Slums and Mansions

Dr. Sennholz is Professor of Economics at Grove City College, Pennsylvania.

 
The present recession has in­tensified the statist clamor for more public housing and “slum-clearing” on grounds that large-scale construction activity consti­tutes a make-work measure and thus alleviates the present reces­sion. Widely overlooked is the fact that resources for public housing construction are taxed or “bor­rowed” from other uses, thus act­ing as “reduce-work” measures in other sectors of the economy. In­sofar as the operation may be fi­nanced by government inflation or monetary depreciation, the “stimu­lation” must take the customary form of boom and recession.

What actually is a slum and what are the characteristics of the people populating it? According to one definition, a slum is a city dis­trict that is substandard in living conditions. The standard is estab­lished by the city authorities to serve as a model. It is obvious that in this case the authorities can en­large or reduce the slums merely by raising or lowering this stand­ard. If it is raised high enough, most houses, or even all houses, may be declared slums because probably no house represents the best that modern technology can build.

But government officials are not alone in setting standards that by their very nature must be arbi­trary. The general public also is influenced by arbitrary standards when defining slums as city dis­tricts marked by squalor and wretched living conditions. The definition obviously depends on the notions, judgments, and experi­ences of each individual. In the United States where living condi­tions are incomparably better than in the so-called underdeveloped countries we may describe a slum in terms which to a Chinese or Hindu may sound like a mansion.

Whatever a slum may be, people create it. It isn’t buildings that make slums, but people. Some peo­ple tend to create a slum wherever they move. Others give cleanliness and orderliness to any surround­ing. This fact also explains why subsidized housing that actually succeeds in attracting slum dwel­lers deteriorates quickly into new slums. Our experience with subsi­dized public housing since 1937 clearly demonstrates this.

Public Housing Breeds Slums

Income controls admission to subsidized public housing. To enter a project a person must not earn more than a certain income with allowance being made for the size of his family. In Chicago, for in­stance, a one or two person family must not earn more than $3,600.

Income is not only the basis for admission but also it determines the tenant’s rent. Public housing projects aim at attracting a spread of tenants in various income brackets. Those in higher brackets pay higher rents for the same fa­cilities than do those in lower brackets. When a tenant’s income rises, his rent also rises. When his income surpasses the top limit, he must move out.

These principles suffer from sev­eral shortcomings whose disastrous effects create vast public slums. Subsidies are paid and received on two levels. First the whole project with all its tenants is subsidized by the taxpayers. Then the lowest income tenants are subsidized by the tenants in higher income brackets paying higher rents. The difference in rent is often consider­able. For instance, in Chicago the rent for the same facilities varies between $31 and $96 a month.

Receiving and paying subsidies are radically different things. In this age of welfare state mentality many people indeed are eager to be on the receiving end, but they are very reluctant to participate in subsidizing others. A tenant who pays rent at the higher level may feel that he is “sharing his wealth” with his neighbor. In fact, he may begin to wonder if he hasn’t be­come the victim rather than the beneficiary of public housing.

To pay more than others do for the same good or service conflicts with man’s sense of fairness and justice. This is the psychological reason why public housing projects are crowded with tenants paying minimum rents. The “cross-sec­tional” rent principle does not work because renters at the upper end of the scale tend to move out long before they have reached the permissible limit. Consequently, public housing projects often fail to earn even the operating costs.

In Chicago‘s projects, half of the tenants are paying minimum rents. In some New York housing projects a majority of families are on relief. The ones that cling to minimum-rent housing are mostly problem families without incentive to increase incomes. Recent studies by the New York Times and the Wall Street Journal found the con­ditions in public housing to be shocking and appalling. “These monstrous aggregates in which one family out of twenty in New York now lives,” says Harrison E. Salisbury in the New York Times of March 26, “have tended to be­come new-style ghettoes. . . By screening applicants for low-rent apartments to eliminate those with even modest wages the new com­munity is badly handicapped. It is deprived of the normal quota of human talents needed for self-or­ganization, self-discipline, and self-improvement. A human catch-pool is formed that breeds social ills and requires endless outside assistance.”

According to Ray Vicker in the Wall Street Journal of April 10, “Public housing attracts a high percentage of broken families, families with big broods of chil­dren by nameless fathers, other welfare cases and shiftless char­acters who prefer unemployment to work as long as government agencies provide handouts.” It can­not be surprising, therefore, that the solid hard-working families tend to move out as soon as the maladjusted cases move in.

