A majority of politicians and pundits believe that economic reality is optional. Of course, they don’t express this belief in any manner so direct. But one can logically infer this belief from their policy proposals.
Take, for example, support for rent control. Having the state keep the monetary prices of rental units below the values that would arise in free markets is believed by many pols and pundits – and by nearly all “Progressives” – to effectively keep the actual market values of rental units at whatever low prices the state sets. In this reality-is-optional world, when the state pushes down nominal rental prices, the quantity of rental units supplied not only does not fall, it increases to match the increase in the quantity of rental units demanded.
Want more housing for folks with modest incomes? No problem! We’ll just push the rental prices lower to increase ordinary folks’ access to housing. See, the world is such a simple place!
Similar reality-is-optional “solutions” are minimum-wage statutes (for increasing the pay of low-skilled workers) and mandated paid-leave (for increasing the welfare of all workers).
Pondering this strange notion that the state can make market values be whatever the state wants them to be merely by dictating changes in the names of market values – that is, changes in nominal prices – I wondered what the world would be like if miracles more broadly could be worked merely by changing nominal designations. […]
Of course, all such scenarios are ludicrous. Reality isn’t changed merely by reporting that reality is other than what it is. In fact, reality is made worse by false reports because, unable to learn the truth about reality, people act in ways that are inconsistent with reality, thus worsening their situations.
Yes – but why, then, do so many people believe that economic reality is optional? Why do so many people believe that economic reality can be made to be whatever the state wants it to be merely by having the state order that reports of economic reality lie about that reality? All state-imposed price controls – rent control, minimum wages, you name it – are state-dictated lies about reality.
Don Boudreaux, “What if All Reality Were Optional?”, Café Hayek, 2019-09-13.
April 3, 2024
QotD: Optional economic reality
September 13, 2020
QotD: Price controls versus reality
Non- (and poor) economists, seeing only that which is in front of their noses, observe the government-controlled prices and conclude that the results of these controls must be just what the government publicly proclaims it wishes these results to be. “Look! Rents are lower with rent controls! Wages are higher with minimum wages! We have helped the poor!”
Those who fall for such superficial appearances, of course, do not grasp the nature of market forces and the role of prices. But the naiveté of such people runs much deeper: they are the sort of people who believe that if the messenger is forced to lie, the underlying reality changes, with the lie thereby converted into truth. Such people, in other words, believe in miracles. They believe that state officials performing incantations can miraculously change economic reality.
Don Boudreaux, “Quotation of the Day…”, Café Hayek, 2018-05-16.
August 25, 2020
Berlin’s experiment with rent control has already made huge changes in the housing market
Sadly, for advocates of rent control in other cities, the changes are not positive for renters or landlords:
In the beginning of this year, the city government of Berlin brought in a rent freeze, a particularly crude form of rent control. Predictably, this led to calls from certain quarters for introducing similar measures here in London. I had several discussions about this, making the standard economic case against rent controls, but to no avail. I was told that I was blinded by neoliberal dogma, that the world is not as simple as my Econ 101 textbook, and that this was a brilliant and necessary measure to rein in the power of greedy landlords and speculators.
The first results are already in now, and they can be interpreted as the revenge of Econ 101. In Berlin, the supply of new rental properties coming on the market has fallen by a quarter compared to last year. No, this is not because of the virus: in other big cities such as Hamburg, Munich and Cologne, supply has increased by a third over the same period.
In fact, the one subsector of Berlin’s rental market which is exempt from the rent cap, namely new-built properties, is not that different from the rental markets of other big cities. In this subsector, the number of new rental properties coming on the market has increased by a quarter. Yet in the main market, where the cap does apply, supply has fallen by almost half – a drastic reduction, which more than cancels out any gains made elsewhere.
There has also been an increase in the number of properties that are up for sale, rather than rent, because while rents have been capped, sales prices have not.
So whether you compare the rent-capped part of Berlin’s rental property market to its counterpart in other cities, to its cap-exempt counterpart in Berlin itself, or to the owner-occupier sector – the result is always the same. The rent cap clearly is having a negative impact on supply, and this is happening astonishingly quickly: even I was not expecting to see any impact in this year, or the next.
