Affordability and the Unintended Consequences of Government Action

Among the leading issues facing Connecticut voters this year is affordability. Housing, electricity, insurance, food and many other necessities have become increasingly expensive for Connecticut families.

Some government-related costs are relatively easy to see. Electric bills, for example as Ryan Fazio has identified, include a Public Benefits category that has been used to recover costs associated with state-mandated energy, assistance and other public-policy programs. Whether such programs are worthwhile is a legitimate subject for debate. But their costs—and how they are financed—should be transparent to the people who ultimately pay for them.

Other government actions present a more complicated affordability problem: policies intended to help consumers can sometimes produce unintended consequences that work in the opposite direction.

When Help Works Against Supply

Rent controls may reduce rents for existing tenants, but they can also discourage investment in rental housing and reduce the supply of available units over time. Price ceilings on goods such as gasoline can temporarily hold down posted prices, but if set below market levels they can discourage supply and create shortages. Higher minimum wages increase earnings for workers who retain their jobs, but depending upon their level and local economic conditions, they can also reduce employment opportunities for some lower-skilled and entry-level workers.

The point is not that government should never intervene. It is that good intentions alone do not guarantee good results.

Incentives, Not Intentions

Economics ultimately involves incentives. Raise the cost of producing something and, other things being equal, less of it is likely to be produced. Restrict the price someone can receive for providing something and fewer people may be willing to provide it. Subsidize something and demand for it will generally increase.

But perhaps the more important affordability issue is less visible. Government-imposed costs are often embedded throughout the economy—in taxes, fees, regulatory requirements, permitting delays, energy mandates and other compliance costs. Each may have a defensible purpose when considered individually. Taken together, however, they can increase the cost of building a home, operating a business, employing a worker or providing a service.

A Test for Every Affordability Proposal

That suggests a useful test for every proposal offered in the name of affordability: What happens next?

Who ultimately bears the cost? How will consumers, employers, landlords and investors respond? Will the policy increase supply or reduce it? And will it actually make Connecticut more affordable five years from now—not merely appear to do so today?

Government cannot repeal the laws of economics. Affordability policy should therefore be judged not simply by its intentions, but by its results.