In a recent article published in the online edition of Fortune, White House senior economist, Jared Bernstein, offers his take on the US housing crisis.

According to  Bernstein, the US housing market has a ROI problem, stemming from the inability of developers to make good returns on their investment if they were to build affordable units. In other words, the supply problem that many officials lament about is nothing more than a market failure that needs to be corrected by public intervention. Bernstein recommends that government picks up some of cost that are holding back the developers in order to incentivize more construction.

While the  diagnosis is accurate, Bernstein proposed remedy is flawed.  The underlying assumption that building more units would automatically drive down market prices does not rest on facts. Evidence drawn from the UK and Canada’s hot housing markets suggests that adding more units does not necessarily lead to a downward shift in prices. Instead, it causes a “home rush” as more buyers, especially corporate and affluent foreign buyers in search of investment opportunities to step in.

There is however a solution, an old and time tested remedy with the potential to fix housing without actually requiring government subsidy: the land value tax or LVT as proposed by Gilded Age economist and social reformer, Henry George in his best seller, Progress and Poverty.

LVT is a plausible solution because it addresses the problem of supply at no additional cost to the taxpayer. It also deals with the cost problem by targeting land prices which is a key element of the cost structure that developers are faced with when engaging in new development. Moreover, with a land value tax in place, not only land speculation is minimized and land prices lowered, foreign buyers in search of easy opportunities in the US housing market are also discouraged. Housing would cease to be the investment vehicle for wealth extraction that it has become and regain its original function as a shelter.