What happens when a philosopher who believes in less government gets benefits from government?
Here is the story:
In a building that Love Story author Erich Segal owned, Harvard professor Robert Nozick (1938-2002), a libertarian philosopher, was a tenant. After paying annual rent hikes, Nozick discovered that his apartment was rent controlled and the increases were illegal. Segal, however, refused to give him a refund saying, “You’ve abdicated the right to complain.” The reason was Novick’s book, Anarchy State and Utopia, in which he explained why society had no right to “commandeer” the fruits of an individual’s talent and hard work through redistribution.
Like taxes, rent control is redistribution. Rather than moving money from the rich to the poor, rent control redistributes income from landlords to tenants through government mandated lower rent.
This story ends in court where Nozick got a favorable decision and his money.
For us, though, the story is never ending. Dr. Novick’s ideas on distributive justice take us to how we view our tax system. Is the “just” society built on a foundation of individual talent with minimal redistribution or community sharing?
For a fascinating discussion of distributive justice from the divergent views of John Rawls (redistribution can be okay) and Robert Novick (not okay), I highly recommend this Econtalk podcast and transcript. More on rent control is here and from Novick, his single page “Tale of a Slave,” here.
When the Ukiah California City Council said yes to rent stabilization for a local mobile home park, senior citizens said, “Thank you.” In NYC, 50% of all housing in Manhattan is rent regulated. Sixty years ago, concerned that the middle class would flee the city, NYC created a huge complete with rent regulated housing called Peter Cooper Village.
Primarily on the demand side of the market, the benefits of rent control include affordable housing, a diverse population, a safety net for low income households, and acclaim for politicians who vote yes.
The costs take us to supply. In Ukiah, the one party that opposed the new regulation was the owner of the mobile home park. Why? Depending on the stabilization level, a large or small proportion of the landlord’s revenue is diminished. If the blow is “life threatening” then landlords abandon unprofitable properties. Correspondingly rent control can lead to less building construction, poorer maintenance of rent-controlled buildngs, and housing shortages. Still functioning today, a complex tale of financial challenges surrounds Peter Cooper Village.
Also, as sometimes happens, government regulation can lead to unintended consequences. Harvard’s N. Gregory Mankiw tells the story. In NYC, universities are purchasing rent-controlled buildings cheaply because landlords do not want them. As he explains it, because senior faculty are offered the inexpensive apartments, the school can pay them less. Faculty members are delighted because of their deal for city housing and the school is happy because of its salary and tax benefits.
The Economic Lesson
Rent control is one of those “It’s complicated” topics. Economically, we can draw a demand and supply graph with a horizontal line below the point at which demand crosses supply. Called a ceiling, that line displays the below market price that rent control creates. Then, locating the point where demand crosses the horizontal line, and where supply crosses, we see that the quantity demanded exceeds the quantity supplied. The result? A shortage.
Would you vote for rent control?