This transcript was generated using AI automation and may contain minor formatting or transcription errors. Please refer to the original audio to verify specific quotes or context.

Unintended Consequences — Episode 27: Rent Control and the Constitution

Host: Paul Matzko Guest: Peter Van Doren, editor of Regulation magazine

Paul Matzko: Welcome to Unintended Consequences, a podcast about what can go wrong with government regulation. I’m your host, Paul Matzko, and with me as always is Peter Van Doren, the editor of Regulation Magazine.

So Peter, last time we talked about New York City policy, it was to discuss the congestion tax. But let’s talk about an even older policy bête noire connected with the city, that’s rent control. Now, the new mayor, Zohran Mamdani, has promised to strengthen the city’s existing rent control rules. But even before that — and we don’t know what Mamdani will actually do yet — the existing rent control rules are being contested in court by a group of apartment building owners.

And we have an article in Regulation by Paul Godeke, titled “Rent Control and the Constitution,” which we can get into here in a minute. But why don’t we start with the classic kind of libertarian economics-based argument against rent control?

Peter Van Doren: Rent control is a government-created restraint on legal prices, and prices are important signals for both supply and demand, and economists tend not to like the interference in the signal that is the basis of their profession.

Prices tell people something. When relative prices rise — that’s to separate it from inflation — so when rents rise relative to everything else, it’s a signal that there’s more demand for housing than there is supply, and then the question is why.

So on the demand side, renters scramble and look around and try to figure out what to do. If the rent is rising more than their incomes or more than inflation, maybe they move to a smaller unit, or at least it gets them looking. People start to think, because moving is costly, so I might stick with it. But if it really is constraining your behavior in ways you don’t like because it’s eating up more and more of your income and you’re not sure why, you look. For landlords, for owners of properties, the increase in rents is good for them, sort of, initially, but then the political system often reacts by trying to constrain their behavior.

And if you’re owners of property and you’re making good money on property and that income is increasing over time, you start thinking about developing. You buy existing stuff and fix it up, you increase the quality, or you actually try to permit new construction and try to make even more money.

And in classic Econ 101, the developers will do this until the profits — what economists call excess profits, or rents, not rent, but rents — and when the rate of return that they’re making on the new development starts to go down and down and finally it’s below whatever they’re making on the S&P 500 or Treasury bills or something, they don’t build anymore. So prices tell demand to think, and they tell supply to think, and to change their behavior in ways that will result in a happy medium somewhere in the future. But in the short run, housing is a necessity, and demand is fairly inelastic, and supply is fairly inelastic.

So in the short run, to renters, rent shocks — rent hikes above inflation — feel like a transfer from them to others. And despite in a class they’re being told that, “Oh, this has efficiency consequences, and you shouldn’t interfere with the prices,” in the short run, it doesn’t feel that way, because they don’t see it that way.

They look around and there are probably very few vacancies, which is why rents are rising, so they don’t have many choices. And the money they earn increasingly is going to housing and not to other things that they might like to spend on. And the concern over that often bubbles over into politics, particularly in New York City, where the majority of the population — it’s one of the rare places — the majority of voters are renters.

Paul Matzko: Yeah. It’s easier to say, well, here’s a developer who has some capital allocation. They’re already well off, and they’re becoming better off, and it feels like a transfer to the renter from them, from their small pocketbook to the much larger pocketbook of the developer. And that feels unfair, which builds political pressure to do something about that.

One of the things that’s popular to be done in New York City politics has been rent control, which basically says you can’t change the rent — there’s different ways you can do this — but you can’t change the rent more than a certain percentage every year. You can peg that to different stuff, but you can only change it by two percent a year or six percent a year, some more modest amount.

There are consequences to that. In the short term, it can seem like a pure win from the renter’s perspective: “Oh, it was gonna go up by twenty percent. I was gonna have to move, and now I don’t. Two percent I can manage. That’s fine.” But there are longer-term complications. Maybe dig into those a little.

