Dr. Sennholz is Professor of Economics at
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
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
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
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.
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.
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.
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.
1For a description of the effects of rent control in
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