Entitlements Versus Investments: A Parable
Entitlements Change Incentives and Reduce Quality
OCTOBER 01, 1997 by GEORGE C. LEEF
Filed Under : Free Market, Socialism, Taxation
Imagine two nations. We’ll call one Atlantis and the other Pacifica. They are similar in most respects, except one. The government of Atlantis has established a right to housing, which is provided free to all citizens. Houses are built by unionized government employees following plans and procedures approved by the Atlantis Housing Department (AHD). Citizens are assigned houses based on family size. They may modify the house (within certain limits), but it remains government property. If a family dislikes their assigned house, they may spend their money to build one or buy one that is not government property.
In Pacifica, in contrast, housing is not a right. The government neither builds nor subsidizes housing for anyone. Those who want shelter must buy it, rent it, or build it themselves. There isn’t even a housing code to tell people how to build houses. There is no Pacifica Housing Department, since the people don’t regard housing as any of the government’s business.
Housing is an entitlement in Atlantis, whereas it is an investment in Pacifica. The important question is whether the people are better off with their “free” government housing in the former or their housing investments in the latter.
Housing is free in Atlantis—but does that mean it costs less? As economists have been pointing out for centuries, scarcely anything is really free. If scarce resources are used, the costs can be hidden, but they cannot be avoided. The funds expended by the AHD for construction and maintenance come from taxes that the government adroitly hides as much as possible through the fiction that businesses pay them. Nevertheless, the AHD has a prodigious budget, which means that it is soaking up a lot of resources that could have been used elsewhere.
The size of the AHD’s budget is determined politically and the often-heard refrain, “We can’t let our kids freeze,” has helped to boost that budget much faster than the rate of population growth. AHD officials find “unmet housing needs” everywhere. Politicians who suggest that the budget be “cut”—that is, the rate of growth trimmed—can expect a salvo of motive-impugning attacks like “You’re against decent housing!”
The vast AHD budget is an irresistible magnet for groups that would like money to flow their way. The various housing producers do very well. The National Edifice Association (NEA), a union of housing builders, is among the most powerful political forces in Atlantis and it has successfully lobbied for ever-larger work crews and ever-higher pay. The suppliers of materials have successfully lobbied for prevailing price laws, which mandate that the AHD purchase only the highest quality (and cost) materials from approved sellers. The AHD naturally needs a large number of highly paid housing inspectors, administrators, facilitators, and other experts.
In Pacifica, people invest their own money in houses. They contract carefully, making as sure as they can that they receive maximum value for their money. They shop around a lot, often driving down original bids and asking prices significantly. Housing producers and suppliers sometimes grumble about the “cutthroat competition,” but most stay in it.
The difference in systems and their incentives leads to quite a difference in cost. Per square foot, housing in Atlantis costs twice as much as it does in Pacifica. The funny thing is that many citizens of Atlantis express pity for Pacificans, who have to pay many thousands of dollars for their homes instead of receiving them “for free.”
In Atlantis, the housing quality is generally poor. The unionized workers know that their jobs are secure. The possibility of any disciplinary action for cutting corners is extremely remote. Most AHD inspectors are “reasonable” and don’t expect framing to be perfectly square or plumbing to be leak-free. After all, the inspectors aren’t the ones who will be living in the houses, so why stir up a lot of trouble? (An embarrassing fact is that many of the housing workers and bureaucrats own privately built houses.) Losing your job is only a theoretical possibility, even for the most egregious blunder, thanks to the union.
Therefore, when citizens of Atlantis move into their houses, they find them to be rickety, drafty, leaky, and sloppy. Most don’t complain, however. For one thing, complying with the procedures to register complaints is time-consuming and seldom leads to a satisfactory resolution. Moreover, the NEA and the AHD spend heavily in advertising each year to convince people that the houses they inhabit are designed and built by “dedicated professionals who really care” and are the best that can be expected, given the many problems that those professionals must deal with (like defective tools, warped lumber, and so on). This has proven to be very successful and most of the people have come to believe that their free housing is the best they can expect. (Occasionally, there are nasty reports comparing the quality of houses in Atlantis with those in Pacifica, but such reports are invariably dismissed by intellectuals and experts as “fatally flawed” comparisons put forth by “housing elitists.”)
