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SAM PELTZMAN, Housing in Latin America, Public and Private - Ralph Raico, New Individualist Review [1961]

Edition used:

New Individualist Review, editor-in-chief Ralph Raico, introduction by Milton Friedman (Indianapolis: Liberty Fund, 1981).

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Housing in Latin America, Public and Private1

SAM PELTZMAN*

ALAN CARNOY DEVELOPED a successful home building business in the suburbs of New York City in the post World War II building boom. Since much of his building experience was concentrated in low priced homes, why not, he reasoned, apply this experience to the construction of homes for the rising middle class in Latin America; American building techniques had theretofore been almost non-existent in that part of the world. Thus it was that Carnoy American Building Corp. became Carnoy de Mexico, S. A. However, Carnoy soon found that there was more to duplicating American building techniques in Latin America than mere change of venue. In the U. S. he had had the benefit of a highly developed mortgage market and a relatively tractable legal system, both essential to large scale home development. In Mexico the situation was drastically altered. There he found extensive government interference, red tape, and an overly complex and ambiguous legal system, all of which encouraged an almost universal government corruption. Needless to say, such an environment had hardly been conducive to the development of a smoothly functioning mortgage market either. This same pattern, Carnoy found, was general in all of Latin America. Thus, to this day his plan for bringing the advantages of low cost privately owned homes to Latin America has hardly been a rousing success, in spite of the fact that a potential market for such homes does exist in all of the larger cities of Latin America.

This rather rude awakening has greatly affected Carnoy’s policy proposals. He is deeply convinced that widespread home ownership in Latin America is both economically feasible and a potential antidote to the spread of communism there. Therefore, he argues, it is in our own cold war interest to encourage the spread of home ownership. The basic hurdles to be overcome are, as just mentioned, excessive government regulation with its attendant red tape, archaic laws and corruption, and the lack of a highly developed market for mortgages without which widespread home ownership is impossible. We can do very little to change the former, but, Carnoy claims, we can do something to change the latter. If only our foreign aid authorities undertook a small program to provide loans to private home builders in Latin America at going interest rates and guaranteed against default of principal, we will have gotten the ball rolling. Once one sizeable project has been so financed and its success demonstrated, the Latin American governments will be encouraged to modify their laws and so encourage the growth of local capital markets for home construction; widespread home ownership there will become a reality, and Latin America will be safe for democracy.

One might, with much justification I would think, dismiss this out of hand as mere special interest pleading for a subsidy. However, I would prefer to deal with the proposal on its own merits and argue that it is not likely to accomplish Carnoy’s objective. Certainly Carnoy knows better than I whether low cost private homes in Latin America are economically feasible or not, and neither will I quarrel with his premise, overly simple as it is, that widespread home ownership can be of assistance in the fight against communism. However, I am sure that Carnoy would agree that his objective can ultimately be realized only if the Latin American governments themselves remove the interferences, red tape and corruption which have heretofore retarded the growth of capitalist enterprise in home building as well as other industries. Indeed, Carnoy spends a good portion of his book chronicling the enormous potential and actual achievements of private enterprise in home construction (about which more below) and decrying the obstacles he found to private enterprise in Latin America. Yet, what would be an important result if his proposal became law? It would, even if initially successful, remove any incentive the Latin governments might have had to engage in needed reforms. The home builders, who might before have brought some pressure to bear on the local governments to relax restrictions on the free flow of capital, would now have that capital provided them on attractive terms from Washington. Why should they worry about the chaotic state of the local mortgage market? Indeed, given that this credit made home building easier and less costly, would not the government bureaucrats have an incentive to actually increase the red tape and so siphon off some of the norteamericano largesse in increased bribes? Of course, Carnoy sees this as only a small once-for-all project to “show the way.” However, who can really believe that, with both builders and local politicians benefiting, it will remain so?2 Also, it must be considered that the proposal would make land expropriation on the part of the Latin governments much more attractive than at present. With Washington guaranteeing the principal of the loan, the builder would lose nothing and the government gain the monthly mortgage payments by expropriating the developments. The ultimate result of Carnoy’s proposal, it seems to me, can only be to encourage even more interference with the free flow of capital than now exists, and impose the costs thereof on the U. S. taxpayer.

