The Homelessness Crisis and the Money Trail#

America’s got a big problem right now: record numbers of folks are ending up on the streets, especially in certain big cities. It’s a crisis, plain and simple.

Now, cities are trying to fix this, throwing billions of dollars at projects. The thing is, many of these projects aren’t really working.

This whole situation has attracted a bunch of companies who are more than happy to step in and offer their “services” – for a price, of course. Helping the homeless has actually become a lucrative business, with government contracts worth multi-million dollars being given out all the time.

This brings up a big question: if there’s so much money to be made, do these companies really want a permanent fix?

Let’s look at some examples of how this money is being spent:

• Austin’s new homeless shelter cost a ton.
• Hundreds of homeless families across one state are being put up in hotels because there’s no space in the regular emergency shelters.
• In one case, 49 apartments built for the homeless cost a crazy $739,000 per unit.

A report by the consulting firm McKenzie & Co. looked at the money situation in Los Angeles.

• The annual budget for the Los Angeles Homeless Services Authority (LAHSA) shot up from $63 million in 2015** to **$808 million in 2022.
• That’s a massive 1300% increase in just 7 years!

So, what did the folks paying taxes in Los Angeles get for all that money?

• The number of homeless people there actually went up by 56%.

Now, setting aside that everyone deserves a safe, affordable place to live, something just doesn’t add up here, right?

Let’s dig a bit deeper into specific programs.

Inside Look: The “Inside Safe” Policy#

Take the Inside Safe homelessness reduction policy in LA.

• The idea was that social workers would offer homeless individuals hotel rooms while they looked for long-term housing.
• Data gathered by the City and reported by local news outlet The Center Square found that this plan cost $250 million in just one year.
• The program only managed to serve 1,463 individuals.
• If you do the math, that works out to $17,700 per individual per month.
• That’s over $200,000 every year spent on one person in one program in one city in America.

So, where in the world is all this money going? And honestly, at what point would it just be simpler and cheaper to give homeless people checks for three times the national salary?

Well, there are a few main reasons why cities are spending way more money than ever on this problem but aren’t making it any better.

Reason 1: The Broken Structure#

Trying to fix a really tough problem with a broken structure.

There’s an old saying, Handlon’s Razor, that suggests you shouldn’t assume bad intentions when simple mistakes or poor systems can explain things just as well.

With so much taxpayer money funding programs that don’t seem to work, you might immediately think of evil corporations just getting rich off people’s suffering. But honestly, that’s usually not the biggest part of the problem.

• Most people actually working in homeless relief efforts are making below-average incomes and are genuinely trying to help. Most of them, not all, but we’ll get to that later.

The real issue, often called the “homeless industrial complex,” is more of a combination of:

• Bad management structures
• Bad incentives
• Bad market conditions

Let’s look at journalist and public auditor Tim Campbell, who wrote about the organizations involved and their failures.

The Los Angeles Homeless Services Authority (LAHSA) is a key player.

• It’s a joint powers authority that gets funding from federal, state, county, and city money.
• But LAHSA itself doesn’t actually do any of the direct work.
• According to their own website, LAHSA provides:
  • Funding
  • Program design
  • Outcomes assessment
  • Technical assistance
• They provide these to more than 100 nonprofit partner agencies that help people experiencing homelessness.

So, LAHSA acts as a middleman. They get the money and give it to over 100 different nonprofits. These nonprofits are supposed to do things like get people into hotel rooms and then assess how well the project worked after it’s done.

With so many different organizations all doing separate things, it’s really, really hard to keep proper tabs on everything.

Look at LAHSA’s own costs:

• In the 2022-2023 fiscal year, just over $40 million of their total money was spent on administration.
• This organization, which runs very few programs directly, has over 750 employees.
• These employees are mainly focused on talking to and managing their nonprofit partners.
• They are overseen by highly paid executives, including the CEO, Valecia Adams Kellum.
• Her base salary is $430,000 per year, according to public records.

