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street where even half of the inhabitants were black. Similarly in
New York, Philadelphia, and Washington, there was some cluster-
ing of blacks, as other groups clustered, but there were no all-black
neighborhoods, such as would become common later on. It was
not simply that the mass migrations out of the South produced
larger clusters of blacks in Northern cities. Blacks now began to be
excluded from white neighborhoods in which they had been able to
live before. In 1911, Baltimore passed its first housing segregation
law. The Ku Klux Klan began to expand into the North.
"Racism" cannot be cited as an explanation of these trends, as if
it were some independent cause, rather than a characterization of
changing attitudes which themselves require explanation. It was
not only whites, but also existing members of Northern black
The Economics of Housing 125

communities, who resented the new arrivals from the South. The
black press denounced these migrants from the South as crude,
vulgar, unwashed, rowdy, and criminal”and as a menace to the
standing of the whole race in the eyes of the larger white commu-
nity. As the Southern migrants became the vast majority of the
black population in Northern cities, barriers went up against all
blacks in housing, as well as in employment.
None of this was unique to blacks. In an earlier era, the Irish
were unwelcome as neighbors”and this too was not merely a
matter of "perceptions," "stereotypes," or other wholly subjective
factors. Cholera was unknown in American cities before the mas-
sive influx of Irish immigrants, beginning in the 1840s, when a
cholera epidemic struck Boston, almost exclusively in Irish neigh-
borhoods. The same disease struck disproportionately in Irish
neighborhoods in New York. Tuberculosis and alcoholism also
plagued Irish communities in various cities. Irish neighborhoods
were also tough neighborhoods. In New York, the predominantly
Irish Sixth Ward was known as "the bloody ould Sixth" another as
"Hell's Kitchen," and still another as "San Juan Hill" because the
battles there were reminiscent of the battle of San Juan Hill in the
Spanish-American war. Irish neighborhoods in other cities had
similar names for similar reasons.
The resistance to the Irish moving into other neighborhoods
was not simply a matter of inexplicable "perceptions" or "stereo-
types." However, as the Irish themselves changed over the genera-
tions, attitudes toward them also changed, as reflected in their
greater acceptance in housing, as well as in employment, where
the stock phrase, "No Irish Need Apply" faded away over time. All
housing segregation has not been spontaneous. As already noted,
Baltimore passed a housing segregation law in 1911. It was one of
a number of municipal governments to make racial segregation in
housing a policy in the twentieth century. The federal government

likewise promoted segregation. The Federal Housing Administra-
tion refused to make government-insured housing loans unless the
housing was racially segregated, on into the late 1940s. The fact
that the government later reversed this policy and began to place
blacks in neighborhoods that were previously all white does not
mean that government is necessarily for or against racial segrega-
tion. It all depends on the attitudes and the politics of the times.
Moreover, the economics of housing segregation differs from the
politics of it.
Where black ghettoes expand into previously all-white neighbor-
hoods through the operations of the marketplace, such expansion
has tended to be led by better-educated and higher-income indi-
viduals already living on the periphery of the ghetto. These are the
kinds of people likely to encounter less resistance than lower-in-
come, more poorly educated, and more violent people farther inside
the ghetto. But, where racial integration is promoted by govern-
ment, those blacks inserted into white communities via housing
projects or individually subsidized housing tend to be those with
lower incomes, poorer education, and higher crime rates.
Either kind of ghetto expansion can and has encountered resis-
tance. But the resistance to the government programs has tended
to be much more vehement. Nor can this resistance all be attrib-
uted to racism. Indeed, some black middle-class communities have
bitterly resisted the transplanting into their midst of the kind of
people they have sought to escape by moving out of the ghetto.


The economics of housing is very different from the politics of
housing. In the politics of housing, issues can be framed in terms
of the desirability of various goals, such as "affordable housing" or
"open space."The economics of housing can only make us aware of
The Economics of Housing

the costs of our goals”and that these costs are inescapable,
whether or not we acknowledge their existence or assess their
Politics offers attractive solutions but economics can offer only
trade-offs. For example, when laws are proposed to restrict the
height of apartment buildings in a community, politics presents
the issue in terms of whether we prefer tall buildings or buildings
of more modest height in our town. Economics asks what you are
prepared to trade off in order to keep the height of buildings be-
low some specified level. In places where land costs may equal or
exceed the cost of the apartment buildings themselves, the differ-
ence between allowing ten-story buildings to be built and allow-
ing a maximum of five stories may be that rents will be twice as
high in the shorter buildings. The question then is not simply
whether you prefer shorter buildings but how much do you prefer
shorter buildings and what price are you prepared to pay to man-
date height restrictions in your community. A doubling of rents
and three additional highway fatalities per year? A tripling of
rents and six additional highway fatalities per year?
Economics cannot answer such questions. It can only make you
aware of a need to ask them. Economics was christened "the dis-
mal science" because it dealt with inescapable constraints and
painful trade-offs, instead of the more pleasant and unbounded vi-
sions, and their accompanying rhetoric, which many find so at-
tractive. Moreover, economics follows the unfolding consequences
of decisions over time, not just what happens in stage one, which
may indeed seem to fulfill the hopes that inspired these decisions.
Nowhere are the consequences more long-lasting than in housing,
where a community can have an aging and shrinking supply of
apartment buildings, with accompanying housing shortages, for
decades, or even generations, after the rent control laws which
lead to such consequences.

