Scott Sumner  

Housing and poverty

Ebola and Open Borders... The Grand Budapest Hotel

The traditional definition of poverty in America has been criticized for ignoring factors such as government benefit programs and regional variation in the cost of living. Now the Census Bureau has released new estimates of poverty, which account for various types of benefit programs and cost of living differences. For some states the figures are about the same, whereas for others they are substantially different. Here are a few examples:

State -- Original poverty rate -- Adjusted poverty rate

California ------ 16.0% ----------- 23.4%

Massachusetts 11.5% ------------ 13.8%

New York ----- 16.0% ----------- 17.5%

Texas --------- 17.2% ----------- 15.9%

In the unadjusted figures, Texas looks the worst of these 4. The adjusted figure for Texas is exactly equal to the national average, but I'll argue that in fact it's far better than the national average, which partly explains why so many people are moving to Texas.

Let's compare Texas to California, which comes in dead last in the adjusted figures. Both states are "majority-minority," with non-Hispanic whites being less than 50% of the population. Both states have huge Hispanic minorities. The main difference between the two is that in Texas blacks are the second largest minority group by a wide margin, while in California it's Asians, with blacks a distant third. Because Asians tend to earn more than blacks, just looking at demographics you'd predict Texas to have more poverty. Instead it has far less.

If you are liberal the news gets worse. California has one of the most generous welfare states in the country, and Texas has one of the stingiest. And yet Texas has far less poverty.

Indeed if you adjusted for demographics, I'd guess Texas actually has less poverty than the US as a whole, and probably even less than heavily white Massachusetts.

So what explains the Texas success in race-adjusted poverty rates? There are probably many factors, but the housing market is almost certainly the biggest difference from California. Housing regulations (often enacted by well-intentioned liberals) are one of the biggest causes of poverty in America. And these regulations don't just hurt progressive areas. Elsewhere I've argued that the biggest problem with otherwise free market Hong Kong is the restrictive building regulations, which keep housing prices absurdly high. I don't have any data for Hong Kong, but I'd guess that much of the poverty level consumption in that city is due to the high housing prices, caused by restrictive housing regulations.

In the modern developed world most people have enough to eat (partly due to food stamps.) Indeed obesity is now a problem among the poor. Clothing is now really cheap, as are many basic home appliances like TVs and washers. There's free public education and Medicaid. The main cause of poverty is housing costs, and more specifically restrictive zoning laws that make it hard to build. Fix that and you fix much of the problem---focus on welfare, minimum wages, etc., and you are likely to be disappointed.

Comments and Sharing

COMMENTS (15 to date)
Bostonian writes:

"The main cause of poverty is housing costs, and more specifically restrictive zoning laws that make it hard to build. Fix that and you fix much of the problem---focus on welfare, minimum wages, etc., and you are likely to be disappointed."

Yes, but the homeowners in my affluent liberal Boston suburb are against easing zoning laws that would cause more children, especially middle class and poor children, to attend our schools, and which could decrease their property values.

Maybe vouchers funded at the state level rather than neighborhood government schools funded largely by property taxes would ameliorate this problem.

Scott Sumner writes:

Bostonian, I agree (and also live in Boston.) But if the houses are not there, I don't see how vouchers would help. House prices in Boston are plenty high. If they aren't building much at these prices, will vouchers lead to many more homes?

Thanks Lorenzo.

RPLong writes:

Excellent post, Prof. Sumner. I can certainly see it "on the ground" here. Housing is extremely cheap here, and that has a big influence on the overall cost of living in Texas.

Bostonian writes:

Replying to Scott Sumner:

There is some undeveloped land in the town where I live, and the preference is to sell it a developer who will build a small number of high-end homes, rather than a large number of low-end apartments, because the former development strategy has a better ratio of incremental property taxes to incremental children in schools. Under a state-funded voucher system a lot of new low-end homes would be better financially for the town than under the current system, because the incremental children would come with vouchers attached.

Full state funding of education would decrease local control, so there is a downside to vouchers too.

David R. Henderson writes:

Very nice micro analysis, Scott.

