Especially given today’s turbulent markets and lasting housing crisis, it seems easy, at least on an emotional level, to demand help for those plagued with high costs of living to be given relief. Even with falling home values, a 2007 Census Department study found that “almost 15 percent of American homeowners with a mortgage -- were spending half of their income or more just on their mortgage, property taxes and insurance.” With food costs spiraling higher almost as much as the stock market spirals lower, half of one’s income spent on one expenditure is exorbitant. Still, the idea of controlling rents or mortgages is not the answer, and doing so causes more problems than are otherwise solved.
Rent control is, in the United States, fairly widespread, with many major cities having some form or another of price controls. New York City was the first city to implement rent control; President Roosevelt signed a federal bill into law in 1943. Other cities were soon to follow. Still, some cities, such as Boston, ended rent control by state referendum in 1994, though no major rent control laws have been changed since then.
This is likely due to the theory of why rent controls should be in place. Proponents of rent control argue that artificially lowering prices, though against the free market, reduces rent costs for lower and middle class individuals and families who would otherwise not be able to live in expensive housing. Proponents argue that though landlords may make less money than they otherwise would, rent control protects working families from having to live in cheap, dirty, and dangerous housing.
Unfortunately, rent control, overall, does much more harm to society than good, acting as a conventional price ceiling that, while exhibiting the small benefits of such a ceiling, shares all of the negative characteristics. Assuredly, there are some clear winners and losers when it comes to rent control: those who are renting a rent controlled apartment pay less than they otherwise would while those who rent a controlled room receive less than they otherwise would. However, rent control—and price control—share four further consequences that are not superficially apparent: inefficient allocation of goods to consumers, wasted resources, inefficiently low quality, and illegal activity.
First, when it comes to the allocation of apartments to consumers, rent control causes shortages. This makes it fairly clear why apartments are allocated inefficiently to consumers. As there are shortages—because at the artificially lower price many more people would want to rent an apartment than at the normal equilibrium price—the kind of people who can get apartments often have special connections or some other insider ties. This means that they people who want to rent an apartment the most, those would be willing to pay the most money for one, are often the people who are shirked out of available housing. Rent control also causes consumers to waste resources, namely time, looking for apartments because there is such high demand and resultant shortages. The New York Times reports that some in San Francisco literally must look for months to find available housing. In addition, artificially controlling prices has the effect of making the apartments that are rented of inefficiently low quality. This is due to the fact that because demand is so high, and renters are so fortunate to be able to rent a home for less than it is actually worth, the landlords—partially to make a greater profit and partially to make up for the fact that they are receiving unfairly low levels of rent—will make the quality of the homes overly poor. This translates into, for example, old and unsafe elevators in apartment buildings, or unpainted and dirty hallways. Basically, landlords have no incentive to improve the quality of the housing units, as consumers, due to the high demand, will rent them anyway. Finally, rent control has the unintended consequence of providing tremendous incentives for the creation of black markets, or illegal market transactions. For example, this can happen if, because a consumer truly desires to live in a rent-controlled apartment, and has the means, she will agree, contractually, to pay the rent-controlled price, but then slip the landlord some money on the side. Renters also have an incentive to illegally sublet their apartments for more than the market price. In sum, though rent control may cause those who are lucky enough to find apartments to pay lower prices, this comes at the price of a host of other inefficiencies.
Apart from economic arguments, one must ask whether rent control is even theoretically justified, approached from a rights perspective. Certainly Nozick, but possibly other political philosophers that we have read, have argued for the importance of rights, specifically property rights. For the government (or any other source of power) to artificially cheapen the value of one’s property through rent control is to in effect rob that person of their wealth, a clear violation of rights. If we reflect, is this an acceptable equilibrium?