The passage of time insulates many political decisions from pub-
lic awareness of their real consequences. Only a small fraction of
New Yorkers today are old enough to remember what the housing
situation was there before rent control laws were introduced during
World War II. Only a dwindling number of Californians are old
enough to remember when that state's housing prices were very
much like housing prices in the rest of the country, instead of be-
ing some multiple of what people pay elsewhere for a home or an
apartment. These and other consequences of particular political
decisions in the past are today just "facts of life" that new genera-
tions have grown up with as something as natural as the weather or
other circumstances of their existence.
The vast numbers of frustrated California motorists who endure
long commutes to and from work on congested highways are un-
likely to see any connection between their daily frustrations and
attractive-sounding policies about "open space" or "farmland
preservation." Nor are economists who point out that connection
likely to be as popular with them as politicians who are ready to of-
fer solutions to rescue these motorists from their current problems,
using the same kind of one-stage thinking that created these prob-
lems in the first place.
Chapter 5

Risky Business

The American Statistical Association offered
at their annual meeting a T-shirt bearing the
motto: "Uncertainty: One Thing You Can
Always Count on."

N othing is more certain than risk. The insurance business is
just one of the ways of dealing with risk. Having government
agencies come to the aid of disaster victims is another. Mutual aid
societies helped victims of social or natural disasters long before
there were government agencies charged with this task. Individu-
als have spread their own risks in various ways and families have
sought to safeguard their members for centuries”longer than any
other institution has taken on the task of cushioning people
against the inescapable risks of life.
Whatever social mechanisms are used to deal with risk seek to
do two crucial things: (1) reduce the magnitude of risk and (2)
transfer that risk to whoever can bear it at the lowest cost. Where
the transfer of risk is accompanied by a reduction of risk this
process makes it mutually beneficial for the person initially at risk
to pay someone else to share the risk or to carry the risk com-
pletely. This in turn means that society as a whole benefits from
having its risks minimized and the resources put aside for dealing


with them reduced, making those resources available for other
Merely providing information or assessments of risk is also a
valuable service, for which credit-rating services are paid, whether
these are companies like TRW that provide businesses with infor-
mation on the credit history of individual consumers, or companies
like Moody's or Standard &, Poor's which rate the relative risks of
bonds issued by businesses themselves, states, or nations, so that
investors can be guided accordingly.
When trade associations of insurance companies test automo-
biles for safety in crash tests, that likewise creates benefits for the
companies in these associations, by allowing them to determine
how much to charge to insure different vehicles, and it also assists
consumers in making choices of which kinds, makes, and models
of vehicles to buy. Consumer choices in turn influence automobile
manufacturers as to what kinds of safety provisions to add to their
cars, in order to compete successfully, leading cars in general to be-
come safer over time.
To some extent, reducing risk through insurance may cause peo-
ple to take more risks. Just as lower prices for other things usually
cause more to be demanded, so lowering the costs of given risks
enables people to take on additional risks. Distinguished econo-
mist Joseph Schumpeter pointed out that cars travel faster because
they have brakes.
If you were driving a car without brakes, or with brakes that you
knew to be completely ineffective, it would be foolhardy to drive
faster than 10 or 15 miles per hour. At a sufficiently slow speed on
a sufficiently uncrowded road, you might be able to depend on
simply taking your foot off the gas and letting the car coast to a
stop. But, when you have well-functioning brakes as a risk-reduc-
ing device, you may well drive 60 miles an hour on a crowded
highway. Thus brakes reduce the dangers in a given situation but
Risky Business 131

also encourage people to drive in more dangerous situations than
they would otherwise. This does not mean that safety devices are
futile. It means that the benefits of such devices include benefits
over and beyond any benefits from net reductions of risk. For ex-
ample, because cars are able to travel at higher speeds, more exten-
sive travel for business or pleasure becomes feasible.
Similarly, when you have automobile insurance, you may drive
over to visit an old friend or family member who lives in a high
crime neighborhood, where you might not risk parking your car if
it were not insured, for fear of theft or vandalism. While you
would still not want to have your car stolen or damaged, the
chance of that happening may become an affordable risk when car
insurance covers that possibility. Whether on net balance one lives
a less risky life as a result of insurance is not always certain. But,
even if there is no net reduction in risk, there may be other bene-
fits resulting from the insurance. In addition to visiting places
where the risk would be too great otherwise, one may live up in
the hills in a home with a spectacular view, even if that home is
somewhat more at risk of fire because it is surrounded by trees and
is on a narrow winding road that would impede a fire truck from
reaching the home in an emergency as quickly as it could down in
the flatlands.
In addition to insurance companies which charge for the service
of carrying other people's risks, there are businesses which incor-
porate charges for risk in the prices they charge for other goods
and services. Indeed, all businesses must include some charge for
risk in their prices, though this is usually noticeable only in busi-
nesses which charge more than usual for the same goods that are
available more cheaply elsewhere because local risks are higher
than in other neighborhoods. Moreover, some risks are in effect
paid for not in money, but by a reduction in the number of busi-
nesses willing to locate in less desirable neighborhoods, or in

countries where debts are hard to collect or where crime, vandal-
ism, and terrorist activity reduce personal safety.
In some low-income neighborhoods with a history of riots, van-
dalism, and shoplifting, the local inhabitants”most of whom may
well be honest and decent people”pay the costs created by those
among them who are not by having lower quantities and qualities
of goods and services available to them locally, and at higher
prices. Many of these local inhabitants may be forced to go else-
where for shopping or to get their paychecks cashed. For example,
a study in Oakland, California, found:

Less than half (46 percent) of Oakland's low-income consumers
surveyed said that they did their banking in their neighborhoods.
However, 71 percent of middle-income area respondents said that
they did their banking in their own neighborhoods.

The same study found that it was six times as common among
Oakland's low-income residents as among its middle-income resi-
dents to use checking-cashing centers instead of banks. With
shopping as well, low-income consumers have often found them-


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