Economics is a remarkable science. In most sciences, exceptions to a hypothesis invalidate the hypothesis. For example, If a mineralogist said, “All diamonds are hard,” finding a soft diamond would invalidate the claim.
Not so with economics.
Rent controls have often been promoted and adopted to aid affordability, have failed in this mission. Yet, here they are again being proposed.
While it’s good news that some more economists have started incorporating “real world dynamics,” we’ll have to see what “Bidenomics” models say. That’s not looking promising. (By Jake Johnson, a staff writer for Common Dreams.)
More than 30 U.S. economists have signed a letter expressing support for strong federal tenant protections and rent control as housing costs remain sky-high, even amid broadly cooling inflation.
The profound economic and social consequences of government intervention in the nation’s housing markets have been documented in study after study over the past twenty-five years.
Due to this hard-earned experience, states and local jurisdictions from Massachusetts to California have banned or greatly constrained rent control.
Nevertheless, a number of communities around the country continue to impose rent controls, usually with the stated goal of preserving affordable housing for low- and middle-income families.
Rent control does not advance this important goal.
On the contrary, rent control has reduced both the quality and quantity of available housing in many communities.
Rent control falls under the broad category of “government price controls.”
Most prices for most things are market controlled. In a capitalist economy, a seller or owner charges an amount that will maximize his/her profits.
This takes into consideration the number of customers each price level will attract. For example, an apartment renting for $1o million a month will entice few, if any, renters, while the same apartment renting for $1 thousand a month might attract thousands of renters.
Many factors are involved, among which are: Number and size of rooms, number of full or partial bathrooms, location, condition, views, furnishings, and other lease terms.
By their very purpose, government price controls create prices that not only don’t consider these elements realistically but largely ignore the owners’ need for profits.
Since the whole purpose is to cut rents below market rates, which squeezes landlord’s profits, the landlord can’t set prices according to the number and size of rooms, bathrooms, condition, etc., so to remain profitable, he must set those criteria to the price — exactly backward of everyday capitalism.
While he can’t change the location, he often can subdivide the rooms’ sizes and bathrooms and primarily cut back on condition. Rather than improving or even maintaining condition to obtain higher rents, he now must allow condition to deteriorate to allow for lower rents.
Government rent controls comprise the Communist approach to housing with predictable results. The slumification of available housing, in which poorer condition and lower prices attract poorer and poorer residents, willing to accept degraded condition in exchange for too-low prices.
The economists note in their letter, released Thursday, that the median rent in the U.S. “has surpassed $2,000 for the first time, and there is not a single state where a worker earning a full-time minimum wage salary can afford a modest two-bedroom apartment.”
“We have seen corporate landlords—who own a larger share of the rental market than ever before—use inflation as an excuse to hike rents and reap excess profits beyond what should be considered fair and reasonable,” the letter continues. “Renters are struggling as a result.”
This is the classic economists’ “cart-pulling-the-horse” scenario.
Problem: Apartments are unaffordable for lower-income people. Solution: Cut the rental cost of apartments.
That this never has worked and cannot work does not deter the economists who seemingly view Socialistic control as a reasonable strategy for aiding the poor.
A more reasonable, Capitalistic solution would be:
Problem: Apartments are unaffordable for many lower-income people. Solution: Increase their net income.
This can be accomplished by reducing the amount of money people must give to the government while increasing the amount of money people receive from the government.
The federal government is Monetarily Sovereign. It cannot run short of dollars. Even if all federal tax collections dropped to $0, the federal government could continue spending, or even triple its spending, forever.
So rather than taking dollars from landlords, who are monetarily NON-sovereign, the same dollars should be taken from the government.
Rather than cutting rents by XX dollars, increase renters’ net income by those same XX dollars. The net affordability result would be the same, but landlords would not be forced to skimp on the things that make apartments more attractive.
Here are some ways in which net income can be increased:
Eliminate the FICA tax. It comes out of workers’ pockets.
Provide comprehensive, no-deductible health care insurance to every man, woman, and child in America.
Provide Social Security to every man, woman, and child in America.
Provide tax deductions to renters similar to the mortgage tax benefits homeowners receive.
All of these would allow low gross-income renters to afford heretofore unaffordable apartments while allowing the market, not the government, to determine rents.
And none of them requires the socialistic government control that rent controls demand.