Pacificans are happy with the quality of their houses; indeed, high quality is taken for granted. Those who build, maintain, and repair houses compete vigorously for the consumer’s dollar and know that they have to monitor quality of workmanship carefully lest they commit a breach of contract. While not all Pacificans are fussy and demanding, enough of them are that it is too risky for a contractor to assume he can get away with sloppy work. The existence of some fussy, demanding housing consumers raises the standards in the market for the benefit of all. Contractors in Pacifica are directly accountable to their customers, fear lawsuits and loss of reputation, and therefore do good to excellent work. People who have lived in both countries unanimously report that Pacifica has much better housing.
For many years following the establishment of a housing entitlement in Atlantis, houses continued to be designed along “traditional” lines. But, starting 20 years ago, politically influential theorists with ideas about the ways housing could be used to restructure and improve society began to assert themselves; now, housing design is very much a political question. The way houses are built has little to do with what the inhabitants might want and much to do with political clout of the many groups that stand to benefit if houses are built in accordance with their vision.
For example, environmentalists have prevailed upon the AHD to use substantially less lumber in framing houses in order to save trees. The Environmental Coalition produced a study demonstrating that houses would be just as strong if 2 x 4s were replaced by 2 x 3s and they were more widely spaced. An advertising campaign showing trees crying at the approach of a logger carried the day, and thereafter, all houses were built according to “environmentally friendly” specifications. Unfortunately, lots of roofs have collapsed and walls have buckled. Some people have died in accidents due to weaker framing, but a proposal by the AHD to go back to the old standards has been tied up in the courts for years by the environmentalists, who say that we must not “turn the clock back.”
The egalitarians have also weighed in. A famous University of Atlantis sociologist wrote a paper arguing that housing differences were a source of social division. Eventually, a bill called the Housing Harmony Act was passed. At first, it eliminated different styles, and by later amendment, different sizes of houses. Now, all houses must appear the same to passersby; some houses are actually bigger than others to accommodate larger families, but that is done by putting more rooms in basements. Now, no one loses self-esteem over the fact that his house looks smaller than others.
Some people have griped about this development. A few painted their cookie-cutter houses wild colors in protest, but that was quickly made illegal. (Now you can choose between two shades of tan.) Others, complaining about basement rooms, were silenced with retorts like, “Since when are you a housing expert?” or “Why are you against social harmony?”
In Pacifica, houses are built with the customer in mind. People can buy or build a house with any features they want (and can afford). They get what they want, not what others have decided they should want.
Other revealing comparisons could be made, but let’s stop here and assess the relative situations. In Atlantis, housing is an entitlement. It is “free” to the citizens, but costs a lot and is of poor quality. Since politics drives the decision-making process, housing is built less to satisfy the occupant than it is to satisfy important political constituencies. Housing is a poor value and getting worse.
In Pacifica, housing is an investment. People spend their own money directly and make sure that they get the most value they can for it. Given their budgets, they get the best, most satisfactory housing they can. The wealthy live in mansions and the poor in very modest homes, but the housing for everyone is solid and functional.
These differences are not accidental. They aren’t a matter of the individuals involved or the cultures of Atlantis and Pacifica. The differences are systemic.
Turning housing into a “free” entitlement necessarily changes the incentives of people. If you can get what you want through politics, people behave differently than if, to get what you want, you have to contract or cooperate with individuals who are free to say no. For that reason, consumers will always get better housing—or any other good or service—when they are investing their own money in it as opposed to accepting it as an entitlement that has been shaped by others.
Atlantis and Pacifica are imaginary, but can you think of anything your government provides as an entitlement that should be an investment?