Price controls in the fun-house mirror

Tyler Cowen, a smart and creative economist especially dear to me because of his interest in the economics of the arts, occasionally falls into a state of self-hypnosis with his own chops, to the point that he’s invented a persona (Tyrone) to show off how deftly he can manipulate the left-wing arguments he usually knocks. Today the subject is rent control. The effect on me is rather more of smirking archness than real thinking, and of course this trick makes it quite difficult to engage seriously, since one never knows whether Cowen means to completely disavow the words he has Tyrone speak. I have no interest in the rhetorical game, so I’m going to assume Cowen is trying to say something with his mirror trick. The general point is that rent control might have benefits not obvious from the standard analysis.

His first point is that rent control would push everyone into lower price, lower quality (meaning smaller, I think) residences (because it truncates the supply curve at the controlled rent). Using less housing is one of my favorite prescriptions for improving life in the US, indeed our wasteful and ungreen shelter habits are a major hobbyhorse of mine. His second is that rent control increases housing density (more people, in smaller apartments, in cities), another trend I would strongly favor.

But rent control doesn’t push in this direction at all: it reduces rent below market for all units, so everyone can buy (rent) more house per dollar than in an uncontrolled market. New York lore is full of empty-nest grandmothers in dusty, echoing six-room floor-throughs in Brooklyn who would be in efficiencies (and happily) if they were paying the real cost or market price of their housing. Which way does the demand curve for housing slope? Do we think the Venezuelans use less gas because its price is controlled at nickels a gallon? I think I’m usually pretty far to the left of Cowen, but rent control in big cities is a regulatory regime for which I have almost nothing good to say, and I’ve been there and lived in it as a landlord and tenant both. In his post, Cowen seems to have departed not only from fundamental principles in a way that requires explanation to pass a straight-face test, but also shows remarkably little acquaintance with how statutory rent control actually plays out on the ground. If it worked the way it’s supposed to, it would almost certainly decrease the total amount of housing provided in a given city, but increase per-capita housing consumption. Anyway, it doesn’t work that way – though it still has mainly the effects I aver, not his.

What Tyler seems to have forgotten, more generally and quite inexplicably, is that markets are not something that happens because government ordains them; markets are what happens when two people, each of whom has something the other wants, meet. They become seized by the most powerful force in human affairs, which is the urge to make a deal. [If you were thinking of another force, reflect on how often pairs of people who could have sex don’t, which is almost all the time, and how rarely they don’t consummate mutually gainful trades. Stores and malls are just full of people not having sex and having commerce, as far as I can see.] If the city government steps in between a landlord and a tenant willing to pay more than the controlled rent, or between a tenant in a controlled apartment and a prospective tenant who wants it very badly, the parties will come up with an incredibly creative variety of ways to make the deal forbidden to them. The error he makes is a really bush-league bobble, which is to analyze a law as though the behavior that will result in the world is what the law permits or requires.

Here are a couple of examples. When I was looking for an apartment in New York before vacancy decontrol, I was offered one by the current tenant (but not as a sublet), who said he just wouldn’t want to bother moving out if he couldn’t sell certain furniture. The furniture on offer, in a pile in the middle of the living room, was the sorriest lot of broken junk, exposed springs, and cigarette burns imaginable; indeed, it seemed redundant to the apparently complete furnishings elsewhere in the apartment, and he allowed as how it was worth several thousand dollars. The price, plus what it would cost me to get it hauled away, was about two years’ worth of the difference between the controlled rent I would pay and the market rent. He had something I wanted, which was the right to occupy a rent-controlled apartment, and I had something he wanted, which was some amount of money between zero and his offer, and there was a deal to be explored, obviously to be made with the next guy if not with me.

Rent control, of course, entails a host of subsidiary regulations about use and tenants’ rights, especially with vacancy decontrol or vacancy rent hikes. If families with children or pets or low incomes or a piano or a wheelchair are going to have housing under rent control, it’s essential to have further rules about evictions and selection, because landlords who can’t allocate by price will allocate by something else. In New York, for example, one library of regulations allowed as many as three different rents for some apartments; one for solely residential use, a higher one for so-called “semi-professional” occupancy (for example, an interior decorator who runs a business out of it but doesn’t have clients coming to the place), and sometimes a still higher one for professional use (such as a doctor who sees patients in it). To protect tenants from being charged a higher rent than should apply, administrative courtlets held hearings in which the landlord attempted to demonstrate semi-professional or professional use by a prospective tenant, and the tenant, of course, tried to show that these were completely false and exploitative allegations, that his law practice was a mere innocent hobby, and that he should not pay more than the lowest rent.


