Renting Reality

by Don Boudreaux on April 17, 2011

in Prices, Reality Is Not Optional, Regulation, Seen and Unseen

Nicole Gelinas eloquently exposes many of the flaws of New York City’s rent-control system. Rent-control advocates – like all advocates of policies that prevent people from voluntarily exchanging goods and services at prices that they (rather than government officials) determine to be appropriate – forget that market prices reflect an underlying economic reality.

Market prices are messengers that deliver important information to buyers and sellers about the relative availabilities of different goods, services, and resources.

To believe that tenants and potential tenants are made better off by capping the ability of markets to charge rents above some artificially determined rates is akin to believing that patients with high blood pressure are cured of their hypertension by capping the ability of blood-pressure monitors to register readings higher than 100 over 60.

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Philo April 17, 2011 at 11:32 am

“Market prices are messengers that deliver important information to buyers and sellers about the relative availabilities of different goods, services, and resources.” If you don’t like the message, shoot the messenger!

Ben Hughes April 17, 2011 at 11:42 am

This notion of “shooting the messenger” underlies almost all fallacies about economics, IMO. What’s more scary is, if people can’t understand extremely fundamental concepts of prices and scarcity, how can we expect them to understand comparative advantage and the benefits of trade?

Mao_Dung April 17, 2011 at 12:05 pm

I was discussing “scarcity” with Oprah on her show the other day. She gave me a blank stare. You are right; it’s scary. Let’s call it from now on, “scary scarcity,” to drive home your point. There are some people who just don’t get the concepts of prices and scarcity. They appear, by all measures, to have a chronic problem of “spooky surplus.” Perhaps you will have better luck getting through to her when you appear on her show.

Mao_Dung April 17, 2011 at 12:13 pm

Oprah’s scrumptious “salary” is $315,000,000 per year according to the this source:

Ross April 17, 2011 at 11:44 am

Care to comment on rent control in NoVa? Most new complexes seem to have units reserved for low income households with capped rates.

tdp April 18, 2011 at 8:33 pm

Of course, in NoVa “low income” means below $100,000 a year.

Tom April 17, 2011 at 11:58 am

“To believe that tenants and potential tenants are made better off…”

While it may be true for potential tenants, it’s really hard to see how those with rent controlled apartments aren’t benefiting enormously!

Methinks1776 April 17, 2011 at 1:12 pm

Landlords of rent controlled apartments have no incentive to invest in those apartments and they tend to be pretty old and run down. Tenants of rent controlled apartments trade comfort and upkeep for well below market rental rates.

There’s another thingie in NYC – rent stabilized apartments. The developer gets a tax break in return for agreeing to cap rate of the year to year rent increases. There’s virtually no decision in which government doesn’t interfere in NYC.

Andrew_M_Garland April 17, 2011 at 1:20 pm

Yes. If you do not allow the price to rise to the quality of the apartment, then the quality will fall to meet the allowed price.

Dan April 17, 2011 at 8:34 pm

Until their apt is in need of repair or maintenance…. The holders of a lease to rent controlled apts are the lucky beneficiaries.

W.E.Heasley April 17, 2011 at 12:42 pm

James and Jane Goodfellow, you know, those folks the government likes to “help”. Yes, the Goodfellows, maligned by the media and just plain stupid to elitist self-appointed intellectuals.

Well, well, well. The Goodfellows’ were the first to point out that a major component of ObamaCare is a price fixing scheme. Hence if we don’t use price as the rationing agent then something else must be the rationing agent. Those dog-gone Goodfellow’s worked that out too! The rationing agent will be time.

Hence with time as the rationing agent the critically ill die and the remainder suffer for an extended period of time until their number is called in the vast waiting line known as time.

