The history of homelessness - your humble blogger from 2015

Few public policy experts doubt the phenomenon of homelessness is the product of public policy. European and Canadian homeless populations are far smaller, so enlightened public policy can really have an impact. Of course it has been ten years since a Norwegian policeman killed anyone, too, so cultural bias also figures in what's viewed as acceptable policy too.

In my view, the origin of the level of homelessness we experience now is rooted in several things. First is the "fiscal responsibility" that has gripped American consciousness at least since Edmund Muskie ran against Richard Nixon for the presidency (and was "disqualified" because he wept when Nixon's operatives insulted his wife). Noam Chomsky says Nixon was our last liberal (in the sense of left-leaning) president.

Muskie believed government was funded by tax revenues, and wanted to have pay-as-you-go federal programs, which is absurd. But government is not funded by taxes; where would tax payers get the dollars to pay their taxes with if government didn't spend them out into the economy first? Taxes make fiat money valuable; they do not fund government, certainly since Nixon retired the gold backing for dollars.

Muskie was a Democrat, as was Jimmie Carter, a former governor who prided himself on his "fiscal responsibility." Unlike the federal government, states (and households) are not currency creators. They are currency users. Carter erroneously believed the same kind of budgeting he applied as governor in Georgia would apply to the federal budget.

During Carter's administration, in service to that notion of "fiscal responsibility," among other things, legislators de-funded the large federal asylums where the U.S. warehoused its mentally ill citizens. As originally proposed, this program included funding for smaller, transitional housing for the inmates of these larger institutions that were to be closed. This made sense in many ways, not the least of which would be to end the "out-of-sight-out-of-mind" abuses of the larger institutions that led to outcomes like One Flew Over the Cuckoo's Nest.

However delusional, "fiscal responsibility" won out, in the end. The large asylums were closed, but no funding was provided for the smaller, local transitional housing. Daniel Patrick Moynihan called it the most shameful episode in his life of public service.

And sure enough, this omission, and Reagan's acceleration of the war on drugs, began to fill up our prisons with non-violent offenders and the (self-medicating) mentally ill.

An additional contribution to the trend toward homelessness were the changes Reagan wrought in the tax code that removed subsidies for rental housing. First, he famously halved the top marginal income tax rate in 1982, which encouraged the 0.1% to invest in their own pleasure, a la Marie Antoinette, rather than productive enterprises. Rather than invest in rental housing, Ken Lay, Enron's CEO, bought a $6,000 shower curtain. John Thane of Merrill Lynch bought a $1500 waste basket. Etc.

More important than that tax change, however, was the 1986 revision of the income tax law. It disallowed partners from claiming write-offs called "passive losses"--particularly depreciation--in limited partnerships. This impacted rental housing because claiming such losses was a subsidy for building rentals (although not as effective if IRS reduced top marginal rates), and this provision was designed into the after-tax yield of the partnerships that built or acquired rentals. To simplify IRS' job, this law was made so even existing partnerships could not claim such tax benefits--so it retroactively ruined the after tax yield of rental housing.

What resulted? Every limited partnership building rentals in the Sacramento region failed, and its property went into receivership or was foreclosed. Every one.

Incidentally, this didn't help with the Savings and Loan scandal, something going on at the same time, and, until then, by a wide margin, the largest political and financial scandal in American history. The recent sub-prime looting spree now is the biggest ever in our history, approximately 70 times larger than the S&L scandal (says William K. Black, an S&L regulator).

Lenders had to foreclose on properties that no longer made financial sense, because their investors abandoned them. The nicest resolutions occurred when the investors simply deeded the (now money-losing) properties to their lenders. Acrimony about many other such properties persisted long after Reagan retired, however, and a Savings and Loan with a portfolio of trouble rentals was a troubled S&L.

So that was a double-whammy for affordable housing. Not only were the inmates from asylums turned loose on America, and, I might add, lenders were reluctant to continue lending for traditional forms of housing that might have helped, like boarding houses. Not only that, but Reagan's tax "simplification" pulled the rug out from under subsidized rental housing that might have helped house this population and poor people generally.

So the homeless population we have now has been, at least partially, the result of nearly a half century of misguided public policy.

The encouraging signs are that policy makers and the public have realized that it's not only more compassionate to house the homeless, it's cheaper. Similarly, the incarceration binge we have undertaken has been de-legitimized, and is starting to thaw. We can only hope that people will wake up to the public policy effort needed: employing the unemployed. Again, not just more compassionate; cheaper.