I expect most readers of this substack will know of Assar Lindbeck's famous statement that there are two ways to destroy cities, aerial bombing and rent control.
Have to say, many of the comment writers in response to the NYT article were very erudite and very common sense--worthy of an article in response by you!
The worst effect from the NYT's piece are the number of people who during casual conversation or on tv shows or on social media that will say "Ivy league economists now say we need rent control. They said it will work this time."
Exactly. That is a truly destructive force in America today. Unlike rocket science, where failed rockets crash, the immediate effects of bad economic policy are not apparent, at least not to poorly informed people attached to political movements. And when a “certified ivy leaguer” (gag) who knows better turns on good science and nothing immediately crashes, people who get their education from 280 character posts on X are apt to bandwagon in accepting very bad ideas. In the social media age, this problem more than any is risks sending 250 years of economic learning to bottom of the Mississippi.
Incidentally you see several goofballs in this comments section essentially dumping on economists as a whole just because of one stupid NYT opinion piece, apparently unaware of the fact that rent controls are balked at as a consensus among economists.
Let's not forget the many governments that assert we need "affordable" housing, and then proceed to propose new housing that is very expensive (as noted by Dr. Cochrane). Consider, though, if only government would get out of the way so that new housing can be built, regardless of affordability. Someone is looking for that new house and is able and willing to pay for it. That person moves out of existing housing, freeing that up for someone else down the economic line, which frees up housing that is further down the economic line. Governments seem to think that only newly built housing can be the source of affordable housing. Why does affordable housing have to be newly constructed? The less economically advantaged people purchase used rather than new cars. Those used cars came from somewhere. People buy new cars, freeing up their trade-in for someone who can afford it, and so on down the chain. (And don't get me started on the "affordable" housing that has granite countertops, one bedroom per child, separate living and family rooms, etc.
"A rent control is the same as a tax on landlords used to subsidize the rents of current tenants." This feels incorrect to me. That kind of tax would actually be quite neutral, whereas rent controls inflict enormous deadweight losses. In any case, I made a video about price controls a few years ago: https://youtu.be/uDosqkJaXBk
Wouldn't the positive tax on landlords lead to a higher price and lower supply, but an equal negative tax on tenants increase demand and push the price higher still, until the market equilibrium quantity is back to its original? Landlords post higher rents, but what they receive net of taxes remains equal to the equilibrium rent without taxes.
Depending on the level of the tax _on rental income_ it could lead to more or less supply.
Decontrol would mean mean more supply and higher tax revenue from landlords and new tennants (assuming that some of the landords are NYC residens and some of the new tennants will come from outside NYC)
Rent control is actually the same as a tax on buildings with the tax revenue earmarked to be paid to existing tenants. A possible red herring that initially threw me off base is that the tax cum subsidy scheme does not create a disincentive to maintain the houses, I incorrectly thought, whereas rent control does. In the steady state both reduce the stock of housing.
It is sad, as Prof. Cochrane notes, that Mahoney and Ramamurti have sacrificed their reputations and ethics for temporary political favor. They have now moved themselves, likely irreversibly, to the trash heap of economic history.
A good observation that political pandering affects both left (rent control, etc.) and parts of the right (tariffs). Both sides would benefit greatly from taking an Econ 101 course taught by Prof. Cochrane. it would save those politicians from inflicting great harm to we the citizens under their government.
I lived in Grenwich Village in 1996-1997 after running a USAID program in Hungary in 1993-94. The contrast was startiling. The Hungarians were facing the elimination of government controls on rent, food, medical care, transportation, education and clothing. The New Yorkers were protesting a move in Albany to eliminate rent control. I was embarassed to be living among the cowards in NY who wanted landlords-or anybody-- to pay for their wonderful lifestyle. The Hungarians faced the future with courage that was admirable. It is no different today. Why do you or anyone need to explain this?
