The Rent Control Bomb
2019-06-10 · Guest: — · 51:41
Economic and social destruction of rent control
Bob Zadek and producer Charlie Deist discuss the economic and social destruction caused by rent control policies. They explore the history of these policies from post-WWII New York to modern-day California and Oregon, arguing that price ceilings create artificial shortages, reduce housing quality, and serve political interests rather than the truly needy.
Topics: Rent Control, Housing Crisis, Economics, Price Ceilings, California Policy, Property Rights, AB 1482
Speakers: Bob Zadek, Charlie Deist, Caller (Charles), Caller (Michael), Caller (Steve)
The Rent Control Bomb [00:15]
Bob Zadek: Hello everyone, welcome to the Bob Zadek Show, the longest-running live libertarian talk radio show on all of radio. And as an oasis in the desert, we are probably the only live radio show all weekend on all of AM radio. Thank you so much for listening this Sunday morning.
It is rare that I start off my show by quoting from a socialist or a socialist economist, but I will do so for what will be obvious reasons this morning. Swedish socialist economist Assar Lindbeck, he famously said many years ago, “In many cases, rent control appears to be the most effective technique presently known to destroy a city, except for bombing it.” Rent control, the functional equivalent of bombing, from a Swedish economist? Well, credit where credit is due. Even Swedish socialist economists get it right sometimes.
This morning’s show, we explore rent control. Why are we exploring it this Sunday morning? Because on our coasts, the East Coast and the West Coast—soon to be in an East or West Coast city near you—the subject of rent control is in the state legislatures and is being discussed locally as well.
First, we have legislators on the East and the West Coast, and in some cities in the middle, such as Illinois—some states in the middle—but we have legislatures who create an artificial, that is a legislatively created, housing shortage by restrictive zoning and strict building codes. And having very effectively created a housing shortage—San Francisco is the poster child for all that, with New York right behind—having created a housing shortage, which means prices are going to go through the roof if you believe the supply-demand theory, and of course everybody must. Once we limit the supply and the demand is there, what happens? Prices go up to adjust. Well, prices of rent go through the ceiling. Well, that becomes unpalatable to the electorate and to the people who elect state legislatures. So in order to fix the problem they created, they say, “Okay, how do we get rents back down since rents are responding predictably to increased demand but limited supply, thanks to the legislature?” The way they do it is by simply criminalizing the free market. And they say, “You cannot adjust the price of something to reflect its shortage.” And therefore, therefore, when the smoke clears, what we have is we have another, yet another form of income transfer. In this case, wealth is transferred under the point of a gun, a governmental police gun. Wealth is transferred from landlords who did nothing wrong except to own real estate, to tenants who simply want to live in a place they cannot afford. And welcome to 21st-century America.
So the subject this morning is rent control. To join me in my conversation, I’m delighted to welcome to the show once again my engineer, Charlie Deist. Charlie, welcome to the show this morning, and let’s talk about rent control. You see it every day. You live in the Bay Area. You witness and experience it. So let’s talk about rent control.
Charlie Deist: Good morning, Bob. Happy to be here. Let’s get into it. You know, it’s funny you say I live it every day, and it’s true, actually. At the moment, I am looking for a new apartment or a new place to live as I’m actually making a transition next month, getting married and moving out of my current place and looking around the Bay Area. It is pretty headache-inducing. You tend to find a few different things. One is the infamous studio cottage in the backyard, which you can snatch up for a—if you’re lucky, maybe you can find a $2,200 a month backyard cottage here in Berkeley. That’s not even the epicenter of the housing crisis in the Bay Area. So it’s really gotten pretty crazy here.
The History of Rent Control [05:29]
Bob Zadek: Now, the history of rent control is quite interesting. Most people aren’t aware it’s been around so long. You just assume it’s always been here like trees and grass. But rent control started, as many really bad governmental policies do, it started kind of for a good reason. And it was a policy which was created for a very specific and very limited purpose.
