- Cafe Hayek - https://cafehayek.com -

Reality Isn’t Changed Simply by Renaming It

Tweet [1]

Here’s another comment (slightly edited) that I left on this EconLog post by David Henderson [2]:

Jon writes [3]:

Isn’t that the whole point of rent control? Without rent control, only the richest renters get to live in the city.

Jon’s defense of – or, at least, summary of – rent control is indeed what rent-control advocates believe. But it is mistaken.

One way to highlight the mistake is to point out that in the United States we have no price ceilings on food, yet it is not only the richest families who get to shop in supermarkets. We have no price ceilings on clothing, yet it is not only the richest Americans who have closets full of shirts, blouses, pants, dresses, coats, underwear, and shoes. We have no price ceilings on cell phones, yet it is not only the richest individuals who have mobile telephones. We have no price ceilings on household appliances, and yet even poor American households today are, on average, equipped with more modern appliances than was the average American household of 40 years ago [4].

Another angle is to note that competition among potential tenants for access to rental housing occurs, or can occur, on margins other than price. If monetary rents are prevented from rising, competition for rental housing is diverted onto other margins – such as exploiting business or social connections and bribing landlords with under-the-table handouts, some of which might be cash and others of which might be non-cash goodies such as ‘free’ season tickets to NY Giants’ games or promises of business deals.

Even with a perfectly inelastic supply of rental housing, rent control causes a shortage of such housing (by increasing the quantity of rental housing demanded). This fact means that some method of allocation, other than explicit monetary price, must be used to determine who are the people who will actually get rental housing and who will not get it.  At best this method will be pure chance – a random lottery – which of course does not guarantee that the rich will not get a disproportionate share of rental housing.

But to suppose that pure chance – some sort of blind lottery – will determine who does and who doesn’t get available stocks of rental housing is naive. While one can imagine that those who are relatively poor in monetary incomes are relatively rich in non-monetary means of payment – such as, again, exploitable business, social, or political connections, or the ability to bribe landlords with under-the-table deals – in fact it is highly unlikely that those who are relatively poor in monetary incomes are relatively rich in non-monetary assets. Much more plausible is the assumption that ability to pay with non-cash means, and the ability to exploit connections in order to secure rental housing, is positively correlated with monetary incomes.

This fact becomes especially important in the real world in which the supply of rental housing is not perfectly inelastic – that is, in the real world in which rent control reduces the quantity supplied of rental housing. A reduced supply of the quantity of rental housing increases the market value of such housing such that, with rent control, this value is above the value that it would have without rent control. The result is that rent control causes the amounts that tenants and potential tenants are willing to pay to maximize their chances of being among the fortunate ones to secure rental housing to rise. In short, rent control makes rental housing more precious and, hence, more pricey – a fact that is only masked by the formal ceiling on the monetary rent that tenants are allowed to pay.

The rise in the market value of rental housing caused by rent control enhances, rather than reduces, the ability of the rich to compete successfully against the non-rich for available stocks of rental housing. The fact that this competition for rental housing takes some form other than price competition should not blind people to the reality that this competition occurs and that those who are artificially benefitted by the need to compete in this way are the rich.

Finally, because rent control artificially increases the supply of owner-occupied housing relative to the supply of rental housing – by, for example, prompting conversions of rental housing into condos – rent control puts downward pressure on the price of owner-occupied housing. If it’s the case, as it surely is, that people who buy are on average better off financially than are people who rent, rent control transfers wealth from the less-well-off to the more-well-off.

…..

To believe that using force to prevent people from paying monetary rents above the level $R reduces to $R the cost to tenants of securing rental apartments is to believe that reality can be made into whatever name we give to it.  Naming the maximum rent “$R” no more makes each rental-unit’s maximum market value $R, or the maximum cost of each rental unit to tenants $R, than would, say, changing the wording of the New York Times‘s report on the recent tragedy in Orlando change the reality of that tragedy.  The Orlando shooter killed 49 people; that’s the fact – and it isn’t changed for the better if the Times reports instead that, say, only 9 people were killed.  Yet people who endorse price controls – be they price ceilings, such as rent control, or price floors, such as minimum wages – believe in such magical thinking.  Such people do not understand what prices are.  Such people do not understand economics.

Comments