Pity the Landlord

So, speaking of rent control, here's an article on San Francisco's system. It's pretty much the usual -- the headline bleats that rent control "subsidizes the super rich," a claim for which no evidence is presented unless you count an income of $100,000 as super-rich, which in San Francisco, um, no. And then there's the sob stories of "mom and pop" landlords. Apparently, by some unexplained moral calculus, because some landlords own just a few units and have blue-collar backgrounds, the City of San Francisco should pursue higher rents as a policy goal.

Noni Richen, a former school cafeteria cook, and her husband, who once worked on the Alaskan pipeline, put their life savings into buying a four-unit Western Addition apartment building in the 1980s. “We had $20,000,” Richen said. “That was a lot of money to us, and we put that down.”

I am, let's say, unsympathetic. (How much do you think that building is worth today?) But from another perspective, this is directly relevant to the previous post. There are strong political as well as market pressures that keep asset returns above some minimum acceptable level. Is Noni Richen the liquidity trap? In a sense, yes, she is.

Anyway!

That's not what I'm writing about. What I'm writing about is the claim that a large share of rent-regualted units are occupied by high-income households, making it a perverse form of redistribution. Is that true?

I don't know about San Francisco, but in New York this is an easy question to answer. The city's Housing and Vacancy Survey gives very detailed breakdown of rental units by rent regulation status, including the residents' incomes. And... here we go:

Income	Rent-Regulated Apartments	Market-Rate Apartments	All Households
under $25,000	37.3%	27.3%	27.9%
$25,000 to $50,000	25.6%	25.5%	22.1%
$50,000 to $100,000	25.2%	28.3%	27.0%
over $100,000	6.7%	12.1%	23.1%
Median	35,531	46,000	50,038
Mean	52,157	71,307	77,940

In other words, compared with the city as a whole, rent-regulated tenants are only moderately more likely to be poor, but they are much, much less likely to be rich. So can we nip this meme in the bud, before it spreads to the East Coast? Rent control is not a subsidy for super-rich tenants at the expense of their hardscrabble landlords. It's a way of stabilizing middle-class and working-class neighborhoods in the face of gentrification, just like it says on the tin.

A Quick Note on Rent Regulation

I really want to write about the household debt-dynamics paper, but first a quick followup to yesterday's rant:

Even more fundamental than the arguments I mentioned yesterday, the thing about rent control is that rents contain an element of, well, rents. (Separating the two senses of the word so cleanly has got to count as a big victory for right-wing ideology in economics.) This is especially true because buildings are so fricking long-lived. The average age of a multi-unit residential structure in the United States is about 30 years. In most cities with rent regulations, it's much higher. For instance, the building I live in was built in 1902. The significance of this is that, even if an asset lasts forever, the share of its present value -- which is what matters for the decision to buy/build it -- that comes from the later years of its life goes arbitrarily close to zero. Say the discount rate is 6 percent. Then 95 percent of the value of a perpetuity comes from the returns in the first 50 years. 99.7 percent comes from returns in the first 100 years. In other words, even if the exact future rents of the building over its whole life were known with certainty, the rent being paid today would have had essentially zero effect on the decision to undertake the expense of  putting up my building 110 years ago. Which means that it is not in any way compensation for that expense. Which means -- apart from the costs of maintenance and improvements, which rent regulations always allow landlords to recoup -- the rent I am paying is pure economic rent.

(This, by the way, is how economics classes should frame the question of rent control. Students would actually learn something! -- like about discount rates, and the age of the capital stock. Just wait til I write my textbook.)

So the Econ 101 point isn't just a gross oversimplification -- tho it is that -- it's substantively wrong even in its own abstract terms. It's analyzing the market for the services of very long-lived assets as if it were the market for currently produced goods and services. In some respects, apartment buildings are analogous to intellectual property. The difference, of course, is that charging market rents doesn't (usually) result in apartments being left unoccupied, so there aren't the same kind of efficiency losses from enforcing perpetual property rights in apartment buildings that there are from perpetual copyrights. But there aren't efficiency gains, either; it's purely a distributional question. Regulation that only limited rents in buildings older than 50 years (which, as it happens, is more or less what we have) wouldn't have any effect on the supply of new housing, it would be a pure transfer from landlords to tenants.

Of course, the landlords are still in control of the buildings, so they'll allocate units somehow, just not on the basis of price. The haters will say that it will be on the basis of race/ethnicity and social ties; more plausibly, it will be on evidence of  responsibility, sobriety, steady habits, etc. (which, ok, sometimes the same thing); or maybe it will just be by luck. But in any case housing will be more available to those with less income, which is pretty much what affordable means.

(And then we should really get into the actual circumstances that precipitate rent control, namely an unforeseen increase in housing demand, together with regulations that (for better or worse) make it hard to increase the supply. Obviously, to the extent that a windfall increase in demand for housing in a given area (perhaps even in part thanks to their existing tenants) increases rents, and new entry is difficult, landlords are recipients of pure monopoly profits which can be taxed or regulated away at no social cost. That rent regulations are almost always part of a second-best solution in the context of other, development-restricting regulations that boost market rents, should also be a staple of intro textbooks. It isn't.)

Economists: Actively Evil Neoliberal Ideologues or Soulless Technocratic Hacks?

