Academic journal article Federal Reserve Bank of New York Economic Policy Review

Housing Production Subsidies and Neighborhood Revitalization: New York City's Ten-Year Capital Plan for Housing

Academic journal article Federal Reserve Bank of New York Economic Policy Review

Housing Production Subsidies and Neighborhood Revitalization: New York City's Ten-Year Capital Plan for Housing

Article excerpt

1. INTRODUCTION

A perennial question in housing policy concerns the form that housing assistance should take. Although some argue that housing assistance should be thought of as a form of income support and advocate direct cash grants to needy households, others favor earmarked assistance-but they differ over whether subsidies should be given to the recipients as vouchers or to developers as production subsidies.

The appropriate composition of housing assistance has recently taken on particular import. In 2000, Congress created the Millennial Housing Commission and gave it the task of evaluating the "effectiveness and efficiency" of methods to promote housing through the private sector. As part of its mandate, the commission is examining changes to existing programs as well as the creation of new production programs to increase affordable housing.

This paper reexamines the debate over the appropriate form of housing assistance. First, we briefly summarize and evaluate arguments in favor of demand-oriented housing subsidies (such as Section 8 vouchers) and supply-oriented housing subsidies (such as production subsidies). We conclude that although demand-oriented subsidies are preferable to supply-oriented subsidies on a number of grounds, government support for production may, at least theoretically, be justified as a way to promote positive spillover effects and neighborhood revitalization. Whether sufficient spillovers exist is, in the end, an empirical question. Although much of the existing research finds little evidence of spillover effects, our findings on the New York City experience suggest that spillovers may be significant and large enough to justify government support for production.

Next, we describe the most extensive experiment in the United States in which a city used supply-oriented subsidies to rebuild neighborhoods-New York City's Ten-Year Capital Plan for Housing (the "Ten-Year Plan"). Born out of the necessity to rebuild communities devastated by years of abandonment and arson, the program, launched by New York City in 1986, ultimately led to the investment of more than $5.1 billion in housing in many of the city's poorest neighborhoods.

Finally, we describe the results of several empirical studies we have recently completed on the effect of the Ten-Year Plan on property values in New York City. Our results suggest that the use of production subsidies can indeed generate positive spillovers and contribute to neighborhood revitalization. Furthermore, by comparing and contrasting New York City's experiences with those of other cities, we explain why New York was so successful, and identify aspects of its program that could be transplanted to other cities.

2. JUSTIFICATIONS FOR HOUSING ASSISTANCE: REVISITING THE SUPPLY-VERSUS-DEMAND DEBATE

Although housing subsidies have become commonplace in the United States, it is still worthwhile to consider whether household financial assistance might be tied to housing rather than just provided as unrestricted cash grants. If the only housing-related problem facing Americans was insufficient income among poor families to purchase adequate housing, then a strong argument could be made that unrestricted cash grants would be best. In a liberal society dedicated to free choice, allowing individuals to make their own decisions with respect to consumption would generally seem desirable. Furthermore, considerable evidence suggests that unrestricted cash grants would lead to increases in housing consumption that fall short of the grant amount (Polinsky and Ellwood 1979). The implication is that earmarking subsidies for housing would be a less efficient way than cash grants to enhance household welfare. Finally, earmarked housing assistance carries an additional inefficiency-the cost of administration necessitated by the requirement that the money be spent on a specific good.

Despite the inefficiency, since the end of World War II, federal, state, and city governments have repeatedly tied subsidies to housing consumption. …

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