Peter Van Doren: Well, just like our discussion of the minimum wage, there are multiple dimensions on which landlords can react to this price control, one of which is to reduce services. So then there’s a whole apparatus in New York City to judge whether the quality of units has gone below acceptable standards and put the landlord in legal jeopardy. But in general, if I can’t get money for making your apartment better, I’m gonna make it worse.

Paul Matzko: Or let it. The natural state of things is entropic — unless you’re actively upgrading or improving stuff, it’ll get worse and worse over time.

Peter Van Doren: Land appreciates, and structures depreciate — they can depreciate. Basically, maintenance can become a problem.

Paul Matzko: So is your landlord going to repair the wall when you put a hole in it by accident? And they don’t answer your phone calls. Do they replace your refrigerator when it breaks? Or when they replace it, do they put a nice one in or a crappy used one in? There’s a bunch of different ways you can reduce costs as the landlord, because it’s no longer worth it to invest in the property.

Peter Van Doren: Correct. Second is condo conversion. There are papers, particularly about San Francisco, where landlords have reacted to strict San Francisco rent controls by taking units off the market and making them condos. The rental supply gets even worse — not only do they not build, they convert existing rental structures into owner-occupied structures, decreasing the rental supply.

Third, there’s a literature on how eviction gets more frequent. So landlords become less tolerant, they nickel-and-dime everybody over anything, because under vacancy decontrol, if you get someone out of a unit, you then can raise the rent more than if they’re in the unit.

Even though on the surface rent control seems like it’s obviously pro-tenant in the short run and in an obvious way, there are all sorts of avenues through which landlords can react in ways that are very anti-tenant, and then that requires a legal apparatus to deal with it, and that doesn’t work, and you’re just in the soup.

Paul Matzko: It also kind of creates a self-perpetuating, negative story about landlords. So you create an incentive structure for landlords now to not improve the property, to not properly maintain, to not spray for bugs or whatever — bad policy creates an incentive for them to be bad landlords, or worse landlords than they already were.

Peter Van Doren: Correct.

Paul Matzko: But the fact that they’re worse makes even more public pressure for even stricter rent control or other measures, and it’s just this downward spiral until the housing supply doesn’t grow anymore, and what exists gets worse and worse, and you can get some pretty bad situations.

Peter Van Doren: To be honest, as an outsider, I know New York works, but I’m surprised it works. Think of the density — lots of things don’t work because of things we’re describing. And yet the population — it went down in the ’70s a bit, but it’s booming now. It’s eight million people. It’s not declining, even though it has a Democratic Socialist mayor. According to Cato, New York, how can it possibly work or exist? Why doesn’t everyone just run away and hide?

You and I should admit that everything I’ve just told you about rent control is true, and yet New York has not died.

Paul Matzko: Well, this might be a testament to the power of network effects — that there are really strong reasons to be in New York, even though X, X, and X might be a bad policy with bad consequences. But the advantage of being a financier and living near Wall Street, or being part of all the different major constituent industries, is just that powerful that people will put up with suboptimal situations, or people will pour in incredible amounts of money.

Peter Van Doren: Well, there has been some displacement, actually. I think the lowest-income New Yorkers have gone upstate. There’s evidence of the decline of upstate, where I grew up. So Syracuse, Buffalo, Utica, Amsterdam, Rochester have just declined terribly. So the cheapest housing available in New York State is if you move outside of New York, and you go to these declining urban areas. That’s in some sense how the poorest New Yorkers have coped with the decline of their options — by leaving. Even though rent control is done in their name.

Paul Matzko: Interesting. So, to Godeke’s argument in this piece, he’s kind of making a legal and constitutional argument. Our discussion thus far has been very economics-focused, but this article is about law and jurisprudence. His argument against rent control is about it being an unjust taking. Maybe explain briefly — that’s jargony — what is a taking, and why does this matter from a legal perspective?

Peter Van Doren: There’s something called the Takings Clause in the Fifth Amendment of the US Constitution, and it says — I’m quoting here briefly — “Nor shall private property be taken for public use without just compensation.” And the word we often use for this process is eminent domain.

