President Joe Biden is suggesting that a federal limit on annual rent increases in residential units will ease housing costs. This is what happens when economist Milton Friedman isn't "running the show": Policymakers follow ideas that make the problem they say they're solving infinitely worse.
"While the prior administration gave special tax breaks to corporate landlords, I'm working to lower housing costs for families," Biden said Tuesday. He urged congressional Republicans to "join Democrats to pass my plan to lower housing costs for Americans," in which corporate owners would have "a choice to either cap rent increases on existing units at 5% or risk losing current valuable federal tax breaks."
If he had only looked west, he would have seen the damage caused by rent-control policies in California.
BIDEN UNVEILS PLAN TO CAP NATIONAL RENT INCREASES AT 5%
California is one of the most rent-controlled states in the country. Even though more than a dozen cities have some type of law that limits how much owners can increase rental rates, it is going through a resurgence of anti-landlord rules, which is sure to spike even higher if voters approve a measure on the November ballot that repeals state limits on rent control.
While common sense tells us that rent control laws are counterproductive, it's clear that lawmakers often miss the obvious. For those, and for the activists who believe rent ceilings are beneficial, we have data.
For instance, a 2019 study by the American Economic Association found that San Francisco landlords "treated by rent control" reduced "rental housing supplies by 15% by selling to owner-occupants and redeveloping buildings," which "likely drove up market rents in the long run, ultimately undermining the goals of" the city's 1994 ballot initiative.
The authors noted that "a substantial body of economic research has warned about potential negative efficiency consequences of limiting rent increases below market rates." Those consequences include the "overconsumption of housing by tenants of rent-controlled apartments"; the misallocation of housing; "negative spillovers onto neighboring housing" that lower "the amenity value of these neighborhoods and mak(e) them less desirable places to live"; and "neglect of required maintenance" – because who's going to pour money into an asset when the law cuts into the return on that investment?
Rent control in Berkeley in the late 1970s created a large-scale dislocation because "a large number of University of California-Berkeley students simply stayed in their apartments long after graduation," says economics professor William L. Anderson. The result was a "massive shortage of housing for new students, who then had to look for housing in nearby cities like Oakland."
A two-decade study by California State University, Sacramento and the Sacramento Regional Research Institute discovered that rent control laws in Berkeley and Santa Monica reduced the supply of rental housing by nearly 7.5% in the former and more than 8.7% in the latter.
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Over that period, the number of college-age students living in Berkeley fell by almost 11%, while in Santa Monica, "formerly a haven for UCLA students," the college-age student population dropped more than 50%.
In California's biggest city, rent control has so skewed the housing market that property owners are offering tenants large sums of money, in some cases as high as six figures, as an incentive to move out. The hardship of rent control is forcing owners to make difficult decisions about their properties. Sometimes, the only options are demolishing their units and using the real estate for other purposes because they cannot afford to continue leasing their property.
Even the state's own nonpartisan fiscal and policy adviser has warned lawmakers of the negative consequences of rent control. In a 2016 report, the Legislative Analyst's Office said rent-control laws fail to "increase the supply of housing and, in fact, likely would discourage new construction," which is perpetually needed in California to drive housing down to more affordable prices.
During the 2020 presidential campaign, Biden said "Milton Friedman isn't running the show anymore," in an interview in which he said the next federal pandemic stimulus needed to be "a hell of a lot bigger" than the $2 trillion CARES Act that had just passed.
Friedman was a brilliant economist who would have bristled at the ease in which today's lawmakers spend other people's money. But he never ran whatever show Biden had in mind, though he did, as economist Stephen Moore has said, have "a profound impact on major policy decisions." Biden would be wise to follow the advice that Friedman freely gave during his life, but he instead has chosen to take California foolishness national.
