On the Bernie Sanders website, the following is listed under the section for Housing for All:
- End the housing crisis by investing $2.5 trillion to build nearly 10 million permanently affordable housing units.
- Protect tenants by implementing a national rent control standard, a “just-cause” requirement for evictions, and ensuring the right to counsel in housing disputes.
- Make rent affordable by making Section 8 vouchers available to all eligible families without a waitlist and strengthening the Fair Housing Act.
- Combat gentrification, exclusionary zoning, segregation, and speculation.
- End homelessness and ensure fair housing for all
- Revitalize public housing by investing $70 billion to repair, decarbonize, and build new public housing.
While the above bullet-points address more than national rent control, I specifically want to focus on this issue in the light of what Ludwig von Mises, Henry Hazlitt, and Thomas Sowell have said on this subject in their books. It’s not the first time rent control has been implemented, and for that reason we are in a position to observe the consequences of such a policy.
Real quick, Ludwig von Mises (1881-1973) was a renowned Austrian economist who wrote numerous books, such as Human Action and Socialism: An Economic and Sociological Analysis. Henry Hazlitt (1894-1993), a journalist and economist, wrote one of the most popular books on economics, Economics in One Lesson (originally published in 1946 and last updated in 1979). Thomas Sowell (b. 1930) is also a well known economist – one of my favorites, in fact! He’s written numerous books on economics and politics, many of which are well known (e.g. Basic Economics; Applied Economics; Discrimination and Disparities). Obviously, Mises and Hazlitt haven’t specifically responded to Sanders’s national rent control; they’re not alive. While Sowell is still alive and may have responded to Sanders somewhere (I don’t know), my focus is on the problems of rent control as voiced by these economists in their books. In other words, how does their writing on this subject help us to think critically about Sanders’s national rent control?
The Fundamental Lesson in Economics
In his book, Economics in One Lesson, Henry Hazlitt lays out the single most important lesson when addressing economic issues.
The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.Hazlitt, Henry. Economics in One Lesson (NY: Currency, republished 1988). 17.
In other words, just because an economic policy sounds good and can easily be perceived as resulting in short-term benefits, or benefits to a particular group of people, it doesn’t mean the policy won’t have long-term negative effects, or negative effects on other people. Unfortunately, many people seem to approach economics with a myopic vision, focused exclusively on the short-term effects on a particular group of people. Additionally, many seem to approach economics from a purely compassionate perspective – if it sounds good and compassionate, it must be good and compassionate. Yet, if such a policy results in the opposite effect, it’s neither good nor compassionate. Sowell follows the same line of thought with specific reference to rent control: “Those who do not think beyond stage one [i.e. the myopic stage] find rent control especially attractive because the good effects come immediately [i.e. it has good and compassionate results], while the bad effects come later — and persist for decades or even generations.” [Sowell, Thomas. Applied Economics (NY: Basic Books, 2009). 112.]
Might there be an economic reason as to why housing has become more expensive? Might other government restrictions be culpable for this rise in housing prices?
Think about it. If a local government places increased land restrictions on new development, there’s less land to develop on. If there’s an increasing population, this presents an obvious problem. Of course, housing developments can be constructed taller, but then you also have to deal with the fact that sometimes restrictions on building heights also exist. Because there’s less housing available for people to buy or rent, housing prices and rents go up. This is just basic economics – supply and demand. As supply decreases and demand increases, the market price increases. I’m not saying this is the case in all situations, but it is a factor. Additionally, Mises notes that “Governments usually resort to price control when they have inflated the money supply and people have begun to complain about the resulting rise in prices” [von Mises, Ludwig. Economic Policy: Thoughts for Today and Tomorrow (Mises Institute, 2006). 41.]. But politicians can’t be bothered with the reality of such things; they have a campaign to run and votes to vie for.
In the following quote, Sowell actually touches on the issue of government intervention ultimately resulting in people paying higher proportion of their income over time, which is apt regarding the Bernie tweet featured for this post.