None of the arguments against rent controls are new. You can already find them all in Verdict on Rent Control, a book which the IEA published in 1972. The book is actually a collection of papers on the subject, some of which are much older than that. It contains one paper by Milton Friedman and George Stigler on wartime rent controls in the US, which were still lingering after the war had ended. It was first published in 1946, but they were already having the same arguments then that we are still having today.
April 28, 2020
QotD: Rent control in Stockholm
Instead of a fairer rental market, where tenants can easily afford rent and live in high-quality housing, Sweden suffers from increased social segregation; eruptions of violence as a result of disagreements in its massive black market of sublet housing; and companies that face immense difficulties in recruiting talent, as potential workers are unable to find suitable accommodation.
Proponents of rent control often emphasise the fairness the measure: rent controls are meant to create a more egalitarian society, where individuals irrespective of their income live in the same neighbourhood and can afford similar quality housing. This could not be further from the truth.
The Swedish experiment shows that it is high-income, well-educated individuals who benefit from rent controls the most, whereas less-educated, or not as well-connected individuals such as younger renters or immigrants, are highly disadvantaged by the system.
In theory, housing stock that becomes available for rent is allocated through the Stockholm Housing Agency, which ensures the rental prices are kept on “an average level”. The average waiting time in Stockholm for such housing allocation is over 11 years. As tenants realise the true value of their contract — e.g. the money they can receive for their apartment on the secondary rental market — they are unwilling to return the property to the agency, even when they move out. Instead, they rent it out to someone in their extended circle of friends or exchange the flat for one in a different area — only in practice, not on paper of course. No wonder that only 0.5% of the housing is returned to the agency, resulting in a massive queue of 670,000 people on Stockholm’s housing waitlist — out of a total population of 970,000.
This system benefits the most well-connected individuals, but highly disadvantages people who lack broad social connections. These groups are often forced into the informal rental market, where the prices are on average double that of the official rent controlled numbers. One in five young Swedish renters face have admitted renting on the black market. Due to the lack of legal arbitration, disagreements between parties can lead to violence and in some cases even murder.
Another problem has been the inflexibility of rental contracts, which have made it difficult for people to move between cities, leading to a fifth of Swedish companies facing severe recruitment problems due to the lack of suitable housing.
Adam Bartha, “Rent controls have failed in cities throughout Europe”, Institute of Economic Affairs, 2020-01-23.
March 15, 2020
Those damned unintended consequences
Sarah Hoyt on the differences between intention and the real world:
Unintended consequences are the bane of social engineers. They are why the “Scientific” and centralized method of governance never worked and will never work. (Sorry, guys, it just won’t.)
Part of it is because humans are contrary. Part of is because humans are chaotic. And part of it is because like weather systems, societies are so complex it’s almost impossible to figure out what a push in any given place will cause to happen in another place.
This is why price controls are the craziest of idiocies. They don’t work in the way they’re intended, but oh, they work in practically all the ways they’re not. So, take price controls on rent. All they really do is create a market in which housing is scarce, landlords don’t maintain their property AND the only people who can afford to live in cities that have rent control are the very wealthy.
BUT Sarah, you say, aren’t rent controls supposed to make them affordable. Yeah. All that and the good intentions will allow you to go skating in hell on the fourth of July weekend.
Let’s be real, okay? I saw rent control up close and personal in Portugal. Rents were controlled and landlords were penalized for “not keeping the property up”.
In Portugal at the time, and here too, most of the time from what I’ve seen, the administration of property might be some management company, but that’s not who OWNS the damn thing. The owners are usually people who bought the property so it would support them in old age/lean times.
To begin with, you’re removing these people’s ability to make money off their legitimately owned property. And no, they’re not the plutocrats bernie bros imagine. These are often people just making it by.
