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’?

Sincerely,
Donald J. Boudreaux

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{ 34 comments }

Slappy McFee May 3, 2011 at 10:10 am

Must have been a messaging campaign because on the local news, in Minnesota, I learned that 55% of renters can’t afford a two bedroom apartment. What that means and why it’s a story, I have no idea.

Tom May 3, 2011 at 10:28 am

Eh…not surprising I suppose. Rent is expensive and gas is through the roof. It’s not really news though…those people should just have taken more personal responsibility, gotten a better education, and been able to make more money. Simple as that. If you can’t afford market rent for a two-bedroom, you’re not good enough for one.

Mao_Dung May 3, 2011 at 12:11 pm

“…those people …”

I prefer “those people” to elitist creatures like you.

Ken May 3, 2011 at 1:07 pm

It’s now elitist to take responsibility for your own life? Who knew?

yet another Dave May 3, 2011 at 2:26 pm

Tom appears to be a leftist type pretending to be a libertarian to make “unsympathetic” libertarians look bad. His phrasing gives him away.

Stone Glasgow May 3, 2011 at 6:35 pm

He was trying to be sarcastic.

vikingvista May 3, 2011 at 1:57 pm

“55% of renters”

This is referring to people who are renting efficiency or 1 bedroom apartments. Does this really say anything about prosperity? College students? Single professionals? Retired widows/widowers? At some point, probably right around the two-bedroom apartment rent range, people are instead in the market to BUY, not rent, and so aren’t even a part of these statistics.

Slappy is right. It doesn’t say anything.

Stone Glasgow May 3, 2011 at 6:39 pm

Tom,

The solution is not to throw people in the street or accuse them of being lazy. The solution is to make housing as cheap and high quality as possible, and the government cannot do that as well as entrepreneurs.

Jeff Neal May 3, 2011 at 10:27 am

As a residential real estate developer, I can attest to the distortions that result from gov’t intervention in the housing market. We developers took advantage of a market awash with capital and [over]-built in certain areas where potential for profits was promising. That over-supply led – inevitably – to a significant reduction in value of the over-supplied asset class, but since the government is propping up prices (for the sake of ‘keeping people in their homes, safe from foreclosures’) the market can’t find the true VALUE of the assets, trades are not happening and thousands of homes/condos sit empty.

Along the way, we were forced to build a certain percentage of ‘affordable’ units in most of our developments. As if developers’ greed was the reason for the high cost of housing in certain attractive locations and neighborhoods. Attempting to ‘merge’ a developer’s business motives with a political community’s public policy objectives and dreams is a recipe for disaster. Evidence – look at the housing market across the country, and note that the worst hit areas are places (Las Vegas, Miami, Southern California) that had natural and sustainable demand dynamics – population growth, good weather, attractive life-style, etc. The government caused TOO much housing to be built in areas where the market would have delivered the right amount with no subsidies. Did the subsidies (low interest rates and Fannie/Freddie flooding market with $$) produce more housing in Harlem or Watts?

The government interventionists inflated a bubble which inevitably burst, and now they try to keep the bubble afloat by pumping more air into the ruptured, leaky disfigured membrane. Constant attempts to ‘fix’ the markets ‘failures’ prevent the market from doing its job – correcting for mistakes via the pricing mechanism. Basic, right? But tough for the guy with only a hammer in his tool box to grasp that he needs a phillips-head screw driver, or that the automatic door latch will open/close the door, as needed – he doesn’t need to smash the glass to get in or out.

Mao_Dung May 3, 2011 at 12:19 pm

“We developers took advantage …”

What else is new?

Jeff Neal May 3, 2011 at 12:38 pm

Leave it to you to ignore the point and cast a stone.

I’ll dodge that one – only a anti-Capitalist would misunderstand the words “took advantage” to suggest that something improper was done.

Go mud-wrestle with someone else. I won’t be baited into such with someone who comments here for sport rather than rational dialogue.

