Wednesday, August 1, 2007

For the rest of my life, I'll have to get up at 5 in the morning to catch the 6:15 train to get to my office at 8.*

Doug has brought to my attention the February 2007 issue of Sojourners Magazine, and a short article about “affordable housing”in high income cities such as Pasadena. It was not surprising that from an author, Jill Suzanne Shock, described as a coordinator of the “Pasadena Affordable Housing Alliance,” that part of the discussion would focus on government attempts to regulate the pricing mechanism by mandating that developers provide “affordable housing” with new housing developments. In addition to the moral and Constitutional challenges that such programs will (or should) always face, mandated affordable housing is a perfect example of what I used to hear called “transitional gains traps.”

A “transitional gains trap” occurs because it is relatively easy for the government to forcibly transfer something of value from a currently rich person to a currently poor person, but it is relatively difficult to continue that benefit to the next generation of the poor. The classic example of this is rent control. Rent control succeeds mostly in helping one part of one generation of poor people (those people in the first generation who are lucky enough to get rent-controlled apartments). However, when that generation, let’s call them Mr. and Mrs. Smith, grows old, becomes middle class, and retires to Florida, their right to their rent-controlled apartment remains. The Smiths are not going to give up that highly valuable property right to a below-market-rate apartment, and governments are essentially powerless to transfer those benefits to the newly poor. As a result, in rent-controlled communities you see the disguised sublets, the “key charges” and so forth that are typical of a transitional gains trap. You don’t want to be a poor person in a community in which rent control was enacted 30 years earlier.

The 600-pound elephant problem with the forced affordable housing programs is what to do when the original “poor” purchaser is no longer poor and/or decides to move. Either you’ve got a classic transitional gains trap where that affordable housing is no longer affordable, or you have to create a government bureaucracy to manage not only the original housing developers but also the original and subsequent purchasers of the “affordable” houses. The problems are similar to those programs in which (mostly Northeast and California) universities attempt to provide affordable housing for new faculty. However, a university typically has more flexibility in creating contracts and better monitoring.

However, one other suggestion by Ms. Shook really struck me as innovative. Having lived in Pasadena, and having seen older neighborhoods in both Tucson and Tallahassee, it’s obvious that there was a time in which a typical middle class house would have had a small “mother-in-law” cottage in the back yard or a flat above the garage. These facilities disappeared, across time, often due to the zoning powers of government. Ms. Shook’s organization has also lobbied for changes in zoning that would allow new construction of these apartments. Getting the government out of the business of saying who can and who cannot rent space in a backyard cottage seems to me to be a winning proposition all the way around. I would hope that Ms. Shook would look at all the government zoning regulations that drive up the cost of housing.

One final note. Ms. Shook correctly discusses the large, implicit tax code subsidy to home ownership. I would make two additional comments on her argument. First, removing a part of a person’s income from the tax base is neither economically nor morally equivalent to mandating that a private property owner has to provide housing geared to the political preferences of the local government, unless you believe that the government has prior claim on all of our income and all of our property. Secondly, part, but not all, of the tax subsidies to home ownership are scaled back when a taxpayer’s income becomes large enough to be subject to the alternative minimum tax. So the tax treatment of home expenses is truly a middle-class program. It’s my guess that the opposition to eliminating these middle class tax programs has been one of the biggest obstacles to enacting a no-deductions flat tax.

*The title is a famous quote from the movie "Mr. Blandings Builds His Dream House." Apparently, long commutes were a problem even for executives in the 1940s. (Thanks to IMDB.)

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