David R. Henderson  

Misallocation under Rent Control

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On Marginal Revolution this morning, Tyler Cowen addresses the question "How bad is rent control when housing supply is artificially restricted by law?" He leads with this:

Many of you have been asking me about this NYT article on the pressures for rent control in Silicon Valley. If no (or few) new apartment blocks will be built anyway, what is wrong with rent control in that setting?

What, apparently, some of the questioners are getting at is that if the supply is constrained anyway, then there won't be the bad effects on the supply side that economists talk about. Tyler points out that that's not true. And one of his commenters, Kommenterlein writes: "The rental housing stock isn't fixed - it will decline rapidly with rent control as rental apartments are converted into Condos and sold at market prices."

So, yes, there are bad supply side effects of rent control.

There are also bad demand side effects of rent control and Tyler points to one of them:

At rent-controlled prices there will be excess demand for apartments. The "plums" will go to those who bribe, those who are well-connected, those who are skilled at breaking the law, and, to some extent, those who have low search costs. The latter category may include well-off people who hire others to search for them.

But he leaves out arguably the biggest demand-side effect: the misallocation of apartments to those who are already renting them. When the rent is not allowed to clear the market, the apartments no longer go to those who value them most. People who rented an apartment with three bedrooms, and had two kids, would, absent rent control, have some large probability of stepping down to a smaller apartment when their kids grow up and leave home: doing so is likely to save money. But now introduce rent control and that probability falls. They are more likely to keep that apartment because they won't save money, or won't save as much money, by stepping down. Instead, they will be in a queue with other apartment searchers.

Related to this, when I teach about rent control, I point out that there is a fundamental difference between rent control and the Nixon/Ford/Carter gasoline price controls. In the latter case, we were out there weekly competing with each other by lining up for gasoline. The simple fact that we got gasoline last week gave us no inherent advantage over others in getting it this week. We had to line up yet again. But, with rent control, the fact that we had a rent-controlled apartment last year gave us a huge advantage over those looking for apartments this year. The way rent controls are typically designed, those who continue to pay their rent have first say over the apartment when the lease comes up. There's no inherent necessity for this. The rent control authorities could design the regulations so that every year, if a landlord wants to evict the tenant and put him on the same footing as everyone else, he can. Then a lot of the support for rent control, which is supported mainly by those who already have rent-controlled apartments, would dissipate. But, of course, the rent controllers don't do that because one of their main goals is to help the people who already have apartments.

I also point out that a major reason that the gasoline price controls were eliminated was that gasoline buyers did not have the same privileged position for getting gasoline that current tenants have for keeping apartments. It's easy, though, conceptually to imagine that the gasoline price controls are changed in a way that makes them more likely to last: if the amount supplied is 80% of the amount demanded, then allocate the supplies at the controlled price to those who will use that 80% (say, people with last names beginning with A to T) and allocate zero to the other 20%. This would be more like the way apartments are allocated now under rent control.

By the way, Tyler concludes:

Even if the current housing stock is fixed, rent control probably will create costs in excess of its benefits, and without significantly desirable distributional consequences.

I have no idea why the word "probably." It's not hard to show, using a downward-sloping demand curve and a vertical supply curve, deadweight loss from rent control. It's a certainty.


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CATEGORIES: Price Controls




COMMENTS (43 to date)
JK Brown writes:

Just yesterday, I was watching an old Uncommon Knowledge interview of Andrew Breitbart. He cited having lived in a rent controlled apartment as one eye-opening experience for his conversion toward conservative.

Rent control is a debilitating to the spirit as any type of welfare handout. It raises the cost to those living in such housing for joining the American Dream because to leap into the real world requires a "loss" of the rent subsidy .

Rent Control writes:

David, it depends. There are different forms of rent control and they have different effects.

In Norway for example, initial rents are freely set in the first year, then controlled to CPI for three years, and then reset to market rate. There appears to be no adverse effect there.

In neighbouring Sweden, initial rents are not freely set, they are controlled by 'use value' of the apartment and annual collective bargaining negotiations between landlord and tenant unions. The rents are NOT reset to market rate when the tenant vacates, indeed the whole concept of 'market rent' is highly controversial in Sweden. It has the same status as a swear word.

The queues for first hand apartment contracts in Stockholm are typically 10 years wait. In inner city areas you can wait 10 to 20 years. Alex Tabarrok posted about this actually a while ago see Rent Control in Stockholm

In San Francisco, initial rents are free, but rents are controlled until the tenant leaves. New constructions are exempt from rent controls, however land restrictions prevents buildings and acts like a quota system. When the tenant leaves, the rents are reset to market rate, and thus no Stockholm style queues are seen.

