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Rent Control

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Peter Dorman writes,


In fact, advocates for rent control have taken Econ 101 (most of them), but they just disagree on how large the positive and negative impacts are. The purpose of economics should be to help us think clearly about the matter--for instance by identifying the potential empirical data that could adjudicate between competing arguments--but in its textbook form it is a ritualistic way of curtailing thought.

Pointer from Mark Thoma. Dorman's post was prompted by a post by Jodi Beggs, who is famous for her economics teaching videos, which put mine to shame. (Hers are not the only ones to do so--someone I know only as gewalker72 is also stellar.)

Beggs had merely cited the IGM poll of economists on rent control, which asked nearly 40 economists from Acemoglu to Zingales and found that all of them disagree with the proposition that "have had a positive impact over the past three decades on the amount and quality of broadly affordable rental housing in cities that have used them." Obviously, she needs to defer to the greater wisdom of Peter Dorman. Shame on her.


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CATEGORIES: Price Controls



COMMENTS (15 to date)
Jim Glass writes:

Some years ago the AER did an international survey of economists to see what they agreed and disagreed upon, and found that the one thing economists world-wide agreed upon most is that rent control is bad.

"Next to bombing, rent control is the most efficient technique known so far for destroying the housing stock of cities."
-- Assar Lindbeck, speaking when chairman of the Nobel Prize committee for Economics.

The happy continuing existence of rent control in so many places is an example of Blinder's law: The more economists agree on something the more they are ignored. (Politicians do what they want regardless of economists. The only time they care about economists' opinions is to invoke them in partisan battle against each other, when there are economists on both sides.)

"I’m agnostic about rent control myself (it depends entirely on the context and the details)"

To hear an economist say this is like hearing a doctor say:

"I'm agnostic about smallpox myself (it depends entirely on the context and the details)".

For a long time smallpox acted beneficially as a cure for syphilis, by increasing body temperature sufficiently high to kill the spirochete. See, the reasonable, informed, impartial, scientific opinion is agnostic about smallpox. :-)

"There are two huge holes in the textbook argument. The first is that it overlooks neighborhood effects—literally. The most compelling argument for rent control is neighborhood stabilization"

Yes, just look at what rent control did to the South Bronx, an area I know well. Landlords abandoning buildings is wonderful for "neighborhood stabilization"!

"The second hole is that rent control ordinances are normally replete with measures intended to maintain supply incentives"

As a person who owns residential real estate in NYC and has been on the boards of corporations that own rental housing, to this I say: "Ha! In your dreams, [expletive deleted by EconLog posting policy]."

I own a co-op apartment in the red hot area of Manhattan. It's value has gone up, up, up!, all the way through the "home price bust", due to the regulation of new housing out of existence. Beat investment I'll ever make.(The only better one I can imagine is NYC taxi cab medallions, also rather regulated.)

The reason the apartment is a co-op is that rent regulation forced the landlord of the building out of business. (One apartment worth $300,000 rented for $150 a month, literally. Another rented for $250 to a NYU professor who used it only occasionally when he decided to spend a night in the city. Another tenant put two apartments together -- like Charlie Rangel put four -- paying combined rent about $600, then rented half of one out for over $1,000, supposedly illegally, but when the landlord sued at great expense the court said "that's OK". Etc) The landlord sold out to tenants (like me) and investors -- leaving that much less rental housing in NYC. There's a "supply incentive" for you.

Here's the dirty secret of rent control: It benefits the rich.

Among renters, the longer a person stays in a rent stabilized apartment the greater the savings are, going up, up, up! Income rises with age, and the people who gain big from NYC rent-control are upper income Manhattanites in that red hot zone who've been in their apartments for years, reaping gains from below-market rents year-after-year.

The losers are the poor and young, who have to find an apartment in the market now and are forced to pay a very high price, both due to the restricted supply and because of the need to pay enough to cover the subsidies received by the rich and old.

In unregulated markets the market price of an apartment equals the average price of apartment of that quality. In NYC the rent price of apartments on the market is far above average rent, while the rent price of controlled apartments is far below average. The poor and young who need apartments pay the former. The older well-off in apartments they've long rented reap the gains from the latter -- and are the ones who organize politically to keep rent controls in place.

And, of course, for those of us who own apartments where demand for housing goes up but regulations kill any increase in supply, this is great!! What home price bust?? :-)

So, what are "the holes in the textbook arguments" that offset these little effects?

litehouse writes:

I find Dorman's criticism very convincing. He never argues that rent controls did have a positive impact; he merely states that most economic problems that are relevant to policy makers require a careful analysis (potentially quantitative) of the pros and cons.

And yes, from the impression that I get from this blogs and others, a lot of economists actually refuse to really dig into the issue and "get their hands dirty". For example, most economists are aware that there are externalities to a host of actions. In some cases, negative externalities make market solutions very inefficients, and government intervention might be a solution to restore more effecient outcomes. When you decide about the if and how of regulation, you might have to try to weigh actual numbers, take into account regional conditions, etc., and ideology-based one-size-fits-all type of argumentations (e.g. market solution is always best) is just out of place. Economic education often gets that wrong, and I think Dorman has done a fine job in raising the issue.

Jim Glass writes:
I find Dorman's criticism very convincing. He never argues that rent controls did have a positive impact; he merely states that most economic problems that are relevant to policy makers require a careful analysis (potentially quantitative) of the pros and cons.

And yes, from the impression that I get from this blogs and others, a lot of economists actually refuse to really dig into the issue and "get their hands dirty".