Now, paying competitive salaries is important for any organization to attract good people, especially one with such big problems. You don’t want bad results because you paid too little. However, according to sites like Salary Cube and the Bureau of Labor Statistics, this CEO salary is roughly double what the average CEO makes for organizations of this size in the private sector.

But even that high salary isn’t the biggest problem.

Most of the money goes out to those nonprofit partners. But because each one is often contracted for a very specific, small job across many different programs, the actual work gets totally stuck in endless:

• Siloing of responsibilities (meaning different groups don’t coordinate)
• Overhead costs for each individual organization

Tim Campbell’s article mentions an example where:

• One agency does the initial outreach.
• Another runs the shelter.
• A third provides support services.
• A fourth builds the housing.
• And a fifth manages the housing once it’s built.

Even though these are nonprofits, they all want to protect their specific role so their employees keep their jobs. This often leads to turf wars over whose job something is.

Plus, they don’t talk directly to each other! All their reporting and communication has to go back through LAHSA.

Something as seemingly simple as booking a hotel room for someone for the night involved:

• 10 nonprofit organizations
• The police
• Hotel staff
• An oversight team at LAHSA

This kind of setup makes it almost impossible for LAHSA to really judge how well a program is working because everything gets lost in endless “that wasn’t my job!” excuses between all the separate nonprofits.

And just when you think it couldn’t get worse, LAHSA isn’t even the only main authority dealing with homelessness just within Los Angeles.

Within this single city, different homeless issues are handled by:

• LAHSA
• The Chief of Housing and Homeless Solutions
• County homeless Services
• The California Department of Housing and Community Development
• The federal Interagency Council of Homelessness
• And don’t forget the federal, state, city, and local police departments.

Every single one of these agencies has its own overhead: offices, administration staff, etc. All that money gets pulled away from actually fixing the problem itself.

And that’s before you even get to the people who are purposefully using this mess to make money.

How Money Works Break#

To really understand why throwing money at complicated problems doesn’t fix them, we need to look at how money moves in this system.

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Okay, back to the homelessness issue.

Outreach staff who work in dangerous areas, often volunteering or for very little pay, aren’t part of some secret group trying to get rich. But, as we said, there are other players.

A major problem caused by having so many separate departments handling services is that people receiving help can actually pick and choose which parts they want and which they don’t.

The individual organizations within this huge mix of private companies and government groups don’t really have a way to stop people from being selective. And according to several people who work inside the system, the organizations actually encourage it.

Kevin Dolen is a former social services worker who has written about his time working at a Housing First center in Portland, Oregon.

• Housing First was a federal idea to solve homelessness by giving people homes first and foremost.
• Other services, like help for addiction, mental health support, or job training, were handled separately.
• Crucially, government treatment programs can’t be forced on people unless they are in an institution, which most agree would make things worse.

According to Dolen and other service workers, the result of this program was that buildings meant for homeless housing often didn’t actually get people off the streets for good. Instead, they just became places that concentrated all the problems that led people to become homeless in the first place.

If you ever needed proof that this is a really complicated situation, you should know that Kevin Dolen, who has pushed hard for changes in support services, was recently arrested. He faces charges of allegedly using the identity information of disadvantaged people he used to work with. He says he’s not guilty, and the case is still going on.

But putting that aside for a moment, the actual data seems to support his point about the programs themselves.

• Across the country, more people take the housing part of these programs than the support services part.
• A study by the University of Chicago on permanent housing solutions found that many homeless people actually avoid services because they see them as being more dangerous than staying on the street.

Advocacy groups say that the idea of housing centers being dangerous is wrong and harmful. But if they really were safe places, then it becomes even harder to explain why spending so much money results in so few people getting back on their feet.

Jason Elliott, a senior advisor on homelessness to California Governor Gavin Newsom, defended the state spending $17.5 billion on the issue in an interview with CNN.

• To put that number in perspective, $17.5 billion** would have been enough money to just pay the market-rate rent for every homeless person in California, with about **$4 billion left over.

