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Challenging the Two Americas: New Policies to Fight Poverty
March 23-24, 2006


Howard Husock

Center on Work, Poverty and Opportunity
University of North Carolina Conference

When the discussion turns to housing policy, we focus most often on need and what's called affordability. So it is that our attention will inevitably be drawn to comparisons of median rent and median income, as well as a variety of other data sets meant to point up the gap between the incomes of low-wage workers and the cost of housing, at least in some areas.

The import of such data is taken to be self-evident: that government, and most likely the federal government, should, indeed, must take measures to bring down the cost of housing for those of modest means-whether through government owned and operated housing-run by public housing authorities-direct housing subsidies to households, to help them pay the rent, or housing subsidies to developers, in exchange for their lowering the price for those of lower income. We've done all these things, to varying degrees, over the past 75 years.

At the same time, we never hear about the need for such below-market rate housing being satisfied. Indeed, it seems that even extremely large increases in federal housing program budgets are viewed as insufficient. Over the past decade, for instance, federal appropriations for the Section 8 Housing Choice Voucher program have virtually doubled-eclipsing even the spending for cash public assistance-yet the focus remains on the inadequacy of spending and need unmet-for, indeed, only a minority of those eligible, by law, for housing assistance actually receive it.

One conclusion: we must spend more.

But another conclusion is possible, as well: that what we are doing now is not the best approach and that, rather than continuing those programs-at higher levels-we should rethink our underlying assumptions. That point of view can be complemented by another-- that the existing programs, in addition to being inadequate to serve the population said to be in need, are fatally flawed by a range of market distortions and social ill effects to which they lead. Together, these two themes-lack of cost-effectiveness and collateral damage-lead, in my view, to a need to rethink whether we should, indeed, by in the specific business of housing subsidies, at all. I'd like to provide an overview of what I see as the flaws of our various housing programs for those of low-income and then propose an alternative approach, one which I think will better fulfill the goal of ensuring that those who work should not be poor.

I will begin, though, with a critique of existing housing subsidy programs. Let's start with the Housing Choice voucher program, the fastest-growing housing subsidy program we have, one that now dominates the budget of the Department of Housing and Urban Development, ballooning to more than $17 billion a year. It's presented as a way to use markets to serve the poor because individual poor households seek out private property owners willing to accept housing vouchers. Its problems, however, are deep. First, it is out-of-synch with the bipartisan approach to public assistance which emerged in the welfare reform legislation signed by President Clinton. Unlike cash public assistance today, the housing voucher program poses powerful disincentives to work. Because recipients pay a flat 30 percent of income in rent, higher incomes lead to significantly higher rents. Indeed, if one goes from earning $10,000 to $15,000, ones rent will increase by $1500, leading to a marginal tax rate of 30 percent, even before income and payroll tax effects are considered. No wonder the program leads to long-term dependency-it makes economic sense to forego increases in earnings and keep the voucher. So it is that, in New York City, for instance-home of the nation's largest housing voucher program-the average recipient has been in the program 8 years-and that understates the dependency problem, because so many new households have been added in recent years. Keep in mind, by the way, that comparisons to cash public assistance are not idle ones-housing subsidy programs target virtually the same low-income single-parent population . Although one hears much discussion of couples who have difficulty affording a home, our low-income housing programs-both vouchers are publicly-owned housing developments-overwhelmingly serve single mothers. Indeed, again in New York, the Housing authority reports that fully 98 percent of non-elderly, non-disabled voucher holders are single parents-and that only one third of them are working. Indeed, by giving priority to those earning 30 percent of median income or less, as we do by law, we virtually guarantee single parents will predominate-and, arguably, encourage the formation of single-parent households in which, we know, children are at a disadvantage from the start. We have signaled through the Temporary Assistance to Needy Families that aid will be contingent on work and will come with a time limit; our housing voucher program-now larger than cash welfare-signals just the opposite.

