Economists Hate Rent Control. Here’s Why They’re Wrong.

May 16, 2023

The following OpEd was published in The American Prospect by Prof. Mark Paul

As any Econ 101 student can tell you, rent control is bad. This is because rent control is a price control, and price controls artificially distort well-functioning markets, resulting in a mismatch between supply and demand and the creation of the dreaded deadweight loss triangle all budding economist learn about. Although the goal of rent control is to create a more affordable housing sector, it in fact causes widespread shortages, leaving would-be renters high and dry while screwing landlords (the road to hell, so says the orthodox economist, is paved with good intentions). The real way to achieve a robust housing sector, with rentals available across the price spectrum, is the freely functioning competitive market, which will ensure sufficient supply of low-cost rentals are available to all seeking them. After all, supply always equals demand.

Given that this is the argument that appears in almost every introductory economics text (with the notable exception of the CORE Econ open-access book, which I use), it should come as no surprise that the vast majority of professional economists credit it. According to a poll of economists at prominent universities conducted by the University of Chicago Booth School, a whopping 81 percent of respondents opposed rent control (while only 2 percent supported it). As the Tufts University economist Gilbert Metcalf said recently, “opposition to rent control is something like an oath of office for the profession.”

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It is also a neoliberal shibboleth. Milton Friedman’s first influential public essay, published in 1946 and co-authored with fellow future Nobel Prize winner George Stigler, was on rent control. Titled “Roofs or Ceilings? The Current Housing Problem,” the essay finds Friedman and Stigler arguing that rent control leads to the worst of all possible worlds. It brings new housing construction to a standstill, fuels housing inequality, and curtails families’ mobility—thus preventing them from moving to more opportunity—all while restricting the very freedom of landlords to profit off their property. Echoing the neoclassical model adduced above, the authors write that the repeal of rent control and the support of a “free market” in housing would ensure that units would be “immediately available for rent—at all rent levels.” Failure to repeal rent controls would “cause haphazard and arbitrary allocation of space, inefficient use of space, [and] retardation of new construction.” Greg Mankiw, a Harvard economist and chair of the Council of Economic Advisers under President George H.W. Bush, agreed, going so far as to write in his top-selling undergraduate economics textbook that economists think rent control is “the best way to destroy a city, other than bombing.” These are the same arguments landlords, real estate developers, and the folks at the Manhattan Institute make to this day.

There’s just one problem: This neoliberal conventional wisdom is wrong. As recent empirical work has shown, the neoclassical account’s core assumptions—one, that rent control restricts the supply of new housing; and two, that it misallocates existing housing, thereby causing an irrecoverable collective loss—fail to hold when it comes to the real world.

The right to stay in one’s home is just as important as the right to move.

For example, there is abundant evidence that rent control does not constrain housing supply. One study of rent control in New Jersey—a state with a rich history of embracing rent control—found that, over three decades, rent control increased housing supply (though this was largely attributed to landlords slicing up larger units into smaller ones). Other studies have repeatedly confirmed that rent control doesn’t affect the overall supply of housing, though landlords may take advantage of poorly written rent control laws that allow them to convert existing rentals into condos to better capture price increases and skirt the intentions of rent control laws—loopholes that could easily be shut.

Researchers have also studied what happens when rent control laws are repealed. If neoclassical theory is correct, lifting regulations on rent should result in a boom in housing supply. However, researchers find that when rent control measures are undone, there has been no subsequent expansion of new housing.

As with constrained supply, so with the “misallocation” of housing stock. Although it is true that rent control creates “winners” (current tenants) and “losers” (landlords seeking to raise rents), this is no “deadweight loss”; rather, benefits that would have previously been fully captured by landlords—rents in the economic sense—are shared with existing tenants. For example, as a non-rent-controlled area grows in popularity, often due to that area’s current inhabitants, landlords are able to hike rents. This is a pure rent in the economic sense: The landlord didn’t invest in the building to realize a return; rather, the landlord simply benefited from owning a particular property at a particular time. Rent control changes the calculus by limiting the economic rents landlords can extract from tenants, thus more equitably sharing the benefits of local economic growth between landlords and tenants.

