Politically, rent control is often a big success, however many serious economic and social problems it creates. Politicians know that there are always more tenants than landlords and more people who do not understand economics than people who do. That makes rent control laws something likely to lead to a net increase in votes for politicians who pass rent control laws. #39 в контекст | | |
Often it is politically effective to represent rent control as a way to keep greedy rich landlords from “gouging” the poor with “unconscionable” rents. In reality, rates of return on investments in housing are seldom higher than on alternative investments, and landlords are often people of very modest means. This is especially so for owners of small, low-end apartment buildings that are in constant need of repair, the kinds of places where tenants are likely to be low-income people. Many of the landlords with buildings like this are handymen who use their own skills and labor as carpenters or plumbers to repair and maintain the premises, while trying to pay off the mortgage with the rents they collect. In short, the kind of housing likely to be rented by the poor often has owners who are by no means rich.{v} #40 в контекст | | |
Where rent control laws apply on a blanket basis to all housing in existence as of the time the law goes into effect, even luxurious housing becomes low-rent housing. Then, after the passage of time makes clear that no new housing is likely to be built unless it is exempted from rent control, such exemptions or relaxations of rent control for new housing mean that even new apartments that are very modest in size and quality may rent for far more than older, more spacious and more luxurious apartments that are still under rent control. This non-comparability of rents has been common in European cities under rent control, as well as in New York and other American cities. Similar incentives produce similar results in many different settings. A news story in the Wall Street Journal pointed up this non-comparability of rents under New York City’s rent control laws: #41 в контекст | | |
Les Katz, a 27-year-old acting student and doorman, rents a small studio apartment on Manhattan’s Upper West Side for $1,200—with two roommates. Two sleep in separate beds in a loft built atop the kitchen, the third on a mattress in the main room. #42 в контекст | | |
Across town on Park Avenue, Paul Haberman, a private investor, and his wife live in a spacious, two-bedroom apartment with a solarium and two terraces. The apartment in an elegant building on the prestigious avenue is worth at least $5,000 a month, real-estate professionals say. The couple pay around $350, according to rent records.{58} #43 в контекст | | |
This example of cheap rent for the affluent or the wealthy under rent control was by no means unique. Ironically, a statistical study indicated that the biggest difference between prices under New York’s rent control law and free-market prices is in luxury apartments.{59} In other words, the affluent and the wealthy get more economic benefit from rent control than do the poor who are invoked to justify such laws. Meanwhile, city welfare agencies have paid much higher rents than those just mentioned when they housed poverty-stricken families in cramped and roach-infested apartments in run-down hotels. In 2013, the New York Times reported that the city’s Department of Homeless Services was “spending over $3,000 a month for each threadbare room without a bathroom or kitchen” in a single room occupancy hotel—half of that money going to the landlord for rent and the other half for “security and social services for homeless tenants.”{60} #44 в контекст | | |
The image that rent control protects poor tenants from rich landlords may be politically effective, but often it bears little resemblance to the reality. The people who actually benefit from rent control can be at any income level and so can those who lose out. It depends on who happens to be on the inside looking out, and who happens to be on the outside looking in, when such laws are passed. #45 в контекст | | |
San Francisco’s rent control laws are not as old as those in New York City but they are similarly severe—and have produced very similar results. A study published in 2001 showed that more than one-fourth of the occupants of rent-controlled apartments in San Francisco had household incomes of more than $100,000 a year.{61} It should also be noted that this was the first empirical study of rent control commissioned by the city of San Francisco. Since rent control began there in 1979, this means that for more than two decades these laws were enforced and extended, with no serious attempt being made to measure their actual economic and social consequences, as distinguished from their political popularity. #46 в контекст | | |
Ironically, cities with strong rent control laws, such as New York and San Francisco, tend to end up with higher average rents than cities without rent control.{62} Where such laws apply only to rents below some specified level, presumably to protect the poor, builders then have incentives to build only apartments luxurious enough to be priced above the rent-control level. Not surprisingly, this leads to higher average rents, and homelessness tends to be greater in cities with rent control—New York and San Francisco again being classic examples. #47 в контекст | | |
