Housing Socialism
by Gregory Bresiger <mailto:gbresiger@…%20>
In every country examined, the introduction and continuance of rent
control/restriction has done much more harm than good in rental housing
markets - let alone the economy at large - by perpetuating shortages,
encouraging immobility, swamping consumer preferences, fostering
dilapidation of housing stocks and eroding production incentives,
distorting land use patterns and the allocation of scarce resources ...
and all in the name of distributive justice it has manifestly failed to
achieve because at best it has been related only randomly to the needs
and individual circumstances of households.
~ F.G. Pennance, Rent Control - A Public Paradox
(The Fraser Institute; Vancouver, B.C., 1975)
Imagine a job in which one's salary could never be raised unless a
government commission approved it, and the commission had a reputation
for allowing no increases or just small ones.
Imagine a business in which one could never increase prices unless some
government commission held a hearing at which it invited all the
customers to comment. And in which customers never want to pay more for
anything.
Imagine businesses unable to supply customer needs efficiently because
they couldn't generate sufficient revenues because of government edicts
that restricted price increases and thereby produced shortages.
Imagine a system in which one group of people, with average or
below-average incomes, would have to pay a premium price for a
critically important product, such as a place to live. But imagine that
a smaller group, often better off than the first group or with more
political influence, could receive the same product at a huge discount.
All this should give you an idea of how rent control works.
It works badly.
Rent control is a kind of slow socialism, one that gradually devalues
and sometimes actually destroys properties. When the process reaches the
critical point, an owner will often walk away from a property because it
has become uneconomical to hold.
Rent control works as badly as all other price controls. It's a very old
story known by almost everyone with the slightest sense of economic
history.
That's why the overwhelming majority of economists - even economists of
the Left - agree that rent-control laws are flawed. Indeed, their
effects on a city's housing stock are always devastating.
"A ceiling on rent reduces the quantity and quality of housing
available," according to a statement subscribed to by 93 percent of the
American Economics Association.
"In many cases, rent control appears to be the most efficient technique
presently known to destroy a city - except for bombing." Who said that?
Milton Friedman? F.A. Hayek? Ludwig von Mises? Some other laissez-faire
economist?
Wrong on all counts! It was said by Assar Lindbeck, a Swedish economist
who is a socialist. Yet rent controls - like many price-control rules -
go on and on. Paul Samuelson, another well-known economist of the Left,
also criticizes all price controls in the 2001 edition of his famous
economics textbook: "When government steps in to interfere with supply
and demand," he writes, "prices no longer fill the role of rationers."
Waste and inefficiency "are certain companions of such interferences,"
according to Samuelson.
The Soviet Union tried to fix wages and prices permanently for close to
75 years, an experiment in socialism that was an unmitigated failure.
Indeed, one queued up for food in the Soviet Union, a nation with some
of the most fertile land on the planet. It could take years to obtain a
telephone. And, of course, good apartments in the Soviet Union were
perpetually in short supply.
Given that, and countless other instances of price-control failures in
history, there is a logical question: Why do rent controls - or any
price controls - continue to be supported by some despite overwhelming
evidence of failure? In part, the reason is human nature.
I believe that price controls are always easy to prescribe for the other
guy. It's easy as a tenant, for example, to demand that owners of rental
property have limitations on what they can charge. It's easy as a
business owner to demand that workers have salary controls. It's easy as
an automobile owner to insist that price controls be imposed on oil
companies.
Where does such a destructive process stop? This is the slow road to
another Soviet Union, once so celebrated by the Left in the West for its
"economic accomplishments."
Another factor in support of price/rent controls is wartime patriotism.
It is a factor in how these flawed price-fixing policies win approval.
Price controls - the same as all limitations on all liberties - are
easier to accept in times of war. That is a time when emotional appeals
to patriotism can temporarily mislead many otherwise sane,
liberty-loving, economically literate people.
Decades of rent controls
Rent control in the United States was originally a wartime measure - in
World War I. It has a long history in this nation, especially in New
York. World War I price and rent controls generally ended in the late
1920s. They were then reimposed by the national government as an
"emergency measure" during World War II. They were embraced by many
local governments, including New York City, but they were supposed to be
temporary.
In many cases, price controls go on and on because government
bureaucracies, once established, are almost impossible to dismantle.
For example, back in the mid 1950s, Averell Harriman, the governor of
New York, wrote,
Rent control must be seen as only a single aspect of a broader housing
program and as an interim device until such time as an adequate housing
supply makes it no longer necessary.
