People value only what they pay for

December 6, 2005 | Essential posts, Markets, Pay, Policy, Subsidy

Essential to any understanding of affordable housing is the Payment Principle:

 

People value only what they pay for

 

Paying for an object (be it product or service) is an action that requires a choice based on conscious decision.  You reach into your wallet and hand over money in exchange for something else.  Choice and decision mean you have formed an affirmative belief in the object’s value to you.

 

Dollar_bills

Everybody knows what money is worth

 

Conversely, if you don’t pay for something — if I present it to you on a silver platter,

 

Butler_serving_drinks_lg_wht

 

who knows how much you value it?  Or whether you value it at all?

 

Payment

 

Payment means exchanging a thing of value because it is scarce.  Payment comes in many forms:

 

·         Money.  Only if its expenditure makes a different in the payor’s lifestyle.  A payment by Bill Gates is meaningless.

·         Time.  It means more to the busy than to the idle.

·         Effort.  Sweat equity is more than a metaphor.

·         Opportunity cost.  Foregoing alternatives, and the more foregone, the more the commitment.

·         Reputation.  Especially if it is public, and pristine.

·         Risk.  Of losing something value (any of the foregoing).

 

All forms of payment represent a pre-benefit commitment by the payor.  That’s the essential quality.  Payment is more meaningful when it cannot be rescinded — that is, when the delivery of value is irreversible even if the receipt is unsatisfactory.

 

Time_is_money

As Einstein demonstrated, time equals money

 

So universal is this rule that it applies at levels micro and macro:

 

  1. Consumers and benefits.  Any benefit you receive as-of-right, for zero or nominal cost, you come over time to see as a birthright and you lose any sense of its cost to produce.  This problem currently bedevils the health-care industry.

Jeeves_and_wooster

“I have no idea what that dog cost.”

  1. Families and affordable housing subsidies.  If a household — however deserving! — is awarded market-quality affordable housing in exchange for a means-tested resident contribution independent of price, the customer tends to have minimal motivation to care for the property.
  2. Communities and affordable housing.  If a local property is funded by a larger body (e.g. property-based Section 8 new construction), the community takes it for granted.  Only when that same community has to build new housing (even indirectly, via inclusionary zoning) does it suddenly wake up in shock that new properties cost so much!
  3. Governments and affordable housing.   Because of the cost-value gap, affordable housing always costs money.  Sophisticated cash flow schedules can obscure this (if used for Evil Rather Than For Good), and smart structuring can improve efficiency, but in the end, if government is unwilling to pay for sustainable affordable housing, government gets something else: not affordable, or not sustainable.

 

Computer_1946_avidac

“What’s the net present value of 2+2?”

  1. Politicians and policy advisors.  To enact a law takes political capital.  To announce a proposed scheme costs nothing, and to commission a blue-ribbon panel to study an issue even less.  The less political capital a politician spends on an initiative, the less he values it, and if he spends none, a bucket of warm words is worthless.

 

The Payment Principle leads to several program-design corollaries:

 

  1. To make people pay attention, charge them admission.  Free concerts usually fetch smaller audiences.
  2. To make beneficiaries care about their benefits, make them pay a portion related to the cost, not to their ability to pay.
  3. To get the most juice out of a government program, make sponsors compete for the resources.
  4. If you are a consultant, before you put your credibility on the line for a client, make the client take a decisive and costly step.  Otherwise you may be the best kind of vaporware — unwitting. 
  5. To get a government committed to a program, make its leadership spend political capital.

 

Latour_payment_of_dues

“Have you paid your dues?”

 

Just remember, you get what you pay for.