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A Reaganite Approach to the Housing Crisis?

It turns out that housing subsidies make the housing crisis worse.

Credit: mark reinstein

According to a principle enunciated by Ronald Reagan, “If you want more of something, subsidize it.” Real-world examples of this phenomenon abound, from electric vehicles to solar panels, but broad generalizations inspire a search for exceptions. Is it true in all cases? And if not, what causes the results to differ?

Affordable housing is a fitting subject to test the theory, as it can be divided fairly neatly into opposing categories, public and private. A privately owned apartment building financed with funds from a privately owned institution can be as affordable to tenants as a project financed with government loans, grants, and subsidies, but the former will not typically be counted as progress towards an affordable housing goal. Why not? Because it won’t be the scene of a ribbon-cutting or ground-breaking ceremony, or provide a naming opportunity for a politician, living or dead. Does the rule that you get more of something if you subsidize it apply equally to the public and private sectors?


No, because of the countervailing principle known as “the Bureaucratic Rule of Two.” 

Formulated by the late economist Thomas Borcherding, this theory concluded empirically that “removal of an activity from the private to the public sector will double its unit costs of production.” 

Affordable housing provided by the public sector is, despite the label, not very affordable. As a result developers are starting, in Nancy Reagan-fashion, to just say no to public funding. In Los Angeles, where a 2016 bond issue for low-income housing raised $1.2 billion, the city of San Jose found that affordable housing units funded in part by tax credits cost an average of $939,000 per unit. The end result of this well-meaning effort? The number of people living on the streets actually grew by 60 percent. By contrast, a private fund raised by SDS Capital Group that did not use this subsidy was able to build comparable units for only $291,000 per unit.

What accounts for the difference? There are several contributing factors. One is the necessary complexity that public funding adds to the cost of such projects. Some of these factors are intrinsic to government; you don’t want to hand out credits that can be used to reduce taxpayers’ liability on a dollar-for-dollar basis without legislative safeguards to prevent abuse by the rich. On the other hand, losing tax revenue is hard-wired into subsidized housing programs; in 2023, the low-income housing tax credit cost around $13.2 billion in lost revenue according to Congress’s Joint Committee on Taxation, and that figure is expected to increase by $2 billion by 2025. As the late Senator Everett Dirksen of Illinois said, a billion here, a billion there—pretty soon you’re talking real money.

The utility of low-income housing tax credits is limited to those with large tax liabilities and high disposable income, however, which means—the rich. Investors buy the credits at a discount—currently around 90 cents on the dollar—with the net funds flowing into the project. Before those monies are spent on land, labor and building materials, however, they must run through a gauntlet of service providers—“syndicators, general partners, managers, and investors,” in the words of a Tax Policy Center study—that is longer than a comparable private sector project would face. Each of these players—plus the usual crowd of lawyers, accountants, consultants and appraisers—takes a whack at the pork at it scurries by. 


Then there are the public policy encumbrances that are added on to serve social goals that may be laudable in the abstract, but which can have unintended negative consequences. Take, for example, project labor agreements that mandate all building trades on a job be union shops. This requirement operates to exclude most minority-owned contractors; in New Jersey, for example, 98 percent of African-American and Hispanic construction companies are non-union. Some public sector competitive bidding laws have the perverse effect of raising construction costs by requiring separate sub-contractor bids, thus ruling out innovative construction methods such as so-called “design-build,” which allows private sector developers to have a single point of responsibility for an entire project.

Viewed in perspective, then, the benefits of affordable housing subsidies flow in a pattern that resembles a snow-boarder’s half-pipe: on one high side, dollar-for-dollar reductions in taxes paid by the rich; on the other, housing for the poor; that big dip in between means nothing for the middle class.

So what is to be done? Ask developers and they say their comparative advantage over the public sector would widen even further from streamlined permitting. How to protect the interests of tenants from private landlords who don’t maintain their properties? The amount of subsidies sloshing around in the low-income residential real estate market—expected to grow to $15.2 billion next year—would pay for a lot of housing inspectors.

Many years ago I was a legal tyro in a law firm that specialized in subsidized housing. A fellow associate would sometimes spend the night, burning the midnight fluorescent bulbs. When I commiserated with her and told her she should ease up for the sake of her health and well-being, she said her work was fulfilling because she was helping poor people.

I recalled for her the investor list from a recent deal I’d worked on: It included movie stars, name-brand musicians, big-time real estate investors, and other high-net-worth types. What about them? I asked. Who’s looking out for their interests?

She thought for a moment, then an expression of enlightenment slowly crept across her face: “I guess I am.”