And yet, while there are mountains of data on the effects of price controls in general and rent controls in particular, Dorman cites none, zero, to support the reasonableness of being "agnostic" about them. (Neither do you.)

Is it because he doesn't want to dig into the data enough to get his fingernails dirty?

Or is it perhaps because he doesn't want to risk confronting facts and data on price controls that run contrary to his opinion that he added to his post....

"UPDATE: Standing in the shower, my mind drifted back to Orwell: "Free markets good! Price controls b-a-a-a-a-d!""
OK, when in survey after survey, from the AER world-wide to this one, economists put price controls at the very top of their list of **bad** economic things, do you think it is more likely because:

1) The mountains of data on the subject have influenced their opinion?

2) They are engaging in Orwellian Groupthink??

If you want to name someone who refuses to dig into the facts of an issue at all, so he can voice any opinion he wants, start with Dorman.


david writes:
The happy continuing existence of rent control in so many places is an example of Blinder's law: The more economists agree on something the more they are ignored. (Politicians do what they want regardless of economists. The only time they care about economists' opinions is to invoke them in partisan battle against each other, when there are economists on both sides.)

See, the point to take away from Dorman is not so much "rent control has its objective net merits" but "very large numbers of people do benefit materially from rent control (at the expense of a smaller number)". Unsurprisingly these people will vigorously fight for it and they will support politicians who do so. Removing rent control is, by itself, not a Pareto improvement, and it becomes worse and worse the longer the rent control has existed (and the distortions pile up).

If you want a minimally controlled residential market, then you need either a Singapore-style politics that can ignore the people, or Scandinvia-style politics that can bribe the people to do it the bureaucrat's way.

Peter Dorman writes:

Since several readers of this blog seem to have strong opinions of me, I might as well add my own. First, I do not claim any superior wisdom relative to the economics profession in general, but I write what I think is correct. I’m ready to be persuaded by a good argument, but not by headcounts of how many agree or disagree with me. And if I wanted to do a headcount, it would be of economists who have actually studied this topic (i.e. analyzed data), not amateurs like me.

Second, I’m not a specialist in urban economics. (I’ve used urban examples in teaching the use of hedonic valuation techniques, for instance in studies of tax increment financing for local amenities, but the core was method, not subject matter.) So, no, I haven’t looked at studies of rent control. My post was not about that. Rather, it is obvious to me, as a nonspecialist, that rent control advocates appeal to neighborhood stabilization, and that the elementary supply-and-demand approach does not respond to this argument. My beef is with those who think that the coverage of the issue in introductory textbooks is dispositive: to me this is ideology, not analysis.

The key phrase in my post is “The purpose of economics should be to help us think clearly about the matter—for instance by identifying the potential empirical data that could adjudicate between competing arguments....” That’s my mantra. It’s how I teach and how I do my own research. The purpose of theory is not to predetermine what is the correct view of the world, but to help you recognize what evidence is likely to be persuasive one way or the other and why.

Trevor H writes:

Rent control discussions look like evolutionism versus creationism to me. The pro side has some intuition about how to help the poor and seems unwilling to turn it loose regardless of the evidence. The question is so utterly and completely settled both theoretically and empirically that the experts who have studied the issue can hardly help but sound arrogant when discussing it.

Norman Pfyster writes:

So, would the conjunction of theory and facts indicating that rent control is bad be enough to persuade you? No?

Yancey Ward writes:

"very large numbers of people do benefit materially from rent control (at the expense of a smaller number)"

But, David, this is exactly the part that is wrong.

Mark V Anderson writes:

I am always happy to see people dispute established wisdom, so I enjoyed Dorman's posting, attacking the seeming dogma of rent control ideas.

But then I read Jim Glass' refutation. Jim's posting was the best I've ever seen on this web site, by either blogger or responder. In my opinion he blew away all of Dorman's points and everyone else who supports rent control. Rent control simply makes no sense, if one is trying to help the poor. Thank you, Jim.

Elvin writes:

What is "neighborhood stabilization"?

Sounds like some Orwellian term for organizing society along someone's view of the world. In this case, the result of rent control is: Rich people good, poor people bad.

Part of my disrespect for a lot of liberal economists is the way they ignore first principles and concoct all sorts of exceptions, externalities, and special cases to justify government regulation and intervention.

The case against rent control should be uncontroversial. Both theoretically and empirically it is bad.

progrowthliberal writes:

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david writes:

@Yancey Ward

"very large numbers of people do benefit materially from rent control (at the expense of a smaller number)"

But, David, this is exactly the part that is wrong.

Are you denying that incumbent tenants benefit from rent control?

Glen Raphael writes:

@david: the incumbent tenants who qualify and keep their apartments (and aren't harmed by the other negatives effects of rent control enough to outweigh their persistently lower rent) are a very small number compared to the number of tenants (and commuters, and various others) who are harmed.. So one might perhaps plausibly claim that:

"very small numbers of people do benefit materially from rent control (at the expense of a larger number)"

...which is the reverse of the statement being called wrong.

Brad Petersen writes:

Perhaps Dorman is only interested in the economic effects of rent control and doesn't care about the moral implications.

But how does buying an apartment building somehow makes a landlord financially responsible for ensuring "neighborhood stabilization"? If it's so important and valuable, then everyone ought to pitch in -- including the tenants and everyone else in the neighborhood.

However, in the end rent control is nothing more than theft on a grand scale. Dorman, of course, will say that I'm being "ideologically rigid." But somehow I doubt that's his attitude when someone steals from him.

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