Magazine | November 12, 2018, Issue

Rent Control Resurgent

(Rick Wilking/Reuters)
An economically illiterate policy is on the ballot in California

Progressives enjoy boasting that their policies are guided by science, that their politics have been liberated from mere ideology by evidence and expertise.

That news has not yet reached California, where a ballot initiative under consideration, Proposition 10, would open the way toward expanding government-imposed price controls on residential rentals, a policy based in economic ignorance and pure superstition. It would do so by repealing the 1995 Costa Hawkins Rental Housing Act, which exempts buildings built in 1995 or after from rent control (and buildings built earlier, in some cases: 1979 for San Francisco and 1980 for Berkeley). It exempts single-family homes from rent control, allowing individuals and families to rent out their own houses without falling subject to rent-control regulation, and it allows landlords to rent out vacated rent-controlled apartments at market price, at which point rent control would kick in from the new market benchmark. Proposition 10 would repeal that law, leaving the sober minds of the Berkeley Rent Stabiliza­tion Board and their counterparts throughout California to interfere in the rental market with essentially no limitation.

Free-market economists such as Friedrich Hayek and Milton Friedman opposed rent controls on the grounds that they would lead to shortages of available rentals in the price range of the very people the policy was intended to benefit. Gunnar Myrdal, the father of the Swedish welfare state, concurred, calling the policy “the worst example of poor planning by governments lacking courage and vision.” Economist Assar Lindbeck, another Swedish socialist, called rent control the most effective way to destroy a city short of bombing. Paul Krugman, who was an economist of some repute before he became the most predictable New York Times columnist, in 2010 called rent control “among the best-understood issues in all of economics, and — among economists, anyway — one of the least controversial.” Professor Krugman cited an American Economic Association poll in which 93 percent of economists agreed that rent control “reduces the quantity and quality of housing.” A similar poll of Canadian economists produced 95 percent agreement.

Professor Krugman was so flabbergasted by a New York Times article on San Francisco’s rental market — an article in which the words “rent control” did not appear — that he publicly mocked his own newspaper for its shoddy journalism:

To an economist, or for that matter a freshman who has taken Economics 101, everything about that story fairly screamed those two words — which are, of course, “rent control.” . . . Almost every freshman-level textbook contains a case study on rent control, using its known adverse side effects to illustrate the principles of supply and demand. Sky-high rents on uncontrolled apartments, because desperate renters have nowhere to go — and the absence of new apartment construction, despite those high rents, because landlords fear that controls will be extended? Predictable. Bitter relations between tenants and landlords, with an arms race between ever-more ingenious strategies to force tenants out — what yesterday’s article oddly de­scribed as “free-market horror stories” — and constantly proliferating regulations designed to block those strategies? Predictable. . . . Surely it is worth knowing that the pathologies of San Francisco’s housing market are right out of the textbook, that they are exactly what supply-and-demand analysis predicts. 

Practitioners of the dismal science apparently are not invited to the Party of Science.

That is as close to unanimous agreement on a contentious public issue as the experts are likely to get. And yet Proposition 10, which would expand a policy held in near-universal disdain by the experts by repealing an earlier law limiting municipalities’ ability to impose rent control, nonetheless enjoys wide support among prominent progressives and their institutions: The Los Angeles Times has endorsed it, as has the Sacramento Bee. It is supported by the municipal governments of Berkeley, Beverly Hills, Oakland, Santa Monica, and West Hollywood, along with the Berkeley Rent Stabilization Board. The California Democratic party has endorsed Proposition 10 — a decision taken after an unusually lopsided vote in which 90 percent of the party’s voting members backed it. The most powerful nongovernment actors in California politics, the California Federation of Teachers and the California Teachers Association, support Proposition 10, along with the SEIU California State Council, the National Urban League, the ACLU of California, the Cali­fornia Progressive Alliance, the Inter­national Socialist Organization, Demo­cratic Socialists of America East Bay, Demo­cratic Socialists of America Los Angeles, Democratic Socialists of America Orange County, Democratic Socialists of America Peninsula, Democratic Socialists of America Pomona Valley, Democratic Socialists of America Sacra­mento, Democratic Socialists of America San Diego, Democratic Socialists of America San Francisco, Democratic Socialists of America Santa Cruz, Democratic Socialists of America Silicon Valley, Democratic Socialists of America Ventura County, the Bernie Sanders Brigade, and Los Angeles mayor Eric Garcetti.

On the opposite side of this soi-disant people-power coalition are the people, who have consistently leaned against the proposition in polls. This is true even in San Francisco, where most renters live in rent-controlled housing.

