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Education Vouchers: The Lessons from Housing
Tyler is concerned that a voucher system for education might end up looking like our health care market – “a crazy-quilt mix of bad incentives, high costs, and increasing levels of intervention.” But our health care system is not a voucher system – much more relevant is the existing voucher system for housing. Public housing has been a disaster in this country, low quality, dangerous and expensive (to the taxpayer). The Section 8 voucher and similar certificate programs have been far superior on all measures. What would you rather have – an apartment in a public housing project, costing the taxpayer $1000 a month, or a voucher worth $500 a month that you could spend on private housing?
The economic studies on the superiority of vouchers are unanimous. Here is Ed Olsen, one of the country’s leading researchers:
Five major studies have estimated both the cost per unit and the mean market rent of units provided by housing certificates and vouchers and important production programs, namely Public Housing, Section 236, and Section 8 New Construction.1 These studies are based on data from a wide variety of housing markets and for projects built in many different years. Three were multi-million dollar studies conducted for HUD by respected research firms during the Nixon, Ford, Carter, and Reagan administrations. They are unanimous in finding that housing certificates and vouchers provide equally desirable housing at a much lower total cost than any project-based assistance that has been studied, even though all of these studies are biased in favor of project-based assistance to some extent by the omission of certain indirect costs.
As with housing, the market for education would be very competitive so we would not see price rises due to monopoly problems (as Tyler fears might be the case). There has been a big debate about whether private schools result in better outcomes that public schools. Put aside this debate and focus on what is undeniable – private schools have achieved at least as good outcomes as have public schools but at about half the cost (similar to the cost savings of vouchers over public housing). Thus we are starving the most productive sector of the educational market and throwing money at the least productive sector. Prices might rise in a voucher market but only as a rational response to the lower price of quality in private schools.
Arguments that (almost) everyone hates
These are usually worth pondering, as at the very least you will learn something. Here is a hate-worthy paragraph from an earlier Bloomberg column of mine:
…note that higher real estate prices, to the extent they result from immigrant demands, largely translate into capital gains for homeowners — most of whom are native-born. To be sure, the higher home prices may be bad for many younger Canadians, who may be locked out of housing markets, but eventually many of them will inherit high-valued homes from their parents.
Yet it is true. “Immigrants pushing up home prices” should not be a major worry, though it does create some distributional problems (is this the main way to induce conservatives to worry about distributional problems?).
With some effort maybe one can make the dislike of the argument stronger. Often I hear “Oh, it’s good if we taken in lots of immigrants. But the more that come, the more we need YIMBY to house them at reasonable expense.”
Maybe! But let’s not forget the terms of trade models for international exchanges. If one of our export industries is “selling homes to arriving foreigners,” you might want your sellers to collude, restrict output, and raise prices to the foreigners. At least if you are maximizing the welfare of initial natives.
And that is precisely what NIMBY policies do, namely by enforcing a kind of implicit collusion, they force the arrivals to pay more for homes. Pay more to the natives, that is.
Raise your hand if you’re against capital gains!
Of course the cosmopolitans amongst us can resolve these issues rather easily.
Thursday assorted links
1. Interview with Michael Elowitz on synthetic biology. Asimov Press again.
2. The brothers who collected Star Trek memorabilia (NYT). A weird story, believe it or not.
3. The importance of foreign workers for national security.
4. What makes home building so expensive? (cost issues, not NIMBY issues)
Why aren’t Canada and other Anglo nations turning against immigration more?
That is the topic of my latest Bloomberg column. I cover several points, here is one of them, based on the economic idea of intertemporal substitution:
In this sense, Canada is ahead of much of the rest of the world in seeing the importance of these factors and turning it into actionable policy. It is willing to give up some of its present cultural identity to achieve a brighter cultural and political future.
This trade-off is much better than it looks at first. For one thing, birth rates for native-born citizens may fall further than they have already. If a country wants to preserve its national culture, it may be better off allowing more migration now, when there is still a critical mass of native-born citizens to ease assimilation.
To put the point more generally: Whatever costs there might be to immigration, successful nations will have to deal with them sooner or later. And the sooner they do, the better off they will be. The choice is not so much between more immigration and less immigration, but rather a lot of immigration now or a lot later. This choice will become all the more pressing as the need to fund national retirement programs requires more tax-paying citizens.
And on real estate prices:
One of the most common criticisms of immigrants is that they push up real estate prices. Yet there is a home-grown explanation: Stringent regulations on building make it difficult for the supply of housing to respond when demand increases.
