‘Poor’ Americans, Amply Served by the Market

by Don Boudreaux on May 3, 2011

in Complexity & Emergence, Government Intervention, Myths and Fallacies, Standard of Living, Subsidies

Here’s another letter to the Wall Street Journal, using a different angle than the last, on Peter Donovan’s claim that government subsidies to finance the construction of down-market residential apartments are necessary to keep poor Americans “out of the cold”:

Peter Donovan asserts that failure of government to subsidize loans to build lower-end rental units would result in poor Americans being homeless (Letters, May 3).

Nonsense.  Unsubsidized markets do not cater exclusively to the middle-income and rich.  Quite the contrary.  Automakers produce not only luxury vehicles such as Lexuses but larger numbers of low-end makes such as Chevys (not to mention the existence of a thriving market in used cars).  We see not only high-end retailers selling the likes of hand-crafted Stickley furniture but also, and more abundantly, Wal-Mart and other discount retailers selling inexpensive household furnishings.  America boasts not only pricey restaurants such as the Inn at Little Washington but, far more commonly, inexpensive eateries such as Olive Garden, Denny’s, and (dare I mention it?) McDonald’s.

This same pattern holds for clothing, hotels, groceries, entertainment, works of art, and nearly every other species of goods and services in our economy.  It’s unreasonable to suppose that without government-subsidized loans to developers, housing would be built only for middle-income and rich Americans.

Sincerely,
Donald J. Boudreaux

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{ 55 comments }

Frank33328 May 3, 2011 at 11:35 am

Not to be argumentative but was Chevy a good example of an Unsubsidized automaker? It opens the door to critics that will now point out that Chevy actually failed and had to be bailed out (aka subsidized) in order that they could continue to service the low-end market. Demonstrating that the market once again failed to properly service low-end consumers and subsidized government intervention is required in this as well.

John V May 3, 2011 at 11:44 am

Chevy failed because they made bad business decisions and got complacent with their market at the time that they made many of these bad decisions. Plain and simple.

And in addition to this, one could say that their subsidized/protected status made them lazy about running their business better.

On the other hand, lower priced cars from other countries do quite well.

Sandre May 3, 2011 at 12:47 pm

Chevy was ruined not only by bad business choices but also by militant union.

John V May 3, 2011 at 12:53 pm

That is part of the bad business choices. ;)

They gave in to silly demands based on some short-sighted idea that the gravy train of GM would last forever.

Jeff Neal May 3, 2011 at 1:10 pm

Unions and CAFE standards killed GM, not bad management (unless you would say that management was ‘bad’ because it did not resist the demands of unions and government regulators).

And the ones who say GM is successful now that gov’t helped it define success very oddly – wiping out tens of billions of dollars of bondholders claims (thereby, eliminating the interest on those bonds as a fixed cost for the company) is a ‘success’ only if you want to live in a new Soviet Russia here in North America.

vikingvista May 3, 2011 at 1:21 pm

What makes you think Chevys would’ve disappeared from the low end market if they hadn’t been bailed out? Why do people think that the alternative to bailout is total annihilation? Why after over a century of modern bankruptcy law do people not understand the first thing about bankruptcy?

Jeff Neal May 3, 2011 at 1:28 pm

Right! The misallocated resources would have been re-allocated to their more productive uses. The resources properly allocated to building automobiles would have ‘survived’ bankruptcy and been redeployed making as many (and only as many) autos as the market demanded from that particular group of manufacturing plants.

Think of it this way: Why should a man be doomed to continue making various car parts that the market doesn’t want? If there are enough fan belts already, let that man go make something else with his life. Forcing him to take a check from the government for a few more years while piling up fan belts is akin to slavery, is it not?

vikingvista May 3, 2011 at 1:40 pm

Forcefully crushing a man’s productive opportunities is bad, but I wouldn’t call it “slavery”. That word I reserve for the taxpayers who are forced pay for the bailouts.

But you are right, the government is a villain at both ends of the bailout offense.