Mao_Dung May 3, 2011 at 12:53 pm

“we were forced to build a certain percentage …”

Nobody forced you. Bull. You still made out like a bandit. You knew what you were getting into. You’re a blamer, and a game player. I’m sick of your con. Move on.

Mao_Dung May 3, 2011 at 12:56 pm

Sometime the developers need to be put in jail for theft and fraud.

http://www.latimes.com/news/local/la-me-adi-20110426,0,1471394.story

Jeff Neal May 3, 2011 at 12:59 pm

one more for the record: YES, we were forced by zoning codes and other government imposed restrictions. Why else would I spend $100 to build something I could only sell for $50?

“bandit” – hardly. Not blaming anyone – nothing in my commentary implies blame.

Stone Glasgow May 3, 2011 at 6:45 pm

So the government policy wasn’t bad, it was the people who accepted the government’s free money. If the government offered you a million dollars in cash, would you turn it down?

Methinks1776 May 3, 2011 at 12:55 pm

Wow, Jeff. Nice post.

The government thwarts price discovery not only in the housing market but in the securities and commodity market as well.

It’s worst than that. While some argue that we don’t have government planning to the degree of dictating the number of units produced, the sources of materials used in production and the price at which the finished product is sold, we’re pretty not that far away from explicit orders. The government uses every method at its disposal – the ability to tax, legislate and regulate – to control the most minute business decisions and influence what is produced and the price at which it is sold. These methods permit the government to control or at least heavily influence economic activity while maintaining the ability to say that there is no planning.

FreedomGuy May 3, 2011 at 1:23 pm

As one who’s been downsized twice in the last two years…I was in the greater Denver area scouting neighborhoods and checking house prices. I have decided I would prefer to own but not sure if I can afford something acceptable…especially since the IRS kicked my butt from a 401k withdrawal tax and single guy with few deductions. Anyway, I am going through some great areas that I cannot afford at my new lower income when my friend who’s an accountant starts pointing out beautiful subsidized housing (she audits the accounts). I make too much too get a subsidy but not enough to live in these nice areas. I was absolutely furious that people who make less than I do can afford better housing and neighborhoods than I because of government subsidies! My effective tax rate is 33% (higher with SSI and Medicare) and I give money to these people who can in turn get a better place by working less. The world is on its head and I’ve had enough. Where is John Galt? I’m getting outta redistributionist, centrally planned, collectivized USA if this keeps up.

Jeff Neal May 3, 2011 at 1:31 pm

I wish you well.

there are many more who agree with you.

> http://wp.me/P1jTK0-2

SaulOhio May 3, 2011 at 1:38 pm

But then, where will you go? Some other redistributionist, centrally planned, collectivized country?

vikingvista May 3, 2011 at 2:00 pm

If you find an actual “land of the free” anywhere, let me know.

Stone Glasgow May 3, 2011 at 6:47 pm

There are no free countries left. They are all redistributionist, centrally planned and collectivist.

David May 3, 2011 at 10:49 am

My building has about 23 “affordable” units in it (making up almost 10% of the building). Four of them have sold, but one people apparently already wants/needs out. The developer actually didn’t market the units and told people who asked about them that they were all sold (according to testimony at community meetings). Recently, they applied for an exemption on the units so they could be sold to a mental health and substance abuse organization in order to use the units as a sort of halfway house. Of course, one of the executives of the company that developed my building sits on the board of the mental health/substance abuse treatment organization.

The developer claimed (to the alderman and city council) that the condo owners supported the exemption proposal even though we had not been informed. Thankfully, a reporter asked our board’s President for comment and he immediately involved our lawyer to oppose the exemption. At that point, the developer simply dropped the plan.

I guess the point of that story is to illustrate how corrupt the “affordable” housing system is. Had it not been for that phone call from a local reporter, the exemption would have been granted and the developer would have succeeded in using the “affordable” housing scheme to enrich himself by selling units to another organization he heads at below-market rates.

Stone Glasgow May 3, 2011 at 6:49 pm

Government policies that break supply and demand rules encourage fraud.

