William Davies has a thought-provoking review of The Price is Wrong: Why Capitalism Won’t Save the Planet by Brett Christophers (Verso, 2024) in the latest London Review of Books (https://www.lrb.co.uk/the-paper/v46/n07/william-davies/antimarket).
The basic point of the review (and, presumably, of Christophers’ book) is that the imperatives of capitalist profit are a major impediment to making any progress in moving away from fossil fuels to renewable sources of energy. The specifics of the argument are simple and compelling, but have far-ranging implications. Basically, fossil fuel extraction generates a profit rate of approximately 15% a year for the oil companies. Yes, there are the original investment costs of exploration and setting up the drilling sites, plus refining processes, but the resultant gasoline can then be sold at a premium price. Renewables also require a large initial investment—but they don’t yield a product that can be brought to market except within the confines of heavily regulated utility markets. On average, solar and wind generate a profit rate of 8%. Davies quotes Wael Sawan, the CEO of Shell: “Our shareholders deserve to see us going after strong returns. If we cannot achieve the double-digit returns in a business, we need to question very hard whether we should continue in that business. Absolutely we want to go for lower and lower and lower carbon, but is has to be profitable.” The bottom line uber alles; investors will not move their money from oil to solar because the rate of return is not sufficient enough.
This economic logic means that capitalists basically insist that they will act only if subsidized (bribed) by the state. There are really only three alternatives here—and states have been very reluctant to use two of the three. 1) States could introduce strong tax or other policies that would drive down the profit rates enjoyed by oil companies. States have basically refused to take this approach because of the fear that heavily taxed (or otherwise thwarted) companies will just move their operations to friendlier venues. Capital is mobile, states are not.
2) De-risking. States can assume the risk of capital investment, while leaving the profits in private hands. This kind of backstopping of financial risk is, of course, rife in the financial markets. The response to 2008 was a classic case of the state assuming the burden of the losses generated by financial overreach, even as bankers and brokers happily pocketed their somewhat smaller bonuses. For all its cowboy talk of risk, capitalists love nothing more than a sure thing—and will blackmail the state into providing that surety any chance they get. But de-risking is not relevant to the switch from oil to renewables. It’s not the risk that is preventing that switch; it is the smaller profit rate.
So that leaves #3) state subsidies. We see that with Biden’s so-called industrial policy. The state will make the up-front investments needed—and then private enterprises will get to pocket the profits. (Something similar happens with government funding of the R&D needed to develop new drugs.) If the state builds the infrastructure for renewables, then the profits for the companies that then come in to manage them will go up.
The whole thing is supposed to work via carrot not stick. Make investing in solar profitable enough and capital will move in that direction. Rely on the magic of market incentives. Except that there is more than enough capital sloshing around out there in search of safe returns that even as solar and wind get developed, fossil fuel extraction is not being slowed down. Money is not moving out of oil toward renewables, especially when it is the state, not capital markets, that are supplying the funds to build the renewables. Without a strong intervention into the way capitalist markets and incentives work, the production and use of fossil fuels will continue apace. As long that is, if there is money to be made in fossil fuels, capitalists will do the work to make it.
What does this have to do with affordable housing? I read Matthew Yglesias and Noah Smith pretty faithfully—and anyone familiar with them and their ilk know that creating “abundant” housing (as well as abundant energy) is one of their major passions. The basic argument is that market-based solutions are the only way to reach the goal of enough—and affordable—housing. Here’s a link to a recent Noah Smith blog post that will give you the flavor of the kinds of arguments he and Yglesias regularly make. (https://mail.google.com/mail/u/0/#inbox/FMfcgzGxSbrtnkhNWfpnKDTnSWnzFsvh The relevant section is number three in this list of five “interesting things.”) Developers won’t build housing at all if they don’t stand to make a “reasonable” profit. So, this particular piece argues, if you make them build “affordable units,” they just won’t build at all (unless, of course, there is a public subsidy that acts to push their profit margin back up.)
In short, you have to bribe developers to build affordable housing—and, even then, the percentage of affordable units in any new development will be fairly small. My hometown of Chapel Hill offers a case in point. The town passed a ten million dollar bond to increase affordable housing. Some of that money went to rent subsidies, but a large amount of it went to developers—and new apartment buildings and complexes are going up all over town. At most, these new developments include 15% affordable units; in most cases, the percentage of affordable units is well below that. The average for all the projects appears to hover around 12%.
In other words, to get access to the lucrative Chapel Hill market, developers must agree to provide some affordable units—and they get a monetary bribe to do so on top of permission to build. Even worse, the town reports that only 10% of these new units are “permanently affordable.” That is, after the originally tenants move out, rents can revert to “market rates.” (Source: Town of Chapel Hill web site and its various reports on development approvals and affordable housing.)