Second, people are going to get the money some other way, because the alternative is dying. And people don’t want to die or be destitute. So they’re going to find the money. I have no idea what it is in NYC, etc, but in Portugal? it was “key buying.” Sure, you can rent the house for the controlled price, but you have to make a huge payment upfront to “buy the key.” From what I remember this was on the order of a small house down payment. And if you couldn’t do that, you were stuck getting married and living with your parents. And if you say “greedy landlords” — well, see the other thing you could do was leave the lease in your will. So the landlord didn’t know if they’d ever get control of their property back, and they needed to live off this for x years (estimated length of life.) So, that was an unintended consequence. The kind that keeps surfacing in rent-controlled cities in the US.
The same applies to attempts to “help” the homeless. Part of this, as part of all attempts to “fix” poverty is that the people doing it, usually the result of generations of middle class parents and strives assume the homeless and the poor are people like them.
To an extent, they’re correct. The homeless and the poor are PEOPLE. But culture makes a difference, and culture is often based on class and place of upbringing. And the majority of humanity, judging by the world, might be made to strive but are not natural strivers. Without incentive, most of humanity sits back, relaxes and takes what it’s given.
August 4, 2018
QotD: Supply and demand
… that terribly simplistic stuff about supply and demand in those econ 101 classes is actually true. Prices are not some arbitrary numbers thrown at something by the capitalist neoliberals in order to do down the proletariat. They’re vital and essential information about who wants what and who is willing to produce what. Where the supply and demand curves meet is where the market will clear and the market price will be the market clearing price. The meaning of this is that when you decide to arbitrarily throw a price at something you’re going to up set that balance. And if you tell producers that the price will be lower than the market one then they will produce less. And as demand curves slope downwards so will consumers desire more at that lower price. Thus price fixing below the market price produces a shortage, a dearth.
This is not some optional feature, it’s an essential fact about our universe. It is the explanation for those food shortages that Venezuela has been having. More than that it’s the only explanation we need or desire. Fix prices below the market price and you will have shortages. Stop fixing prices and you will stop having shortages.
So, well done to Venezuela for giving in to reality there. And this is something that we need to take on board too. Rent controls which fix the price of housing below the market price will lead to a shortage of housing. And the opposite applies too – fix the price of labour above that market price with a minimum wage and you’ll have an excess supply of labour. Or, as we usually call that, an excess of unemployment.
The price of something simply is the price of something and don’t ever forget it.
Tim Worstall, “Congratulations To Bolivarian Socialism – Finally A Sensible Economic Policy In Venezuela”, Forbes, 2016-10-15.
February 8, 2018
The revenge of the return of the bride of rent control
Megan McArdle on the unexpected return of one of the very worst economic policies known to mankind, or as our beloved Prime Minister would insist “peoplekind”:
According to the Wall Street Journal, rent control seems to be making a retro comeback. Most forms of intelligent life could be forgiven for asking why.
Serial experimentation with this policy has repeatedly shown the same result. Initially, tenants rejoice, and rent control looks like a victory for the poor over the landlord class. But the stifling of price signals leads to problems. Rent control starts by producing some sort of redistribution, because the people with low rents at the time that controls are imposed tend to be relatively low-income.
But then incomes rise, and rents don’t. People with higher incomes have more resources to pursue access to artificially cheap real estate: friends who work for management companies, “key fees” or simply incomes that promise landlords they won’t have to worry about collecting the rent. (One of my favorite New York City stories involves an acquaintance who made $175,000 a year, and applied for a rent-controlled apartment. He asked the women taking the application if his income was going to be a problem; she looked at the application and said, “No, I think that ought to be high enough.”)
So the promise of economic justice erodes over time, as lucky insiders come to dominate rent-controlled apartments, especially because having gotten their hands on an absurdly cheap apartment, said elites are loathe to move and free up space for others.
The longer the rent-control policies remain, the more these imbalances grow. The gap between the rent that is charged, and the rent that could be charged in a competitive market, widens. Deprived of the ability to make a profit, landlords skimp on maintenance and refuse to build new housing. If you loosen the law to incentivize renovation, or new building, this only creates new forms of dysfunction: discrimination against tenants who might stay longer than a few years (limiting the ability to raise rents); a decontrolled market that has to absorb all of the excess demand created by locking up so much of the housing market in rent-controlled leases that rarely turn over; even landlords who renovate too often, the better to raise the rent. This arrangement is very good for the people who happen to have gotten their hands on a rent-controlled apartment, and very bad for everyone else, especially newcomers to the city.
