From: pjakobse@chat.carleton.ca (Peder Jakobsen) Subject: Rent control. Date: Wed, 22 Mar 1995 21:34:49 GMT I'm an undergraduate student of economics in Ottawa, Canada, and now I'm stuck again with this frustrating business of social policy. This time my beef is the issue of rent control. My text book spends 10 or so pages explaining why price ceilings are actually a detrement to the very people it is supposed to help. The explanation is completely oversimplified, and concludes that people are too stupid to see that they are being manipulated by politicians. How arrogant! What....are economists the only ones who see these things clearly? Seems to me the entire 'science' has been idealogically bankrupted by the types who persue it; establishment wannabees, commerce dropouts, and oldfashioned daddy's boys. Perhaps it is my school that has given me the wrong impression of economics. Do I have the wrong idea, or does equity really not matter anymore. Seems to me that this was the original idea that Smith struggled with, and that the invisible hand was only a possible answer. HELP!!!!!! Frustrated Economics Student. ----------------------------------------------------------------------- "It is perfectly true, as philosophers say, that life must be understood backwards. But they forget the other proposition, that it must be lived forwards." Soren Kierkegaard, 1843. Email address: pjakobse@chat.carleton.ca ----------------------------------------------------------------------- Date: Wed, 29 Mar 95 11:54:03 CST From: "jim blair" To: pjakobse@chat.carleton.ca,ssusin@econ.berkeley.edu, alt-politics-economics@cs.utexas.edu Cc: BCc: Subject: Re: Rent control To: Peder Jakobsen (the Frustrated Economics Student) Re: Rent control I saw your post and would like to be of help. But I don't have a clear understanding of your problem. Since you are an undergraduate STUDENT, you are presumably trying to LEARN about the ECONOMIC aspect of social policy. You seem upset by the suggestion that politicians could (or WOULD?) manipulate people just to get votes. One thing that you should learn early in an economics class is that the ECONOMIC aspects of social policy are often different from the POLITICAL aspects. That is, the politically popular is not always consistent with sound economics. I realize that this concept may be disturbing to some undergraduate students. But if you are to understand economics you will need to know this. There are also moral, historical, sociological, and other aspects. Ideally, you should learn to consider ALL of them. Scary isn't it? On the specific topic of rent control, I assume the 10 or so pages in your text discussed such topics as "key money" and the advantage that long time (and often richer) tenants gain over new (and often poorer) ones. Did you see the recent post to a.p.e. by Scott Susin on the effects of minimum wage laws? Scott is curious as to why there is a lack of "anecdotal stories" about the harm done by the minimum wage to match the corresponding large number of them about the harm of rent control. He uses this discrepancy to suggest that maybe the minimum wage does not cause as much harm as economic theory suggests (or maybe none at all). The flip side of this argument is that rent control DOES the harm predicted. You also claim that "the entire 'science' {of economics} has been idealogically bankrupted by the types who persue it" Now I won't attempt to analyze the personality types who become economists, but in my own field of chemistry there have been some pretty strange people. But the validity of a science does not rest on the personalities of its practitioners. I view economics as a science which has much in common with meteorology. Both are grounded in solid basic principles. Both use computers and lots of data of uneven accuracy and are good at explaining what HAPPENED after the fact; but are less useful for predicting what WILL happen in the future. And with both, the idea is to understand and predict a reality, not just to confirm our prejudice about what we think the reality SHOULD be. ,,,,,,, _______________ooo___(_O O_)___ooo_______________ (_) jim blair (jeblair@facstaff.wisc.edu) Madison Wisconsin USA. This message was brought to you using biodegradable binary bits, and 100% recycled bandwidth. AND THIS: Date: Thu, 31 Dec 1998 06:37:52 GMT From: oldnasty@mindspring.com (Grinch) Newsgroups: sci.econ, sci.environment, sci.energy, sci.space.policy, sci.physics "Shawn A. Wilson" wrote: >Jonathan A Goff wrote in message <367FFB78.655C0E28@et.byu.edu>... >>The person buying votes isn't buying them from other >>voters you dolt! He's bribing senators, and others >>with gifts, votes from organizations, campaign funds, >>etc. > >Ah, so it's the senators, et al, who are ignorant, stupid, and irrational. Grinch: No, they are knowledgeable, rational and self-interested. Their vote trading is called "log rolling". Surely you've heard of it. >Incumbents who vote against the wishes of their constituency lose, no matter >how much they spend on their campaigns. Are you identifying "the wishes of their constituency" with "the welfare of their constituency"? If not, then you are back to the situation you denied before, where >>> some non-trivial >>> group