Rent Control: The Perennial Folly (Cato Public Policy Research Monograph No. 2)

INTRODUCTION

It appears that the 1980s will witness a resurgence in the imposition of rent controls in the United States. But theoretical analysis and historical evidence clearly indicate that rent controls cannot fail to aggravate the existing problems of the housing market and create new ones besides. At the same time, rent controls will diminish our freedom and make us ever more dependent on government. The purpose of this monograph is to explain the nature of the problems in the housing market that have given rise to the current rent control craze and to explain why rent controls only serve those seeking to profit unfairly at the expense of others and those promoting radical changes in the relationship in our society between individuals and the state.

Chapter 1 outlines the economic and ethical framework of our analysis. Chapter 2 examines the supply and demand for housing—both rental and owner-occupied—and examines how and why government has created severe shortages in the housing market. Chapter 3 analyzes both conventional and new generation rent controls; it closes with brief sketches of rent control measures recently adopted in six major United States cities. Finally, chapter 4 considers the question that is always used by proponents of market interventionism to make a case for the suppression of voluntary exchange: What about the poor? In this chapter we see that the interventionists have no monopoly on virtue; it is in the free market that the poor fare best.

I. THE ORGANIZING FRAMEWORK

Scarcity and Competition

Throughout history, humans have been confronted by scarcity; which is to say that there just aren't sufficient resources to provide people with everything they would like to have. People must make choices—more of good A means less of good B. A good is something that a person would prefer, cost aside, to have more of rather than less of. Most people consider housing, nutrition, transportation, health care, dean air, and education to be goods. With the means at his disposal, each person pursuing his own goals, constantly attempts to obtain his preferred combination of goods. The consumption of more or better housing services implies the consumption of less of something else—less pleasing forms of nutrition, less recreational travel, or maybe even less dean air. We simply are incapable, individually or collectively, of having as much as we would like to have of all goods.

Moreover, it is obvious that people do not share the same tastes, preferences, and values. One person's view of the ideal combination of new housing development, traffic density, and open space is likely to be different from another person's. If we lived in a utopia, we could all have things exactly as we would like them; but we don't, and we cannot. In all economic systems, whether based on individualism or collectivism, there must be a process whereby the competing goals and interests of the people involved are resolved. Because there is scarcity, competition for goods is inevitable.

There is no objectively definable public interest; there are only the interests of the individuals who together make up the public. A person who advocates using more open space to build new housing is as much a member of the public as a person who attempts to block the creation of additional housing in order to preserve a better view, a hiking trail, or the habitat of a plant. A landlord who decides, instead of improving his rental property, to invest in an enterprise that manufactures electric motors is every bit as much a member of the public as a tenant or prospective tenant who would like the rental property to be improved.

A business firm, even if it is a corporation, is merely a set of contractual relationships between individuals. The central figure is the entrepreneur, who perceives that enough people are willing and able to pay enough for some good to bring him a total revenue that is more than enough to cover all of the costs of producing the good.¹ The entrepreneur contracts with people who supply the services of the human and nonhuman resources they own for use in the production process. Some people supply labor services, others supply the services of physical capital (tools, buildings, and machines), others supply the services of financial capital, and still others supply the services of land. When the good is produced, the entrepreneur then contracts with those who wish to acquire the good. Out of the revenue collected from customers the entrepreneur pays all of the contractual claims of the resource suppliers and keeps whatever residual is left. The residual claim is the reward to the entrepreneur for his alertness to the wants of others.

A developer does not build homes in order to look at them; he builds them in order to sell them to people who want to live in them. A lumber company that cuts timber does so in order to accommodate those who want to live in the houses that are built with the lumber. The developer and the lumber company do not compete with the public. They serve individual members of the public. A backpacker who wants timber to stand as trees competes with the person who wants to live in the house that could be built If the trees were harvested. People compete with people. It is simply fraudulent to depict business as competing with the public. Business is merely the agent of its suppliers and its actual and potential customers. It is an institution through which the competing claims of individuals over the uses of scarce resources are processed.

Rationing

Because of scarcity it is impossible for people to get all they would like to have of the many things they consider to be goods; so there must be some process to decide who gets what and how much. Rationing is the name given to that process. Rationing devices can be divided into two categories: nonprice rationing and rationing by price.

A. Nonprice Rationing

The most time-honored rationing device is violence. That is, those who have the might are those who, more than other people, get what they want. Who gets what and how much? It depends on who has the biggest club, or the biggest army, or the most hired thugs. In a society where rationing is accomplished by violence there is little or no incentive to produce. If one were to produce something it would be likely that someone else, a little better at using violence, would merely take it away. Since nothing in the violence rationing mechanism calls forth additional amounts of goods, any gain made by one person must represent a loss to some other person. Moreover, competition through violence must gradually result in the demise of the physically weak and the dominance of those who are best at using violence.

Another rationing device, frequently employed throughout history, is rationing by authority. An emperor, a king, a fuhrer, a commissar, or a chairman of a rationing board decides who gets what and how much. Do people have conflicting tastes, preferences, and values? Is there disagreement on how to use scarce resources? Is there disagreement on the distribution of goods? Let the authority decide. Let the authority decide whether to use a particular plot of open space for new housing construction. Let authority decide how many rental dwellings there will be and what their characteristics will be. Let authority decide the terms on which rental space will be offered.

Like rationing by violence, rationing by authority provides no incentive to people to increase the quantity made available of any particular good, or of goods in general. Why attempt to offer additonal amounts of rental space, or of new single-unit dwellings, or of electric motors, or of any good, when the terms of the offer are dictated by an authority? If the authority permits acceptable terms today, it could well reverse itself tomorrow. With no incentive built into the rationing device to call forth additional supplies, more of a good obtained by one person implies less of that good for someone else. The authority must stretch out the existing supply or command more to be made available. People will not choose to make more available.

When goods are rationed by authority, attempts will be made to influence decisions of the authority. If the president of the United States had no authority over the price of milk, would the dairy industry be interested in making contributions to presidential campaigns? Whenever there is an authority that can determine the welfare of any group, that group will naturally attempt to corrupt the authority. The fault, if there is one, is not with the group. After all, we all act purposefully to attain our goals. The fault is with the existence of the authority in the first place. But many people are willing to accept authority nonetheless, because they judge that the benefits of rationing by authority outweigh the evils of corruption.

A third frequently employed rationing device is queuing—first come, first served. Prior to 1975, for example, rental housing space in Sweden was parceled out by u~ing waiting lists. The waiting list also is one of the main rationing devices in the Soviet Union, where production is determined by authority without much attention to what people want. Many goods are produced that are never purchased, and many other goods are not produced in sufficient quantity. In the latter case, the waiting list determines who gets what and how much. Gasoline lines in the United States are another example of rationing by queuing. Department of Energy regulations prohibit the changes in price that would get people to adjust their use rates to the available supply. As a result, whenever there is some unusual and unanticipated interruption of the supply of petroleum, the available supply is rationed out on a first-come, first-served basis.

There is no incentive, under rationing by queuing, for anyone to increase, or even attempt to increase, the available quantity. Suppliers can sell all they want to sell at existing prices; they are not made better off by making more available. They are already inundated with customers. Thus when one person gets more of the good, some other person must get less.

Moreover, rationing by queuing is very discriminatory. One's cost of waiting in line depends on what else one could be doing with the time. People whose alternative uses of time do not earn them much income bear a low cost. The income one earns by selling labor