Nor are those its only problems. Voucher holders are not randomly distributed in metropolitan areas. They tend to cluster, both in long-time low-income areas and in inner-ring suburbs-where property owners are lured by reliable rent payments and may have only limited other options. For instance, in New York City-with more than 90,000 voucher-holders-just 11 of the city's 59 community districts contain 50 percent of all voucher households. As voucher-holders do move into areas of less concentration, however, all is not well; in many inner ring, older suburbs where voucher-holders have begun to move, long-time residents hope, often desperately, to maintain the working family character of their neighborhoods. Emerging concentrations of vouchers have become a political issue in the south suburbs of Chicago and the San Fernando Valley area of Los Angeles, where politicians are being pressured to crack down on what residents say publicly is anti-social behavior they associate with voucher households. Let me read you a recent note I received from a resident of Los Angeles county. I warn you it's not a pretty note. " I'm a single, self-supporting working-class women. On paper it looks like I have a good income as a secretary . However, I can't afford to buy a home in the area. where I live. And I can't afford safetywise to rent an inexpensive apartment there because I have been and would be in a predominantly Section 8 neighborhood, where there are rampant "broken window syndrome" crimes which, if I reported them, would turn me into both a pariah and a target. It's a Catch-22 for me. It's harder to save for a down payment because I am forced by the dominance of Section 8 housing to live in a far more expensive apartment complex just for safety.One of our local candidates is making Section reform a campaign issue. His suggestion is that the property owners who rent to Section 8 be required to reimburse the Sheriff's Department for the law-enforcement costs associated with the presence of a Section 8 family. And our local newspaper has published a bit editorial demanding accountability from the Housing Authority."
Such demands do not arise without reason. They should not be surprising. Vouchers offer their holders a ticket to higher-income neighborhoods without having adopted the habits-thrift and marriage, amongst them--which have allowed households traditionally to ascend what I call the housing ladder, one from lower to higher-income neighborhood. This is the problem with the view that by "deconcentrating poverty", we will encourage upward mobility. In fact, we send the opposite message-by providing reward based on need, we signal beneficiaries that effort is not required-and, indeed, may even-if it leads to higher income-be penalized.

So it is that Section 8 has, sadly, been a recipe for tension between social classes and the races. Of course, a great many voucher holders do their best to work hard and play by the rules. My point here: the rules do not encourage them to work hard and the program's side effects tend to alienate even traditional working class Democratic constituencies.

But the obvious alternative to housing vouchers-government-aided housing construction targeted to low-income households-has its own serious flaws. Few today defend traditional public housing developments. But few understand the underlying nature of their flaws-and why those flaws are just as relevant to new forms of subsidized construction, such as the so-called HOPE VI new generation public housing and for-profit and non-profit-owned housing developments whose "affordability" is a function of financing through the low-income housing tax credit. Quite simply, there is little reason to be optimistic about there being high-level long-term maintenance of any sort of housing in which residents to do pay rents sufficient to provide the funds needed for upkeep. That is the problem which emerged with traditional public housing, far more than the much more celebrated issues of high-rise architectural design, for instance. At its inception, public housing was not to receive operating subsidies; instead, although construction would be financing through public bonds, operations would be financed, as with any apartment complex, through rental income. But those with choices have fled public housing, decimating the rental income of housing authorities, who can only collect a maximum of 30 percent of household income in rent. There is simply no guarantee that this same problem will not, over time, visit other subsidized construction programs. Indeed, we have already seen maintenance problems emerge in developments owned by well-known non-profit organizations. HOPE VI projects look good when the ribbons are cut; but as the projects age, middle-income owners are likely to find better options in the private market, while low-income renters do not provide adequate rents for upkeep. This has been the story of subsidized housing dating to the 19th century, when so-called model tenements were built in New York and Chicago.

Yet even if subsidized construction does not develop maintenance problems, it poses serious problems-especially for those concerned broadly about helping to ensure both that those who work will not be poor and that our cities provide economic opportunity. First, subsidized construction of any kind is, quite simply, an extremely expensive way to serve those in need-and serves, inevitably, very few. At per unit costs ranging from $250 to $350,000, HOPE VI projects make this clear. Moroever, just as housing voucher programs require extensive, and expensive, administrative overhead at every local housing authority and at HUD in Washington and in the regions, so do HOPE VI and low-income housing tax credit programs require both expensive public operations but must provide for private or non-profit developers fees, as well. Indeed, housing finance economist Richard Green of George Washington University has estimated that more than half of every public dollar spent for housing construction programs goes to such purposes, rather than the residences themselves. Even if such units were never to develop maintenance problems, they constitute, in effect, a sort of lottery prize for a lucky few, rather than a broad-brush approach to making work pay.

