From /r/starterpacks: Gentrified restaurant starter pack. Whoever makes these will be raking it in if California successfully copies Oregon’s rent control laws.

The Rent Control Bomb

The latest policy trend that is destroying Blue States from within

San Francisco just celebrated the 40th anniversary of rent control policies.

Meanwhile, homelessness and housing shortages have reached crisis levels.

While some may look at the crisis as evidence for the need for more sweeping protections for tenants, economists who study the subject say that such policies are in fact to blame.

Show producer Charlie Deist joins the show to discuss various proposals to implement state-wide rent control in places like Oregon, California, and New York.

Tune in to the podcast:

Transcript:

Bob Zadek: Hello everyone, and welcome to The Bob Zadek Show, the longest running live libertarian talk radio show on all of radio. Like an oasis in the desert, we are probably the only live radio show the weekend on all of AM radio. Today, I start off the show with a quote from the socialist economist. I will only do so for obvious reasons this morning. Socialist economist Assar Lindbeck famously said that in many cases, rent control appears to be the most effective technique presently known to destroy a city — except for bombing it.

Rent control, according to Assar Lindbeck, was the functional equivalent of bombing from a Swedish economist. Well, credit where credit is due. Even Swedish socialist economists get it right sometimes.

Today we explore rent control. Why are we exploring it this Sunday morning? Because, on our coasts, the subject of rent control is in the state legislatures and is being discussed locally as well.

We have legislators on the East and the West coast and in some cities such as Illinois, who create an artificial housing shortage by restrictive zoning and strict building codes. Having very effectively created a housing shortage, San Francisco is the poster child for this, with New York right behind. A housing shortage just means that prices are going to go through the roof, if you believe the supply-demand theory. So prices of rent go through the ceiling. That becomes unpalatable to the people who elect state legislatures.

Since rents are responding predictably to increased demand, but limited supply (thanks to the legislature), the way they fix the problem is simply by criminalizing the free market by saying it is illegal to adjust the price of something to reflect its shortage. And therefore, when the smoke clears, what we have is another form of income transfer. In this case, wealth is transferred under the point of a governmental police gun from landlords who did nothing wrong except to own real estate, to tenants who simply want to live in a place they cannot afford.

Welcome to 21st-century America.

To join me in my conversation, I’m delighted to welcome to the show, once again, my producer, Charlie Deist. Charlie, welcome to the show this morning. Let’s talk about rent control. You see it every day. You live in the Bay Area, you witness and experience it.

Charlie Deist: Good morning, Bob. Happy to be here. Let’s get into it. It’s funny, you say I live it every day and it is true. At the moment I am looking for a new apartment, as I’m making a transition the next month and getting married, so I’m moving out of my current place and looking around the Bay Area. It is headache inducing. You tend to find a few different things. One is the infamous studio cottage in the backyard, which you can snatch up for maybe $2,200 a month here in Berkeley. And that’s not even the epicenter of the housing crisis in the Bay Area. So it’s really gotten pretty crazy here.

The Origins of Rent Control and Seen Versus Unseen Consequences

Bob Zadek: Now, the history of rent control is quite interesting. Most people aren’t aware that it has been around for so long, you just assume it’s always been here, like trees and grass. But, rent control started as many really bad governmental policies do. It started for a kind of good reason. It was a policy which was created for a very specific and very limited purpose. The history of rent control in modern America can be traced back to post WWII veterans returning to the country to start their post-World War II lives. And of course, lots of of veterans are returning, young and wanting to start a family and needing a place to live. America was so justifiably grateful for the service they performed for our country that we passed the GI bill of rights to give that greatest generation a college education for free.

In order to protect them from the natural housing shortage, with so many veterans returning and not enough housing to accommodate them, that New York City passed temporary rent control. This simply meant that landlords were not able to raise the rent of the tenants except in a very limited period of time. So, for the first time we have governments saying that even though a tenant is willing to pay more for an apartment and the landlord is willing to accept that increased rent, that contract is against the law. Is it not the government saying that the market is not going to be allowed to demonstrate the value of a commodity, in this case rent, but instead the government will determine the value. So the government will compel a landlord to rent for a lower price. I guess we can say that there was a good motive, perhaps reluctantly. As long as it is temporary.