In fact, there is a way immigration can help address this problem. First, immigrants may themselves induce their adopted country to free up its real estate markets. So immigration might increase real estate costs in the short run, but help reduce them in the longer run. Second, immigrants can help lower-tier cities move to the fore. The suburbs of Toronto, for example, have seen much of their growth driven by Asian in-migration, and longer term that will give Canadians more residential (and commercial) options.
These points aside, note that higher real estate prices, to the extent they result from immigrant demands, largely translate into capital gains for homeowners — most of whom are native-born. To be sure, the higher home prices may be bad for many younger Canadians, who may be locked out of housing markets, but eventually many of them will inherit high-valued homes from their parents.
Rrecommended.
Monday assorted links
*Build, Baby, Build*, by Bryan Caplan
Here is my blurb for the book:
“Bryan Caplan is a pioneer in the use of graphic novels to expound economic concepts. His new book Build, Baby, Build is thus a landmark in economic education, how to present economic ideas, and the integration of economic analysis and graphic visuals. If you want to learn the economics, ethics, and political economy of YIMBY— namely the freedom to build this is the very best place to start.”
And from Bryan:
Please forgive my laughable arrogance, but I assure you that BBB is the most fascinating book on housing regulation ever written. In fact, I assure you that there will never be a more fascinating book on housing regulation!
While objective self-interest impels you to buy the book as soon as it releases, it would be a huge favor to me if you would take the extra step of pre-ordering right away from Amazon, Barnes and Noble, Bookshop, Apple Books, or anywhere else. Why? Because all pre-orders count as “first-week sales” for national best-seller lists — and I’m aiming high.
Here is the book’s home page. It is really very good.
Sunday assorted links
1. A YIMBY victory in Wellington, New Zealand. And boarding houses are underrated.
2. Eric Lombardi on an abundance agenda for Canada.
3. Christopher Beam and Catarina Saraiva at Bloomberg cover EJMR.
4. Luis Garicano thoughts on the Levitt podcast with Hartley.
5. John Nye on the political economy of Dune.
7. William Nordhaus on whether we are approaching a singularity.
8. Frans de Waal, RIP, and more here.
Milei update
The shock therapy administered by Milei and his economy czar Luis Caputo right after the Dec. 10 inauguration is showing results. In a severely recessionary context, inflation is slowing down (February prices rose 13.2% in monthly terms compared with 25.5% in December) while foreign reserves grew by more than $7 billion despite debt repayments. Deposits on local dollar-denominated bank accounts have also recovered. Last week, Argentina’s sovereign spread (a measure of country risk) dropped to the lowest in more than two years and the nation has received the enthusiastic backing of the International Monetary Fund, its single largest creditor.
The exchange rate — historically the Argentine economy’s key indicator — has recently appreciated in parallel markets and now trades at just 15%-20% over the official peso, opening the door for authorities to consider unifying the currency market. As local economists have argued, it’s time to start dismantling the byzantine currency controls that have long strangled Argentina.
The flipside of the government’s deep spending cuts, however, is a near-collapse in economic activity, with industrial production falling more than 12% year-on-year in January and construction retreating even more.
And:
At the same time, the parallel peso’s appreciation in a context of high inflation is leading to a loss of competitiveness, with Argentina fast becoming expensive when measured in dollars. The result adds to speculation that a new devaluation will soon be unavoidable, reversing gains in the fight on inflation. “Our base scenario considers a correction of the exchange framework in May,” Buenos Aires-based consultant Equilibra said in a recent report. Monday night’s measures by the country’s central bank can be seen as an attempt to tame this appreciation.
The government’s gamble is that, by the second quarter, a strong crop from Argentina’s high-powered farmlands spurs a rebound in activity that helps contain some of the social discontent produced by the measures.
Here is more from Juan Pablo Spinetto at Bloomberg. And from the FT:
Argentina’s Senate has rejected President Javier Milei’s sweeping emergency decree to deregulate the economy, in a major blow to the libertarian leader and his attempt to deliver reforms for the crisis-stricken country. Senators voted 42 to 25 to reject the decree, with four abstentions. Issued in December it modifies or eliminates more than 300 regulations affecting the housing rental market, food retailers, air travel, land ownership, and more.
So further progress on the libertarian front may be tough. Also from the piece:
“This is a worry for the market because the president is on the verge of losing . . . the only set of substantial economic reforms he has been able to introduce so far,” he said. Milei already opted to withdraw the other plank of his legislative agenda — a multipronged omnibus bill aiming to overhaul the Argentine state — from the floor of the lower house last month after lawmakers rejected several key articles.
