Escaping the Statrix: The Rent Control Red Pill

Escaping the Statrix: The Rent Control Red Pill

Trevor Burrus
Show Date
March 28, 2021
Rent Control
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Is a more prosperous world with less government intervention possible?

Trevor Burrus of The Cato Institute joins me this Sunday to discuss the constitutionality of rent control and the related issue of expanding the "libertarian imagination,” in a world filled with statist dreamers.

Landlords cannot be allowed to raise rents to whatever they want, whenever they want. We need a tenants bill of rights that includes a national rent control standard.— Bernie Sanders (@BernieSanders) November 18, 2019

Bernie Sanders is obsessed with a vision of a national rent control policy, complete with a “Renter’s Bill of Rights.” However, this imaginary bill of rights couldn’t exist without violating the original bill of rights - in particular, the Fifth Amendment’s “takings clause,” which guarantees that private land cannot be taken for public use without “just compensation.”

Burrus, a senior fellow at Cato’s Robert A. Levy Center for Constitutional Studies and editor‐in‐chief of the Cato Supreme Court Review, has helped file a friend-of-the-court brief in defense of NYC landlords whose rights have been violated by a new set of “rent stabilization laws.” Burrus notes that “The right to exclude people from occupying your property is obviously central to the concept of ‘property.’”

Among other illegal “takings” embedded in the law, the latest rent control push forces owners to transfer a lease from the original renter to their relatives. Advocates will argue that rent control helps the poor afford housing in areas where they otherwise couldn’t live. However, 93% of economists already agree that rent control hurts the very people it’s trying to help by restricting the supply, and decreasing the quality of the rentals on the market.

We might consider shifting our focus from doing more studies on rent control to trying to win hearts and minds. This Sunday, Burrus will help me imagine what city life could be like in New York if property owners were free to set rents at the market rate, and developers were allowed to build new real estate to meet the resulting demand. If you take the red pill, you’ll never look at our cities or government the same way again.

Cato’s Robert A. Levy Center for Constitutional Studies helps restore the principles of constitutional government that are the foundation of liberty.




In general, what does rent control do?

It's a price ceiling. That means they are keeping the price below a certain level via some formula, so it is lower than what it would be in a market situation. This does two things. It makes people consume more of the product. and the suppliers produce less of it. So you create a double whammy.

And there is  less incentive for landlords to maintain their properties if  they can't get enough rent to just keep up the properties. This means that some of the housing stock continually gets taken out of the market because the houses become dilapidated.

The end result is famously said by an economist: “If you want to destroy a city's housing stock, short of bombing, rent control is one of the best ways of doing it.” We've had situations economists have known about for years since the 70s. Sweden had very onerous rent control laws. They were building houses faster than any country has ever built, but they still had a shortage of housing because people were taking up too much housing with this artificial price ceiling.

This is a wealth transfer from the owner of real property to the renter. It is simply a statute that says A must transfer value to B. Once you do that, no landlord is going to self destruct. Landlords will say, ‘Okay, if I cannot charge what my apartment is worth, then I have to make it worth less.’

How do landlords beat the game by actually making their rental property be worth less?

They don't maintain the basic core of the properties. They don't maintain them, they do not keep appliances up to date. They do the bare minimum competences that are required by statute or by the lease, but that is the minimum that they can get away with. They won't do anything to improve the property because they're not going to get any benefit from improving the property.

Rent control took off in the New York metropolitan area at the end of World War Two. We had lots of GIs returning from battle, all wanting to start families and needing a place to live. There was an extraordinary and quite sudden demand for housing in New York City. What is the legal precedent for emergency rent control?

The Supreme Court case that heard this in 1921, called Block v. Hirsch, which was very narrowly scrapped by a constitutional challenge. And interestingly enough, a few years later, this was a Washington DC ordinance. So Congress governed in Washington DC on the theory that it was an emergency. A few years later, the case came back to the Supreme Court. In that case, the Supreme Court ruled that the emergency had expired. They struck down those laws as one of the only times of all the times the Supreme Court has heard cases brought to them by a rent controller. They say, “Look, if you say emergency, it has to actually be an emergency. We are not just going to rubber stamp everything because you say emergency now.”

Justices of different times have been very upset by this. iIn dissent, they wrote that the Constitution does not get suspended in times of emergency. And the legislator can't just say emergency and do whatever they want. So that is where we are 's s today with this ongoing emergency that New York City reauthorizes about every three years. They say yep, still an emergency. I doubt it is a real emergency, because the rent control laws themselves are creating the housing emergency due to the  economic phenomenons we just described.

Give rent control more of the benefit of the doubt. Who are the sympathetic citizens who rent control is trying to benefit?