Brian Donohue writes:

Excellent post.

MG writes:

Also, whatever "statistical advantages" states like NY/CA/IL were to show (relative to many faster growing states in the Sun Belt) after these kinds of adjustments, the advantage may not be sustainable to the extent that they reflect the consumption and depletion of "original capital". In other words: the Blue State model may be an adequate model for rich, established states to consume previously generated wealth, not for the upstarts who are still bulding it.

Cyril Morong writes:

Texas only uses the federal minimum wage. Yet since December 2007 Texas has added 1.3 million jobs while all other states combined have 1.23 million fewer jobs. Some of those other states have minimum wage laws above the federal level

Lorenzo from Oz writes:

School vouchers are not electorally popular because middle class parents do not want ghetto kids in their schools. They are of a piece with zoning regulations.

And of course zoning regulations are about property values -- regulations are generally about defending the interests of (economic) incumbents. Land rationing suits lots of interests:

(1) it raises property values for existing home-owners,
(2) it raises tax revenue gained from said higher property values,
(3) it raises funds for politicians (either individually or via political parties) because developers need access to officials who make the discretionary decisions.

It is just bad for low income folk, housing market entrants (but regulations are often against the interests of potential market entrants) and asset price stability.

As an aside, one of the things Germany does well is land regulation. First, their constitution blocks officials discretions -- if it is not against written-in-the-statute law, folk can do what they want with their property. (Apparently, 12 years of Nazism gave the new Federal Republic a violent allergy to official discretions.) Second, their local governments are funded on the basis of residents -- more residents, more funding.

The result is that German house prices move at about the rate of inflation. (There is a drop in the figures after unification, because the sub-standard Eastern German housing stock was added in.)

Alas, land regulation is one thing we in Australia do badly. Because we copied the postwar British model (though about 30 years later). *sigh*.

A useful post with helpful links is here.

RonRonDoRon writes:

I recently moved from a small city in far northern California to a slightly larger city in South Dakota (closer to where I grew up but not as cold). Previously, I lived in Los Angeles.

I live on Social Security only (unless I take temp work). I'm less poor here than in the small CA city. In LA, I would be destitute.

CapitalistRoader writes:
The main cause of poverty is housing costs, and more specifically restrictive zoning laws that make it hard to build.
I'm surprised Houston, with no zoning laws, wasn't mentioned. For a boom town housing remains very affordable and it's not all sprawl:
The increase in high-density housing tracts (more than 5,000 per square mile) since 2000 has been almost ten times higher than the Bay Area.

Joel Kotkin, Battle of the Upstarts: Houston vs. San Francisco Bay, 10/06/2014, New Geography

Scott Sumner writes:

Everyone, Lots of good comments. (Bostonian should also look at Lorenzo's comment.)

I regret saying housing is the "main" cause of poverty, that's a bit too strong. But I do feel it's a very important cause. I think it explains most of the difference between Texas's 15.9% and California's 23.4%. And recall that California has more welfare than Texas, so this gap might UNDERSTATE the impact of housing alone.

Former Texan in the Northeast writes:

While there are certainly homeowners who try to protect their property values and municipalities that try to reduce the growth of school enrollment by blocking construction of new houses and apartments, these factors are far less responsible for regional shortages of affordable housing than the unquenchable liberal thirst for control over our daily lives. For example, some northeastern states now require that new single family homes install fire sprinkler systems--a feature that can add $20,000 to the cost of a house. Of course any homebuyer in any state could opt to buy such a system if he thought the incremental increase in safety worth the price, but in the liberal worldview we are too simple-minded to make such choices for ourselves. Add to this a deep-seated bias in most blue states against development and population growth that finds its outlet in (among other things)financial burdens such as municipal "impact fees" on homebuilders. The very name of these levies implies that a builder is somehow harming the community to which he adds housing stock. Ashley Judd's comment that having children is the most selfish thing you can do is merely an extreme expression of engrained liberal hostility toward population growth, except perhaps from illegal immigration. Most parts of Texas are business-friendly and--far from fearing growth--embrace and encourage it.

Andrew writes:

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