Jeff Neal May 3, 2011 at 4:40 pm

I err on the side of caution – to compel a man to do something against his will is slavery – yes, there may be some socially acceptable such examples – cover your nose when you sneeze or else!! – but I think freedom in absolute terms. Before Abe Lincoln signed the Emancipation Proclamation, he didn’t first consider maybe just giving the slaves the weekends off – free them or not were his options.

vikingvista May 3, 2011 at 5:15 pm

“to compel a man to do something against his will”

The forceful suppression of opportunities for workers is not compelling those workers. Even the people who are the direct recipients of government aggression–the businessmen trying to create the opportunities–are not really slaves. Even the victim of a thief is not really a slave. Slaves are forced to systematically labor for others. Since almost all people are required by nature to labor for themselves, taxes on that labor are a form of slavery.

Stone Glasgow May 3, 2011 at 7:00 pm

I agree with Viking. If the tax rates were 100% we would be slaves. Slaves have housing and food and medical care provided for them, but do not control the products of their own labor.

A tax rate of 50% means we are all 50% slave. And that is only the income taxes we pay at face value. If you include the myriad other taxes we pay (sales, property, cap gains, etc), we are what… 70% owned and 30% free?

RC May 3, 2011 at 11:57 pm

VikingVista,

So I understand that – assuming that the total burden of taxation cannot be changed – you would support replacing the income tax with a consumption tax (like the European VAT, for instance)? I’m interested about your opinion. (I know you reject all taxes, but apparently you regard some as more evil than others).

Regards,
RC

Don May 3, 2011 at 11:40 am

Not only is this undeniably true, but I would argue that in entreprenerial circles, the well-understood wisdom is that serving the low end of the market is the clearest, most promising path to success. This is captured in the maxim that I have heard countless times from budding entrepreneurs: “Sell to the classes, live with the masses; but, sell the masses, live with the classes.”

Tom May 3, 2011 at 12:50 pm

Anyone else scratching their head at that one?

Methinks1776 May 3, 2011 at 1:24 pm

I took it to mean upper classes vs. the masses. It’s easier to become wealthy by selling a product everyone wants and can afford than it is to serve a niche market of wealthy folks.

Sam Grove May 3, 2011 at 5:57 pm

The first digital watch was priced at $1,500.

Enough of them were sold to demonstrate the market and to finance more productive ways t manufacture digital watches priced for the masses.

At this point, the makers of cheap digital watches can afford to buy Rolex watches.

Peter May 4, 2011 at 7:44 am

The classic example is Post-It’s vs Yachts – the former is many multiples more profitable than the latter …

Paul May 4, 2011 at 8:57 am

There are not to many rich people, and by and large they don’t need anything, and have many options. Poor people are numerous and need and want more things. So, other than figuring out how to make, serve, finance those wants and needs, you have a near inexhaustible customer base.

Those companies that figure out how to prosper selling to the masses, vastly out value those that sell only high end products to the wealthy.

Sandre May 3, 2011 at 12:23 pm

Slightly off but related topic, subsidization of housing loans for the poor help drive up demand, there by driving up the price of such houses. This was observed in the housing bubble of the last decade. In fact, poor found “their” homes foreclosed in the process.

vikingvista May 3, 2011 at 1:26 pm

Same with health care.
Same with education.
People don’t understand is the effect of subsidies on prices, and subsequent positive feedback loop to increase subsidies further.

Matt May 3, 2011 at 2:28 pm

Nice observation.

Stone Glasgow May 3, 2011 at 7:07 pm

If apples sell for $1.00 and the government says they will reimburse anyone who buys an apple with $1.00, what happens to the price of apples? Now that everyone has a free dollar, the supply and demand for apples will normalize at about $2.00. The only person that gains from the subsidy is the apple seller.

Economists Do It With Models May 25, 2011 at 2:23 pm

I think you have it backwards. If the cost to the seller of producing an apple is still only $1.00 (as it would be in a competitive market), competition and market entry will bid down the price of apples to the initial $1.00 point, meaning that only the consumers benefit from the subsidy in the long run.

