As in the case of transportation policy, one could have a housing policy without any particular spatial objective. It is not necessary for the cabinet secretary who oversees housing to also supervise urban development. Indeed, the earliest federal forays into the housing market during the Great Depression, the Reconstruction Finance Corporation and the Federal Home Loan Bank Board, were not intended to reinvigorate any particular locale. More modern interventions, such as Section 8 vouchers and the low-income housing tax credit, are similarly aimed mainly at making housing cheaper, not at making places more economically vibrant.
Starting in the 1940s, there has been an increasing tendency to link housing policy and urban revitalization. In 1941 the National Association of Real Estate Brokers advanced a scheme whereby the government would use its powers of eminent domain to assemble urban parcels and then subsidize private development of that land. (58) The Harvard economist Alvin Hansen endorsed a similar scheme, and individual cities, such as New York, increasingly subsidized urban renewal efforts. After a great deal of legislative wrangling, in which "Mr. Republican," Senator Robert Taft of Ohio, strongly supported public housing against the opposition of his fellow Republican, Wisconsin Senator Joseph McCarthy, Congress passed the Housing Act of 1949. Title I of that act brought the federal government into the business of urban renewal.
The 1949 housing act authorized $1 billion in loans to cities for them to acquire blighted land and $100 million a year in outright grants for such purchases. In principle, the cities were to pay one-third of the purchase price, but the contribution could be made in the form of new public facilities. (59) The sites would then be given to private developers to build new housing or commercial buildings. The Housing Act of 1954 broadened the program to allow funds to be used for renovation and for Federal Housing Administration mortgages for renewal projects.
Several rationales have been given for urban renewal. The intellectual roots of the slum clearance movement go back to the Progressive Era, when reformers believed that the poor conditions and high densities of poor neighborhoods spread disease and fomented crime. A related, externality-based argument is that blighted areas create aesthetic externalities for neighbors. Amy Schwartz and coauthors find some evidence for this view: (60) neighboring housing prices seem to go up when dilapidated housing is replaced with a new housing project.
Another argument for urban renewal is that private developers may be unable to assemble sufficiently large land parcels for major projects because of the hold-up problem: any individual landowner's part of the area is indispensable to the project, so all of the former landowners will try to extract the project's entire surplus. Of course, this argument is really a justification for the use of eminent domain and provides no rationale for subsidizing private developers. A policy intended to solve hold-up problems would presumably have developers pay market rates for land assembled through the use of eminent domain.
In the 1950s and 1960s, urban renewal was increasingly also seen as a tool for revitalizing cities. There are two ways of understanding how subsidizing housing might, in principle, help declining cities. The number of people in an area is generally proportional to the number of homes there. (61) Subsidizing new housing is one way of increasing the population of an area to take advantage of agglomeration economies. A slightly different view is that better housing might attract residents with more human capital, who will then generate positive externalities in the workforce. In this case housing policy becomes a human capital policy, as discussed in the next section. However, there are also good reasons for skepticism about these arguments. …