I live in the boonies. A 7 mile round trip gets me a gallon of whole milk for $7.99. Adding 20 miles to that around trip would lower it to $5.79. Adding 40 more round trip miles would lower it to $4.99. Last time I saw the annual figures on average cost/mile, it was 50 cents a mile; it's probably closer to a full buck now. No one factors that in.
Too many locals do not understand that simple arithmetic. They rant about the local grocer ripping them off; some even while refusing to drive that extra 20 or 60 miles to save $2.20 or $4.00, some who do drive that extra distance and ignore the time and expense. Even the ones who grumble about the time and gasoline do not factor in the extra wear and tear on their car.
There are none so blind as those who do not want to see.
It seems USAID has been taken over--maybe swamped- by ideologues in the past twenty years. The NGOs are unbridled in their influence. It is better to distribute aid through other means
Seems like USAID had lost track of the reason for foreign aid. Foreign aid isn’t charity, it’s intended to promote U.S. interests overseas. Aid used to force policies that foreign countries find repugnant, that enriches a plethora of NGOs & corrupt governments, that undermines local agriculture & fosters dependence and helps underwrite endless conflicts isn’t in our interest.
Shocking idiocy from any economist, let alone the director of the Stanford Institute for Economic Policy Research. The history of rent control is replete with poorly maintained, substandard rental units, exorbitant privileges for the politically well connected, and perseverance for decades after the supposedly temporary crisis. However, oddly befitting of the elite residents of one of the most exclusive, zoning-protected. new-apartments-hostile, NIMBY-squared districts on earth. If they're so fair-minded, how about insisting that all spare bedrooms in wealthy neighborhoods be rented out at state-controlled prices? At least that would temporarily expand supply and encourage more socioeconomic mixing.
The last line reminded me of what H.L. Mencken said, "democracy is the theory that the common people know what they want, and deserve to get it good and hard." Apparently, you can substitute "common people" with "unprincipled and ignorant economists." Thank you for writing this!!
No one moves anymore. My grandparents were very very poor. 8th grade and high school education. No work in Mississippi so they moved to Arkansas to work on building the highway during the Depression. WW2 starts and they need welders in New Orleans so they moved there. The war ended and they needed factory workers in Michigan so they moved there. The Okies left Oklahoma to pick fruit in California. People don't move to opportunity. Why? (we can make a strong probabilistic guess that it is government support payments)
We left California (Kleptofornica) after 60 years, with our assets intact. People don’t move because they are lazy, ignorant, frightened or haven’t been hurt enough. We now have lower property taxes, no income tax, less crime and significantly lower utility costs.
Great article, but please drop the dis on Detroit. Housing prices have gone from an average of $34,000 12 years ago when Mike Duggan became mayor to $134,000 today. Good government can make a difference when you reduce taxes, cut back on bureaucracy, and create a pro-business environment. Mayor Mandami schould give him a call…
Game this out. Suppose 5% of the population owns 95% of the housing stock. The form of government is a republic. Elections are held every four years. Universal suffrage is the norm and applies in this jurisdiction. One man, one vote, is the rule. Now, the 5% of population that owns 95% of the housing stock can by paying an incentive swing the popular vote in its favor and thereby avoid the government of day from imposing rent controls. This strategem will continue for as long as "rents" remain "affordable". However, when the rents are racked up at an increasing rate beyond the upper threshold of "affordability" one of two things occur: (i) rental income does not keep up with the rate rent increase, or (ii) the government (politicians) is replaced by a new government that is not beholden to the 5% of the population that owns 95% of the housing stock for its election, and a rent control bylaw is adopted by the new government.
In the case of NY, a wartime measure (price control) became the norm after the wartime conditions gave way to peace time conditions. Ideally, at that point, the price controls would have been lifted. Did that happen? Perhaps, and perhaps not. In the case of rent control, the answer is obviously not.