Charlie Deist: Right. I think is one of the textbook cases of supply and demand where the unintended consequences — it’s sort of the seen versus the unseen — comes into play. You have some sort of obvious “seen” benefit, like renters who are protected from a rent increase. These benefits tend to be frontloaded after the policy is passed. So, you have people who are allowed to stay in their homes longer than they otherwise would have during a period when prices are rising for other reasons. Then, on the flip side, you have the “unseen,” unintended consequence of the scarcity of new housing going through the roof, no pun intended. Developers take a look at the market and say, “Well, can we recoup our investment if we are only allowed to charge a below market rate?”

So, they decide to build in another city, and you end up with what you have in San Francisco and the Bay Area, which is a lot of smaller single-family units that were built in the 1960s and 70’s. So it’s an example that economists love to talk about and love to hate. It can be difficult to explain because you might seem like the heartless person coming in and saying that you want to evict people. You hear a lot of talk about gentrification these days as the source of all evil. In fact, the economist wants to say, “No, if you put in rent control, you’re actually making these problems worse.

The Fallacy of the Housing Shortage

Bob Zadek: One of the wrongheaded principles underlying rent control is the cry on the left that we have a housing shortage.

Now Charlie, let’s do a little bit of a mind game together. Let’s take the phrase which is in the news every day, “housing shortage.” I’ll tell our friends out there that we didn’t rehearse this, so Charlie is going to be blindsided. I would like you to tell me if there is a housing shortage, and if there is, what exactly does the phrase “housing shortage” mean?

Charlie Deist: Okay. Well, I wish I had a whiteboard or something here because the way the economists would explain it would be that they would draw the big x on the board– the upward sloping supply and downward sloping demand– and something like rent control functions as a price-ceiling. So, you can imagine a horizontal line that caps the price at some level below the point where those two lines intersect, and so you have the line that intersects demand at a higher quantity than where it intersects supply. So that’s kind of the wonkish explanation.

Bob Zadek: What is the non-wonkish answer? Does San Francisco or New York have a housing shortage? I would maintain that it is intellectually impossible to have a housing shortage. Do you think there is a housing shortage in San Francisco or New York or any city that claims to have a housing shortage?

Charlie Deist: In a sense I think you can have one, when the quantity demanded exceeds the quantity supplied by the market. If you had a perfectly free market and if landlords were allowed to raise rent to incentivize new development of houses that people could afford, then maybe you would be correct. Right now you have hundreds of thousands of people moving into the San Francisco Bay Area. They can afford to move out to some area where historically maybe rents weren’t so high.

Maybe in effect you don’t actually have a shortage because people are so creative. Landlords are creative in figuring out ways around rent control. For example, in New York City, there was a time when landlords were charging these key fees. You can imagine, you know, “Okay, we have to change the keys when a new tenant comes in. So we’re going to charge you $2,000 for that. That will level out the amount less in rent that we are allowed to charge based on the rent control policy.”

But I do think that we can talk about a housing shortage as something that is happening in places like San Francisco where the influx of people is not being accommodated by either an increase in rent, which would encourage more people to put their apartments on the market, condominiums could be rented out, people would rent out their spare rooms. So I do think that when politicians start to meddle in the market, I think we can talk about a shortage, but where do you find fault in that?

Bob Zadek: I find great fault in it even though we are dear friends. The fault is that implicit in your explanation — in other words, until San Francisco can accommodate 75 million people — there will be a shortage, because there will be a person who can’t live in San Francisco because he can’t afford it. So, a housing shortage really means that people cannot find housing at the price they want or cannot afford. That will mean we have in this world a severe diamond shortage. We have a shortage of expensive cars. We have a storage of designer clothing. Because everybody who wants it can’t afford to have it. So I maintain there is never a housing shortage. There is only a shortage of a commodity, in this case housing at a price somebody feels that they want to or can pay.

We will only have exactly the amount of housing if there is a free market, which means that some people can’t afford it. The problem is not the quantity of housing, but the problem is the price. So housing shortage, Charlie, is a placeholder, a surrogate for cheap stuff. There is only a shortage of cheap housing, not a shortage of housing. We have a price issue, not a commodity issue. That’s why I say there can never be a housing shortage. There is only a shortage of cheap housing, not a shortage of housing.