Public hOusing breeds slums Of indescribable squalor and horror. It shuts them up within new walls of brick and steel and thus hides them from the eyes of a gullible public. But the same public is told constantly by a host of socialists and other do-gooders of the cases of poverty and poor housing con­ditions that existed before the days of the Welfare State. Capitalism is reviled for having created slums which government housing is sup­posed to supplant.

One may point to the slum con­ditions of public housing as one answer to these charges, but a fur­ther answer lies in some elemen­tary principles of economics.

Old Slums

Before the days of subsidized public housing, slums only devel­oped in the oldest districts of a city. When the houses were new, they were occupied by tenants who paid rent sufficient to cover in­terest on the owner’s investment, compensation for depreciation, and perhaps also a profit. But houses, like all other earthly goods, begin to deteriorate as soon as they are built. Wear, tear, and old age gnaws at them continuously. Of course, skillful maintenance may retard this process, but cannot de­feat it entirely.

With the deterioration of the houses, the demand for them un­dergoes a continuous change. The original tenants move on to newer houses with modern facilities and services. And lest the old houses stay vacant, the rent must decline in order to attract tenants in the lower income brackets. This proc­ess of deterioration and declining rent continues until the indigent and improvident crowd the prem­ises. Thus do mansions become slums.

Other Factors

Aging buildings are unprofit­able. The return on them, as with other investments, is all the more insecure because of the rapidity at which the capitalist economy with its advancing technology improves living conditions. Toward the close of the nineteenth century and dur­ing the first decade of this century numerous improvements, such as electric lighting, new heating sys­tems, bathrooms, elevators, and the like, tended to outmode com­paratively new housing develop­ments and inflicted losses on land­lords.

Another factor that contributes to the unprofitableness of deteri­orating houses is the property tax which two or more superimposed governments — state, county, school district, and others — levy on land and houses. While rent income declines, the assessed value which constitutes the basis of taxation usually demonstrates a remarkable rigidity. Especially during depres­sions when rents decline rapidly, property taxes usually remain the same, or at least fail to decline simultaneously and to the same degree. Consequently, the rate of taxation on market value tends to rise.

The relationship between taxa­tion and housing conditions is through the fact that taxes con­stitute one of many factors of cost. A man who builds a house for rent expects to be reimbursed by his tenants for these taxes as well as for all other costs. Naturally, with­out this reimbursement of cost he would refrain from making the investment. Nor would he build the house for his own occupancy unless he expected value or satis­faction greater than the costs, in­cluding taxes.

Rent, which is the price for the use of someone else’s real estate or housing facilities, is a market price. Like the prices for all other commodities and services, rent is determined by demand and supply. As is well known, costs do not affect prices directly and immedi­ately. However, when costs decline, production becomes more profit­able, which in turn will increase the supply and push prices down­ward. On the other hand, when coats rise, production becomes un­profitable, the supply fails to increase, and prices are pushed up­ward.

The same is true in housing. When construction costs, real estate taxes, or other costs rise, house ownership becomes unprofit­able. The supply fails to increase, which in turn tends to increase rent. When taxes are raised on old houses, it becomes unprofitable to own them, or at least less profit­able, which reduces their market value. This is true whether a house is occupied by a tenant or by the owner himself. Every tax increase inflicts on the owner a capital loss that amounts to a multiple of the taxes.

Property Taxes Worsen Conditions

Throughout the nineteenth cen­tury when government interfer­ence with other businesses was greatly minimized, the general property tax was the basic local and state tax, and in many cases amounted to several per cent of the value of land and buildings. And, of course, property taxes are even more burdensome today than they were then.

The restrictive effects of this taxation are enormous. In order for a landlord to embark upon housing construction, his return must yield the tax rate in addition to a net return comparable to that in other industries. In other words, the gross return on housing in the form of rent in many cases has to be double the return on other investments. This is why rents must be relatively high before invest­ment capital begins to flow into the housing industry.