Although many people see government intervention as necessary to produce ‘affordable housing,’ history as well as economics says otherwise. Prior to the advent of large-scale government involvement in the housing market, people tended to pay a smaller proportion of their incomes for housing, even though incomes in earlier times were lower. Back in 1901, Americans spent a smaller proportion of their income on housing than they did a century later–23 percent in 1901 versus 33 percent in 2002-03. New Yorkers paid 24 percent of their incomes for housing in 1901 and 38 percent in 2003, even though real income had quadrupled over that span of time. Even in California, home prices were much lower, and very similar to home prices elsewhere in the nation, before local building restrictions became severe in many parts of that state during the 1970s. Just as building new housing for the affluent tends to lower housing prices for all classes of people, so restricting housing tends to raise all housing prices, including the prices of housing that were once affordable.Sowell, Thomas. Applied Economics (NY: Basic Books, 2009). 109.
Isabelle Morales, in “Bernie Sanders Wants to Impose National Rent Control,” notes that the very article Sanders linked to in the tweet actually attributes some of the blame to “government control over the private housing market.” Yes, the very thing that Sanders wants to do…at the national level.
It seems that few take the time to ask the question, “Why is housing becoming more expensive in certain areas?” Or, if they do ask the question, the assumption is most definitely, “It’s the greedy landlords’ fault.” That is, of course, what we essentially hear from Sanders and other Democrats (though Bernie is not truly a Democrat), it’s the greedy capitalists’ fault and therefore government must step in to solve the problem that the greedy capitalists have created. Such, however, is an overly simplified approach to the situation and those in politics ought to know better. Of course, they likely do know better, but sometimes the economic reality of things doesn’t comport with the politically correct agenda. It’s much easier to garner votes for office by saying someone else is to blame and that only government – specifically the politician or political party – can fix it. The politicians don’t take responsibility for the failures of such policies, but instead use the failures for their next campaign for more government involvement — a vicious spiral of increased government control of the economy and our lives. Hazlitt, writing in the latter half of the 20th century, touches on this very point.
When these consequences are so clear that they become glaring, there is of course no acknowledgement on the part of the imposers of rent control that they have blundered. Instead, they denounce the capitalist system. They contend that private enterprise has ‘failed’ again; that ‘private enterprise cannot do the job.’ Therefore, they argue, the State must step in and itself build low-rent housing.Hazlitt, Henry. Economics in One Lesson. 130-131.
This has been the almost universal result in every country that was involved in World War II or imposed rent control in an effort to offset monetary inflation.
So the government launches on a gigantic housing program–at the taxpayers’ expense. The houses are rented at a rate that does not pay back costs of construction and operation. A typical arrangement is for the government to pay annual subsidies, either directly to the tenants in lower rents or to the builders or managers of the State housing. Whatever the nominal arrangement, the tenants in the building share being subsidized by the rest of the population. They are having part of their rent paid for them. They are being selected for favored treatment. The political possibilities of this favoritism are too clear to need stressing. A pressure group is built up that believes that the taxpayers owe it these subsidies as a matter of right. Another all but irreversible step is taken toward the total Welfare State.
We get a glimpse of the problems with rent control from Hazlitt’s words here. However, a more focused look at the issues is in order.
What’s Wrong with Rent Control?
What exactly is rent control? Rent control falls under what economists call a “price ceiling,” which means the price for a certain product or service — in this case, housing — cannot exceed the set limit; it can only go so high. This price ceiling results in prices being set below the market value — where the price “equalizes” based on supply and demand. When these economic realities are ignored and policies are implemented to control the market, issues ensue.
Among the consequences of price controls in general have been (1) a shortage, as the quantity demanded increases while the quantity supplied decreases, both in response to artificially lower prices, (2) a decline in quality, as the shortage makes it unnecessary for the sellers to maintain high quality in order to sell, and (3) a black market, when the difference between the legal price and the price people are willing to pay becomes large enough to compensate for the risks of breaking the law. These same consequences have recurred again and again, for all sorts of different goods and services whose prices have been held down by law, in countries around the world, over a period of centuries, and under governments ranging from monarchy to democracy to totalitarian dictatorship. It should hardly be surprising that similar things happen in the housing market when there is rent control.Sowell, Thomas. Applied Economics. 112-113.