... or in other words, does economics (as it's currently constituted) inherently promote a vision of markets for everything and no rights but property rights? (A vision that, obviously, conforms nicely to the interests of the owners of capital.) Or is the role of economics in upholding neoliberalism mainly the work of apolitical technicians, administrators and scientists manques, who could just as comfortably supply arguments for more regulation and a larger public sector if that's what those in power were asking for?

Well, like nature vs. nurture, or whether to get the sweet brunch or the savory, it's a debate that will never be fully resolved. (Go with savory, unless you're, like, 12 years old.) But new evidence does sometimes come in.

Like those those polls of economists that the University of Chicago business school does; has everybody seen those? For those of us who've been debating this question, these things are a gold mine.

The latest question, on rent control, has Peter Dorman rightly exercised. As he points out, the question -- whether rent regulations have had "a positive impact over the past three decades on the amount and quality of broadly affordable rental housing in cities that have used them" -- omits the genuine goal of rent regulation, neighborhood stabilization:

The most compelling argument for rent control is neighborhood stabilization, the idea that social capital in an urban environment requires stable residence patterns.  If prices are volatile, and this leads to a lot of residential turnover, the result can be a less desirable neighborhood for everyone.  ... not a single textbook treatment of rent control mentions stabilization as an objective, even though this is a standard element in the real-world rhetoric surrounding this issue. 

I would just add that a diversity of income levels in a neighborhood is also a goal of rent regulation, as is recognizing the legitimate interest of long-time tenants in staying in their homes. (Not all rights are property rights!) So by framing the question purely in terms of the housing supply, the Booth people have already disconnected it from actual policy debates in a way favorable to orthodoxy. Anyway, no surprise, orthodoxy wins, with only a single respondent favoring rent regulation. (And I think that one might be a typo.) My favorite answer is the person who said, " Rent control will have similar effects to any price control." That's the beauty of economics, isn't it? -- all markets are exactly the same.

Some of the other ones are even better. Check out the one on education, which asks if all money currently being spent on K-12 education should be given out as vouchers instead. (Why not cash?) By a margin of 36 to 19 (or 41 to 23 when the answers are weighted by confidence) the economists vote, Hells yeah, let's abolish the public school system. Presumably they're mostly reasoning along the same lines as Michael Greenstone of MIT: " Competition is likely beneficial on average. Less clear that all students would benefit leading to tough questions about social welfare functions" -- which doesn't stop him from signing up in favor of vouchers. The presumed benefits of competition are dispositive, while distributional questions, while "tough" in principle, can evidently be ignored in practice. On the other hand, props to Nancy Stokely of the U of C (strongly agree, confidence 9 out of 10) for spelling it right out: "It's the only way to break the unions." (Yes, that's what she wrote.) So, hardly definitive, but definitely some ammo for Team Ideologue.

People sometimes say that academic economists just reflect the views of the country at large, or even the more-liberal-than-median views of other academics or educated professionals. And on some issues, that's certainly true. (Booth also gets a solid majority in favor of drug law reform.) But come on. Replacing the public school system with vouchers is a far-right, fringe position in almost any significant demographic -- except, it would seem, professional economists.

Back to rent control. Jodi Beggs enthusiastically endorses the consensus, but her conscience then compels her to add:

Techhhhhnically speaking [1], if none of the housing in an area was deemed “affordable” before the price ceiling, then the price ceiling could, I suppose, increase the quantity of affordable housing. (In fact, Pinelopi Goldberg specifically points this out.) [True. Goldberg's answers in general are a beacon of sanity.] In most realistic cases, however, the rent control laws are going to make builders think twice about putting up residential properties and make potential landlords think twice about getting into the rental business. 

It's awfully hard not to read the drawn out adverb as a parapraxis, indicating resistance to the heretical thought that, in fact, economic theory gives no answer to the question of whether rent control laws increase or decrease the supply of affordable housing. More concretely, Begg's "realistic cases" are a figment of her imagination, or rather her ideology; in all actual cases rent control laws, at least in major American cities (there are only a couple) only apply to units built before a certain date. In New York City, for instance, rent regulations DO NOT APPLY to anything built since 1974. Hard to believe that builders are thinking twice about putting up new buildings because of rent stabilization, when it hasn't applied to new buildings in nearly 40 years. But hey, why should you have to actually know something about the policy you're discussing, to walk through the old familiar supply and demand graphs showing why Price Controls Are Bad?

"Nothing dulls the mind," says Feyerabend, "as thoroughly as a sequence of familiar notions."



(I can't resist putting down the quote in full:

Writing... [is] almost like composing a work of art. There is some overall pattern, very vague at first, but sufficiently well defined to provide ... a starting point. Then come the details -- arranging the words in sentences and paragraphs. I choose my words very carefully -- they must sound right, must have the right rhythm, and their meaning must be slightly off-center; nothing dulls the mind as thoroughly as a sequence of familiar notions. Then comes the story. It should be interesting and comprehensible, and it should have some unusual twists. I avoid "systematic" analyses. The elements hang together beautifully, but the argument itself is from outer space, as it were, unless it is connected with the lives and interests of individuals or special groups. Of course, it is already so connected, otherwise it would not be understood, but the connection is concealed, which means that, strictly speaking, a "systematic" analysis is a fraud. So why not avoid the fraud by using stories right away?)