The Mechanism of Bizarro-Federalism

Charlie Deist: I would agree with you almost 100% except that we did say those couple of words, “if there is a free market.” When there is not a free market or in the case of some kind of supply-shock, like let’s take the example of World War II Europe where all the houses were leveled. That might also be considered some sort of a housing shortage, in the sense that there are people who want houses and it is just not available.

But to focus on the topic of rent control and current events and these cases where there is not a free market, and where we can see the effects of what I am calling a shortage — let’s take what just happened up in Oregon and which is now happening in California. Oregon passed the first statewide legislation of a cap on rent control.

They said you can’t increase rent more than 7% a year. This was applauded by all the progressive’s in Oregon. Kamala Harris picked up on it and she said that this is a bold step. Now California is copying them, and they just passed a bill that was even more ambitious initially than Oregon. They were going to cap it at 5%, and eventually they modified it and made it a 7% just like Oregon.

So you have this kind of “bizarro federalism.” Usually you have federalism operating the other way around where a local government or a state tests out a policy that is successful so it gets copied. But here you see Oregon and California, two states with the worst housing situations and bad homelessness problems and people are speaking about the lack of affordability in these areas, yet it’s getting copied all around. What do you make of that? 9 out of 15 of the metropolitan areas with the highest median home values are in California. Don’t you think there has to be some kind of cognitive dissonance on the part of the people who are pushing policies that have seemed to make the problem worse?

Bob Zadek: I disagree with the phrase “cognitive dissonance.” I can’t find the opposite. It’s like what is the opposite of orange? You can’t find the opposite of of cognitive dissonance. I would say that it is more sinister than that.

We are in a Democracy in the sense that majority rules to a substantial degree, and politicians, in order to be reelected and elected, they have to cobble together 51%. To get 51% of the landlord vote, you’re not going to get elected, while with 51% of the tenants vote it is a lock. Therefore it is simply a question of catering to the majority. In this case, renters. So, it is a calculation done to ensure reelection. We call it “public choice theory.” Politicians behave as they should, in their self-interest, and their self-interest is to get reelected and you get reelected by pandering to 51%, and that’s how you get to be a representative or a Senator in Washington or in the State House.

What is interesting is that if we stipulate hypothetically that rents are “too high” and that there is a need for relief (remember, I don’t agree with that. The market takes care of it). But if we stipulate that only to see where we go with it, then the solution would be that if you feel that tenants are in need of help like students and like everyone else who claims to be in need of help, legislators can give them subsidies, i.e., governmental checks or tax relief, but why in the world is it good policy to pick a subset of society, the landlords and tell them they have to bear the economic burden of the tenants’ need for help? To me that is arbitrary and unfair. Why not just pick bankers? Why not pick accountants?

Rent Control’s Devastating Consequences

Bob Zadek: Charlie, as you and I know, and we ought to explain it to our listeners, all of the adverse consequences that happen from the arbitrary selection of landlords to bear the brunt of it. Assuming you are a landlord and you are limited in raising your rent and you are determined to make a profit lest you abandon the property, if you cannot increase the income, the only other option you have is to decrease the costs. And what are the costs you are going to decrease?

Charlie Deist: Things like maintenance and upkeep. You are going to become a pretty sloppy landlord probably.

I think you make a great point. Why do we pin it all on landlords? It is the stereotype that landlords are always these rich, wealthy oppressors, and the tenants are poor disenfranchised, oppressed victims.

I read about some cases where landlords were bearing the brunt of laws that really came down heavily on people who had to evict tenants at the end of their lease. In the city of Oakland for example there was a case where a couple was sued for ending their lease, and they had to pay $12,000 to their tenants just to reoccupy their property. They had their circumstances change and they needed to move into the property that they owned. $12,000 for this family was a huge hardship. It was not a wealthy family. They had two young kids. And I think that, looking at politics always through the lens of the oppressors being a certain category of people and the oppressed being another is always a recipe for bad policies.

It is sad to see stories like this, but even more sad to look at the big picture of properties that are not being kept up. To see these blighted neighborhoods. That is another thing where the poorest neighborhoods are often hit the hardest by the metaphorical bomb drop that is rent control, where all the landlords don’t have the option to raise rents, so they just choose to neglect the property hoping that the tenants will eventually find it so squalid that they can’t live there anymore.