Finally, due to the myriad problems with rent control, others have proposed solutions that accomplish the same goals—but without the problems. These goals are to find affordable housing for lower and middle class citizens. An effective solution would be housing subsidies, or providing money or a credit to individuals who cannot afford housing themselves. Other, though possibly more indirect solutions relate to the earned income tax credit, another way for the government to provide transfer payments that people can choose to use for housing. Both of these solutions bypass the economic inefficiencies that are associated with rent control.
Paul Krugman, in 2000, wrote an editorial in the New York Times harshly critical of New York’s rent control laws. In it, he alludes to the so-called Murphy’s Law of Economic Policy, namely that which is agreed upon most the most economists will be followed the least. Indeed, Krugman states, 93% of economists agree that rent control reduces both the quality and quantity of housing. Still, I’m optimistic that rent control will soon be a political issue of the past. Until then, it won’t be just Murphy’s Law that causes my toilet to overflow.
Sources:
Krugman, Paul, and Robin Wells. Economics. New York: Worth Publisher, 2006. 87-88.
http://www.washingtonpost.com/wp-dyn/content/article/2008/10/10/AR2008101000049_pf.html
http://www.tenant.net/Oversight/50yrRentReg/history.html
http://query.nytimes.com/gst/fullpage.html?res=9C04E3D61438F936A25755C0A9659C8B63
http://en.wikipedia.org/wiki/Rent_control
http://query.nytimes.com/gst/fullpage.html?res=9F02E4DF153FF934A35755C0A9669C8B63&sec=&spon=&pagewanted=1
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4 comments:
Playdoh-
You make a lot of good arguments in your post and certainly the artificial rental boundaries have had some negative effects for both renters and landlords. However, while I agree it is not beneficial in the long-term, I can't agree that rent control should not act as a short term solution. Otherwise, I would imagine, given the current state of the financial markets, that such circumstances would benefit the liquid-wealthy speculators. With little housing development in the near future to assuage renter demands, those who can find housing would be forced to pay exorbitant rents, hurting both prospective and paying renters. However, that's just one possible scenario. Instead perhaps the markets will stabilize quickly and rent control will be unnecessary. You were definitely right, though, that the issue should be brought to light in midst of the crisis and will hopefully be resolved once and for all.
Great post. As a side comment on the issue, it's interesting to note the current increased percent expenditure many families now have for their housing costs causes this area to be come more elastic for their budget. I come from suburbia, not the city, where I know of many families who overbuy on that beautiful McMansion (indeed, this attitude has something to do with our current crisis). While regrettable, this whole situation will hopefully teach us to be more prudent with housing costs. As most economists will tell you, the way to wean ourselves off oil is not to drill for more, but raise the price even higher. The same concept applies to housing. With price ceilings in the city, however, not everyone who should will feel this effect. I don't mean to be harsh; I'm not suggesting any of this now. Actually, I think your credit suggestion at the end sounds like a good idea. But, in the long run, I think American citizens, as well as the government, need to reconsider how to deal with housing.
I think you make a good point about rent controls here. It's a textbook example of a price ceiling that generally makes society worse off.
But let's look at what the justification that's put forward for rent control is (i.e. we should make it easier for people to buy housing).
One argument you made was that under a rent controlled system the people who really want housing may not get it because it comes down insider connections, and they cannot secure housing by paying more. While I think this argument has some merit, one assumption it makes is that the people who want housing the most are those willing to pay the most for it. However, I think this assumption is flawed because people who really need housing might not get it in a competitive market simply because they don't make enough to pay high rents.
So how do we help those who need to secure housing, while not causing the market shortage and deadweight loss inherent in the price ceiling system? Your subsidy idea is quite a good one; give aid to those who demonstrate a clear need for housing in an expensive area, and are unable to pay the market price.
However, like so many other worthy programs, it's never easy to find the money. Subsidizing housing in LA or Manhattan could be shockingly expensive.
I would like for everyone to have a safe, clean place to live, but I'm not sure where we'll find the money. Simply deregulating the housing market might be our best option in the short-term.
Interestingly enough Pman, its also the best policy in the long run.
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