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The Economics of It: The Economics of Rent Control

Host: Ryan Bourne
Guest: Alex Tabarrok, Professor of Economics, George Mason University

Ryan Bourne: I’m Ryan Bourne, and this is The Economics of It.

Today’s episode is the economics of rent control, with Alex Tabarrok.

New York Mayor Zohran Mamdani promised to freeze rents on rent-stabilized leases in the city, and he’s now delivered on that pledge. In a city that has regulated rents for decades, the tightening of the rules might seem a bit unremarkable. But the appetite for rent control has spread well beyond New York City. A recent Wall Street Journal poll found that 65 percent of registered voters across the country now support some form of limit on annual rent increases in private tenancies.

With housing so expensive in many communities, who can be surprised? A steep renewal increase can force a family to leave their home despite their never having missed a rent payment. And with people’s budgets squeezed by the recent inflation, it seems intuitive to think we can cap the increases landlords can charge to give those tenants more security.

The problem is that the rent written into a lease tells us only part of what it costs to find and keep a home. What happens to the number of apartments available to newcomers when rents are controlled? Who gets the bargain when everyone wants it? And what happens when your family grows, your job moves, or the building needs repairs?

Today’s guest explores all those questions through stories from cities around the world in his beautiful visual essay, Rent Control: The Ceiling Trap. Alex Tabarrok is a professor of economics at George Mason University. He holds the Bartley J. Madden Chair in Economics at the Mercatus Center, and he’s co-blogger at Marginal Revolution. Alex, welcome to The Economics of It.

Alex Tabarrok: Great to be here.

Ryan Bourne: Now, Alex, until recently, I was a renter in an apartment here in Washington, DC. And I remember being quite anxious as we got toward that lease renewal date every year. If I’d known there was some sort of cap on what landlords could charge, that would have brought me a degree of economic security. That’s the real appeal of rent control, isn’t it? It’s a crude tool, but it does provide certain benefits for people who have those established leases and want to stay in their apartments. That’s where the appeal really comes from.

Alex Tabarrok: Yeah, sure. It’s very understandable. The question is, are people willing to pay the cost? If one wanted to, for example, one could say, well, I’m willing to pay the rent three years in advance, so long as we keep the price stable for three years. Would renters actually go for a contract like that? I think probably not.

So the question is, why not? One reason is that a lot of renters like to move. That’s one reason they are renters. Maybe they’re students, or maybe they’re moving up, or they might want to move, so they want that option.

So suppose you offered renters the option of having their rent flat for three years or five years while they still get the option to leave. Well, how much is that going to cost the landlord? Those contracts are certainly available. Commercial leases for little stores and things like that often have three- to five-year guaranteed terms. But renters are just really not willing to pay that cost.

So I think it boils down to this: yes, it would be a nice thing to have, but who is going to pay the cost, and can you get a free lunch? And as you know, free lunches are hard to come by.

Ryan Bourne: I think instinctively part of the problem here is that people talk or think as if landlords can just set any price they like. You have famously described prices in general as a signal wrapped in an incentive, and rental price increases are that signal wrapped in an incentive. So talk us through what high rents in a city are actually telling us, and how a movement up in rents affects both sides of the market: people demanding rental accommodation and people supplying it.

Alex Tabarrok: Yeah, exactly. You want both sides of the market, demand and supply. If we have a situation in which people want to move in and we’re not building enough apartments, and we’ll come back and talk more about that, then it’s very natural that the signal, the price, goes up. That tells you two things. It tells you the apartments are scarce, but it’s also a signal to suppliers: hey, we ought to be building more apartments here, because the price has gone up.

So the question comes down to this: where prices are going up, why don’t we see a bigger supply response? And the answer in the United States is that we have tied our own hands. We have made it extremely difficult to build. The value of new apartments in a city like New York is actually much higher than the cost of the land and building. So why is the price so much higher than the cost of building a new apartment? The answer, as shown by Ed Glaeser, is regulation. We have zoned out apartments. We’ve made them extremely difficult and extremely expensive to build. So to the extent that we really want to increase the number of places to live, the focus should be on reducing the cost of building.

