Opinion: Daily Journal

Missing The Trees For The Forest

RALEIGH – You always find the best stuff in the margins. That was true for many of my used textbooks in college – particularly the fawning book on the Soviet Union that my communist professor assigned, a book that previous students had liberally inscribed with the requisite insults.

It is also true in public-policy work, though in this case I mean to refer not to white space but to the economic concept of marginal utility. Its more-or-less contemporaneous discovery by three economists working separately in the 1860s and 1870s – William Stanley Jevons in England, Carl Menger in Austria, and Leon Walras in Switzerland – was critical to the formation of modern economic analysis, and thus to answering many of the questions that had plagued policymakers and thinkers for millennia. Why are diamonds worth more than water, given that the latter is necessary for human life? Why do people pay very different prices for the same commodity, given that the commodity’s essential properties don’t change? Why do seemingly small differences in price – say, between docking fees at two competing ports – frequently have huge effects?

In a nutshell, people react to economic information at the margin, not in total. That is, if you are thirsty, you value the next drink of water more than if you are satiated. Because water is relatively plentiful and diamonds relatively rare, you value the diamond more than the glass of water.

This notion may sound like common sense. That’s because it is – but only if you are thinking about a problem in such terms. Often, folks don’t. They look at totals and averages rather than considering the effect of a given price on a given future action. You might say that they can’t see the trees for the forest.

A good example here in North Carolina would be the various taxes and regulations imposed on residential development. State and local governments impose thousands of dollars in extra costs on homebuyers through such policies as impact fees, sales and income taxes, land-use regulations, and real-estate transfer taxes. But while these costs look big in dollar terms, policymakers and activists sometimes minimize their effects by pointing out that they are typically only a small fraction of the median price of a home. If a home that would have sold for $150,000 must instead be sold at $157,500 because of $7,500 in government-imposed costs, that’s only a five percent increase. Surely, apologists for government intervention say, it can’t be that big a deal.

Well, it is if you happen to be among the thousands of people for whom that marginal cost is not matched by at least as much of a marginal benefit. In seller’s markets, homebuyers must either buy less house or no house at all. In buyer’s markets, homebuilders and their employees and contractors must accept lower returns on their work.

The National Association of Home Builders has just published an interesting study seeking to quantify the number of households affected by changes in government taxes and fees at the margin. For every $1,000 in additional cost, the study estimated the number of households who are no longer qualified to purchase the median-priced home in a jurisdiction. For the nation as a whole, the study came up with an estimate of 217,000 households. Tallying up all the North Carolina statistical areas, the study estimated that for every $1,000 increase in government-imposed housing costs, some 5,200 North Carolina households lose the ability to afford the median-priced home.

Policymakers are, of course, free to weigh such costs against the benefits they perceive from a new tax or regulation. But it is wrong to suggest that there are no losers when governments intervene in the housing market. There are thousands of them. They don’t deserve to be marginalized in the discussion.

Hood is president of the John Locke Foundation.