Worldwide Woes of Rent Control

|

Rent Control: Myths and Realities, edited by Walter Block and Edgar Olsen, Vancouver: The Fraser Institute, 1981, 335 pp., $9.95.

My first reaction upon opening this book was, "How tiresome, not another book on rent control." This reaction was not provoked by any sympathy on my part for rent control—quite the contrary. I just thought that rent control was one wicked horse that has been flogged so long and so hard by economists that surely it must by now be thoroughly dead, requiring no further administration of the whip to prevent its intellectual revival. Yes, I know that here and there we have rent control, not least conspicuously in my native city of New York; but nonetheless, no one other than tenants—and the politicians who need their votes—can still defend it with a straight face.

Well, I must report my reaction changed as I worked my way through this collection of essays and articles on the rent control experiences of six nations. Some of the articles are new and were apparently written expressly to appear here; others are reprinted from sources widely spaced in time and locale—as long ago as 1930 (Hayek) and as far away as Sweden (Rydenfelt). As the anti-rent-control arguments mounted, Rashomon style, with the same flaws and defects being observed, measured, and criticized from different vantage points (geographically, chronologically, from various aspects of microeconomic theory), I became once again enraged at the cupidity of the public and their political leadership in promoting and tolerating a system so economically shortsighted, so unfair in its incidence, so counterproductive of its intended goal of furnishing universal access to high-quality housing.

My reaction also changed because, even as a veteran housing-policy analyst, I learned some things. While all the microeconomic arguments should be familiar to economists and housing specialists, some of the empirical data, especially on the experience with rent control in Europe and Canada, was, for me, new and extremely illuminating.

Even the familiar microeconomic points gain a certain force from repetition in this volume. Example: the notion of a housing shortage as the rationale for imposing rent control is absurd not only because one can expect that underpricing any consumer good is guaranteed to exacerbate its scarcity but because demonstrably in every locale that has invoked this rationale there was no housing shortage before rent control was imposed and there came to be one afterward. This is documented for the United States by Friedman, Stigler, Olsen, and Kristof; for Europe by Rydenfelt, in his very thorough analysis of the rent-control experience in Sweden; and for Canada in a recent study by Kalymon.

Example: Anyone who has ever lived in a rent-controlled city knows that many of the beneficiaries of rent control are by no means poor, and, conversely, many of its "victims" (that is, landlords) are by no means rich. But one does better appreciate the real extent of the capriciousness of the economic incidence of rent control after reading the chapters by De Jouvenal, Hayek, Olsen, Rydenfelt, and Kalymon. Forget for a moment the supposed transfer of wealth from landlords to tenants. The greatest unfairness lies in the impact on the tenant class itself. Occupancy of a rent-controlled apartment is a product not of need, hard work, or even seniority; it is a result of luck, bribery, treachery, or, perhaps, incredible persistence. Once attained it is a vested, capital asset, the value of which is itself erratically distributed among rent-controlled tenants according to the desirability of individual apartments and the locational vagaries of the underlying housing market.

Example: We are familiar with the general notion that rent control contributes to a housing shortage by stimulating demand, but it is interesting to see specifically where the added increment of demand comes from. Rydenfelt empirically demonstrates (at least for Sweden) the impact of rent control on household formation and the role played by unmarried individuals in adding to the stock of housing demanders as the price of housing falls.

Example: Most housing analysts subscribe to the view that rent control depresses supply, but we must remain at least somewhat uncertain on this score when faced with the kinds of typical rent-control ordinances that exempt new construction from control. Kalymon establishes convincingly that the rate of housing starts corresponds inversely to rent control. He and the other non-US contributors argue that this is not so much a function of whether or not new housing is controlled but that expensive uncontrolled units cannot compete with cheap controlled ones except in the very strongest locations and for the most affluent sector of demand.

One of the few arguments that is unconvincing is the assertion that rent control represents a massive transfer of wealth from landlords (or other components of the ownership sector) to tenants. Kristof estimates the value of this transfer for New York as being $20 billion over the 33-year life of rent control. Clearly, where there is a differential between market rents and controlled rents, the discrepancy must be accounted for somewhere. It is simplistic, however, to view it as a mere transfer from owners to tenants. Some of the differential is obviously absorbed in deferred maintenance. To the degree that the differential is itself a product of rent control (because of the way in which demand is stimulated and supply reduced), the transfer is a chimera that would largely disappear with decontrol. Finally, for most members of the ownership sector, the differential has already been capitalized at the time of acquisition of a rent-controlled property. All of these points are made in various contexts but never specifically related to the "transfer of wealth" concept.

This is a quibble, of course. For the most part, Rent Control is a highly informative volume and one that gives new ammunition to the long-standing enemies of rent control; it may perhaps even convert the occasional rent-control advocate who can be persuaded to read it.

The presentation of the book, however, is far from satisfactory. The problem lies in the ambiguity surrounding the book's intentions: whether to be a polemical tract or a solid compendium of social science research. The way in which the book is presented, for example, with its argumentative subtitle, a cartoon-like cover, and silly photographs that contrast scenes of housing abandonment (by inference, therefore, the consequence of rent control) with scenes of wartime devastation, all contribute needlessly to a tract-like quality almost guaranteed to arouse the scorn of serious scholars and policy analysts.

Also, while there is ample and respectable precedent for a collection of readings so disparate in terms of dates of first appearance, backgrounds of authors, national orientations, etc., the basis for such a collection should be much more clearly spelled out in a strong introductory chapter. The failure to do this—indeed, even the failure sometimes to identify accurately the time and auspices of authorship (whether a particular chapter is original to the volume or a reprint)—further detract from the book's potential contribution as a serious addition to the housing literature. I offer these criticisms with regret because, editorial and publishing problems aside, I think this is really a very good and academically respectable book.

Peter Salins is chairman of the Department of Urban Affairs at Hunter College, City University of New York, and the author of The Ecology of Housing Destruction.