Who gets "affordable" housing?

When the government fixes prices of affordable housing below market rates, there is excess demand, i.e., more people demand the apartments at the low prices than are available for supply.  So how do the apartments get allocated?

"Insiders" use influence to grab the valuable apartments:

But for years, Brooklyn DA Eric Gonzalez charges, the top three execs of the Luna Park Housing Corp. conspired to “sell” units — accepting five- and even six-figure bribes in exchange for faking documents so that a new tenant could “inherit” an apartment as a supposed relative of the old one.

Prosecutors “believe that this was the norm, not the exception,” Gonzalez reports. The 14,000-strong waiting list was a joke.

Corruption this brazen surely isn’t “the norm” at all Mitchell-Lama projects, but it’s hardly cynical to suspect that insiders are pulling scams all across the city’s vast and varied affordable-housing landscape.

An apartment that by law has a rent well below market rate is a valuable commodity; gatekeepers can cash in big by quietly selling access. Not always for actual money: Political or even family connections can be enough.

Similarly, would-be tenants regularly have to pay someone (a broker, a landlord, some fixer) a hefty fee up front to score a rent-regulated apartment.

Anytime the government fixes prices below (or above) what the market price would be, it also creates incentives to circumvent the prices.  What is most damaging, however, is that these bribes are paid by those who want apartments (demand) but the rewards go to people who manage the apartments, not to those who build (supply) them.  As such they reduce supply (as they have done in Nashville), creating "shortages."

BOTTOM LINE:
Next time you hear a politician complain about a "shortages of affordable housing" ask him or her if she thinks there is a "shortage of affordable Rolls Royce automobiles."

More posts on the effects of affordable housing.

Governments create wealth

To see this, look no further than Venezuela, where the absence of government has lead to a 10% drop in population and a 62% drop in GDP since 2013.

So what is causing the tremendous drop in economic activity? Ironically, it’s not too much government but too little. Outside of the capital, the government has practically abandoned its most basic responsibility of providing law and order. The result has been widespread looting. Ordinary theft is about stealing money or valuable “final” goods like diamonds or art works. In theory, the thief receives more or less what the owner loses. Looting, however, is a special kind of theft. Looting is theft plus destruction. The person who steals a candy bar is a thief. The person who breaks a store front window and steals a candy bar is a looter. Looters destroy intermediate goods and infrastructure and gain far less than owners lose. Looting is the worst kind of theft.

However, signs of economic activity are returning as law and order return:

Local shopkeepers are repairing power lines, feeding public workers and taking over the power of the state. Awesome! ¡Viva la maquinaria de la libertad! 

More from a terrific post from Marginal Revolution

"Consumer testimonials are not reliable scientific evidence"

...In the initial immersion week of classes, a Luke Froeb-led lecture and discussion touched on a project at work and changed his decision making process. When he returned to the office, he changed course on how he was putting a bid proposal together. The revised bid added $400,000 to the bottom line, far more than the investment Vulcan was making in his Executive MBA degree. ... After just one class, Vulcan’s MBA investment was in the black,” he recalls with a chuckle.  (link)

Consumer testimonials that mention a number are one of the most effective forms of advertising for two reasons:

1. People read the testimonial and think that they can do better than whoever gave the testimonial, a form of "availability bias";
2. People do not understand that testimonials are drawn from a selected sample.  

These ads are so powerful and effective that the FTC suggests a disclaimer to accompany them.  So here it is:

 “... testimonials are based on the experiences of a few people and you are not likely to have similar results."

I hope this disclaimer can undo the misperceptions may have been given to potential consumers of a Vanderbilt education.

Greedy capitalists save lives in Africa

Venture backed Zipline.com is saving lives in Africa by using Unmanned Aerial Vehicles (UAVs) to deliver blood to African hospitals that can’t stock all the necessary blood types. They have two bases which cover a 100 mile flight range and a drop zone the size of only two parking spots. The drones are pre-programmed, and fly 65 mph which results in 15-20 minute average delivery times.

If Lectures and books don't work; try this instead

Books and lectures are remarkably bad at conveying information.  Try this instead:

If pressed, many lecturers would offer a more plausible cognitive model: understanding actually comes after the lecture, when attendees solve problem sets, write essays, etc. ... Listeners’ attention wanders after a few minutes, so wouldn’t we want to interleave the problem-solving sessions with the lecture?... to understand something, you must actively engage with it.

Can't Even Trust Man's Best Friend

Principal/Agent Problem: Your "employees" can be bribed by those they are supposed to protect you against.

Concentration Increasing?

There have been reports that industry concentration has been rising in the US. If so, firms will tend to have more market power that allows them to set higher margins. If so, those lazy antitrusters need to wake up and protect competition.

But it all turns out how you define the market. As my students all know, markets can be defined in relation to three dimensions: product characteristics, level of geography, and unit of time. A new paper by Rossi-Hansberg, Sarte, and Trachter examines the data at a more local level. While national concentration measures are rising slightly, more local measures are declining. This is consistent with ever more competition (although there have been claims that product differentiation is increasing). 

Perhaps the antitrust bureaucrats can go back to their naps.

Hat tip: The Grumpy Economist

Addicts respond to incentives

Great post from MarginalRevolution.com:

I always get excited when people surprise me by acting against their self interest.  In this case, when Purdue Pharma replaced their OxyContin drug with a new, anti-abuse version that was more difficult to turn into an injectable, demand fell precipitously.

The addicts whose demand fell were aided and abetted by about 40% of physicians, who switched patients to more easily abused opiates.

BRAVO to Purdue Pharma!
 

Self promotion

Why don't insurers try to mitigate risk?

Allison Shrager's terrific book, An Economist Walks into a Brothel, contains all sorts of innovative risk mitigation strategies pursued by people in all walks of life (see earlier blog post, How are Jet Skis like Financial Derivatives).  So why don't insurance companies spend more time figuring out how to mitigate risk?

The answer is simple:  Risk mitigation is not a source of "sustainable competitive advantage:"

Argument #4: mitigation is easy to copy. Underwriting risk selection is much less tangible and secrets can be a protected source of advantage. People can reverse engineer a dongle but not underwriting strategy. Once copied mitigation provides a one-off benefit to the market, changing the rate level but not the profit level (bit of a negative inventive because lower claims means lower premium and so less float!).

 Instead, insurers spend most of their time classifying risks (classification strategies are proprietary) which offers the benefits of diversification:

Argument #3: Improved classification allows for stratification and so diversification. Insurers are diversifiers. If you can segregate genuinely distinct classes of risk, portfolio volatility will drop.