There are further benefits that the conventional wisdom misses. One, rent control works; as study after study has shown, rent regulation keeps housing more affordable. In Massachusetts, researchers have found that tenants in controlled units pay just half as much in rent as those in non-controlled units of similar size and quality. On the opposite coast, L.A. renters in regulated units pay one-quarter to one-third less in rent than those in nonregulated units—meaning hundreds of dollars a month in savings for households often living paycheck to paycheck.

Two, rent control helps realize social interests beyond the purely economic. When an area becomes more desirable, whether through rising productivity or improved amenities, rent control can stem the tide of gentrification and keep the area’s longtime inhabitants—often low-income people of color—in their homes. The right to stay in one’s home is just as important as the right to move. It helps turn housing from a nexus of profit to one of community, family, and social space. Instead of gentrification, we get less money going to landlords and hence more economic development.

Lately, policymakers have begun to recognize the benefits of rent control. During the last presidential campaign, Sen. Bernie Sanders introduced a Housing for All plan that included nationwide rent control, while Rep. Alexandria Ocasio-Cortez introduced her Place to Prosper Act, which aims to put universal rent control at the heart of progressive housing policy. At the local level, mayoral candidates, like Boston’s Michelle Wu, are running, and winning, as ardent supporters of rent control.

In some places, these ideas are being turned into reality. In 2019, New York state passed a law allowing New York City, along with other cities across the state, to strengthen rent control for the first time since the 1940s. Oregon and California recently passed the nation’s first statewide rent control laws, with other states, including Connecticut, pushing hard to join them. And while momentum is strong, some state and local governments won’t be able to embrace the benefits of rent control: Thanks to the work of the conservative group ALEC, which produces sample right-wing legislation for state governments, more than half of states, ranging from Alabama and Georgia to Washington and Michigan, have preemption laws against rent control on the books.)

At the time of this writing, progressives in Oregon are mobilizing to strengthen the state’s new rent control law by lowering the rate at which landlords can hike prices every year, a fight that is playing out in the statehouse. With rents having been a key driver of inflation over the past few years—and thus of concern for macroeconomic stability—as well as of household immiseration, policymakers at the federal level are beginning to talk about rent control, too.

These policymakers are simply responding to their constituents. Polling conducted in 2019 by Data for Progress found that a majority of likely voters, including a majority of independents, support rent control, with just 1 in 5 opposing such a measure. More recent polling in Massachusetts found that 68 percent of likely voters want rent control, showing that people are fed up with the exorbitant and unjustified rent hikes that are making the working class collectively poorer.

For those still opposed to rent control, let’s look at the problem through the other end of the telescope, as it were. Some 67 percent of Americans live in owner-occupied homes—meaning they enjoy de facto rent control in the form of the 30-year mortgage. That style of mortgage was a creation of the federal government during the New Deal. Homeowners, who skew white and rich, benefit tremendously from the government’s rules, regulations, and subsidies that allow them to pay a fixed monthly sum for housing over 30 years. It’s high time for the government to extend these benefits—and the economic security that comes with them—by adopting rent control to cover all people in the United States.

But like most complex policy challenges the nation faces, we should be honest that rent control is not a silver bullet that will magically fix the housing sector and finally deliver true affordability across the board. Strong rent control laws, limiting rent increases to local measures of inflation using the Consumer Price Index (CPI), or perhaps CPI plus 1 or 2 percent, with a hard cap at, say, 4 or 5 percent, would drastically improve affordability.

But these measures alone won’t be enough. The neoliberals may be wrong about rent control, but they are right that America needs a lot more housing—after all, controls are no help to people who can’t find a place to live in the first place. To truly transform the housing sector, the United States will need to embrace complementary policies to increase the number of affordable and market-rate housing units, encourage more construction and density through changes to zoning laws, and build millions of units of social housing—high-quality public housing for people across the income spectrum. It’s a tall order. But embracing rent control is a commonsense place to start.

The American Prospect, May 16, 2023

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