What critics of rent controls are missing is this: Even if rent control is a bad idea, the market left alone by itself will not provide cheap housing to people who have low or no incomes. Markets only serve people who have income levels that allow them to participate in the market.

There seems to be little harm in adopting Norwegian style long-term rental contracts approach. Nor does there seem harm in providing or subsidising housing for people with very low incomes or land value taxes to encourage construction and make NIMBYs pay for blocking development in their area.

BrianH writes:

With a fixed supply (not realistic), producer surplus becomes consumer surplus along with a shortage. But no DWL.

I'm not arguing for the rent control, but the "costs" in that scenario are different than under perfect inelasticity.

Don Boudreaux writes:

BrianH,

You correctly note that the assumption of a perfectly inelastic supply of rental housing is not realistic. But I believe that it is incorrect to say that, were this assumption to hold in reality, rent control would create no deadweight loss.

In what Deirdre McCloskey calls "the first act" there is indeed, unlike with an upward-sloping supply curve of rental housing, no deadweight loss. It's all transfer from landlords to tenants. But unless we assume also a perfectly inelastic demand for rental housing, rent control will in the second act cause current and prospective renters to waste resources as each competes to increase his or her chances of securing one of the rent-controlled apartments.

Picture a standard supply-and-demand graph, but one in which the supply curve is perfectly vertical. With the demand curve shaped as it usually is - namely, sloping downward to the right - rent control will still cause a shortage of rental housing. Tenants will therefore compete more vigorously to secure these rental units. The use of resources in such non-price competition - wining and dining landlords; racing or keeping constant vigilance to sign up for a newly vacated rental unit; whatever - is a waste of resources from society's perspective.

It's true that these wastes are conventionally called "rent-seeking wastes" rather than "deadweight losses." But I've always taken Gordon Tullock's point to be that rent-seeking-"rectangle" losses are no less real or important losses than are deadweight-loss "triangle" losses: both losses act as deadweights on society. Valuable goods and services that would otherwise have been produced remain unproduced because of the interventions that cause these losses.

I don't wish to defend too strongly my claim that rent-seeking losses should be called and classified as "deadweight losses" (although I do believe that that claim is defensible). But I do wish to insist that the absence of conventionally defined deadweight losses does not mean that an intervention, such as rent control, effects only a transfer and causes no real losses.

[The commenter nickname Brian has been edited ex post to match a minor nickname change to BrianH.--Econlib Ed.]

David R. Henderson writes:

@BrianH,
With a fixed supply (not realistic), producer surplus becomes consumer surplus along with a shortage. But no DWL.
You appear to have totally ignored my reasoning. If you want a further response, please reread my post and tell me why you think there is no misallocation among demanders, why, that is, the apartments go to those who value them most even when there is a shortage.

[The commenter nickname Brian has been edited ex post to match a minor nickname change to BrianH.--Econlib Ed.]

Benjamin Cole writes:

Egads. Eliminate property zoning.

Henderson and Boudreaux appear to be devising ways to condone no rent control in unfree housing markets.

Which, in fact, is the politico-economic position of the American Right Wing. Property zoning is rarely a concern, and artifical single-family detached housing districts never a topic, but rent controls are an evil outrage.

BrianH writes:

Professor Boudreaux and Henderson,

Thank you for the reply. I'm writing from my phone so it is difficult to be more thorough in my responses, but i was merely pointing out what you, Professor Boudreaux, intuited here already.

There is clearly a large misallocation of resources here, with many unintended consequences.

As a teacher of princies though, i think there is value in having terms which have somewhat precice meanings.

Perhaps "misallocation of resources" is a broader concept and "deadweight loss" is one type within this. But geometrically, as you even point out, there isn't a "deadweight loss" of over or under consumption, but again, there is clearly a misallocation of resources.

I am reminded of the illustrative example of "perfect taxation" put forth by Henry George, whereby a tax on landlords, since supply is inelastic, causes no DWL, and the incidence is entirely on the "wealthy" landlords, not the "poor" tenants. This breaks down, in large part because supply is not inelastic, especially over time, as the misallocation here can manifest with smaller future developments.

But, my point is that, specific meanings of the vocabulary we use can benefit the influence we try to convey.

Remember the controversy surrounding the exact meaning of "opportunity cost?"

Also, i have found that students confuse financial and physical investment, especually as it involves international trade, because the language used is so imprecise, and it takes someone who realizes what is happening to understand from context.

Anyway, thank you again for the replies.

I hope this clarifies my point

BrianH

jon writes:

When the rent is not allowed to clear the market, the apartments no longer go to those who value them most.
Isn't that the whole point of rent control? Without rent control, only the richest renters get to live in the city.

As @Rent Control stated:

What critics of rent controls are missing is this: Even if rent control is a bad idea, the market left alone by itself will not provide cheap housing to people who have low or no incomes. Markets only serve people who have income levels that allow them to participate in the market.