The history of rent control in modern America can be traced back to post-World War II. Veterans returning—the Greatest Generation is returning back to the country to start their post-World War II lives. And of course, lots of veterans are returning, all young, all wanting to start a family, all needing a place to live. And America was so grateful to the service they performed for our country that we passed the GI Bill of Rights to give those Greatest Generation a college education for free. And in order to protect them from the housing shortage, the natural housing shortage with so many veterans returning and housing not able to accommodate them, New York City passed temporary rent control. And rent control simply said landlords were not able to raise the rent of the tenant except in a very, very limited period of time. So for the first time, we have government saying, even though a tenant is willing to pay more for an apartment and the landlord is willing to accept that increased rent, that contract two willing adults want to enter into it, the government said that is against the law. So Charlie, it’s simply, is it not, the government saying the market is not going to be allowed to demonstrate the value of a commodity, in this case rent, but we, the government, will determine the value and we will compel a landlord to rent for a lower price. So that was simply—that was, I guess we can say, Charlie, good motive, perhaps good policy, reluctantly, as long as it’s temporary.
Charlie Deist: Right. This, I think, is one of the textbook cases in a way of supply and demand where the unintended consequences, the sort of the seen versus the unseen, come into play. And you have some sort of obvious seen benefit where you have renters who are protected from a rent increase. And these benefits tend to be front-loaded after the policy is passed. So you have people who are allowed to stay in their homes longer than they otherwise would have during a period when prices are maybe rising for other reasons. But then on the flip side, you have the unseen, unintended consequence: prices going through the roof, no pun intended, as developers take a look at the market and say, “Well, can we recoup our investment if we’re only allowed to charge a below-market rent?” So they decide to build in another city and you end up with what you have in San Francisco and the Bay Area, which is a lot of smaller single-family units that were built in the 1960s and ’70s and very few units built at a sort of market rate where people would actually very likely be able to afford them. And so it’s, you know, it’s the example that economists love to talk about—love and hate—because it can be difficult to explain because you might seem like the heartless person coming in and saying that you want to evict people or, you know, we hear a lot of talk about gentrification these days as the source of all evil. And in fact, the economist wants to say, “No, if you put in rent control, you’re actually making these problems worse.”
The “Housing Shortage” Myth [09:43]
Bob Zadek: And I was going to say, excuse me, Charlie, I was going to say that one of the principles, the wrongheaded principles underlying rent control is the cry on the left that we have a housing shortage. Now, Charlie, let’s do a little bit of a mind game together. Let’s take the phrase which is in the news every day: “housing shortage.” And I’ll ask you, and I’ll tell our friends out there, we didn’t rehearse this, so Charlie is going to be blindsided. I would like you to tell me if there is a housing shortage, and if there is, what exactly does the phrase “housing shortage” mean? And then we’ll go from there.
Charlie Deist: Okay. Well, I wish I had a whiteboard or something here because the way the economist would explain it would be they’d draw the big X on the board and that’d be, you know, the upward-sloping supply and downward-sloping demand. And something like rent control functions as a price ceiling. So you can imagine a horizontal line that caps the price at some level below the point where those two lines intersect. And so you have the line, it intersects demand at a lower quantity than where it intersects supply. So that’s kind of the wonkish explanation where you have—
Bob Zadek: Okay, Charlie, on the everyday—the non-wonkish answer. Does San Francisco, does New York, does any city have a housing shortage? And I would maintain, to sort of prompt you, there never can be—it’s impossible for there to be, intellectually, a housing shortage. So do you think there is a housing shortage in San Francisco, for example, or New York, or any city that claims to have a housing shortage? Is there a housing shortage, and if so, what do you mean by that?
