Economists Are Right To Hate Rent ControlProgressives like to argue that rent control policies that exempt new construction don't impact the construction of new housing.
CHRISTIAN BRITSCHGI
5.17.2023
Progressives keep trying to rehabilitate the reputation of rent control, and often misuse existing research to make their case that it's an effective policy with few, if any downsides.
The most recent example comes in the form of an essay for The American Prospect from Rutgers University economics professor Mark Paul, who argues "the neoliberal convention" that rent control is counterproductive policy is dead 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," he writes.
Given the lack of ill effects, rent control is basically free money, says Paul. Housing could be made more affordable and overall welfare enhanced by adopting nationwide rent caps of 4 or 5 percent of inflation, a policy he says is indistinguishable from the "rent control" provided by a 30-year mortgage.
Set aside for the moment whether Paul is right in his provocative claim that rent controlling someone else's house is the same thing as borrowing money from the bank to buy your own. Instead, let's start by asking whether he's right in his core assertion: does the research show that rent control doesn't reduce the housing supply? Judging by the studies Paul cites, it would be more accurate to say rent control doesn't reduce the supply of housing exempt from rent control.
While he describes "abundant evidence" that rent control doesn't negatively impact supply, Paul is relying on two studies that look at the effects of local rent control policies in New Jersey. He also cites one study that looks at the effects of a state-level repeal of local rent control policies in Massachusetts to argue that the repeal of rent control doesn't increase the housing supply.
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That's consistent with a more recent 2019 paper by Stanford economists Rebecca Diamond, Tim McQuade, and Franklin Qian, finding that the expansion of rent control in San Francisco led the owners of affected buildings to convert their units to condominiums.
We also have the example of rent control killing off the housing supply in St. Paul, Minnesota. In 2021, city voters passed a ballot initiative that imposed a 3 percent annual cap on rent increases without exemptions for new construction or allowances for inflation.
The result? Developers fled town en masse, walking away from already in-progress projects and canceling permit applications. The city hurriedly worked to weaken the voter-passed law.
The episode does not get a mention in Paul's article.
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Source:
https://reason.com/2023/05/17/economists-are-right-to-hate-rent-control/