Ryan Bourne: The most famous risk of rent control that economists talk about is that if you’re holding rent below the market-clearing price, there are going to be shortages of accommodation. Holding a price below the market rate encourages more people to demand the rental apartments that exist, but at the same time it dissuades landlords on the margin from supplying apartments to the market. That might be because it becomes relatively more profitable to put them on Airbnb, outside of the rent control. It might make it more likely that they sell the property for owner occupation, or that they rent to somebody in their family outside the formal strictures of the market.

But people might say, OK, yes, that happens. You get a change of tenure in all these properties. What’s the problem? There are slightly fewer apartments available for rent, but there are more available for people to buy. Perhaps that might depress house prices for owner occupation a little bit. There are more on Airbnb, so people can do short-term lets. What’s the big deal if some of these apartments move from the rental sector to other tenure forms?

Alex Tabarrok: I think there is a natural inclination to put a price control on apartments, because it’s unlike, let’s say, a price control on gasoline. If we pushed the price of gasoline below today’s market price, there would be shortages and lineups tomorrow. The thing about apartments is that once they’re built, it’s hard to move them around. Nevertheless, that is exactly what happens in the long run. And the long run may not be all that long. For all of the reasons you suggested, you can turn them into condos, you can build a parking lot, and you can stop building new apartments. All of these things reduce the long-run supply.

Now, the fact that some of them will show up elsewhere is all very fine and well, but that’s not solving the problem rent control was supposed to solve. So yes, it’s true that some of these residences will show up elsewhere.

Also, who gets these apartments? Famously, for example, Charlie Rangel had four rent-controlled apartments in New York City, which he turned into one giant apartment. So you also get misallocation. We can talk more about that. But certainly in the long run, and maybe not even only in the long run, rent controls are not a very good tool for solving the problem they were supposed to solve. They reduce supply, as we’ve talked about. They reduce quality. They create a lot of misallocation. And the people who end up getting the apartments are often not even poor. People like Charlie Rangel are not the ones the program was ostensibly designed for.

Ryan Bourne: And I guess one of the problems is that it’s all very well saying some of those properties will go into the market for sale. But a lot of people are renters because they can’t afford a big down payment, and they still can’t afford one if these properties move into the market for owner occupation. People think rent controls are good for poorer people, but if poorer people can’t afford to buy homes, having more homes available to buy is not great for them.

But I want to stay on the shortages aspect for a second, because in your essay you have a brilliant example of this. You talk about the city of San Francisco in two years, 1906 and 1946, and how this shows the effect of rent control in leading to shortages. Why don’t you talk us through that example? I think it’s a great one.

Alex Tabarrok: Yeah, it’s a great example. It goes back to Milton Friedman and George Stigler, in one of the first things they ever wrote, Roofs or Ceilings?, which was for, I guess, one of your competitors, the Foundation for Economic Education.

They did this great example. They showed that in 1906, you get the great San Francisco fire. About 40 percent of the city burns down. Demand far exceeds supply. Where are these apartments going to be found? And yet, you look at the newspapers the next week, a few weeks later, and there’s no discussion of a shortage. Why not? Well, the price of apartments has gone up, but because of that, people are taking in boarders. They’re opening their homes to renters. They’re quickly building more places to rent. People have found places to live, and that’s because in 1906, prices adjusted.

Now, in 1946, after the war, people are coming back to San Francisco. There’s actually a much smaller increase in demand, about 10 percent. And yet the governor is worried about the shortage of apartments: what are we going to do? The newspapers are filled with “apartment wanted” ads. People aren’t advertising that they have an apartment for rent. People are advertising that they need an apartment. It’s a complete reversal of the market.

Ryan Bourne: Because they’d instituted rent controls.

Alex Tabarrok: Because they had instituted rent controls. So now, when the price doesn’t adjust, when the price doesn’t resolve the scarcity, you have all of these political considerations. Who do you know? How long do you have to wait? There’s just no reason for people to open up their homes. There’s no reason for people to start building more quickly. And so you had a massive, massive problem.