Rent Control writes:

Economists are scathing about rent control, but there is disproportionately less recognition about zoning ordinances and regulation acting like a quota system.

Quota systems also cause housing shortages by directly restricting supply, even if it is profitable to build.

There is very little recognition that government / public sector can initiate a beneficial intervention here - NIMBYism is an externality. The solution there is to tax NIMBY by taxing land. As land value tax falls on landowners (and land is fixed in supply) there is little or no deadweight loss to society.

Consider a NIMBY area that blocks all development, thereby putting a de facto quota on new housing in their area. These people would increase their land value. Under land value tax, these people would push themselves into higher and higher tax brackets, thereby paying the cost of their NIMBYism.

Land value tax promotes density, and discourages wasteful use of land because it is a price signal. But how many economists are going to take that line, rather than the more popular "government always and everywhere is a bad thing"?

jon writes:

Just yesterday, I was watching an old Uncommon Knowledge interview of Andrew Breitbart. He cited having lived in a rent controlled apartment as one eye-opening experience for his conversion toward conservative.
A couple of interesting points:

1. He said that old ladies would knock on his door and tell him that the light bulb in their apartment needed to be changed (his family apparently owned the building he lived in -- in a rent control apartment). Without any sense of irony, he saw this as the height of entitlement. But isn't that how rentals work -- the landlord takes care of all the BS because he is the owner, and in return you make payments without building any equity.

2. As already pointed out, his family owned the building in which he got to live in a low rent apartment. And he even mentioned other family members living in rent control apartments in the building. At first blush, that seems a little corrupt.

Rent Control writes:
"There is sense that all taxes are antagonistic to free enterprise, and yet we need taxes.We have to recognise that we mustn't hope for a utopia that is unattainable.

I would like to see a great deal less government activity than we do now, but I do not believe that we can have a situation in which we don't need government at all. We do need to provide for certain essential government functions - the police function, the national defence function, function of preserving law and order, of maintaining a judiciary.

And so the question is, which are the least bad taxes? And in my opinion - and this may come as a shock to some of you - the least bad tax is the property tax on the unimproved value of land, the Henry George argument, from many many years ago."


- Milton Friedman, 1978

Source: Milton Friedman talks about property taxes

[broken html fixed--Econlib Ed.]

Don Boudreaux writes:

Jon writes:

Isn't that the whole point of rent control? Without rent control, only the richest renters get to live in the city.

Jon's defense of - or, at least, summary of - rent control is indeed what rent-control advocates believe. But it is mistaken.

One way to highlight the mistake is to point out that in the United States we have no price ceilings on food, yet it is not only the richest families who get to shop in supermarkets. We have no price ceilings on clothing, yet it is not only the richest Americans who have closets full of shirts, blouses, pants, dresses, coats, underwear, and shoes. We have no price ceilings on cell phones, yet it is not only the richest individuals who have mobile telephones. We have no price ceilings on household appliances, and yet even poor American households today are, on average, equipped with more modern appliances than was the average American household of 40 years ago.

Another angle is to note that competition among potential tenants for access to rental housing occurs, or can occur, on margins other than price. If monetary rents are prevented from rising, competition for rental housing is diverted onto other margins - such as exploiting business or social connections and bribing landlords with under-the-table handouts, some of which might be cash and others of which might be non-cash goodies such as 'free' season tickets to NY Giants' games or promises of business deals.

Even with a perfectly inelastic supply of rental housing, rent control causes a shortage of such housing. This fact means that some method of allocation, other than explicit monetary price, must be used to determine who are the people who will actually get rental housing and who will not get it. At best this method will be pure chance - a random lottery - which of course does not guarantee that the rich will not get a disproportionate share of rental housing.

But to suppose that pure chance - some sort of blind lottery - will determine who does and who doesn't get available stocks of rental housing is naive. While one can imagine that those who are relatively poor in monetary incomes are relatively rich in non-monetary means of payment - such as, again, exploitable business, social, or political connections, or the ability to bribe landlords with under-the-table deals - in fact it is highly unlikely that those who are relatively poor in monetary incomes are relatively rich in non-monetary assets. Much more plausible is the assumption that ability to pay with non-cash means, and the ability to exploit connections in order to secure rental housing, is positively correlated with monetary incomes.

This fact becomes especially important in the real world in which the supply of rental housing is not perfectly inelastic - that is, in the real world in which rent control reduces the quantity supplied of rental housing. A reduced supply of the quantity of rental housing increases the market value of such housing such that, with rent control, this value is above the value that it would have without rent control. The result is that rent control causes the amounts that tenants and potential tenants are willing to pay to maximize their chances of being among the fortunate ones to secure rental housing to rise. In short, rent control makes rental housing more precious and, hence, more pricey - a fact that is only masked by the formal ceiling on the monetary rent that tenants are allowed to pay.

