October 29, 2015 9:01AM

Markets and Social Justice in Housing and Education

For decades, discriminatory housing policies in the U.S. restricted the ability of black citizens to purchase homes outside of predominantly black ghettos. From the 1950s through the 1970s, real estate speculators called "blockbusters" made some progress opening up white-only neighborhoods to black families until an odd coalition of segregationists and left-wing activists succeeded in regulating blockbusters out of existence. Tragically, the U.S. housing market has remained largely segregated even until today. Moreover, because a family's access to a quality education is determined primarily by the location of their home, black children are disproportionately assigned to low-performing district schools, depriving them of opportunity. 

Sadly, misguided suspicions about the market led left-wing leaders to support paternalistic regulations that harmed the very people they intended to help -- a disastrous mistake that many modern progressives are now repeating in education policy.

In a recently updated version of his 1998 paper, "A Requiem for Blockbusting," Dmitri Mehlhorn of the Progressive Policy Institute details the sordid history of discriminatory housing policy in the U.S. When Southern agricultural jobs dried up in the early 20th century, black workers began migrating to the industrial North. The response was ugly:

White Americans mostly reacted to this migration with coordinated and violent hatred. Driven by xenophobia, they used physical, political, and economic power to drive blacks into strictly circumscribed ghettos. The ugliness was a team sport, including local governments, state and federal agencies, courts, businesses, and the media.

At the federal level, the Federal Housing Administration encouraged racial covenants, stating that they “provide the surest protection against undesirable encroachment and inharmonious use.” These covenants contractually prohibited homes from being resold to black families. By the 1940s, integrated neighborhoods had ceased to exist in every major city in the United States.

The U.S. Supreme Court eventually ruled against racial covenants in housing, but racists found workarounds. As Mehlhorn details:

For instance, both federal and local agencies encouraged white flight by steering resources to whites seeking segregated suburban houses and schools, while cutting those resources for black families. So-called “urban renewal” laws were used to raze expanding black neighborhoods that threatened white institutions. Federal funds were used to construct massive public housing projects for the displaced black residents.

We are still feeling the effects of these discriminatory policies today, particularly in education, which is intimately linked with housing policy. According to a 2012 study by the UCLA Civil Rights Project, "80% of Latino students and 74% of black students attend majority nonwhite schools (50-100% minority), and 43% of Latinos and 38% of blacks attend intensely segregated schools (those with only 0-10% of whites students) across the nation."

In the 1950s, "blockbusters" began selling homes in white areas to black families in violation of industry norms because they could charge blacks significantly higher prices. As Mehlhon details:

From the 1950s onward, for roughly two decades, blockbusters bought low, sold high, and moved housing supply from whites to blacks at an accelerating pace. By 1962, when blockbusting had been in existence for barely a decade, Chicago alone had over 100 operators. For a time, blockbusters around the country were on pace to destroy the price differential between white and black housing markets, making housing much more widely available for African Americans.

But make no mistake, these men were hated.

It's easy to understand why segregationist whites hated the blockbusters, whom the segregationists accused of being race traitors perpetrating "communicide." The reason progressives joined with the segregationists in supporting laws against blockbusting is more complicated. Progressives believed blockbusting entailed an "unconscionable exploitation of minority groups" for profit because blockbusters regularly charged blacks higher prices than whites. Congress responded by passing a series of regulations restricting blockbusting and in 1969, a federal court ruled that any black homebuyer could invalidate his property and finance contracts if he could demonstrate "that he was charged more than a white person would have been charged or that he received less favorable terms and conditions than would have been given to a white person." On its face, that seems sensible. But practically, as Mehlhorn shows, these regulations and rulings preserved segregation:

Thus, by the early 1970s, any real estate agent who wished to sell a home to a black family faced enormous legal liabilities. If any clients alleged that their contractual terms were not identical to the terms a white family might have obtained, they would have an automatic cause of action in federal court to challenge the contracts. If a client asked about changing racial demographics, the agent would either have to decline to answer, or could be subjected to substantial civil and criminal penalties. Given the realities of the racially segregated markets of the time, the only safe way to avoid these lawsuits was to adhere to the prior professional code of racial steering: buy and sell homes only within a single race.

Blockbusters charged blacks higher prices but, as Mehlhorn explains, they also bore significantly higher risks and costs. "By dealing with blacks, blockbusters earned the social sanctions of the segregationist era, including boycotts, local government sanctions, and even death threats." At the time, "banks would not lend to blacks and whites would not sell to blacks" so, Mehlhorn concludes, "Without the profits available from blockbusting, the real estate and finance industries might not have been willing to alienate their racist white customer base by dealing with blacks, or at the very least might have slowed their activities. The profits available to blockbusters were the biggest driver of support for black homebuyers during this period." By eliminating those profits, well-intentioned activists eliminated blacks' only promising avenue to escape the ghetto and live in middle-income communities.