Just to be clear on why rent control has historically resulted in housing shortages (from the supply side), there’s less incentive for developers to construct new housing, as the rent control makes it difficult to recuperate their costs [Ibid. 113.]
Thomas Sowell provides numerous examples of such happenings in both Applied Economics and Basic Economics. Following are two examples taken from the latter (although some of this material exists in both books).
Just as price fluctuations allocate scarce resources which have alternative uses, price controls which limit those fluctuations reduce the incentives for individuals to limit their own use of scarce resources desired by others. Rent control, for example, tends to lead to many apartments being occupied by just one person. A study in San Francisco showed that 49 percent of that city’s rent-controlled apartments had only a single occupant, while a severe housing shortage in the city had thousands of people living considerable distances away and making long commutes to their jobs in San Francisco. Meanwhile, a Census report showed likewise that 46 percent of all households in Manhattan, where nearly half of all apartments are under some form of rent control, are occupied by only one person– compared to 27 percent nationwide.Sowell, Thomas. Basic Economics (NY: Basic Books, 2015). 39-40.
Declines in building construction have likewise followed in the wake of rent control laws elsewhere. After rent control was instituted in Santa Monica, California in 1979, building permits declined to less than one-tenth of what they were just five years earlier. A housing study in San Francisco found that three quarters of its rent-controlled housing was more than half a century old and 44 percent of it was more than 70 years old.Ibid. 41.
As we can see, ideas have consequences. I understand people may have good intentions when it comes to enacting such controls, but good intentions aren’t enough. Good intentions divorced from logic and reality are nonetheless bad ideas.
Economics, as we have now seen again and again, is a science of recognizing secondary consequences. It is also a science of seeing general consequences. It is the science of tracing the effects of some proposed or existing policy not only on some special interest in the short run, but on the general interest in the long run.Hazlitt, Henry. Economics in One Lesson. 191. Emphasis is his.
Amplifying the Problem by Making It National in Scope
First of all, implicit in a plea for national rent control is the notion that this is a national crisis – a crisis that is not confined to particular regions, or more likely, particular cities (as we saw in the examples provided by Sowell above). Therefore, a national policy essentially amounts to trying to fix something that isn’t broken in certain areas. Don’t get me wrong, I don’t think rent control at the local level is the proper answer, just in case that hasn’t been clear from the above. Anyways, Sowell points out this making-a-mountain-out-of-a-mole-hill approach to the problem.
The often-expressed desire for a national government program to produce ‘affordable housing’ has misconceived the reality. There is not a crisis of high housing prices across the nation, there is a severe housing price crisis in particular places where land use restrictions and other severely restrictive building regulations have driven housing prices up beyond what most people can readily afford. Historically, the government has not been the solution to the problem of ‘affordable housing’ but a major part of the problem, especially when its restrictions drive the price of housing well above the cost of constructing new housing.Sowell, Thomas. Applied Economics. 107.
Second, a national rent control involves a highly centralized approach to a local issue. The fundamental problem with a centralized economy is that the economy is too complex to be managed. This was, of course, a central problem (pun intended) with Soviet Russia. Their highly centralized economy resulted in shortages of some things, overproduction of other things, and mass starvation. Supply and demand is always shifting based on numerous, sometimes unforeseen, factors. As a result, prices fluctuate. This kind of complexity cannot be managed by a federal government; it must be guided by the Invisible Hand of the market economy which is made up of the countless producers and consumers with differing incentives and preferences.
You can find out more about this issue by watching this video put together by Marginal Revolution University. It’s slightly more technical than this post, as it also looks at supply and demand curves, but those not familiar with such diagrams should still be able to follow along, especially after reading this post.
I’ll conclude this post with a quote by the great Austrian economist, Ludwig von Mises.
One of the main reasons why many cities in the United States are in such great financial difficulty is that they have rent control and a resulting shortage of housing. So the government has spent billions for the building of new houses. But why was there such a housing shortage? The housing shortage developed for the same reason that brought milk shortages when there was milk price control [the cost of production is higher than the price ceiling]. That means: when the government interferes with the market, it is more and more driven towards socialism.von Mises, Ludwig. Economic Policy. 50-51. Emphasis is his.