A Defense of Landlords as Financial Intermediaries

By Jonathan Hofer, Christopher J. Calton, Kristian Fors, Caleb Petitt of The Independent Institute. Excerpt:

"A persistent misconception is that rent simply equals the cost of ownership plus a profit margin. A crucial economic principle is that input costs do not determine prices; the value of outputs determines them. Input costs are important insofar as they affect supply. In a market, rent is determined by supply and demand for housing services, not by a landlord’s costs. The landlord’s cost structure is largely irrelevant to the market-clearing price. 

The difference in monthly costs between owning and renting in large cities can be great. For instance, the typical monthly rent for a two-bedroom apartment in San Francisco can be a few thousand dollars less than the monthly mortgage payments, including principal and interest, for a similar property. This trend is observed in many areas across the United States, especially in regions experiencing rapid growth or facing macroeconomic conditions in which interest rates rise quickly. 

Characterizing landlords as reaping significant profits oversimplifies the situation by failing to account for the broader financial context and the risks landlords face. Successful landlords may make great gains nominally, but the typical yield on a unit is actually quite low. In some states, yield (income generated by the property expressed as a percent of the asset’s cost) can be around 6-7%, but large cities tend to have a lower yield, typically around 2-5%—an amount insufficient to change a renter’s ability to generate wealth. 

While tenants pay a fixed rent, landlords bear unpredictable, non-negotiable costs, such as maintenance. Maintenance can include routine wear and tear, as well as catastrophic repairs or the replacement of costly appliances. Landlords are contractually and, oftentimes, statutorily obligated to maintain the unit’s full “output” value. If the property depreciates, that is another cost absorbed by the landlord and not the tenant. They also have to bear the financial risks of legal compliance, which can include costs related to having tenants, such as rent controls, or general risks, such as insurance. When landlords have negative carry (when monthly rental income falls below the combined costs of debt service, maintenance, and taxes), landlords are effectively subsidizing tenants. That latter point might be obvious, but what may be less obvious is how common negative carry actually is. According to a report by DoorLoop, only “35% of landlords say their rental properties are profitable year after year. This percentage held steady from 2023 to 2024 even as rental prices rose sharply.” and “38% of landlords say their rental properties break even financially (mortgage and expenses) but don’t generate consistent profit.”

A significant and underappreciated advantage for renters is the ability to benefit from a landlord’s historical investment. A landlord who acquired a multi-unit building a decade ago operates on a cost basis, and likely a mortgage interest rate that is no longer available in the current market. Due to the lower entry price, the landlord can accept a lower yield (rent as a percentage of the current property value) than a new buyer could achieve. For those familiar, this can be illustrated by the standard supply-and-demand model: landlords who bought at different prices shift the supply curve to the right, resulting in lower equilibrium rent than if units had to be financed at current prices. 

This creates what might be called a travel-back-in-time effect. Renting from an established landlord allows tenants to access housing at a price point anchored to historical costs, effectively insulating them from the full impact of rising interest rates and price appreciation. For individuals seeking to maximize net worth, the cost of paying a landlord’s overhead can be substantially lower than the opportunity cost of committing a large down payment to an illiquid, concentrated asset.

Economies of scale

Beyond historical cost advantages, scale matters. Landlords, particularly those managing multi-unit developments, generate value through operational efficiencies that single-family homeowners cannot replicate. Research on rental housing economies of scale demonstrates that costs per unit tend to decrease as the number of units increases, due to shared infrastructure, bulk purchasing power, and specialized management. This scale efficiency manifests in several ways. By pooling costs, landlords can lower the price of housing services for tenants. The development costs of new or renovated housing can be reduced through bulk orders with suppliers and vendor consolidation. Renters in multi-unit buildings benefit from shared infrastructure, such as roofs, foundations, and HVAC systems. These shared resources, when calculated per square foot, are significantly more efficient than those in single-family homes.

Creating a Buffer for Renters

By leveraging the historical cost advantage borne by the landlord, renters effectively gain a competitive financial buffer. Renters can secure a similar consumption good, i.e., shelter, at a discount relative to the current frontier cost of a mortgage. The delta between the market rent and the counterfactual homeownership scenario allows renters to use different wealth-generation vehicles. 

