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Economists’ hate-hate relationship with rent control

Don’t believe anybody who thinks that rent control is simple. In the July episode of Apparent Reason, we’ll be diving into data on rent control and stabilization in New York City. Why rent regulation? How does it work? And why does it have economists in such a lather? I’ll also be speaking with Sam Stein of Tenants and Neighbors, which does organizing, education, and lobbying on behalf of New York’s rent-regulated tenants; he’ll provide an on-the-ground perspective on the political and social dimensions of rent control that he’s encountered during his advocacy and organizing.

The goal is straightforward enough: we want our cities to be open to all. This means helping poor people, the elderly, and members of minority groups to not get squeezed out of the city, or out of a sustainable livelihood, by rising rents in their neighborhood. Controlling the pricing and maintenance of housing can help shift the power dynamic away from the landlords and in favor of these vulnerable populations.

Non-specialist economists simplify away the realities of modern rent control

Economists and libertarians love to bash rent control. Many introductory economics classes and textbooks, including the one I took at University of Colorado, love to use rent control as an example of a “price ceiling”—the maximum price that something can be sold for. This textbook reasoning describes how limiting the price means that there is a shortage of housing relative to the demand for that housing; normally the price would simply adjust upwards, driving away some of the demand, until you had an equilibrium between supply and demand. Since the price hits the maximum, this can’t happen in this vision of rent control, and so you have landlords not able to charge what they want which means that they have to adjust by lowering their maintenace, trying to push rent-controlled tenants out, setting this unprofitable unit on fire, worshipping Satan, etc.

Otherwise quite intelligent economists like Paul Krugman fall for this argument, to the point where the great international trade expert feels like he can huff about the “predictable” consequences of San Francisco’s rental regulations while apparently doing very little research beyond digging up the oft-quoted figure that a 1992 American Economic Association poll found that 93 percent of its members agreed that “a ceiling on rents reduces the quality and quantity of housing.”

Just one problem: that’s not really what modern rent regulation is like, especially in NYC. Housing lawyer Timothy L. Collins, who was the Executive Director/Counsel of the New York City Rent Guidelines Board from 1987-1994, points this out (pdf, page 10). It’s not a price ceiling: there’s a huge amount of flexibility for increasing rent prices and getting rewarded for maintenance improvements. Anybody quoting that poll of economists thinking that this is a condemnation of rent control is living on the fantastical alien world of Introecon that we visited last episode (which was, ironically, inspired by a Paul Krugman quote).

Unfortunately, I think that Collins is wrong that economists are not knee-jerk against rent control: it seems to be a part of the indoctrination process. But that doesn’t mean that what the average economist thinks is actually very relevant. Economics is a huge field, and rent control regulation is a complex subject in one subfield; I’ll trust Krugman on rent control about as far as I’ll trust an astrophysicist on string theory. Economist Richard Arnott takes pains to explain that modern rent control is not at all like the introductory economics stereotype in his article “Time for Revisionism on Rent Control?” in The Journal of Economic Perspectives.

But, there are some powerful concerns about the overall social cost and effectiveness of rent control measures.

Economists who have actually studied the issue closely come to a range of more nuanced conclusions about several of modern rent control’s effects and impacts in US cities, according to a lengthy literature review by Blair Jenkins for Econ Journal Watch. But she generally concludes that the preponderance of the literature shows that rent control has substantial negative effects.

I’m still wrapping my head around the complexity of rent control and its effects, which I’ll be diving deeper into as I prepare for my conversation with Sam Stein. Yet two things do seem to pop out for me right now: rent control is very poorly targeted (landlords still get to choose who lives there), and it quite probably raises rent for everybody else (because the limited supply in the unregulated market absorbs the extra demand in the regulated one). These two factors mean that the rent control regime probably hurts vulnerable populations who are not lucky enough to live in a regulated apartments. Yes, rent control definitely is a lifeline to some of the people who are in the system, but I’m not convinced that their benefit outweighs the harm to those outside. This is a central issue I’ll be thinking about when I dive deeper over the next weeks.

Image © Bosc d’Anjou, Creative Commons BY