High property taxes, therefore, hamper construction activity and restrict the supply of housing, which in turn causes higher rents. Consequently, housing throughout the nineteenth century was expen­sive. While food and clothing be­came cheaper and many other items that used to be luxuries be­came accessible to American workers, good housing often re­mained prohibitive. Therefore, many crowded into cheap housing facilities that looked like slums to the planners. The advocates of pub­lic housing never mention this re­strictive aspect of property taxes when they denounce capitalism.

Rent Controls Hamper Construction

A relatively recent cause of housing shortages and slum con­ditions is rent control. The enor­mous inflation during and after World War II tended to increase all prices, including rent. But rents were arbitrarily controlled at pre­war rates while such costs as taxes, labor, and materials increased greatly. One reason why rent con­trol has not been wholly disastrous is that the controls have not ap­plied strictly to new housing built after the war. Nevertheless, to the degree that rent control has been effective, it has discouraged the production of housing, and has obliged many tenants to pay higher rather than lower rentals.

The dual burden of increased taxes and rent control means a dwindling return to the landlord and a loss in the market value of his real estate. In terms of depre­ciating money, this may not be readily perceptible because his loss may be hidden by inflationary price rises. But in terms of purchasing power, his loss is real. He loses current income as well as capital. Unless he wishes to play ostrich and pretend that nothing is hap­pening, he must cut costs in order to re-establish the earning power and value of his investment. This is why many landlords have been doing so little to maintain or im­prove their properties, for such expenditures may merely add to their losses. Houses subject to rent control and rising taxes inevitably deteriorate. Cities subjected to rent control for several decades al­ways have deteriorated into huge slums.¹

Mansions at Bargain Prices

An interesting side aspect of this problem is the deterioration of costly mansions built and occupied by wealthy people before the days of redistribution. Confiscation of wealth, through inheritance taxes and 91 per cent income taxes on top of 52 per cent corporation taxes, has forced the sale of an increasing number of mansions. The former occupants have sold their estates at whatever prices they could get and have moved to more modest homes.

Heavy property taxes on man­sions and large estates have had the twofold political appeal of rais­ing revenue and redistributing the wealth. But instead, they have destroyed the object of taxation. While taxes rose, prices tumbled, until they amounted to a mere fraction of the original construc­tion costs. Needless to say, the con­struction of mansions practically came to a standstill, and old man­sions often fell into the hands of the taxing authorities. Many of the old places have lost their splendor, some standing vacant, others oc­cupied by such tax-exempt organi­zations as hospitals, schools, and charitable institutions. The prop­erty tax thus failed in its fiscal ob­jective but eminently succeeded in its redistributive end.

The development of a city is such that most of the houses in any given district are of approximately the same age. Being subject to the same taxation and controls, they de­teriorate together. As was pointed out at the beginning, the old ten­ants move on to more modern quar­ters and thus make room for other tenants. It is hopeless for a single landlord to fight this change. Even if he were to rebuild and modern­ize his facilities, the demand would decline because the section is de­teriorating. High-rent tenants shun the most modern apartments if they are located in a low-rent neighborhood.

Rehabilitation of Slums

Rehabilitation of a “slum” usu­ally proceeds by large blocks which radically changes the appearance of the district. Such redevelopment involves large capital investment to purchase the old city blocks and to construct modern apartment buildings. However, accumulation of capital in such amounts, by in­dividuals or by companies, becomes increasingly difficult under steeply progressive income taxes and con­fiscatory corporate taxes. The effect of such burdensome taxation is to perpetuate the old slums.

The Welfare State then seeks to solve the problem through hous­ing projects that breed new slums. Thus government housing is slowly substituted for privately owned homes, and socialism advances an­other step. But socialism neither improves housing conditions nor otherwise alleviates the poverty of people; it enslaves and impoverishes them.  

Footnotes

¹For a description of the effects of rent control in Paris, see Bertrand de Jouvenel’s No Vacancies. Single copy, on request, from the Foundation for Economic Education, Irvington-on-Hud­son, N. Y.

 
 

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Ideas On Liberty

Enclosures for the Careless 

 
The authorized function of our government is to restrain those who might attempt to deal coercively with one another. The government was designed to be the defender, not the equalizer, of life and property.

If a human being is ingenious and industrious, he can create a house and claim it as his own. If he is careless enough to let the government do it for him, he will live in the kind of walled enclosure which compulsory state socialism affords — public housing for those who serve political masters.

 

Paul L. Poirot, Public Housing