Quality, misallocation, and who gets the apartments

Ryan Bourne: So there are many ways that people end up paying for rent controls, beyond the fact that there might be shortages of accommodation. Ordinarily, the debate focuses on the imbalance between demand and supply. But we know from a lot of studies that one other way markets adjust is that the quality of rent-controlled accommodation can actually decline, because there’s less of an incentive for landlords to invest in maintenance if they can’t recoup the cost of that outlay through higher rents.

We see that in New York City, for example. If you look at some of the government’s own statistics on things like plumbing and the quality of heating and AC systems, they tend to be much worse in the rent-stabilized apartment cohorts. There’s also double the rate of rat infestations in those properties. But your essay documents what happened in another city, Mumbai in India. And there we saw an even more dramatic decline in the quality of accommodation.

Alex Tabarrok: Yeah, absolutely. I was living in Mumbai, and I would see these dilapidated buildings and wonder what was going on. Mumbai is a growing city with lots of demand, and you’d see these terrible buildings. It turns out that Mumbai introduced rent controls in 1946 or 1947, sometime around then. And basically, they kept the price the same for 50, 60, 70 years.

Ryan Bourne: So this wasn’t going up with inflation or whatever. The price was just kept the same.

Alex Tabarrok: Exactly. So there are these giant apartments in Mumbai where, if you had a rent-controlled apartment, you were literally paying 500 or 600 rupees, which might be a couple of dollars a month. Obviously, the owners can’t make any money on that, so they’ve just abandoned them. These buildings have become completely abandoned, and over time they’ve become so dangerous that the Mumbai government has established a special tax, a cess, to come in and try to repair them. But India is a poor country, and it takes a while. And every single year, some of these buildings collapse, quite often with people in them. So this is a literal destruction of some of the housing stock of Mumbai.

And the thing is, famously, this happens everywhere. It’s been said that nothing destroys a city’s housing stock more than rent control, except perhaps bombing.

Ryan Bourne: I think that was Assar Lindbeck.

Alex Tabarrok: Assar Lindbeck, exactly. A socialist, by the way. But yeah, Assar Lindbeck.

My coauthor Tyler Cowen and I often talk about the great forgetting. And we have a great forgetting with rent control, because we had rent controls in New York City, and famously, in the 1970s, New York City was falling apart. We had mass abandonment of apartments. You had tons of arson, tons of fires. The Bronx was famously on fire, and so forth. Rent controls were certainly one of the major reasons for this.

Ryan Bourne: One response you usually hear to this is, OK, let’s suppose things fall into disrepair. Nobody’s talking about the stringency of rent controls that we saw in Mumbai. We’re talking about rent stabilization, with rents just going up a bit slower than they otherwise would at market rates. So why don’t we just combine that with regulations on landlords to ensure that they deliver the maintenance to keep these properties up to scratch? What’s the problem with that?

Alex Tabarrok: Yeah, just add another regulation on top of the previous regulations. This continues today. For example, depending on whom you believe, there are some 26,000 to 52,000 vacant apartments in New York City that are just left untouched. The reason this happens is that you’ve had somebody living in an apartment for, say, 20 or 30 years, and they move out. The apartment’s in bad shape. It needs new plumbing. It needs to be brought up to code. It needs new wallpaper, new tiling, new drywall. An apartment that has been lived in for 30 years has a lot of problems.

So why don’t the landlords fix it up and rent it out? Well, it’s a very easy calculation. It’s going to cost you easily $100,000 to fix the apartment, and your rent is fixed at $1,000 a month. It’s going to take you decades and decades to recoup that. So literally, there are tens of thousands of apartments sitting empty in New York City because it doesn’t pay to fix them up and rent them out at the current allowed rates.

Ryan Bourne: Yeah, that’s a really important point. It’s not just that the incentive to do maintenance isn’t there. The effective subsidy of rent control means tenants stay in apartments longer than they otherwise would. As a result, the apartments gradually fall into disrepair, because it’s very difficult to make big new investments or do big maintenance when you’ve got tenants living in a property.