So most of our listeners will be familiar with that, which is: there’s land, and it’s gonna be used for a road expansion, and so you ask everyone to sell at market value the hundred feet of your property that they need for the sewer expansion or the road expansion or the water or the lights or whatever. It’s a taking for public use.

Paul Matzko: And if they refuse, you can go through a process, go through a court, and force them to sell it to you.

Peter Van Doren: Correct. And then an arbitrator says what the market value of the property is, full stop. And Godeke argues that rent control fails this test — that it’s a taking, it’s a transfer from one party to another private party, i.e. from landowner to renter. But it’s not a public use, and thus courts should find that rent control is unconstitutional.

The only problem with his argument is that there’s a history of Supreme Court cases that have said rent control is constitutional. But these cases come out of the World War I and World War II emergencies, and courts don’t second-guess stuff during wartime. After World War I, it all kind of went away in New York, although not that quickly. And then in World War II, it did not go away. It became, instead of a federal price control regime, a state-level and New York City-level price control regime.

Anyway, the article is about a court case. Court cases are never random. These are always primed.

Paul Matzko: Mm-hmm. When we talk about eminent domain and takings, I’m not a specialist when it comes to the use of eminent domain, so I’m not a land-use specialist, but it has shown up on my radar. There’s this famous case, Kelo v. New London, which did, I think, percolate up, bubble up to normies — almost twenty years ago now. Or twenty… 2007?

Peter Van Doren: 2005.

Paul Matzko: 2005. Yeah. Wow. Twenty years ago, it doesn’t seem like it. So even ordinary folks have heard about this infamous case of eminent domain. Is there anything we can cross-apply from those eminent domain use cases to the current lawsuit that’s going on in New York City?

Peter Van Doren: So there’s two sort of case histories, and they’re separate. There’s the Supreme Court approval of urban renewal cases — Kelo falls under that. And then there’s regulatory takings cases, mostly involving coastal land and attempts to deal with beach erosion.

So first, the urban renewal — the 1949 Urban Renewal Act. Robert Moses mowed down bunches of buildings in New York and built highways and all of that, and there were cases around that.

Paul Matzko: Mostly minority neighborhoods, too.

Peter Van Doren: ‘Cause those are always the cheapest, and the least political opposition. So somehow blight gives you a pass to do harm, basically. I’m paraphrasing, but that set of cases has been a dead end for regulatory takings of that sort. And Kelo is the last installment of the so-called urban renewal cases, because that was a case in New London, Connecticut, where a holdout landowner didn’t wanna sell for a redevelopment effort funded by the state of Connecticut and maybe some US funds.

Paul Matzko: So it’s another situation where there’s not — it’s not like they’re taking private land for a clear public use in the sense of, they’re building an elementary school or public infrastructure or a road or something. In this case, it’s just taking a house from one person and building houses for other people, essentially.

Peter Van Doren: Correct. And you’d think that the Supreme Court wouldn’t allow that, but they have.

Then on regulatory takings, again, there’s a literature on how much can zoning take away before you have a cause of action, because the government has, in effect, reduced your right to develop without compensating you. And the Supreme Court answer, again, is: if it takes all the value away — not if it restricts value, but basically if you have a plot of sand on the Carolina or Jersey Shore, and you once could do something with it, and now the Coastal Zone Commission comes in and says, “Nope, we’re gonna save the coast,” and you now own something that is zero value — the court has said that requires compensation.

Paul Matzko: That’s the bridge too far.

Peter Van Doren: That’s the bridge too far. It’s gotta be zero. So the neat thing about this case in New York is a bunch of landlords got together. Well, in 2019, New York increased the strictness of its rent stabilization law — not rent control, but stabilization, the law that came in in 1969. And it made it tougher for landlords to get reimbursed for what we would call improvements — the stoves, air conditioning, all the things they do to keep a unit going over time, you replace things over time. The allowable rent increase for that was decreased dramatically, and it didn’t used to pertain to renters over two hundred thousand dollars. In 2019, New York State got rid of that.

