Over twenty years ago economist Henry Hazlett wrote, "The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups." Unfortunately, too many of today's artless politicians have ignored this lesson and have promoted a fallacious policy of price fixing known as "rent control."
Rent control discriminates in favor of one group at the expense of all others. When landlords raise rents to compensate for inflation (or for other reasons), the tenants will generally respond by economizing and taking up less space. This will allow others to obtain housing by taking up the newly available space. High rents also encourage developers to construct new housing. When rent is controlled, however, the new space is never made available, and the shortage cannot be relieved. Consequently, homeless people are not permitted to use their dollar—votes to bid for housing; landlords are forced to donate the same supply of housing units (while there is a greater demand) and receive a smaller return; and the group who already occupies the controlled apartments is able to arbitrarily exclude all others.
So, rent control is of (dubious, as we shall see) advantage to that one group of tenants fortunate enough to live in a residence which legislators deem "controlled." These people live at the expense of all others operating, or wishing to operate, within the market. Other than these favored tenants it has primarily been vote-seeking politicians and certain ideologically-motivated political groups who have promoted rent control.
New York's Mayor John Lindsay has continually sacrificed the landlords and apartment-seekers in general to what is called the "public interest" (which, in this context, means the current tenants). Lindsay played trick-or-treat last Halloween, calling a meeting of real estate industry leaders "to make clear to them once again the Administration's determination to protect the public from abuse of economic power." Lindsay also met with owners of non-controlled buildings and told them to hold down their rents to "reasonable" levels and "adopt a program of self-regulation."
Lindsay has been especially adamant in insisting that the building industry be controlled. "We have given the industry a chance to clean its house," he said. "So far, it has failed to do so. As long as responsible members of the real estate industry continue to be unwilling or unable to act, the city must intervene…"
What Lindsay ignores here is that if the industry has "failed to clean its house," it is for basically one reason: Lindsay's interventions have locked them out. Who would venture into an enterprise where costs are continually rising with new conditions (inflation, for one) and returns remain static at a level which no longer yields a profit?
Sometimes officials will attempt to avoid economic disaster by exempting new housing from control. New York City has done this in modified form; landlords are allowed to raise the rent 15% if the tenant moves out after two years. But this does not serve to alleviate the problem because people in rent-controlled apartments are understandably reluctant to lose a good deal, and therefore tend to remain stationary.
Fearing future rent control, some landlords set a rent price that is higher than it would normally be. Hew York's housing shortage, caused by a number of economic conditions, including rent control, has also raised prices. Ironically, sections of the Silk Stocking (17th) District (formally represented by Lindsay), which are not controlled, have been bursting with complaints of 100% increases in rent.
M.I.T. economist Paul Samuelson, in spite of his staunch advocacy of a Lindsay-like controlled economy, has pointed out that France experienced an ear of practically no residential construction between 1914 and 1948 because of rent control. After World War II such controls were abandoned and there has been a boom in residential housing ever since.
Tenants in New York City's rent-controlled apartments have complained of inadequate condition ever since control begin. The reason for this is obvious. Since the advent of controls landlords have neither been willing, nor have they been able, to maintain better housing conditions. Unwilling, because they have been robbed of their incentive (the right to seek whatever profit the market will bear); unable, because they have been robbed of their cash (unactualized potential profits). Tenants who thought rent control would mean Nirvana at 125 dollars a month, are learning their economics lesson—that there is no such thing as "something for nothing"—the hard way—to the tune of dripping faucets, creaking air conditioners, and stoves that won't light.
There is an old folk tale which explains this phenomenon perfectly. Once upon a time the king of a quaint and backwards nation learned from his court jester rumors which charged the local bakers with cheating customers, with short-changing them. The rumors were not true; with the exception of a single government-subsidized baker, all the town's pastry shops were impeccably honest. Nevertheless, the king issued a mandate which decreed that from that date on bakers were to provide thirteen donuts for the price of a dozen. That evening, the outraged bakers held a secret meeting of an extremely volatile nature, with a great deal of table-pounding and shouting. Finally, late that night, the meeting broke up and the excited bakers scattered for their respective stores. In the morning, when the stores open, astonished patrons were greeted by a truly remarkable development: for the first time in recorded culinary history, there were holes in donuts.
Like the bakers in the fable, landlords burdened with rent control are forced to economize—like it or not. Rent controls cannot bypass economic reality; someone must pay. It is ironic—and tragic—that it is the tenants, whom Lindsay is so eager to "protect," who suffer most from the"protection." But the most grievous element of their misfortune is that the tenants continue to point an accusing finger in the wrong direction, that they fail to identify and remove the real cause of their suffering: rent control.
This article originally appeared in print under the headline "Rent Control and Urban Decay".