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Rent control: The always-fails solution for the economics illiterate.
Tuesday, August 8, 2023 14:43
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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.