And that brings us to another cost of rent control, really, which is the misallocation you’ve talked about. Ordinarily, you get quite high turnover in tenancies. People get a new job. They perhaps have a child or a second child, and all of a sudden the apartment’s not quite right for their needs. They move out elsewhere, and that frees up properties for new people to come into a city. But when you have rent control, and especially when rents are quite far below the market rate because rent control has been in place for a long time, you don’t get this turnover. People stay in. They don’t want to give up the subsidy even when they get a new job or have more kids. So they end up living in a property that perhaps doesn’t fulfill their needs in terms of the number of bedrooms, location, or something else.

Now, some would say that security is the whole point of having rent controls, right? We don’t want people to have to leave for economic reasons. This is a home they’ve built over time. So how do we distinguish that kind of valuable security from pure misallocation?

Alex Tabarrok: Let me talk a little bit about misallocation in general terms. My coauthors Brian Albrecht, Mark Whitmeyer, and I have a paper on this. We’re not looking so much at rent control as at price controls in general.

Imagine we have a price control on gasoline, and we have two towns: one at the top of the hill and one at the bottom of the hill. It costs a little bit more to pump the gas to the top of the hill. In a market, that’s no problem. People there just pay a little bit extra to get the gas up there. Now suppose we have a price control on gasoline, and the oil company is looking around and saying, I can sell to the town at the bottom of the hill, or I can pay a little bit more to pump it up to the top of the hill and get the same price. Wait a second. Why would I take on the extra cost of pumping the oil to the top of the hill when I can get exactly the same price without those costs and sell it all at the bottom of the hill?

So what happens with a price control is not only do you get the shortage, maybe 10 percent or 9 percent, as in the 1970s, but that 9 percent isn’t allocated evenly. Instead, the town at the bottom of the hill gets all of the gasoline, and the town at the top of the hill gets none. You get a massive misallocation of oil, even though people at the top of the hill are willing to pay. Price is a signal wrapped in an incentive. When you control the price, there’s no signal and there’s no incentive, so all the oil pools at the bottom of the hill.

Now apply the same idea to rent controls, and this is exactly what happens. Say there was a family of five, two parents and three kids, living in an apartment. Now the kids have moved out and gone to university, and the family has this big apartment. Ordinarily, they’d say, hey, we don’t need this; we could save some money and get a smaller apartment. With rent control, why would you do that? Why would you give up the apartment? Meanwhile, there are families who would be willing to pay to get that apartment, but because of the rent control, they’re completely frozen out.

Ryan Bourne: So it’s often those transient, younger people who find it more difficult to find accommodation with these rent controls in place.

Alex Tabarrok: Exactly. And so over time, you get a situation where, who gets a rent-controlled apartment in New York City? Well, famously, as in When Harry Met Sally, you have to read the obituaries. You look: oh, this guy died; maybe there’s an apartment. But it’s the people who are smart and well connected who know to read the obituaries. Faye Dunaway got a fantastic rent-controlled apartment in New York City. This is true. She’s quite rich, quite well off, and she knows how to use the system. So there’s a misallocation, because rent control is supposed to help poor people, but it actually ends up helping the people who can work the system.

Ryan Bourne: I think Zohran Mamdani himself was living in a rent-stabilized apartment. But that’s a really important point, because it’s not just that kind of misallocation, is it? There’s also broader misallocation, because with rent control in place, the landlord is trying to mitigate other risks, like the risk of having a bad tenant he can’t get rid of because they’re incentivized to stay in the property longer. So all of a sudden, you get these insane ways that landlords try to discern whom they should rent to. They might try to avoid people they think are on government welfare, for example. And in your essay, you talk about some truly insane ways that people in Oslo tried to signal to landlords that they’d be good tenants. Why don’t you talk about that example?

Alex Tabarrok: In Oslo, they had rent control for many years, but then they got rid of it in 1994, I think. There’s a great paper by Are Oust that looks at what happened. Amazingly, he found that when the rent controls were in place, just as Friedman and Stigler found in San Francisco, renters in Oslo advertised: I need an apartment. Won’t you rent me an apartment? And as part of their advertisements, they would say, I’m willing to look after your cat. I’m willing to shovel the snow.

