One of the worst tendencies in American politics is to restrict supply and subsidize demand. (The phrase is from the economist Arnold Kling.) The likely result of such policies is high and rising prices, restricted access and often poor quality. If you limit the number of homes and apartments, for example, but give buyers subsidies, that is a formula for exorbitant prices.
That is what makes early accounts of Senator Kamala Harris’s economic plans so disappointing. There is still room for course corrections as she campaigns for president, but too much of what is being bandied about seems designed to annoy Arnold Kling.
Consider Harris’s embrace of subsidies for renters, as reflected by her recent sponsorship of the Rent Relief Act of 2018. Given the high price of housing in many parts of the U.S., it is easy to see why the idea might have appeal. But the best and most sustainable way of producing cheaper housing is to build more homes and apartments. The resulting increase in supply will cause prices to fall in many neighborhoods, even as some areas become hot and up-and-coming. At the end of the day there will be more housing, more choice of housing, and more people in homes and apartments. That is basic supply and demand, with supply doing the active work.
The Harris bill, in contrast, calls for tax credits to renters. Eligible renters would be those who earn less than $100,000 a year, and who spend more than 30 percent of their income on rent and utilities, with various details and modifications.
There is an obvious problem with this approach. If you subsidize renters, that will push up the price of apartments. Furthermore, economic logic suggests that big rent increases are most likely in those cases where the supply of apartments is relatively fixed, a basic principle of what is called “tax incidence theory.” In sum, most of the gains from this policy would go to landlords, not renters. The opposite would be true from a policy that encouraged increased supply, which is typically opposed by existing landowners.
On the bright side, Harris once tweeted, “Building more affordable housing in California must be a priority.” But she has not taken a leading role advocating for supply-increasing pieces of legislation introduced in the state of California, such as SB 827.
Another problem with the Harris bill is that it will induce some renters to increase the bidding war for apartments. Recall that the subsidies kick in only when rental plus utilities costs exceed 30 percent of income. And say you are a renter choosing between a place that costs 26 percent of your income and one at 33 percent. Given the available subsidy, you might opt for the bigger and better place. That would put more upward pressure on real estate prices.
I fear that “restricted supply, subsidized demand” will become an increasingly common pattern in economic proposals. There is also talk of Harris favoring a $2.8 trillion middle-class tax cut. Without further details, it is difficult to judge whether this is a good idea. Still, I would prefer a focus on getting the economy to produce more goods and services, and to create more economic opportunities, with or without a tax cut. A broad tax cut and stable supply leads mainly to higher prices, at least in an economy that is very close to full employment. Even John Maynard Keynes recognized that economic expansions were the time for fiscal rectitude, not further tax cuts and demand boosts.
How about Medicare for All, another idea associated with Harris? No matter what your view on that proposal, I would prefer to see an emphasis on increasing innovation in health care and easing constraints on supply. A recent research paper found that the supply of medical care and innovation did much more to lower mortality than did increased access to care.
Again, you still might favor greater access. Nonetheless, it is fair to judge politicians on their priorities: Do they favor fostering innovation or increasing demand? Right now I see Harris as on the wrong side of this ledger. Is there a bright side to all of this? Well, Harris is also proposing to ease or eliminate cash bail for many people facing trial. Too often people of lesser means are held in jail needlessly, even when they pose no risk to broader society. That, finally, is a proposal to liberate supply.
(Tyler Cowen is is an economics professor at George Mason University and a Bloomberg columnist)