Against council housing

Brett is righteously angry that Lee Jasper, Livingstone's former race advisor, is living in a big council house on rent of £90 a week despite being a rich man.
This  raises a wider question:  why should the state provide subsidized housing at all? Basic economic theory says it shouldn't, as in-kind benefits are obviously inferior to cash transfers.
The reason for this is simple. If you give cash to the poor, they can choose for themselves their favourite combination of housing and other goods. Some will choose a nice house with little cash, others a grotty flat with higher incomes. But if you give them housing directly, some'll have bigger houses and less cash than they'd like whilst others - as any MP will tell you - won't have good enough housing.
Do I have to draw a diagram? I will. In this chart, the poor have a budget constraint before intervention of AA. The highest indifference curve they can reach is IC1. Subsidized housing shifts the budget constraint to AC, allowing them to get to a higher indifference curve, IC2. But cash transfers - which cause a parallel shift outwards in the budget constraint to BB - allow them to reach a higher indifference curve, IC3.
Why, then, give the poor redistribution in kind, when cash transfers are better?
In some cases, there are externalities or paternalistic reasons. We give people education and healthcare because if we merely gave them cash some would buy too little of these and thus expose the rest of us to either infectious diseases or a sub-educated rabble. But it's not clear that these arguments apply to housing. Nor is it obvious that other reasons apply.
A more plausible argument is that the rich hate the idea of the poor having fun, and fear that if they give cash the poor will spend it on booze, fags and whooping it up. But if they know that the poor will only get a flimsy flat, they'll be less opposed to the transfers, so the poor end up getting more.
But is this argument really so powerful as to offset the case against in-kind redistribution? I suspect not, especially as the Jasper case strengthens the argument against state-provided housing by showing that such housing can go not to the most needy, but to those best able to play the system.

Comments

[Luis Enrique]

Is there anything to the argument that if cash transfers were given and the provision of housing left to the market, then landlords with monopoly power would extract a profit, so that the cash transfer recipient would be unable to purchase the same combination of other goods (cash) and housing as you show on IC3 - I guess I'm saying the line BB steepens.

[Nathan]

I like your diagram. It could be made slightly better by running line BB through the tangency of IC2 and AC. That way the cash transfer equals the cost of the housing. (The way you've drawn it, the cash transfer is larger and so it is little surprise that utility is higher.)

Really enjoy your blog.

[Matthew]

Imagine a CBI - Lee Jasper would not only get his £120,000 salary, but also £15,000 CBI! Not against the law, but something morally repugnant about it. Brett would be hysterical.

[jim jay]

Well council housing is not just about money it's also about housing security that the private sector can't provide to those forced to rent.

However, in terms of efficiency council housing generally makes money where as giving money away to poor people would not. It's simply not correct to see council housing as a drain on the public purse.

Your whole argument rests on the idea that council housing is some form of welfare payment - it isn't. Well managed, publicly owned housing stock is an assett both financially and socially.

[Kevin McCardle]

Luis - where are these landlords with 'monopoly power'? If there is more than one landlord (and there is) and if anyone with the means can buy properties to rent (and they can), then your worries about monopoly are unwarranted.

[Barry]

As I understand it, there is plenty of evidence (sorry don't have it to hand) that poor housing (including 'voluntarily' chosen overcrowding) contributes to negative, health, education, and employment outcomes, so to some degree there may be an externalities argument for social housing provision along the same lines as for education and health.

[Kevin McCardle]

Jim Jay - in what sense does council housing 'make money'? If it depends on subsidy, then by definition it is not economically viable.

[ad]

"A more plausible argument is that the rich hate the idea of the poor having fun, and fear that if they give cash the poor will spend it on booze, fags and whooping it up."

I would say that a more plausible argument is that paternalism gives more power to government bureaucrats, and those NGOs and parts of the media that parasitise the public sector. They can then make their own decisions about how other people must live AND feel a warm self-righteous glow at the thought of working to do all this good for others, unlike the evil rich people who paid for it all.

[Scott Hughes]

Perhaps there is a middle-ground between giving the poor houses and giving them cash. For example, they could be given them vouchers that are good for an assortment of approved goods such as food, housing, housing-related bills (such as hot water and electricity), education, healthcare, etc. But the vouchers could not be approved for unhelpful purchases such as drugs and alcohol. What do you think?

[Sam]

"Your whole argument rests on the idea that council housing is some form of welfare payment - it isn't. Well managed, publicly owned housing stock is an asset both financially and socially."

Umm, no. Lee Jasper and other council tenants pay well under the market rate to live in a council house. The council could make more money by selling off its houses, or by letting them on the open market. The difference between the market price and the price that Mr. Jasper pays is a wel-fare sub-si-dy.

Now, if the council charged a market rent for their properties (which for a 4-bed house in London might start at 1500 quid a month), and only subsidised the actual poor through housing benefit, we could start to talk.

What we would probably talk about is government using its size and power to engage in unfair competition with private landlords.

[donpaskini]

The idea that social housing exists because the rich hate the idea of the poor having fun doesn't really fit with history - it isn't very credible to claim that this was what motivated, say, Nye Bevan or the millions of people who voted Churchill out. It's also worth making the point that a majority of people on low incomes want to see more subsidised housing, not less.