One of the reasons for the political success of rent control laws is that many people accept words as indicators of reality. They believe that rent control laws actually control rents. So long as they believe that, such laws are politically viable, as are other laws that proclaim some apparently desirable goals, whether those goals end up being served or not. #48 в контекст | | |
One of the crucial distinctions to keep in mind is the distinction between an increased scarcity—where fewer goods are available relative to the population—and a “shortage” as a price phenomenon. Just as there can be a growing shortage without an increased scarcity, so there can be a growing scarcity without a shortage. #50 в контекст | | |
As already noted, there was a severe housing shortage in the United States during and immediately after the Second World War, even though the ratio of housing to people was the same as it had been before the war, when there was no housing shortage. It is also possible to have the opposite situation, where the actual amount of housing suddenly declines in a given area without any price control—and without any shortage. This happened in the wake of the great San Francisco earthquake and fire of 1906. More than half the city’s housing supply was destroyed in just three days during that catastrophe. Yet there was no housing shortage. When the San Francisco Chronicle resumed publication a month after the earthquake, its first issue contained 64 advertisements of apartments or homes for rent, compared to only 5 ads from people seeking apartments to live in. #51 в контекст | | |
Of the 200,000 people suddenly made homeless by the earthquake and fire, temporary shelters housed 30,000 and an estimated 75,000 left the city.{63} Still, that left nearly 100,000 people to be absorbed into the local housing market. Yet the newspapers of that time mention no housing shortage. Rising prices not only allocate existing housing, they provide incentives for rebuilding and for renters to use less space in the meantime, as well as incentives for those with space in their homes to take in roomers while rents are high. In short, just as there can be a shortage without any greater physical scarcity, so there can be a greater physical scarcity without any shortage. People made homeless by the huge 1906 San Francisco earthquake found housing more readily than people made homeless by New York’s rent control laws that took thousands of buildings off the market. #52 в контекст | | |
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In addition to shortages and quality deterioration under price controls, there is often hoarding—that is, individuals keeping a larger inventory of the price-controlled goods than they would ordinarily under free market conditions, because of the uncertainty of being able to find it in the future. Thus, during the gasoline shortages of the 1970s, motorists were less likely to let their gas tanks get down as low as usual before going to a filling station to buy more gas. #54 в контекст | | |
Some motorists with their tanks half full would drive into any filling station that happened to have gas, and fill up the other half, as a precaution. With millions of motorists driving around with their gas tanks more full than usual, vast amounts of gasoline disappeared into individual inventories, leaving less available for sale from the general inventory at filling stations. Thus a relatively small shortage of gasoline nationally could turn into a very serious problem for those motorists who happened to run out of gas and had to look for a filling station that was open and had gas to sell. The sudden severity of the gasoline shortage—given how little difference there was in the total amount of gasoline produced—baffled many people and produced various conspiracy theories. #55 в контекст | | |
One of these conspiracy theories was that oil companies had their tankers from the Middle East circling around in the ocean, waiting for a price increase before coming ashore with their cargoes. Although none of these conspiracy theories stood up under scrutiny, there was a kernel of sense behind them, as there usually is behind most fallacies. A severe shortage of gasoline with very little difference in the total amount of gasoline produced meant that there had to be a large amount of gasoline being diverted somewhere. Few of those who created or believed conspiracy theories suspected that the excess was being stored in their own gas tanks, rather than in oil tankers circling in the ocean. This increased the severity of the gasoline shortage because maintaining millions of larger individual inventories of gasoline in cars and trucks was less efficient than maintaining general inventories in filling stations’ storage tanks. #56 в контекст | | |