September 30, 2017
Kathleen Wynne’s “War on Economics” is going great!
Giving people “free” stuff will always get you support from people who don’t understand TANSTAAFL (including the leader of the opposition), as Chris Selley explains:
Polls suggest Premier Kathleen Wynne’s ongoing war on economists is paying dividends. Fifty-three per cent approve of her Liberal government extending rent control to units built after 1991, according to a Forum Research poll conducted in May; only 25 per cent disapproved. In June, Forum found 53 per cent of Ontarians supported jacking up the minimum wage to $15 from $11.40 by Jan. 1, 2019, versus 38 per cent opposed. The move was hugely popular among Liberal voters (79 per cent) and NDP voters (28 per cent). Wynne’s approval rating is staggering back up toward, um, 20 per cent. But a Campaign Research poll released Sept. 13 had the Tories just five points ahead of the Liberals. That’s pretty great news for this beleaguered tribe.
The boffins still aren’t playing along, though.
Earlier this month, Queen’s Park’s Financial Accountability Office projected the hike would “result in a loss of approximately 50,000 jobs … with job losses concentrated among teens, young adults, and recent immigrants.” And it could be higher, the FAO cautioned, because there’s very little precedent for, and thus little evidence on which to judge, a hike as rapid as the one the Liberals propose — 32 per cent per cent in less than two years.
This week, TD Economics weighed in with a higher number: “a net reduction in jobs of about 80,000 to 90,000 positions by the end of the decade.” And the Canadian Centre for Economic Analysis paints the grimmest picture: “We (expect) that the Act will, over two years, put 185,000 jobs at risk” — that’s jobs that already exist or that would otherwise have been created.
It’s easy to see why raising the minimum wage is popular. Governments like it because it doesn’t show up in the budget. We in the media can pretty easily find victims of an $11.40 minimum wage, and reasonably compassionate people quite rightly sympathize. Forty hours a week at $11.40 an hour for 50 weeks a year is $22,800. You can’t live on that.
Of course, these Liberal policies are flying in the face of mainstream economic theory, so you’d expect the Ontario Progressive Conservatives to have lots of arrows in the quiver to fight … oh, wait. Tory leader Patrick “I’m really a Liberal” Brown supports both the rent control and the minimum wage hike, just not quite as much at Wynne does. There’s Canadian “conservatism” in a nutshell for you: we also want to get on the express to Venezuelan economic conditions, just not quite as fast as the government wants. There’s a reason Kathleen Wynne isn’t as worried about getting re-elected as she used to be…
May 9, 2017
QotD: Wage floors and rent ceilings
[Progressives] tend to favor policies such as New York City’s rent controls, and the new $15 minimum wage being gradually phased in in some western cities. I like to think of these policies as engines of meanness. They are constructed in such a way that they almost guarantee that Americans will become less polite to each other.
In New York City, landlords with rent controlled units know that the rent is being artificially held far below market, and thus that they would have no trouble finding new tenants if the existing tenant is unhappy. So then have no incentive to upgrade the quality of the apartment, or to quickly fix problems. They do have an incentive to discriminate against minorities that, on average, are more likely to become unemployed, and hence unable to pay the rent. Or young people, who might damage the unit with wild parties.
Wage floors present the same sort of problem as rent ceilings, except that now it’s the demanders who become meaner, not the supplier. Firms that demand labor in Los Angeles in the year 2020 will be able to treat their employees very poorly, and still find lots of people willing to work for $15/hour.
Scott Sumner, “How bad government policies make us meaner”, Library of Economics and Liberty, 2015-08-25.
