Price Control Apologia

By John Cochrane. Excerpts:

"the glaring elephant-in-the-room Econ 101 issue: Budget constraints. Every dollar of “relief” for one party is a dollar of “burden” for another, plus the inefficiencies of redistribution.

Sure, “sharply rising rents and utility bills wreak havoc on family budgets,” if the families don’t follow the screaming market signal to move. (Which is not painless, for sure. Incentives never are.) But the money comes from somewhere. Rent controls and energy price caps wreak havoc on landlord end electric utility budgets. The money must come from somewhere.

A rent control is the same as a tax on landlords used to subsidize the rents of current tenants. You may picture a giant corporation, but many landlords are sympathetic individuals who worked hard and saved and use the apartment to fund their retirement. Corporations are owned by the 401(k) plans of sympathetic workers too. But economists should know better than to tug on your heartstrings for who should get resources forcibly taken from who else. If you ask “what’s the optimal way to tax people in general in order to lower housing costs for a politically attractive group (current tenants)” the screaming answer is not “let’s tax the people who currently own the buildings.” Sure, “tax the rich.” If you want to go down this route, it’s a lot more efficient to tax all the rich. If you ask “what’s the optimal way to help families who just got stuck with higher rents,” the screaming answers is “send them a check, but then let them move to the apartment that best fits their needs.”

A rent control only makes rental “affordable” for the lucky recipient. It does not make rental housing more “affordable” for society as a whole. It does not increase the number of people who have housing. Indeed it reduces that number. It just changes who gets it. It does not even make housing more “affordable” on average. For those who want it must now pay with time, and inconvenience, or pay by foregoing the great opportunities that moving to the city provided.

The biggest losers of rent control are the young, the mobile, the ambitious, immigrants, and people without a lot of cash. If you want to move from Fresno to take a job in San Francisco and move up, and you don’t have millions lying around to buy, you need rentals. Rent control means they are not available. Income inequality, opportunity, equity, all get worse. 

There is no blob of “government” money, or “policy” that can make something affordable for one without making something else less affordable for another."

"Supply does not need “tax incentives,” which are usually specific to a project and negotiated between developers and politicians. This is showy stadium construction finance, which does little for broader prosperity. Supply needs “get out of the way,” starting with reducing the taxes we have now. The problem with “regulatory barriers” is not that on removal it takes years to build housing, it’s that it takes decades to remove regulatory barriers. Remove the barriers tomorrow — zoning, planning, density and height restrictions, dozens of separate permits, labor restrictions (unions, high minimum wages), and so on — and you could get actual new housing before the next presidential election."

"Everyone is focused on building, but “supply” is so much more than building. There is tremendous supply in using more efficiently what we have now. Most cities have laws against renting parts of single family homes, or sharing larger homes. Think how many spare bedrooms are empty every night. There is plenty of housing supply in the US, it’s just not in places where people want to move. Others moving out is “supply,” and greatly impeded. Older people stay in too-big houses and apartments, in locations close to work and school opportunities that young families desire, but the older people no longer need. Why? If they sell, they are taxed on capital gains, even just due to inflation. They lose property tax exemptions, and, of course, rent control protection. Each older person who cashes in, downsizes, or moves to a neighborhood more suited to them, supplies a house or apartment. The non-portable fixed rate 30 year mortgage, an invention of our federal housing subsidy regime, leads people to stay where they are rather than move to where they want to go, and free up a scarce house or condo for someone else. Strong apparently “consumer protection” laws in rental contracts dry up the supply, especially to the marginalized. If you can’t kick people out, you’re much more careful who you let in. Limits on short term rentals limit rentals. Remove rent controls, permanently, and houses and condos can be rented. Many houses and apartments need rehab, not new construction, which can happen very quickly once owners know they will not be robbed of their investment. Even “affordable” housing leads people to stay where they are, rather than move to better opportunities for them and free up an apartment for someone else, because it’s rationed with long waiting lists."

"When Javier Milei ended rent control in Buenos Aires, rent went down. Instantly. Nothing had to get built. It can happen in Manhattan.

Nothing rings more true of our government than restrict supply, subsidize demand, and watch prices skyrocket. Universities and health care are poster children along with housing and energy. “Landlords” and “utility companies” are not, in fact, making a killing here. Land owners benefit. Energy faces rising costs like anything else. AI, not corporate apartment companies, electric utilities, and oil companies, are the hot stocks of the moment."

"rent controls are . . . exactly the same thing as a tax on suppliers used to fund demand subsidies. With a fixed supply, the number of people who have houses is fixed. The only effect of rent controls or demand subsidies is to change who gets the houses."

"Oh, please. New York put in “temporary” rent controls in WWII. 80 years ago. Congress passed “temporary” Obamacare subsidies during the pandemic, and we just shut down the government for a month and a half over that. “Rent caps on existing units” have been tried by every single failed rent control regime in history. Tax away the hard-earned investment of existing landlords. But apartments need maintenance and even the Times (can’t find the link) runs stories of apartments vacant in Brooklyn because it’s not worth it for landlords to fix them, since they were built before the last “existing unit” freeze in 1974. Plus, every investor knows that what can be done “just this once” can be done again. “Government investment in new housing?” California specializes in that, featuring $1 million one bedroom units for homeless people. Come tour the ruins of Chicago’s housing projects. And once again, just where is this endless pot of money? Let’s see, 3 million homes at $500,000 per home is $1,500,000,000,000 yes one point five trillion if I got my zeros right. Not exactly couch change on the government budget."

"You must live in quite a bubble not to know about the trillions of “government investment” in solar panels and windmills we already have. California leads the way. And also has the highest gas and electric prices in the nation. And you must have forgotten a lot of economics to not recognize that “household budgets” also have to pay the taxes that pay for these “investments.” California’s electric utilities and refiners are barely scraping by, rather than being effective pots of tax money, so that “shielding” of some household’s budgets will come from other households.

Energy prices have if anything more incentive effects than housing, and are more elastic in the short run. If gas prices go up, you can car pool, take transit, bike, or just drive less. Or move closer to work. Except rent controls mean you can’t. Energy is a smaller component of income. Another textbook rule of economics: don’t mess with price signals, especially of elastically demanded goods that are a small component of budgets, in order to transfer income. Energy subsidies do the opposite."

"price controls that have been tried since Diocletian (300AD) and failed every single time"

"Many rent or price controls in the 1,700 years (and likely more) on this earth have promised to be temporary, targeted, combined with structural reforms. I cannot think of a single one that ever has done so. If you want Mamdani to succeed politically, you will do a lot better to advise him against self-delusion not to pander to his ill-informed instincts."

"A last thought. Mamdani, if he does follow through on his policies, will indeed make Manhattan much more “affordable.” Chase away all the wealthy people, all the businesses and business owners, and apartments will be cheap. Detroit is affordable too. Be careful what you wish for, you just might get it."