Arnold Kling  

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Bad News for Me?... My IHS Lectures...

Mihir A. Desai, Dhammika Dharmapala, and Monica Singhal write,


The Low Income Housing Tax Credit (LIHTC) program provides for the majority of new affordable housing units built in the U.S. and has resulted in the production of 1.5 million low-income housing units since its inception in 1986. The LIHTC represents a radical departure from the structure of previous supply-side housing programs, which relied on direct provision or subsidization of low-income housing... Under the LIHTC program, the government allocates tax credits to developers of low-income housing who then sell the credits, often via intermediaries, to investors in exchange for equity financing. Credits are subsequently claimed by investors on their tax returns. As a consequence, the tax beneficiary is an investor, rather than the provider or the targeted beneficiary of the subsidized service.

Sounds to me like classic trickle-down economics from the government. Spill a huge subsidy to a rich beneficiary (investors, in this case), and hope some of it trickles down to some poor folk (those in need of "affordable housing," a cause that should make you hold onto your wallet even more than "family farmer.")

Speaking of trickle-down economics,

catch this abstract, from a paper by Carola Frydman and Raven E. Saks:


We analyze the long-run trends in executive compensation ...the median real value of compensation was remarkably flat from the end of World War II to the mid-1970s, even during times of rapid economic expansion and aggregate firm growth. This finding contrasts sharply with the steep upward trajectory of pay over the past thirty years, which coincided with a period of similarly large increases in aggregate firm size. A second surprising finding is that...recent years were not the first time when compensation arrangements served to align managerial incentives with those of shareholders.

Speaking of CEO's, another abstract comes from a paper by Ulrike Malmendier and Geoffrey Tate.

We find that award-winning CEOs subsequently underperform, both relative to their prior performance and relative to a matched sample of non-winning CEOs. At the same time, they extract more compensation following the award, both in absolute amounts and relative to other top executives in their firms...Our results suggest that the ex-post consequences of media-induced superstar status for shareholders are negative.

The phrase "fooled by randomness" just keeps getting stuck in my head.

Finally, I was fascinated by this abstract, from a paper by Benjamin Olken.


48 Indonesian villages were randomly assigned to choose development projects through either representative-based meetings or direct election-based plebiscites. Plebiscites resulted in dramatically higher satisfaction among villagers, increased knowledge about the project, greater perceived benefits, and higher reported willingness to contribute. Changing the political mechanism had much smaller effects on the actual projects selected, with some evidence that plebiscites resulted in projects chosen by women being located in poorer areas. The results show that direct participation in political decision making can substantially increase satisfaction and legitimacy, even when it has little effect on actual decisions.

Wouldn't it be neat to try that experiment here?



COMMENTS (4 to date)
Jim writes:
Spill a huge subsidy to a rich beneficiary (investors, in this case), and hope some of it trickles down to some poor folk

Over a million low-cost homes have been funded using LIHTC since it was launched. Didn't you know this, or didn't you think it was worth telling your readers?

Ajay writes:

Jim: It was in the first quote.

[Comment edited for rudeness.--Econlib Ed.]

Greg writes:

Including private investors in the provision provides a much needed monitoring of the housing projects. The typical investor in LIHTCs are banks who can use the credits as part of their required affordable housing investments. Banks have very good information on the quality of large residential projects. The tax credits give the banks the incentive to monitor the quality of the projects.

Before a particular project is awarded the tax credits, the developer must first secure a commitment from investors to purchase the credits. The developer will sell the credits to the highest bidder. With this commitment in hand, the application is ranked and gets the yea or nay from the housing finance authority. If the application is denied approval, the investor does not get any tax credits from that project. Therefore, they have an incentive to look for projects of high quality. Furthermore, if the completed project does not pass muster on annual inspections, the banks may lose the tax credits and in some cases must pay back amounts already claimed on taxes in previous years.

I do think that the monitoring function that investors play is important in this process. Without this monitoring, no one has an incentive to weed out bad quality projects or keep standards up on already completed projects.

Jim writes:

Tis true, I missed that - must have got distracted by Arnold going on to imply there's been little or no benefit to poor people.

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