There’s a problem in California. No, I’m not referring to the punitive tax laws. Nor am I talking about the massive unfunded liabilities for bureaucrat pension.
Those are big problems, to be sure, but today’s topic is the state’s government-created housing crisis. The population keeps expanding, but local governments use zoning laws to restrict development of new homes and apartments.
And guess what happens when supply is constrained and demand keeps climbing? Even a remedial student in Economics 101 will probably understand that this is a recipe for ever-rising prices.
The solution, of course, is to expand the housing stock. Build more homes, apartments, and condos.
But local governments don’t like that option because existing homeowners (who vote) benefit from scarcity-induced increases in home values. And environmentalists also don’t like any development because of ideology.
Moreover, why fix the problem when politicians in Washington are willing to promote crackpot ideas. And that’s a very apt description of Senator Kamala Harris’ scheme to subsidize rental payments.
Why is this a crackpot idea? Because prices go up in every sector of the economy that is subsidized. This is why health care keeps getting more expensive. It’s why higher education keeps getting more expensive.
And if Washington politicians decide to subsidize rent, the same thing will happen.
Writing for National Review, Jibran Khan explains why Harris has the wrong solution for the wrong problem. He starts by explaining why there’s a housing shortage.
Harris’s subsidy won’t improve the situation, and could even make things worse by drawing attention away from actual solutions. The Bay Area’s rent crisis is driven by a drastic shortage in housing. Strict rent control in San Francisco and “NIMBY”
(not in my backyard) zoning policies have ensured that the area constructs only a fraction of the housing it needs. The San Francisco metro area added 373,000 new jobs between 2012 and 2017, but it allowed the construction of only 58,000 new units of housing. …Per Lawrence Yun, an economist who studies housing trends, the norm is for one housing unit to be built for every two jobs created. In the San Francisco area, there is less than one unit built for every six jobs created. …under Harris’s proposal, the currently homeless would remain homeless, while renters would receive some very short-term relief at the cost of other taxpayers.
He then explains why a subsidy will lead to higher rents, and a windfall for landlords.
Why would the relief be short-term? Because as landlords become aware that renters are receiving a subsidy, they will simply raise rents by the amount of the subsidy. The cost will be the same for the renters — who today are lining up for a chance to rent, showing that they are willing to pay it. In the end, then, this would be an effective subsidy for landlords, not renters.
Which, as mentioned above, is exactly what’s happened in other sectors that have received subsidies.
It’s not just libertarians who understand that Harris will make a bad situation worse.
Matt Yglesias is hardly a small-government zealot. He’s accused me, for example, of being insane and irrational because of my libertarian views. But we both agree that the real problem in California is government rules that limit development.
And I assume he also would agree that Harris’ plan will wind up enriching landlords rather than helping renters.
So why, then, is Harris proposing such a destructive policy?
There are three possible answers.
- She’s ignorant, and her staff is ignorant. Simply stated, there’s no understanding of indirect effects. Bastiat would be very disappointed.
- She’s malicious. In other words, she’s smart enough to realize the policy is bad, but she doesn’t care. Call this the Venezuela approach.
- She’s ambitious. In this scenario, she has no intention of pushing a bad idea, but she thinks it’s a good way of getting votes from renters.
I assume #3 is the right answer.
Regardless of her motives, she’s doing the wrong thing.
I’ve shared this chart on many occasions because it does a great job of showing that subsidized sectors are characterized by rising prices.
Give politicians enough leeway and maybe the entire economy can be dysfunctional!
P.S. I’m not being partisan. Republicans are quite capable of supporting very stupid policies in exchange for votes or campaign contributions. Just look at the GOPers who support the Export-Import Bank, Fannie-Freddie subsidies, or ethanol handouts.
P.P.S. Needless to say, I also object to the Harris scheme because it would make the tax code an even bigger mess. I realize it’s unlikely that I’ll ever see a simple and fair flat tax, but is it too much to ask for politicians not to make the system even worse?
