Economy & Business

The Return of Rent Control

New York City Mayor Bill de Blasio (Stephanie Keith/Reuters)
Policies similar to those proposed for New York City have been pursued to disaster elsewhere, most notably in Venezuela.

New York City mayor Bill de Blasio has long been an admirer of the Sandinistas, the revolutionary political movement that overthrew the government of Nicaragua and brought to that unhappy country its Marxist ideal of justice, which turned out to be rather heavy on mass executions. But Mayor de Blasio’s roving eye seems to have settled for the moment on Venezuela.

Mayor de Blasio proposes to expropriate the property of New York City’s commercial landlords. Of course, he wouldn’t put it quite like that, just as Senator Warren wouldn’t use the same blunt honest language to describe her daft proposal to put corporate boards under political discipline. (To be fair, Senator Warren is only 1/1024th a Leninist.) But that’s what his proposal amounts to: Commercial landlords would no longer have the power to set their own rents, to evict undesirable tenants, to determine deposit amounts, etc. The property would remain formally titled to them, but they would in effect lose control of it.

This is an example of what Robert Higgs calls “regime uncertainty,” which does not describe the rise and fall of governments but rather the security of property rights. Mayor de Blasio and other Democrats would argue that they are not depriving landlords of their property rights, only subjecting them to regulation in the public interest. But the changes proposed represent a fundamental shift in the nature of those property rights, away from property owners and toward political actors — the prior regime of property rights ceases to exist. A landlord who cannot set his own rent may still own his property on paper, as does a corporation that cannot determine for itself the composition of its board, but ownership no longer means what it did.

Regime uncertainty means that investors are unable to make long-term plans for their property, because the nature of rights to that property is not securely established. Often, this has the perverse effect of raising prices that regulation had been meant to lower or to stabilize: If an investment involves a higher degree of risk, then investors will demand higher returns to put their money behind it.

New York City, of all places, should understand this, given the catastrophic and categorical failure of its residential rent-control regime, which ended up subsidizing the housing of celebrities and politically connected multimillionaires. As a Vanity Fair contributor by the name of Donald Trump put it in a 1987 essay:

Consider one building on Central Park West at Seventy-third Street — magnificently designed, with huge apartments, wonderful detailing, a beautiful double-height marble lobby, and, of course, gorgeous views. Mia Farrow has ten rooms overlooking the park, paying about $2,000 a month for an apartment that could rent for upwards of $10,000 a month on the open market. Carly Simon lives in the same building and pays about $2,200 a month for her ten rooms with the same view. Across town, Alistair Cooke pays roughly $1,100 for his eight-room apartment on Fifth Avenue, and William Shawn, former editor of The New Yorker, lives in an eight-room apartment in the same building and pays about $1,000 a month. William vanden Heuvel, a very prominent attorney who served as ambassador to the United Nations under Jimmy Carter, pays less than $650 a month for his six-room apartment in a terrific building on East Seventy-second Street.

(Ambassador vanden Heuvel is the father of Nation editor Katrina vanden Heuvel, who seethes with revolutionary zeal in the Hamptons.)

Many of those celebrities eventually were shamed into giving up their subsidies — or they just moved on, as people do — but the underlying dynamic never changes. Oddly enough, neither does the progressive response: Every few years, some far-thinking politician will propose tax credits or some other form of subsidy to encourage manufacturing jobs, or alternative energy, or whatever it is the politicians think needs encouraging, and, then, a few years later, they will complain that these subsidies are going to actual businesses — businesses they hate — instead of the magical nice rainbow businesses of their mentally diminished imaginations. Manufacturing credits go to Starbucks and oil companies, green-energy incentives redound to the benefit of Tesla or General Electric, credit subsidies sold as guarantors of good blue-collar jobs go to Koch Industries. Think of Elon Musk as the Carly Simon of green-weenie schmundo.

(For the record, Musk is a vocal critic of the federal electric-vehicle incentive program.)

