How to Think about Low-Income Housing

By Kevin D. Williamson

Friday, June 09, 2017

Well, raise my rent! Here’s a great big Muppet News Flash from the Washington Post: Average-priced goods are relatively expensive for low-wage consumers.

Seriously.

Today’s entry in the great national stupidity sweepstakes comes from Tracy Jan, who is relaying the findings of the latest report from the National Low-Income Housing Association. The report’s basic claim takes a familiar form that falls somewhere between intellectual sloppiness and intellectual dishonesty: People earning the minimum wage cannot afford the average one-bedroom apartment without spending more than 30 percent of their incomes . . . pretty much anywhere in the country. There are some variations on the theme: Sometimes, the rent considered is for a two-bedroom apartment, and sometimes the income considered is the federal poverty line or some figure related to it.

All of these so-called studies — they are not really “studies” in the true sense of the word — suffer from the same error: comparing a low wage to an average rent.

The NLIHA paper Jan relies on is methodologically slightly better than most entries in this genre, but only slightly. The usual technique is to consider minimum wage vs. median rent, as in this much-cited report from Zillow: “Zillow analyzed median rents and the income necessary to afford them in 15,099 cities and towns nationwide. In the least expensive city — Beecher, Michigan — a single renter would need to earn $10.64 per hour to afford the city’s median rent of $532 per month without exceeding the 30 percent limit, significantly above both the federal minimum wage and the Michigan state minimum wage of $8.15 per hour.”

The median rent is the rent at the 50th percentile, i.e. the price point at which half of all rents are lower and half are higher. If you consider the median rent, then you just saw off the cheaper half of the market in its entirety. You know where low-wage people go looking for rental properties? In the half of the market that is below the median, most often. Why ignore the actual rents on the actual apartments that actual minimum-wage workers actually rent? For one thing, acquiring that data is hard work. For another, it does not produce nearly enough angst and hysteria.

The NLIHA paper makes almost the same error, but instead of the median rent in various communities it uses a “fair market rent” calculated by the Department of Housing and Urban Development. That number, according to the report, “is typically the 40th percentile of rents that a family can be expected to pay” when that family is moving today, “not what all current renters are paying on average.” That is significant because, according to HUD’s own reporting, families moving to a new rental property with a relatively short timeline for securing new housing typically pay slightly higher rents than do families that haven’t moved in a while, typically about 6 percent more. So the 40th percentile of rents for families paying a 6 percent premium — that won’t be the dead median, but it will be in the neighborhood. It’s the same basic problem: Comparing the incomes of minimum-wage workers against an average rent that includes all families moving into new rental properties, i.e. putting exclusively low wages on one side of the scale and weighing them against the expenses of households with incomes across the spectrum.

Needless to say — but the report does say it — these comparisons do not “reflect the rent variation within a metropolitan area or nonmetropolitan county.” Which is to say: They’re basically useless. Which you might begin to suspect when you consider the fact that low-income people who can’t afford to live anywhere mostly manage to live somewhere.

How does that happen? Hippie magic?

One of the remarkable things about people who don’t have very much money is that they have so much money — which is to say, individuals and families with relatively low wages may not have tons of economic power as individuals, but as a market they are enormously powerful. America’s largest private employer, Walmart, represents a truly enormous accumulation of capital organized to address the problem of providing low-cost goods to people who want or need them. Walmart doesn’t keep its prices low because it loves low-income people, but because low-income people spend a great deal of money, and if Walmart doesn’t give them what they want at the price they want, somebody else will.

How this works in the real world is obvious to everybody who doesn’t write for the Washington Post: The median cost of a new car in the United States is about $34,000, which is well out of reach for most minimum-wage earners. You know how minimum-wage earners get around that problem? They buy cars that cost a heck of a lot less than the median — or they buy used cars, share cars, take the bus, etc. Minimum-wage workers solve the problem of relatively high rents by choosing accommodations that are well under the 50th or 40th percentile — or by having roommates, living with their families, etc. The relationship between the minimum wage and the median or near-median rent is an entirely artificial problem cooked up by organizations that want more federal spending on low-income housing (NLIHA) or by politicians arguing for a higher minimum wage. The latter is especially popular during campaign season.

***

But there is much more to this than a pliant Washington Post reporter getting taken by an intellectually sloppy propaganda “study.” That happens all the time. There’s a much more interesting aspect to all this that’s worth considering.