April 18, 2017
QotD: Rent control
To someone ignorant of economic reasoning, rent control seems like a great policy. It appears instantly to provide “affordable housing” to poor tenants, while the only apparent downside is a reduction in the income flowing to the fat-cat landlords, people who literally own buildings in major cities and who thus aren’t going to miss that money much. Who could object to such a policy?
First, we should define our terms. When a city government imposes rent control, it means the city makes it illegal for landlords to charge tenants rent above a ceiling price. Sometimes that price can vary, but only on specified factors. For the law to have any teeth — and for the politicians who passed it to curry favor with the public — the maximum rent-controlled price will be significantly lower than the free-market price.
The most obvious problem is that rent control immediately leads to a shortage of apartments, meaning that there are potential tenants who would love to move into a new place at the going (rent-controlled) rate, but they can’t find any vacancies. At a lower rental price, more tenants will try to rent apartment units, and at a higher rental price, landlords will try to rent out more apartment units. These two claims are specific instances of the law of demand and law of supply, respectively.
[…]
In the long run, a permanent policy of rent control restricts the construction of new apartment buildings, because potential investors realize that their revenues on such projects will be artificially capped. Building a movie theater or shopping center is more attractive on the margin.
There are further, more insidious problems with rent control. With a long line of potential tenants eager to move in at the official ceiling price, landlords do not have much incentive to maintain the building. They don’t need to put on new coats of paint, change the light bulbs in the hallways, keep the elevator in working order, or get out of bed at 5:00 a.m. when a tenant complains that the water heater is busted. If there is a rash of robberies in and around the building, the owner won’t feel a financial motivation to install lights, cameras, buzz-in gates, a guard, or other (costly) measures to protect his customers. Furthermore, if a tenant falls behind on the rent, there is less incentive for the landlord to cut her some slack, because he knows he can replace her right away after eviction. In other words, all of the behavior we associate with the term “slumlord” is due to the government’s policy of rent control; it is not the “free market in action.”
Robert P. Murphy, “The Case Against Rent Control: Bad housing policy harms lower-income people most”, The Freeman, 2014-11-12
March 23, 2017
The rent is too damned high? I know – let’s kill the rental market!
Toronto’s real estate market has been insane for years, with prices for utter wrecks still approaching a million dollars. This has a knock-on effect for rental housing, with insufficient supply guaranteeing that rents will also go higher and higher. The Ontario NDP thinks they’ve got a silver bullet to fix the rental market: rent control! Chris Selley explains why this won’t work out the way eager would-be renters in Toronto might hope:
The NDP’s solution: rent control. MPP Peter Tabuns tabled a private member’s bill Monday that would extend limits on annual rent increases to units built after 1991 — thus closing a so-called “loophole” the Mike Harris Tories introduced in hopes people would build more new units. The Liberals followed quickly behind, with Housing Minister Chris Ballard promising “substantive rent control reform” — details to come.
You can see the attraction, politically. Robber baron landlords swoop in, cackling, forcing families onto the streets and auctioning off their homes, literally, to the highest bidder. The government can stop it. Why won’t the government stop it?
No doubt there are some very sympathetic stories out there. But we in the media tend to be very good at finding those, and it’s hard not to notice the preponderance of “victims” who could afford very high rent in the first place, and didn’t do their homework with respect to rent control or the lack thereof. A typical example: CBC introduced us to a 32-year-old who was paying $1,650 a month for a tiny one-bedroom condo, only to be sent couchsurfing by a whopping $950 increase.
[…]
The fact is, rent control would largely help high-end renters in a high-end market. The vast majority of units that aren’t rent controlled are condos. In October, CMHC pegged the condo-over-apartment rental premium in the GTA at 46 per cent for one-bedrooms, 54 per cent for two-bedrooms and 65 per cent for three-bedrooms.
The real challenge these days is finding an apartment, period: the vacancy rate in October was 1.3 per cent. Critics say the “loophole” didn’t actually incentivize building rental apartments, but closing the “loophole” certainly won’t. Indeed, it’s tough to see how it would accomplish much except transferring money from unit owners to their tenants. Many will like that idea on principle — but if owners can’t rent to the highest bidder, they are unlikely to suddenly rent for less to the youngest, most disadvantaged and most vulnerable people rent control ostensibly helps.