Mayor de Blasio and others of his ilk — Senators Warren and Sanders prominent among them — are simply hostile to the idea of property rights as classically understood. What they would prefer is a regime of pseudo-rights that is subject to constant political intervention. One of the benefits of strong property rights is that private property creates centers of power outside politics and outside the state. Mayor de Blasio and Senator Warren are étatists, who are hostile to all centers of power outside their control: corporations that conduct their business as they think best, holders of substantial private wealth who pursue their own political interests, private associations that raise money to participate in the political process and influence policy, etc. As the étatists would have it, power is a one-way street: Politicians have essentially unlimited power over the private economy (and over private life in general) but private actors are to have no power over the state other than that afforded to them — on the politicians’ own terms — at the voting booth. But there is more to liberty than having a vote.

Policies substantially similar to those proposed by Mayor de Blasio have been pursued to disaster elsewhere, most recently and notably in the case of Venezuela. The chavista regime thought that food prices were too high, so it set about controlling them; soon enough, there was simply no food for sale, and ordinary needful things such as toilet paper simply disappeared from the store shelves as producers declined to produce at the artificially low prices demanded by politicians. Mayor de Blasio has done the chavistas one better by pursuing this agenda at a particularly stupid time: Manhattan is experiencing a minor crisis of retail vacancies. Over the summer, retail vacancies in the West Village climbed above 11 percent — and they hit 20 percent in other parts of Manhattan. It’s a great time to be shopping for a storefront in New York City.

On the other side of the country, California voters are considering Proposition 10, which would give cities expansive new powers to control rents — not only on apartment buildings but also on private homes. Question: If you cannot decide to rent your house out for a price agreeable both to you and to your tenant — but instead are obliged to ask the permission of, say, the geniuses who govern San Bernardino — in what sense do you own your home? Much of California, especially the Bay Area, is suffering from a severe shortage in residential real estate, especially in affordable rental housing. Why would any sane investor put a few hundred million into a new development there if he cannot even determine for himself what rent he will accept?

Landlords do not have the power to unilaterally set rent. Neither do tenants. What both have — and this is the genius of the free market, and the beauty of it, and the justice of it — is the right of exit, which is to say, the right to say “No.” All parties come to the transaction with exactly the same power: the power to walk away. And if you think that the size and position of big corporations gives them extra special power in those relationships, ask yourself why it is that Walmart and McDonald’s cannot unilaterally raise prices without losing money. The seller wants x, and the buyer thinks x is too high; he proposes y instead. Maybe the seller likes y, maybe he doesn’t, but they negotiate something between them until they arrive at a price that both are willing to accept — or they don’t. The deal that doesn’t happen — the sale that isn’t made — is the little death that gives the free and cooperative institutions their evolutionary character. No politician had to put a price cap on New Coke or Clairol Touch of Yogurt Shampoo — consumers did that for them. Floyd Mayweather doesn’t make Floyd Mayweather money because some politician says that it must be so. New York City real estate is what it is, and it is worth what it is worth on the rental market — and no law can change that underlying economy reality. It can only get in the way of cooperative relationships between buyers and sellers, owners and renters.

There are many things that New York’s municipal and state powers could be doing to make life easier on commercial renters in the city. For instance, having one of the highest tax burdens in the nation surely is something felt more acutely by the little guy than it is by David Solomon’s gang, even if the latter pays a lot more in absolute taxes. (A functional subway system would be an excellent addition to the city as well.) Schools that are more functional and less corrupt might at least make them feel like those taxes are spent to good purpose. But putting the big ugly snout of politics between landlords and renters is going to end badly for everybody — as it has in the past.

Politicians are always and everywhere vulnerable to magical thinking. Somebody makes a complaint, “The rent’s too damn high!” And politicians respond by passing a law saying that the rent can’t be so damn high — as though this would magically change the nature of the market, the inventory of available real estate, the budgets and desire of other would-be renters, etc. — as though there would be no consequences.

But there are consequences to this kind of totalitarian thinking. You can see them in Caracas.

Correction: Writing about commercial rent control in New York City last week, I conflated Mayor Bill de Blasio’s support for a commercial rent-control measure instituted as part of a rezoning scheme in upper Manhattan with support for a different measure under consideration by the city council. The de Blasio administration in fact has had reservations about the bill under consideration and today officially came out against it. I regret the error.

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