The feasibility of hoarding varies with different goods, so the effect of price controls also varies. For example, price controls on strawberries might lead to less of a shortage than price controls on gasoline, since strawberries are too perishable to be hoarded for long. Price controls on haircuts or other services may also create less of a shortage because services cannot be hoarded. That is, you would not get two haircuts on the same day if you found a barber with time available, in order to go twice as long before the next haircut, even though barbers might be less available when the price of haircuts was kept down by price controls. #57 в контекст | | |
Nevertheless, some unlikely things do get hoarded under price controls. For example, under rent control, people may keep an apartment that they seldom use, as some Hollywood stars have kept rent-controlled apartments in Manhattan where they would stay when visiting New York.{64} Mayor Ed Koch kept his rent-controlled apartment during the entire 12 years when he lived in Gracie Mansion, the official residence of New York’s mayor.{65} In 2008, it was revealed that New York Congressman Charles Rangel had four rent-controlled apartments, one of which he used as an office.{66} #58 в контекст | | |
Hoarding is a special case of the more general economic principle that more is demanded at a lower price and of the corollary that price controls allow lower priority uses to preempt higher priority uses, increasing the severity of the shortages, whether of apartments or of gasoline. #59 в контекст | | |
Sometimes the reduction in supply under price controls takes forms that are less obvious. Under World War II price controls, Consumer Reports magazine found that 19 out of 20 candy bars that it tested in 1943 were smaller in size than they had been four years earlier.{67} Some producers of canned foods let the quality deteriorate, but then sold these lower quality foods under a different label, in order to preserve the reputation of their regular brand. #60 в контекст | | |
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While price controls make it illegal for buyer and seller to make some transactions on terms that they would both prefer to the shortages that price controls entail, bolder and less scrupulous buyers and sellers make mutually advantageous transactions outside the law. Price controls almost invariably produce black markets, where prices are not only higher than the legally permitted prices, but also higher than they would be in a free market, since the legal risks must also be compensated. While small-scale black markets may function in secrecy, large-scale black markets usually require bribes to officials to look the other way. In Russia, for example, a local embargo on the shipment of price-controlled food beyond regional boundaries was dubbed the “150-ruble decree,” since this was the cost of bribing police to let the shipments pass through checkpoints.{68} #62 в контекст | | |
Even during the early Soviet period, when operating a black market in food was punishable by death, black markets still existed. As two Soviet economists of a later era put it: “Even at the height of War Communism, speculators and food smugglers at the risk of their lives brought as much grain into the cities as all the state purchases made under prodrazverstka.”{69} #63 в контекст | | |
Statistics on black market activity are by nature elusive, since no one wants to let the whole world know that they are violating the law. However, sometimes there are indirect indications. Under American wartime price controls during and immediately after the Second World War, employment in meat-packing plants declined as meat was diverted from legitimate packing houses into black markets. This often translated into empty meat counters in butcher shops and grocery stores.{vi} #64 в контекст | | |
As in other cases, however, this was not due simply to an actual physical scarcity of meat but to its diversion into illegal channels. Within one month after price controls were ended, employment in meat-packing plants rose from 93,000 to 163,000 and then rose again to 180,000 over the next two months.{70} This nearly doubling of employment in meat-packing plants in just three months indicated that meat was clearly no longer being diverted from the packing houses after price controls were ended. #65 в контекст | | |
In the Soviet Union, where price controls were more pervasive and longer lasting, two Soviet economists wrote of a “gray market” where people paid “additional money for goods and services.” Although these illegal transactions “are not taken into account by official statistics,” the Soviet economists estimated that 83 percent of the population used these forbidden economic channels. These illegal markets covered a wide range of transactions, including “almost half of the repair of apartments,” 40 percent of automobile repairs and more video sales than in the legal markets: “The black market trades almost 10,000 video titles, while the state market offers fewer than 1,000.”{71} #66 в контекст | | |
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One of the reasons for the political success of price controls is that part of their costs are concealed. Even the visible shortages do not tell the whole story. Quality deterioration, such as already noted in the case of housing, has been common with many other products and services whose prices have been kept artificially low by government fiat. #68 в контекст | | |