must be ignorant, irrational, and stupid enough to be willing to >>> to trade make themself worse off That is, a lot of people don't know what's good for them, and politicians indeed can exploit this ignorance to get re-elected even while profiting from votes taken against their constituents' interests. But if so, then here's a real-life paradox for you to resolve: The New York State and City legislatures both have voted every three years or so for the last 53 years, most recently this year, to renew rent control in NY. Yet if there is *one thing* that economists unanimously agree upon, it is that rent control is destructive to the communities that enact it. Two separate polls of professional economists, one international (American Economic Review, May 1979) and one within the US (AER, December, 1992) drew near 100% agreement on this -- more agreement from the economists than on any of 30 other policy issues. The consequences for NY have been predictable. To quote Assar Lindbeck, the former chairman of the Nobel Prize committee for economics: "Next to bombing, rent control seems in many cases to be the most efficient technique so far known for destroying cities, as the housing situation in New York City demonstrates." Yet NY's legislators keep voting for it and voting for it, and using the charge that their opponents are insufficiently supportive of rent control as a prime weapon to get re-elected. Mayors and Governors are terrified to oppose it -- any one of them could easily have ended it with a legislative veto any time within the last 53 years, but not one has had the nerve in all that time. So we have a paradox. Either: 1) Economists are wrong about the one policy issue regarding which they are in most unanimous agreement - which means economics is darn well useless for practical matters; or 2) Legislators not only *do* get re-elected by voting against their constituents' interests on this major issue, they don't even have to hide their votes -- they profit from aggressively advertising them. Which is your choice? I note in passing that rent control is one of the few issues that the average voter in NY State is fairly well informed about -- certainly compared to the literally thousands of other matters that get log-rolled through the state legislature by committee chairmen and party heads without even the average legislator being informed about them. Regards AND LATER (Grinch again) Reducing the investment return on rental housing to below the market level reduces its supply both due to suppression of investment and "hoarding" of apartments (by both tenants and building owners). Reduction of supply drives up the market price. Rent control keeps rent increases below the market level but allows "controlled", below-market rent increases. These "controlled" increases can well be *larger* than increases that would occur in an open market where supply could increase to keep rents stable, or even reduce them. So rent control can simultaneously drive up the rents that tenants pay relative to the market that would exist had it not been instituted, while further depressing rents below the immediate short-term market price -- which of course further depresses investment and further encourages hoarding, driving the process ever onward. After WWII the average market rent was the same in NY and Philadelphia. At that point NY continued controls and Philly dropped them. Today the average market rent is 2.6 times higher in NY than Philly. Tenants pay this. .... Rent control substantially raises the market cost of rental housing overall. Studies show that 66% to 75% of the "benefits" of rent control are received by Manhattanites living below 96th street -- the richest New Yorkers. Tenants living uptown and in the other boroughs are net losers. There's a lot more detail to the analysis of things like this than you are considering. Regards AND FROM JIM BLAIR: Hi, My comments and question on rent control and NYC. I'll repeat these from the thread: >>If you pay low-quality-building rents, the building will end up being low >>quality, regardless of its initial condition. >.... > The benefits of rent control are reaped by those who stay >in an apartment many years and profit from regulated below-market rent >increases. > The losers are landlords and those who can't afford to live in the city. And to that list I add, "those who move into a controlled appartment and have to pay a large amount of "key money". And those who would like to move to the city but can't afford the key money." Now my TWO comments. FIRST: Back in the mid 1960's I lived in New Jersey near the Big Apple. I went in for a play or some event every so often and watched their TV stations. David Suskin was the (first?) talk show of the type later made famous by Donahugh and Jerry Rivers (later Hispanicized to Geraldo Rivera) and Ophra, etc. I watched a David Suskin show on the subject of rent control. There were tenants and landlords. (guess who was for and who was against ;-). The tenants complained that their buildings were not well maintained, and the landlords complained that they could not afford to, and were losing money. Suskin fancied himself to be a "liberal" and tried to side with the tenents. Landlords were called 