I mentioned yesterday that I would post something serious. I am a liar, but I will anyway.
The French government maintains a public welfare program called “Allocation Etudiante.” Allocation is an excellent word (for those who receive it), because it has an excellent English connotation that the word welfare lacks. Le gouvernement français allocates particular benefits for students to support their housing costs through the program. The support comes in the form of a monthly payment whose amount is indexed to the individual student’s cost of rent, earnings, family situation, and housing condition.
This program sounds odd to me as an American (what doesn’t sound odd from the viewpoint of the Island of America?) because welfare benefits there typically do not directly cover housing-expenditures, but government support of housing stock can be generally seen in the form of things like Section 8 housing, mixed-tenancy agreements, and the bizarre, quasi-governmental authorities of Freddie Mac and Fannie May through the government’s implicit guarantee of their mortgage based lending. Lately, these programs have been criticized and the moral hazards Freddie and Fannie represent in their “too big/important” banners will come to nest in the pockets of future generations of Americans. Students loans, in that they confer sub-market interest rates to students by tapping the wealth of American taxpayers, also count indirectly because they offset payments normally reserved for tuition towards housing and other living expenses.
While these programs exist in America, their function is indirect. The French welfare system for students is direct. The allocation is referred to directly as CAF, the acronym for the government agency managing the payments.
Now for the first policy position I will take on the blog, besides my stated admiration for French driver welfare: CAF payments are unsound economic policy. As any good hypocrite, I will benefit from them as a student attending a French university. However, to mitigate my hypocrisy somewhat, I propose a way of viewing the CAF system in order to evaluate it. First, I will evaluate the system’s goals. Then, I will subject these goals to basic economic theory. Finally, so as to be not too contrarian, I will offer what I see as a better solution.
First, the CAF is a transfer of wealth from the old to the young. Precisely, the old, who are already educated, to the young, who are being educated. Because there is a positive correlation between level of education achieved and earning, this transfer of wealth is possible and, in theory, is warranted to spur future additional earnings of the younger generation. The CAF’s monthly payment attempts to compensate partially rent because students are less able to pay for housing than those that are older. In other words, the CAF is justified for lawmakers because young, non-educated people are less able to pay for rent than older, educated people.
This idea alone is difficult to dispute.
Second, the CAF provides that with additional funds, students should be able to access more housing stock because they can afford more housing stock with the monthly payment from the government. Both of these ideas support students in indirect ways as well: students can live closer because of increased, accessible supply of housing.
“Accessible” is key – overall supply is, of course, affected only building or demolishing housing. The CAF functions to supplement income that would have otherwise gone for rent by freeing up cash for buying books, paying for school, and eating (hey, we are in France; good food is required). In doing, students can choose more housing options because their budget curve has shifted rightwards.
However notable these two goals are, several difficulties emerge. But one argument needs to be set aside first: the argument of efficiency. I will disregard this argument not because it is wrong, but because it is not interesting. A transfer of wealth from one group to another, to be sure, involves paperwork, time, and most expensively, warm bodies. The overhead involved thus has a variable and fixed component, and is costly.
But the argument from efficiency is not interesting from the standpoint that simply because something is efficient does not confer on it moral quality, or draw a teleological arrow between its processes and the stated goal. For example, families are perhaps inefficient: the notorious process of deciding whose house we will use to celebrate Christmas this year, transporting the kids on vacation. But, we do not say that these processes, as inefficient as they are, somehow drain the family of value. We could more cheaply contract an event planner to organize our Christmas family dinner and gift opening time in a hotel conference hall. We could also more cheaply contract a Greyhound bus or Amtrack train (ok, probably not the Amtrack train) to get the kids from Memphis, TN to sunny Florida. However, both of these more efficient options using market solutions miss the point. They lack the intangible (though initially frustrating) processes involved in planning together, cleaning up together, and making five bathroom stops together on the way. In summary, simply being inefficient does not mean being without value.
Instead, the idea that the CAF is bad economic policy rest in the fact that the system distorts market process, and then commits the second, and arguably worse crime of advertising that the system helps students in the first place.
The average CAF for my apartment is €200 each month. For the year, this amounts to a USD 2600 transfer from old to young. As we have seen, it would be naive to conceive that individual renters and apartments owners would not take this significant sum of money into both rent budgeting and rent setting.