Although nothing that economists do surprises me, I am astounded to see the name James K. Galbraith in the misguided list.
He fully understands the power of Monetary Sovereignty to solve the rent problem. I plan to contact him to get his responses; if he responds, I’ll print them.
The letter’s signatories—including Mark Paul of Rutgers University, James K. Galbraith of the University of Texas at Austin, and Isabella Weber of the University of Massachusetts Amherst—call on the Federal Housing Finance Agency (FHFA) to require rent regulations as a condition for federally-backed mortgages and reject the “economics 101 model that predicts rent regulations will have negative effects on the housing sector,” likening it to typical arguments against raising the minimum wage.
Yes, the arguments against raising the minimum raise are similar in that they require the private, for-profit sector to pay for a net-income problem that the no-profit-needed federal government easily can and should solve.
And if the problem is “corporate landlords” controlling vast swaths of rental apartments, anti-monopoly laws could include local rental properties.
“Empirical research on local rent control policies in San Francisco, CA and New York, NY found that rent regulations lower housing costs for households living in regulated units,” the economists wrote.
“In Cambridge, MA, empirical research showed that the repeal of rent stabilization laws resulted in an average rent increase of $131 for tenants.”
Yes, of course, prices went down. That is the whole purpose and the whole problem. The economists’ “solution” makes the tacit assumption that all landlords are price gougers who should be punished or, at least, seriously controlled.
Given that “Fannie Mae and Freddie Mac mortgages on the secondary market support nearly half of the rental units in the U.S.,” they argued, “Government Sponsored Entities (GSEs) have the influence needed to meaningfully change the trajectory of the housing crisis.”
The “housing crisis,” like inflation itself, is almost entirely due to a lack of supply, exacerbated by price controls. Shall we also cure the “food crisis” by forcing farmers to receive less for their crops?
The economists’ letter is part of a broader push by tenant rights groups and housing justice organizations to secure federal protections against egregious rent hikes and wrongful evictions.
Rent controls don’t differentiate between “egregious rent hikes” and reasonable rent hikes. They are a huge knife that slices through rents, regardless of egregiousness.
Earlier this week, 17 U.S. senators wrote to the FHFA that “renters also have too few protections, making them vulnerable to steep rent increases and deteriorating housing conditions—factors that are out of their control.”
While rent increases can be prevented by rent controls, have these same economists even considered what will happen to “deteriorating housing conditions.”
More than 140 academics, over 70 climate researchers, and dozens of local elected officials have joined the call for nationwide rent regulations.
Perhaps these “academics” need a refresher course in supply and demand.
Tara Raghuveer, director of the Homes Guarantee campaign at People’s Action, said Thursday, “Tenants are coming for rent regulations, and everyone from senators to economists agrees: tenant protections are common sense.”
Tenants don’t understand the relationships among income, profits, supply, and condition, but senators and economists should.
“Due to lack of regulation, affordable housing is lost quicker than it can be built,” said Raghuveer. “Corporate landlords call the shots with federal financing through Fannie Mae and Freddie Mac. That’s why tenants spent this summer organizing to win what we need: federal tenant protections like caps on annual rent increases.”
Builders and landlords go where the money is. Give renters more money, and more housing units will be built. No one wants to build a housing unit that will receive government-limited rent.
In late May, the FHFA requested public input on tenant protections at multifamily properties with mortgages backed by GSEs.
Tenants with the Homes Guarantee campaign responded by knocking on more than 4,000 doors at GSE-backed properties and organizing more than 2,000 comments supporting tenant protections and rent regulations.
Next, shall we knock on 8,000 doors and ask eaters whether farmers should cut their food prices??
“The system as we know it today has failed everyday people, many of whom make impossible choices between rent and food, their homes or their medications,” said Raghuveer.
“The status quo is not working for the people, it is only working for the profiteers, and it is time for change. It is time for the federal government to change that system, correct the imbalance of power between landlords and tenants, protect tenants, and stabilize the American economy.”
Isn’t this exactly what the purveyors of Communism promise? “We, the government, will protect you from those greedy business owners charging you too much.”
It simply is nonsense that punishes the people it’s supposed to help.
18 thoughts on “Rent control: The always-fails solution for the economics illiterate.”
