The Myth of Supposed Market Failures
Markets are said to be failing when supply doesn’t respond to demand—like a beachside shop refusing to sell sunscreen. When it comes to public policy, the markets are more complex and the process of diagnosing a failure is often difficult. If policymakers determine that a market is failing, their question then becomes what, if anything, the government should be doing about it. The problem is that poorly targeted government intervention can be more harmful than if nothing had been done at all.
If a market is truly failing, there can be economic justification for government policies in response. Though in practice, government intervention rarely hits the mark. For example, Missouri’s state and local governments would have you believe the housing market is failing. Their argument is that the market is failing to provide a sufficient supply of affordable housing. In 1996, the state’s elected officials decided that they should intervene. But is Missouri’s housing market any better for the state’s low-income residents today than it was 23 years ago?
More than two decades have passed since Missouri implemented the state’s version of the federal low-income housing tax credit (LIHTC). In that time, billions of dollars have been devoted to building new housing with 30-year rent protections, yet the program’s wait list is supposedly longer than ever. If that is really the case, it’s time to question why policymakers would consider continuing a government intervention that is failing to solve the problem it was intended to address.
LIHTC is predicated on the idea that subsidizing the development of housing will increase access to more affordable places to live across the state. But this is only true if there is currently not enough housing because it’s too expensive to build, and if subsidizing new developments will spur further housing investment by private entities. Without both of those conditions being met, the program can’t be effective—which matches the academic research on the subject and more importantly, Missouri’s past experience.
If the market is failing and there is an insufficient supply, policymakers should look into what may be causing the inefficiency. Restrictive regulations and zoning laws add to project costs, which discourage investment in neighborhoods where an increase in housing supply may be needed. Or if there is already enough housing but it is simply unaffordable, demand-side fixes such as housing vouchers or other measures that effectively lower the cost of already existing housing may be more appropriate.
It’s extremely unlikely that the issues plaguing the housing market in St. Louis are identical to those being faced in Pilot Grove. Policymakers shouldn’t expect broad-stroke statewide policy actions to be equally successful in both Missouri’s metropolitan and rural areas.
The fact of the matter is that very little has been done to establish whether Missouri’s supply of housing is actually lacking or why that may be the case. Without that information, it’s nearly impossible for policymakers to successfully intervene. Two things they do know are that many of their constituents would appreciate greater access to less expensive housing, and that developers have told them that issuing tax credits is the only way to make that construction worthwhile.
For some reason, policymakers continue to act as though the LIHTC program is their only tool for “fixing” housing in Missouri, when that couldn’t be further from the truth. Instead of doubling down on an already-failed policy, why don’t Missouri’s elected officials take a closer look at the underlying causes of the supposed market failure to find a new path forward for Missouri; or better yet, step back and let the market take care of itself.