That means that renting is not “throwing money away”; rather, it is the purchase of a thing without the attendant risks of over-leverage, illiquidity, and concentrated asset exposure. By assuming the risks of property devaluation, legislative changes, physical depreciation, and liability, landlords enable tenants to allocate capital toward other potentially liquid uses, including seeking higher returns on capital. When that occurs, landlords are not barriers to wealth, but rather, providers of financial flexibility and absorbers of real estate volatility, enabling tenants to maintain optionality. If renters allocate the capital intended for a down payment to a diversified portfolio of equities, they may often achieve returns greater than those of a single property.

Obviously, this relationship is not without trade-offs. Renters face the risk of eviction, rent increases, and limited long-term security. These vulnerabilities can have significant financial and emotional impacts. However, these challenges do not negate the fundamental economic function landlords serves.

Do Landlords Hoard Units? 

Some affordability activists make the claim that landlords are “hoarding” tens of thousands of unoccupied units, such as the oft-cited figure of 60,000–90,000 vacant homes in San Francisco. This is a curious argument and may imply some ignorance of how housing markets, and markets in general, function. Supply and demand never achieve perfect, instantaneous matching; some inventory is always in transition or needs to be called up. High rents and prices in places like San Francisco are the market’s clearest signal of insufficient supply relative to demand, not evidence of deliberate withholding.

Even still, the “vacant units” number is largely a mirage. Census and city data include short-term vacancies, units between tenants, in the process of being sold, renovated, or prepared for re-rental. Many others are unfit for habitation (e.g., severely dilapidated or in need of major repairs), or are simply not rentable or sellable at current market conditions without significant investment. Recent reports show San Francisco’s effective rental vacancy rate (units actually available and ready for occupancy) hovers around 3–5% in 2025–2026, among the lowest in the nation and well below a reasonable benchmark for smooth turnover. While overall reported vacancies include these transitional categories, they don’t represent “hoarded” stock. True long-term deliberate vacancies (e.g., vacation homes and luxury units held empty for speculation) exist but are a tiny fraction, not enough to suppress prices meaningfully.

Some of these activists have proposed an “empty homes tax” to penalize landlords who have vacant units. Such a scheme discourages investment because it erodes a landlord’s margin, as there will inevitably be durations when tenants churn. It may also discourage upkeep, as landlords may avoid taking time to renovate between occupants because that is a period when they would be taxed. 

Even if some curmudgeony owners were trying to “hoard” for profit, ironically, adding substantial new supply would undermine that strategy by increasing competition and capturing those potential gains for different landlords/developers and future residents instead. The real delusion is pretending that vacancies prove abundance when they coexist with skyrocketing costs, precisely because overall long-run supply has failed to keep pace with population and job growth in high-demand areas."

The Hidden Cost of Hard-to-Fire Labor Laws: Why European Firms Don’t Take Risks

By Alex Tabarrok.

"In our textbook, Modern Principles, Tyler and I write:

Imagine how difficult it would be to get a date if every date required marriage? In the same way, it’s more difficult to find a job when every job requires a long-term commitment from the employer.

In two new excellent pieces, Brian Albrecht and Pieter Garicano extend this partial equilibrium aphorism with some general equilibrium reasoning. Here’s Albrecht:

[I]magine there is a surge for Siemens products. Do you hire a ton of workers to fill that demand? No, you’re worried about having to fire them in the future but being stuck until they retire.

But it’s even worse than that…..[suppose Siemens does want to hire] where is Siemens getting those workers from?…Not only is it a problem for Siemens that they won’t be able to fire people down the road, the fact that BMW doesn’t fire anyone means you can’t hire people. 

Garicano has an excellent piece, Why Europe doesn’t have a Tesla, with lots of detail on European labor law:

Under the [German] Protection Against Dismissal Act, the Kündigungsschutzgesetz, redundancies over ten employees must pass a social selection test (Sozialauswahl). Employers cannot choose who leaves: they must rank employees by age, years of service, family maintenance obligations, and degree of disability, and then prioritize dismissing those with the weakest social claim to the job. If someone is dismissed for operational reasons but the company posts a similar job elsewhere, the dismissal is usually invalid.