Chucklehead April 17, 2011 at 1:30 pm

Occupiers of rent controlled apartments are subsidized by newcomers. What is the cost to the (city) collective whole? It is a barrier to entry for newer, younger entrants to the market, who could bring productivity enhancements to the community. It shifts cost from older and therefore wealthier population to a poorer, younger population. It discourages movement, such as moving closer to work when you change jobs. What else?

hayseed April 17, 2011 at 3:37 pm

I have wondered whether anyone has a General Theory on which market prices to ignore.

Polly April 18, 2011 at 9:43 am

I think the first rule would be “How many voters are affected by this price?” Charlie Rangel can tell you the second rule.

E.G. April 17, 2011 at 4:23 pm

If you’re making $300,000, you are relatively poor. Except when it comes tax season and you’re the evil 5% hording all the money.

Is there a more intrusive and detrimental crime, as the land control and “urban planning” of local city governments? While we may complain over the federal government, local governments can truly nickel and dime you to death.

Though some of you seem to be under the assumption that these people don’t understand supply and demand, or prices. They do, they just ignore them, and manage to pull it off for their own benefit.

John Galt April 17, 2011 at 4:36 pm

Today’s Ray of Moonshine from econlib dot org:
Economists are virtually unanimous in concluding that rent controls are destructive. In an American Economic Review 1990 poll of 464 economists , 93 percent of U.S. respondents agreed, either completely or with qualifications, that “a ceiling on rents reduces the quantity and quality of housing available.
Reality of course is no barrer to the dreams of Il Bloombergio or Counselor Praheet Bharara. The most dictatorial government imaginable is one that is the most moral. Cynical rulers are often very tolerant and humane. It’s when the fanatics get on top that you learn there is no limit to the oppression they can foist upon you.
Just ask 70 Million Millionaire rapper Lil’ Wayne who tried to exercise his rights to bear arms or anyone including myself, who once made a few shekels playing online poker.

robert_o April 18, 2011 at 12:39 am

What’s wrong with the other 7%?

John Galt April 20, 2011 at 6:45 pm

They are whim worshipers. Rather than methodically observe the cause and effect of rent controls, they convince themselves that good ends are reached by altruistic means despite the overwhelming evidence of life-sustaining property destruction and enforced scarcity.

vikingvista April 17, 2011 at 6:15 pm

You know what is more important than paying rent? Buying food. Have you seen the cost of a dinner in Manhatten recently? The city planners really need to do something.

Methinks1776 April 17, 2011 at 7:09 pm

They did. They forced restaurants to incur the additional cost of posting completely useless (and unavoidably inaccurate) calorie counts on their menus. That oughta fix everything.

Sam Grove April 17, 2011 at 9:52 pm

The Marching Morons describes a future where the speedometers are mislabeled to make people think they are going faster than their actual speed.

Martin Brock April 18, 2011 at 8:48 am

Market prices reflect an underlying economic reality, and forcible propriety is part and parcel of this reality. A forcible propriety (property right) is like a dam channeling a stream away from direction and toward another.

A rent control is a forcible propriety imposed over an existing system of forcible propriety, a dam redirecting a stream that is already dammed upstream. The beneficiary of this redirection, the payer of controlled rent, effectively shares ownership of the housing he rents. The difference between a market rent without the control and the market rent with the control is the renter’s share of the marginal value of the property.

So instead of one wealthy landlord governing the value of the property, we have two. The renter is not a “poor” person rescued by the beneficent state from the “rich” landlord. He is just another rich landlord, added to the proprietary class by the statesmen defining “proper”.

The relatively poor people don’t live in rent controlled, Manhattan apartments. They live somewhere else, and pay more to commute to Manhattan, rather than paying the forbidden, higher rents in Manhattan.

Housing in Manhattan might not be less plentiful as a consequence, but people living in rent-controlled, Manhattan apartments are definitely richer, all else being equal, than the people who would otherwise pay higher rents but instead live outside of Manhattan and pay to commute. Needless to say, Manhattan housing is always scarce.

vidyohs April 18, 2011 at 8:53 am

“Rent-control advocates – like all advocates of policies that prevent people from voluntarily exchanging goods and services at prices that they (rather than government officials) determine to be appropriate – forget that market prices reflect an underlying economic reality.”

