What Is It About "Affordable Housing"?

An article from the Manhattan Institute's City Journal a couple of days ago illustrates the difficulty of being a Republican candidate for mayor in New York City.  A church in East New York (a low income neighborhood in northeast Brooklyn) held a mayoral debate dedicated to housing policy.  Six candidates for mayor showed up -- Democrats Quinn, Liu, Thompson and de Blasio, and Republicans Lhota and Allon.  The Democrats are either current or former city officeholders (respectively current Speaker of City Counsel, current Comptroller, former Comptroller, and current Public Advocate).  Lhota is a former Giuliani deputy and recent MTA head, and thought to have an actual shot at the office.  Allon is a private citizen in the publishing business.  As reported by Nicole Gelinas of the Manhattan Institute:

The hosts and the questioners accepted as fact that New York faces an affordable-housing crisis and that it’s the city’s job to fix it. Everyone who spoke wanted the city to build or “preserve” city-controlled housing—whether private, rent-regulated buildings or public units.

How about Lhota?  Well, it seems that he just kept his mouth shut.

Lhota showed that he is not politically naive. Politicians must pick their battles. Falling on his sword over public housing inside a church surrounded by public housing would have disqualified him on grounds of political incompetence.

The virtues of subsidized housing are such an accepted part of the local orthodoxy that you can't even question them in polite company.  At least the article by Ms. Gelinas shows that I am not completely alone in New York pointing out the insanity of spending public money on subsidized housing; there are at least two of us.  (Howard Husock would be a third.  That leaves only 7,999,997 on the other side!)  This just seems to be one of those issues on which rational thought is impossible.  

Even if you completely accept the idea that it is the government's job to cure all inequality by taxing and spending, public housing has to be the most expensive possible way to help the smallest number of people.  Indeed, even the word "help" is dubious here, because subsidized housing functions as a poverty trap for the people who manage to get in.  No one ever leaves -- the turnover rate in New York low income public housing is barely over 3% per year, for an average stay of over 30 years.  By contrast, the national turnover rate in all rental housing is about 35%, or an average stay in one place of only about three years.  Because you are subsidized, you have a powerful incentive to stay; it's a whole different way of life from the private housing world.  And because nobody ever leaves, very few people can get in.  Despite decades of massive building in New York (about 170,000 low income apartments) we have ended up with a small class of the permanently dependent and waiting lists stretching beyond a decade for everyone else.  Does anyone remember the old Soviet Union, where 70 years of socialized efforts to build nearly "free" housing ended with 25 year waiting lists for tiny apartments?  It's the same thing.  Meanwhile, the accounting hides the extent of the huge subsidies to a small number of people -- nobody accounts for the lost property taxes, or the opportunity cost of subsidized financing, or the deferred maintenance that will have to be made up some day.  And finally, the residents come under powerful incentives to minimize their income, or at least to minimize any income that the overseers can observe, because if you have substantial reported income they'll increase your rent or even throw you out.  If you are a rational actor, probably your best option is to become a drug dealer; second best option is to put together a package of non-cash government handouts (food stamps, Medicaid, school lunches, etc.)  In short, there is no more destructive public policy than public housing.  So of course, it has near universal support here in the trendy precincts of Manhattan. 

Well, actually there is something even crazier than subsidized low income housing, and that is subsidized "affordable" middle income housing.  In a world of limited resources, how can it possibly make sense to hand out subsidies to those who aren't even poor, even while the poor persist?  Of course, subsidized "affordable" middle income housing suffers from essentially all the same problems as the low income housing, starting with the fact that nobody leaves, and therefore only a tiny number of people get in on the boondoggle and have to be subsidized for their entire lives even though by definition they are not poor.  

A basic key to the enterprise is to make the subsidies totally opaque so that no one can possibly figure out how much this is costing per beneficiary.  The latest game is the so-called 80/20 program, whereby a developer agrees to make 20% of the units in his development "affordable" and return he gets to use tax-exempt bonds to finance his project.  Try to figure out who's paying how much for that one!  Of course, it's exactly this kind of diversion of supply that makes the remaining private housing in Manhattan so scarce and expensive, but it's difficult to perceive and impossible to quantify. 

And thus we have the phenomenon of the City Council Zoning and Franchise Committee meeting on Tuesday to vote on a developer's proposal to build one of these 80/20 buildings on West 57th Street, and the local city councilperson, Gail Brewer, opposing it on the ground of not enough "affordable" units and also she wants the "affordable" units to be permanent as opposed to the affordability having an expiration date.  Crain's New York Business has the story.  