International Liberty 
[…] market with supply restrictions that produce higher costs, and then compounding their mistake with subsidies and price […]
[…] assume they can blame “greedy landlords” for the inevitable housing shortages and then push for government housing subsidies as an ostensible […]
[…] referendum to allow rent control (though this isn’t stopping one of their politicians from trying to muck up rental […]
[…] con su idea de crear un subsidio federal para los pagos de alquiler. Escribí sobre este nuevo folleto el año pasado y advertí que enriquecería a los propietarios (tanto como los subsidios de […]
[…] start with her idea to create a federal subsidy for rent payments. I wrote about this new handout last year, and warned that it would enrich landlords (much as tuition subsidies enrich colleges and […]
Liberals don’t care what destruction they cause, they only care about having a position of power where they can control prople and destroy their lives.
[…] For what it’s worth, one of the state’s Senators, Kamala Harris, has a national plan to wreck housing markets. […]
[…] I don’t pretend to know the ideal measure to capture inflation, but I definitely know that we’d have lower prices in the absence of government […]
[…] Things can always get worse. Senator Kamala Harris has a hare-brained proposal that would trigger even higher prices for rental […]
[…] I worry she’s something worse. Sort of a Kamala Harris on […]
Californians, long ago, accepted “sustainability” as their lord and savior. Of course, this has made their rents, housing prices, and general cost of living anything but sustainable.
Yes, politicians do have their own diverging interests, as noted by public choice theory, however politicians do to a large extent also reflect the mentality of the voters who elect them. So, at every electoral junction Californians will vote for ever more of the same.
In my view it is indeed environmentalism that is the main driver of this housing shortage and inflation mentality, not that much the desire of homeowners to see the paper value of their homes increase. Proof of that, the fact that the environmentalist anti development mentality is widespread even amongst California renters. And since housing prices are becoming ever more unaffordable, the number of renters keeps increasing, and thus so does the ratio of renter to owner voters. Yet, even as renters Californians continue to worship environmentalism as their lord and savior.
While many homeowners are naive (just as most voters are) many do understand that inflating home prices make their next home, the home they aspire to one day upgrade to, increase in price at an even faster rate than their current dwelling. Also, many understand that not having secured an extra home for each one of their children, they are essentially pricing their offspring out of the area. So many homeowners do indeed understand that the only owners who benefit are a small minority of investors and homeowners without children who one day plan to sell their California homes and move out of the area. Yet environmentalism urges them to push the anti-growth agenda ever further.
Most of the higher costs of everything in California start with inflated dwelling costs which permeate the entire economy. The reason the California gardener, plumber, garbage collector etc. charges twice as much as in the rest of the country is that he too must live in million dollar housing and share it with another extended family to boot. When that differential cost of living is paid out he is left with a standard of living that is not much higher than in the rest of the country.
In economic terms it would suffice to point out that there is little to be gained by making a commodity more expensive through politics and policy. And housing is a commodity. We cannot make steel into gold, but we sure can make steel a lot more expensive through policy. Obtain the same for more, hence a decline in standard of living.
In summary, while most Californians understand that housing price and rent inflation are detrimental, their green religion keeps them enslaved to this reality. That is the main driver.
Alas, voter-lemmings will keep doing what they do. Stifle growth an thus inevitably open the door for more authoritarian regimes to overtake them. Slogans of the type “people over profits” or “equality before growth” will hurt both and the resulting economic decline and overtake will ultimately pose an existential threat to democracy itself. Will voter-lemmings wake up and push growth to levels that at a minimum match average world growth? This is now becoming an existential threat in western world democracies.
PS. Californians are also sending the following message to the rest of the country: “We’ve found our paradise, now lets lock the door. No vacancy! Small million dollar low-carbon apartments by the railroad tracks only!”
Democrats want it both ways, restrict land use to drive up rents, and open borders to drive down incomes. Guess who benefits? Land owners and business owners.
Democrats are not the party of the little guy.
I am surprised you did not mention the principal-agent problems of the cities and the NIMBY crowd. As long as the supply of dwellings are scarce and values and rents are sky high the cities benefit from the tax levied on the inflated value of the dwellings and tax on the rents.
Reblogged this on James' Ramblings.