A Major Problem for Progressives

A case study in rent control

Recently, several progressive states such as California and Oregon have passed rent control laws to alleviate their lack of affordable housing. It has also become a core part of Bernie Sander’s housing policy in his presidential campaign and something Alexandria Ocasio-Cortez supports as well. Rent control is making a comeback across the US at the local, state, and federal levels.

On the surface rent control seems aligned with progressive interests of creating a more equitable society. In theory rent control makes existing housing stock more affordable, allowing people with lower incomes to live affordably in areas with rising housing costs, especially for those who already reside in these places. It can slow gentrification and allow established residents to maintain their current standard of living.

The problem with rent control in reality though is that it both fails as good economic policy, exacerbating the actual problem it seeks to tackle, and contradicts a core progressive value, which exposes the underlying hypocrisy in supporting rent control.

The Economic Case Against Rent Control

Rent control is a classic example of a terrible economic policy because it creates a greater mismatch in supply and demand then existed prior to the policy. It artificially deflates the housing supply, reducing investment in existing properties and discouraging the building of additional units that would actually lead to greater reductions in prices over time than the rent control policy brings.

The classic way to show the failure of rent control in economics is through a supply and demand diagram. We can imagine that there is a demand for rental housing as a function of price (ignoring that there are many types of housing with different prices, we can simplify to assume a single type of housing with a single price). This slopes downward because as the price of renting rises less people want it.

There is also a supply of rental housing as a function of price that slopes upward. Higher prices mean there is greater opportunity to profit from renting units out, so builders will want to build more to take advantage of that.

In an efficient market, the intersection of these two lines determines the overall market price, demand, and supply, perfectly balancing the two. Everyone who wants housing at the prevailing price can get it because everyone who wants to build at the market price is able to.

Now this is obviously an idealized case because we know there exist other frictions in the housing market that make it far from efficient such as redlining and racial segregation, but it captures to a first order the effects that rent control policies would have.

Rent control typically means that rental prices cannot rise to where they would normally be and sets a price lower than what we would see in the unregulated market (otherwise why have rental control policies in the first place).

This all has the effect of lowering housing supply below where it would be in both the short term and the long term. While this initially seems like a good thing, it doesn’t tackle the underlying cause of high housing prices and creates greater harm in the rental market.

At its core housing prices rise because there is demand for more housing than the market has available at a point in time. If additional building is allowed, then the supply will increase, leading to lower prices eventually as that demand is satisfied. Stifling the ability of price to regulate supply and demand creates an artificial lack of supply that prevents this adjustment from happening.

Rent control is a classic example of a demand side only policy as it artificially lowers the price, encouraging more demand from people who are willing to rent at that lower price. Normally, free markets are regulated by the price mechanism above that balances both demand and supply, satisfying everyone who wants housing at the prevailing price (again ignoring other frictions in the market).

A better housing policy than rent control would instead tackle the core problem in coastal cities and other areas where housing is too expensive for many residents: the lack of adequate supply. Increasing supply allows the market to work as it should through lowering prices, allowing demand to increase to fill those additional units, rather than creating too few housing units for the amount of people who want them.

Today, the price mechanism is prevented from working both as a demand and supply side policy because of poor zoning policies. These force land in cities and expensive places to be reserved for single family housing that is an inefficient use of space, artificially decreasing housing supply.

Below, for example, is a map of zoning in San Francisco that shows why rental prices are really high and why people feel like they need a rent control law to make living affordable in the first place.

There is a very detailed key that is too hard to read, but the takeaway is that everything in yellow is reserved for single family homes, which is the majority of the city.

This is the central reason why many costal cities are so expensive! Not tackling the zoning issue and instead imposing rent control does not tackle the underlying issue of artificially low supply and just exacerbates the actual problem.

The Hypocrisy of Rent Control

It is quite clear why rent control is a bad economic policy, and that should be enough to kill any rent control bill, but the policy is also emblematic of an underlying hypocrisy.

Progressives tend to care a lot about inherent power structures and the implications they have in society. Many support campaign finance reform, increased taxation, and unions to help balance the scales between the rich and everyone else.

Rent control at its core though is also a power struggle: it is the struggle between incumbents who live in rental units today and residents who want to move into these areas.

Rent control only benefits those who already live in these places (or can leverage connections to find a place) and creates barriers to entry for those outside the area, which is often where the best jobs and career opportunities are located. It is a selfish policy that favors the existing power structure, which is exactly what progressives combat against in many other areas of life.

To not recognize this hypocrisy and support rent control while supporting other policies that tackle other power structures reveals a core problem. How can progressives be seen as the party of economic prosperity and equality for all when many miss the ways in which they create inequality in their own backyard?

The Way Forward

Rent control fails as a both a good economic policy and a policy that reflects progressive values. No town, city, state, or national housing policy should include it as a solution or pass legislation for it. Progressives need to stop advocating for it and instead embrace better policies that push the values they believe in across all areas of life.

A better housing policy would involve working within the market to drive both demand and supply and correct existing frictions through things like removing zoning restrictions, increasing government backed vouchers, and passing regulation to ensure more can access the housing they want and need. That will require progressives to fix problems of their own creation in their backyards and locally live the values they signal in other areas of life.