Tuesday , May 21 2019

Rent Control Poem

Summary:
"kevinsch" posts an remarkable essay on rent control on a  Seattle city council blog (HT Marginal Revolution).I’m not an economist, not a landlord, nor a renter. But since we’re having this debate, I went to the UW Library and pulled the literature on rent control so I could understand the issues, the studies, and what ...

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"kevinsch" posts an remarkable essay on rent control on a  Seattle city council blog (HT Marginal Revolution).
I’m not an economist, not a landlord, nor a renter. But since we’re having this debate, I went to the UW Library and pulled the literature on rent control so I could understand the issues, the studies, and what the experts conclude.  Here’s what I found. 
1. Within the community of economists there is broad consensus that rent control is a bad idea. The consensus is on par with the scientific community on climate change, and the medical community on the safety of vaccinations. 
Given the widespread move to introduce rent controls on the left coast, savor that.
2. There are two documented benefits of rent control: it decreases economic displacement for people living in rent-controlled housing, and it can reduce the volatility of rental pricing in cities where there is sufficient stock of rental housing. 
3.  There is a very long list of documented harms that rent control causes. It provides a strong disincentive to build more rental housing. It drives landlords to reduce spending on maintaining their units until the quality of the housing has drawn down to the point where it matches the allowed rent. And thus by reducing property values, it reduces property tax revenues. It reduces mobility for renters, causing them to stay in their rent-controlled housing rather than move when a better job or the needs of their family require it. It misallocates the total housing stock by encouraging people to stay in housing that doesn’t match their needs.  It encourages rental property owners to convert apartments to condominiums, thereby reducing the rental housing stock. It inevitably leads to a “cluster” of regulations piled on top to try to legislate away all of rent control’s problems. And it doesn’t help the people with the greatest need, but rather the people most capable of gaming the system. 
It's remarkable that someone who is not an economist could so quickly find all these subtle effects. Yes, most people quickly get that landlords will not keep up apartments, and builders won't build them. But most people don't quickly get the disincentives for renters not to "move when a better job or the needs of their housing require it." Or that it leads not to nirvana for the low income renter, but helps "the people most capable of gaming the system." I would only add that it really hurts the young ambitious person of limited means who wants to move to town to get that upward-mobility job.

4.  In many cities with rent control, tenants see annual rent increases at the maximum amount allowed, because landlords understand that if they skip a year they will never catch up. 
5.  Rent control’s harms can be mitigated in part through an aggressive public/social housing program that creates a large quantity of units using public funds. However, in those places it’s unclear that rent control itself is adding much value beyond the significant value that the public housing program alone delivers. 
OK, Kevinsch is not an economist so I'll let this pass. The history of aggressive public/social housing programs in US cities are an absolute disaster.

More deeply, he missed the underlying cause of the problem -- building, zoning, and land-use restrictions. Supply meets demand. If builders were allowed to build cheap apartments for modest renters, they would do so. If builders were allowed to build expensive apartments for high-income renters, who then would move out of buildings suitable for low rent apartments, they would do so.
6.  As this paper says, rent control “confers its benefits early, and extracts its costs late.” That’s one of the reasons it’s such an attractive policy idea. 
Well, it confers benefits to renters early. The loss of property value to landlords is instant, but apparently nobody cares about them. The "one time" capital tax is always tempting.
7.  As this article puts so well, among rent control advocates there are no rent control failures; there are only bad implementations. 
Ditto, say, Socialism and Venezuela.
8. And finally, as this research paper suggests, economists have been thorough at convincing themselves that rent control is a bad idea, and inept at convincing anyone else.
This is a gem. And so true. Like, say, tariffs. I wish I knew just how to fix that despite the immense effort and millions of dollars going in to better dissemination of economic ideas.

The essay goes on, and it's worth reading the whole thing. 

There is a lesson here. Why do our governments, and especially local governments, so often wander into terrible economic policies? The "education" theory says they just don't know basic economics, and don't have any competent policy advice. If they and their staff could just be "educated" things would get better. (And if we could break through all the competing parties who also want to "educate" politicians.) The "interest" theory, more typical among public choice economists, views political outcomes as the result of power, not ideas. Rent control wins when incumbent renters who want to stay put win the political battle over landlords, mobile renters, and potential newcomers, and invoke whatever ideas butter the toast of their cause.

That the city council of Seattle has available such amazingly good policy advice speaks to the latter, sad to say for those of us in the "education" business.

The third view is that ideas still matter at the larger level.  A bad idea like rent control requires the asset of the general voter. Yes, incumbent renters who know how to work the system may win the political battle over landlords, property owners, people who want to move to the city and rent, and mobile renters or those not good at working the system, who will lose.  But the larger mass of homeowners, condo owners, and non-controlled renters must go along. They don't have a personal interest, other than a general desire to feel good by helping those who face higher rents, so they don't have much reason to study the issue. If the general electorate understood how bad rent control is for their city, and most of the people they want to help, perhaps economic policy would be better. There is hope for ideas. 


John H. Cochrane
In real life I'm a Senior Fellow of the Hoover Institution at Stanford. I was formerly a professor at the University of Chicago Booth School of Business. I'm also an adjunct scholar of the Cato Institute. I'm not really grumpy by the way!

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