Your arguments are the ones used in favour of Local Housing Allowance - people get a set amount and they can choose to live somewhere cheaper and keep some of the money or live somewhere more expensive and pay extra themselves in rent, rather than just being allocated somewhere to live. Whatever the theory, it's not working very well in practice - landlords collude to put the rent up, and more people run up arrears and get evicted.

What did work really well are the homes which were built under Bevan and intended for ordinary people and every bit as good as private housing - these have delivered highly successful mixed communities for decades and left the state with very valuable assets. Then the Tories got in and started the trend that what mattered was how many houses were built, and never mind the quality, because they'd only be for those who can't afford anything better.

[Jim]

This leaves rather a lot out. You might have mentioned that there is already a system of housing-related cash transfers in the shape of housing benefit, and it is very expensive and very inefficient, in fact it only really succeeds at subsidising crap private sector landlords. By contrast, the provision of council housing is about providing low-income people with a secure place to live rather than being moved on whenever their social superiors tire of the sight of them. As for 'flimsy flats', I suggest you compare what's being built for housing associations with what's being built for private tenants in terms of quality - you might get a surprise.

[Jim]

Sorry, shouldn't have called HB a cash transfer, obviously it isn't, but it's the closest you're going to get in this context, bearing in mind that wacky fantasies about CBI aren't going to fly.

[Jock]

All subsidy to housing is subsidy to landlords. Even if many of them are public sector landlords.

David Ricardo's analysis of what causes rent was right and LVT of course is the answer.

(And yes, landlords do hold a monopoly, as do every other occupant of a particular location. At the moment the monopoly profits go to the landlord rather than the community that gives those locations their value)

[jameshigham]

Vox says:

One way out of the dilemma is to invest directly in the education of the poor in an attempt to enhance their human capital.

The answer to that is higher up in the article:

... standard economic theory says...

... and that is the problem. Economics is about the scarcity and movement of money and all the rest is about living, breathing humans - two completely different things.

[reason]

Luis Enrique has it right and I'm surprised a left libertarian sympathiser would miss this - after all it is one of the basics of Henry George. Looking at the demand side has it wrong - the supply side is the problem. This is a real and difficult problem, but yes direct public provision of housing is probably the wrong answer. Read Life and Death of Great American Cities for a discussion of this. (Rent subsidies are suggested).

[reason]

I see Jock beat me to it.

[reason]

Seriously,
the way forward is to increase the number of lively walkable (Jacobian) communities, so that people can live well almost anywhere (i.e. location has less of a monopoly position). It is impossible for individual builders to provide this because public infrastructure is an essential part of the mix.

[reason]

People need to think more about the built environment and what makes it successful or not (Jane Jacobs should be compulsory reading). It is naive to think that market incentives are never perverse (tragedy of the commons anyone).

[Luis Enrique]

Kevin,

sorry I wasn't clear - I was using monopoly power in the jargony economics sense of having some pricing power. If an industry uses inputs with fixed supply, then there will be profit* and monopoly power. You can have more than one monopolist in this sense of the world (monopolistic competition).

* although not profit in the jargony economics sense of the word, because there's always the 'opportunity cost' of (not) selling that profit stream to somebody else. Fittingly, the word I ought to be using instead of profit, is 'rents'.

[Luis Enrique]

Mind you, I should point out that while I was wondering whether there was anything in the argument, this is not the same thing as saying state provision is justified to stop landlords extracting profit from housing. Profit is also a motive for innovation, quality improvements and competing for tenants - whether these potentially good things are operational in the housing market, I couldn't say - as Jim suggests, quality and innovation are not words the spring to mind from the bottom end of the housing market - nor from council housing either sadly, although they used to build great council flats in London (I love the Bourne estate, Clerkenwell for instance) and they could do again judging from this (found via Mick Hartley)

http://deputy-dog.com/2008/01/09/the-worlds-nicest-social-housing-complex/

[james c]

You could make the same argument about university education, which the state subsidizes massively. Why doesn't it just give £50k to everyone with the required A level results.

[dearieme]

A friend of mine discovered the purpose of council housing when she went to work in her council's housing office. To be allocated a decent council house, the poor women had to go to bed with Councillor Murphy.

[reason]

james c
Yes and the argument is stronger there. The argument against is a trickier one - it is that universities have a completely different role to play that has nothing to do with education.

[ad]

So the story that university education is subsidised in order to subsidise education at university level is a lie?

If people are not prepared to give the real reasons why they want something to be given money, that is a good reason to believe their motives to be unjustifiable.

[reason]

ad..
are you surprised? But isn't that story in our hands. We (in the broadest sense) should be more demanding both of our press and our politicians. We get what we deserve.

[Bob Deed]

While in general it is better to give people cash rather than in-kind benefits, there are some complications with housing. Firstly, social housing is often more than only housing - the beneficiaries are the most vulnerable in society so often council housing or housing associations offer vital support. Secondly - and more significantly -we are where we are: if full market rents were charged on housing that was subsidised in its construction then someone will make windfall profits if the subsidised construction was not reflected in below-market rents.