However, the latest emergency measure has lasted more than 60 years. And
there is no sign here in New York - under either Republican or
Democratic governments - that disastrous price controls will be
consigned to the ash heap of history.
The initial justification of this seemingly permanent housing emergency
- an emergency with a similarity to some of the economic and political
measures of the national security state - was that during wartime, in
the absence of the controls, property owners would exploit the scarcity
of civilian housing. But even after the end of World War II, rent
controls led to low housing-vacancy rates in places where they were
continued.
Anything under a 5 percent vacancy rate is considered by housing
officials to be an emergency. But decades of rent controls certainly
didn't solve the problem. They instead made the "emergency" worse. New
York City's vacancy rate actually was as low as 1.23 percent in 1968 at
the height of the Vietnam War.
Several factors have ensured that some jurisdictions have stuck with
rent controls. In New York City, with its generally leftist political
tilt, vacancy rates don't approach 5 percent against a national average
that is usually about double that of the city's rate. Another factor
supporting rent control is that the percentage of home ownership in New
York City is much lower than in the rest of the United States.
For the 70 or 80 years of various rent- and price-control experiments,
New York City has been run by liberal Democrats or moderate city
Republicans, who rarely offer a dramatically different philosophy. Both
local political parties usually pledge never to touch rent controls. The
laws have been administered since the early 1980s by the state. And
despite occasional promises to the contrary by upstate Republicans, rent
controls show no signs of being eliminated.
Perverse consequences
This is despite their net effect of reducing the quantity and quality of
New York City housing. Rent control also discourages ownership. Why own,
many tenants in rent-controlled units believe, when their apartments
represent a lifetime entitlement?
Fewer owners mean the city has more tenants. About a quarter of the
city's residents live under some form of rent control. That's a
formidable political force. Large numbers of politically organized
tenants mean raw political power is on the side of the renters, a fact
that New York politicians understand.
Regardless of the efforts of landlord lobbying groups, no major
political figure in New York City today or in the recent past, Left or
Right, has called for an end to these laws or even a major examination
of them.
This is a curious fact in a city in which almost everyone complains
about the lack of affordable rental units and the lack of new
middle-income units. Although rent-control laws usually don't cover new
building, the laws exist in an environment in which strict zoning
controls often discourage all but the richest builders from going
through an exhaustive and expensive site-review process. Given that the
system of rent control has become a kind of municipal religion, builders
and owners often worry whether it could be expanded to their properties.
These facts also change the actions of builders. They fear that their
units could be covered by this antediluvian state act, which was
originally known as the War Emergency Tenant Protection Act.
"The mere anticipation of controls is enough," writes economist Walter
Block.
Indeed, who wants to invest in the kinds of businesses mentioned at the
outset of this article? Faced with the choice to sell a product or
service in a place where one could charge market prices without fear of
controls or in one where prices - and therefore profits - were
controlled or often extinguished, what rational person would opt for the
latter?
Rent controls, the same as every other government price control, go
against the innate human desire for improvement. Put another way, let's
consider someone who never expects to own anything and always expects to
labor for a living. Would this person want to take a job in which his
salary could be frozen or strictly controlled by a government
commission? Not very likely.
Most people want to succeed at what they do, whether it involves an
investment or a job or a piece of property. Most people want the highest
salary, the best returns on their investments, and the highest rent on
their property. No one wants an artificially imposed government
limitation on his financial success. What person accepts less money than
he could have received? There is a human instinct for self-improvement -
for a better life for a person and his loved ones. Why expect property
owners to be any different from anyone else?
The desire for self-improvement is not the mentality behind
price-control laws and rent-control laws. Behind them is the mentality
of social engineering. It is a mentality subscribed to by those who want
the government to micro-manage prices, wages, and even the level of
success of each member of society. It is the attempt of a central
authority to find a "fair" or "just" price for housing.
Ironically, this central authority with its decades of rent controls
succeeded only in creating housing shortages. Yet it has charged itself
with finding the solution. Even one of the authorities, in this case the
New York State Division of Housing Community Renewal, concedes it is a
difficult task to find "just prices" and sufficient supplies.
"Complexities arise from the necessity of balancing the interest of
owners seeking fair rents in a market where there is a housing
shortage," division officials wrote in a publication marking the 50th
anniversary of the World War II rent-control laws. But this search for
"fair rents" is an impossible task. In setting the rents for a property,
how can any authority know all the ever-changing costs and needs of the
owner and those of every prospective renter? How can anyone know what is
a "fair" or "just" rent?