A response from Professor Galbraith:
Dear Mr. Mitchell,
I appreciate your remarks. I’m not as pessimistic as you are about the possibility of regulating rents, and wouldn’t base an argument about it on broad and abstract words like “socialism” or “communism.” But — as a solution for pressing housing issues — it’s not the first or last word. Land taxes (to spur redevelopment), public housing, and other measures are also needed.
Thanks, Professor,
I repeatedly admire and agree with your remarks about federal finances.
And I agree with you that a label like “socialism” is misleading. I have published several blog posts about this term used as an epithet.
I suggest that narrowly targeted “solutions” to an individual problem are less likely to prove helpful than simply giving people more spending money and allowing them to decide how to use it.
Again, thank you for taking time from your busy schedule.
Rodger Malcolm Mitchell
The value of much real estate should have been falling for quite a few years now… half or more of it is going to have to be torn down and replaced with stuff built to the latest building code standards for energy efficiency if we are going to have any chance of meeting any of the 2050 climate change goals.
Well-said. I agree. How would you best respond to those who flippantly say, “if you give tenants more money, landlords would just jack up their rents even more, just because they can”?
The cost of apartments (i.e. “rent”) would function no differently from everything else that’s sold in the market: Supply and demand. The same concern could be voiced about Social Security payments or any other financial benefits for the populace.
Further, giving tenants more money adds dollars to the economy, which grows the economy. GDP=Federal Spending + Nonfederal Spending + Net Exports.
Well-said. I know people have made this argument against UBI in the past, and also about student loans and financial aid being the real reason why tuition has outpaced inflation. Of course, such neoliberal arguments (essentially arguments for austerity) are half-baked at best. Thanks 🙂
Notice the lack of concern about tax cuts, especially tax cuts for the rich. Tax cuts = spending increases in net effect. It just depends on who receives what.
As the Swedish economist Assar Lindbeck famously said long ago, “In many cases rent control appears to be the most efficient technique presently known to destroy a city—except for bombing.”
To illustrate this, I recall a meme showing two pictures to see if one could tell the difference: one was the South Bronx, and the other was bombed-out Warsaw, Poland in the aftermath of WWII. Indeed, the ONLY way you could objectively tell them apart was the graffiti that said “Falsas Promesas” (“false promises”, in Spanish) in the South Bronx picture, since practically no one in Poland speaks Spanish.
Many of the richest landlords love rent control because it eliminates the competitive need to maintain or improve properties. The landlords can just sit back and collect rent because their tenants will have nowhere better to go.
What you say about price ceilings like rent control is certainly true. One cannot successfully violate the immutable laws of supply and demand; the best one can do is add variables to the equation.
So what about price floors then, like that most sacred of sacred cows, the minimum wage? While that one is far more nuanced, to be sure, there is likely some truth to the “cutting the lower rungs off of the ladder” argument, even if that argument is deployed most cynically by the “master” class of right-wingers and neoliberals. But abolishing it entirely and changing nothing else would also be even more harmful as well.
So how does one square that circle, then? Same solution to the rent problem: UBI, of course, and the rest of the Ten Steps as well ideally. I would actually be fine with abolishing the minimum wage (or at least making it non-binding for private businesses that are not government contractors) IF and ONLY IF we also implement a UBI high enough to eradicate poverty and give the working class some REAL bargaining power for a change. But the neoliberal right or pseudo-left would never support that, for obvious reasons. (But UNTIL then, I will continue “Fight for 15”.)
The minimum wage doesn’t take economic reality into consideration. Should a coal miner have the same minimum wage as an office worker? And to account for differences in job difficulty and employee availability, the federal minimum wage is so low as to be meaningless.
I agree re UBI, which I term, “Social Security for All.”
Rodger, I am one the biggest fans of UBI there is. But I have another question for you: how would you answer the self-styled “relationalist” or “communitarian” critics who claim that UBI would further “atomize” our already increasingly atomized, fractured, and lonely society? That is, as an advocate for UBI, how should I respond to critics who throw that argument my way, aside from simply laughing at them? I need something WITTY to say, as that is one of the VERY few arguments against it that might have a kernel of truth to it.
I’m not sure what atomize means in this context, but my suggested version of UBI is Social Security benefits paid to every man, woman, and child. Those over 18 all would receive the same benefits, regardless of income, wealth or citizenship. Those under 18 would receive smaller but equal benefits.
There may be factors I have not considered, but I would be glad to consider them.