Disabled employees can be dismissed only with the approval of the Integration Office (Integrationsamt), a public body. The office will weigh the employer’s reasons, whether they have taken sufficient steps to integrate the employee, and whether they could be redeployed elsewhere in the organization. Workers who also become caregivers cannot be dismissed at all for up to two full years after they tell their bosses they fulfill that role.

As a company becomes larger and tries to let more workers go at once these difficulties increase. In many European countries, companies with more than a certain number of workers – 50 in the Netherlands, 5 in Germany – are obliged to create a works council, which represents employees and, in some countries, must give its approval to decisions the employer wants to make regarding its employees, including layoffs or pay rises or cuts.

…Companies that are allowed to fire someone and can afford to pay the severance costs have to wait and pay additional fees. Collective dismissal procedures in Germany start after 30 departures within a month; once triggered they require further negotiations with the works council, a waiting period, and the creation of a ‘social plan’ with more compensation for departing workers. When Opel shut down its Bochum factory in Germany, it reached a deal with the works council to spend €552 million on severance for the 3,300 affected employees. This included individual payments of up to €250,000 and a €60 million plan to help workers find new jobs.

Now what is the effect of regulations like this? Well obviously the partial equilibrium effect is to reduce hiring but in addition Garicano notes that it changes what sorts of firms are created in the first place. If you are worried about being burdened by expensive dismissal procedures, build a regulated utility with captive government contracts, not a radical startup with a high probability of failure.

Rather than reduce hiring in response to more expensive firing, companies in Europe have shifted activity away from areas where layoffs are likely. European workers are for sure, solid work only. This works well in periods of little innovation, or when innovation is gradual. The continent, however, is poorly equipped for moments of great experimentation.

…Europe’s companies have immense, specialized knowledge [due to retained workforces, AT]. The problems happen when radical innovation is needed, as in the shift from gasoline to electric vehicles. The great makers of electric cars have either been new entrants, like Tesla and BYD, or old ones who have had their insides stripped, like MG.

..If Europe wants a Tesla, or whatever the Tesla of the next decade will turn out to be, it will need a new approach to hiring and firing."

Why Blaming Walmart and Amazon for Public Assistance Is Misguided

By Chris Freiman.

"With SNAP funding in the news, we’re seeing a revival of a familiar complaint against big business. The reason millions of Americans need public benefits like SNAP, critics say, is that their employers don’t pay them enough.

As one columnist recently put it, corporations “have taken advantage of Medicaid, food stamps, and other safety net programs for years to get out of paying their workers a living wage by sticking the taxpayers with the expense.” These corporations are to blame for people’s need for public assistance, and they should pay their workers more so that they’ll rely less on safety net programs funded by taxpayers.

But this complaint is morally confused. To see why, let’s start with a simple point: an employer is a buyer of labor. So when critics say that big corporations should raise their employees’ wages to the point where they don’t need public assistance, what they’re really saying is that corporations should pay more for what they buy. But we shouldn’t assume that merely buying something from someone obligates you to pay them so much that they never need public assistance, rather than simply paying them the mutually agreeable price.

Here’s an analogy. Scarlett likes to buy scarves from Wes on eBay. Whenever Wes lists a scarf for auction, Scarlett makes the highest bid. In short, she’s his best customer. But times get tough for Wes. He begins to struggle to pay rent and buy groceries. Scarlett keeps winning the auctions for Wes’s scarves and sending payments his way, but it’s not enough to keep him off SNAP.

Politicians and commentators learn about Wes’s situation and place the blame squarely on one person: Scarlett.

If only she had paid more than the auction price for his scarves, they argue, Wes wouldn’t need SNAP benefits. According to one columnist, “Scarlett is taking advantage of the government’s safety net to get out of paying Wes enough to live on and sticking taxpayers with the expense.”