'slumlords', and Suskin said they should keep their building up to human standards, etc. But the high point was when a landlord said to Suskin: "if you want to demonstrate how to operate a rent controlled apartment building in NCY, I will GIVE you one". He then offered a contract to sell David Suskin a big controlled apartment building for one dollar. Suskin was stunned, and said that he would consult his lawyers. He later admitted that he was advised to refuse the offer. The idea that rent control can make investments in housing worth 'less than nothing' was confirmed by the large number of building in the city that were abandoned. Does that still happen in NYC? SECOND: My mother-in-law had a big business/rental housing building in downtown Tel Aviv, Israel, that her husband left when he died in 1945. She could barely make a living from it because of rent control laws, and was getting too old to keep trying. So in 1964 she was offered a deal by the Keren Kayemet (a sort of land corporation/government agency): they would take the property and give her a two bedroom house in Haifa plus a monthly pension. She said yes, and I happened to be there, and was invited to be present when they finalized the deal. (...deleted an economics lesson about inflation, available on my web page economics section under MONEY & INFLATION, "Why You Should Be Alert in Econ Class".....) Another lesson in this story is the "protection" that rent control has. The Tel Aviv building is located in a busy part of the city but was worth little to her, due to rent control: she could not raise rents or evict the tennents. The day Keren Kayemet took over, the rents went up and some of the tennants were out in the street. Under rent control, it helps to know the right people. MY QUESTION: what is the legal status of "key money" in NYC? For those ignorant about rent control. "key money" is the bribe that one must pay to someone who leaves a rent controlled apartment if the new tenent will also be "protected". Having a controlled apartment is worth a lot of money (the difference between the market rent and the controled rent, each month), so naturally anyone gaining this "property" must pay for it. Different ways this is handled that I have heard of: in some places it was an open bribe, and the people getting it had to pay taxes on it. But in some places key money was "illegal" which meant the money was paid "under the table" and not taxed. And in some cases, a new tenent in a previously controlled apartment is not "protected" and pays market rent. Thus there is no key money. But also no incentive for the current tenant to leave. In some places, people not only never leave a controlled apartment, but can will it to their children and grandchildren, etc., "forever". But where there is key money, it could be quite large. People would have to have a year or more of rent money to pay as cash in advance to get into a controlled apartment. Rather like the down payment when buying a house. So the rent control was a benefit only to those potential new tenants rich enough to be able to afford the key money. -- ,,,,,,, _______________ooo___(_O O_)___ooo_______________ (_) jim blair (jeblair@facstaff.wisc.edu) For a good time call http://www.geocities.com/capitolhill/4834 BROUGHT THIS REPLY: From: oldnasty@mindspring.com (Grinch) Organization: Happy Skeptics of America Newsgroups: sci.econ References: 1 , 2 , 3 , 4 , 5 , 6 >jim blair wrote: [Quoted material that follows not from Jim Blair] And also those who move into rent-regulated apartments that come on the market, but have to pay extraordinarily high, regulated rents -- and who sometimes have to pay key money too. Contrary to the assertions of those who believe they can deduce the structure of a market from basic principles without looking at it, rent regulation does not in fact divide the NYC housing market into two separate markets for available rental apartments, one with low controlled rents and the other with high unregulated rents. One of the little "transaction costs" of rent regulation is that it gives all parties a strong incentive to intensely lobby legislators and bureaucratic rulemakers for changes in particular rules that favor them. Over 50 years this has created a fantastic Gordian Knot of rent regulation in NYC -- in fact, two different parallel regulatory systems, each with rules that have been changed regularly, each often applying within the same building to different apartments. (The lobbying expenditures are very good for law firms in a legal industry that doesn't exist anywhere else in the US, and of course for the politicians and regulators who are the beneficiaries of lobbying expenditures -- so they don't have a great incentive to be motivated to simplify things.) This Gordian Knot contains loopholes which enable landlords who obtain empty rent-regulated apartments and have good legal advice to attain very substantial rent increases for them. (Thus the motivation even for the occasional murder of a rent-regulated tenant -- would it be worth the risk if rents couldn't be raised *a lot*?) At times full mark-to-market rents for controlled apartments have been allowed. The result is that among those rent-regulated apartments that become available, a