Worse still, such construction poses problems for urban economies. When subsidized housing is constructed, with guarantees that it will remain in place for long periods of time-indeed, de facto perpetuity, when one thinks of land owned by public housing authorities-we stand in the way of urban real estate being put to its highest and best use-and, in the process, generating jobs and income for our cities. I call this the phenomenon of the frozen city. In Boston, for instance, a new HOPE VI project blocks expansion of the city's medical district, whose research laboratories, if allowed to expand, will provide jobs for a wide range of residents. In New York, public housing is so extensive that it constitutes the equivalent of 156 World Trade Center sites. In Boston, fully 20 percent of all residential structures are subsidized rentals, many with legal impediments to their sale and use. Are many of these sites or structures really likely to be re-used in ways that lead to economic growth? One cannot, of course, be sure. But it is certain that we now block creative re-use of public and subsidized housing sites-forgoing who knows what important opportunities that would serve a wide range of income groups. Economists would call this the opportunity cost of building subsidized housing and ensuring so-called long-term affordability.

This is the point in this talk, at which, I suppose, I should expect to be asked to tell you what I really think about housing subsidies. And, indeed, I could go on further about the flaws I see in them. But, for the purposes of this gathering, the most serious flaw should be the limited extent to which they help make work pay-because they benefit a great many other than those directly in need and because so much of their spending is spent on overhead.

It is this realization which is spurring even some liberal Democrats to look to other avenues to assist those of lower-income. Implicit in their views is the following question: why should we tell the poor how to spend the assistance which we give them? Why not, instead, trust them to know what's best for their own households? We should be clear to ourselves that we have not a great deal to limit poverty in the United States and that, indeed, by international standards, we have virtually no so-called absolute poverty-privation so severe that households cannot afford the basics of life. But we do, inevitably, have many households which are poor relative to others-and, to the extent to which we believe they struggle too much without proper reward, the question arises as to how best we should assist them. It seems clear that housing-specific programs are, at best, a flawed approach. Why not, instead, simply augment their incomes directly, with the least possible involvement by others?

Income supplements lie at the heart of one of the signature accomplishments of the Clinton Administration, the expansion of the earned income tax credit, designed to to ensure that low-wage workers would not be poor. This approach has inspired suggestions by some that a further, indeed significant expansion of the EITC, could form the basis of a grand compromise that would replace purpose-specific programs like housing vouchers with income supplements that would not be phased out as rapidly as the current EITC-and would thus reach more households and provide greater income supplements. In a brilliant series of lectures at the University of Wisconsin-Milwaukee, David Riemer-a former top aide to a Democratic governor of Wisconsin and a Democratic Mayor of Milwaukee, a former aide to Senator Edward Kennedy and currently the head of an organization dedicated to expanding health care access-proposes such a grand bargain. He asked the following question "Should government increase the number of its categorical programs in order to better target them on sub-groups with special needs? Or should government decrease the number of its categorical programs in order to provide social insurance to large numbers of left-out groups and reduce administrative costs?

My previous critique of housing programs fits with Reimer's critique of categorical programs more broadly. As he puts it, " there are compelling reasons in many cases to consider getting rid of the categorical barriers that fence in-and fence out-different beneficiaries or would-be beneficiaries of the social insurance system.