If the owner of a capital asset is faced with a price control, there are options: (i) she can sell for whatever price the market for that asset will bear (hope springing eternal); or, (ii) she can hold and carry the asset in hopes that the next government will be more sympathetic to the asset owner. If the rent controls are "freeze the rent" at the current nominal dollar rent, then the asset owner faces a diminished yield on the asset. A diminished yield on an asset translates into a lower price for asset in conformance with economic theory. If that yield is below the carrying cost of the asset, the asset becomes a sink instead of a source, and sustaining capital expenditures are deferred indefinitely. The renter and the owner both suffer. If the rent controls allow the owner to adjust the rent for improvements the owner undertakes to maintain the asset and provide a "reasonable" return (yield) on the asset, then the rent controls are not so burdensome that the owner will cease maintenance of the asset. Ergo, it does not follow that rent control will necessarily result in a loss to the owner. Details matter.
Socialists will be less sympathetic to the 5% that own 95% of the housing stock, as befits their political philosophy. Liberals will, perhaps, attempt to find the "happy median". Conservatives and libertarians will eschew rent controls altogether. The right answer depends on ones personal view of the rights of property owners vs. the needs of the propertyless workforce.
Each one chooses his own version of poison. And, rues or celebrates the outcome.
John, being of a libertarian mindset, sees every trespass against property as an outrage. Fine. It's a useful point of view; and, it should inform us whenever we venture to upset the natural order of those things that Darwin's theory of natural selection favors.
I expect most readers of this substack will know of Assar Lindbeck's famous statement that there are two ways to destroy cities, aerial bombing and rent control.
"The Americans couldn’t destroy Hanoi, but we have destroyed our city by very low rents." -Nguyen Co Thach
Unless of course the aerial bombing helps fight the rent control:
https://academic.oup.com/joeg/article/21/6/869/6213370
Have to say, many of the comment writers in response to the NYT article were very erudite and very common sense--worthy of an article in response by you!
Agree 💯
The worst effect from the NYT's piece are the number of people who during casual conversation or on tv shows or on social media that will say "Ivy league economists now say we need rent control. They said it will work this time."
Exactly. That is a truly destructive force in America today. Unlike rocket science, where failed rockets crash, the immediate effects of bad economic policy are not apparent, at least not to poorly informed people attached to political movements. And when a “certified ivy leaguer” (gag) who knows better turns on good science and nothing immediately crashes, people who get their education from 280 character posts on X are apt to bandwagon in accepting very bad ideas. In the social media age, this problem more than any is risks sending 250 years of economic learning to bottom of the Mississippi.
Incidentally you see several goofballs in this comments section essentially dumping on economists as a whole just because of one stupid NYT opinion piece, apparently unaware of the fact that rent controls are balked at as a consensus among economists.
To quote Joseph Heath (https://josephheath.substack.com/p/kohei-saitos-tsunami-of-confusion): "Do we really have to have the same debates, about the same self-evidently unworkable ideas, again and again?"
Let's not forget the many governments that assert we need "affordable" housing, and then proceed to propose new housing that is very expensive (as noted by Dr. Cochrane). Consider, though, if only government would get out of the way so that new housing can be built, regardless of affordability. Someone is looking for that new house and is able and willing to pay for it. That person moves out of existing housing, freeing that up for someone else down the economic line, which frees up housing that is further down the economic line. Governments seem to think that only newly built housing can be the source of affordable housing. Why does affordable housing have to be newly constructed? The less economically advantaged people purchase used rather than new cars. Those used cars came from somewhere. People buy new cars, freeing up their trade-in for someone who can afford it, and so on down the chain. (And don't get me started on the "affordable" housing that has granite countertops, one bedroom per child, separate living and family rooms, etc.
"A rent control is the same as a tax on landlords used to subsidize the rents of current tenants." This feels incorrect to me. That kind of tax would actually be quite neutral, whereas rent controls inflict enormous deadweight losses. In any case, I made a video about price controls a few years ago: https://youtu.be/uDosqkJaXBk
It wouldn't be neutral for the property owners.