good many if not most carry *very high* above free-market (though below actual market) rents. I can speak about this because for some years I was on the board of directors of a not-for-profit that owned rental housing as an endowment, and I had the personal pleasure of filling out all the rent-regulation registrations. In one building we had large apartments, 5 & 6 rooms with two baths, renting for $180/month to tenants who had been in them for 40 years, and small apartments, 2 & 3 rooms with one bath, renting for $1,600 to $2,000. All the apartments were rent regulated. But the expensive small ones we had been able to rent recently, and they kept the building afloat (barely). (One might think that such irrational pricing -- low-value units being priced 10 times higher than higher-value ones -- is a sign of additional economic ineffeciency and welfare loss not visible in the supply/demand lines for a price ceiling. However, I have been assured by an expert that this is not the case, since even under irrational pricing all transactions are entered into voluntarily, and voluntary transactions can only improve welfare. How did he put it? >>Tenants who "get what they pay for" often are paying >>rents 10 times different for like apartments in the same building > >Irrelevant. Any given tenent is getting value for his money. Mulling it over for 30 seconds now, I just can’t imagine *any* way that irrational pricing could be economically harmful or costly to anybody in any "relevant" manner, since indeed people always "get value for their money" in voluntary transactions. Analysis from an expert is so reassuring! ) Also in this same building, we had a 70-odd-year-old widow living alone on the 5th-floor in one of the big two-bath apartments, paying $180/month, and a young couple with two kids living in three rooms on the first floor, paying $1,600/month. The widow and the couple came up with the idea of swapping apartments -- the widow had physically blocked off half of her apartment because it was too big for her to maintain (she was hoarding those empty rooms!) and also didn’t want to have to go up and down to the 5th floor any more. The family of course wanted more space. They proposed that they would continue paying the same rents after the swap. Alas, any system of price controls designed to keep people from exchanging at free-market prices must have administrative and enforcement mechanisms that apply at the *individual* level to stop them from doing so. So to get permission to swap apartments all parties had to hire lawyers to file administrative requests, and when these were denied appeals, all way up the regulatory hierarchy until the final, unappealable, denial was issued. This freezing of transactions -- elimination of voluntary exchanges -- at prices *under* the "price ceiling"" of rent control is an extra "transaction cost" of the system producing further welfare loss that I think anybody will recognize. As are the taxes paid each year to finance the regulatory bureaucracy which enforces this market rigidity. But when one calculates the welfare impact of a price ceiling by drawing a ceiling-price line on a supply/demand chart, does one immediately see whether or not the market will become rigid at *below* the ceiling price, see the scope of the resulting welfare cost, and see the further cost of administering and enforcing market rigidity? >I don't need to know much about a specific set of rent control ordinances to >analyze the general economic impact of prices ceilings. I guess one does! (Also, in the futile attempt to swap apartments, all three parties, landlord and both tenants, naively thought we had suffered a real loss in the form of the legal fees we had futilely paid. However, the aforementioned expert has advised me here too that this is not the case, because, you guessed it... >>Landlords and tenants spend a like amount [$1 billion] on litigation >>against each other, the city and the state. > >Voluntary transaction. I am certainly glad to know now that all our welfare was *not* reduced -- could it have been increased? -- by ouur voluntarily paying our lawyers in an effort to get regulatory permission to conduct a voluntary exchange *under* the enforced rent ceiling, which permission was denied. After all, voluntary transactions always increase welfare, can't argue that, and you always "get what you pay for" in them. Think of all the welfare being created by such voluntary transactions with lawyers city-wide! I never would have realized it if it hadn’t been pointed it out to me. Economic analysis from an expert is great!) As an afterthought I’ll point out that all this occurred in just one building with eight rental units. To get some idea of how the total "transaction costs" of rent control add up, multiply this by all the regulated buildings in the city, then add in the odd murder. You'll get the cost incurred by the minority of NYC residents who are landlords or tenants living in regulated buildings, which is a start. [Quoted material below resumes being from Jim Blair] >FIRST: ..... >The idea that rent control can make investments in housing >worth 'less than nothing' was confirmed by the large number >of building in the city that were abandoned. Does that