The High Price of Good Intentions

Movements Start Small #37

We used to suffer from problems. Now we suffer from solutions. F. Hayek

Perhaps you have seen this chart. If not, take a look. 

Mark Perry, the creator, calls it the “chart of the century” - partly because it describes major price changes since the century started but mostly because it explains so much about our current political climate. How so?

First, while inflation has been a hot topic recently, it has been happening for some time. Historically, its uneven spread kept it out of the headlines. So while some things were gradually going up in price, others were going down. Only in the last few years have the impacts been so broad and pronounced as to drive the aggregate inflation number and real pain to most people.

Next, notice that the big price risers are in all the basics of living: healthcare, housing, education and food. If you want to understand the presence of widespread economic frustration, this reality is a good place to start. Just living has gotten very expensive - a dynamic guaranteed to drive stress and populist outrage.  

Yes, our TVs have gotten bigger and higher definition at lower prices, but when you are struggling to keep your family housed, healthy and educated, it is a small consolation. 

The political Rorschach test comes when you ask what has caused this dynamic, and therefore, how do we solve it?

One view claims increasing costs are the inevitable outgrowth of a capitalistic system. Business owners will extract profit and raise costs unless regulated aggressively. The view holds that strong intervention will be required to undo this trend. The quick comeback to such a claim is: why would it be happening so unevenly? Are software, clothing and TV corporations simply more altruistic and less eager to extract profits? Hard to believe.

In fact, the opposite looks much more likely. Housing, healthcare and education are the most regulated of industries. The government has created a web of subsidies, tax incentives and prohibitions to intervene in each of these markets. 

By design, most government interventions have two main goals. First, a group will complain about some activity. So, the government steps in to restrict it. The result raises costs around those activities therefore limiting supply. Next, because costs rise, the government comes up with programs to help those that now cannot afford it. Restrict supply, subsidize demand. You don’t need a PhD in economics to know this is a surefire recipe for rising prices. 

Let’s look at housing as an example. How has the government restricted supply? Let’s count the ways:

• Detailed zoning restrictions

• Historical reviews

• Environmental reviews

• Community feedback sessions

• Minimum amenity requirements (including parking)

• Detailed building codes and standards

• High fees and permits

• Rent controls or other revenue limiting rules

I assure you this is a partial list. Now any one of these can be defended - and all are put into place to address the concerns of some legitimate interest. But collectively they act as a massive tax on building anything. The result: less housing - and higher prices for the existing stock of homes. And you will notice these restrictions multiply in our most prosperous places (e.g. New York, San Francisco, downtown anywhere, USA) - limiting housing options where opportunity is most abundant - and contributing to sprawl into low regulations suburbs.

Given this reality, it is imperative that the government step in and help low income people afford housing. So, a series of programs are inevitably created to help meet this need. How so? Well, again, the list is long (and incomplete here):

• The mortgage interest tax deduction

• Property tax deductions

• VA, FHA, and USDA loan guarantee programs

• Rent vouchers (Section 8)

• First time home buyer programs

• Fannie Mae and Freddie Mac liquidity guarantees

• Emergency rental assistance

• Local rental assistance programs

• Artificially low interest rates (i.e. printed money to pay for all of it)

Again, any one program is easily justified and clearly helps people that have been priced out of the market. But imagine you are a middle-class person (or in your early career) and simply do not qualify for one of these programs? Well you face a housing market that is just flat out too expensive. Sound familiar?

For healthcare and education the patterns are similar and the interventions just as numerous. For computers or TVs? Not so much (although that might be changing).

This dynamic creates a doom loop of higher costs. And it is not easy to fix. Remove one of these regulations and you offend a passionate constituency. Remove one subsidy and more people simply will not be able to afford housing. Each program helps someone, but together they make the system more distorted, rigid and unsustainable. Eventually the system breaks. 

We might be approaching that point. Housing now takes up a record share of income (healthcare and education are right behind). Younger and poorer people simply can’t afford to get housing - while existing homeowners (generally wealthy and older) see their homes (and therefore wealth) continue to rise. And, both sides of the political aisle instinctually revert back to more of the same: appease angry NIMBYs (Not in My Backyard) who yell at City Hall to stop development and give handouts to those consequently priced out of the market. The intentions are good, the results are terrible.

The good news is this problem is not expensive to fix. No trillion dollar program is required. We simply need to allow more housing. Let people build. Relax zoning. Demand quick decisions from regulatory reviews. Reform overzealous restrictions. These are not costly changes! And political forces on both sides are pushing for them. In housing, it is the YIMBY movement (Yes In My Backyard) driving community awareness of these problems. From Paul Krugman to Bryan Caplan, thought leaders from left to right are getting on board. The general interest is clear. The problem is special interests yell and scream at City Hall. And, they mobilize the votes.

But a reckoning is coming. Not just in housing, but in each of these critical industries. Voters will demand new approaches to drive down the basic cost of living. It is possible to do! We simply need leaders willing to play a long game and better balance the short term allure of quick fix regulations and subsidies with market forces that will supply new innovative options - and lower prices.

Good Links

1. NIMBY has been around forever. Artists and architects vehemently opposed the Eiffel Tower (of course!). They just succeed a lot more now.

2. Yes, we should save true historical treasures. But, historical preservation eventually goes way too far and slows everything down.

3. My hometown of San Antonio is sprawling like mad. The downtown? Not so much - a full 30% of it is parking lots. Why? No housing, no transport. All the elements mentioned above are at play.

4. Progressive Ezra Klein becomes a supply sider. Build baby build!

5. Want to wallow in frustration of silly outdated rules hampering progress. The podcast Why We Can’t Have Nice Things will surely do the trick.

6. Football is back. Time for the United Way and Payton Manning to mentor our children.