The moral condemnation of Scarlett would be downright bizarre, and it’s not hard to see why. Remember, Scarlett is Wes’s best customer — she offers more for his scarves than anyone else. If anything, we should have the least complaint against her. She’s already given Wes thousands of dollars while other customers have given him less or nothing at all. Scarlett is doing more than anyone else to benefit Wes, so it’s strange to single her out for blame.

Now turn back to big businesses like Walmart and Amazon. Just as Scarlett is Wes’s best customer, so too is Walmart its employees’ best customer — that is, it made them the best offer for their labor.

We know this because if Walmart hadn’t made them the best offer, those employees would be working somewhere else instead. Workers accept the best offer for their labor just as weavers accept the best offer for their scarves. So, as with Scarlett, we should have the least complaint against Walmart, not the most. Other employers either made Walmart workers worse offers or made them no offer at all. Since Walmart is doing more than anyone else to benefit Walmart workers, it’s strange to single it out for blame.

You might reply that I’m overthinking things. The simple truth is that Walmart should pay its employees more because it can afford to pay them more. But this view assumes you’re obligated to pay more for something simply because you can afford to do so — and that’s a dubious assumption.

Think back to Scarlett. Suppose that she could afford to pay Wes more for his scarf than what turned out to be the winning bid. While it might be generous of her to do so, that seems more like charity than fulfilling an obligation. When someone sells you a scarf, a cup of coffee, a gym membership, or an hour of labor, you don’t thereby incur a duty to pay them whatever it takes to fix their personal finances. You simply owe them the agreed-upon price.

And that agreed-upon price isn’t arbitrary — it reflects supply and demand in the case of labor just as it does for anything else. A scarf sells at a price where someone is willing to buy it and someone else is willing to let it go. Labor is no different: wages settle where workers are willing to offer their time and employers are willing to buy it. If the wage is set too high, people will be less likely to hire workers; if it’s too low, people will be less likely to work.

Even if you insist that rich customers like Scarlett do have a moral obligation to pay Wes more for his scarves, it doesn’t follow that government officials should force her to do so. The mere fact that you should do something — be it paying more for a scarf, driving a good friend to the airport, or visiting your sick sibling in the hospital — doesn’t establish that it’s the government’s job to make you do it. Plus, forcing Wes to raise his prices would likely backfire: if the government required Scarlett and other customers to pay more for his scarves, they’d be less likely to buy them, leaving Wes even worse off than before.

The parallel to employers is clear. Even if you think that buyers of labor should pay more if they can afford to do so, it doesn’t follow that the state should make them. And here again, the proposed policy would probably backfire: by making workers costlier to hire, it would discourage employers from buying their labor at all — leaving them not with higher wages, but with no job. At the bare minimum, we should ensure that any policy intended to benefit workers doesn’t harm the very people it aims to help."

Immigration, Innovation, and Growth

By Stephen J. Terry, Thomas Chaney, Konrad B. Burchardi, Lisa Tarquinio & Tarek A. Hassan. From The American Economic Review.

"Abstract

We propose a novel identification strategy to isolate exogenous immigration shocks across US counties, by interacting quasi-random variations in the composition of ancestry across counties with the contemporaneous inflow of migrants from different countries. We show a positive causal impact of immigration on local innovation and wages at the five-year horizon. The positive dynamic impact of immigration on innovation and wages dominates the short-run negative impact of increased labor supply. A structural estimation of a model of endogenous growth and migrations suggests the increased immigration to the United States since 1965 may have increased innovation and wages by 5 percent."

For-Profit Teacher Training

By Jeffrey Miron.

"Many public schools face persistent teacher vacancies. Lacking fully certified candidates, they often hire uncertified teachers instead.

Evidence from Texas shows that expanding certification to for-profit teacher training programs

reduced schools’ reliance on uncertified teachers. … [T]he lower-cost training routes [also] brought new types of certified teachers into the profession.

Teachers from for-profit programs

were of lower quality than standard-trained teachers as measured by turnover rates and … the average increase in their students’ standardized test scores … [But] they were significantly better on both metrics than uncertified teachers.