Bob Zadek: Now Charlie, let us assume that the motive of rent control is to help people who can’t afford to live in a certain place help them live there. Remember, people are not entitled to live in nice places. They are only entitled to live there if they can afford it. I start with the premise that people are entitled to live where they can afford, and if, as a result of higher rent prices an area, city, or a state determines they do not like what is happening to their area, they are free to give scholarships, subsidies, moving allowances, bonuses, etc. They are free to vote an entitlement to a certain subset of their population, to give them money so they can afford to pay market rent. But of course, that doesn’t work because legislators would be voted out of office if they did anything directly like simply transfer wealth from the government, our wealth, to the renters.

So it is much better to demonize landlords and transfer wealth from them to tenants. Now legislators get two points — one for punishing landlords, and one for benefiting tenants. They score two points and they don’t get a ding for raising taxes. They are forcing one segment to pay for the economic shortage of another segment. That is really what’s going on.

Who benefits from rent control? It is not people who have low incomes. In most rent controlled areas, there is no income test. It is first come first serve, law of the jungle of for rent control. Isn’t it kind an unfocused way of helping people if the goal is to help people who have an income shortage?

Charlie Deist: It’s even worse than that in a way. You said it doesn’t necessarily hurt the taxpayer, but it does in the unintended and longer term effects of the fact that new developments don’t get built. And there is no tax revenue on those buildings. That has been documented empirically. Places like San Francisco are suffering as a result of not getting those tax dollars. It seems that the people who can afford to hold out and stay in their rent controlled apartments for a long period of time are not those who are in most need. They tend to be relatively upper-middle class families that have been in the area for a long time and are attached to their houses. It is one of these inefficiencies.

It is like a “leaky bucket.” In a perfectly efficient market, people would move when they wanted to when they felt the need to have more space or less space, and that would be sort of transferring water from one bucket to another. But leaky bucket is where everyone’s doing something that is slightly suboptimal. They’re staying in their apartments for longer than they would. They don’t want to lose that sweet ticket of being in that artificially cheap place.

There was an article in Bloomberg by a progressive writer, for progressive audience, saying that there’s more than just the supply and demand story. Noah Smith says that in the housing market, you might think that building market-rate housing would increase the rents for the people even in the outer areas, but you find that if the city is allowed to build high-rise apartments in the parts of the city where these tech workers actually want to live and work, then they are less likely to go out to the suburbs or the peripheral areas in the city that are historically occupied by lower-income people.

So, it’s not a straightforward supply and demand story. He uses this analogy of these high rise apartments being the fish tanks, and if you build more fish tanks you can absorb more people coming in with the people outside relatively untouched.

He also suggests an idea of paying off displaced renders with the social insurance. I wonder if that could be a successful political message. I doubt Kamala Harris is going to pick that up anytime soon, but it could be something for a policy entrepreneur to take and run with if California’s crisis ends up getting much worse than it already is.

Bob Zadek: The problem with rent control is that it produces all of these, as you said earlier, unanticipated consequences. One of them is that tenants can’t afford to move because they are in a rent controlled, below-market living space. If they move, they are going to move to market-rate housing. You end up with these stories of elderly couples living in a seven room Park Avenue West apartments. They don’t need all this space. They are taking it to have three rooms where they store used clothing and one bed they sleep in. Why don’t they move? They can’t afford it because they are paying $81 a month for the rent, and if they move, it is going to be thousands of dollars. So rent control exacerbates the shortage of housing because people don’t make decisions based upon cost and need. They are forced to be prisoners in their apartments because they can’t afford to move.

Rent control is not means-tested. Therefore, you end up with very wealthy people who get the benefit of below-market housing at the detriment of their not nearly as wealthy landlords. So it is an incredibly stupid policy, which is created only because it gives political benefit to those who enact rent control legislation.

Charlie Deist: Have you ever seen the show Hoarders? That image that you just painted there with the house with a room full of clothes reminded me of that. Hoarding in an economic sense. You have people hoarding their homes rather than moving to where it is best for them and their families. Walter Block, an economist, writes for Mises.org and you can find his work on Walterblock.com. He’s also been a guest on this show. He says that people are “trapped by the gentle and invisible hand that keeps them where they are rather than where they might do better.” And so rent control neighborhoods end up blighted, the assessed value of the properties fall, so it is a vicious cycle.