On one level, it's just a concentrated benefits, diffuse cost question, where these very interested people who happen to win the lottery, so to speak, get a rent controlled apartment.

The joke in New York City has always been looking in the obituaries to try and find someone who died in the rent control apartment, that is paying 1950 rent, and then trying to get in there. Many of these laws including New York cities have ways of transferring essentially to family members and other people who lived there in perpetuity.

The people you can't see are the ones who don't get an apartment. All the people who aren't getting cheaper housing, because apartment buildings are not being built at the same rate that they would be built if you had a free market system.

Tell us a bit more about how little rent control as a concept focuses on a target audience of people who need it, and how it doesn't do that at all?

I think that it's important to note that in some sense, the price will always be paid, even if the money price is limited. So the best analogy here is to think about free ice cream cone day. Free ice cream cone day is not free ice cream cone day. Free ice cream cone day is paid with your time for an ice cream cone day. Because you basically get a huge line outside of the ice cream cone shop, and then you wait 20 minutes to get a free ice cream cone where you don't have to pay any money at the time, but you just paid 20 minutes of your time.

If you just waste 20 minutes of your time, no one is benefiting from that. But if you say, “Can I just pay you four bucks for an ice cream cone?” the same principle is true for rent control. If you have an artificially low rent, the people who get it were not distributing these apartments on the basis as you put it out of. You have rich people and wealthy people who get these apartments all the time. We're distributing it based on some principle of time and luckiness. It's like a lottery. And so in terms of attacking the problem for this has helped the poor, they're not even designed that way.

What does this have to do with the Fifth amendment and the Takings Clause?

The takings clause says private property cannot be taken, except for “public use” and with “just compensation.” The point of this clause is to stop politicians from saying they need to provide better housing for people as a collective, and then saying the way we are going to do it is to essentially force the landowner to subsidize them.

In essence, although we're claiming that we care about fair housing, we are going to make Dan basically lose money because of how big the deficit is. The takings clause said that it is fine if you want to if you're doing something for a public benefit that we are all doing together, then compensate Dan. Why do we put all of this on to Dan, the hypothetical landlord, if we're supposed to be beneficent people who care about our fellow citizens? Why is Dan is the one taking the hit?

This has come up in a lot of Supreme Court cases. Justice Scalia had a line where he says the purpose of the takings clause is to not put the onus on one person, or one group of landowners or property holders, where the rest of us are supposed to bear it together. Politicians don't like that. It's really attractive to just surreptitiously make people bear the brunt of the costs of the beneficence, and then not have to raise taxes.

Give us the picture of the constitutional framework in which rent control fits insofar as taking is concerned.

The fifth amendment says, “nor shall private property be taken except for public use, without just compensation. That means that private property can be taken if there's a public use, and they give just compensation. And this was very important to the framers. First of all,the framers were extremely concerned with the way that political actors could misuse their power. Much of the Constitution is about that. They would have called that a corruption of the public responsibility that you have as a politician.

if you don't make the government pay just compensation, then they're going to misbehave because there are all the incentives to misbehave.

Tell us how rent control exacerbates the supply problem by preventing houses from being built. Who in the world would build rental property if you're limited in how much you can make, and you cannot charge what the market will bear? You have no incentive to build and no incentive to improve.

These lawmakers continually believe that magic words can solve problems. Healthcare is unaffordable, pass the Affordable Health Care Act. Rent is unaffordable, pass the affordable rent act. And then of course, people respond with the incentives to those new laws. They then take their properties and convert them from rental properties to something else, because they cannot make money. They start converting them to condominiums or cooperatives.

Are there any examples of cities or states that have repealed rent control and statistical data shows the housing problem was relieved? Are there studies in areas that have imposed rent control where the problem became exacerbated?

It's not a complicated issue, like one survey that was done. I remember, about two decades ago, 93% of economists said that rent control was a bad idea.

Everyone talks about Sweden as a “socialist” country, but beginning in the 70s, they started repealing a bunch of these anti-market laws. And one of them was a really massive rent control housing subsidy that was causing a huge housing shortage. They were building houses really quickly, but people were occupying more housing that they needed.

Help us understand the big picture of how tenants end up by doing nothing other than signing a lease, actually acquiring an ownership interest which is transferable in the property in which they are renting.

Many rent control laws, especially in New York, have these amendments with some rule that a rent controlled apartment can be transferred to someone, usually a family member. But New York's law says that anyone who has lived in that apartment with you for a period of two years can be a transferee. And the landlord has nothing to say about it. And that can go on forever and ever and ever.

So therefore, we end up with the landlord involuntarily being forced to convey an interest in real property that he owns or she owns and purchased to a tenant merely by accident of the tenant occupying the premises. So, rent control laws violate almost everything we think we understand about private property in America.