Charlie Deist: Well, in effect, I think you can. I think when you have the quantity demanded that exceeds the quantity supplied by the market, if you had a perfectly free market and if landlords were allowed to raise rent to incentivize new development of houses that—because right now you have hundreds of thousands of people moving into the San Francisco Bay Area. They can afford to move out to some area where historically maybe rents weren’t so high. And the thing is, maybe in effect you don’t actually have a shortage because people are so creative, landlords are creative in figuring out ways around rent control. For example, in New York City, there was a time when landlords were charging these key fees. You can imagine, “Okay, we have to change the keys when a new tenant comes in, so we’re going to charge you 2,000 bucks for that.” And that will level out the amount less in rent than we are allowed to charge based on the rent control policy. But I do think that there is sort of a meaningful—we can talk about a housing shortage as something that’s happening in places like San Francisco where the influx of people is not being accommodated by either an increase in rent, which would encourage more people to put their apartments on the market, condominiums would be rented out, people would rent out their spare rooms. And so I do think that when politicians start to meddle in the market, I think we can talk about a shortage. But where do you find fault in that?
Bob Zadek: I find great fault in it, Charlie, even though we are dear friends. The fault is implicit in your explanation is the concept that there is a housing shortage unless everybody who wants to live in San Francisco can, irrespective of the price. In other words, until San Francisco can accommodate 75 million people, there will be a shortage because there will be a person who can’t live in San Francisco because he can’t afford it. So a housing shortage really means, “No, people can’t find housing at the price they want to or can afford to pay.” Well, that will mean we have in this world a severe diamond shortage. We have a shortage of expensive cars. We have a shortage of designer clothing because everybody who wants it can’t afford to have it. So I maintain there is never a housing shortage. There is only a shortage of a commodity, in this case housing, at a price somebody feels that they want to or can pay. We will always have exactly the right amount of housing if there is a free market, which means some people can’t afford it. So the problem is not the quantity of housing, but the problem is the price. So “housing shortage,” Charlie, is a placeholder, is a surrogate for “cheap stuff.” There’s only a shortage of cheap housing, not a shortage of housing. And that’s my point. Did I miss something, or are you in the program?
AB 1482 and Recent Legislation [15:36]
Charlie Deist: I would agree with you almost 100%, except that we did say those couple of words: “if there is a free market.” And that’s where I would say, when there is not a free market, or in the case of some kind of supply shock—like let’s take the example of World War II Europe where all the houses were leveled, or houses in major cities were leveled by air bombing. That might also be considered some sort of a housing shortage in the sense that there are people who want houses and it’s just not available.
But to focus on the topic of the rent control and kind of current events in these cases where there’s not a free market and where we can see the effects of what I’m calling a shortage, let’s take what just happened up in Oregon and what is now happening in California, which is Oregon passed the first statewide legislation of a cap on rent control. They said you can’t increase rent more than 7% a year. And this was applauded by all the kind of progressives in Oregon. And then Kamala Harris picked up on it and she’s saying that this is a bold step. And now California is copying them and they just passed a bill—I think it was AB 1452 or 1451, 1482. This was even more ambitious initially than Oregon’s. They were going to cap it at 5% and eventually they modified it and made it 7% just like Oregon. So you have this strange kind of—I’d call it “bizarro federalism” where usually you have federalism operating the other way around where, you know, local government or a state tests out a policy that is successful and so it gets copied. But here you see Oregon and California, which are two states with the worst housing situations, bad homelessness problems, and all kinds of people are speaking about the lack of affordability in these areas, and yet it’s getting copied all around. So I mean, what do you make of that? The fact that nine of the 15 metropolitan areas with the highest median home values are in California? That’s a quote from the LA Times. And yet at the same time, don’t you think there’s got to be some kind of cognitive dissonance on the part of the people who are pushing policies that have seemed to make the problem worse?
Bob Zadek: I disagree with the phrase “cognitive dissonance.” I can’t find the opposite—it’s like what’s the opposite of orange? I mean, you can’t find the opposite of cognitive dissonance. But I would say that it’s more sinister than that. Politicians have long since—we are in a democracy in the sense that majority rules to a substantial degree. And politicians, in order to be re-elected and elected, they have to cobble together 51%. Well, to gather 51% of the landlord vote, you’re not going to get elected. 51% of the tenant vote, it’s a lock. Therefore, it is simply a question of catering to the majority, in this case in urban areas, the majority are obviously renters. So it is a calculation done to ensure re-election. We call it, in a way, public choice theory. Politicians behave as they should in their self-interest, and their self-interest is to get re-elected, and to get re-elected by pandering to 51%. And that’s how you get to be a representative or a senator in Washington or in a statehouse.