The rise in the market value of rental housing caused by rent control enhances, rather than reduces, the ability of the rich to compete successfully against the non-rich for available stocks of rental housing. The fact that this competition for rental housing takes some form other than price competition should not blind people to the reality that this competition occurs and that those who are artificially benefitted by the need to compete in this way are the rich.

Finally, because rent control artificially increases the supply of owner-occupied housing relative to rental housing - by, for example, prompting conversions of rental housing into condos - rent control puts downward pressure on the price of owner-occupied housing. If it's the case, as it surely is, that people who buy are on average better off financially than are people who rent, rent control transfers wealth from the less-well-off to the more-well-off.

Jon Murphy writes:

@rentcontrol and @jon:

What critics of rent controls are missing is this: Even if rent control is a bad idea, the market left alone by itself will not provide cheap housing to people who have low or no incomes. Markets only serve people who have income levels that allow them to participate in the market.

This is incorrect. If I may paraphrase Don Boudreaux's general response on this at Cafe Hayek, there are no price ceilings on lots of good, from food to clothing to automobiles, and yet the market provides these for all, both rich and poor. There is no reason to think housing is much different.

Besides, rent control doesn't guarantee that there will be suddenly affordable housing everywhere. As both David and Don point out, the competition only becomes fiercer for what units are available. If anything, rent control reduces the available units to the poor compared to a period absent price controls. After all, as you say the price of rent must be high enough to encourage building. In order to be effective, the price ceiling must be lower than the equilibrium price. Given that, it is no longer effective for builders to build and renters to rent. Therefore, the quantity supplied drops and housing becomes even more scarce.

Compare this to a period where rents are allowed to signal relative scarcity in a market. If rents are relatively high, this means there is a relative scarcity of housing units in the market and it signals to builders and landlords that more options are needed. Builders come in, build new units, and landlords rent them out. As the supply in the market increases, the rent falls, making it easier for those with lower incomes to rent. Conversely, when the rent is relatively low, that signals to builders and landlords there is a relative abundance in the market and that additional units are not necessary.

In accordance with my last sentence, rent control sends the persistent signal that there is a relative abundance of housing in the market and therefore no (or few) new units are needed. This is the last thing you'd want in a market if you're trying to help the poor.

Thomas B writes:

California's public policies make a lot more sense if you think of the place as - probably unconsciously - steering toward being a high-end gated community.

One of the things you don't want in a high-end gated community is low-end residents. But low-end residents vote. Answer: workplace policies that low-end residents will vote for, that drive away the businesses that employ them. Over time, the businesses move to Texas (or wherever), and you get net migration of low- and middle-income people out of California to follow the jobs - which is what's happening.

Another is density. Answer: zoning laws. This is a twofer, because it also makes affordable housing hard to find, adding to the pressure on low and middle income people to move out of the state. Again, check.

And another thing you don't really want to encourage in a high-end gated community is renters. Answer: rent control. The renters will vote for it, and it virtually assures a gradual decline in the number of renters over time.

High-end gated community, here we come.

Rent control writes:

@Jon Murphy

History shows that this is not the case. If you look at pre-rent control Stockholm, New York or Glasgow, living was expensive and overcrowding was unbelievable. Yes, the market does not provide for people who do not have the income levels to participate in it, but no, this isn't the same as advocacy for rent controls.

Just because the market provides cheap goods in many or most areas does not mean that it will do so for every single good, or that it will do so quickly enough. It isn't relevant that many positive examples where markets work exist - producing a single negative example would disprove that proposition.

Indeed, a standard economics supply and demand graph implies this: At zero price, zero goods and services are provided. So if you have very little or nothing, there is nothing for you.

Anyone can test this theory for themselves: simply try to take something from a supermarket with no money, or offering less than what the ticket price is at the cashier. It won't work.

So, that is the reason why almost every country has set up health, welfare and education systems and connected those to a public funding source. To guarantee coverage to absolutely everyone, not just the section of society that the market is interested in.

Rent controls are a bad idea, but they are a response to a problem. Opponents should recognise this and advance an alternative solution and actually tackle the problem.

There is a role for the market and a role for the government and they can specialise in what each does best. Acknowledging that the public sector can have a beneficial role (i.e. land value tax) is uncomfortable for those who see government everywhere and always as a bad thing.

Government does have a role: a combination of progressive land value taxes and loosened building regulations (such as right-to-build) would do the trick. Subsidies or payments to people who don't have the income level yet.

The rent strikes and social rioting/unrest in places like Stockholm, New York and Glasgow at the turn of the century does show that the market does leave quite a gap at the bottom.