"The issue is real affordable housing," Jesse Bodine, a spokesman for Ms. Brewer said. . . .  "They always say no, no, no, no, no to permanent affordability to the end, and the community won't stand for it."

So that's it:  It is absolutely imperative for a small number of not poor people to get a lifetime entitlement to subsidies while at least an equal number of unknown and unseen people by definition get priced out of the neighborhood.  Anything else, and the community won't stand for it!  Well, this is the West Side of Manhattan.

Can We At Least Get Rid Of Federal Flood Insurance?

One of the main places where I differ with the Manhattan Conventional Ignorance is on the concept that the Federal government has the ability (and therefore the obligation) to take all the downside risk out of life by acting as the infinite insurer of all major risks.  Most people know that the Federal government provides insurance against old age in the form of annuities for all (Social Security), and against medical expenses in old age (Medicare), and for the poor (Medicaid).  Fewer know about other massive government  interventions into the world of insurance, including insuring nearly all home mortgages (Fannie, Freddie, FHA), all private pensions (PBGC), risks from terrorism (TRIA), risks of loss of crops, and on and on.   How do intelligent people convince themselves that it is possible for this level of risk-bearing to persist for a long period without creating its own disaster?

Out of them all, my pet peeve is the National Flood Insurance Program (NFIP), the one that pays when your house on the barrier island gets washed away in a hurricane.  The program was originally created in the 1960s, when the idea of the government as infinite insurer of everything was just taking hold.  The program was supposed to be self-sustaining, but of course that's not how the government works.  In the 90s, when I owned a house on the barrier island, I got into an argument with the president of the Fire Island Association, with him claiming that the program always had and always would make money off the ocean-area people, and me saying that it was just a matter of time until the Big One put the program tens of billions of dollars "under water."  Guess who was right.

The original "Big One" was Katrina in 2005.  The NFIP promptly ran out of money and "had" to be bailed out, to the tune of $20 billion of borrowing authority from the Treasury.  They promptly blew through $18 billion of that.  Then came Sandy, and they just got another $7 billion a few weeks ago.  And so it goes.

But could it be?  An article in the current issue of Business Insurance says that proposals are circulating in Congress to privatize the flood insurance business.  The Chairman of the House Financial Services Committee, Jeb Hensarling (R, TX) actually seems to be hostile to this thing, and is quoted as calling it "ineffective, inefficient and indisputably costly to hard-working American taxpayers."  But of course, there is no mention of anyone in the Democrat-controlled Senate taking any kind of a skeptical look.  And for every industry player quoted in the article as thinking that privatization would be a good idea, another is quoted pointing out problems and risks.  My favorite is this quote from Nathaniel Wienecke, an executive of the Property Casualty Insurers Association of America:  "[T]he cost would be significantly higher because the industry would have to charge rates that were actuarially sound."  Imagine that!

Back in my Fire Island days, I did some back-of-the-envelope calculations of what kind of rates it would take to make a real business out of barrier-island flood insurance.  Based on a hurricane taking out a town or two every 30 - 50 years I figured that rates would need to be about 2 - 3 times the then-current Federal rates, except for the ocean front houses.  For the ocean front houses, the rates would need to be at least 10 times the Federal rates.  Why?  Because the ocean front houses are greatly at risk not just from major tropical storms and hurricanes, but also from run-of-the-mill nor'easters that come around most every year.  During the eight years we owned a house on Fire Island, there was no major tropical storm or hurricane, but about a third of the ocean front houses (and no non-ocean-front houses) were taken by the ocean.

Oh, I hadn't mentioned that the NFIP saves its hugest subsidies for the richest of the rich, the ocean front homeowners?  I hope you are not surprised.

Current status is that the program has no reserves at all and is about $27 billion in the hole to the Treasury from Katrina and Sandy, with no real prospect of ever paying that back.  Meanwhile, Katrina mostly missed the most valuable parts of New Orleans (Downtown, French Quarter, Garden District), and Sandy was a bare minimum category 1 hurricane.  The next one could be far, far worse.  Next time you are in South Florida, check out the build-up on the barrier islands from about Palm Beach to Miami.  A good category 5 strike right there could easily be a $100 billion event, maybe $200 billion.  Not a dollar of that is included in any debt or deficit projections you will see.

