Over the history of housing assistance for low-income households, economists have generally been critical of supply-side measures and supportive of demand-side approaches. In particular, O’Sullivan goes to some lengths to reveal the inherent inefficiencies of supply-side approaches like public housing projects and the superiority of demand-side approaches like Section 8 housing vouchers. Quigley proclaims that demand-side measure are the “only” way to eliminate the well-documented problem of poverty concentration. However, proponents of demand-side housing generally make an inappropriate comparison between an idealized Section 8 program, operating in world where people welcome the poor into their neighborhoods, and the debacle of public housing, which is a rather unfairly poor representative of supply-side housing. This essay will discuss why public housing need not be viewed as such a misconstrued approach and why demand-side approaches, while superior conceptually, are not necessarily the best realistic option for housing low-income families or even for eliminating the concentration of poverty in our urban neighborhoods.
Optimized Public Housing: Not So Bad
Advocates of demand-side approaches to affordable housing frequently make the false claim that subsidies are cheaper than supply-side approaches. This claim is based on the assumption that subsidies are put toward the market of already-built housing while supply-side approaches are focused solely on building new, and therefore more expensive, housing stock. However, this assumption, while empirically true, should not be used in evaluating supply-side approaches as a whole for a couple reasons.
- Public Housing Mostly Cost-Effective: According to Gabriel [682], between eighty and ninety percent of all current public housing is cost-effective, thereby implying that the empirical claims regarding the high cost of public housing are biased due to a minority of exorbitantly expensive projects.
- Used Market Not Unique to Demand-Side Solutions: Public programs could simply purchase used housing and hold it for low-income households, thereby capturing the advantage of cost-effective used housing frequently claimed by demand-side methods.
Demand-Side Approach Still More Flexible
Despite questions surrounding the comparison of costs, demand-side approaches do have the clear advantage of providing low-income households with greater control over the quantity of housing they consume. This level of choice makes demand-side approaches Pareto-optimal compared to supply-side approaches because, by not fixing the supply of affordable housing provided, they allow low-income households to choose the best mix of housing and other goods to meet their needs.
The Section 8 Program: To demonstrate this point, the economic dynamics of a demand-side program like Section 8 rental vouchers must be understood. Figure 1 depicts the impact Section 8 vouchers have on the housing consumption decisions of a low-income household. Point E1 is the initial consumption choice of an unsubsidized low-income household, as it provides the maximum consumer utility (U1) given a certain budget constraint (Budget Line). The Section 8 voucher program sets a fair market rent and allows households to pay just 30% of their income for whatever housing they can get at that rent. In Figure 1, point E3 shows the new level of consumption assuming moving costs are affordable. Even if moving costs are unaffordable, the fact that most low-income households must pay more than 30% of their income for rent means that the Section 8 program will still save them money in their current house. In either case (high or low moving costs), the household utility (U3 and U2, respectively) clearly increases under Section 8.
Figure 1. Effect of Section 8 Housing Vouchers
The Limitations of Public Housing: Keeping in mind the dynamics explained in Figure 1, the limitations of public housing become clear. Because a public housing project is inevitably a “one size fits all” endeavor, it cannot account for the tremendous variety of budget constraints and preferences of low-income households. The only way for a public housing program to have the same impact as Section 8 vouchers on the household depicted in Figure 1 would be if the amount of public housing provided was equivalent to the amount the household would choose at point E3 and if the government charged 30% of the household’s income in rent. While the latter method is easily attainable, the former is nearly impossible. Even under a revamped public housing program that purchases used housing, it is simply not conceivable that the government would ever be able to provide the variety of housing options the market is able to provide. Inevitably, many households will not be able to find public housing that is as worth 30% of their income as they would find on the market. Of course, the reality of public housing is considerably worse than the optimized program I am describing here; O’Sullivan describes the superiority of demand-side options in detail [421-3].
Criticism of Section 8
Of course, it is a bit unfair to compare an idealized Section 8 program to the realities of public housing; indeed, the actual performance of the Section 8 program leaves much to be desired. This section will discuss criticisms of the Section 8 program from three perspectives.
Liberal Criticisms: According to Marcuse, demand-side programs like Section 8 have only limited impact and are the least progressive of approaches to subsidized housing. Marcuse argues that Section 8′s “fair market value” is set too low, so families enjoying the benefit of the subsidies still cannot afford reasonable housing on the private market. In addition, Marcuse points out that the extensive waiting list for Section 8 vouchers indicates that there are not enough subsidies to go around. However, it is not clear whether the waiting list to which Marcuse refers is actually comprised of eligible households, so he could be overestimating the need for Section 8 vouchers. [Marcuse]
Conservative Criticisms: Bovard takes the opposite view of Marcuse, arguing that Section 8′s “fair market value” is actually set above a reasonable rent, therefore allowing low-income households to enjoy massive subsidies to live in relatively luxurious units. Bovard’s evidence however is anecdotal, and his reactionary viewpoint, evidenced by his concern over the influx of a “crime element” under Section 8, likely distorts his ability to be reasonable. [Bovard 1996]
Economic Criticisms: The most astute criticism of Section 8 actually comes from O’Sullivan himself, though he brushes over it. He points out that demand-side programs could have little impact, especially in the short run, because relatively inelastic housing supply will react to the increase in demand for housing (induced by government subsidies) by simply increasing prices. Thus, landlords, not low-income households, will capture most of the gains from Section 8 vouchers. However, in the long run, housing supply, particularly in the United States, has generally been fairly elastic, so O’Sullivan’s criticism seems only a short-term concern.
Conclusion
While above criticisms of Section 8 seem to hold little water on their own, taken together they provide a fairly strong argument against Section 8. Unfortunately, as reactionary and misguided as it is, Bovard’s conservative viewpoint is held by the majority of the population who currently live in neighborhoods where low-income families might be able to benefit from an improved quality of life with the assistance of Section 8 housing. Although landlords might be able to kick up their rents in the short run (per O’Sullivan), the long-run housing supply will react by creating new housing. However, this housing is generally taken not by low-income households but by the very households that believe in Bovard’s biased viewpoints, thus depleting the very neighborhood into which a low-income household can now move of the very elements of wealth and stability that made that neighborhood more desirable in the first place.
Therefore, the best solution might actually fall more in line with Marcuse’s more liberal inclinations. Following after the suggestions for optimized public housing described above, the public sector could invest Section 8 funding into new private developments with the requirement that the development includes low-income housing With well-targeted investments, the government would be able to capture a cross-section of the market, providing ample choice for low-income households, who would be asked to pay 30% of their income for housing. In this manner, a supply-side approach could address Quigley’s ideal of eliminating concentrated areas of poverty. Indeed, a supply-side approach might be the only way.
References
Bovard, James. “Section 8: A Wrecking Ball for Your Neighborhood,” Freedom Daily, The Future of Freedom Foundation, http://www.fff.org/freedom/0996d.asp, September 1996.
Gabriel, Stuart A. “Urban Housing Policy in the 1990s,” Housing Policy Debate, Volume 7, Issue 4, Fannie Mae Foundation 1996.
Marcuse, Peter. “The Liberal/Conservative Divide in the History of Housing Policy in the United States,” Housing Studies, Volume 16, Number 6, 2001.
O’Sullivan, Arthur. Urban Economics (4th edition), Irwin McGraw-Hill: Boston, 2000.
Quigley, John M. “New Directions for Urban Policy,” Housing Policy Debate, Volume 5, Issue 1, Fannie Mae Foundation 1994.
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