Democratic Senators and Presidential candidates Kamala Harris and Cory Booker have both recently proposed legislation to address the issue of rising housing costs. Senator Harris’ bill ‘The Rent Relief Act’ and Senator Booker’s bill ‘Housing, Opportunity, Mobility, and Equity Act’ both focus on assisting people who pay more than 30% of their gross income on rent or, in the case of Senator Harris’s bill, rent and utilities. The details of exactly who would be eligible to receive tax credits are different but include both those under as well as those well above the Federal Poverty Level. Neither bill includes a cost estimate or stipulates a funding source.
Rising housing costs are certainly something we should be concerned about, particularly for those lest able to afford them, so why object to subsidizing rents? The objection becomes clear when we recall Henry Hazlitt’s famous economics lesson:
In this lies almost the whole difference between good economics and bad. The bad economist sees only what immediately strikes the eye; the good economist also looks beyond. The bad economist sees only the direct consequences of a proposed course; the good economist looks also at the longer and indirect consequences. The bad economist sees only what the effect of a given policy has been or will be on one particular group; the good economist inquires also what the effect of the policy will be on all groups.
In this case what ‘immediately strikes the eye’ is the tax credit to individuals and families, but what lies beyond? What are those pesky longer and indirect consequences? Economist Jeffrey Dorfman of the University of Georgia, speaking specifically of Senator Harris’ plan, points out the long-term indirect effects subsidies have on prices,
That federal subsidies of this sort lead to price increases is well-known. An example of this sort of unintended consequence can be found in the case of college tuition. Studies have shown that federal financial aid led colleges to increase tuition by so much that colleges benefit more from the financial aid than do students. A study by the New York Federal Reserve Bank found that an extra dollar of subsidized student loans leads to a 65 cent increase in tuition and that Pell Grants cause tuition to increase by 50 cents for every extra dollar of financial aid. In simple terms, colleges gain more than students from the government “help.”
In a similar manner, the proposed rent subsidy will encourage landlords to increase rents, meaning the government help will make rent even more expensive. While the lowest-income renters are protected by the 100% tax credits and will get some relief, higher-earning participants, only getting tax credits for 25 or 50% of each extra dollar of rent could end up paying more out of pocket thanks to rent increases. Joining them in the pain, taxpayers will take it in the wallets as the program rapidly costs more than expected thanks to subsidies causing rents to spiral upwards.
What started as a good faith attempt to help struggling individuals and families results in higher rents and increased profits for landlords. Any policy designed to help people cope with rising housing costs should not exacerbate the problem! Any new government program for which no funding source is stipulated contributes to our unconscionable debt crisis. Senator Booker’s plan does include provisions to encourage municipalities to relax restrictive zoning laws. This would enable entrepreneurs to increase the supply of housing making it more affordable (Senator Warren’s very different plan does share this positive point with Booker’s). This, at least, is encouraging. We need policy proposals that wed good intentions to sound economics.