The biggest problem with privatizing the flood insurance program, or even increasing the rates, is that lots more people would then just go uninsured and figure that when the hurricane comes they can buffalo the government into paying them off in a "disaster relief" bill.  My solution is that the government should go around to every corner within the coastal flood zones and put up signs in huge print saying:  THIS AREA NOT ELIGIBLE FOR FEDERAL DISASTER RELIEF IN THE EVENT OF OCEAN FLOODING.  Of course, that kind of plan doesn't offer good prospects for vote-buying for the likes of Schumer.  So for now, I'm not holding out much hope.

Fallacy Of The Day

I often say to my kids that almost everything in life is some sort of scam or fallacy.  OK, it's an exaggeration, but not that much of one. 

Here's something you probably would never have thought of as a major fallacy, but it is.  How many headlines have you seen about increasing risks of cancer, with the general implication being that more cancers must be caused by a deteriorating environment?  Or is it just a fallacy?

An excellent blog called Numberwatch, by British mathematician John Brignell, has a short write-up in November 2012 on the "independence fallacy."  This fallacy is particularly relevant when discussing the causes of death:

[T]he probabilities of cause of death are not independent. Because we all die of something, they are constrained to add up to 100%.

In other words, our very success in curing other causes of death leads of necessity to our living longer and eventually ending up with cancer.

This is not a trivial point. Much of the bureaucratic interference in our lives has been justified by the putative increase in cancer rates. The main reason that they are increasing is that we are not dying of the other diseases that have inflicted man throughout his existence.

Keep this in mind next time you see some study using an increase in cancer rates as the justification for increasing government involvement in some aspect of your life.

The Next Four Years -- Looks Like The War On The Economy Will Continue

Four years into a pitiful economic recovery, what are the prospects for the next four?  In the last four years, the government footprint in the economy has gone up by 4 - 5% of gdp -- no sign that that is going to go down any time soon.  Social Security, Medicare, and Medicaid continue to increase at rates far in excess of overall economic growth, with no good prospect of reform.  Taxes on the top producers have just gone up.  But the U.S. economy is a huge and remarkably resilient engine.  Can't it get going and outrace these things?  

If you were thinking of getting your hopes up, consider this from Obama's second inaugural address:

We will respond to the threat of climate change, knowing that the failure to do so would betray our children and future generations. Some may still deny the overwhelming judgment of science, but none can avoid the devastating impact of raging fires, and crippling drought, and more powerful storms. The path towards sustainable energy sources will be long and sometimes difficult. But America cannot resist this transition; we must lead it. We cannot cede to other nations the technology that will power new jobs and new industries — we must claim its promise. That is how we will maintain our economic vitality and our national treasure — our forests and waterways; our croplands and snowcapped peaks. That is how we will preserve our planet, commanded to our care by God. That's what will lend meaning to the creed our fathers once declared.

And this wasn't just buried somewhere.  From all indications, it appears that he intends to make it the signature initiative of his second term.

There were no policy specifics mentioned.  However, every policy idea that has ever been on the table as to "climate change" has two essential features:  (1) it attempts to decrease the use of carbon-based energy either by direct prohibition or by raising the price, and (2) its effect on total world use of carbon energy, given rapid increases in third world use, cannot have any but completely negligible effect on world temperature, even if you believe that more atmospheric CO2 will increase temperatures.

Over at the Washington Post's wonkblog, Steve Plumer has a list of policies that Obama might try:  have EPA force the closing of coal-fired power plants (sure to raise the price of electricity); force the use of more "renewable" energy (costing a multiple of carbon-based energy); back to cap and trade (specifically intended to raise the price of energy to force the people to use less, aka intentional impoverishment of the people).  Or how about a really high, really regressive "carbon tax"?  Maybe that will "save the planet" by forcing the low income people to stay home and keep their homes heated to only 50 degrees.  Or how about a few more billions -- make it trillions! -- for renewable energy subsidies?  Of course, the renewables can't possibly compete with fossil fuels on equal terms, so when the subsidies end, all of the wind and solar producers go out of business the next day.

Meanwhile, it's been fifteen years since world temperatures have increased -- fifteen years in which carbon emissions from the third world and former third world (China, India) have soared.  One would think that the climate campaigners by this time would be looking for a way to climb down inconspicuously and slink away before they make themselves look even more ridiculous.  Nope, they're doubling down.