Complaints are often made that 30 or 40 percent of the income of renters
in New York City goes toward rent, a much higher percentage than that
paid in many other parts of the country. Is that a fair criticism in a
city in which many renters don't buy cars because there is more public
transit here than in any other part of the country? How can one know?
How can anyone account for all these constantly changing personal and
market factors? How can anyone know all the value preferences that each
person has and that change throughout his life?
One cannot.
"Value is not intrinsic," writes Ludwig von Mises in Theory and History.
"It is not in things and conditions but in the valuing subject. It is
impossible to ascribe value to one thing or state of affairs only.
Valuation invariably compares one thing or condition with another thing
or condition. It grades various states of the external world."
Even the New York State Division of Housing, in its book celebrating the
accomplishments of a half-century of rent controls, concedes that the
system of finding the right values is difficult. "The balancing of
interests necessitates that rent regulation be more than a mechanism to
restrain rent increases but also a system to maintain an adequate supply
of affordable housing," according to "Rent Regulation after 50 Years."
"Rent control," writes federal housing official Michael Stegman in his
article in The Rent Control Debate, "is a form of social planning in
that it involves public intervention in the private market in order to
achieve social welfare objectives." Stegman continues,
"To the extent that it substitutes public housing decisions for private
housing decisions, a properly designed and effective rent control
program requires that the administering agency have a substantial
knowledge of the local housing market and access to large quantities of
high quality housing data."
Nevertheless, obtaining that kind of information, Stegman implicitly
concedes, is difficult. "The magnitude of this challenge and the
incompleteness or inaccuracy of data may lead to inappropriate policy
choices."
May lead?
Indeed, this daunting task also requires "a substantial knowledge" of an
arcane system. For example, in New York there is a system of rent
controls and rent stabilization. There are rules governing pre-1947 and
post-1947 properties. There are "vacancy de-control" laws. There are
specialized courts for landlord-tenant disputes. There are lawyers who
specialize in these kinds of issues, and they're not inexpensive.
And yet there are owners who often have no ability to raise rents in
spite of recognition by tenants that higher rents are needed. The bias
of these rent-control commissions always seems to be against rent
increases.
"It took one Washington, D.C., landlord six months and a good lawyer to
win a rent increase for maintenance," wrote scholar Eric Hemel, "despite
the fact that not a single tenant opposed his application. Often
increases allowed for maintenance and repairs do not approach the actual
rise in owners' costs."
The same often happens in New York City. I personally knew of a
rent-stabilized property in Queens that was bought some eight years ago.
Back then the rent generated a small 4 percent yearly profit. But the
rent has never been raised because rent-control rules virtually
prohibited it. And now, owing to huge property-tax increases, the owner
is losing money on the unit.
The agent, who handles a property for the owner, once told me, "The
owner could try to put in for a raise, but the tenant would have the
right to object. My advice is not to go through this process because the
tenant might actually lower the rent. The owner should make the tenant a
cash offer to go away."
Of course, the "justification" for this system is that the government is
helping "the poor" at the expense of "the rich." Yet social engineering,
no matter how well-meaning, often leads to surprising and perverse
consequences.
A war on the poor
The goal of rent control is: Make rich landlords pay; make them
subsidize the poor. But, as with other government interventions, things
don't always work out the way they were planned.
The supposed goal is to help the poor who cannot afford high rents - to
provide equity and justice for average people. But rent control - as
with so many other government interventions - has often helped people
who were quite capable of paying for their own way, even while hurting
others who were not well-heeled.
This kind of system hurts the poor. Rent control discourages
entrepreneurs from figuring out ways to deliver low-income and
middle-income housing in the affected areas. That's because even if the
builders succeed in building the housing, their financial rewards will
be limited or minimal. And they will be burdened by arcane systems that
even some rent-control advocates concede are difficult to administer.
Better to build in some other place.
"Thus," write two social scientists looking at rent-control laws in The
Rent Control Debate,
"rent control acts as a disincentive to potential investors, whose funds
will be required for the construction of rental housing. The smorgasbord
of competing investments is far too attractive, and the uncertainties of
residential properties under rent control are far too worrisome."
The authors of the article, George Sternlieb and James W. Hughes,
conclude that rent control restrains the housing supply. "Rent control
runs the risk of undermining its own purposes," they warn.