One of the fundamental problems of price control is defining just what it is whose price is being controlled. Even something as simple as an apple is not easy to define because apples differ in size, freshness, and appearance, quite aside from the different varieties of apples. Produce stores and supermarkets spend time (and hence money) sorting out different kinds and qualities of apples, throwing away those that fall below a certain quality that their respective customers expect. Under price control, however, the amount of apples demanded at an artificially low price exceeds the amount supplied, so there is no need to spend so much time and money sorting out apples, as they will all be sold anyway. Some apples that would ordinarily be thrown away under free market conditions may, under price control, be kept for sale to those people who arrive after all the good apples have been sold. #69 в контекст | | |
As with apartments under rent control, there is less incentive to maintain high quality when everything will sell anyway during a shortage. #70 в контекст | | |
Some of the most painful examples of quality deterioration have occurred in countries where there are price controls on medical care.{72} At artificially low prices, more people go to doctors’ offices with minor ailments like sniffles or skin rashes that they might otherwise ignore, or else might treat with over-the-counter medications, perhaps with a pharmacist’s advice. But all this changes when price controls reduce the cost of visits to the doctor’s office, and especially when these visits are paid for by the government and are therefore free to the patient. #71 в контекст | | |
In short, more people make more claims on doctors’ time under price control, leaving less time for other people with more serious, or even urgent, medical problems. Thus, under Britain’s government-controlled medical system, a twelve-year-old girl was given a breast implant while 10,000 people waited 15 months or more for surgery.{73} A woman with cancer had her operation postponed so many times that the malignancy eventually became inoperable.{74} The priorities which prices automatically cause individuals to consider are among the first casualties of price controls. #72 в контекст | | |
A study conducted by the international agency Organisation for Economic Co-operation and Development found that, among five English-speaking countries surveyed, only in the United States was the percentage of patients waiting for elective surgery for more than four months in single digits. All the other English-speaking countries—Australia, Canada, New Zealand, and the United Kingdom—had more than 20 percent of their patients waiting more than four months, with 38 percent of those in the United Kingdom waiting at least that long. In this group, the United States was the only country without government-set prices for medical treatment. Incidentally, the term “elective surgery” was not confined to cosmetic surgery or other medically unnecessary procedures, but in this study included cataract surgery, hip replacement and coronary bypass surgery.{75} #73 в контекст | | |
Delayed medical treatment is one aspect of quality deterioration when prices are set below the levels that would prevail under supply and demand. The quality of the treatment received is also affected when doctors spend less time per patient. In countries around the world, the amount of time that physicians spend per patient visit has been shorter under government-controlled medical care prices, compared to the time spent by physicians where prices are not controlled. #74 в контекст | | |
Black markets are another common feature of price controls that apply to medical care as to other things. In China and Japan, black markets have taken the form of bribes to doctors to get expedited treatment. In short, whether the product or service has been housing, apples, or medical care, quality deterioration under price control has been common in the most disparate settings. #75 в контекст | | |
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Just as a price set below the level that would prevail by supply and demand in a free market tends to cause more to be demanded and less to be supplied, creating a shortage at the imposed price, so a price set above the free market level tends to cause more to be supplied than demanded, creating a surplus. #77 в контекст | | |
Among the tragedies of the Great Depression of the 1930s was the fact that many American farmers simply could not make enough money from the sale of their crops to pay their bills. The prices of farm products fell much more drastically than the prices of the things that farmers bought. Farm income fell from just over $6 billion in 1929 to $2 billion in 1932.{76} #78 в контекст | | |
As many farmers lost their farms because they could no longer pay the mortgages, and as other farm families suffered privations as they struggled to hang on to their farms and their traditional way of life, the federal government sought to restore what was called “parity” between agriculture and other sectors of the economy by intervening to keep farm prices from falling so sharply. #79 в контекст | | |