The Ethics of Price Gouging

Charlie Deist: It really is like the proverbial bomb drop. In New York, it is also interesting because they are another state that has copied the model of Oregon and California. The bizarro federalism is going viral across the nation. Everyone’s copying the failures of California and Oregon. New York is looking at a law that would cap rent increases at 1.5% plus the inflation rate. So, even less than California’s 5%. And they described anything more than this as being an “unconscionable” rent increase. I wanted to get your take on the use of that word “unconscionable,” because I feel like you’ll have something interesting to say.

Bob Zadek: No market price can ever be unconscionable unless you have a pretty gosh darn distorted conscience. That invites the related concept of alleged price gouging. States and legislators are repealing the free market right and left. Price gouging is directly relevant to rent control. I’ll tee it up with a very clear hypothetical.

During Hurricane Sandy in the East coast, there was a shortage of everything on the planet including water, and entrepreneurs bought up cases and cases and cases of water. They drove at great peril and expense into the areas hard hit by Hurricane Sandy and began selling bottled water, at maybe four or five times the price. All the water was bought up immediately, which means they weren’t overcharging because they were charging the price at the time.

Were it not for those entrepreneurs, the people who needed the water simply would not have gotten it. Because if you had the prospect of making 10 cents a bottle on the water, why bother to drive from Pennsylvania with an SUV full of water into hurricane Sandy to make a quick profit? So the fact is that price gouging never exists. You are selling a commodity at the price it commands at that time and at that place. Another example is that hamburgers are more expensive at airports. Why? Because you have no choice. If you want a hamburger at the airport, you can’t drive down the interstate and find a hamburger place. You are at the airport. So given the captive market, that’s the price. It’s a different price than on the interstate. Price gouging simply represents the higher price a commodity will command based upon the time and place it is being sold. The same with rents.

Therefore there’s no unconscionable price, because if you charge something unconscionable, nobody’s going to buy it. So the market tells you if you are charging the right price or not, not the government. Government cannot decide the price of anything.

Charlie Deist: The analogy of the people coming in and bringing things in at an unconscionable new price would be housing developers. To his credit, Gavin Newsom actually said that California needs more housing construction. So that may be part of his policy platform, but in the meantime, rent control is hurting the very people that it’s trying to help, in the same way that if you put a cap on the price of water during an emergency, or ice, which people need to keep their baby formula preserved, or medicine, these people who are in the most desperate need and would be willing to pay $100 for a bag of ice, whatever it might be, the price signal is kind of a signal wrapped in an incentive. If you take away incentive you take away the supply.

A Bay Area Landlord Weighs In

Caller: Rent control of course damages the property owner, the landlord. But there’s a big brother hiding in the woods. and they reared their head last November in the statewide election, in trying to overturn a previous law that controlled what is called “vacancy decontrol.” I rent an apartment out to this nice person for five years. They move out and then I want to fix it up. I fix it up. Now I want to rent it to another person. But vacancy control does not allow me to raise the rent from the previous tenant. I must offer that same price even though five years down the road it may be 20 or 30% more on the open market. That will be the death knell because there will be no incentive for the individual landlord to do any remodeling and improvements of their building if they cannot recoup their costs.

Charlie Deist: This step might be compared to the atomic bomb of rent control. You’re basically turning the landlord into a surf for their tenants. They, it’s a coercive act, you know, it gives the landlords know legal option other than to rent, to attend and against their will. And sometimes, like you’re saying, just even at a financial loss,

Bob Zadek: The only solution I see is for individual landlords is to sue the city, the State when that becomes effective and then it has to be resolved by the US Supreme Court as a violation of our right to offer a service for a reasonable amount.

The New Deal was the death knell of economic liberty in America. We lived in a golden age between the Lochner Era in the early 20th century and the New Deal when economic rights, i.e., the right for consenting adults to negotiate a contract. Take minimum wage laws and rent control. It is simply another example of the government saying individuals are not competent to negotiate a fair bargain between them, so the government has to be there with their thumb on the scale setting the price.

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