Now, what’s interesting is if we stipulate—I will not, but I stipulate hypothetically—if we stipulate that rents are “too high,” that there is a need for relief—remember, I don’t agree with that, the market takes care of it—but if we stipulate that only to see where we go with it, then the solution would be, “Okay, legislators, if you feel that tenants are in need of help, like students, like everybody else who you claim to be in need of help, if tenants are in need of help, well then give them subsidies. Give them governmental checks or tax relief or something.” But why in the world is it good policy to pick a subset of society, i.e., landlords, and say, “Okay, landlords, you have to bear the economic burden of the fact that tenants need help”? To me, it is arbitrary, random, and unfair to pick landlords. Why not just pick bankers? Why not pick accountants and say, “Okay, accountants, you have to subsidize tenants”? It’s random and it makes no sense. Plus, Charlie, as you and I know, and we ought to explain to our listeners, all of the adverse consequences that happen from the arbitrary selection of landlords to bear the brunt of it. Charlie, what happens assuming you’re a landlord and you’re limited in raising your rent and you are determined to make a profit lest you abandon the property? If you can’t increase the income, the only other option you have is to decrease the costs. And what are the costs you’re going to decrease?
Charlie Deist: It’ll be things like maintenance, upkeep. You’re going to become a pretty sloppy landlord probably. And yeah, I think you make a great point with “why do we pin it all on landlords?” It’s the stereotype that landlords are always these rich, wealthy oppressors and the tenants are always the poor, disenfranchised, oppressed victims. But you know, there—I’ve read about some cases where landlords were bearing the brunt of laws that really came down heavily on people who had to evict tenants or end a lease. And in the city of Oakland, for example, there was a case where a couple was sued for ending their lease and they had to pay $12,000 to their tenants just to reoccupy their property. They had their circumstances change and they needed to move into the property that they owned. $12,000 for this family was a huge hardship. It was not a wealthy family. They had two young kids. And I think that, yeah, looking at politics always through the lens of the oppressor being a certain category of people and the oppressed being another is always a recipe for bad policies. And it’s sad to see stories like this, but even more sad to look at the big picture of properties that are not being kept up and, you know, blight and things like that in these blighted neighborhoods. That’s another thing where the poorest neighborhoods are often hit the hardest by the metaphorical bomb drop that is rent control, where all the landlords, like you say, they don’t have the option to raise rent, so they just choose to neglect the property, hoping that the tenants will eventually find it so squalid that they can’t live there anymore.
Bob Zadek: This is Bob Zadek. I’m spending a wonderful morning talking with my producer and dear friend, Charlie Deist. We are discussing the insidious creep of rent control. Right now it’s on the East Coast and the West Coast. It is the most counterproductive, wrongheaded policy one can conceive to solve what some people believe to be a serious problem, which is a housing shortage. By that, of course, everybody means not a shortage of housing per se, but a shortage of cheap housing or at least affordable housing. We’ll be back to explore the adverse consequences of rent control and how it is the worst cure for a non-problem that there could possibly be. We’ll be back in 30 incredibly short seconds. Please stay tuned. Lots of fun stuff to come.
[Commercial Break]
The “Unconscionable” Rent Increase [25:29]
Bob Zadek: Welcome back to the Bob Zadek Show, the longest-running live libertarian talk radio show on all of radio. Thanks so much for listening this Sunday morning. We are the oasis in the radio desert. We are actually live radio, unrehearsed, spontaneous. We take a chance that we’ll do it right. We always succeed. Thanks so much for listening this Sunday morning to my conversation with my dear friend and producer, Charlie Deist. We are talking about the subject of rent control. Charlie lives in a rent-controlled environment in the San Francisco Bay Area. He is a student of the economic effects of rent control as well as the social effects. And Charlie is therefore the perfect counterpart for me to have my conversation with this morning.