Given all of these problems, it seems astonishing that progressive elements of society supported the anti-blockbusting movement. The problem appears to be that progressives lacked economic savvy, and in fact were openly hostile to market mechanisms. This hostility blinded them to the needs of individual blacks and allowed them to accept destructive policies. [...]

The first way that blacks suffered from this bias by their leaders was at the individual level. Prior to anti-blockbusting laws, blacks had the choice of whether or not to patronize blockbusters. By the millions, blacks indicated that their preference was for blockbusting. The anti- market, anti-blockbusting progressives, however, refused to accept that choice as legitimate, and thus enacted laws that prevented blacks from acting upon these preferences. Perhaps some progressives genuinely felt that the decisions to patronize the blockbusters were the result of market distortions such as fraud. Others, however, refused even to accept the possibility that market mechanisms can empower individuals and reveal preferences.

Fear and misunderstanding about profit and market mechanisms also drives much of the modern left's opposition to school choice. Even more prevalent is the concern that by choosing a better education for their children, parents who accept vouchers or tax-credit scholarships or enroll their children in charter schools thereby deprive traditional district schools of funding. The left's solution, therefore, is to deprive families of that choice -- and those families are disproportionately low-income minorities. 

Take, for example, the case of Washington D.C.'s Opportunity Scholarship Program (OSP). Nearly all of the OSP voucher recipients are black or Hispanic and a gold-standard study of the program found that it increased high school graduation rates by 12 percentage points. As the study's lead researcher notes, this finding is important because "high school graduation is strongly associated with a large number of important life outcomes such as lifetime earnings, longevity, avoiding prison and out-of-wedlock births, and marital stability." Moreover, Congress intentionally funded the OSP separately from the district schools to shield them from any fiscal impact. Yet although 74 percent of D.C.'s mostly black residents support the OSP, all but two Democrats in Congress voted against the OSP's reauthorization last week.

D.C.'s non-voting member of Congress, Eleanor Holmes Norton, condemned the voucher program as Speaker John Boehner's "pet project" and argued that "D.C. residents, not unaccountable members of Congress, know best what our children need and how to govern our own affairs." However, by "our own affairs" Norton appears to be referring to government officials rather than individual residents and families. Norton's language betrays the progressive inclination to celebrate democratic decision-making while dismissing decisions made in a market, a tendency that Mehlhorn detected in the progressive opposition to blockbusting:

One court made this argument explicitly, holding that blacks should be forced to express their preferences through political, instead of market, mechanisms. According to this court, the availability of housing from blockbusters actually reduced the likelihood of true justice, “by offering the long-oppressed black an unattractive yet alternative choice to that of a confrontation for equal buyers’ rights in a white neighborhood.” The explicit articulation of the court’s anti-market bias allows us to explore its moral and empirical flaws. At face value, the court’s argument seems brutal. After all, the court appears to be agreeing that individual blacks would choose blockbusters over political confrontation. Nonetheless, the court refuses to allow them that option, preferring to force them to take political action. In addition to moral problems with overtly removing decision-making power from blacks, the court’s logic has little empirical grounding. The court fails to consider the speculative nature of the eventual political relief, or the costs that would be imposed by delay while blacks waited for political reform to take effect. Moreover, it is not clear how making blacks desperate would have enhanced their ability to influence the all-white power-brokers of city government.

One hears echoes of these arguments in the claims of some modern leftists that--using Albert O. Hirschman's lexicon--giving families an "exit option" (the ability to leave a school that isn't working for them) undermines their exercise of "voice" (advocating for change) within in a school. However, this is an empirically testable hypothesis and it has been tested repeatedly. Of 23 studies on the impact of competition on district schools, 22 found a modest but statistically significant positive impact on student outcomes and one found no detectable difference. None found harm.

Indeed, the ability to leave may well enhance the ability of and propensity for parents to advocate change within their schools. Hirschman himself later realized that “opening up of previously unavailable opportunities of choice or exit may generate feelings of empowerment in parents, who as a result may be more ready than before to participate in school affairs and to speak out.” When administrators who know that parents have other options, they are more likely to pay attention to their concerns. And when parents see that the administration takes their concerns seriously, they're more likely to speak up. Choice, therefore, benefits not only those who choose to leave it but also those who choose to stay.

Moreover, despite fears to the contrary, numerous studies have found that school choice improves integration. As Dr. Ben Scafidi details in a Friedman Foundation study released yesterday, school choice policies have a better track record of promoting integration than government efforts. Sadly, it is too often the case that "government restrictions on the choices of African Americans and of low-income families leads to a more segregated society."

The market is not the enemy of social justice. As Mehlhorn observes, "Markets allow an expression of preferences, including in some circumstances the preferences of society’s worst-off." The best way for policymakers to foster integration and remedy historical wrongs against minorities is to empower minorities to make decisions in their own best interests rather than to presumptuously make decisions for them. 

To learn more about the impact of housing policy on access to quality education, watch the recent Cato Institute event, "Race, Housing, and Education":