So the landlords said, “All right, what are we gonna do?” So they’ve created a clever case. They’ve claimed — I won’t use the word colluded, ’cause that’s a bad word, but they’ve coordinated — they’ve kept a bunch of units vacant under this new rent stabilization update by New York State, and they claim that they’re not renovating those units because they are valueless, knowing the previous Supreme Court ruling. So this case is teed up to be a gift to conservatives on the Supreme Court, to get rid of at least this aspect of New York City/​New York State rent control, because it’s a regulatory taking, like taking away your right to build on sand on the shore.

Paul Matzko: This whole scenario, the situation we’re in feels strange in the sense that — pushing things to their logical extreme, that any taking is okay as long as it doesn’t equal 100%. Once it’s 100%, once it’s valueless, then it’s not okay. But is that true if it was 99%? Is it okay if you only have 1% value? 90%? That’s bizarre.

Peter Van Doren: Critics of the court have — correct. Justice Thomas was not pleased with this. Again, the median voter on the court is different than either the liberal or conservative extremes, and the pragmatists on the court have wanted to not deal with this. They don’t wanna deal with rent control, because it’s just a pain that they wish would go away. But this new case is like, “Okay, you can’t avoid this one. We’re gonna put you in the vice grips and see what happens.” And, I mean, again, I’m always amazed by how legal scholars can — they take words, and there seems to be a plain meaning to you or I, and somehow, “No, a taking, it’s not a taking, it’s just — well, you were 6’5” and now you’re 4′2″. But if you’re not zero, you’re not zero height.”

Paul Matzko: Yeah. We just chopped you off at the knees. We didn’t kill you. We didn’t whack you.

Peter Van Doren: Vinnie was told not to whack you. And instead, to just shorten you a bit.

Paul Matzko: Right? Make you crawl. You’re still breathing. This is, I suppose, why you and I are not lawyers. Why you went economics, I went history. We like a little more, like — the legal argumentation here, we shouldn’t go there.

Peter Van Doren: Yes. Our legal colleagues sometimes listen.

Paul Matzko: Now, if we were to take this logic to its full extreme, which I’m sympathetic to — call myself a takings maximalist — we should take more seriously when your property is being impaired in some way. I don’t know if that means every taking must be compensated, but more than currently is.

I don’t know. Again, if we were to take that full bore, then we get into stuff like: well, should your local township, if they decide to change the minimum setback for your property — your house has to be —

Peter Van Doren: Yeah, every —

Paul Matzko: That’s a form of taking. You cannot build — the buildable size of your lot just changed. That’s a taking. When you sell it in the future, you could not add on to the property, because it would go into the setback. Or to have a sidewalk on your property, the use of the easement. All these things are a form of small taking.

Peter Van Doren: Yep.

Paul Matzko: So we’d put to the full — well, you couldn’t get anything done in your township in this scenario. But at the same time, Godeke kind of dismisses this. He’s like, “Well, don’t worry yourself about that. These are just common sense.” He actually quotes Hayek on this point.

Peter Van Doren: Well, whenever — I mean, I’ve been around a long time, and my favorite undergraduate answer to any tough question, or my colleagues even, is: we all know that. But politics is because people don’t know all — they do disagree, and one person’s reasonable: “Oh, come on, you can have a weird lamp on the front lawn.” “No. No.” Do you remember — well, I forget what we talk about on the podcast versus what I have in my notes. I have a file of what I call weird, nutty property zoning fusses, and they often involve hanging out laundry. The most absurd one I got lately was in Maryland. It only happens in developments where the people are rich enough to sue each other forever, and this was whether or not he had a permissible mailbox design or not.

This wasn’t — this was a homeowners’ association fuss, hundreds of thousands of dollars in litigation over — it’s common sense that it doesn’t matter what your mailbox looks like. Well, in this development, it did. So never underestimate the power of people to disagree over real estate aesthetics. Their powerful passions are involved. Not for most of us, but for the ones who litigate it, it can go on and on forever.

Paul Matzko: There was a situation, I think it was in Georgetown — which makes sense, lots of wealthy people with too much time on their hands — someone put a giant, it was like a mecha robot —

Peter Van Doren: A sculpture.

