The Economic Illiteracy of Rent Control

By Dan Mitchell. Excerpts:

"When writing about rent control in the past, I’ve used words like “horrid” and “lunacy.” And let’s not forget “folly.”

The policy is (as I wrote in 2019) the “triumph of vote counting over sound economics.”"

"an overwhelming share of academic economists are Democrats.

Yet there is near-unanimity in the profession that rent control is a failure. Here’s the data, courtesy of Professor Jeremy Horpedahl.

Yet politicians on the west coast don’t care about economic reality, as explained by David Chen in a report for the New York Times.

…thousands of Washington residents…have converged in recent weeks on Olympia, the state capital, to lobby legislators about one of the most closely watched housing bills in the country: A measure that would cap residential rent increases at 7 percent a year. Deemed a priority by the Democratic leaders who control the State Legislature, the bill has cleared the House of Representatives and is now in the Senate. If it is enacted, Washington would become the third state in the country to adopt statewide rent regulations, after Oregon and California… The state of Washington…would protect tenants throughout the state, including those in towns that may be unable or unwilling to take their own action.

Actually, such legislation would not “protect tenants.”

As always happens with price controls, shortages will appear.

But tenants don’t understand that economic reality and politicians are happy to ignore that reality.

Speaking of politicians who ignore reality, here are some excerpts from a Wall Street Journal editorial last year.

Democrats in Congress are now pressing the President to impose rent control nationwide…a pretext to nationalize local housing policy. Fifty Democrats in Congress…sent a letter urging Mr. Biden “to pursue all possible strategies to end corporate price gouging in the real estate sector and ensure that renters and people experiencing homelessness across this country are stably housed this winter.” …Democrats want the Federal Housing Finance Agency (FHFA), which supervises government-sponsored enterprises Fannie Mae and Freddie Mac, to establish “anti-price gouging protections” and “just cause eviction standards” in rental properties with government-backed mortgages. These are their euphemisms for rent control and eviction bans.

As you might expect, some of the most economically illiterate members of Congress signed the letter, including Bernie Sanders, Elizabeth Warren, Alexandria Ocasio-Cortez, and Ayanna Pressley.

Let’s close with some evidence from a recent rent-control mistake in Germany. Two German scholars, Pekka Sagner and Michael Voigtländer , investigated the impact of a rent freeze in Berlin.

The Berlin rent freeze was an unprecedented market intervention in the German housing market. We analyse how the rent cap part of the legislation which fixed rents at below market levels affected the supply side in the short term. We find rent decreases accompanied by decreases in supply five times as large. …We make use of a rich dataset of real estate advertisements and employ hedonic difference-in-difference and triple-difference estimation strategies.

Maybe it’s just me, but “decreases in supply five times as large” seems like a bad thing.

It’s almost as if Berlin politicians were a bunch of economic illiterates. Or, they knew the likely result but didn’t care because they were focused on short-term political benefits for themselves."