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The American housing shortage
A collective action problem, like OPEC or Yucca Mountain
One of the pandemic’s many effects has been an increase in housing prices. Labor shortages and supply chain problems, combined with an enormous spike in demand, drove house prices to eye-popping levels.
While the increase in housing prices during the pandemic was real, the high cost of lumber can’t be the whole story. Housing prices have steadily increased over decades. Even when adjusting for inflation, the median price for a house in the United States is now something like ten times greater than what it was in the 1940s.
Think about that: imagine if the price of a house wasn’t $500,000 but $50,000!
How did we end up here? Many factors are to blame. The most important root cause is that there simply aren’t enough houses to go around. Estimates vary, but the US has a housing shortage of between 3 and 6 million houses, on a denominator of about 140 million housing units.
In general, the solution to expensive houses is to build more houses. If some product is expensive, you increase the supply, and prices fall. So why don’t we build more houses?
The reductionist answer is NIMBYism: people don’t want more houses where they specifically live, so they stop local building projects through zoning laws, by styming public approval processes, or by threatening to vote out politicians who allow building projects to go forward.
NIMBYism is sometimes treated as irrational. For example, some opponents of housing development hold the mistaken notion that building many more houses increases the price of housing. Other times, NIMBYism is treated as immoral or racist.
Regardless of whether those characterizations of NIMBYism are inaccurate, they are incomplete. Because, in fact, NIMBYism is a perfectly rational response to a collective action problem. It is perfectly rational to say, I do in general want lower housing prices, but I also don’t want a new housing development in my neighborhood. Thus, closing the housing shortage is, in the economics jargon, a collective action problem.
In 1965, Mançur Olson published a landmark book in political economy, The Logic of Collective Action. Olson was dissatisfied with a common sense proposition that had also been treated as self-evident in political and economic thinking:
It is often taken for granted [...] that groups of individuals with common interests usually attempt to further those common interests. Groups of individuals with common interests are expected to act on behalf of their common interests much as single individuals are often expected to act on behalf of their personal interests.
Economists had modeled humans as independent, interest-seeking agents at least since Adam Smith published his Wealth of Nations. Those same economists had then often made the hand-wavy assumption that groups of humans could also be thought of as independent, interest-seeking agents.
Through empirical research and mathematical proof, Olson showed that this likely was not the case: “[R]ational, self-interested individuals will not act to achieve their common or group interests.” And he identified only very narrow circumstances in which large groups can be successful in delivering a common good:
If the members of a large group rationally seek to maximize their personal welfare, they will not act to advance their common or group objectives unless there is coercion to force them to do so, or unless some separate incentive, distinct from the achievement of the common or group interest, is offered to the members of the group individually on the condition that they help bear the costs or burdens involved in the achievement of the group objectives.
In other words, a person will act toward the collective benefit only if there is a carrot or a stick that will affect them personally.
I mostly hear collective action treated as a moral or logical problem. If only people would realize that it was their duty to pay their taxes. If only people would realize it was in their benefit to attend their neighborhood meetings. But Olson shows that collective action problems lead to both desirable and undesirable behavior.
Consider, for example, a Zoom meeting. Everyone wants the meeting to be short. To contribute to this collective good, you might naively expect that everyone would keep their talking points short. But for every individual person, the individual benefit of their talking for one more minute is greater than the collective benefit of a meeting that is one minute shorter. If I take a little more airtime, I’m more likely to get what I want, so I’ll take that airtime. The problem is that this logic holds for every individual, and then suddenly you have a string of excruciating Zoomologues.
In this example, people seem either selfish or irrational. But now consider a group of companies selling the same kind of product. All the companies want to keep the price of the product high, and one might naively expect that the companies would collude to keep supply down and price up. But for every individual company, it is worth it to produce more, taking advantage of the high price point produced by the other companies’ low production to reap a large profit. The same logic holds for all the companies, and so they each produce more products and prices fall.
In the first example, we are pleased by small, cohesive groups of people who take each others’ interests into account and keep the meeting short. In the second example, we despise small, cohesive oligopolies that effectively collude to control production. But if you take morality out of the equation, it’s the same collective action problem, just leading to different outcomes.
Olson goes even further, to make it clear that acting for the collective benefit is not always a thing we admire:
Selfless behavior that has no perceptible effect is sometimes not even considered praiseworthy. A man who tried to hold back a flood with a pail would probably be considered more of a crank than a saint, even by those he was trying to help. It is no doubt possible infinitesimally to lower the level of a river in flood with a pail, just as it is possible for a single farmer infinitesimally to raise prices by limiting his production, but in both cases the effect is imperceptible, and those who sacrifice themselves in the interest of imperceptible improvements may not even receive the praise normally due selfless behavior.
The housing shortage, then, is a necessary consequence of the fact that local jurisdictions have the power to control the production of housing. Wherever you are, it is perfectly rational to demand that the housing be built somewhere else. That rationality is neither moral nor immoral, any more than the same collective action problem leads to desirable competition between companies but also undesirably long meetings.
By Olson’s logic, we should expect the housing shortage to continue, so long as individual cities, towns, or neighborhoods face neither a stick nor a carrot. Governments must give incentives that outweigh objectives so that it becomes rationally self-serving for a town or neighborhood to say YIMBY. Clever organizing and strong moral feeling can certainly get some housing built, but I doubt it would be enough to fill the 5 million house gap we’ve built up over decades.