Successful Business Models Do Not Require Subsidies

The U.S. government frequently attempts to modify investment and business creation in support of policies that are not profitable. They do this through subsidies – either direct cash or tax savings. The wind turbine shown above – used to create electricity from the wind – are just one of the products or industries that the government has created through artificial subsidies. So what’s wrong with this behavior?

Why subsidies are not a solution but actually a long-term disaster

Subsidies influence behavior by both businesses and consumers. As they shape the economy, they can also lead to effectively building a foundation on sand, as the subsidy can ultimately be ended by political forces and the market then collapses. If the government gives back $500 to the consumer on the purchase of a $600 widget, they will create a market, but what happens when the $500 subsidy ends and nobody wants to buy the widget anymore?

Some failed examples from the past

Failed subsidies abound in the U.S. Two famous failures were the ethanol subsidies that promoted the use of corn for gasoline in cars. The subsidy was as high as $1,10 per gallon paid by the U.S. taxpayer which, when later reduced, made the entire concept a failure. This subsidy hurt many parts of the U.S. economy, even causing corn prices to surge since many farmers put their corn into the ethanol program. Another disaster was the 2009 “Cash for Clunkers” program in which the government gave a $4,500 subsidy to the car dealer for any old car that was turned in as a down payment on a new car. The goal was to spur new car sales, but it really just created more debt for consumers with little impact on the economy.

Some failed examples from the present

Current subsidies in the alternative energy sector have similar questionable results, namely the credits and cash gifts for the use of wind and solar power. When you take the subsidies away, these items are marginally self-supporting and sometimes require energy to build than they actually save. Once again the government has diverted demand with free gifts without any plan for this to go on in perpetuity.

The only non-subsidized form of affordable housing are mobile home parks. Period

Which brings us to the topic of affordable housing. The apartment industry is what most Americans think of as the solution to the affordable housing crisis due to their involvement in the Section 8 program. However, most taxpayers would be shocked to know that they are anything but a solution. Apartment rents far outstrip the customer’s budgets, and the differential is paid by the government through the Section 8 program. The only form of non-subsidized affordable housing in the U.S. is the mobile home park industry. Period. There is no #2 provider.

Why Section 8 cannot get the job done

The Housing Act of 1937 – where Section 8 originated from – has grown exponentially since inception. There are 1.2 million households in the Section 8 program (with another 4 million households on other forms of subsidy under HUD). Section 8 has a waiting list of millions of Americans who need affordable housing but Section 8 has no money in their budget for new additions to the rolls. It’s a program that no chance of ever being self-sufficient. Every time an apartment builder claims that they have created new affordable housing, it’s a complete lie. It’s just more subsidies for the American taxpayer to cough up. There were some interesting moments in the Congressional discussions on affordable housing a few years ago. I remember that one Congressman asked HUD what would happen if the Section 8 program tried to reduce their subsidies and was told “they’d just convert the apartments into better paying customers”, effectively killing the government’s ability to even negotiate a reduction in cost.

The lack of acknowledgement of this simple issue is disturbing

Nothing angers many park owners more than the simple lack of transparency by the media and government regarding the unique role that mobile home parks play as the only non-subsidized form of affordable housing in the U.S. We are the only solution for millions of Americans yet we receive no recognition at all on this point. When was the last time you saw an article on mobile home parks as the savior to those who want a nice place to live at a low, low price? That’s right, never. And that should strike anyone as extremely unfair.

Conclusion

Subsidies are not a solution to anything other than to influence consumer and business behavior. They don’t solve problems unless a product or service can stand on its own two feet. They often create more harm than they do good. And it’s about time that our industry received the recognition that it deserves as the only non-subsidized form of affordable housing in the U.S.

Frank Rolfe has been an investor in mobile home parks for almost 30 years, and has owned and operated hundreds of mobile home parks during that time. He is currently ranked, with his partner Dave Reynolds, as the 5th largest mobile home park owner in the U.S., with around 20,000 lots spread out over 25 states. Along the way, Frank began writing about the industry, and his books, coupled with those of his partner Dave Reynolds, evolved into a course and boot camp on mobile home park investing that has become the leader in this niche of commercial real estate.