Every so often you hear of a project, often funded or subsidized with tax money, for building low cost homes and selling them to low income families at bargain prices. Bargain prices means below fair market value.
According to the Miami Herald’s ongoing investigative report, one such project was gamed by non-low income people. They bought the houses at the below market prices and flipped them at a profit. Naturally, the Herald is upset at this. But the Herald failed to appreciate reality. As in hurricane disaster relief and low income housing, much of the benefit intended to go to people in need does not go there and this is a pervasive problem that is not likely to be eliminated.
The far more important issue, which the Herald missed completely, is that these kind of projects are inherently inefficient. Providing housing to low income people is, necessarily, a waste of money even if the housing does go to low income people.
To see why consider two alternatives. First, that a house worth $100,000 is provided to a low income family at a price of $80,000. Also assume that the house costs $80,000 to build. That means that the family has been given a gift of $20,000. Second, consider giving the family $20,000 to do with as they please.
In the second case, the family can spend the $20,000 in whatever manner makes them happiest. In the first case, they are forced to spend the $20,000 on housing.
There are two possibilities, either housing is the family’s optimal use for the $20,000 or it is not. For some families the optimal use for the $20,000 will not be housing, or at least not all for housing. These families could be made happier by giving them $20,000, not a discounted house. Families where the optimal use of the $20,000 is the house would be no worse off receiving $20,000. They could still buy the equivalent house.
The moral of the story is that gifts with strings attached are not as valuable as gifts without strings attached.
The basis for this moral is the mathematical fact that maximizing a function with constraints yields a result that is, at most, as great as maximizing a function without the constraints.
2 comments:
Your assumption is that the family receiving the gift will make a better assessment of the optimal use of that gift than the person making the gift. As skeptical as I am of government, I'm not sure that is a safe assumption.
This is an interesting point and I sympathize with it. In fact, my view is that my assessment is always better than the other persons. :-)
Subject to that constraint, I view most programs like subsidized housing as reflecting the preferences of the giver. For example, I may be willing to provide money toward a house, but would be unhappy if my money was spent on a host of other things.
The distinction is somewhat unclear. I may give money for a house and it may be spent on a house. However, that frees up the same amount of the person's money that would have been spent on housing for something else. In effect, some of my gift gets spent on things I don't approve of no matter the strings.
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