Methinks1776 May 25, 2011 at 2:47 pm

Pet peeve: you cannot “bid down” anything. Bidders compete with each other to buy, not to sell, and competing to buy doesn’t drive down price.

kyle8 May 4, 2011 at 7:40 am

Correct, also the biggest obstacle to low income housing are rent controls. Cities with rent controls never have enough low income housing because well off people still live in the rent controlled slums.

SaulOhio May 3, 2011 at 12:31 pm

And the quality of low end production is constantly improving.

Ryan S May 3, 2011 at 1:20 pm

Yep. Cell phones and computers are clear example of that claim. The very poor can afford a cell phone and computer that were better than most of the rich could get their hands on a decade ago.

Paul May 4, 2011 at 9:02 am

Yes. I can remember only when high end cars had FM radios, air conditioning, radial tires, decent sound proofing. You used to arrive after a car trip in the summer, deaf from the open windows, sweaty, dirty and oily, with a blasting AM, two speaker radio. Ah, what fun!.

Now a low end car is fairly quiet, has good handling, excellent radio/CD/Mp3, AC and will last with basic care 150K miles, or more.

Methinks1776 May 4, 2011 at 9:51 am

Ahh….remember when Gordon Gekko makes that “money never sleeps” call from the beach in the Hamptons? That phone was the size of a brick, cost an arm and a leg and had one feature. I had one I carried in its own shoulder bag. Now, If I can fish the tiny thing out of my handbag, I can surf this new thing called the “internet” while I wait in line at the DMV (some things never change!).

Paul: You really took me back to some looooong family car rides in the blazing, sticky heat of summer in the Southeast. Lucky you weren’t a woman with long hair – which invariably breaks free from any attempt to restrain it and turns into dozens of tiny face whips aiming for eyeballs and sticking to lip balm. I would arrive at our destination looking like Chewbacca’s mother.

WhiskeyJim May 3, 2011 at 12:38 pm

The cost of housing, especially at the low-end, is a function of government regulation and zoning.

Same with cars. There is a car that gets 100 miles to the gallon; it is safe and survives roll-overs. It is not allowed on the highway. Not expensive either.

Just sayin’.

Randy May 3, 2011 at 2:03 pm

Yep. I was just thinking the other day that someone needs to produce a 4 wheeled “motorcycle”.

Russ Nelson May 3, 2011 at 2:16 pm

Except that once you put that fourth wheel on it, it becomes a car, and suddenly is subject to many many more regulations and safety testing.

Paul May 4, 2011 at 9:07 am

It is illigal to build the fine, new house that I grew up in. House structures cost double or more what they comfortably and safely need to be. I’m a carpenter and all the other trades I know talk about this. About how we are forced to overbuild by ‘the codes’, pushed by the town inspectors every justifying their existence and the rent seeking manufactures that profit by central planning obsolescences. As a consequence I have noticed more and more RV, trailers parked in yards as work arounds the government forced costs.

I won’t even mention land controls.

kyle8 May 4, 2011 at 2:08 pm

What you say is undoubtably true and is a good example of how good intentions go astray with government overreach.

Building codes are a good thing, unlike many pure libertarians, I support them because they are the reason a big earthquake kills only a few dozen people in California and tens of thousands in Haiti.

But they can be, and are abused. Like every other thing government does.

Paul May 4, 2011 at 7:57 pm

Wrong. Over expensive housing kills. You have to drive a truck more, or your spouse work more to pay. More work means more work place deaths, to pay higher costs. Further, people live in older, less improved housing, with older wiring because they can not afford the Cadillac codes. For instance the new lead paint, near EPA hazmat procedures for any ..any…remodeling over four square feet. Do you have any idea of the tens of millions of New England/Mid west homes that fall into this?

I don’t know if you notice, but most people know a Mercedes is better than a KIA. People, if left enriched buy nicer, better, smoother, more lux , safer things. Government takes their wealth. See any public housing project for …ahem…’quality’ and ‘security’.

In today’s Boston Globe, 2/3 of the state escalators ‘inspectors’ are getting the boot for basically not being able to read a tape measure. Years ago in NYC the FBI did a sting of some two hundred building inspectors, all took the bribes except two who held out for more.