If you want central Toronto to be a more affordable place to live, you need to figure out how to boost supply. There are lots of different ideas out there. It’s a topic of constant discussion at City Hall and Queen’s Park alike. Rent control is nothing but a political distraction.
August 21, 2016
QotD: Price controls and other forms of rationing
Of the numerous and occasionally contradictory techniques used to ration demand and supply [when monetary prices are not used], perhaps the most common is past behavior: persons already in apartments are given preference under rent control, or past acreage determines current allotments under agricultural price support programs. Another common technique is queuing or first come – first served: taxicabs, theater tickets, medical services, and many other goods and services are rationed in this way when their prices are controlled. Of course, discrimination and nepotism are also widely used; the best way to get a rent-controlled apartment is to have a (friendly) relative own a controlled building. Other criteria are productivity – the least productive workers are made unemployed by minimum wage laws;…. collateral – borrowers with little collateral cannot receive legal loans when effective ceilings are placed on interest rates.
Each rationing technique benefits certain groups at the expense of other groups relative to their situation in a free market. Price controls are almost always rationalized, at least in part, as a desire to help the poor, yet it is remarkable how frequently they harm the poor.
Gary Becker, Economic Theory, 1971.
September 2, 2015
Seattle is considering implementing rent control
Megan McArdle on the things Seattle may learn — painfully — if they fail to heed the experiences of other cities that have implemented rent control:
So I see that Seattle is considering rent control. For a columnist who covers economic issues, this is a little bit like hearing that residents are debating how big to make the reet pleats on their zoot suits. It’s hard to get economists to agree on much of anything, but as Alex Tabarrok notes, this is an area of rare consensus among economists: Rent control creates more problems than it solves.
If you want a vivid example of what those problems look like, you can do no better than a letter written by a resident of Stockholm to the good citizens of Seattle, quoted by Tabarrok: “Seattle, you need to ask your citizens this: How would citizens like it if they walked into a rental agency and the agent told them to register and come back in 10 years? … Stockholm City Council now has an official housing queue, where 1 day waiting = 1 point. To get an apartment you need both money for the rent and enough points to be the first in line. Recently an apartment in inner Stockholm became available. In just 5 days, 2000 people had applied for the apartment. The person who got the apartment had been waiting in the official housing queue since 1989!”
Now, Stockholm is extreme. But the general effect always goes in the same direction. Rent control creates two classes of tenants: people who have the right to rent at below-market rates, and renters who would like to get a long-term lease on an apartment, but cannot, or must pay through the nose for a limited number of uncontrolled properties. Meanwhile, landlords let the quality of the existing stock decline and become very reluctant to build new housing that they can’t make a profit on.
This is not some sort of arcane secret that has not reached the policy analysts in our nation’s fair metropolises. They’re well aware of what rent control does. So why is it ever on the table?
August 3, 2015
Why Do Governments Enact Price Controls?
Published on 25 Feb 2015
If price controls have negative consequences, why do governments enact them? Let’s revisit our example of President Nixon’s wage and price controls in the 1970s. These price controls were popular, as is demonstrated by Nixon being re-elected after they went into effect. The public didn’t think that the price controls were to blame for things such as long lines at the fuel pump. Without knowledge of the economics behind price controls, the public blamed foreign oil cartels and oil companies for the shortages.
In this video we’ll also address questions such as: do price controls — like rent controlled apartments and the minimum wage — help the poor? Are there better ways to help the poor? If so, what are they? Let’s find out.
July 15, 2015
Price Ceilings: Rent Controls
Published on 25 Feb 2015
Rent controls are a type of price ceiling. We’ll use our diagram to show how rent controls create shortages by reducing the supply of apartments available on the market. Rent controls also result in reduced product quality, since they reduce the returns to landlords from renting apartments. Landlords respond by cutting costs or performing less maintenance, leading to lower quality. There are search costs associated with rent controls, and they also lead to a misallocation of resources since apartments are not allocated to renters who value them the most.