A friend of mine, a very high-end photographer I will call Hawkeye, found a semi-pro apartment for himself and his new bride and en-route child, and was very happy to pay the semi-professional rent for it. He and the landlord went to the hearing and the landlord laid out the most recent few issues of Progressive Architecture with my friend’s pictures in it, the last two Bloomie’s home furnishing catalogs which he had shot entirely, interior photographs of the negative files and equipment storage in his current apartment, and thank-you letters from clients, all this evidence of course torn from Hawkeye’s very willing hand by the rapacious landlord and his army of private detectives, uh huh. In reply to this devastating evidence of semi-proness, the photographer could only hang his head and confess to everything. Note that if the landlord couldn’t make this case, the apartment was going to go to someone who would be found guilty of semi-professional use, as the landlord had no intention of leaving the rent difference on the table.

The hearing officer said, approximately, “You’re obviously a wonderful photographer, but we’ve had a bunch of suspicious semi-pro cases here recently and there’s a lot of pressure on us, so I’m going to deny this application.” As everyone left the hearing in deep gloom, the landlord said, “I’m really sorry about this; I can tell you’re a nice couple and will be good tenants. I think you really need a studio.”

“No, I only do location work; I don’t need a studio…”

“Please, Hawkeye, shut up and listen. I have a studio for rent in the middle of sketchiest industrial neighborhood of the Bronx. I’m happy to write a lease for it as long as we have a clear oral understanding that you are never to go within ten blocks of the address, certainly not to make any determination whether it really exists. The rent is very reasonable, just the difference between the residential and the semi-pro rent on your new apartment.”

Hawkeye thought about this, helped by a sharp elbow in the ribs from his smart wife, and smiled broadly. “You’re absolutely right; this is just the kind of studio I really need, and think how much I’ll save never cleaning it or even turning the lights on.” Deal. Now, who was protected from what in this noble exercise of administrative justice?

Nice riff, Tyler/Tyrone, but it’s off key. Rent control forbids renting apartments at the market-clearing price, but it doesn’t prevent it; it just forces people to make more complicated deals involving key money, secret sublets, finder’s fees, plain bribes, imaginary real estate, and the like, and to get really creative and aggressive about condominium conversions, because the people it’s supposed to protect are frequently its victims. This is because, though it appears to oblige landlords to rent housing at a low price, it actually doesn’t oblige anyone to rent any housing at all. Indeed, it also signals people who might build housing to build it somewhere else (even if new construction is exempt, there’s no assurance the same crazy city council that enacted it once won’t expand it in the future). Rent control is just nuts, as nuts as hanging “and of course, we want gas prices to stay low” on a global warming policy. The cure for housing overconsumption is higher prices, not lower (and the cure for a housing ‘shortage’ is to build more units, just the thing high prices induce).

Author: Michael O'Hare

Professor of Public Policy at the Goldman School of Public Policy, University of California, Berkeley, Michael O'Hare was raised in New York City and trained at Harvard as an architect and structural engineer. Diverted from an honest career designing buildings by the offer of a job in which he could think about anything he wanted to and spend his time with very smart and curious young people, he fell among economists and such like, and continues to benefit from their generosity with on-the-job social science training. He has followed the process and principles of design into "nonphysical environments" such as production processes in organizations, regulation, and information management and published a variety of research in environmental policy, government policy towards the arts, and management, with special interests in energy, facility siting, information and perceptions in public choice and work environments, and policy design. His current research is focused on transportation biofuels and their effects on global land use, food security, and international trade; regulatory policy in the face of scientific uncertainty; and, after a three-decade hiatus, on NIMBY conflicts afflicting high speed rail right-of-way and nuclear waste disposal sites. He is also a regular writer on pedagogy, especially teaching in professional education, and co-edited the "Curriculum and Case Notes" section of the Journal of Policy Analysis and Management. Between faculty appointments at the MIT Department of Urban Studies and Planning and the John F. Kennedy School of Government at Harvard, he was director of policy analysis at the Massachusetts Executive Office of Environmental Affairs. He has had visiting appointments at Università Bocconi in Milan and the National University of Singapore and teaches regularly in the Goldman School's executive (mid-career) programs. At GSPP, O'Hare has taught a studio course in Program and Policy Design, Arts and Cultural Policy, Public Management, the pedagogy course for graduate student instructors, Quantitative Methods, Environmental Policy, and the introduction to public policy for its undergraduate minor, which he supervises. Generally, he considers himself the school's resident expert in any subject in which there is no such thing as real expertise (a recent project concerned the governance and design of California county fairs), but is secure in the distinction of being the only faculty member with a metal lathe in his basement and a 4×5 Ebony view camera. At the moment, he would rather be making something with his hands than writing this blurb.