Exactly. William Tucker, in a controversial, much-debated study, The
Excluded Americans, has argued that rent control is one of the causes of
homelessness. Rent controls aggravate housing shortages for low-income
tenants, Tucker contends. These are the people least able to compete for
housing, he says. But it also hurts the poor and newcomers because
tenants - rich or poor - who have rent-controlled apartments rarely
leave them.
"New York used to be like other cities, a place where tenants moved
frequently and landlords competed to rent empty apartments to
newcomers," the New York Times recently wrote in an editorial.
"But today the motto may as well as be: No Immigrants Need Apply. While
immigrants are crowded into bunks in illegal boarding houses in the
slums, upper-middle class locals pay low rents to live in good
neighborhoods, often in large apartments they no longer need after their
children move out."
So, even though supporters concede that the system has major problems
and even though opponents believe rent controls should be ended, the
system goes on. Why?
Some of the reasons these destructive rules survive are personal and
political. In New York City, the rates of home ownership are low
compared with the rest of the country. Private homes - in part because
of taxes and high regulatory costs - appear beyond the means of many
average-income families. These people believe that they will always be
renters in one of the most expensive cities in the country. Politicians
soon recognize where the votes are. Opposing rent controls, local
politicians understand, is a dangerous business.
Welfare for the rich
Another reason rent-control laws survive in New York City is human
nature. The old saying is "You can never be too rich or too thin." There
are many instances of business people and well-off individuals who enjoy
various government subsidies.
Generally, in most places and most times, rent control has not been
means-tested. So, many New Yorkers know or know of upper-middle-class
and rich people who reside in rent-controlled and rent-stabilized
apartments. There are millionaires with second apartments that are
rent-controlled. They use them for pleasure or business in a city with
housing shortages! This happens while many less-fortunate New Yorkers
can't find a decent place within their price range.
We've had sports stars, movie stars, and at least one mayor here who
lived in rent-controlled apartments. Indeed, one mayor, Edward Koch
(1978-1990), maintained his rent-controlled apartment while he was in
office. That's even though he was furnished with an official residence
in his three terms as mayor. By the way, Koch is hardly a charity case.
He made millions of dollars from books, speaking fees, and media
appearances. He and other wealthy people are some of the beneficiaries
of this flawed system. Don't expect any anti-rent-control speeches from
our former mayor.
Rent-control laws often help people who are politically connected and
who know someone who can obtain these apartments. Thus, oftentimes those
who need it the least receive what amounts to a housing entitlement.
The entire system - which is based on the idea that there is not enough
housing in the free market - becomes a kind of vicious circle. For
example, there is not enough housing for middle-income and low-income
people in New York City. Although new buildings generally are not
threatened, there is always the threat that a building will come under
controls. Indeed, in wartime there is a real potential for controls,
especially in places with a long history of such rules such as New York
City.
Therefore, few builders risk capital on low- or moderate-income units in
New York unless there are all manner of tax breaks. Since most builders
can't or won't play this political game, fewer units are built than if
there were a free market.
Moreover, the beneficiaries of this system often consider their
rent-controlled apartment a lifetime entitlement and even count it as an
asset. They form tenant groups. They pressure the city and state
governments. So do the builders who want to end the laws, but they have
not been as successful. The politicians understand there are more votes
in tenants than in owners in New York City.
Indeed, a former New York City Council speaker, Gifford Miller, actually
used taxpayer dollars a few years ago to help fund an Albany lobbying
event for a tenants' group. The idea that Miller - or any other major
politician, Republican or Democrat - would fund an event for those who
wanted to end rent controls is politically unthinkable in New York City.
Turnover rates in rent-controlled towns are low. Even if the building is
collapsing, why leave an apartment when one is paying below-market
rates? At the same time, why should an owner put any extra money into a
property he doesn't control and on which he may be losing money? The
losers are owners and those who don't enjoy the privilege of a
rent-controlled building. All this, of course, means it becomes more
difficult for those looking for an apartment.
The result: Those locked out of the system rarely have a chance to
obtain the nice apartments that are available in places without controls
and that have higher turnover rates. For example, here in New York City,
apartment vacancy rates are only about 3 percent. This compares with
more than double that for most of the rest of the nation. The experience
of cities that have ended rent controls is that supply was no longer a
problem.
It's time for New York City to stop destroying itself. It's time for New
York City to join most of the rest of the nation. It's time to end rent
controls.
September 14, 2006
Gregory Bresiger [send him mail <mailto:gbresiger@…%20> ] is a
business writer and editor living in Kew Gardens, New York.
Copyright (c) 2006 Future of Freedom Foundation <http://www.fff.org/>