Now, Charlie, when you have the subject of rent control, assuming the motive is to help people who can’t afford to live in a certain place, to help them live there—now remember, I abhor the motive. People are not entitled to live in nice places. They are only entitled to live there if they can afford it. So I don’t start with the premise that people are entitled to live anywhere. I don’t start with that premise. I start with the premise people are entitled to live where they can afford. And if as a result of higher rent prices, an area, a city, or a state determines they do not like what is happening to their area, they are free to give scholarships, subsidies, moving allowances, bonuses. They are free to vote an entitlement to a certain subset of their population to give them money so they can afford to pay market rent. But of course, that doesn’t work because legislators would be voted out of office if they did anything directly like simply transfer wealth from the government, which is our wealth, to the renters. They would be voted out of office. So it’s much better to demonize landlords and then transfer wealth from landlords to tenants. Now legislators get two points: one for punishing landlords who do nothing but become present—punishing landlords and benefiting tenants. They score two points and they don’t get a ding for raising taxes. They are forcing one segment to pay for the economic shortage of another segment. And that’s really what’s going on.
Now, Charlie, the problem is who benefits from rent control? It’s not people per se who have low income. In most rent-controlled areas, there is no income test. It’s first come, first served, law of the jungle for rent control. Isn’t it kind of an unfocused way of helping people if the goal is to help people who have an income shortage?
Charlie Deist: Right. And it’s even worse than that in a way because you said that it doesn’t necessarily hurt the taxpayer, but it does in the unintended and longer-term effects of new developments don’t get built and then there’s no tax revenue on those buildings. And that’s been documented empirically that places like San Francisco are suffering as a result of not getting those tax dollars. But then the people who benefit from—it seems that the people who can afford to say hold out and stay in their rent-controlled apartments for a long period of time are not those who are in the most need. They tend to be relatively upper-middle-class families that have been in the area for a long time and they are attached to their houses. But it’s one of these inefficiencies or it’s one of these—what’s the word that economists use? It creates a wedge or it is like a leaky bucket where in a perfectly efficient market, people would move when they wanted to, when they felt a need to have more space or less space. And that would be sort of transferring water from one bucket to another. But the leaky bucket is where everyone’s doing something just slightly suboptimal. They’re staying in their apartments for longer than they would, staying crammed in because they don’t want to lose that sweet policy or that sort of sweet ticket of being in an artificially cheap place.
But I think when you make the argument in terms of the taxpayer and I do think that just from a policy standpoint, we can talk about—and you do mention some ways that we could still benefit tenants who would otherwise be priced out of the market by say an influx of tech workers. But I think there’s kind of a—there was an article in Bloomberg by a progressive writer who is writing for a progressive audience. And he’s saying that there’s more than just a supply and demand story. Even if you think that the market should set the price as you do, you say if the prices just go up too much, well kind of too bad. And then cities can pass some welfare policies or transfer wealth. But what Noah Smith is saying is that in the housing market, you might think that building market-rate housing would increase the rents for the people even in the outer areas. But you find that it’s—if we’re allowed to develop, and this also plays into the zoning question, if the city is allowed to build high-rise apartments in the parts of the city where these tech workers actually want to live and work, then they’re less likely to go out to the suburbs or the peripheral areas in the city that are historically occupied by lower-income people. So it’s not the straightforward supply and demand story, but kind of—he uses this analogy of these high-rise apartments are the fish tanks. And if you build more fish tanks, they can absorb the people coming in with leaving the people outside relatively untouched. And he also suggests an idea of paying off displaced renters with social insurance. And you know, I wonder if that could be a sort of successful political message. I doubt that Kamala Harris is going to pick that up anytime soon, but it could be something for a policy entrepreneur to take and run with if California’s crisis ends up getting much worse than it already is.