In the old days the government thought it was its business to make electricity available and inexpensive.  From the 1930s to 1990s we had the Rural Electrification Administration, that handed out big grants to bring carbon-based electricity to every farm in America.  What happened to that?  Well, no Federal bureaucracy ever goes away.  In 1994 they turned it into the Rural Utilities Service.  According to allgov.com, that agency dispensed some $9 billion from 2002 - 2012.  And one of the key missions?  Making electricity less expensive in rural areas!  Here's a press release from December 19, 2012: 

USDA ANNOUNCES FUNDING TO HELP REDUCE ENERGY COSTS IN REMOTE, RURAL AREAS

Well, nobody ever said the government had to be consistent.  The point is to pass out money and to make yourself look like the sugar daddy.

Anyway, everything about "climate change" policy is a war on the efforts of entrepreneurs to make the economy more productive and efficient, and the people wealthier.  So what is the chance of the economy improving any time soon?

A Good High Level Summary Of Manhattan Conventional Ignorance

The term "conventional wisdom" is often applied to describe a widely-held point of view with which the writer disagrees.  But I can't bring myself to apply that term to the Manhattan orthodoxy, because "wisdom" implies that there was at least some grasp of the facts and some application of thought to arrive at the conventional position.  A better term for the Manhattan orthodoxy is "conventional ignorance." 

The funny thing about Manhattan conventional ignorance is that its purveyors are often very smart people.  They make successful careers dealing with complex concepts and solving difficult problems.  That leaves little time for studying history or thinking about public policy, but others in the elite crowd are already doing that, and they all agree on all essential points.  So it's really easy just to conform. 

Yesterday one of my partners, whose field is tax, invited me to the annual lunch of the Tax Section of the New York State Bar Association.  This was a very large affair, perhaps 3,000 attendees, held in the large Grand Ballroom of the New York Hilton.  It would be fair to say that all the top tax lawyers in New York were there. 

The draw was a speech by a guy named Edward Kleinbard.  Perhaps you haven't heard of him, but he's a bona fide big name in the field of tax law.  After many years as a top partner at the Cleary Gottleib firm, he went off to become Chief of Staff of the Joint Committee on Taxation of the Congress (OK, my radar should have been alerted by that one), and then left there to become a professor at USC Gould School of Law.  My colleague personally knew Kleinbard and described him as a "really smart guy."  The advertised topic was "budget and tax policy."

Well, this guy may know more than anybody about reverse K squared tax shelters or the language of the new ObamaCare tax provisions, but this speech had nothing to do with his actual expertise.  He had decided to branch out into being a public policy guru, with the compass of the New York Times editorial page and Obama campaign talking points to guide him.  This speech was to be a high level summary of Manhattan conventional ignorance.

Title of the speech:  Why Tax Revenues Must Rise.  Already I knew I was in trouble.  Well, why can't spending be cut instead?  In summary the answer was that spending is just a law of nature and there's nothing that can be done about it.  I made notes of a few of the key quotes:

Spending cuts just aren't going to happen.

You can't suck too many dollars out of the economy too quickly.

Spending just cannot be cut more.

The sharp austerity path is not a great idea.  Most of us thought that was resolved in the Great Depression.

There you have the instinctive and ignorant acceptance of the official narrative that the Great Depression was cured by government spending.  He is blissfully unaware that it was in fact spending cuts well in excess of 50% of the total that set off the postwar boom.  Here is a link to one of my prior posts on this, with further links to the important David Henderson article about the postwar spending cuts and subsequent boom.

Cut discretionary spending?  That's already been "cut to the bone."  There was no specific mention of why the hundreds of billions of dollars of annual spending for things from agriculture subsidies, to education, to green energy boondoggles, to the Commerce Department, to the Labor Department, to the TSA, to disaster relief, to the drug war, etc., etc., cannot be cut or, in fact, eliminated.

Cut entitlements?  That will take decades.  We can't have "medical costs visited cruelly out of the direct pockets of Americans."  Did he actually say that?  Yes.

I won't go on.  It's too painful.  Three thousand people or so - the best and brightest in New York tax law - sat there nodding their heads.  At the end of the speech, there was a little polite applause.  I booed, but I was off in a corner in a room way too big for many people to hear me. 

Of course, the speech actually demonstrated the fundamental argument for refusing to raise any taxes in any respect, because providing any additional revenue just gives added credence to the ridiculous argument that spending cannot be cut.  Kleinbard cannot justify that, and neither can anyone else.  As soon as someone actually challenges the "it's just a law of nature" argument, the whole structure crumbles.

How Many Times Must The Taxpayers Pay To Rebuild Sea Bright, New Jersey?

