A Charming Tale of Political Nitwitery and Your Tax Dollar: Neighborhood Stabilization Program (NSP).

There are two distinct camps of thought regarding the US housing bubble: (a) the government induced bubble caused by decades of housing market intervention augmented by a cheap money bubble created by the Federal Reserve 2002-2004,  (b) greedy bankers. Regardless of which school of thought one subscribes to the US housing bubble resulted in a mortgage foreclosures crisis, resulting in an economic down turn, resulting in millions of lost jobs and consequentially millions of discouraged workers, with a lingering result of lost wealth in housing values.

Setting aside for a moment which school of thought one might subscribe to, congress set out to mitigate the effects of the now burst bubble and associated cascading consequences by introducing legislation known as the Housing and Economic Recovery Act (HERA). Within this particular legislation was a sub component known as the Neighborhood Stabilization Program (NSP).

The Neighborhood Stabilization Program was recently studied by The Federal Reserve of Richmond to find what stabilizing effects the program managed to produce. The title of the study is: Neighborhood Stabilization – Putting Policy into Practice. The results? One might want to pay particular attention to the following which is part of the study’s conclusion:

“….framing neighborhood stabilization as an emergency relief program posed special challenges for recipients. Despite its tight deadlines, NSP1 was also characterized by complex rules and policies, and for indirect recipients, an additional layer of bureaucracy that stymied quick progress. In addition, the pressure to obligate funds quickly seems to have forced recipients to choose the most efficient strategies from the five eligible uses and to change plans midprogram. As one local government official remarked during our visit, “We have been so focused on following the NSP1 grant rules and getting the program up and running that your visit was the first time we have thought about the broader context of stabilization”. (1)

In the report are cited five case studies, two in Ohio, one each in South Carolina, Virginia and Pennsylvania. From the report and the report’s conclusion one can easily see that the participants of the five case studies suffered from the standard deficiencies associated with federal bureaucratic top-down central planning and extremely complicated and time delaying regulations.

The Neighborhood Stabilization Program (NSP), the aim thereof, was to quickly stabilize a housing market suffering from unprecedented foreclosure rates. That is to say, the program is politically depicted as causing only positive externalities with no negative externalities associated. That politicos through the mechanism of government are quick to point to supposed market based negative externalities but government based programs are politically framed as only causing positive externalities. Stated alternatively:

“The point, rather, is to provide background for asking why the free-rider, collective-action, externality problems that are regularly identified as sufficient reason for restricting the role and scope of markets are so seldom identified as reasons for restricting the role and scope of government”.  -   Dr. Donald Boudreaux, department of economics George Mason University (2)

What was not part of the Federal Reserve of Richmond’s report is a report entitled Chronology: Neighborhood Stabilization Program, The Modesto Bee, 01/03/2012. One should take a moment and go to the link below and read the report. It’s a charming tale of general conflicts of interest, city councilmen and conflict-of-interest-rules, non-profits with individuals compensated in excess of $400,000, family members of the participants living in taxpayer renovated structures, exorbitant spending and extravagant purchases, shoddy workmanship, "egregious deficiencies", city bureaucrat resignations, the FBI, and HUD's Office of Inspector General. You’ll laugh, you’ll cry, you’ll kiss your tax dollars goodbye.

Chronology: Neighborhood Stabilization Program, The Modesto Bee, 01/03/2012.

http://www.modbee.com/2012/01/03/2010747/chronology-neighborhood-stabilization.html

Notes:

(1) Community Scope, vol2, Issue 2, 2011, Neighborhood Stabilization - Putting Policy into Practice

http://www.richmondfed.org/publications/community_development/community_scope/2011/pdf/vol02_issue02_full_issue.pdf

(2) An Asymmetry, http://cafehayek.com/2011/11/an-asymmetry.html

 

Restricting Size and Scope of Government Based on Externalities?

The following is a question put forth by Dr. Donald Boudreaux, department of economics George Mason University:

“The point, rather, is to provide background for asking why the free-rider, collective-action, externality problems that are regularly identified as sufficient reason for restricting the role and scope of markets are so seldom identified as reasons for restricting the role and scope of government”. (1)

A most excellent question.

If neighborhood effects aka externalities exist in the private sector, do they not exist in the government sector? In essence one is examining a subsection of : if markets fail, governments fail too.

One might observe the following: externality problems, in a market environment, are many times depicted without the counterpart of positive externalities. Stated alternatively, the proposition of externalities is only a negative sum with no countervailing positive sum.

The above depiction is not an economic position. The purposeful ommission to depict, expound upon, discuss and otherwise recognize the positive externality or summations of interacting positive externalities is a political proposition.

The afore mentioned market externality proposition framed as a political position creates an  incentive for the particular politico to depict government intervention as zero or positive externalities. Negative externalities are, extrodinarily, and purposely, not present. Hence, no cascading unintended consequences reflecting back upon market mechanisms.


Going back to the original question: “The point, rather, is to provide background for asking why the free-rider, collective-action, externality problems that are regularly identified as sufficient reason for restricting the role and scope of markets are so seldom identified as reasons for restricting the role and scope of government”.

The answer may exist in purposeful politics.


Notes:

(1)  An Asymmetry, http://cafehayek.com/2011/11/an-asymmetry.html