Listener Calls [33:00]
Bob Zadek: Charlie, no surprise, but this subject is of course a hot-button issue. We have callers lining up around the block. Let’s see if they are landlords or tenants. So let’s take, Charlie, if you’re still on the line, our first caller of the morning. Good morning, Charlie.
Caller (Charles): Boy, this is Charles in Vineyard. Am I on?
Bob Zadek: You are on, Charlie. Welcome to the show.
Caller (Charles): Okay, great. Well, good morning. I stay outdoors. I’ve probably given this thought more than anybody that you’re ever going to meet. And I tell you, I finally came down to something that I call the principle of the separation of home and marketplace. And it starts like, in order to form a more perfect union, perhaps we missed a turn and, you know, it’s going to be hard to detangle this and start something that’s right. But you know, for example, like how about making it so that it’s a truly free market that only a person who’s going to live in a home can buy the home? You know, how about increasing competition by where the city buys the architecturals with different pricing options so that we don’t have these large builders with all this overhead to carry and increase competition to build? You know, for me, it’s about like equity, not equality. So I mean, that’s kind of where I’m coming from. Like we’re never going to solve a problem of commerce with a housing solution. I mean, I could tell you that right now. So anyway, that’s it.
Bob Zadek: By the way, you say, Charlie, you say “solve the problem.” I don’t concede there is a problem. What is the problem you are seeking to solve?
Caller (Charles): Well, how about we begin with thinking of like anti-trust where a class can be considered as a monopoly? For example, moving all of that brain capital and monetary capital from the easy money of creating scarcity by purchasing second and third homes for rent, moving that capital into the marketplace, the commercial, industrial side, and inventive side, and protecting our homes so that we have a principle to follow and making it so that we’re only going to build a home where a person that’s going to live in it can buy it. That’s, for example, and it would take some creative thinking like on the anti-trust side to think of a class as possibly controlling or cornering a market, which is how great men used to think. But that’s one way to look at it, you know. And I think there’s room there.
Bob Zadek: Charlie, thank you for your thoughts. My solution is much simpler and much less complex and one that everybody can grasp, and that is get rid of rent control, which is counterproductive, which provides an economic benefit to a large degree to people who don’t even need it because it’s not focused. But Charlie, we sure do welcome your being a listener and thank you for your thoughts.
Now, I think we have another caller. Michael, are you still on the line?
Caller (Michael): It’s a great pleasure to speak with my two favorite talk show hosts. And—
Bob Zadek: Oh, thank you so much, Michael. Nice to hear your voice again.
Caller (Michael): You’re welcome. I had a side point not directly related to the issue. But Bob, you said that trying to get the opposite of cognitive dissonance is like trying to get the opposite of orange. But isn’t “cognitive consonance” the opposite of cognitive dissonance?
Bob Zadek: I knew—I knew you would hear my plea for help. I was hoping you were out there. And if anybody was going to call and help me enhance my vocabulary, Michael, I knew it was going to be you. So thank you very much. You came through.
Caller (Michael): Okay, well, glad to help. Keep up the good work.
Bob Zadek: Thanks a lot, Michael.
Charlie Deist: I would also add, Bob, that I looked up the opposite of orange and it turns out that on a color wheel, that would be blue.
Bob Zadek: Well, okay, Charlie. Now you—
Charlie Deist: The mysteries of the universe are being unraveled before your eyes here on the Bob Zadek Show this morning.
The “Opposite of Frog” [37:13]
Bob Zadek: Well, Charlie, as an unadvertised special, as an unadvertised special for you and for my friends out there, I am reminded—this is incredibly off-message, but I have to share it. In the 1970s, when New York City was in the pits and you may remember that headline “Ford to New York: Drop Dead” in the 1970s during the dark period of New York City. Well, one of the tabloids, I think it was the Daily News, in order to explain how bad the quality of public education was, it published a question from a fourth-grade exam that a New York City public school teacher gave to her students. And this question was in 19-point bold type on the front page of the Daily News. And the question, Charlie, was—this was a question posed to fourth graders by their teacher. And the question was, “What is the opposite of frog?” Now, if you want to get metaphysical, Charlie, you can’t get more metaphysical than that. And you’re probably dying to know the answer. The answer the teacher was looking for was “tadpole.” But of course, that tadpole—so that’s how bad public education was. Sorry to my friends out there, incredibly off-message, I had to share the story.