Last few years have seen quite a few building crane inspectors fired for bribes, this after collapses and deaths.

Low quality, high cost government inspectors, like bad money, chased out the private inspection and certification market. I don’t doubt that banks, insurance companies would of by now built a private inspection industry with flexible cost/feature ratings.

Haiti has poor shelter for many reasons. The lack, or not, of Haitian government inspections isn’t one of them.

Methinks1776 May 4, 2011 at 9:27 pm

Bravo.

Harold Cockerill May 4, 2011 at 7:59 pm

Basic improvements through the code have made a big difference. Smoke detectors are cheap and save a lot of lives. Decks don’t fall off houses and kill people nearly as often as they used to due to fairly inexpensive design changes mandated by the building code.

We are entering a phase where marginal increases in safety are becoming more expensive. The low hanging fruit has been picked. The building industry is in a fight to deny the requirement for fire sprinkler systems in all new housing. This would be a major expense that would drive up the cost of housing and is a requirement supported strongly by the fire fighters and the fire suppression industry. Obviously some lives would be saved by these systems but what would be the real cost? Government entities don’t tend to worry about costs as they don’t have to rely on sales to stay in business.

If you want to save lives ban bath tubs and stairs. You can say that’s silly but having both has a cost in lives and we make that calculation when deciding to put them in houses.

Dallas Weaver May 3, 2011 at 12:56 pm

“It’s unreasonable to suppose that without government-subsidized loans to developers, housing would be built only for middle-income and rich Americans”.

Yes it is unreasonable. The government, at the direction of the politically connected, will zone, regulate and place parcel fees (schools, parks, etc) so high that reasonable prices housing can’t be built. By having the government interfere by putting a $100,000 minimum fee on every unit, only special exempt government supported housing units are possible for the low end.

You have to deregulate all the way or the system will fail. That means you could have shacks next door to the Mayor and he wouldn’t like that — the poor belong in someone else’s neighborhood, someone not politically connected.

vikingvista May 3, 2011 at 1:35 pm

Zoning–yet another government function for which government isn’t needed.

WhiskeyJim May 3, 2011 at 1:56 pm

As I implied in the post above yours, there is no low cost housing because government regulations preclude it. Same with cars and health care and education.

I never want to assume what Don knows (because he knows so much), but I wonder if he fully appreciated the import of his statement, “Sell to the masses, live with the classes.” The simple fact is that virtually all successful innovation disrupts existing market leaders FROM THE BOTTOM.

It is true of hard drives, cars, steel, IOW, everything. Therefore, if you regulate the bottom away from an industry (like housing), there is little or no innovation. For many reasons, how can there be?

Subsidizing purchase misses the whole point.

Don Boudreaux May 3, 2011 at 2:00 pm

FYI, just to clarify. I’m not the “Don” who wrote the lines about “selling to the masses” – although I find the aphorism to be accurate.

WhiskeyJim May 3, 2011 at 2:05 pm

Incidentally, this point illustrates the naivete of bailing out GM.

GM vacated the low end car market decades ago. Their culture, cost structure, and hierarchy preclude them from competing with low cost manufacturers. To believe they can just ‘fix’ that is akin to believing a Harvard PHD author of biological texts can write a children’s book whenever they wish.

Why then, did GM continue to make low end cars, reducing their ROI on every sale? Because of the Cafe laws, which require companies to have minimum average miles per gallon. No one will buy a gutless high end truck or car.

Stone Glasgow May 3, 2011 at 7:12 pm

There is still innovation, but people figure out how to make better BMWs, not better Fords.

Paul May 4, 2011 at 9:10 am

Don’t for get the entire land finance/bank system is built and tottering on high valuations. If supply limiting, costly controls were removed, prices would collapse. This of course would be good for modest earners and their families, but painful to those that bought in, or profit from the present cost structures. I suppose Uncle Ben would have to bail them out.