still >happen in NYC? You bet it does. >SECOND: ...... >Another lesson in this story is the "protection" that rent >control has. The Tel Aviv building is located in a busy part of >the city but was worth little to her, due to rent control: she >could not raise rents or evict the tennents. The day Keren Kayemet >took over, the rents went up and some of the tennants were out in >the street. >Under rent control, it helps to know the right people. You've got that right too. In any politically administered system, people with political influence can game the system. And political influence generally does not reside among the poor, or among "little guy" individuals who have nothing going for them other than that they are good citizens. >MY QUESTION: what is the legal status of "key money" in NYC? Illegal. So is subletting a rent-regulated apartment for an above-regulated price without the landlord's permission. So is keeping a rent regulated apartment when you don't live in the city. So is jaywalking. Nobody ever does any of them. ..... >Different ways this is handled that I have heard of: in some >places it was an open bribe, and the people getting it had to >pay taxes on it. A very common method is simply "returning a favor", no cash changes hands. When I was young, single, and fresh out of school, my first Manhattan apartment was a rent-regulated two-bedroom, two-bathroom duplex, somewhat more than I actually needed, but only about $300/month. I got quite legally it from a woman who was a managing agent for the real estate company that owned the building. She gave it to me because she was the girlfriend of one of my school-days roomates, and I had done them past favors that shall remain unspecified here. This cost her employer nothing, since nobody else was going to pay more than I did for the apartment. Nobody legally could. However, someone who needed all that space more than I did, perhaps a family, was denied an opportunity to outbid me for it. (I used to feel a little guilty about this, like I had reduced societal welfare for my own gain. But now I know that wherever that family went and whatever they paid for whatever they got, "they received value for their money" as long as it was in a voluntary transaction. So I feel better.) The Soviets ran near their whole economy on favor trading. The Russians still do, it seems. >But in some places key money was "illegal" >which meant the money was paid "under the table" and not taxed. >And in some cases, a new tenent in a previously controlled >apartment is not "protected" and pays market rent. Thus there >is no key money. But also no incentive for the current tenant >to leave. Short of murder. >In some places, people not only never leave a controlled >apartment, but can will it to their children and grandchildren, >etc.,"forever". Yes, the "property rights" of renters in property they don't own. It's a big part of the politics of preserving rent control. You know -- these apartments are peoples' *homes*!! This is coming to a head right now in many parts of the city. About thirty years ago, to make up for the dearth of new construction that results from rent regulation, the city created a program of financing subsidies for private sector builders of new housing who agreed to charge below-market, regulated rents for the fixed term of the initial financing. An *explicit condition* of this program was that at the end of the initial financing period -- usually something like 30 years -- the building owner would be required to refinance in the private sector at market rates, and to enable him to do this all rent restrictions would be lifted and rents would go to market. Well, it's now 30 years later, and the initial financings are beginning to expire. These buildings -- major apartment complexes -- are now filled with retirees who are rationally getting the most from their limited retirement incomes in apartments that carry rent often at 1/3rd to 1/5th of market rates. And, of course, they are facing the loss of "their homes" of 30 years! Every day the city's tabloids carry stories of old couples and little old ladies on small fixed incomes, who are threatened with eviction because greedy landlords want to raise their rent from $500 to $2,000. Bastard greedy landlords! goes the story line. This is how the city's general population gets its education from the popular media about the economic of rent control. >But where there is key money, it could be quite large. People >would have to have a year or more of rent money to pay as cash >in advance to get into a controlled apartment. Rather like the >down payment when buying a house. So the rent control was a >benefit only to those potential new tenants rich enough to be >able to afford the key money. Yup. Rent control systematically benefits the better off. In NYC, generally those in Manhattan below 96th street. An odd thing: John Cheever's _Collected Stories_ include several set in NYC pre-WWII, and pre-rent control. In these stories, on April 1 and October 1 tenants across the city happily swapped apartments. These were the dates that leases usually expired, "city moving days", and people who's kids had recently left home would give their apartments to young couples with young kids, and