Elliott argued that simply paying rent wouldn’t work because many people face significant behavioral health challenges. He said housing solutions need to have controls in place to address these issues.

Okay, so it’s clear there’s more going on here than just bad management structures. All this confusion and complexity is also hiding the second reason why homelessness is getting worse while costing more.

Reason 2: Housing is Too Expensive#

The problem of people not having a house has a lot to do with the cost of houses themselves.

States like California, New York, and Oregon have been mentioned a lot because they have the highest rates of homelessness. It’s probably no surprise that these are also states with very expensive real estate markets.

These states attract a lot of people looking for jobs and career opportunities. As someone who has lived in both San Francisco and LA, I’ve seen the unaffordable housing problem myself.

• Even with good-paying jobs (as an investment banker and now as a full-time YouTuber), I’ve found it hard to afford even a small apartment.
• I’m much better off financially now, but right out of college, if I had lost my job and couldn’t find a new one within a few weeks, I would have had to move back home.

A study by the University of California San Francisco (UCSF) looked into why people become homeless.

• They found that the number one reason was simply because they lost their income.
• This is a huge factor in cities where places to live are really expensive.
• The study also found that a large majority of people they surveyed could have avoided becoming homeless with a subsidy of less than $300 a month.

Think about that: $300 a month to prevent homelessness is way cheaper than the cost to help someone after they are already homeless.

A big criticism of the housing programs in these expensive states is the high cost of the housing solutions they build or buy.

• The San Diego Housing Commission is planning to use $150 million in state money to buy a 400-room Extended Stay hotel.
• The idea is to quickly turn it into housing.
• But the cost per unit works out to a whopping $383,000! And it’s basically just a hotel room with a small kitchen.

Government officials and real estate experts defended this purchase, saying that finding housing close to things like public transport for less than that in San Diego just wasn’t possible.

But again, if spending $300 a month could stop the need to buy more of these super expensive units, that would clearly save a huge amount of money in the long run.

This leads to another complicated question: at what point are taxpayers just paying rent for people who moved to LA hoping to become actors or for other reasons unrelated to needing crisis support?

And that brings us to the third big reason why homelessness seems to be getting worse and more expensive.

Reason 3: It’s Become a Political Football#

The UCSF study also looked at common ideas, like the one that homeless people are moving to California because the services there are better than in other states.

• Politicians from both major parties often claim this. One side might say it to criticize the help efforts of other states, while the other might say it to blame California’s “soft” approach.

But the study actually found something different:

• 90% of the people surveyed who were suffering homelessness became homeless while they were already living in California.

Okay, yes, people do move to California, but they are clearly only a very small part of the overall problem.

Homelessness is a huge issue that affects many voters.

• People want a solution because nobody likes seeing others suffer on the streets.
• But they’re also fed up with related issues like cars being broken into or streets being full of tents and trash.

Because it’s such a visible problem, politicians can easily score points by:

• Announcing a new “solution” to add on top of all the old ones.
• Pointing out that their specific area or group of voters doesn’t have the same level of problem.

Politicians also have a tough time making significant changes to the existing system because it provides so many jobs.

• This tangled web of ineffective government agencies and partners might not be great at getting people off the streets, but it’s very good at employing a lot of people.
• Every nonprofit, government department, administrative staff, and private company involved is keeping people in a job.

A truly more efficient solution might work better for homeless people, but it would also likely eliminate many of those jobs. And no politician wants to be the one responsible for putting that many people out of work.

I’m working on an article that covers some of the more controversial parts of this whole issue for my totally free email newsletter, Compounded Daily. You can find a link in the video description. I don’t have to worry about complicated online algorithms over there, so I can share stories that wouldn’t do well on platforms like this.

To be honest, this whole problem hasn’t been helped by one of the groups that actually benefits from all this confusion and lack of results: media companies that try to get people angry for clicks. If you want to learn about a guy who made billions from that kind of strategy, check out my video on Rupert Murdoch over on my other channel, How History Works.

And as always, make sure to like and subscribe if you want to keep learning how money works!