It is for exactly this reason that Noah Smith’s blog post argues that mandating the inclusion of affordable units is a losing strategy. But because he will not countenance any interference in market processes, Smith has only two other strategies to offer. 1) Rent subsidies. Just having the government help tenants pay their rent. (Smith, like all economists, insists that rent control does not work.) 2) Let developers build non-affordable (i.e. market rate) housing. If we build enough, the law of supply and demand will kick in and rents will fall. It’s simply a question of getting enough supply. Yes, the new units will go for a premium, but older housing will become cheaper as it becomes less competitive, less desirable. This insistence that building new housing, no matter how expensive, will eventually drive down costs is an article of absolute faith for Yglesias, Smith, and all the other soi disant YIMBYs.
The problem is: how much is enough? In Chapel Hill, it’s a Red Queen race. Why? Because more and more college students have abandoned dorms for off-campus living. Because die-hard TarHeel fans buy condos to stay in when coming to football and basketball games. Because the town is very, very desirable for retirees and for those with school-age children (best school district in the state) and for its general laid-back, liberal, college town vibe. It will always be a game of catch-up in Chapel Hill. The demand will always outstrip the supply. And it’s an upscale market, so the cost is always going to reflect that the town is an enclave for the comfortably off.
The market signals and the market processes are very clear in the Chapel Hill case: build it and they will come—and they will pay a premium price to be here. Waiting for the market to drive prices down means waiting a very, very long time indeed. And renders the subsidies the town is paying to developers a token gesture that, effectively, is providing developers with access to this market while doing very little to move the needle on housing affordability.
Where does that leave us? Rolling up the ladder and just preventing any growth, any new housing development? That seems unconscionable. But it does seem like we should recognize that the market rules of the game are rigged. The developers hold all the good cards. They can always go elsewhere—to places where the bribes will be bigger, or where there is no demand to include affordable units. (That’s why Smith thinks jurisdictions should just abandon making that demand.) And the town has no capacity to build anything itself. They have no recourse but to placate developers if they want any new housing built at all.
Public housing has not been a success in this country. Perhaps it has been elsewhere (I don’t know enough on that score.) But giving up on state-built and state-managed housing doesn’t necessarily mean we have to fall back on the market as currently configured, that we just have to resign ourselves to giving into all the developers’ demands . Public utility companies work pretty well, as do public hospitals. We have instituted profit limits for medical insurance and regulate other forms of insurance as well. The YIMBYs say housing—and especially zoning—regulations stand in the way of our achieving housing abundance. But do we really want to leave provision of a basic need to the market? We, as a society, intervene in all kinds of ways in the production and pricing and quality of food. Our food policies are, admittedly, a mess. But would we really want unregulated food production and distribution, to return to the adulterated products of nineteenth-century laissez-faire?
It is no surprise that developers in Chapel Hill are currently playing the cards that are dealt them. They are gaming the system that currently exists. No doubt they would work to game any other system of regulations that were put in place. But that’s no reason for the community and its local government to fold, to just throw up its hands and say “let the market have its way; it’s too strong for us.”
Smith blog post concludes: there are only two effective strategies. Let builders build and provide rent subsidies. Trying to build affordable housing just doesn’t work, in his view. What he does not consider (if we accept that publicly built and administered housing is off the table) is developing a housing policy that regulates the market in ways designed to get the results everyone claims to want: enough and affordable housing for everyone.
In Chapel Hill’s case, such a policy would, for starters, have to be state-wide. As a single jurisdiction, and in competition with other jurisdictions, Chapel Hill doesn’t stand a chance. It is forced into making terrible deals with developers because of the threat that they won’t build here at all. And then (very annoying) we have to hear about everything they are doing to address our affordable housing crisis—when in fact they are collecting a bucketful of water in a deluge. That the hands of local government are tied is a terrible thing—and is leading to terrible outcomes that do next to nothing to solve our problems. Accusing their opponents of racism hardly covers their own futility.
We are back where we started. It is pretty much universally accepted by liberal economists that health care cannot be left to an unregulated market. But those same liberals seem to have come to the opposite conclusion when it comes to housing. The prevailing orthodoxy among self-labeled “progressives” is that we need to deregulate, to take away impediments to development, so that abundance may be achieved. But that position overlooks the relentless—and amoral—search for profits that the market unleashes and rewards. To expect developers to solve our housing problems is as unrealistic as it is to expect Mobil to solve our climate crisis.
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