I think you’re being generous when you use the word forget. I’d say it is impossible to forget what one has never learned.

The people of whom you speak do not know what a market is, much less understand it, its signals, and they certainly do not believe in the very little about markets that they have heard as rumor.

muirgeo April 18, 2011 at 9:17 am

A better view of paying rent and what’s happening in our economy.

Martin Brock April 18, 2011 at 7:34 pm

I’d support a 90% marginal tax rate on consumption (above $100,000 annually say) today, and I’ve said so repeatedly at this web site, but I can never get any agreement from you. Of course, this rate would rapidly deplete the coffers of the Congress, as people with so much income would chose more to invest rather than consume, and the economic effects would be as positive as Michael Hudson suggests, but a few hundred Congressmen then would not control 25% of the produce of 300 million people.

Dan April 18, 2011 at 11:06 pm

Again, punishing success. Biz tax rate between 20%-25% with a deduction of 2%-5% for charitable givings. No other deductions available………. Zero…… Nada……. None. Income tax rates, progressive,from 10% – 22%, all incomes will pay a share, and charitable deductions of 2%-5%. No other deductions available……zero…nada..none. Capital gains would remain at 15%, can adjust to 18%. The goal is to avg. 15%-18% of GDP. All income levels must have skin in the game.

Martin Brock April 19, 2011 at 8:06 am

“Punish success” in this context is only a political slogan apologizing for the privilege of statesmen. A progressive consumption tax limits the authority of less central authorities without increasing the power of more central authorities. It “punishes” only in the sense that a check on the power of Congress “punishes” Congress by limiting its authority.

The less central authorities are beneficiaries of forcible propriety, required to reinvest much of the marginal value of their forcible possessions. These proprietors are part and parcel of the state as much as any Congressman or Judge or Prosecuting Attorney, and the marginal value of their possessions is a product of the enforcement as much as anything else. They receive monopoly rents.

Monopoly rents are an unavoidable consequence of any property system, but the beneficiaries of these rents need not organize vast resources to produce for their exclusive consumption, as opposed to organizing capital for ever increasing utility in a mutually beneficial capital market. The former occupation is the business of a self-serving rent seeker. The latter is mutualism.

I’ll go further than you on “fairness”. I would eliminate corporate income taxes (presumably what you mean by “biz tax”) altogether. I would eliminate charitable deductions per se, by treating charitable contributions like investments (or “not consumption”) and exempting it entirely from the consumption tax. A charitable contribution is an investment with an expected, negative yield for the investor.

When I say “I would” here, I’m using a figure of speech. In the system I imagine, common juries hearing tax evasion cases would make all of these decisions, subject only to an explanation of the purpose of a progressive consumption tax. I would not impose any other judgement over the jury’s judgement, other than appeal to another common jury, say the best two out of three or three out of five juries.

I don’t agree with “all income levels must have skin in the game”. Ideally, the vast majority of people are not taxed at all, and the state’s revenue is a minimal portion of the value of its forcible impositions, with the remaining value absorbed by the cost of continually reorganizing capital to increase its utility, i.e. the cost of the freest possible capital market. This outcome was the intent of the progressive income tax, just as Michael Hudson suggests in the youtube video that Muirgeo links above.

I’m not sure which Oracle foretold your magical “flat tax” numbers, but I don’t want any central authority controlling 10% or even 5% of all income.

Brodsky Organization April 26, 2011 at 2:59 pm

It’s interesting to see the variation in rents of rent-controlled and non-rent-controlled Manhattan apartments. There was the recent story about the gentleman who paid less than $200 for an apartment, while others in the city pay, on average, ten times that. Not sure it’s really fair that some pay painfully low rents while the rest of the city pays market price.

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