Jon Murphy writes:

If you look at pre-rent control Stockholm, New York or Glasgow, living was expensive and overcrowding was unbelievable.

The question we need to ask is "why?" Was there something preventing this from happening? Zoning laws, perhaps?

I'm glad you agree that rent control is not a solution and I agree that the actual underlying issues should be addressed.

However, you are misinterpreting the supply and demand graph. Remember that it is static for any given commodity. In reality, it moves around. One thing that we have seen quite clearly is that labor-hours (that is, the amount of labor time needed to afford a given good or service) has been falling steadily. In other words, things are getting cheaper, not necessarily in monetary price but in economic price (explicit price plus implicit price). We've also seen firms becoming more and more efficient, which allows them to shift their supply curve, creating more supply and a lower price.

However, the interaction I just described above can only occur if there are fewer barriers to entry (preferably no artificial ones). After all, articifcal barriers (like rent control, zoning, building codes and restrictions, etc) essentially act as monopoly protecting barriers and can reduce the efficiency to which the market reacts.

That is why I think your list of areas that government intervention is needed ("health, welfare and education systems") gets the problem exactly backward. Here in the US, health, housing, and medicine are among the most heavily regulated industries and these are the ones that buck the labor-hours trend I discussed earlier. These industries have very high barriers to entry, which allow those operating in it to raise prices higher than they normally would. It also prevents any kind of competition from forcing gains in efficiency. Under this, more government intervention is demanded which only perpetuates the problem further.

In short, to attack the underlying causes, I think you need less government intervention, not more.

Jon Murphy writes:

The important thing to remember when discussing price controls, whether it be a price floor like minimum wage or a price ceiling like rent control, is that they do not bring any additional units to the market. They just outlaw certain kinds of units. In the example of rent control, rent control does not bring new rental units to the market, it just bans rental units priced above Price X.

Since the supply (in this case) is hindered, it cannot possibly be helpful in revealing shortages of supply.

jon writes:

Don Boudreaux writes:

One way to highlight the mistake is to point out that in the United States we have no price ceilings on food ... clothing ... cell phones ... household appliances
Jon Murphy writes:
there are no price ceilings on lots of good, from food to clothing to automobiles, and yet the market provides these for all, both rich and poor. There is no reason to think housing is much different.
Actually, there is at least one very good reason to think that housing is much different. Even if we removed all zoning restrictions (good luck with that), we would still have limits on the supply.

Jon Murphy writes:

@jon

What limits would those be that do not exist in other markets?

jon writes:

Land, obviously. You can only fit so many houses on Manhattan.

Jon Murphy writes:

True, but scarcity of resources (land being one) is not unique to housing. Food, clothing, anything else you can imagine suffers from the same scarcity issue (as a matter of fact, that's essentially what economics is: the study of the allocation of scarce resources).

As a matter of fact, it's because of that scarcity that demand curves slope down and supply curves slope up.

In short, the fact that resources are scarce is not unique to housing, so that cannot be an answer to my question or why housing, for some reason, is immune to economic laws.

jon writes:

Do you honestly think the scarcity of land has no bigger impact on the price of homes than does the scarcity of other resources on other goods?

Also, the original point I (with an assist from Rent Control) made that started this discussion was that the market, on its own, isn't going to provide housing for lower income people in Manhattan (or SF or London, etc.), and that that the whole point of rent control is to remedy this by making sure that:

the apartments no longer go to those who value them most.

Rent control writes:

If I were to produce a single negative example, Jon's theory would be disproved. For example, if I were to show that it would be possible to have a housing shortage, high rents and such in the absence of zoning laws or rent controls, that would be enough to invalidate the theory that the market left to itself will everywhere and always provide, even for people with low or no income.

Rent control is terrible. But to understand it, one must look at what the situation was in Stockholm, NYC, SF etc, immediately before its introduction.

If a 100% - 200% rent increase lands on your desk, are you just going to sit there and say 'Oh well, market signal'. No, of course not. If your civic leaders won't do anything, you are going to arrange a rent strike/riots. (and I might add, your landlord will phone the government for intervention in the form of taxpayer-funded police protection)

Pauline Newman organizes influential New York rent strike. December 26, 1907

"The strike, involving 10,000 families in lower Manhattan, lasted only until January 9, but about 2,000 families succeeded in having their rents reduced. More importantly, the strike attracted the attention of leading figures in the settlement house movement who suggested capping rents at 30% of a family's income."

The interesting thing about this was that government-imposed zoning laws did not appear in New York until 1916:

"1916, New York City adopted the first zoning regulations to apply city-wide as a reaction to construction of the Equitable Building (which still stands at 120 Broadway)."