Thank you. Their argument is essentially that UBI would make people even more hyper-individualistic because it would give them too much freedom and too many choices. Somehow that would short-circuit the development of community.
Or something. Indeed, their argument is largely an argument from overthinking, and it is a very weak one.
What you said is in fact the best way to respond: answer every question with a question, to get them to explain exactly what they mean. Since their argument is basically hollow, it will force them to reveal all of their unstated assumptions that they would rather not say out loud, namely:
Some people are apparently so hyper-collectivist that they want everything to have more strings attached than a spider’s web, apparently. The individual is completely subordinate to the collective, period. They generally don’t value individual rights very much, if at all, and are quick to resort to coercion (economic coercion via poverty and desperation) when they don’t get their way. And to put it in vernacular terms, they suck.
We can all argue till we are blue in the face on to what significant degree (because it is a matter of degree, not a binary) humans are more independent or interdependent, or to what degree we are our brothers’ and sisters’ keepers. But that does not change anything about whether UBI is a good idea (it still is regardless of where one fits on that continuum).
To paraphrase Thomas Jefferson, I would rather live in a world of too much freedom rather than too little, or too many choices rather than too few.
“Can we assume the rich don’t feel THEY have too much freedom, but if the poor are given money, the “no-longer-poor” will have too much freedom ??”
BINGO. The fear is that the no-longer-poor will behave like the rich currently. Which says far more about the person saying such an argument (especially when they themselves are rich) that those they seek to criticize.
Or alternatively, the specious claim that they will adopt all of the vices of the rich but none of the virtues. But that is ultimately begging the question.
It is essentially an outmoded Hobbesian argument at best, and extremely disingenuous and dishonest at worst.
#Monetary Sovereignty - Mitchell 
A response from Professor Galbraith:
Dear Mr. Mitchell,
I appreciate your remarks. I’m not as pessimistic as you are about the possibility of regulating rents, and wouldn’t base an argument about it on broad and abstract words like “socialism” or “communism.” But — as a solution for pressing housing issues — it’s not the first or last word. Land taxes (to spur redevelopment), public housing, and other measures are also needed.
Regards,
James G.
===================================================
My response to his response:
Thanks, Professor,
I repeatedly admire and agree with your remarks about federal finances.
And I agree with you that a label like “socialism” is misleading. I have published several blog posts about this term used as an epithet.
I suggest that narrowly targeted “solutions” to an individual problem are less likely to prove helpful than simply giving people more spending money and allowing them to decide how to use it.
Again, thank you for taking time from your busy schedule.
Rodger Malcolm Mitchell
====================================================
I should mention that he is on my very short list of economists whom I believe to be very smart and who understand Monetary Sovereignty.
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The value of much real estate should have been falling for quite a few years now… half or more of it is going to have to be torn down and replaced with stuff built to the latest building code standards for energy efficiency if we are going to have any chance of meeting any of the 2050 climate change goals.
LikeLike
Well-said. I agree. How would you best respond to those who flippantly say, “if you give tenants more money, landlords would just jack up their rents even more, just because they can”?
LikeLike
The cost of apartments (i.e. “rent”) would function no differently from everything else that’s sold in the market: Supply and demand. The same concern could be voiced about Social Security payments or any other financial benefits for the populace.
Further, giving tenants more money adds dollars to the economy, which grows the economy. GDP=Federal Spending + Nonfederal Spending + Net Exports.
LikeLike
Well-said. I know people have made this argument against UBI in the past, and also about student loans and financial aid being the real reason why tuition has outpaced inflation. Of course, such neoliberal arguments (essentially arguments for austerity) are half-baked at best. Thanks 🙂
LikeLike
Notice the lack of concern about tax cuts, especially tax cuts for the rich. Tax cuts = spending increases in net effect. It just depends on who receives what.
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So true.
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As the Swedish economist Assar Lindbeck famously said long ago, “In many cases rent control appears to be the most efficient technique presently known to destroy a city—except for bombing.”
To illustrate this, I recall a meme showing two pictures to see if one could tell the difference: one was the South Bronx, and the other was bombed-out Warsaw, Poland in the aftermath of WWII. Indeed, the ONLY way you could objectively tell them apart was the graffiti that said “Falsas Promesas” (“false promises”, in Spanish) in the South Bronx picture, since practically no one in Poland speaks Spanish.
