The Ghost in the Machine: How the Failure of Deinstitutionalization is Driving a New National Housing Emergency Plan
By Vaughn Woods, CFP, MBA
The American public, confronted daily with the visible crisis of homelessness and urban decay, has become acutely aware that something has gone terribly wrong. City streets, once bustling hubs of commerce and culture, are now often defined by tent encampments, public drug use, and the tragic sight of individuals suffering from severe mental illness. The conventional wisdom—that this is merely a housing affordability issue—fails to capture the full scope of the problem. Instead, a growing chorus of policymakers, including those within the Trump administration, is pointing to a deeper, more systemic failure.
With the possibility of a new administration executive action, Treasury Secretary Scott Bessent has announced the administration is considering declaring a national housing emergency under the Emergency Powers Act. This is no ordinary policy proposal. While it may include measures like tariff relief on construction materials or standardizing building codes, its true ambition goes far beyond the typical levers of economic policy. This proposed action is, in essence, a direct response to what the administration views as the calamitous legacy of deinstitutionalization—a decades-long experiment that, in its most brutal assessment, bled states dry, fractured the cost of care across a multiplicity of systems, and ultimately left millions with no safety net at all. It is a plan that implicitly, and in some cases explicitly, advocates for a form of re-institutionalization as a solution to a crisis that has spiraled out of control.
The Great American Experiment: From Asylums to the Streets
To understand the proposed executive action, one must first revisit the historical context of how the United States has cared for its most vulnerable citizens. For over a century, the primary model was institutionalization. Beginning in the 19th century, spurred by reformers like Dorothea Dix, states built massive psychiatric hospitals. The goal was to provide a dedicated, humane environment for the mentally ill, a significant improvement over the squalor of almshouses and prisons. By the mid-20th century, these state-run asylums housed hundreds of thousands of individuals.
However, the tide began to turn in the post-World War II era. Revelations of inhumane conditions, a shortage of staff, and powerful new forces—both scientific and social—spurred a monumental policy shift. The development of the first antipsychotic drugs in the 1950s provided the first medical rationale for community-based care, making it seem feasible for individuals to manage their symptoms outside of a locked ward. Sociologists and academics published influential works, such as Erving Goffman’s Asylums (1961), which meticulously documented how institutions stripped away identity and autonomy.
This academic critique found its political expression in the landmark policies of the 1960s. President John F. Kennedy, whose sister suffered from a developmental disability, signed the Community Mental Health Act of 1963, a visionary law that promised a network of community-based mental health centers to replace the old state hospitals. This was followed by the creation of Medicaid in 1965, which included a crucial financial disincentive: the Institutions for Mental Diseases (IMD) exclusion. This provision prohibited states from using federal Medicaid funds to pay for care in large psychiatric hospitals, effectively putting a financial gun to the head of state governments to move patients into the community. Legal rulings, most notably the Supreme Court’s 1975 O’Connor v. Donaldson decision, reinforced the right of individuals to be free from involuntary confinement if they were not a danger to themselves or others.
The deinstitutionalization experiment was now fully underway. The promise was a more humane, cheaper, and more effective system of care. But for many, the reality was a tragedy of good intentions. The state hospitals emptied, but the community-based care centers were never adequately funded. The “savings” from closing institutions never materialized into comprehensive outpatient programs, affordable housing, or robust support services. This created a vacuum that was quickly filled by a chaotic and expensive “multiplicity of systems,” leading to a massive and fractured “cost creep” across American society.
The True Cost of Deinstitutionalization: A Multi-System Breakdown
The Trump administration’s proposal is built on the premise that the public has borne the cost of this failure for decades. It argues that the true cost of deinstitutionalization is not found in a single line item, but is hidden within the budgets of multiple government departments and social institutions, all of which are now “bleeding money due to chronic dependency.”
The Criminal Justice System: Our New Asylums
The most staggering shift of burden has been to the criminal justice system. Jails and prisons have become the de facto mental health institutions of the 21st century. The sheer number of incarcerated individuals with severe mental illness is a testament to the system’s failure. The cost per person to house and manage these inmates is often equal to or even higher than the old institutional model, especially when accounting for the need for limited, specialized psychiatric care.