Unintended Consequences and Hoarding [38:52]
Bob Zadek: Getting back to rent control. One of the problems with rent control—it was New York City rent control, no question about it. But the problem is it produces all of these, as you said earlier, unanticipated consequences. One of them is tenants can’t afford to move because they’re in a rent-controlled, below-market living space. And if they move, they’re going to move to market-rate housing. And what you end up with are these stories of elderly couples living in seven-room Park Avenue West—Park Avenue South, more likely West—apartments, seven rooms. They don’t need all this space. They have three rooms where they store used clothing and one bedroom they live in. Why don’t they move? Because they can’t afford it. Because they’re paying $81 a month for their rent, and if they move, it’s going to be thousands of dollars. So rent control creates, exacerbates the shortage of housing because people don’t make decisions based upon cost and need. They are forced to be prisoners in their residence because they can’t afford to move. And also rent control isn’t means-tested. Therefore, you end up with very wealthy people who get the benefit of below-market housing at the detriment of their not nearly as wealthy landlords. So it’s an incredibly stupid policy which is created only because it gives political benefit to those who enact rent control legislation.
Charlie Deist: Have you ever seen the show Hoarders? That image that you just painted there with the house with the room full of clothes, that kind of reminded me of that. But also the word “hoarding” in the economic sense, this is what’s going on. You have people hoarding their homes rather than moving to where it’s best for them and their families. Walter Block, who’s an economist—he writes for Mises and you can find his work on walterblock.com, he’s also been a guest on this show—he says it like this: he says that people are in a sense trapped by the gentle invisible hand that keeps them where they are rather than where they might do better. So rent-controlled neighborhoods end up blighted, the assessed values of those properties fall, and it’s, you know, it’s a vicious cycle. We see, you know, it really is like the proverbial bomb drop.
But when we’re talking about New York, it’s also interesting they are another state that has copied the model of Oregon and California. So here’s the bizarro federalism going viral across the nation. Everyone’s copying the failures of California and Oregon. They just are looking at a law that would cap rent increases at 1.5% plus inflation rate. So even less than California’s 5%. And they describe this as being an “unconscionable” rent increase. And I wanted to get your take on that word “unconscionable,” because I feel like you’ll have something interesting to say.
Price Gouging and Market Realities [42:19]
Bob Zadek: Well, unconscionable. No market price can ever be unconscionable unless you have a pretty gosh-darn distorted conscience. That invites the related concept which we have discussed on our show more than once, which is the concept of alleged price gouging. States and legislators are repealing the free market somewhat right and left. And price gouging is directly relevant to rent control, and I’ll tee it up with a very clear hypothetical. During Hurricane Sandy on the East Coast, there was a shortage of everything on the planet, including water. And entrepreneurs bought up cases and cases and cases of water and they saw an opportunity. And they drove at great peril and expense into the areas hard-hit by Hurricane Sandy and were selling bottled water at maybe four or five times the price. And that offended—and by the way, all the water was bought up immediately, which means they weren’t overcharging because they were charging the price at the time and at that place. They were charging exactly the market price. Were it not for those entrepreneurs, the people who needed the water simply would not have gotten it. Because if you had the prospect of making 10 cents a bottle on the water, sort of why bother to drive from Pennsylvania with an SUV full of water into Hurricane Sandy to make a quick profit? Just stay at home and stay warm and dry. So the fact is price gouging never exists. You are selling a commodity at the price it commands at that time and at that place.