How does the CAF distort market processes in these two processes? The CAF has the effect of raising the price of units of housing supply. This is because landlords, just as students, factor in the housing benefit in the process of rent setting. Landlords can do so precisely because the CAF is easily calculable by third parties. Thus, full information exists to all parties. Landlords build the CAF function into their rent-setting models because it is rational to do so. Students calculate the CAF into their budgetary considerations, so why wouldn’t the landlord? If they did not, landlords would miss out on significant additional profits proportional to the CAF payment. Because renters are price takers, landlords set prices below equilibrium by not factoring in the CAF. Therefore, a landlord who does not factor it in prices inefficiently to his or her detriment. Underpriced housing as the additional effect of being over demanded, and flush with dreams of over one thousand additional euros per year on housing, students would demand both nicer and more accommodations that the apartment market could bear. In short, the rational landlord prices in CAF in rent setting.
An overlooked element of CAF now comes into play. I had discussed earlier the family not being judged on the basis of efficiency alone. In the national sense, a nation of those who share a common culture bear transfers of wealth in practice for the general benefit of that common culture. Each summer, tax dollars go to pay for cultural events that showcase regional dancing and cultural pride in Fetes de la Musique in cities all over France, including Grenoble. Perhaps for all of its economic fallacies, the CAF functions under this banner.
However, I am not a sharer of the French culture. My background is something different entirely, which is why I am an étranger no matter what I wear, what I blog about, and how much I try not to butcher the French language with my bouche américain. But more importantly, I have never shared the burdens (taxation) with French people to benefit now from the allocation. For me, the CAF payment represents a direct payment of USD2600 to a foreigner from the pockets of older French citizens. This is, in the most literal and economic sense, rent seeking.
I have now complained, so I must offer a solution. Rent seeking does not seem to be economically, or ethically, justifiable. What about tackling the supply side, then?
If rents are too high for students, as the CAF suggests they are, the supply of housing ought to be increased by those that provide housing. Perhaps a PILOT program, or reduced property taxes for students-only residences, would accomplish this effect. But, it must be student-only residences that receive such benefits. With diverse managements competing, more housing stock, and more wiggle room for margins, prices ought to decline towards a more palatable equilibrium. At least an equilibrium that considers previously unseen consequences and does not allow clueless foreigners to benefit from the French state unduly, and more importantly, unjustly.
The French government maintains a public welfare program called “Allocation Etudiante.” Allocation is an excellent word (for those who receive it), because it has an excellent English connotation that the word welfare lacks. Le gouvernement français allocates particular benefits for students to support their housing costs through the program. The support comes in the form of a monthly payment whose amount is indexed to the individual student’s cost of rent, earnings, family situation, and housing condition.
This program sounds odd to me as an American (what doesn’t sound odd from the viewpoint of the Island of America?) because welfare benefits there typically do not directly cover housing-expenditures, but government support of housing stock can be generally seen in the form of things like Section 8 housing, mixed-tenancy agreements, and the bizarre, quasi-governmental authorities of Freddie Mac and Fannie May through the government’s implicit guarantee of their mortgage based lending. Lately, these programs have been criticized and the moral hazards Freddie and Fannie represent in their “too big/important” banners will come to nest in the pockets of future generations of Americans. Students loans, in that they confer sub-market interest rates to students by tapping the wealth of American taxpayers, also count indirectly because they offset payments normally reserved for tuition towards housing and other living expenses.While these programs exist in America, their function is indirect. The French welfare system for students is direct. The allocation is referred to directly as CAF, the acronym for the government agency managing the payments.
Now for the first policy position I will take on the blog, besides my stated admiration for French driver welfare: CAF payments are unsound economic policy. As any good hypocrite, I will benefit from them as a student attending a French university. However, to mitigate my hypocrisy somewhat, I propose a way of viewing the CAF system in order to evaluate it. First, I will evaluate the system’s goals. Then, I will subject these goals to basic economic theory. Finally, so as to be not too contrarian, I will offer what I see as a better solution.
First, the CAF is a transfer of wealth from the old to the young. Precisely, the old, who are already educated, to the young, who are being educated. Because there is a positive correlation between level of education achieved and earning, this transfer of wealth is possible and, in theory, is warranted to spur future additional earnings of the younger generation. The CAF’s monthly payment attempts to compensate partially rent because students are less able to pay for housing than those that are older. In other words, the CAF is justified for lawmakers because young, non-educated people are less able to pay for rent than older, educated people.
This idea alone is difficult to dispute.
Second, the CAF provides that with additional funds, students should be able to access more housing stock because they can afford more housing stock with the monthly payment from the government. Both of these ideas support students in indirect ways as well: students can live closer because of increased, accessible supply of housing.