LikeLike
Many of the richest landlords love rent control because it eliminates the competitive need to maintain or improve properties. The landlords can just sit back and collect rent because their tenants will have nowhere better to go.
LikeLike
Sit back with mouth open to swallow the gravy like only a Pritzker can! https://en.wiktionary.org/wiki/gravy_train
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What you say about price ceilings like rent control is certainly true. One cannot successfully violate the immutable laws of supply and demand; the best one can do is add variables to the equation.
So what about price floors then, like that most sacred of sacred cows, the minimum wage? While that one is far more nuanced, to be sure, there is likely some truth to the “cutting the lower rungs off of the ladder” argument, even if that argument is deployed most cynically by the “master” class of right-wingers and neoliberals. But abolishing it entirely and changing nothing else would also be even more harmful as well.
So how does one square that circle, then? Same solution to the rent problem: UBI, of course, and the rest of the Ten Steps as well ideally. I would actually be fine with abolishing the minimum wage (or at least making it non-binding for private businesses that are not government contractors) IF and ONLY IF we also implement a UBI high enough to eradicate poverty and give the working class some REAL bargaining power for a change. But the neoliberal right or pseudo-left would never support that, for obvious reasons. (But UNTIL then, I will continue “Fight for 15”.)
LikeLike
The minimum wage doesn’t take economic reality into consideration. Should a coal miner have the same minimum wage as an office worker? And to account for differences in job difficulty and employee availability, the federal minimum wage is so low as to be meaningless.
I agree re UBI, which I term, “Social Security for All.”
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Well-said.
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Rodger, I am one the biggest fans of UBI there is. But I have another question for you: how would you answer the self-styled “relationalist” or “communitarian” critics who claim that UBI would further “atomize” our already increasingly atomized, fractured, and lonely society? That is, as an advocate for UBI, how should I respond to critics who throw that argument my way, aside from simply laughing at them? I need something WITTY to say, as that is one of the VERY few arguments against it that might have a kernel of truth to it.
LikeLike
I’m not sure what atomize means in this context, but my suggested version of UBI is Social Security benefits paid to every man, woman, and child. Those over 18 all would receive the same benefits, regardless of income, wealth or citizenship. Those under 18 would receive smaller but equal benefits.
There may be factors I have not considered, but I would be glad to consider them.
Does that address the “atomize” situation?
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Thank you. Their argument is essentially that UBI would make people even more hyper-individualistic because it would give them too much freedom and too many choices. Somehow that would short-circuit the development of community.
Or something. Indeed, their argument is largely an argument from overthinking, and it is a very weak one.
https://en.m.wikipedia.org/wiki/Atomism_(social)#:~:text=This%20theory%20refers%20to%20%22the,of%20the%20individuals%20who%20inhabit
What you said is in fact the best way to respond: answer every question with a question, to get them to explain exactly what they mean. Since their argument is basically hollow, it will force them to reveal all of their unstated assumptions that they would rather not say out loud, namely:
Some people are apparently so hyper-collectivist that they want everything to have more strings attached than a spider’s web, apparently. The individual is completely subordinate to the collective, period. They generally don’t value individual rights very much, if at all, and are quick to resort to coercion (economic coercion via poverty and desperation) when they don’t get their way. And to put it in vernacular terms, they suck.
We can all argue till we are blue in the face on to what significant degree (because it is a matter of degree, not a binary) humans are more independent or interdependent, or to what degree we are our brothers’ and sisters’ keepers. But that does not change anything about whether UBI is a good idea (it still is regardless of where one fits on that continuum).
To paraphrase Thomas Jefferson, I would rather live in a world of too much freedom rather than too little, or too many choices rather than too few.
That’s how I would respond.
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Can we assume the rich don’t feel THEY have too much freedom, but if the poor are given money, the “no-longer-poor” will have too much freedom ??
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“Can we assume the rich don’t feel THEY have too much freedom, but if the poor are given money, the “no-longer-poor” will have too much freedom ??”
BINGO. The fear is that the no-longer-poor will behave like the rich currently. Which says far more about the person saying such an argument (especially when they themselves are rich) that those they seek to criticize.
Or alternatively, the specious claim that they will adopt all of the vices of the rich but none of the virtues. But that is ultimately begging the question.
It is essentially an outmoded Hobbesian argument at best, and extremely disingenuous and dishonest at worst.
LikeLike