IN CONTRAST TO the weaknesses of his major policy proposals, Carnoy is on far more substantial ground when he deals with the home building industry as he has known it. In fact, his chapter entitled, “Government Building vs. Private Building” is one of the best discussions of the subject I have ever seen. Here Carnoy employs his considerable knowledge of the economics of home building, public and private, North American and Latin American, and comes to one simple conclusion: “I do not see how [public housing] can ever be to the advantage of the majority of the people in any country.” He backs this conclusion up with numerous references to his own experience with the monumental inefficiency of public housing. Consider, for example, Carnoy’s experience with a public housing project in Westchester County, New York:

The (budgeted) cost of a 750 square foot (five room) apartment in this [public housing] project is $14,250. [I] can build an 800 square foot (5½ room) private home on a 50 × 100 foot lot for $9,000 (including the land . . . and I did.)3

Much the same story is outlined for Latin America. Yet, even given this fairly incredible waste of resources, what manner of product is it that the taxpayer is subsidizing? From the White Plains, New York project where a tenant confided to the author: “We all dream of getting out of here,” to the French housing project which won a prize for design but was full of tenants complaining of the shoddy construction, to the Middle Eastern project devoid of any tenants, complaining or otherwise, because it had been built in the middle of the desert far away from the necessary utilities, the answer is the same—too little for too much. The reasons for the superiority of private over public building are stated so simply and succinctly by Carnoy that they deserve repetition here:

1. Private enterprise does not cost the country anything. An independent builder invests his own money, and when he borrows from the bank, he has to pay his loan back. When people buy his houses or rent his apartments, they will pay for them . . .

2. Private enterprise has a powerful master—the public. If the prospective clients don’t like the location, they will not rent or buy. The prices are subject to public acceptance and competition, and this is the monumental factor in favor of the purchaser or the tenant.4

What then is the reason for the growth of public housing, inferior as it is? On this, Carnoy is quite blunt:

I think that the political power which a government gets through housing is probably its primary reason for going into the building business.5

Carnoy details how, for example, in Latin America, favored labor unions get government credit while these same governments restrict the availability of credit to private builders, how space in projects is distributed on the basis of favoritism and bribery, etc. Using public housing as a means to political power has also had some interesting side results. Carnoy tells of the Venezuelan government’s attempt to curry favor with the labor unions by building a public housing complex for them. This had the incidental effect of herding thousands of workers together in a central location where they could be effectively harangued en masse by left-wing agitators. The result was the Caracas riots of 1960.

In summary, the reader will find Democracia—Si! a curious mixture of noble sentiments far more difficult of attainment than the author realizes and well informed commentary on the realities of his own industry today, all embellished by a steady stream of anecdotes derived from a life far more varied than has even been indicated here. The book permits of no easy judgment, except that it recalls some of Adam Smith’s remarks on the advantages of specialization.

[1 ] A review of Democracia—Si! A Way to Win the Cold War by Alan Carnoy (New York: Vantage Press, 1962).

[* ] Sam Peltzman, a graduate of City College of New York, is now a Ford Foundation Fellow in the Department of Economics, University of Chicago. He has recently become business manager of New Individualist Review.

[2. ] One recalls in this context that our domestic farm price support program was initiated merely to tide the farmers over the depression of the 1930’s.

[3. ] Italics mine.

[4. ] Italics mine.

[5. ] To be sure, the desire for political power is not the only motive behind public housing. Another factor which Carnoy feels important is the collectivist mystique which is operative in the most well intentioned government planners: “Somehow, to a government official this word [housing] implies thousands of attached units rather than .. .. .. detached homes with gardens.”