By David M. Fields, (a complement to my last post here)
Economic growth and affordable housing are two important areas that have been analyzed extensively by policymakers. Considerable debate centers on the advantages and disadvantages of both, assuming, oftentimes, that they are incompatible and mutually exclusive. For a certain degree of resolution to the impasse, we examine the extent to which the provision of affordable housing is a catalyst for economic growth. Since income is a key determinant of housing affordability, let’s abstractly examine the extent to which to which affordable housing increases income. Let,
I (Total Private Investment) = f(Y),
where Y equals total output, which is total income from the effects of autonomous expenditures that are generated from the effects of increased earnings as a result of decreased housing cost burdens. Aggregate effective demand determines levels of employment. The expectations of future demand on behalf of producers are such we can derive a steady-state equilibrium level of employment by the following equation,
Y = φZ,
where φ is the multiplier, and Z is the level of autonomous expenditures in the economy. The decisive effect of a permanent increase in the demand for a good is an increase of the productive capacity through investment in fixed capital, which in turn fosters an increase in more employment due to demand for said assets.
We can write,
Y = W + Π,
where Y is total income (output), W is gross wages, and Π is gross profits; total income Y (output) is the sum of gross wages and gross profits in the economy. Increased aggregate demand not only leads into increases in employment, but, with increases in consumption due to increases employment, allowing for wages to rise with productivity, gross profits aggrandize. If expected future earnings are met by effective demand and surpassed by production, profits are directed towards more investment, and hence increased employment, which, in turn, fosters more investment. As such, allocating public investments towards housing affordability is a socially responsible fiscal policy initiative that ensues positive gains in the long-run.