W.E. Heasley May 3, 2011 at 10:55 am

“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” – Peter Donovan

Donovan is asserting markets fail when in fact the market is distorted due to government intrusion. Hence government intrusion into a market causing distortion, to Donovan, means markets fail (Mf). Hence we begin this exercise in a state of finger pointing or placing blame (B)

Then Donovan takes his conclusion and then advocated more government intrusion (G) which will cause more market distortion which will, in Donovan’s logic, cause the market to succeed.

However, the market will merely continue to fail, which will then lead Donovan to advocate more government intrusion and more market distortion. This will cause more failure. Eventually, Donovan-omics will be a dismal failure.

But wait! It can’t be failure! The exercise of escalating government intrusion should make markets succeed according to Donovan-onomics. Hence some external and exogenous force will be blamed (B)

Hence, Donovan-onomics is: B requires >G = >B which is a function of >Mf leading to >G = >B, and so on.

Yes, the Donovan-onomics perpetual circular model of blame!

John V May 3, 2011 at 11:03 am

Yes.

“Donovan is asserting markets fail when in fact the market is distorted due to government intrusion. Hence government intrusion into a market causing distortion, to Donovan, means markets fail (Mf). Hence we begin this exercise in a state of finger pointing or placing blame (B)”

And this analytical behavior from the Left applies to almost everything. So sad.

FreedomGuy May 3, 2011 at 1:27 pm

It’s interesting but the modern statist-liberal’s answer to all problems is always “more government”. Even when government is the cause of the problem, the solution involves tweaking at best plus more money, power and policing to make it work. That’s why Hayek and many others foresaw that the end of all centrally planned-collectivized states (even with good intentions) is an autocratic state, always.

Stone Glasgow May 3, 2011 at 6:52 pm

We just need more rules to force people to be good people. Eventually, after we force people to be good and close all the loopholes and find gods to be in charge, people will learn to be good on their own. It’s like raising children, you see.

Russ Nelson May 3, 2011 at 11:21 am

To answer the question at the end of your letter: Yes.

LoneSnark May 3, 2011 at 12:21 pm

Back in the days before interference, housing for the poor came about when brand new expensive housing was built for the rich, causing the middle class to move into the former housing of the rich, and the poor to move into the former housing of the middle class. In this way, the poor did not need to cover the cost of their own housing, just cover the opportunity cost of not bulldozing it.

To put it another way: the city does not need housing to be built expressly for the poor, what it needs is housing of any sort to be built, people will allocate it accordingly afterwards. As such, in so far as the rules cause less housing to be built for the rich and middle class produces on-net less housing, the poor will suffer.

Jeff Neal May 3, 2011 at 12:43 pm

Bingo.

Some people live in larger houses and some occupy one bedroom apartments. Some people drive Mercedes Benz and others ride bicycles. Government intervention and attempts to equalize housing or, say, health care, produces shortages and mis-priced goods/services and misallocation of resources. Then they campaign to get re-elected to solve the problems they caused. And the Republicans just go along for the ride.

We need a new brand of politicians – and SOON. > http://wp.me/P1jTK0-2

Stone Glasgow May 3, 2011 at 6:54 pm

Great insight.

SaulOhio May 3, 2011 at 1:41 pm

This sounds like the same logic that ranks countries according to the quality of their health care. Having universal coverage earns a country points in these rankings, and as a result, people are able to claim that universal coverage provides better health care. I think I see a huge thumb on the scales here.

Jeff Neal May 3, 2011 at 4:49 pm

Extra credit goes to all countries who have universal coverage AND who buy drugs from American drug companies, who, having covered their fixed costs in America, sell the marginal pill for slightly more than the marginal cost of that one extra pill . . . nice to have a sugar-daddy called America’s free market to foot the R&D and infrastructure bills for the rest of the world, so other beneficent governments can put a cap on the price of good drugs for their thankful citizens.

Stone Glasgow May 3, 2011 at 6:55 pm

And we don’t even have a free market in drug production. The FDA makes sure of that.

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