Housing Socialism

by Gregory Bresiger
by Gregory Bresiger

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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.

Copyright © 2006 Future of Freedom Foundation

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