so on. And people were happpy! He describes it like those two dates were secular holidays, everybody partied with a friend who just got a new apartment! It's like reading science fiction stories about another planet. >-- > ,,,,,,, >_______________ooo___(_O O_)___ooo_______________ > (_) >jim blair (jeblair@facstaff.wisc.edu) For a good time call > http://www.geocities.com/capitolhill/4834 And this on why it is BAD only when it is open and explicit. Subject: Rent Control and the Philosopher Date: Tue, 12 Jun 2001 11:28:22 -0400 From: Grinch Organization: Happy Skeptics of America Newsgroups: sci.econ A ROOM AND A VIEW -- John Tierney, NY Times, 6/12/01 Does Joan E. Mazzola deserve to join the list of New York's 10 Worst Tenants? That is a tricky moral question. She may be an illegal profiteer, but it can also be argued -- in fact, it has been argued by an eminent philosopher -- that her actions have been promoting the greater social good. Mrs. Mazzola is a tenant who turned her home into a profit center. She was living in rent-stabilized splendor at Park Avenue and East 84th Street, paying $1,847.77 per month for a large two-bedroom apartment that she estimates would rent for $10,000 in today's market. She decided that it would be even better to live rent free. She rented out the smaller bedroom for $2,200 per month. Now, as Bruce Lambert reported on this page, she is in danger of losing her apartment. Her landlord is in court seeking to evict her for illegally charging her roommate more than his proportionate share of the rent. Mrs. Mazzola has tried to portray herself as an innocent who didn't understand the rules putting limits on rental charges, which is not the easiest argument to make when you're paying $8,000 below the market price. Ignorance of the law is no excuse when the law gives you a deal like that. Mrs. Mazzola, who is 70 and has emphysema and heart ailments, has said that she needs the rental income to pay for medical bills and to supplement her meager annual income of $12,000. "If I'm evicted, I would be homeless," she said. "I don't know what I would do. I have no place to go." Well, what about the place you own in Westport, Conn.? The house your New York landlord says is on nearly two acres, has an estimated value between $490,000 and $640,000, and yields $33,000 annually in rental income? "Oh, maybe there's almost two acres, but the house itself is tiny," she replied. She didn't care to discuss the financial details. She did, however, volunteer that her landlord was a "cutthroat, horrible person" who wanted her out of the apartment so he could make more money. "To him, it's just business," she said. But then, Mrs. Mazzola was pretty businesslike herself about that second bedroom. She saw a chance to profit from a willing customer. What's so bad about being businesslike when renting real estate? The philosopher Robert Nozick takes up that question in "Anarchy, State, and Utopia," his classic libertarian treatise published in 1974. Dr. Nozick, a professor at Harvard University familiar with Cambridge's rent-control system, imagines that he's a tenant paying $100 a month for an apartment worth twice that on the market. He would be willing to sublet only if he could pocket the extra $100 a month. Suppose you want the apartment enough to sublet it at that price. "I am better off under such an arrangement," he writes. "You are better off, since you get the apartment for $200, which you're willing to pay, whereas you wouldn't get it under the rent-control law with no subletting provision. . . . The owner of the building is not worse off, since he receives $1,200 per year for the apartment in either case. Rent-control laws with subletting provisions allow people to improve their position via voluntary exchange." Similarly, Mrs. Mazzola's subletting of the room leaves both her and the subtenant better off, at no financial cost to the landlord. Society as a whole is better off with one extra room available during a housing shortage. Yet New York, like other cities with rent control, makes this form of subletting illegal. Even the most ardent "tenant advocates" shy from explicitly endorsing tenant profiteering. "Why do people find the subletting-allowed system so unacceptable?" Dr. Nozick writes, and he provides a shrewd answer: "Its defect is that it makes explicit the partial expropriation of the owner." Once Mrs. Mazzola starts making a profit, once she converts part of her rent-regulated deal into hard cash, it becomes uncomfortably clear that by occupying the apartment she is taking what is not hers. She is profiting from someone else's property, and the extra money she's taking directly from her roommate is small change compared with what she's indirectly taking from her landlord -- the $8,000 extra that he could be collecting in rent. Her most serious moral offense, then, is not exploiting the roommate but taking advantage of the landlord, the same offense committed by any tenant benefiting from rent laws that Dr. Nozick concludes are an unjust application of state power. She probably belongs in the 10 Worst Tenants because she's been so blatant about it, but she's not intrinsically worse than the rest of us tenants. At heart, we are all profiteering thieves.