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Flawed Logic

Posted By Don Boudreaux On May 3, 2011 @ 9:28 am In Government Intervention,Housing,Myths and Fallacies,Other People's Money,Subsidies | Comments Disabled

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 [1], 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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