And on the other side, the landlords would say, I’m looking for a good Christian, or I’m looking for a heterosexual married couple, these kinds of things. Sometimes this was literally advertised. Sometimes it would happen under the table. There would be things like having to pay many months in advance, sometimes years in advance. All kinds of ways in which, because of the shortage of apartments, it was the renters who had to advertise and say, I will do this. Even companies would say, I’ve got a great employee; won’t you please give them an apartment?

In 1994, the rent controls were lifted, and suddenly the advertisements switched 100 percent. It was no longer the renters who were advertising. It was now the landlords: I’ve got a great apartment. And all of this stuff about being willing to shovel the driveway or take care of my cat, it all goes away.

Ryan Bourne: I think that’s a really interesting example, because quite often I hear people say, look, the rental market isn’t perfectly competitive. Landlords have a degree of market power because they know you want to be in that particular location, perhaps because your job is nearby or whatever. So they have the market power to raise rents a bit above competitive levels and extract a rent from you. But you seem to be saying the opposite: when rent controls are instituted, landlords have more of an incentive to seek what little rent they can extract.

Alex Tabarrok: Yeah, absolutely. Look, this is a more symmetrical market than people imagine. Landlords don’t want to be out a few months’ rent. When someone moves out, if it takes them two or three months to rent the apartment, that’s a big cost for them.

This idea that landlords have all the market power and extract it from renters implies, just as you said, that rents on the old apartments should be higher than those on the new apartments. And actually, that’s really not the case. Sometimes it may be that way, but sometimes it’s the opposite. Sometimes rents on the old apartments are actually lower on average than on the new apartments at the margin. That’s because the landlords say, well, yes, if I raise the rent, I could get a higher rent from somebody new. But this tenant has been here for five years and has been paying the rent on time. Why take that risk? So landlords also value stability. They value tenants not burning the place down and so forth. So it’s actually a more symmetrical market than people imagine.

Ryan Bourne: Yeah, if you’ve been a good tenant, they like to keep you and are willing to take a slight hit on the rent they can obtain.

Alex Tabarrok: Absolutely.

Public opinion, politics, and building more

Ryan Bourne: So economists broadly agree that rent control is a bad idea. In most of the surveys I can remember, like those from the Kent A. Clark Center at Chicago Booth, which frequently ask about this type of thing, overwhelming majorities think rent control doesn’t help the quantity and quality of available accommodation. And yet the public, as I said in the intro with the recent Wall Street Journal poll, seems willing to countenance a kind of national rent control policy. So how do you think about that? Have economists just failed to articulate the trade-offs of rent control? Or is there something else going on with public opinion?

Alex Tabarrok: I think part of it is, as I mentioned earlier, the great forgetting. The public’s not that great at theory. They’re pretty good at practice. So when you look around and see huge shortages, gasoline lines, people waiting in line, then you can learn: hey, maybe this policy isn’t working. Economists could have told you that before you instituted the policy. But people say, oh, that’s just theory. That’s just you economists with your diagrams on the blackboard. What do you really know? So often the public, unfortunately, has to be hit in the face before they wise up. I hope that’s not the case. Sometimes I do hope economists have some influence.

The fact is that with rent control, it’s definitely not all theory. We have excellent studies. We mentioned San Francisco in 1906 and 1946, but we don’t have to go back that far. There’s a recent paper on San Francisco, which had a very interesting law that controlled rents on small apartment buildings, but only on the old buildings, not the new ones. So economists were able to go back and look at the effect of rent control precisely on these old apartments compared with very similar new apartments that didn’t fall under the rent control. What they found is that the stock of old apartments declined by 15 percent. That meant—

Ryan Bourne: Because people were changing them into condos and things like that.

Alex Tabarrok: Exactly. They were becoming parking lots, they were becoming condos, they were just moving off the market in one way or another. Now, because there was a decline in the stock of rent-controlled apartments, where do the people who would have rented those apartments go? That 15 percent is now gone. They go to the uncontrolled part of the market, and they push up rents there.