Also,

the main effect of the policy for teachers was to reduce the time and cost of training[,] … [suggesting] that the reduction in teacher training requirements was a net positive for public education in Texas.

Yet again, having fewer government rules facilitates more efficient outcomes."

The Elevator Problem: How Rent-Seeking and Regulation Make Modern Life Unaffordable

By Patrick Carroll of AIER.

"On July 8, 2024, a guest essay by Stephen Smith on elevator policy was published in The New York Times. Though this may seem like a rather dry topic at first glance, Smith’s essay quickly dispelled that notion. The piece immediately went viral and has sparked a considerable amount of commentary from across the political spectrum. 

In the essay, Smith summarized the findings of a lengthy report on elevators that he had authored in May of that year for a think tank, the Center for Building in North America, which he founded in 2022. Prompted by a personal struggle with a lack of elevator access, Smith conducted a comprehensive review of the global elevator industry with the goal of answering a very specific question: Why are there so few elevators in North America compared to the rest of the world? 

“Despite being the birthplace of the modern passenger elevator, the United States has fallen far behind its peers,” he writes in the report. 

While the US has more than 1.03 million elevators — one of the highest totals in the world — it has fewer elevators per capita than any other high-income country for which data can be found, and Canada’s position on a per capita basis is similar. 

“…Part of this absence is due to the dominance of freestanding single-family houses in North America,” Smith acknowledges, “but even apartments in the United States are less likely to have elevators than those in much of Europe and Asia.” He points out, for example, that while New York City and Switzerland have similar populations, and a greater percentage of New Yorkers than Swiss live in apartment buildings, New York only has half the number of passenger elevators. 

“No matter how you slice the numbers,” he says, “America has fallen behind on elevators.” 

Smith’s findings all pointed to cost as the major factor. In Canada and the US, he says, new elevator installations cost at least three times as much as in Western Europe — roughly $150,000 compared to $50,000. What is driving this cost differential? Smith spends the majority of the report outlining three main culprits: mandatory minimum cabin sizes, labor issues with elevator installers, and technical codes and standards, which are harmonized for practically the whole world except the US and Canada. 

He writes: 

The North American approach is one of extremes. American and Canadian elevators have the largest cabins, the strongest doors, the most redundant communication systems, the best paid workers, and the most diversity of codes on the one hand. And in exchange, Americans and Canadians have the highest prices, the most limited access, the most uncompetitive market for parts, and the most restricted labor markets.

‘One of the Most Powerful Construction Unions in North America’ 

Smith’s comments on the labor point have attracted particular attention, because the inefficiencies are so glaring. As he wrote in The New York Times: 

Architects have dreamed of modular construction for decades, where entire rooms are built in factories and then shipped on flatbed trucks to sites, for lower costs and greater precision. But we can’t even put elevators together in factories in America, because the elevator union’s contract forbids even basic forms of preassembly and prefabrication that have become standard in elevators in the rest of the world. The union and manufacturers bicker over which holes can be drilled in a factory and which must be drilled (or redrilled) on site. Manufacturers even let elevator and escalator mechanics take some components apart and put them back together on site to preserve work for union members, since it’s easier than making separate, less-assembled versions just for the US. 

National Review economics editor Dominic Pino has noted, along with City Journal contributor Connor Harris, that this is a textbook example of what’s known as featherbedding, a practice in labor relations where unions obtain “make work” rules so that more union workers can be employed. 

The main elevator union in Canada and the US is the International Union of Elevator Constructors (IUEC), which Smith points out is “one of the most powerful construction unions in North America.” A 2011 comment from its General President, Dana Brigham, is revealing. 

“We can’t afford to sit back and see our trade dumbed down through factory prefabrication and preassembly to a point where all our members will have to do on the job is simply uncrate the elevator, set it, and plug it in,” Brigham said. Responding to this quote, Pino quips: “Heaven forbid elevators be easy to install.” 

It’s no wonder that featherbedding has a bad reputation. As Leonard Read observed in 1960, these practices are “as obviously absurd to the layman as they are disgusting to the economist.” 