If you drive around most American cities and their suburbs, you might conclude that there seems to be a fair amount of apartment construction going on. You’d be wrong: Multi-family construction hit a six-year low in May. And the construction that is going on is not, for the most part, meant for the lower-wage end of the rental market. From NLIHA: “Household income has not kept up with the rising cost of rental housing. From the housing crisis of 2007 to 2015, the median gross rent for a rental home in the U.S. increased by 6 percent, after adjusting for overall inflation, while the median income for renter households rose by just 1 percent.”

Why aren’t we building more housing for low-income people?

It’s not because there’s no money to be made selling goods and services to low-income consumers: I doubt the French Laundry does as much business in a year as McDonald’s does in an hour, and Honda makes a lot more money selling economy cars to regular folks than Lamborghini does selling exotic cars to guys with yachts. Walmart makes a heck of a lot more money than Hermes or Louis Vuitton. Somebody out there would love to be the Walmart of low-income housing. What’s stopping them? It isn’t, strictly speaking, an economic of technological problem: Mobile homes (which start around $30,000 new), trendy “tiny houses,” and low-income housing developments abroad all show that we can build decent housing at prices within the reach of those with more modest incomes. But construction is moving toward the higher end of the market.

The basic problem is that politicians won’t let developers build housing for poor people. They don’t put it that way, but that’s what they do. Restrictive zoning and development rules in places such as New York City and San Francisco artificially restrict the supply of housing, often for purely aesthetic reasons. The old housing “covenants” were racial; the new ones are economic, with nice rich liberals in Pacific Heights basically saying: “We like things just how they are, thanks, so why don’t you poors beat feet on down to Stockton or wherever it is we warehouse you, right after you’re done cutting my grass?”

The only way to make housing more plentiful is to make housing more plentiful. What that implies, especially in the case of our big cities, is denser development. But our big-city governments — which are almost exclusively under Democratic control — will not allow that. New York City’s population density is less than half that of comparable European cities (and much less than many comparable Asian cities) and, in spite of its reputation as a city of skyscrapers, fewer than 2 percent of its residences are in buildings 20 stories or taller, much lower than the figure for comparable cities globally. In New York, the progressives aren’t working to allow denser development and, hence, cheaper housing: They’re doing the opposite, proposing to cap the number of tall buildings in the city. Forget New Jersey — there are a fair number of New Yorkers who commute from Pennsylvania. San Francisco, Austin, Los Angeles, the parts of Chicago or Philadelphia you might actually want to live in . . . similar story. They’ll call it historic preservation or “defending the character of the neighborhood” or whatever, but it’s basically economic segregation, which, it’s probably worth noting, is still a pretty good proxy for racial discrimination: San Francisco’s black population has decreased by one-third in recent years, and diversity-loving Portland saw its black population shrink by 11.5 percent in just four years.

By way of contrast, our friends at the Los Angeles Times were surprised to learn that Houston, way down in right-wing Texas, is the most diverse city in the United States. Everybody knows what Houston has what people want — jobs — but part of the attraction is something that Houston doesn’t have: zoning laws — not very much, anyway. That makes housing in Houston relatively cheap, which makes the area attractive to all sorts of people, including young people, immigrants, and others earning relatively low wages.

At this point, our progressive friends will ask an inevitable question: “Instead of making the whole country look like Houston, which is a horrifying prospect, why not make it more like lovely San Francisco, and then just raise the minimum wage so that people can afford to live there?”

***

That really isn’t a caricature. Here are the nice Bernie Sanders enthusiasts at feelthebern.org making basically that argument. There’s some high-test, weapons-grade economic illiteracy built into that question, the short answer to which is: “Raising the minimum wage will not magic more housing into existence, it just sends a larger pool of money chasing the same quantity of goods, which is the classical formula for inflation.”

But the fundamental error at work here informs so much misguided progressive economic thinking that it is worth considering at some length, starting with the basic economics.

There is in economics something called Say’s Law, which could be summarized as: “People produce in order to consume.” What does that really mean? Consider the most basic and primitive economy, a small band of hunter-gatherers at the dawn of mankind. (The date of which we have just moved back by about half again, apparently.) Why did those hunter-gatherers hunt and gather? It was not for the love of hunting and the thrill of gathering, but for a much more obvious reason: to eat. The basic facts of economics are far removed from abstraction: The point of fishing is fish, and the point of picking coconuts is eating them. That holds true until the level of production and social organization is high enough to allow for the emergence of our old friends specialization, the division of labor, and comparative advantage, all of which is another way of saying that once Throg has more fish than he wants to eat and Grug has more coconuts than he wants to eat, they start swapping fish and coconuts between them. And then Warg figures out how to make useful tools out of flint, which is good for a lot of fish and coconuts, and Yawr learns that she’s better at making thorns into fishing hooks than anybody else in the caveman clan, which is of great interest to Fisherman Throg, and eventually you get Corvettes and Google.