Wouldn't the positive tax on landlords lead to a higher price and lower supply, but an equal negative tax on tenants increase demand and push the price higher still, until the market equilibrium quantity is back to its original? Landlords post higher rents, but what they receive net of taxes remains equal to the equilibrium rent without taxes.
Depending on the level of the tax _on rental income_ it could lead to more or less supply.
Decontrol would mean mean more supply and higher tax revenue from landlords and new tennants (assuming that some of the landords are NYC residens and some of the new tennants will come from outside NYC)
Rent control is actually the same as a tax on buildings with the tax revenue earmarked to be paid to existing tenants. A possible red herring that initially threw me off base is that the tax cum subsidy scheme does not create a disincentive to maintain the houses, I incorrectly thought, whereas rent control does. In the steady state both reduce the stock of housing.
It is sad, as Prof. Cochrane notes, that Mahoney and Ramamurti have sacrificed their reputations and ethics for temporary political favor. They have now moved themselves, likely irreversibly, to the trash heap of economic history.
A good observation that political pandering affects both left (rent control, etc.) and parts of the right (tariffs). Both sides would benefit greatly from taking an Econ 101 course taught by Prof. Cochrane. it would save those politicians from inflicting great harm to we the citizens under their government.
I lived in Grenwich Village in 1996-1997 after running a USAID program in Hungary in 1993-94. The contrast was startiling. The Hungarians were facing the elimination of government controls on rent, food, medical care, transportation, education and clothing. The New Yorkers were protesting a move in Albany to eliminate rent control. I was embarassed to be living among the cowards in NY who wanted landlords-or anybody-- to pay for their wonderful lifestyle. The Hungarians faced the future with courage that was admirable. It is no different today. Why do you or anyone need to explain this?
Because people do not see the unseen.
I live in the boonies. A 7 mile round trip gets me a gallon of whole milk for $7.99. Adding 20 miles to that around trip would lower it to $5.79. Adding 40 more round trip miles would lower it to $4.99. Last time I saw the annual figures on average cost/mile, it was 50 cents a mile; it's probably closer to a full buck now. No one factors that in.
Too many locals do not understand that simple arithmetic. They rant about the local grocer ripping them off; some even while refusing to drive that extra 20 or 60 miles to save $2.20 or $4.00, some who do drive that extra distance and ignore the time and expense. Even the ones who grumble about the time and gasoline do not factor in the extra wear and tear on their car.
There are none so blind as those who do not want to see.
And now both countries are galloping toward Fascism. I wish I could talk to you about the tragedy at USAID.
It seems USAID has been taken over--maybe swamped- by ideologues in the past twenty years. The NGOs are unbridled in their influence. It is better to distribute aid through other means
The US has been galloping toward fascism since Woodrow Wilson's time.
Seems like USAID had lost track of the reason for foreign aid. Foreign aid isn’t charity, it’s intended to promote U.S. interests overseas. Aid used to force policies that foreign countries find repugnant, that enriches a plethora of NGOs & corrupt governments, that undermines local agriculture & fosters dependence and helps underwrite endless conflicts isn’t in our interest.
Shocking idiocy from any economist, let alone the director of the Stanford Institute for Economic Policy Research. The history of rent control is replete with poorly maintained, substandard rental units, exorbitant privileges for the politically well connected, and perseverance for decades after the supposedly temporary crisis. However, oddly befitting of the elite residents of one of the most exclusive, zoning-protected. new-apartments-hostile, NIMBY-squared districts on earth. If they're so fair-minded, how about insisting that all spare bedrooms in wealthy neighborhoods be rented out at state-controlled prices? At least that would temporarily expand supply and encourage more socioeconomic mixing.
I vaguely remember some Seattle proposal for just that, which apparently was too much even for Seattle.
Everyone is in favor of taxes and regulations… until they are personally harmed. And that is a serious problem in our country right now.
My econ PhD is from Stanford (1980). You can imagine how much this NYT piece saddens me.