So we have this very negative feedback. You put rent control on some part of the market, which reduces the quantity in that part of the market and increases demand in the uncontrolled market. Then people look around and say, oh my God, prices are going up; we need more rent controls. Well, the rent control was the cause of the increase in prices. But of course, the public doesn’t always understand that. They just see prices going up and say we need rent controls, not understanding that it’s the rent controls that are actually causing higher prices in the market as a whole.

Ryan Bourne: Yeah, and a lot of proponents of rent controls say, look, we understand some of these effects, but you can mitigate them somewhat. We can have older buildings under rent control but exempt newer buildings, and that way we’ll still encourage new construction. We can have rent controls apply only within a tenancy, so landlords can raise rents between tenancies.

But these fall foul of the political problem you’re talking about. If you’re trying to construct an apartment block, and you know that because of concerns about affordability a local government is willing to put rent controls on a certain stock of apartments, and that this will drive up prices for the new apartments because of the effects you’re talking about, well, why wouldn’t the government be willing to expand the rent controls in time? It puts that idea in the back of your head, and of course that deters you from building as many apartments as you otherwise would, because you’ve got this risk to your profits going forward.

Alex Tabarrok: Yeah, absolutely. There’s one way to mitigate all of the problems of rent control, and that’s not to have it. But more generally, you’re absolutely right.

Look, people often complain that capitalism is just short-run thinking. Right? It’s all focused on the next quarter, the bottom line. Well, take a look at developers, people who are building apartments. They are thinking long term. To make money on apartments, those apartments have to last 30 or 40 years. You’re not turning a profit on day one after all your construction costs. It takes decades before you’re earning an overall profit.

So the landlords, the developers, are precisely the ones who are thinking long term. They’re the capitalists who are not short-term thinking. And yet we pound them. We hit them over the head precisely because they were thinking long term: oh, you built this stock, and you can’t take it away, so now we’re going to put a rent control on it. So the developers definitely have to be thinking not just about whether the city is growing and whether they should be building apartments there. They also have to be thinking about whether there’s going to be a Mamdani elected and whether there are going to be rent controls. That’s also part of long-term thinking.

Ryan Bourne: What do you make of the argument I’ve seen from some progressive economists, some people who were in the Biden administration? They say, look, we recognize the downsides of rent controls, but people need help now. So why don’t we have temporary rent controls, and then we’ll engage in the supply-side reforms you said were necessary: zoning reform and other land-use changes to free up more land for private-sector development of housing. In time, we can get rid of the rent controls, but for now we need this short-term palliative to get people through this difficult period.

Alex Tabarrok: Yeah, well, that’s exactly what they said in Mumbai. Those rent controls after the war were supposed to be temporary. Same thing with New York. New York has had temporary rent controls for 70 years now.

Ryan Bourne: Right, rent controls were initially put into place for people coming home after World War II. It’s over 80 years now.

Alex Tabarrok: Yeah, yeah. I’m getting older now.

Ryan Bourne: We all still think it’s the middle of the 2010s here.

Alex Tabarrok: Yeah, exactly. So these temporary rent controls often become permanent. And precisely as I said, because people are thinking long term, what you think of as temporary has long-term effects. So you really need stability. What’s going to produce the biggest increase in supply is stability in politics, stability in property rights, and relaxing some of these regulations that have made it so expensive to build.

Ryan Bourne: Yeah, I think there are two effects that undercut their long-term desire there. One is, of course, that if you apply rent control, you deter construction for some of the reasons we’ve talked about. So you might hope your zoning reform is going to produce more housing, but what you’re giving with one hand, you’re taking away with the other, because you’re reducing the incentive to produce it. And on the other side of the equation, instituting rent control, which is like a subsidy to people who are lucky enough to keep their tenancies and don’t want to move, creates a political coalition against getting rid of rent controls.

Alex Tabarrok: Absolutely.

Ryan Bourne: So there are these two big political forces that undercut that desire, even if your intention was to have a temporary rent control and then liberate supply.