Marcus May 3, 2011 at 1:06 pm

I find it interesting that many on the left poke fun of many of the market solutions available to the poor and even poke fun of the people who use them. Solutions like mobile homes, for example. There are others.

vikingvista May 3, 2011 at 1:48 pm

My experience too. The Left typically have nothing but ridicule for the efforts of low income folks to pursue happy lives. But they are quick to switch on their indignant and sanctimonious faces when it comes to using the poor as a rhetorical device to seize power for themselves.

Paul May 6, 2011 at 6:27 am

Only in America. If the poor are working in a Cuban labor camp for nothing, then their ‘struggle is heroic….and we can learn much’. ( To be hones, a little less so for North Korean labor camps. Not all labor camps are equal. )

/sarc

Stone Glasgow May 3, 2011 at 7:15 pm
Jeff Neal May 3, 2011 at 1:15 pm

Don,

You should add to the list medical products and services, yes?

Why do planners think that the more important a product or service is, the less likely the market is to fulfill the need for that product or service? Reverse psycology of some sort working in their brains?

Their logic seems to be: Since the market is great at producing and distributing things in abundance and at a fair price, let’s let market forces work only in the production and delivery of trivialities and let the government do the important things.

Odd way of thinking, isn’t it?

more about market forces and health care > http://wp.me/p1jTK0-5X

Krishnan May 3, 2011 at 2:32 pm

Imagine if the GOVERNMENT decided today that ‘iPads’ are very important to the masses and so their production and distribution cannot be entrusted to the private sector (particularly one that makes (gasp) profits) – imagine what will happen … Substitute ‘ipad’ with whatever you want and imagine the result – Heck, no need to imagine – Take a look at EVERYTHING the GOVERNMENT does and look at how poorly it is run … “Spending other people’s money on other people” is highly inefficient – (MFriedman) – yet the belief that GOVERNMENT should do everything important persists …

Food, clothing, shelter, healthcare – (add whatever you want) are all critical – so GOVERNMENT should do it (?)??)

kyle8 May 4, 2011 at 2:19 pm

we don’t have to imagine, we have seen it time after time again. The government would make exactly one type, it would be twice as expensive to make, there would never be enough of them and there would be long waiting lines. And they would be of poor quality. And the cost to taxpayers would be astronomical.

Can you say, DMV? or Post Office? or, VA hospitals?

Chuck May 3, 2011 at 1:45 pm

In fact some low end market servicers are so successful at what they do, the coin flips and they are accused of being too successful, and therefore they must be exploiting someone somewhere in the system. How else can you explain being so successful servicing moderate and low income sectors? Such is often the case with McDonalds and Wal-Mart at least.

Krishnan May 3, 2011 at 2:40 pm

WalMart may be the low price leader and sells billions and billions of items for billions and billions of dollars to the masses … and also makes money for those that invest in that company …

Simple – the sum of many small numbers can add upto a very large number and the “classes” know that better than the “masses”

Economists Do It With Models May 25, 2011 at 2:50 pm

In a free-market economy, firms are only going to provide goods and services when the consumers’ willingness and ability to pay covers the costs of production. Therefore, it’s entirely possible that the market would not provide what we as a society would consider acceptable housing for poor people. While I do acknowledge that building codes, zoning laws and the like do contribute to a higher cost of producing housing, this increase in cost has to be weighed against the benefit that consumers won’t unknowingly reside in an unsafe dwelling. (I, for example, don’t know enough about architecture and mechanical engineering to know what is safe and what isn’t.) As such, the relevant objection to pose is that the building codes err too much on the side of absolute caution and rigidity without taking the cost increases that they impose into account.

Methinks1776 May 25, 2011 at 2:57 pm

So, have you ever lived in any of those housing projects that “we as a society” decided are “suitable” holding pens accomodations for the poor? There are a couple of neighbourhoods I dare you to walk through in Chicago, NYC, Bridgeport, Bradenton, etc….

I, for example, don’t know enough about architecture and mechanical engineering to know what is safe and what isn’t.

You can “do it with models” but you can’t figure out how to hire an expert to help you make decisions?

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