The last line reminded me of what H.L. Mencken said, "democracy is the theory that the common people know what they want, and deserve to get it good and hard." Apparently, you can substitute "common people" with "unprincipled and ignorant economists." Thank you for writing this!!
No one moves anymore. My grandparents were very very poor. 8th grade and high school education. No work in Mississippi so they moved to Arkansas to work on building the highway during the Depression. WW2 starts and they need welders in New Orleans so they moved there. The war ended and they needed factory workers in Michigan so they moved there. The Okies left Oklahoma to pick fruit in California. People don't move to opportunity. Why? (we can make a strong probabilistic guess that it is government support payments)
We left California (Kleptofornica) after 60 years, with our assets intact. People don’t move because they are lazy, ignorant, frightened or haven’t been hurt enough. We now have lower property taxes, no income tax, less crime and significantly lower utility costs.
Great article, but please drop the dis on Detroit. Housing prices have gone from an average of $34,000 12 years ago when Mike Duggan became mayor to $134,000 today. Good government can make a difference when you reduce taxes, cut back on bureaucracy, and create a pro-business environment. Mayor Mandami schould give him a call…
It's amazing that educated people still believe rent controls work. It's also amazing that anyone believes that rent controls will be temporary.
Game this out. Suppose 5% of the population owns 95% of the housing stock. The form of government is a republic. Elections are held every four years. Universal suffrage is the norm and applies in this jurisdiction. One man, one vote, is the rule. Now, the 5% of population that owns 95% of the housing stock can by paying an incentive swing the popular vote in its favor and thereby avoid the government of day from imposing rent controls. This strategem will continue for as long as "rents" remain "affordable". However, when the rents are racked up at an increasing rate beyond the upper threshold of "affordability" one of two things occur: (i) rental income does not keep up with the rate rent increase, or (ii) the government (politicians) is replaced by a new government that is not beholden to the 5% of the population that owns 95% of the housing stock for its election, and a rent control bylaw is adopted by the new government.
In the case of NY, a wartime measure (price control) became the norm after the wartime conditions gave way to peace time conditions. Ideally, at that point, the price controls would have been lifted. Did that happen? Perhaps, and perhaps not. In the case of rent control, the answer is obviously not.
If the owner of a capital asset is faced with a price control, there are options: (i) she can sell for whatever price the market for that asset will bear (hope springing eternal); or, (ii) she can hold and carry the asset in hopes that the next government will be more sympathetic to the asset owner. If the rent controls are "freeze the rent" at the current nominal dollar rent, then the asset owner faces a diminished yield on the asset. A diminished yield on an asset translates into a lower price for asset in conformance with economic theory. If that yield is below the carrying cost of the asset, the asset becomes a sink instead of a source, and sustaining capital expenditures are deferred indefinitely. The renter and the owner both suffer. If the rent controls allow the owner to adjust the rent for improvements the owner undertakes to maintain the asset and provide a "reasonable" return (yield) on the asset, then the rent controls are not so burdensome that the owner will cease maintenance of the asset. Ergo, it does not follow that rent control will necessarily result in a loss to the owner. Details matter.
Socialists will be less sympathetic to the 5% that own 95% of the housing stock, as befits their political philosophy. Liberals will, perhaps, attempt to find the "happy median". Conservatives and libertarians will eschew rent controls altogether. The right answer depends on ones personal view of the rights of property owners vs. the needs of the propertyless workforce.
Each one chooses his own version of poison. And, rues or celebrates the outcome.
John, being of a libertarian mindset, sees every trespass against property as an outrage. Fine. It's a useful point of view; and, it should inform us whenever we venture to upset the natural order of those things that Darwin's theory of natural selection favors.
China can probably build a million new housing in NYC in 5 years. Policy is too slow to impact real life only cause we chose so.
China only builds empty apartments.
Some empty apartments would certainly be useful in NYC right now. :)
No one builds occupied dwellings of any sort.