Furthermore, this burden has cascaded down to local budgets. Police officers, who receive minimal training in de-escalating mental health crises, are now the primary first responders. This leads to a massive and unaccounted-for cost within local government budgets, from repeated emergency calls to the tragic and often violent outcomes of encounters with a system ill-equipped for this role. The arrests for non-violent crimes like loitering and vagrancy, which are often symptoms of an underlying mental health condition, funnel people directly into a costly and punitive system that offers no real treatment.
The Healthcare System: The Emergency Room as a Last Resort
When a mental health crisis becomes acute, the only option for many is the emergency room. For individuals with chronic mental illness, this has become a revolving door. These visits are the most expensive form of medical care. The costs associated with underlying health issues, substance abuse treatment, and acute hospitalizations for stabilization are immense, and they place a disproportionate burden on a healthcare system that was never designed to serve as a comprehensive mental health provider. The lack of available community-based care forces these expensive acute interventions, only for the individual to be released back into the same conditions that led to their crisis in the first place, perpetuating a financially ruinous cycle.
The Social and Welfare System: The Burden of Chronic Dependency
The deinstitutionalization model was supposed to lead to self-sufficiency. For many, it led to chronic dependency. The cost of public housing subsidies and direct cash assistance through programs like Supplemental Security Income (SSI) and Social Security Disability Insurance (SSDI) has skyrocketed. These programs provide a critical safety net, but they do so in a way that often locks individuals into a state of poverty and dependence without providing the comprehensive support—like job training, case management, and sustained therapeutic care—that could lead to a more productive life. The social welfare system is now a passive recipient of the consequences of this failed experiment, absorbing costs without the mandate or resources to address the root problems.
Family and Community: The Hidden Costs
The multiplicity of systems extends beyond government budgets and into the fabric of society. The costs associated with the child protective services and family court system are immense, as untreated parental mental illness is a major driver of child abuse and neglect. Family members are often left to navigate a labyrinth of non-existent resources, becoming de facto caregivers and absorbing emotional and financial costs. This entire system of care—or rather, the lack thereof—leads to the ultimate and most profound cost: a loss of economic productivity. The human potential of millions of people is lost, their ability to work, pay taxes, and contribute to society squandered in a state of untreated illness and chronic instability.
The New Plan: Re-institutionalization as a Cost-Saving Measure
The Trump administration’s proposed executive action is being framed as a necessary corrective to this multi-system failure. It is an acknowledgment that the cost-shifting that has occurred since the 1960s has led to a far more expensive, less humane, and less effective system. By declaring a national housing emergency, the administration could leverage the full force of federal authority to centralize power and bypass the fractured, underfunded state and local systems.
The plan being discussed, which may be announced this fall, goes well beyond lowering interest rates and making housing more affordable, implicitly or explicitly argues for a new form of institutionalization. The administration’s focus on a “more comprehensive plan to take people off the street” suggests a direct intervention. This could include using federal land for the construction of new facilities, moving away from “Housing First” models, and providing incentives for states to broaden civil commitment laws. The administration’s rhetoric about “ending crime and disorder on America’s streets” and shifting people into treatment is a clear signal that it sees the current situation as a public safety crisis that requires a decisive, top-down solution.
This approach is a profound departure from the last several decades of policy. It is a diagnosis of the problem not as a lack of housing, but as a lack of comprehensive, structured care for a population that has been left to languish. The argument is that while the old asylums were flawed, the current system—a disorganized, underfunded network of emergency rooms, jails, and homeless shelters—is far worse, both for the individuals suffering and for the society footing the bill. A controlled, federally-directed re-institutionalization plan, in their view, could be both more humane and ultimately more cost-effective by reducing the massive cost creep that has bled government budgets for generations.
Whether this approach is a return to a more stable and effective model of care or a dangerous step backward to a new era of confinement is a question that will define the coming policy debate. But one thing is clear: the Trump administration’s proposal on housing and homelessness is not just a plan to build more homes. It is a fundamental challenge to the foundational policies of the past 60 years, driven by the belief that the great American experiment in deinstitutionalization has failed, and its true cost is a ghost that now haunts every city in the nation.
Sincerely,
Vaughn Woods, CFP, MBA
Vaughn Woods Financial Group, Inc.
2226 Avenida De La Playa
La Jolla, CA 92037
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Email your questions to vw@vaughnwoods.com. In addition, we are never too busy for your referrals.
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