Things could be better.
Sunday assorted links
1. The suburban YIMBY movement (NYT).
2. Chess Fever, a Soviet silent movie. 27 minutes, Buster Keaton-style.
3. Angus Deaton makes a nationalist turn.
4. Is Silicon Valley pricing academics out of AI research? (I hope so.)
5. List of names you cannot give your Icelandic daughter (sorry Abigail! Aisha eventually was approved, though). For men, they have banned Fabio, but not Elmer. I believe in laissez-faire for names, but if you are going to ban anything, surely Elmer is worth some consideration?
6. Are Florida voters tiring of the culture wars?
7. “Mr. Musk has not hired any staff for his foundation, tax filings show. Its billions are handled by a board that consists of himself and two volunteers, one of whom reports putting in so little time that it averages out to six minutes per week.” (NYT, quite possibly he is doing this well?)
Saturday assorted links
1. “In sports, South Korean women generally outnumber men in the stands.” (NYT)
2. Why don’t people talk about fat-tailed sheep more?
3. China-Africa donkey trade wars? (NYT) Donkey nationalism!
4. “Roosevelt fixed his VP mistake.”
5. New Oliver Kim Substack, he is an economist from Berkeley, first piece is on public housing.
Israel facts of the day
GDP declined by an annualised 19.4 per cent compared with the third quarter. On a pure quarter-by-quarter basis, the economy contracted 5.2 per cent compared with the previous three months.
The sharp drop was caused in part by the call-up of 300,000 reservists, who had to leave behind their workplaces and businesses to embark on months of army service, the Central Bureau of Statistics said.
Other factors to hit the economy included the government’s sponsorship of housing for more than 120,000 Israelis evacuated from the northern and southern border areas of the country.
Following the October 7 attack, Israel also imposed tough restrictions on the movement of Palestinian workers from the West Bank into the country. The move hit the construction sector, causing labour shortages that became an additional drag on economic growth, the bureau said.
Overall, Israel still closed the year with a growing economy, with GDP up 2 per cent in 2023 from 2022. But that compared with an increase of 6.5 per cent a year earlier.
The war has triggered a steep increase in government spending, which rose 88 per cent in the three months after the outbreak of war compared with the preceding quarter. Consumers, meanwhile, were spending 27 per cent less. Imports of goods and services fell 42 per cent, the report said, while exports dropped 18 per cent.
Might a Georgist land tax help revive Detroit?
That is the topic of my Bloomberg column. Maybe they should try it for federalism/discovery purposes, but overall I am skeptical. Here is one excerpt:
The history of “enterprise zones,” which are specially designated areas (usually urban) with lower taxes and fewer regulations, offers a cautionary tale. Enterprise zones have at best mixed results in revitalizing declining areas. Could fiddling with the marginal incentives embedded in the property tax code really make that much more of a difference? Most economic decisions are made on the basis of broad criteria such as labor force quality, nearby markets and the ease of doing business.
By itself, the uneven record of enterprise zones is no reason not to experiment with land value taxation. But it does limit the upside from any change.
A possible downside from land value taxation is that it discourages land speculation. Land speculators do not, I concede, have the best reputation — but speculation can be either a positive or negative, depending on whether entrepreneurs have good foresight. On the plus side, speculation can keep land from being developed prematurely, or from being locked into uses that later turn out to be too low in value.
If dormant land in Detroit is taxed at a higher rate, that might encourage property owners to develop low-quality housing or retail to lower their tax burden. A landowner might build a small house, for example, rather than holding out for a large, higher-quality apartment complex. The city might get modest growth, but lose out on the chance for a bigger economic redevelopment. Detroit has in recent times shown signs of a revival, so perhaps waiting for the right opportunity is sometimes best.
Of course, speculators can also make mistakes, for example by failing to develop their property more quickly. Still, whether the tax authorities have the foresight and flexibility to do better than property speculators is an open question. In the meantime, some speculators may abandon their holdings to avoid the tax, putting more property in the hands of the municipal government — hardly an ideal outcome.
Note also that the proposal is revenue neutral by design (taxes on developments are supposed to go down), but over time it might simply evolve into a flat-out tax increase.