It’s the money that confuses people.

Money is basically information technology. It is a record-keeping system. One of the interesting implications of Say’s Law — that we produce in order to consume — is that there are not really any objective economic values: Everything that is produced and consumed is valued relative to everything else that is produced and consumed. If one mackerel is worth six coconuts or four fishing hooks or one-tenth of a flint chopper, then that can get to be a lot for your average caveman to keep up with. But it’s even more complicated than that: Not only is everything that is produced and consumed valued relative to everything else that is produced and consumed, everybody has different preferences, meaning that there are as many economic-value hierarchies as there are people — and those preference hierarchies can change from day to day or second to second. Again, this is easier to understand if you stick to the physical world rather than get mired in abstraction: You know whose kids get sick of apple pie? Those of the guy who owns the apple orchard. There’s no metaphysically “correct” exchange rate between apples and oysters and shoes and arrowheads — everybody likes what he likes and wants what he wants and — here’s the part that gets overlooked — has what he has.

Because we produce in order to consume, we value what we have in terms of the things we want. The emergence of money as a record-keeping technology makes that a lot easier to think about, but money is not the point: The things that money gets are the point.

This is important to understand because those valuations exist independent of money. That’s how inflation happens: We value what we value just the way we value it, and introducing more money into the system does not change those value judgments; it just makes money worth less in terms of fish or coconuts. Conversely, taking money out of the system (less of a problem, usually) doesn’t change those value judgments, either: It just makes money worth more in terms of fish or coconuts. You do not change the underlying value relationships by changing the record-keeping system.

That is where so much progressive economic policy goes wrong. Ignoring the physical facts of supply and demand in the real world, progressives attempt to game the record-keeping system in order to produce advantages for politically favored clients or disadvantages for politically disfavored rivals. That’s what raising the minimum wage is all about: The guy who owns your local Burger King franchise values one hour of 17-year-old fry-guy labor just the way he values it. That calculation is inescapably complex — so complex that it never ends up being an actual calculation — taking into account what the product of that hour’s labor can be traded for and the value of that trade relative to the price of the labor. What an hour’s fry-guy labor is worth is bound up in a vastly complex web of value judgments, and the boss’s value judgment isn’t necessarily the most important one: Customers have a say, too. So does the guy who wants your job and is willing to do it for a little less money or who is able to do it a little bit better for the same money. So does the guy who figures out how much interest to charge the boss on the loan with which he buys his new BMW. All of those things are, for lack of a better word, real.

Money is just how we keep track of them.

Passing a law that says you have to pay the fry-guy x + y instead of x does not change the value of the fry-guy’s labor relative to everything else that is produced and consumed. Not really. Ultimately, it is just a change to the record-keeping system. You could pass a law that says we have to pay 15-year-old baby-sitters eight times what we pay hedge-fund managers or brain surgeons, but that is not going to change how we actually value their respective labor. Government can get pretty aggressive about this stuff, which results in fairly predictable market distortions: When the federal government instituted wartime wage controls, employers looking to get the labor they actually valued on terms consistent with their actual valuation of that labor started paying employees in health insurance and company cars instead of paying them in money. The modern practice of offering “fringe benefits” in the form of paid sick leave, vacation time, and other employee perks is a direct response to the policies of the War Labor Board in the 1940s. (It is a big part of why our health-care system stinks.) The lesson: Even in times of war and the heavy-handed economic interventions associated with them, reality finds a way of sneaking around the record-keeping system.

People who earn low wages don’t just have labor that is lightly valued in terms of money: They have labor that is lightly valued in terms of everything for which money can be traded. That includes, among other things, housing. But it also includes education, health care, cars, shoes, food — and fish and coconuts and flint caveman axes, too. You can mess with the money, but those underlying value hierarchies will reassert themselves, sometimes in obvious ways, sometimes in unexpected ones.

With that in mind, let’s reconsider the question: If we are unhappy about the relationship between the price of certain kinds of labor and the price of renting an apartment, what should we actually do about that? We could try changing the price of labor through legislation, or we could try changing the price of renting an apartment through regulation and subsidies — meaning that we could try messing around with the record-keeping system.

Or we could build more apartments.