Last week, the House Committee on Financial Services began hearings on a plan to create a new federal voucher program aimed at paying the rent of every lower-income American. Such a program could represent an extra $100 billion subsidy to housing demand, which, in America’s constrained housing markets, would further increase rents. An indiscriminate, fivefold increase in the number of Section 8 voucher recipients would also squeeze the families that could benefit most from the program out of the housing market. A better approach would direct the current vouchers toward families with young children and reduce the regulatory barriers that limit the construction of affordable rental housing.
Economics 101 provides a simple guide for intervening in markets where prices are too high or output is too low. When supply is plentiful, we should subsidize consumer demand since the market can boost production without increasing prices. When supply is limited—as it is in America’s most unaffordable cities—then subsidizing demand will increase prices rather than expanding access.
The U.K. tried to address its limited housing supply with a “Help to Buy” demand subsidy. One study found that the program “increased house prices by more than the expected present value of the implied interest rate subsidy and had no discernible effect on construction volumes in the Greater London Authority.” In the United States, we should expect a similar result: an extra $100 billion for housing vouchers will enrich landlords and do little to expand the stock of low-income housing.
A 2002 paper by Scott Susin in the Journal of Public Economics found that housing vouchers “raised the rent paid by unsubsidized poor households in the average metropolitan area by 16 percent” and “caused a $8.2 billion increase in the total rent paid by low-income non-recipients, while only providing a subsidy of $5.8 billion to recipients, resulting in a net loss of $2.4 billion to low-income households.” More recent work by Robert Collinson and Peter Ganong shows that “policy that makes vouchers more generous across a metro area benefits landlords through increased rents, with minimal impact on neighborhood and unit quality.”
The supply of apartments available to voucher recipients is even more limited than the overall supply of rental housing. An Urban Institute study found that only one out of every 39 apartments advertised online, across five cities, “appeared to be voucher-eligible”—and voucher-eligible didn’t mean voucher-willing. More than three-fourths of Los Angeles landlords with “potentially eligible units” refused to accept the vouchers.
Given this dearth of supply, what will happen to families with small children if the program expands fivefold? The few landlords who now take Section 8 vouchers may well prefer to have simpler, childless tenants. Universal vouchers could easily make it harder for multi-child families to find a landlord willing to rent to them.
Housing vouchers deliver the greatest benefits for families with small children. We should target vouchers toward them rather than crowding them out of the market. The Housing Majority Staff memo for last week’s hearing cites work by my colleagues Raj Chetty, Nathaniel Hendren, and Lawrence Katz on the Moving-to-Opportunity (MTO) experiment, which tested the impact of special vouchers that encouraged relocation to low-poverty neighborhoods with a randomized controlled trial. Their work found that “moving to a lower-poverty neighborhood when young (before age 13) increases college attendance and earnings and reduces single parenthood rates,” but that “moving as an adolescent has slightly negative impacts, perhaps because of disruption effects.”
Another randomized controlled trial supported by the Department of Housing and Urban Development (HUD) examined the impact of housing vouchers on homeless families, most of whom had more than one child and half of whom “had a child younger than age 3 in the shelter.” The voucher recipients experienced fewer “stays in shelter and places not meant for human habitation,” fewer separations between parents and their children, less substance abuse, less household violence, and better school attendance.
Well-targeted vouchers do some good, but a universal voucher program would be an extremely expensive way to raise rents paid by ordinary people. An Urban Institute study cited in the House Majority Committee report “projects” that a universal voucher program “would cost approximately an additional $62 billion per year” but notes that the real cost “would likely be closer to $100 billion” because of income losses during the pandemic and rising rents.
Universalizing the voucher program would also super-size the number of poorer Americans who face an effective marginal tax rate over 75 percent. Since the voucher program caps rents at 30 percent of income, 30 cents of every extra dollar earned by a voucher recipient is lost because the subsidy falls by that amount. The food stamp program also follows a 30 percent rule that creates a similar tax, and the Earned Income Tax Credit effectively taxes earnings beyond a threshold. Added together, these programs work against the goal of getting America back to work.
Targeting housing vouchers toward the 172,000 homeless people in families with children is humane and sensible. Trying to use housing vouchers to deal with the other 408,000 homeless people in America poses far bigger problems, especially since HUD reports that 120,000 of the homeless are “severely mentally ill” and 98,000 suffer from “chronic substance abuse.” These populations will be ill-served by a paperwork-intensive voucher program that requires them to find willing landlords.
Well-run social programs do not subsidize demand in markets where supply is fixed, since that just leads to higher prices. We should seek to target the Section 8 voucher program more effectively, not universalize it. Washington should give new vouchers primarily to families with young children. Benefits should be time-limited so that, as the children age, the vouchers can be reallocated to other families. The program should encourage mobility to neighborhoods that turn poor children into better-off adults. Above all, we should combine the voucher program with a commitment to freeing our metropolitan areas from regulatory straightjackets.
Photo by Helen H. Richardson/The Denver Post via Getty Images