Rent Control: It’s About Rents

Rent control is one of those things neo-liberal economists, along precious progressive pundits, love to criticize. But what many people seem to forget is that rent control is about controlling rent seeking (manipulating social or political systems to extract others’ wealth, as opposed to generating new wealth). J.W. Mason explains (boldface mine):

Even more fundamental than the arguments I mentioned yesterday, the thing about rent control is that rents contain an element of, well, rents. (Separating the two senses of the word so cleanly has got to count as a big victory for right-wing ideology in economics.) This is especially true because buildings are so fricking long-lived. The average age of a multi-unit residential structure in the United States is about 30 years. In most cities with rent regulations, it’s much higher. For instance, the building I live in was built in 1902. The significance of this is that, even if an asset lasts forever, the share of its present value — which is what matters for the decision to buy/build it — that comes from the later years of its life goes arbitrarily close to zero. Say the discount rate is 6 percent. Then 95 percent of the value of a perpetuity comes from the returns in the first 50 years. 99.7 percent comes from returns in the first 100 years. In other words, even if the exact future rents of the building over its whole life were known with certainty, the rent being paid today would have had essentially zero effect on the decision to undertake the expense of putting up my building 110 years ago. Which means that it is not in any way compensation for that expense. Which means — apart from the costs of maintenance and improvements, which rent regulations always allow landlords to recoup — the rent I am paying is pure economic rent

So the Econ 101 point isn’t just a gross oversimplification — tho it is that — it’s substantively wrong even in its own abstract terms. It’s analyzing the market for the services of very long-lived assets as if it were the market for currently produced goods and services

Regulation that only limited rents in buildings older than 50 years (which, as it happens, is more or less what we have) wouldn’t have any effect on the supply of new housing, it would be a pure transfer from landlords to tenants.

There’s more at The Slack Wire.

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