Forsaking the consensus of economists, California’s progressives — and not California’s alone — have been predictably ensorceled by the allure of cheap class-warfare rhetoric. (Note their use of the word “corporate,” which has evolved from a term describing the legal organization of a business firm to a label of general opprobrium.) “Predatory corporate landlords oppose Prop 10 because they have spent the last 20+ years gaming the system to make more millions in profits on the backs of renters,” says a statement from Yes On Prop 10. “The status quo benefits corporate landlords, not the millions of California renters whose rent is too damn high. California voters won’t be fooled by the profit-driven landlords’ campaign of deception.” One can see the appeal of such a non-argument to the Democratic Socialists of Silicon Valley: Mere expertise is nothing when set against the fashionable radicalism of rich white Millennials.

“There’s a reason people don’t want to be the next San Francisco,” says Robert Melvin of the National Apart­ment Association (NAA), an industry group that opposes rent controls. “Rent control might appear on the face to be a good strategy to help low- and moderate-income individuals, but it does more harm than good. It has negative impacts on property owners — and on resi­dents themselves.”

The shape and direction of those negative impacts are, as Professor Krug­man noted, entirely predictable. Rent-controlled apartments become cherished assets, and access to them is hoarded and handed out with favoritism: A proposal to eliminate rent control in New York City in the 1980s was nicknamed the “Carly Simon Act,” a reference to the subsidized apartments — in Simon’s case, ten magnificent rooms with a view of Central Park — enjoyed by well-connected and well-off New York celebrities ranging from Mia Farrow to William Shawn, former editor of The New Yorker, to William vanden Heuvel, former deputy ambassador to the United Nations. Landlords will make less money — that’s the point — and, as a result, they may pay less in income taxes. The California Legislative Analyst’s Office (a kind of CBO for the state) forecasts that broadening rent control would lower state revenues by devaluing rental properties and hence lowering landlords’ tax bills. And as it lowered revenue, it would raise municipalities’ costs, potentially adding “tens of millions of dollars per year” in new administrative expenses to some localities’ budgets. A study on rent control in New Jersey showed $3.2 billion in lost property values.

And, of course, developers have less incentive to build new rental housing, the scarcity of which is the fundamental cause of sky-high rents in the Bay Area and some other parts of California. In the post-war years, New York City saw an average of 35,000 new residential units built every year; after the imposition of a rent-stabilization ordinance in 1969, that number fell to 20,000; there was an expansion of rent control in 1974, after which new construction fell to 10,000 units per year, and it has declined further since then.

The cure for scarcity is abundance: Market prices are set by the interaction of supply and demand — and there is great demand for housing in Cali­fornia, but the supply is artificially constricted by the same progressives who want to impose rent control. Streamlining the nightmarish zoning and permitting rules to which California builders are subject would be an enormous and complex project, one complicated by problems with interagency communication and conflicting regulations. But that is the necessary work — and not only in Cali­fornia. NAA forecasts that 4.6 million new residential units will need to come on the market by 2030 — and that 11.6 million will need to be rehabilitated. It is unlikely that the Bay Area — or Manhattan, or Brooklyn, or Austin, or any other highly desirable residential market — is going to regulate its way out of scarcity and its effects. They are going to have to build their way out — and no denunciation of “corporate landlords,” however spittle-flecked, is going to change that.

There are things that could be done in the short term. Denver — which is growing by 1,000 people a month — has an intelligently designed pilot program that matches low-income families with vacant rentals, paying some or all of the difference between the market rent and what the renter can bear out of a fund sustained by the city’s affordable-housing program, foundations, and employers — the last of which will likely be the leaders in dealing with the Bay Area’s critical housing shortage and with similar shortages elsewhere. Employers end up bearing a share of the burden of high rents — highly desirable prospects can do the rental math, which is why it costs more to hire a first-rate software designer for a job in the Bay Area or New York City than it does to hire one for a job based in Houston or Salt Lake City.

All of the above assumes that the people pushing for expanded rent control in California actually want to solve the problem. Consider the situation on the other side of the country, where some on the city council are pushing for a bill that would impose draconian measures on commercial landlords, not only controlling their rents but also mandating lease renewal, controlling deposits, and more. After touting commercial rent control over the summer — and imposing a new rent-control program in part of Upper Manhattan — the mayor has de­veloped doubts about the bill under consideration, as well he should. But the debate on that bill hasn’t been about the economic consequences of rent control — it mostly has been conducted in black-hats/white-hats terms, pitting the good guys (small businesses) against the bad ones (evil landlords). Even the benighted members of the New York City Council are not in the main naïve enough to believe that the program would have much of a positive effect on the city’s business environment. It’s pure populist demagoguery, and a way for one or two of the city’s mayoral aspirants to see whether they can get to the left of de Blasio.

The housing shortage is not a problem that is going to be fixed by men with gavels. It’s going to be fixed by men with hammers, if the men with gavels get out of their way.­­­

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