This intervention took various forms. One approach was to reduce by law the amount of various crops that could be grown and sold, so as to prevent the supply from driving the price below the level that government officials had decided upon. Thus, supplies of peanuts and cotton were restricted by law. Supplies of citrus fruit, nuts and various other farm products were regulated by local cartels of farmers, backed up by the authority of the Secretary of Agriculture to issue “marketing orders” and prosecute those who violated these orders by producing and selling more than they were authorized to produce and sell. Such arrangements continued for decades after the poverty of the Great Depression was replaced by the prosperity of the economic boom following World War II, and many of these restrictions continue to this day. #80 в контекст | | |
These indirect methods of keeping prices artificially high were only part of the story. The key factor in keeping farm prices artificially higher than they would have been under free market supply and demand was the government’s willingness to buy up the surpluses created by its control of prices. This they did for such farm products as corn, rice, tobacco, and wheat, among others—and many of these programs continue on to the present as well. Regardless of what group was initially supposed to be helped by these programs, the very existence of such programs benefitted others as well, and these new beneficiaries made it politically difficult to end such programs, even long after the initial conditions had changed and the initial beneficiaries were now a small part of the constituency politically organized and determined to keep these programs going.{vii} #81 в контекст | | |
Price control in the form of a “floor” under prices, preventing these prices from falling further, produced surpluses as dramatic as the shortages produced by price control in the form of a “ceiling” preventing prices from rising higher. In some years, the federal government bought more than one-fourth of all the wheat grown in the United States and took it off the market, in order to maintain prices at a pre-determined level. #82 в контекст | | |
During the Great Depression of the 1930s, agricultural price support programs led to vast amounts of food being deliberately destroyed, at a time when malnutrition was a serious problem in the United States and hunger marches were taking place in cities across the country. For example, the federal government bought 6 million hogs in 1933 alone and destroyed them.{77} Huge amounts of farm produce were plowed under, in order to keep it off the market and maintain prices at the officially fixed level, while vast amounts of milk were poured down the sewers for the same reason. Meanwhile, many American children were suffering from diseases caused by malnutrition. #83 в контекст | | |
Still, there was a food surplus. A surplus, like a shortage, is a price phenomenon. A surplus does not mean that there is some excess relative to the people. There was not “too much” food relative to the population during the Great Depression. The people simply did not have enough money to buy everything that was produced at the artificially high prices set by the government. A very similar situation existed in poverty-stricken India at the beginning of the twenty-first century, where there was a surplus of wheat and rice under government price supports. The Far Eastern Economic Review reported: #84 в контекст | | |
India’s public stock of food grains is at an all-time high, and next spring, it will grow still further to a whopping 80 million tonnes, or four times the amount necessary in case of a national emergency. Yet while that wheat and rice sits idle—in some cases for years, to the point of rotting—millions of Indians don’t have enough to eat.{78} #85 в контекст | | |
A report from India in the New York Times told a very similar story under the headline, “Poor in India Starve as Surplus Wheat Rots”: #86 в контекст | | |
Surplus from this year’s wheat harvest, bought by the government from farmers, sits moldering in muddy fields here in Punjab State. Some of the previous year’s wheat surplus sits untouched, too, and the year’s before that, and the year’s before that. #87 в контекст | | |
To the south, in the neighboring state of Rajasthan, villagers ate boiled leaves or discs of bread made from grass seeds in late summer and autumn because they could not afford to buy wheat. One by one, children and adults—as many as 47 in all—wilted away from hunger-related causes, often clutching pained stomachs.{79} #88 в контекст | | |
A surplus or “glut” of food in India, where malnutrition is still a serious problem, might seem like a contradiction in terms. But food surpluses under “floor” prices are just as real as the housing shortages under “ceiling” prices. In the United States, the vast amount of storage space required to keep surplus crops off the market once led to such desperate expedients as storing these farm products in unused warships, when all the storage facilities on land had been filled to capacity. Otherwise, American wheat would have had to be left outside to rot, as in India. #89 в контекст | | |