“Accessible” is key – overall supply is, of course, affected only building or demolishing housing. The CAF functions to supplement income that would have otherwise gone for rent by freeing up cash for buying books, paying for school, and eating (hey, we are in France; good food is required). In doing, students can choose more housing options because their budget curve has shifted rightwards.
However notable these two goals are, several difficulties emerge. But one argument needs to be set aside first: the argument of efficiency. I will disregard this argument not because it is wrong, but because it is not interesting. A transfer of wealth from one group to another, to be sure, involves paperwork, time, and most expensively, warm bodies. The overhead involved thus has a variable and fixed component, and is costly.
But the argument from efficiency is not interesting from the standpoint that simply because something is efficient does not confer on it moral quality, or draw a teleological arrow between its processes and the stated goal. For example, families are perhaps inefficient: the notorious process of deciding whose house we will use to celebrate Christmas this year, transporting the kids on vacation. But, we do not say that these processes, as inefficient as they are, somehow drain the family of value. We could more cheaply contract an event planner to organize our Christmas family dinner and gift opening time in a hotel conference hall. We could also more cheaply contract a Greyhound bus or Amtrack train (ok, probably not the Amtrack train) to get the kids from Memphis, TN to sunny Florida. However, both of these more efficient options using market solutions miss the point. They lack the intangible (though initially frustrating) processes involved in planning together, cleaning up together, and making five bathroom stops together on the way. In summary, simply being inefficient does not mean being without value.
Instead, the idea that the CAF is bad economic policy rest in the fact that the system distorts market process, and then commits the second, and arguably worse crime of advertising that the system helps students in the first place.
The average CAF for my apartment is €200 each month. For the year, this amounts to a USD 2600 transfer from old to young. As we have seen, it would be naive to conceive that individual renters and apartments owners would not take this significant sum of money into both rent budgeting and rent setting.
How does the CAF distort market processes in these two processes? The CAF has the effect of raising the price of units of housing supply. This is because landlords, just as students, factor in the housing benefit in the process of rent setting. Landlords can do so precisely because the CAF is easily calculable by third parties. Thus, full information exists to all parties. Landlords build the CAF function into their rent-setting models because it is rational to do so. Students calculate the CAF into their budgetary considerations, so why wouldn’t the landlord? If they did not, landlords would miss out on significant additional profits proportional to the CAF payment. Because renters are price takers, landlords set prices below equilibrium by not factoring in the CAF. Therefore, a landlord who does not factor it in prices inefficiently to his or her detriment. Underpriced housing as the additional effect of being over demanded, and flush with dreams of over one thousand additional euros per year on housing, students would demand both nicer and more accommodations that the apartment market could bear. In short, the rational landlord prices in CAF in rent setting.
An overlooked element of CAF now comes into play. I had discussed earlier the family not being judged on the basis of efficiency alone. In the national sense, a nation of those who share a common culture bear transfers of wealth in practice for the general benefit of that common culture. Each summer, tax dollars go to pay for cultural events that showcase regional dancing and cultural pride in Fetes de la Musique in cities all over France, including Grenoble. Perhaps for all of its economic fallacies, the CAF functions under this banner.
However, I am not a sharer of the French culture. My background is something different entirely, which is why I am an étranger no matter what I wear, what I blog about, and how much I try not to butcher the French language with my bouche américain. But more importantly, I have never shared the burdens (taxation) with French people to benefit now from the allocation. For me, the CAF payment represents a direct payment of USD2600 to a foreigner from the pockets of older French citizens. This is, in the most literal and economic sense, rent seeking.
I have now complained, so I must offer a solution. Rent seeking does not seem to be economically, or ethically, justifiable. What about tackling the supply side, then?
If rents are too high for students, as the CAF suggests they are, the supply of housing ought to be increased by those that provide housing. Perhaps a PILOT program, or reduced property taxes for students-only residences, would accomplish this effect. But, it must be student-only residences that receive such benefits. With diverse managements competing, more housing stock, and more wiggle room for margins, prices ought to decline towards a more palatable equilibrium. At least an equilibrium that considers previously unseen consequences and does not allow clueless foreigners to benefit from the French state unduly, and more importantly, unjustly.
3 comments:
i like cheese
Your insightful comment clarifies many of the questions I have raised in this post regarding gastronomic issues. In short, a warm thank you to you, sir.
Andy, this makes me laugh man. Just be content that they French are willing to give you their money even though you have not suffisament cotisé.
Chris W.
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