Biden’s infrastructure bill doubles down on bad housing policy

As a vote nears on the $1 trillion infrastructure bill and the $3.5 trillion Democratic budget reconciliation package, the sheer magnitude of spending and its potential spur to inflation command attention. But the details of the bill itself also are worrisome. What it terms, for example, “historic investments” in affordable housing, development and revitalization are instead vast expansions of failed and suspect programs — initiatives that should be reformed, not expanded. 

Among the programs that deserve scrutiny are a new spending surge for public housing; the wasteful and ineffectual Community Development Block Grant (CDBG) program; and a buffet of existing programs from the Housing Trust Fund to new ideas such as federal oversight of local zoning.

The CDBG program is a vestige of the 1960s-era “War on Poverty.” Its animating idea is attractive: to provide federal dollars to maintain and improve low-income communities whose tax base is eroding. To the extent that the funds directed to more than 1,200 communities nationwide are actually used to maintain public safety and core services such as safe drinking water, it has value. In practice, however, it frequently has been marked by dubious use, with few positive outcomes to show. As City Journal’s Steve Malanga has written: 

“Conceived in the early 1970s as a way to give local officials a say in how federal poverty aid gets doled out, the CDBG has sent some $150 billion to impoverished neighborhoods in Baltimore, Buffalo, Newark and other struggling cities, with little or nothing positive to show for it. Worse, the CDBG has created a local patronage racket, funding politically connected nonprofits that do little to spur economic development.”

But perhaps the worst aspect of the program lies in its perverse incentive structure. As communities become more destitute, they receive larger CDBG grants.

Rather than shrinking spending overall as communities improve, funds are directed to cities whose own poor management — such as spending more on generous pension programs instead of current services — are complicit in their problems. When CDBG funds are used to build “affordable housing,” it’s often linked to the Low-Income Housing Tax Credit, the median cost of whose per unit construction is $180,000 and can top $400,000 in high-cost states such as California. This is a program that merits rethinking all together — not blind expansion.

It is superficially attractive to appropriate funds for the nation’s public housing systems, as the plan proposes. The system in New York City alone — by far the nation’s largest, with 176,000 units — is estimated to need up to $40 billion in repairs and renovations. But a creative Obama-era program has begun to channel private, not public, money to dilapidated government housing projects. The Rental Assistance Demonstration (RAD) program permits private developers to borrow against future tenant rent assistance to renovate public housing, and then go on to manage it. For their part, tenants have the option to use a housing voucher to move elsewhere — a welcome contrast to the long tenures that characterize much of the system. The median tenant in New York has lived in public housing for 19 years.

Even the New York Times has characterized RAD as a way to “save public housing.” This is not the time to give dysfunctional public housing authorities an infusion of cash without conditions. Instead, we should be following the example of the San Bernardino, Calif., system, which insists on a five-year limit on tenancy while helping tenants get better jobs and save money. Longitudinal studies out of San Bernardino report positive results: “We have seen positive outcomes since implementation, including: earned income for families in the program increases by an average 31.4 percent during their five-year term of assistance; full-time employment increased by 20 percent, and unemployment decreased by 26.5 percent.”

The infrastructure bill doubles down on federal interventions in the overall housing market and distorts it in ways that risk harming the low-income households. The Housing Trust Fund, to be expanded under the Democratic budget plan, draws on mandated contributions for the federal secondary mortgage market giants Fannie Mae and Freddie Mac. Revenue from the sale of mortgage-backed bonds is primarily directed toward a “trust fund” to build rental housing for those of “extremely low income.” 

In effect, however, this is a tax on the millions of middle-class homeowners whose mortgages are purchased by Fannie and Freddie — and whose bank interest rates are indirectly influenced by their costs. As with CDBG, the units built inevitably will be costly — this is a plum for housing developers more than a benefit for the poor, as small numbers of units are likely to be constructed.

The unforeseen consequences of generations of federal housing programs should be a red flag for those who would maintain and expand them. Doubling down on decades of failed housing policies will do little to adequately serve the nation’s poor. As the proposed budget moves through Congress, legislators would be wise to avoid repeating the housing policy mistakes of the past. The budget plan ignores a tragic history and shrinks from a thoroughgoing rethinking.  

Howard Husock is a senior fellow at the American Enterprise Institute, where he focuses on municipal government, urban housing policy, civil society and philanthropy.