Sunday, February 12, 2012

A Little More on Rent Control

After posting on this subject a few days ago, I’ve been raked over the coals in the conservative Blogosphere, principally in the Arnold Klingdom.  I am accused of thinking I possess a “superior wisdom”, since I disagree with the majority of economists on this issue.  I ignore “mountains of data” and base my agnosticism on sheer ignorance.  I am really the worst of the worst.

I could rest my case on a simple defense: my post was not about rent control, which I haven’t studied, but on the doctrinaire treatment of the topic by economic textbooks.  Even if they’re ultimately right, they’re right for the wrong reasons, and that matters when the issue is how to use economics as a tool for thinking.

But having had my curiosity piqued, I decided to do a quick literature search.  Sure enough, there is a large literature out there.  I glanced at a few models with their statistical implementations and formed a few reactions.  I will spare you here, since it takes more than a couple of hours to know what’s what in a serious field of study.  But I noticed that two review essays from the 1990's seem to hold pride of place.

Edgar Olsen, a veteran rent control researcher, wrote one of these in 1998 for Regional Science and Urban Economics.  A sample quote:

“Although economists have strongly held views about the effects of rent control, they have provided little convincing empirical evidence in support of these views [Olsen, 1990] and their theoretical analyses typically ignore relevant features of actual rent control ordinances and important responses to them [Olsen, 1988].”

And Richard Arnott asked whether it is “Time for Revisionism on Rent Control?” in the Journal of Economic Perspectives in 1995; his answer was yes.

But of course there was further work in the 00's, and no doubt the subject will look different a few years from now.  The one conclusion I can draw at this point is that a sweeping condemnation of rent control derived from elementary supply and demand analysis (in a frictionless market with no externalities) isn’t a very good way to enter the debate.

UPDATE:  It's not enough to know the US experience with rent control.  I've found out that Germany has had a national system of rent control for decades; it is widely seen as successful, and, as far as I know, no major party has proposed getting rid of it.  Maybe German readers of this blog (all three of you?) will want to chime in.  Once again, this proves nothing, but it does suggest that simplistic, doctrinaire judgments rendered by economics textbooks are not much to go on.  This is not an argument for rent control; it's an argument against the textbooks.


ProGrowthLiberal said...

Kling seems to be impressed that this business economics student summarized a poll question? Huh? OK, they were 40 economists most of which did not even bother to post their reasoning. A few did and their responses should be reviewed. One example: Pinelopi Goldberg of Yale: “Price controls create disincentives to increase supply. But without rent control, no one outside the top 1% would be left in Manhattan.”

Tim Worstall said...

German rent control is very similar to Portuguese (I've experience of both).

Initial rents are market negotiated. Through the lease the rent is raised through a government calculation of the general rent rises in those free market new leases.

The contract itself just says "rents will rise by the number the government announces each year".

So really the rents aren't controlled in the US sense.

Peter Dorman said...

Tim, I don't know about Portugal, but Germany's approach is more complicated. There is a parallel system of "social" rentals for which one has to apply; criteria are income, number of children, etc. If you are accepted you pay below-market rent in specially designated housing blocks. (These blocks often have non-social housing mixed in, as a way to create diversity -- not always successfully.) Also, there are the controls on how rapidly rents can rise over time, imposed on everyone. The German system is massively tilted toward renters, and everything is done to make tenancy as secure as possible.

I have to wonder whether this downward pressure on rental prices discourages speculation in housing in Germany compared to countries with less interference in the market. Maybe a comparison between residential and commercial markets would be apposite.

Tim Worstall said...

"There is a parallel system of "social" rentals for which one has to apply; criteria are income, number of children, etc. If you are accepted you pay below-market rent in specially designated housing blocks."

Sure. That's, in the US experience, HUD. Something which really isn't part of what USians include as part of "rent control".

If we're going to talk about social housing across countries we really must distinguish between social housing (say, the projects), subsidy to market housing (say, Section 8 or in the UK, Housing Benefit) and rent control.


And it is rent control itself which is under discussion here (something I consider an appalling idea while I'm quite happy with, even support, Sec 8 and HB).

Peter Dorman said...

Right about the social sector in German housing; effectively it's a form of public housing rather than rent control. OTOH, the controls on rental increases are serious, especially combined with the quasi-tenure of renters enforced by law. It is virtually impossible for long-term tenants to be terminated, and this is an important reason why there is much less demand in Germany for home ownership.