Rent Controls
Ryan Bourne has a good rundown on rent controls in Argentina. In 2020 Argentina introduced a relatively mild form of rent control; rent increases during tenancy were capped at a weighted average of inflation and wage growth, tenancy was a minimum of 3 years and it became very difficult to end a tenancy. In ordinary times, this might have had only mild negative effects but in a high inflation rate scenario everything was accelerated (and the controls got worse over time, most notably in 2023 rent increases were capped at the minimum of inflation and wage growth).
….The results of all this were predictable. Around the policy’s introduction, it’s estimated that 45% of landlords stopped renting to instead sell their properties, not least because most home sales were made in dollars [it was illegal to rent in dollars, AT]. A lot of landlords shifted to short-term rentals on AirBnB too. In 2019, Buenos Aires had 10,000 properties listed on AirBnB; now it’s over 29,500. There have thus been no end of stories about a rental housing crisis, with tenants unable to find rental accommodation, despite the Financial Times reporting late last year that energy use implies ‘one in seven homes’ in Buenos Aires, the capital, laid empty.
This supply crunch led to soaring rents. Bloomberg reported that rents jumped sharply after tenancy rent controls were announced, as landlords opted out of the market or front-loaded rent increases to protect against inflation. Having been falling in real terms through 2018 and 2019, and tracking inflation for most of the previous decade, rents in Buenos Aires grew at 1.7 times the pace of inflation in 2020, broadly tracked inflation in 2021 and 2022, and then accelerated much faster than inflation again in 2023 as the rate which rents could be increased within tenancies was tightened further to the lower of wage growth or inflation.
As a result, the average rent for a two bedroom apartment in Buenos Aires has surged from 18,000 pesos per month at the end of 2019 to 334,000 pesos today, far above the 210,000 pesos if prices had merely tracked broader inflation, as used to happen. This relative price hike obviously hurts the poor most, because they cannot easily afford deposits to buy homes, or more expensive shorter-term dollar rentals.
Controls on rents within tenancies also soured landlord-tenant relations, incentivising landlords to forgo expensive maintenance (thus allowing the value of the property to fall towards its regulated price or to encourage tenants to leave). Misallocation of properties was rife. Reports in Buenos Aires described friends having to share apartments further out of the city centre, meaning cramped conditions and longer commutes. Under such controls, people enjoying sub-market rents are incentivized to stay in properties ill-suited for them, while others must leave properties they can afford prematurely when rents adjust sharply before their wages rise.
Milei’s Decree 70/2023, translated as ‘Foundations for the Reconstruction of the Argentine Economy,’ eliminated rent controls, including allowing contracting in dollars. Even though it has been only a matter of months, early signs are very positive:
Already the reduced risks to landlords is leading a rebound in the rental supply. Broker Soledad Balayan has shown a 50% rise in notices for traditional rentals since the decree. A host of other sources, including the Argentine Real Estate Chamber, have confirmed large supply jumps. Perhaps unsurprisingly, reports show new rental prices falling, by between 20 and 30% so far.
Duke History of Economic Thought Summer Institute
The Center for the History of Political Economy at Duke University will be hosting another Summer Institute on the History of Economics from June 3-12, 2024. The program is designed for students in graduate programs in economics, though students in graduate school in other fields as well as newly minted PhDs will also be considered.
Students will be competitively selected and successful applicants will receive free housing, access to readings, and stipends for travel and food. The deadline for applying is March 10.
We are very excited about this year’s program, which will focus on giving participants the tools to set up and teach their own undergraduate course in the history of economic thought. There will also be sessions devoted to showing how concepts and ideas from the history of economics might be introduced into other classes. The sessions will be run by Duke faculty members Jason Brent, Bruce Caldwell, Kevin Hoover, and Steve Medema. More information on the Summer Institute is available at our website, https://hope.econ.duke.edu/2024-summer-institute
Is the mortgage interest deduction a good idea?
I usually don’t like arguments like the one that follows, as purely short-run second best considerations tend to rub me the wrong way. Nonetheless I had never thought of it before, so I am happy to present it for our collective enlightenment:
Mortgage interest deductions and other homeownership subsidies are widely believed to be harmful because they redistribute resources from lower-income renters to higher-income homeowners. We argue that renters actually benefit from these policies in general equilibrium for two reasons. First, the rental supply curve is relatively inelastic, which means that rents fall when these policies reduce rental demand. Second, many renters spend most of their income on housing, and these renters gain substantially from rent decreases. We calibrate a quantitative model to match empirical evidence on these factors and show they are strong enough that subsidizing homeownership actually increases welfare.
That is from a newly published article by Shahar Rotberg and Joseph B. Steinberg. Via the excellent Kevin Lewis.