In modern jargon, the economist’s disgust is often expressed by characterizing these practices as a kind of rent-seeking. Indeed, Alec Stapp, co-founder of the Institute for Progress, recently cited the elevator union rules that Smith uncovered as a good example of this concept. 

The notion of rent-seeking comes from the public choice school of economics, specifically the work of economists Gordon Tullock and Anne Krueger. Developed in the ‘60s and ‘70s, rent-seeking refers to any practice where you are trying to increase your wealth by changing the rules of the game, as compared to profit-seeking, which is trying to increase your wealth by being more productive. 

Common examples of rent-seeking include lobbying for tariffs or subsidies — or, in this case, union featherbedding. Profit-seeking, on the other hand, would include activities such as research and development aimed at creating new products to sell to customers. 

The word “rent” in this context refers to the old economic definition of rent, which is about the excess returns yielded by a factor of production, and not the colloquial definition of a payment made for the use of property.

Elevators Are Just the Tip of the Iceberg 

The other two factors that Smith discusses — minimum cabin sizes and technical codes and standards — are a classic case of government regulations making things considerably more expensive than they need to be (and regulation, particularly licensing, no doubt contributes to the labor issues as well). 

Now, if the mandated wastefulness that we find in the elevator industry were unique, it would still be cause for alarm, but the absurd truth is that regulations like this are everywhere. 

“When most people go through their daily lives, they don’t think about the ways in which government regulations are making their lives more difficult,” writes economist Scott Sumner, reflecting on Smith’s elevator story. “In almost every case I come across with systematic inefficiency, the root cause is counterproductive regulations.” 

It feels like every few months, a story like this comes along that grips the public’s attention. Calls for reform are heard, a public outcry fills the airwaves, maybe legislation is introduced. But it rarely occurs to people that these stories form a pattern. As such, we’ve fallen into this routine where our news feeds periodically become dominated with the latest absurd regulation story, and then at best we play whack-a-mole with legislation designed to address the Current Thing. 

Perhaps, if we can focus on the bigger picture, we should consider trying a different approach. Maybe there will come a point where we realize that news-driven piecemeal deregulation isn’t particularly effective, and more fundamental changes, such as blanket limits on government intervention in the economy, must be considered."

Adam Smith on markets and their potential to benefit the poorest in society

Ginny Seung Choi & Virgil Henry Storr. From the journal Constitutional Political Economy.

"Abstract

Revisiting Adam Smith can be a useful way to resurface key aspects of how markets work that are underemphasized in current scholarship. This is especially fruitful when Smith’s claims have strong support within the political economy literature. This article focuses on Smith’s various arguments about the impact of markets on the least advantaged, and whether there is support for his claims in the contemporary literature. Despite advances in the last several decades, and indeed since the Industrial Revolution, poverty remains a worrisome problem. Additionally, inequality between countries and inequality within countries remain social challenges. Adam Smith, especially in The Wealth of Nations and The Theory of Moral Sentiments, has highlighted the potential of markets to improve the material conditions of the poorest in society."

Excerpts:

"Thus far, most global efforts to address the problems of poverty and inequality (perhaps unsurprisingly) have tended to be top-down. In 2015, for instance, all the members of the United Nations adopted 17 Sustainable Development Goals. These goals meant to serve as a call to action for member states and drive an agenda aimed at eliminating poverty, reducing inequality, encouraging economic growth, and promote inclusion and sustainability. It is unclear, almost a decade later, that this top-down effort has been successful. And, although the strategies members agreed to adopt called for expanding trade and promoting markets, they instead encouraged aid, and the focus was on countries adopting certain regulations and pursuing interventions that would ensure that the “right” kind of development occurred. Arguably, markets are frequently viewed as the cause rather than the cure for inequality and poverty." 

"In this article, we argue that markets are the best way out of poverty and toward more equal societies. Despite poverty and inequality still being problems, the evidence suggests that markets are not the problem but are part of the solution. Indeed, the potential of markets to reduce poverty and inequality is a lesson that we arguably should have learned from Adam Smith. More importantly, however, Smith encourages us to focus less on inequality and more on the conditions of the poorest."