Flawed Logic

by Don Boudreaux on May 3, 2011

in Government Intervention, Housing, Myths and Fallacies, Other People's Money, Subsidies

Here’s a letter to the Wall Street Journal:

Writing about the residential rental market, Peter Donovan asserts that “Private capital may serve the higher-end properties and top-tier markets well, but it has not shown the same interest in work-force housing or housing in smaller markets.  A private-only solution would leave many markets unserved and millions of Americans out in the cold.  As evidence, fully 90% of the government-sponsored enterprise-financed apartments over the past 15 years -10 million units – were affordable to families at or below their community’s median income” (Letters, May 3).

Mr. Donovan mistakes an artifact of current policy as being some sort of law of nature.  The fact that government subsidizes the financing of a huge chunk of lower-market apartments means only that government subsidizes the financing of a huge chunk of lower-market apartments.  Because government – unlike private lenders – can offer arbitrarily low interest rates on loans to apartment developers, it would be shocking if such government involvement the market for lower-end apartments did not result in this market being dominated by government-subsidized loans.

If Uncle Sam were instead to subsidize the financing only of luxury apartments, the construction of a huge chunk of these apartments would be financed with government-subsidized loans.  Would Mr. Donovan then conclude that ‘a private-only solution would leave luxury-rental markets unserved and millions of wealthy Americans out in the cold’?

Donald J. Boudreaux


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