Wikipedia: Zoning in the United States

So there you have it, a historical test of where the theory was applied and observed to fail. Even with no zoning laws, people's rents rocketed to levels where they organised riots. New York then went on to introduce rent control in the 1930s.

(Perhaps one explanation here is that as the value of land increases, the rental yield e.g. rate of return must fall. Though I am not certain of it.)

In summary, the market has a role, but the government has a role also. Here are some examples of governemnt interventions that could assist:

Expanding public transport so that the area that people will find commuting to work reasonable is expanded, and access to cheap land is opened up. A motorway lane only carries about 2000 people/hour, whereas a train line can do 30,000/hour.

Defining land property rights and title to property.

Taxing the land to promote the efficient use of land so that density is promoted, which can bring rents down through promoting building, and provide revenue for public roads, parks, sewer systems, stormwater handling, streetlighting, etc.

Providing housing assistance For the section of society where the market is not interested. E.g. People with complex problems or hardships, or people with low or no income, bad record etc. This could be social housing, vouchers, direct payments or something else.

Jon Murphy writes:

@jon-

Do you honestly think the scarcity of land has no bigger impact on the price of homes than does the scarcity of other resources on other goods?

I do not, no. At least, not naturally. To the extent that it does, it's because of land-use restrictions artificially restricting the supply of land. There is nothing unique about land for housing vs land for, say, farmland that would result in the inability for housing to follow economic laws.

In fact, to the extent that land is more scarce for housing, it would naturally encourage even more efficient use of current land, which would suggest housing would be more susceptible to economic laws, not less.

That is why I say your conclusion, specifically:

the market, on its own, isn't going to provide housing for lower income people in Manhattan (or SF or London, etc.)

is incorrect. You have yet to provide any reasoning on why you believe this vs other markets that are susceptible to the same restrictions. Furthermore, your conclusion that the apartments no longer go to those who value them most is incorrect for the many reasons already listed by Don, David, and myself.

By artificially creating more scarcity in an already scarce market, rent control only harms the poorest, not helps them. Do you really think the poor have a greater advantage over the right if they are fighting over 30 homes vs 300?

Jon Murphy writes:

If I were to produce a single negative example, Jon's theory would be disproved.

No it wouldn't. As with any theory, there can be any given anomaly (the whole "exception that proves the rule" sort of thing). Does the fact a balloon filled with helium rising disprove gravity? Of course not.

Rather, you would need to provide a preponderance of evidence to show that housing doesn't follow the same economic laws literally everything else does (and provide some kind of explanation why). After all, extraordinary claims require extraordinary evidence. To keep with the balloon metaphor, just as its existence doesn't disprove gravity, but there is a reason for it's seeming defiance of the law of gravity, you'd need to do the same for housing. Jon suggested "land," but that cannot be as all resources are subject to that same restriction (this would be like saying "helium rises because it has atoms in it." Everything has atoms in it, so that cannot be the reason it rises).

Jon Murphy writes:

I think it's important to remember (and you both seem to be forgetting this) is that the market does not promise utopia, it does not promise everyone will get the prototypical house with the white picket fence. In short, it does not promise you'd be happy. What it does promise is that, left to its own devices, market actors will work to continuously improve effeciencies and, based off price signals, allocate resources from where there is a relative abundance to places where there is relative scarcity.

Markets must exist because there is scarcity. This is not Heaven, or even Eden. This is Earth.

Jon Murphy writes:

There is a typo in the last sentence of my 7:07 AM comment. It should say:

"Do you really think the poor have a greater advantage over the rich if they are fighting over 30 homes vs 300?"

Jon Murphy writes:

One final thought, @jon-

I agree with you that rent control makes sure "the apartments no longer go to those who value them most."

But that's really the problem. The apartments don't go to whom they are valued highly. They go to whom they are affordable. This is the thrust of David's point on why rent control is bad.

Rent Control writes:

"Falsifiability or refutability of a statement, hypothesis, or theory is the inherent possibility that it can be proven false. A statement is called falsifiable if it is possible to conceive of an observation or an argument which negates the statement in question."

Wikipedia: Falsifiability

This is exactly what I have done. I have historical third party evidence that even in the absence of zoning laws you absolutely can have a massive shortage, huge rent increases, and rent strikes/rioting.

All it requires is that the movement of people to an area is rapid or a large number of high paying jobs move to that area. It is not automatically inconsistent with other economic laws (just as the helium balloon example is not inconsistent with gravity), it just requires that the market is slow to respond.

You will also note that around 2000 families got their rents reduced after the rent strike - economically, this is the same as a rent control/price control minus the government presence.

There are other examples of this, so it isn't one exception. From the late 1800s - early 1900s there were rent strikes in many places.