Alex Tabarrok: Yeah, and I would add two things to that. There are a lot more renters than there are developers. And also, the votes come from people in rent-controlled apartments. Those are the people who have the votes. The people who don’t have the votes, who are harmed by these policies, are the people who would like to move in. They want to live in New York City. They would like to live in San Francisco. I guarantee you there is somebody in Oregon today who would like to move to San Francisco and earn those high wages in Silicon Valley, but they can’t find an apartment. Do they have a vote that says I’m against rent control? No.

The people who are harmed by rent control are frozen out of the political system. They don’t have the votes. The ones who benefit have the votes. So it’s a very asymmetrical political situation, in which the people who are harmed may not even know they’re harmed, and they don’t have votes in San Francisco elections.

Ryan Bourne: Yeah, I think that’s a really important point. And of course, if you’re a progressive Democratic politician with rent control as one of your big campaign promises, once it’s instituted, the next progressive Democratic politician isn’t going to want to get rid of it, even if the housing situation frees up a bit more on the supply side. So I totally agree with that.

Most economists, including both of us, as we’ve alluded to, would say, look, if you’re really worried about sustained high rents, what you need to do in the longer term is allow more private-sector development of housing. We need to do that zoning reform. We need to do that land-use reform.

But when I say this, a big pushback I get, even from quite intelligent people, is: OK, but the problem is that developers are going to be incentivized, given these restrictions we’ve had for a long time, to build really expensive luxury apartments. What does that do to help people who are really struggling, people who can’t get into the city, perhaps doing cleaning jobs or something like that? What would your response to that type of critique be?

Alex Tabarrok: Yeah, it’s really unfortunate, because this is a classic case of the seen and the unseen. It’s a difficult thing to see. For an economist to say, as I’m about to say, that building luxury apartments helps the poor, people think, what, are you crazy? That sounds really weird, right?

So here’s the simple way of thinking about it, and then I’ll give you a slightly more complicated but more accurate way. The simple way is: how do you build affordable housing? Well, you start with unaffordable housing, and over time it becomes affordable. The apartments in New York City today that we’re talking about as affordable were built 40 years ago as luxury apartments.

Now you’re going to respond: oh, so you’re saying we have to wait 40 years for these fantastic luxury apartments in the sky to become affordable? No. What actually happens is a filtering process. The rich were going to buy apartment A. Now they’re buying apartment B, which is even better. It’s got fantastic saunas and all, blah, blah, blah. But who buys apartment A, which has now become relatively less desirable? Well, the people a little bit below them, who can now afford that apartment. And they leave open their apartment, and who gets that? The people below them, and so forth and so forth.

Ryan Bourne: Sounds like trickle-down economics. A genuine example of so-called trickle-down economics.

Alex Tabarrok: Yes, it is trickle-down, though I would say it’s more of a waterfall. Each level leads to people moving up a level. If you build at the top, then people move up, but that means people at the bottom also move up. So it’s not that there’s a little bit trickling down. It’s an escalator: everybody is moving up on the escalator.

So the important thing is how you keep the escalator running. And the way to keep the escalator running, moving everybody up, is to reduce some of these regulations, make it easy to build, have property rights, and make sure developers understand that they’re not going to be rent controlled in the future. That’s how you keep the housing escalator running.

Ryan Bourne: I think what you highlighted there is the key lesson of this overall debate, really. Rent control is all about the seen and the unseen. It would be churlish of us not to admit, as I think we have in this discussion, that rent control obviously has beneficiaries. People who are able to keep their leases benefit financially from lower rents, at least in the short term, before the property falls into disrepair. But there are so many families who suffer in the longer term. Many of them you don’t see, because they can’t move to a city they otherwise would have moved to. Many you can see, in the deterioration of the quality of their apartments or in their inability to get apartments that fit their needs. And it’s these broader effects that I think we really have to consider. Alex, thanks again for helping us think through all of that.

Alex Tabarrok: Thank you.

Ryan Bourne: That’s all for today’s episode of The Economics of It, a production of the Cato Institute, a think tank dedicated to advancing individual liberty, limited government, free markets, and peace. Don’t forget to subscribe wherever you get your podcasts. I’m Ryan Bourne. Until next Thursday, goodbye.