At this writing the Senate still hasn't approved the second-round $50+ billion Hurricane Sandy relief bill, but I'm not holding out much hope that it will go down to defeat, or for that matter be trimmed even a little.  So it's time to further examine the infinite credit card mindset behind these things.

Yesterday the AP had a story raising the legitimate question of whether it's the right thing to rebuild yet again in some of those communities destroyed time and again by ocean storms.  The story was picked up by numerous outlets.  Here is the version at Newsday.  But like almost everything from the press, the story is so totally infected by the infinite credit card mentality and ignorance of history as to be next to useless.

The headline is:  Should worst-flooded areas be left after Sandy?  Here's the response of Dina Long, mayor of Sea Bright, NJ:  

"We're not retreating," said Dina Long, the mayor of Sea Bright, N.J., a chronically flooded spit of sand between the Atlantic Ocean and the Shrewsbury River only slightly wider than the length of a football field in some spots. Three-quarters of its 1,400 residents are still homeless and the entire business district was wiped out; only four shops have managed to reopen. . . .  But as in many other storm-damaged communities, there is a fierce will to survive, to rebuild and to restore.  "Nobody has come to us and said we shouldn't exist," she said. "It is antithetical to the Jersey mindset, and particularly to the Sea Bright mindset. We're known for being strong, for being resilient, for not backing down."

Sounds like the voice of a brave fighter.  Or is she a contemptible moocher?  To me the answer entirely depends on whether the residents of Sea Bright are prepared to rebuild with their own money, or private insurance, or whether their so-called "strength" and "resiliency" is just a function of the hand-outs they can suck off the Federal credit card.  Incredibly, the AP reporter is not curious enough to understand that this is the fundamental question.  It is not asked.  But we know the answer, since the $60 billion Federal hand-out is enough to pay for all legitimate losses from Sandy at least three times.

Well let's take a little look at the history of Sea Bright.  When was the last time it was flooded by some combination of its ocean and river?  That would be 2010.  Here's a story about the 2010 storm and its aftermath:

“Sea Bright families are still recovering from the effects of the snowstorm that hit the area and destroyed local families’ homes back in 2010.  This funding will help fully repair the damage caused; it will also bolster the relevant public infrastructure to prevent future damage from the regular storms and floods that affect area,”  said New Jersey U.S. Senator Bob Menendez. 

The Federal funding in question would be $1.4 million to build and repair bulkheads "to minimize [future] flood damage."  Looks like that money went straight down the rat hole.

And the next previous flood at Sea Bright?  Why, that would be September 2009!  Here is a youtube story with a video of the ocean flowing up onto the streets.

Before that, it seems you have to go all the way back to 1992.  Lou Lumenick of the New York Post lived there at the time, and wrote a recent story for the Post describing his experience in the horrific 1992 destruction.  Oh, but here in a blog post from 2005 called "The Jersey Shore Real Estate Bubble" we have a description of houses for sale "north of $3 million" on the very site of properties destroyed in the 1992 storm.  Those would be the houses just now destroyed and that the taxpayers must pay for.

Next, a policy paper from Rutgers University (for those who don't know, it's the state university of New Jersey) listing other major storms that destroyed Sea Bright, going back into the 19th century:

1962 The Great Ash Wednesday Northeaster

1944 - Great Atlantic Storm

Christmas Storm and Jan. 1914 Storm - caused massive destruction

1890s - storms repeatedly destroyed wooden bulkheads and battered many of the cottages in Sea Bright

And here is NJ Governor Christie calling the House of Representatives "disgusting" for postponing a vote on Federal relief to bail out these people for the umpteenth time.  Really, Governor Christie?  Perhaps I am the only person in the United States who finds it disgusting that the Congress votes $60 billion of Federal taxpayer money to bail out everyone who built anything on the coast that got destroyed.  But it is disgusting, and it's time for a few other people to join me.

Back to the AP story.  They have the idea that the only possible alternative to Federal hand-outs to rebuild again and again is "buyouts" of the affected property owners.

If buyouts did occur, [Prof. Jon Miller of Stevens Institute of Technology] predicted they would happen in areas with lower property values because of the high cost of buying up prime coastal real estate. That could have the unintended consequence of placing the shore off-limits to all but the wealthy, he said.

It's like the idea of letting people suffer their own losses, or buy their own insurance, doesn't even occur to them.  It's beyond the pale!  The mindset is:  of course it's obvious that the taxpayers must either bail out or buy out the people who just bought newly built $3 million homes in a community that has been destroyed by the ocean seven times in the last 130 years.   Am I the only person who is willing to say no to this insanity?