"After the First World War started in 1914, thousands of workers flocked to Glasgow to jobs in the shipyards and munitions factories. Property owners calculated they could raise rents for tenement flats, thinking that as the demand for housing outstripped supply, if sitting tenants would not pay up others would. Besides, many men were away fighting or were bring held in German prisoner of war camps, and the landlords thought the women would be a soft touch.

Instead, fury was aroused. Women were already campaigning against the poor maintenance of their dwellings and the greed of the landlords in failing to carry out repairs. The rent strike was the response."

Mary Barbour & Rent Strike 1915

Also, the helium balloon example is flawed. It is consistent with gravity, and it is known what accounts for that.

"If there were no atmosphere the balloon would go down as you have expected. But the presence of air has changed this. The key fact here is that the balloon is lighter than air."

Hasn't disproved it, merely explained by extension of the theory to account for air. In a place with no air (i.e. the moon) the balloon would fall. It is the same with dropping things like a feather and a brick, the fall at the same rate in the absence of air.

Indeed, there are plenty of examples of this!
Rent Strikes

See: Why does a helium balloon rising up in the sky represent an apparent violation of the law of conservation of energy?

jon writes:

That is why I say your conclusion, specifically:
the market, on its own, isn't going to provide housing for lower income people in Manhattan (or SF or London, etc.)
is incorrect. You have yet to provide any reasoning on why you believe this vs other markets that are susceptible to the same restrictions.
My conclusion is based on the fact that, absent market interventions like rent control, there isn't any housing for lower income people in Manhattan (or SF or London, etc.). It's an objective fact, I don't need an economic theory to justify it.

jon writes:

I agree with you that rent control makes sure "the apartments no longer go to those who value them most."
But that's really the problem. The apartments don't go to whom they are valued highly. They go to whom they are affordable. This is the thrust of David's point on why rent control is bad.

No no no no no, the whole point of rent control is that we want poor people to be able to live in these apartments. If you want to argue that that is not a good goal, that is fine. But you cannot argue that rent control is bad because it achieves exactly what it set out to achieve.

jon writes:

I think it's important to remember (and you both seem to be forgetting this) is that the market does not promise utopia, it does not promise everyone will get the prototypical house with the white picket fence.
I don't think anyone is arguing for utopia (just basic dignity), and I am even more certain that a rent controlled apartment in downtown is not the prototypical house with the white picket fence, so I am not sure what you are getting at here.

Jon Murphy writes:

@jon-

But you cannot argue that rent control is bad because it achieves exactly what it set out to achieve.

But it doesn't achieve that for the various reasons Don, David, and I laid out. That's the point. Rent control is an ineffective way for providing housing for the poor because it raises the cost* for housing, not lowers it. It reduces the supply of housing, not raises it.

If the goal is to help the poor get housing (a wise and noble goal), rent control is a poor method of doing that. If the goal is the help the poor, raising costs is not going to help. If the goal is to help the poor, the worst thing you could do is restrict supply.

*Please note I am discussing economic cost here, which is explicit (the monetary price) and implicit (aka opportunity cost) costs combined.

Jon Murphy writes:

My conclusion is based on the fact that, absent market interventions like rent control, there isn't any housing for lower income people in Manhattan (or SF or London, etc.). It's an objective fact, I don't need an economic theory to justify it.

Please provide a source for that fact. All the information I have says otherwise.

Besides, you need to remember to ask the all important question "as compared to what?" Does rent control make things better as compared to the free market? The answer is absolutely not. In fact, as the link I displayed shows, rent control is widely regarded as a failure in achieving its purported goals of providing low income housing.

I don't think anyone is arguing for utopia (just basic dignity), and I am even more certain that a rent controlled apartment in downtown is not the prototypical house with the white picket fence, so I am not sure what you are getting at here.

Forgive me for being poetic. Let me be more plain: the market does not promise everyone will enjoy the same quality. The market simply promises that it will allocate resources, to the best of its ability, to where they are most needed. Higher prices in Midtown, for example, would encourage people to seek homes elsewhere where there is more housing available. It also encourages builders to build more in Midtown, thus creating more housing (absent artificial controls, of course). That is a good thing. That is what should happen.

Jon Murphy writes:

@Rent Control-

Please note that jon's comments can be disproven with a signal negative example as he does make an absolute claim ("My conclusion is based on the fact that, absent market interventions like rent control, there isn't any housing for lower income people in Manhattan", emphasis mine.). Notice his theory relies on an absolute ("isn't any housing provided"), whereas mine and Don's point is more general ("markets generally lower the cost over time,").

Rent Control writes:

I have already provided an example from NYC where rents rose faster than supply and thus people organised rent strikes because they couldn't pay.

