Rent control is an illegitimate set of laws that enact a price ceiling on housing leases. They set a maximum allowable price that a landlord can charge a tenant, thus establishing an artificially lower price than would otherwise be set on a free market. The proponents of this kind of market shackle believe that rent control solves the problem of high-priced housing. Since the price has gone up, then by forcing prices to stay low people will be able to find affordable housing. Rent control fetishists err because they do not realize that this is not a solution at all. The problem that causes rent to go up is not that one day landlords decided to form the New Orleans Landlord Price Fixing Cartel, but rather because there is a massive shortage of housing.
The price of housing (and of almost everything else in New Orleans) is going up because at the old price, demand is greater than supply. Due to Katrina, the amount of viable housing is far less than the amount people want to occupy. Rent control does not address the problem at hand – that of low supply. People in the market do what they've always wanted: to get the most for their goods and services. Workers and employers ask for the highest possible price that buyers are willing to pay. Competition keeps this practice in check. It allows for prices to vary depending on consumer preference, rewarding with profits those who best satisfy demand and punishing with losses those who do not. High prices also serve as a market signal to entrepreneurs. It says, very loudly, build more houses!
New Orleans is experiencing a drastic housing shortage. Landlords, like workers, see that people are willing to pay more, and prices rise accordingly. Under the rent control scenario, prices are not allowed to increase (or not increase as much or to freely and dynamically fluctuate). Therefore, what incentive would there be for any company, particularly one from another city of state, given the shortage of local workers in New Orleans, to build houses? Rent control laws would not permit such an incentive to arise. Therefore, the construction industry would not have as much of a reason to build houses there. Let's remember that the problem is not high prices; the high prices result from lower supply.
Rent control also has a more nefarious result: it demonizes landlords even more. If before Katrina they already had a questionable reputation, rent control could quite possibly make things worse. How so? If all of a sudden I am forced to keep prices lower than they ordinarily would, individual renters (just like building companies), have less of an incentive to rent houses. Some, for example, would prefer to sell the home rather than rent it at a loss even if there were people willing to pay more. Others who had suffered damage might not be as expedient in their repair knowing that they would not be able to recover from their loss under rent control laws. Finally, insofar as rent control also reduces competition, the quality of new and existing housing could very well be compromised. In all of these scenarios, however, the result is the same. By eliminating high prices the problem of housing is exacerbated. Construction would be slower, owners would be more apathetic, and people would still not have a place to live, regardless of the price. Indeed, with no rent control laws the prices would come down on their own as more houses are added to the marketplace. Only by allowing prices to temporarily rise can we be sure that incentives to build stay strong. Anything else shows an utter contempt for private property rights and economic retardation.
It is very interesting and insightful to point out that the same people who call for price-gouging laws also call for rent control. Like rent control, price-gouging laws set a maximum price on a product or service. We've heard it quite often recently as the summer storms reduced domestic refining capacity, hindered the import of crude, and blocked delivery routes. In the gulf area, we also heard about price gougers in tree cutting and house gutting. What is known as "price-gouging" is nothing more than the (mostly temporary) increase in the price of labor. Due to the hurricane, not only was there a huge upsurge in demand for labor, but also a sharp reduction in supply. The high prices are merely a result of this new set of conditions. Again, the high price serves as an incentive to bring people in and get things fixed as quickly as possible. price-gouging laws, just like rent control, make sure that fewer people are rewarded for working. We don't hear much about "wage gouging" laws even though companies in the affected areas are hiring workers at much higher hourly wages. The workers are, by the same standard we used to talk about rent control and price-gouging, gouging the companies. Why doesn't the supporter of rent control also want to impose maximum hourly wage laws? If I own a business, I am "forced" (just like the house owner is "forced") to pay more to an employee during a shortage. But why is it, on the other hand permissible, according to the market saboteurs, to not allow other things to rise in price also, such as housing and gasoline? It makes no economic sense at all.
Oh I can hear it already. I hear the drums calling for rent control, the chant of the progressive-minded urging our proud and blessed public officials to do something about the housing situation in the Crescent City. "It's for the children, for the old, for the Everyday Joe," they shall claim. Others, with magnanimous prosaic recitation skills, will no doubt proclaim that all tenants are created equal and that New Orleans ought to respect some inalienable right to be free from the elements. "Down with the landlords and their evil and greedy paws!" Rent control in New Orleans? Let's hope I am wrong.
December 15, 2005