Paul Matzko: A sculpture. This made the post.

Peter Van Doren: Yeah.

Paul Matzko: Yes, it made the — so it ended up on your radar. And they made him remove it, and I don’t know what ended up happening, but there was a lawsuit.

Peter Van Doren: Oh. Years and years of Georgetown heritage, historic preservation zoning. And this guy put — not just a statute, it was —

Paul Matzko: It was big.

Peter Van Doren: A modernist — it was a clunky metal whatever.

Paul Matzko: Yeah, he’s a fan of Japanese robot art.

Peter Van Doren: Yep, historic zoning districts in Boston, Washington.

Paul Matzko: So, so far we’ve been tracking kind of the classic libertarian understanding of how rent control works and doesn’t work as the case may be, pretty closely. Was there anything surprising from Godeke that you took away that you were like, “Oh, this I didn’t fully appreciate or understand”?

Peter Van Doren: What’s stunning to me is the history of this goes way back in ways that I had not totally understood, and how arguments are stale — that’s a pejorative term, but they don’t change.

I did a book review a long time ago of a book on rent control in New York around World War I, and the book describes the Supreme Court opinions about rent control. I’m quoting here — Justice Oliver Wendell Holmes, writing for the majority, said, “Rent control’s okay. If the legislature has the power to regulate building heights” — and this is a 1909 decision involving Boston — “it also has the power to regulate rents.” Because we had this decision, which may have been wrong, this ought to follow, and he was in the majority.

Then the dissent sounds like Cato today: “If such an exercise of government is legal, what exercise of government is illegal? Houses are necessary, but other things are as necessary. May they too be taken from the direction of their owners and disposed of by the government?”

Paul Matzko: Yeah, yeah.

Peter Van Doren: Nothing’s changed.

Paul Matzko: Yeah, yeah. We’re still having the exact same argument now.

Peter Van Doren: Then there’s the meta question. Courts have to be wary of political reactions. Even though it’s the Supreme Court, they too have to think through the game of whether they wanna blow this up or not, because the electoral system may respond after we blow it up in ways that are not pretty — and you can think of the writing on desegregation of the South. There’s the literature on whether Brown v. Board of Education helped or hurt, for long periods of time, because the public wasn’t ready. So if the courts get ahead of where things are going — if the courts say the Democratic Socialist regime in New York City cannot do what it’s done for a long period of time, which is regulate rent — okay, they can decide that, and then does the game end there, or does it go on?

But again, the Godeke article ends with thinking that this is a great case. It’s teed up. We’re gonna get rid of rent control when this case works its way up through the courts, and then he goes, “Phew. We’re done.”

And then I go, “Hmm.” Are we — you know, it doesn’t change my view. I don’t think rent control’s a good idea. But in the end, I’m a democrat with a small D, which is: you gotta convince everybody, just like we said with the minimum wage — you’ve gotta convince the public that this intervention, allegedly done on their behalf, is probably very misguided and will not help them, and they need to understand that.

But until they do, if we use force — even libertarian force through courts — to try to end their little legislatively enacted regime, that probably may not be such a good idea either. We’re in the soup. I wish education — I wish, you know, the journal I edit and what you and I say, I wish people would listen and go, “Oh, okay, they’re right.” But this has been going on for a hundred years. In the preparation for this, I read an article on rent control in history, and it was on cases involving Rome.

Paul Matzko: Yeah, we’re going back thousands of years now.

Peter Van Doren: I mean, turns out rent control has been an answer for 2,000 years, and I go, “Oh my goodness, our work is gonna be hard.”

Paul Matzko: And that’s our show. But I have a special request for you: we would like to run a mailbag episode to tackle the questions about regulations that you have. Have you ever wondered why your state or local or federal government has some arcane rule, and what its potential effects on your community might be? Well, then send us an email at ucpodcast@​cato.​org. Again, that’s ucpodcast@​cato.​org. Thank you for listening. Please leave a review on your podcast platform of choice — it helps more people find us. Thank you to Sedona Lamar for producing, and until next time, be well.