? Maybe I’m missing something.
Because people respond to incentives. OF COURSE they do this. Just like making RRSPs tax free in the first place made people go, “Screw the government - I’ll use this program and put my money in it so they can’t take it in taxes.”
There are many, many people who do not save for retirement because they believe that their social security is their retirement plan. Do you doubt that if the govenrment said tomorrow, 'Sorry people, but when you retire, you’re on your own", that savings wouldn’t immediately and dramatically increase?
The claw-backs don’t affect wealthy savers, or professionals and union employeers who will get good retirement packages. They won’t qualify for most of the subsidies and benefits I’m talking about anyway. It’s the working poor who are screwed by this. It’s almost impossible for them to save more than $100,000 for retirement, so there is no point in saving in RRSPs at all. They’re all destined for essentially a welfare lifestyle. The smart ones put their money in investments that aren’t subject to clawbacks, like their home, or post-tax savings that don’t count as income when they withdraw it in retirement.
And many of them who have RRSPs and aren’t financially savvy enough to understand what these clawbacks mean are simply in for a rude surprise.
I’m interested in why Sam’s objections are to this particular government-imposed developers’ overhead, and wonder if there are any others he objects to - or is it just ones that assist low wage earnrs he doesn’t like?
That’s simply asinine. If you’re going to throw around insults and untruths, take it to the Pit.
Fact is, he’s making a lot of good points, and much of the reaction to his points so far (not all, but a lot of it, like yours) has been personal, knee-jerk, and ill-informed.
Honestly, if you don’t think interference in the housing market doesn’t tend to reduce the number of developments, you’ve never lived in a big city with heavy rent control and heavy restrictions on developers. Maybe the effect doesn’t get noticed in ultra-high-demand places, but in Toronto the effect of rent and development control was to virtually end development in a lot of areas and drive the vacancy rate to purely frictional levels, drive homelessness UP, and push all the development out to the suburban municipalities. Every case is different, but it’s nuts to think these sorts of laws don’t have negative effects. We saw it here.
One of Sam’s first points was the best made so far; if you want poor and working class families to get help from the government to own homes, don’t do it half-assed by putting weird little conditions on developers. Do it directly; give those people more money. Reduce income taxes on low income earners. Make mortgage principle up to a certain limit a tax writeoff. Provide direct subsidies.
Right, but direct subsidies are often very unpopular, partly because conservatives and libertarians have poisoned the well so much on the subject of “government handouts” and the “nanny state”.
Personally, I’d be delighted to see conservatives and libertarians in general advocating for tax-funded social welfare programs. But they have an awful lot of work to do to overcome the popular prejudices against such programs—prejudices that they themselves have done their best to encourage.
I confess to being sometimes a little skeptical of the sincerity of some conservatives and libertarians arguing against “government interference” in markets on the grounds that tax-funded direct subsidies are better, for this reason. (Although note that I’m not accusing Sam in particular of such insincerity here.) I think some conservatives and libertarians want to defeat the type of subsidies that might actually attract significant popular support, so they pretend to advocate for the type of subsidies that are much less likely to get significant popular support. Play that just right, and you can wind up with no subsidies at all.
Again, I don’t accuse any of the participants in this particular thread of committing this kind of “fake advocacy”. I am very glad to think that many honest conservatives and libertarians genuinely support tax-funded social welfare programs. But as I said, they’ve got their work cut out for them in undoing the damage that their anti-tax, anti-government ideological brethren have done.
I agree that this is true, but I’m also leery of the idea that we should do something ultimately counterproductive and destructive because, theoretically, if we don’t do it we might have trouble intriducing the right thing. The result of that could be stupidity layered upon stupidity. Not to sound nationalist, but surely the woeful state of many U.S. inner cities speaks to the wisdom of a lot of the Great Society programs?
Speaking as a guy who thinks the government taxes way, way, way too much, in large part because the money is mostly wasted on issues and people who don’t need it and ISN’T spent on poor people, I agree that unfortunately this does seem to put me on the same side of the tax issue as a lot of jerks like the mayor of West Palm Beach. I’m not going to pretend I favour higher taxes, though, just in order to make the argument an easy dichotomy to follow.
It’s a different social issue, but I’ve started a thread or two on the plight of aboriginal Canadians, and the money spent on “helping” them in Canada. Last I checked it was something like $5.5 billion a year, or (I’m going on memory here) about ten thousand bucks for every man, woman and child classified as a status Indian. That’s every year. And yet, their situation never gets better; many abriginals are living in conditions I wouldn’t wish on my worst enemy.
What I find baffling about this is that the government spends such a monstrous amount of money, and yet accomplishes, quite literally, nothing; in any practical, measurable sense, no progress has been made in my lifetime. The question, therefore, is whether status Indians would actually be worse off if we simply eliminated the entire Department of Indian and Northern Affairs. It is, frankly, difficult to imagine that things could possibly be any worse. We have entire ethnic groups and communities in this country who started with nothing, just as far behind the eight ball, WEREN’T the subject of massive government spending, and are building wealth and successful lives with remarkable speed.
You start to wonder if maybe the government isn’t hurting more than it’s helping by introducing a variety of perverse incentives. Everyone would be better off if they just got rid of the entire department, divided $5 billion bythe number of status Indians, and just mailed them all tax-free checks every month.
Anyway, that’s way off topic. Well, no, it isn’t. If you look at the $5.5 billion the feds spend on “Aboriginals” what you very quickly find is that very little of the money is actually given, as money, to ordinary joes so that they can buy clothes and food and whatnot. Most is spent on various Programs and Directors and various other cost centres of governmental and pseudogovernmental organizations. I knew a guy once who got a $120,000 consulting deal from the government to help a tribal council committee study ways to encourage small business startups on the reserve. Maybe they could have just given $120,000 to some guy who wanted to start a small business.
So it is with plans like “Let’s force developers to build cheap housing.” That’s a way for government to do something without offending the voters that SOUNDS like it should work. It’s going to result in twenty unintended consequences, and if you don’t believe me I’ll bet you a hundred bucks (if they do it) that in twenty years it will be apparent to any honest person that the end net result was that nobody was helped; there’s just too many ways that could backfire.
And the real end problem, of course, is that government is cumulative. It never gets smaller. In the U.S. context, every administration - every one, Republican or Democrat, it makes no difference - ends up bringing in way more tax money, and spending way more of it, than they did when they took office. If you don’t believe me, look it up. Layer upon layer of “programs” will be built up until finally the end result is a ridiculous, Byzantine maze of crap that throws the market hopelessly out of whack; for modern day examples just look at U.S. agricultural spending, New York City rent control, or, well, our Department of Indian and Northern Affairs.