Like many other observers of the Earned Income Tax Credit, he notes that it phases out rapidly and risks both deterring work effort and limiting its rewards. The EITC provides a cash income supplement which, as it is phased in, matches each dollar in earnings with 34 cents in income supplement, rising to 40 cents per dollar for a family with two or more children. It reaches a maximum of $3800 for a family with two or more children-when family income reaches just $12,460 per year. At this point it is phased out sharply, at a rate of 15.98 percent for families with one child and 21.06 percent for families with two or more children, who must, by the way, also pay social security payroll and Medicare taxes. By the point at which a household with two children is earning just $35,000 per year, the EITC has disappeared completely. Hidden away in those figures is the powerful marriage penalty built into the current system. As economists David Ellwood and Jeffrey Liebman of Harvard have written, "If a custodial parent of two children with zero earnings-that is, relying on welfare-marries a single man with $12,000 in earnings, the couple will gain nearly $4,000 in child tax benefits, all from the Earned Income Tax Credit. . .Buit if the mother were already earning $12,000 and she married the same man earning $12,000, child benefits would fall by roughly $1200 and serve as a marriage penalty. At $24,000, the child benefits are smaller than at $12,000. "

Ellwood and Liebman, who both served in the Clinton administration and are amongst the Democratic Party's most creative public intellectuals, have explored idea of reducing or even eliminating the phase out of the earned income tax credit. They have modeled the idea of extending the earned income tax credit dramatically-all the way up to incomes of $110,000-so as to ensure that we do not undermine incentives for work and marriage. They estimate the cost of even so dramatic a plan as that as only $53 billion-not a huge number in the context of the federal budget. They estimate the cost of a more limited plans to target lower-income households more specifically at just $27 billion, slightly less than doubling the current EITC cost. What they describe as a "three-step refundable working-family tax credit integrated into the tax code" would increase the maximum benefit for low-income families with more than two children to $4600". Such a plan, they write, not only increases aid to the poorest but will "fill in the valley" of benefits that augment the earned income of lower-middle class families who work their way up from poverty and find themselves affected by very high marginal tax rates as they earn more. Benefits would remain constant until a family's income reached $18,000-when they would decline much more gradually than at present. But, note Ellwood and Liebman, "such plans will inevitably involve additional expenditures." It is far beyond the scope of this talk to offer detailed proposals as to how to use the tax system to ensure against poverty amongst those who work. My point here is only that extremely serious people believe this is a practical approach-and that those serious people are also liberal Democrats. As a political matter, however, we are unlikely to progress in that direction if advocates of individual categorical assistance programs continue to insist these programs are sancrosanct and those who believe them to be flawed lack compassion. The makings of a new New Deal must involve trading in some of the programs of the first New Deal and the Great Society. As David Reimer puts it, the cost of a new, cash-based social insurance system would "be more than offset by the elimination of dozens of symptom-treating programs in the area of nutrition (e.g., Food Stamps) and housing (e.g., housing subsidies)." Again, he is a former aide to Ted Kennedy, not a colleague of mine at the Manhattan Institute! There would be much to discuss about such a new approach. Would we need to have a limited public works jobs program if we tie income to work? Would a minimum wage continue to make sense? Liberals and conservatives can be expected to disagree about many such ideas. My point here is that if those who care deeply about ensuring that those who work will not be poor want to reach as many households as possible, it is well worth considering "cashing-out" categorical aid programs in favor of increased income assistance tied to work. Putting the $17 billion which now goes to the Housing Choice Voucher program on the budget table would be a great first step in such a discussion, in my own opinion-a Nixon goes to China moment for any Democratic presidential candidate.

Moving away from categorical programs would require standing up to a wide variety of special interest groups. In the matter of housing, there is an array of for-profit and non-profit developers who would fight such a change. Advocacy groups which specialize in pushing for categorical budget appropriations and legislative mandates would likely see their missions threatened, as well. But Housing-specific programs, in addition to the collateral damage I've already described, stem from the flawed assumption that housing markets are uniquely flawed and fail to function. The high homeownership rate of the United States and the virtual elimination of substandard housing conditions, as reflected by census data comparing current conditions to those of 1940 make clear. The government should no more be assuring that individual households receive a certain amount of housing than it should be worried about other specific consumer goods. It makes far more sense to make sure that citizens broadly are rewarded for their work effort and have access to a reasonable market basket of all goods and services. Let's make sure that those who work are not poor-but supplementing their income and letting them decide how best to spend it.



 


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Howard Husock

 


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