Another example: hamburgers are more expensive at airports. Why? Well, because you have no choice. If you want a hamburger at the airport, you can’t drive down the interstate and find a hamburger place. You’re at the airport. So given the captive market, that’s the price. It’s a different price than on the interstate. And price gouging simply represents the higher price a commodity will command based upon the time and place it’s being sold. The same with rents. And therefore, there’s no unconscionable price because if you charge something unconscionable, nobody’s going to buy it. So the market tells you if you are charging the right price or not, not government. Government cannot decide the price of anything.
Charlie Deist: Yeah. And I think in this analogy, the example of the people coming in and bringing things at an unconscionable new price would be developers, housing developers. And to his credit, I saw that Gavin Newsom actually said that California needs more housing construction. So that may be part of his policy platform, but in the meantime, rent control is hurting the very people that it’s trying to help in the same way that if you put a cap on the price of water during an emergency or ice, which people need to keep their baby formula preserved or medicine, these people who are in the most desperate need and would be willing to pay $100 even for a bag of ice, $50, whatever it might be. This signal—I think that you could think of a price signal as kind of a signal wrapped in an incentive. And if you take away the incentive, then you take away the supply.
Vacancy Decontrol and Legal Challenges [46:32]
Bob Zadek: Charlie, we have one more caller. I knew it wouldn’t take us long to hear from—oh, we had a caller, sorry. He was a landlord. Oh, we have a landlord. Let’s have our last caller of the morning from a landlord. Good morning, is it Steve?
Caller (Steve): Yes it is, Bob. Thanks for taking my call. I own property in San Francisco.
Bob Zadek: Steve, we have a few minutes. You could take an hour if you have property in San Francisco, but take a shot at a few seconds. Go ahead.
Caller (Steve): Okay. So rent control, of course, damages the property owner, the landlord. But there’s a big brother hiding in the woods, and they reared their head last November in the statewide election trying to overturn a previous law that controlled what’s called vacancy control. Vacancy control is real brief: I rent an apartment out to this nice person for five years, they move out, and then I want to fix it up. I fix it up, now I want to re-rent it to another person, but vacancy control does not allow me to raise the rent from the previous tenant. I must offer that same rental at the same price even though five years down the road it may be worth 20, 30% more on the open market. And that will be the death knell because there will be no incentive for the individual landlord to do any remodeling and improvements of their building if they cannot recoup their costs.
Bob Zadek: You’re exactly right. And vacancy decontrol was—go ahead, Charlie, sorry.
Charlie Deist: Oh, just saying that this step might be compared to the atomic bomb of rent control. And yeah, if you’re not allowed to recoup your costs of making improvements, you’re basically turning the landlord into a serf for their tenant. It’s a coercive act, you know. It gives the landlord no legal option other than to rent to a tenant against their will and sometimes, like you’re saying, even at a financial loss.
Caller (Steve): And my—the only solution I see is for individual landlords to sue the city, the state, when that becomes effective, and then it has to be resolved by the US Supreme Court as a violation of our right to offer a service for a reasonable amount.
Bob Zadek: The trouble is the New Deal was the death knell of economic liberty in America. We lived in a golden age between the Lochner era in the early 20th century and the New Deal when economic rights—the right for consenting adults to negotiate a contract that the government would not interfere with—that all is gone and only very slowly coming back. It manifests itself in minimum wage laws and the like, and rent control is simply another example of that, of the government saying individuals are not competent to negotiate a fair bargain between them, the government has to be there with their thumb on the scale setting the price.
So Steve, you have our profound sympathies. You should be a pathetic figure on any television program that will have you because you have a story that would make any listener or watcher weep. So you have our sympathies, but keep up the good fight. Thanks so much for calling and thanks for being a listener.
So Charlie, the future kind of in summary—we’re running out of time—looks kind of bleak. But so far it’s retained—the virus has been contained to the East and West Coast. Middle America is in the program, they respect the free market, and we hope that California will survive rent control as it survives earthquakes. Charlie, thanks so much for sharing an hour of your time this morning. This is Bob Zadek. Thanks a lot to all my friends out there. Thanks for Michael to enhancing my vocabulary. This is Bob Zadek. I’ll be back again next Sunday. Thanks so much for listening and enjoy the weekend.