I also demonstrated that this occurred in the absence of zoning. Exactly where were the displaced going to go? Into housing that didn't yet exist?? Where would you have them go while they wait for, over the long term, more places to be built?

Perhaps the market will provide - a cardboard box - for those displaced by rapidly rising rents. Demand can absolutely overshoot supply and it can take time to catch up. That statement does not violate supply/demand laws. Nothing is said about how long this could be.

In this entire discussion I have made it clear that rent control is bad policy and an absolute last resort. Rent controls are a response to a problem: The problem that people face when they get letters saying pay 100-200% increase or get out.

There are limits on the supply of land. Land is not made in a factory like bread is. One is people's fixed travel time budgets to get to work which historically has been shown to be 30-45 minutes (60-90 minutes daily). Land that may be cheap 1000km from a city is pointless because you'd not be able to get to work on time.


Jon Murphy writes:

@ Rent Control-

I have no problem with anything you've said. Nor does any of it contradict anything I have written. In fact, much of it is what one would want in a market economy.

I'm not sure what your objection is? Can you please help me to better understand your objection?

jon writes:
But you cannot argue that rent control is bad because it achieves exactly what it set out to achieve.
But it doesn't achieve that for the various reasons Don, David, and I laid out.
Can you name a city that doesn't have rent control but does provide housing for low income people? Because I can name a lot of cities that do have rent control and do provide housing for low income people.
jon writes:
Please note that jon's comments can be disproven with a signal negative example as he does make an absolute claim ("My conclusion is based on the fact that, absent market interventions like rent control, there isn't any housing for lower income people in Manhattan", emphasis mine.).
So find it. Where is that single negative example of housing for poor people in Manhattan that doesn't rely on any market intervention.
Jon Murphy writes:

Because I can name a lot of cities that do have rent control and do provide housing for low income people.

Jon- Please note that no one is objecting to this part of your argument.

The objection (to which you have yet to provide any empirical or theoretical evidence for) is that, absent rent control, there will be no housing for the poor.

Additionally, merely providing a list of cities with rent control that has some housing for the poor is insufficient to disprove the argument we have put forth. You must remember the all important question "as opposed to what?" Our position (and to which I have provided ample empirical and theoretical evidence, by the way), is that rent control reduces the housing available for the poor, not increases it.

jon writes:

The objection (to which you have yet to provide any empirical or theoretical evidence for) is that, absent rent control, there will be no housing for the poor.
And you said that claim
can be disproven with a signal negative example as he does make an absolute claim
yet you have not provided even that one, single negative.

benj writes:

Without people paying the full market rent, valuable location will be over consumed and misallocated. So, the same criticism applies to owner occupation as it does to rent controls.

The solution is that we all pay rent to exclude others from a scarce resource, supplied by nature.

That way it's capitalised value drops to zero, and the market can allocate it at optimal efficiency.

We'd also see a much more equal society, the real cause of affordability issues.

So, that's the stupidly named "housing crisis" sorted.

Rolson writes:

Rent Control hinges much of his/her argument on an example from early 20th century New York City in which a rent strike occurred in the absence of both rent control and zoning. It occurs to me that in order for such an event to truly justify the implementation of rent control, other questions might need answering to determine if this were truly a market failure. I have not done in-depth research myself, but perhaps Ms./Mr. Control has done so. Here are some items on which he or she may want to elaborate:

Firstly, is the 2,000 rent reductions a statistically significant figure in a borough that Wikipedia thinks had close to 2 million inhabitants at that time?

https://en.m.wikipedia.org/wiki/Demographic_history_of_New_York_City

How capable were these strikers of accurately assessing the environment in which they lived? One of the articles Ms./Mr. Control cites notes that renters struck in the 1960s over insufficient maintenance (itself a predictable outcome of rent control). Did the 1907 strikers truly understand the landlords' costs?

Might those landlords' costs have been raised artificially? Did they have to comply with any costly regulations or regularly pay out bribes or protection money?

We're there regulations that reduced supply? These could conceivably occur at any point in multiple supply chains, including areas from local building codes and livery oligopolies to federal tariff policy and labor restrictions that affected construction workers. We certainly know Tammany Hall had its hand in a number of pots during that era.

Assuming that consideration of the above factors reveals a free market in housing, we must then determine if the situation causing the strike was merely a temporary lull that a market correction would have quickly solved, such as by diligent engineers looking to overcome a lack of land by creating ever-taller skyscrapers.

And if all the other categories were satisfied, Ms./Mr. Control must then assess if the Robert Moseses, Eliot Spitzers, or whomever the available politicians/bureaucrats are in a given era can be relied upon to produce a rent control system that is, in fact, more effective than free individuals using their talents.

Assessing zoning and Price controls are important factors in determining whether a free market exists, but they are not the only ones.

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