Rent Control; The Government Giveth and . . .

Rent control has been around for many years.  This is a dull subject.  It carries a lot of turgid detail. So if you want the equivalent of Sesame Street characters to sing and dance about rent control, you are in for a huge disappointment.

You still with me? I don’t blame you if you’re not. This is the dry stuff.

It’s important only to the people involved, but it is oh-so-easy to ignore other people’s problems.

Proposition One: 

Understand this: There is no such thing as government money. Governments create nothing tangible. What the government does is create order and organization and does so using other people’s money to do necessary things that the public is not likely to do for themselves. This is neither good nor bad. We would not voluntarily fund roads to go places we individually don’t want to go, nor call on the fire department when there is no fire, nor spend defense money against a threat until it appears.  Roads, fire departments and defense are examples of why government exists.

Government money comes from people. People pay for everything through direct taxation, tariffs which increase the cost of goods and services, and payment to businesses which cover the cost of the business. (This ignores the role of interest, I know.  I’ll leave that for another day in case I ever figure interest out.)

Again, having money funneled through the government is not a bad thing nor a good thing, it is just a thing. I have lived my life receiving money which has stopped briefly in government hands, as do most people. I’m okay with that.

Now, rent control:

There is a housing crisis in California as in lots of places. The rent is high and people have difficulty affording housing and associated costs. Every darn thing is a “crisis” these days, and maybe this one really is. It is cheaper to live in Kansas, Montana, West Virginia, Maine, etc., but then you give up the opportunities to make more money with jobs and the opportunity to live in a large, well-served area people.  The residents may like that, may not like that, may pretend to like it or not, or a few may simply be unaffected by it. But it is true.

California has new legislation that says that a landlord can raise the rent on an existing tenant by 5% per year plus the regional consumer price index (defined by the US Bureau of Labor Statistics), not to exceed a total of 10% per year.

A modest two-bedroom apartment in Orange County, California, goes for at least $2000 per month. For an existing tenant, given the CPI at 3% (which is close to the actual number), the rent on that $2000, two-bedroom apartment can be raised to $2160 in 2020. If the landlord does no real work on the unit, the landlord may make out well; if there are excess expenses, the landlord will eat at least a part of that. You take your chances. That’s business.

(A friend advertises apartments in West Virginia.  He has equivalent apartments to a $2000 California apartment for $700 per month.)

Proposition Two: Everybody looks out for number one.

So here are some possible effects of the current rent control legislation.  There are two expected effects of new rent control, both of which should have been expected, may have been expected, but nobody has been talking about.

First, we have created a difference between what an existing tenant pays for a now-$2000 apartment and what a new tenant will pay for the same apartment.

The landlord – looking out for number one – looks at the total income from the apartment business, and will only care which individual pays what to the extent it affects the willingness of potential tenants to sign a lease.

(A long time ago in a galaxy far, far away, I was the treasurer of a $42 million hospital. I excited some comment making a joke on-the-square that it didn’t matter - from the hospital's perspective - if everybody paid the same no matter what care they had or if we soaked two rich people for $21 million each as long as paid. As I say, that was a joke on-the-square which did make sense from a very limited perspective by the provider.)

With rent control, new people will get soaked, and there is little that anybody can do about that.  The next step may be that some public agency, who may not know a lot about rentals, will declare what rent will be.  And that, of course, would have additional unexpected effects. 

Second, rent control will freeze tenants where they are. If you have someone who wants to live in a different place, they are going to subsidize the people staying where they are at. Some people might want to move to a nicer place, which is currently a $3000 a month apartment, for which that will cost them $4000 with rent control - and which they may not be able to afford. Some tenants' jobs may have moved and they can’t afford the $4 gasoline and need to move. So, do they moved to a one-bedroom now-$1500, then-$2000 apartment or balance the transportation costs against a now-$2000, then-$3000 apartment and just go out to dinner less often? (Which, of course, will reduce the gross income in the restaurant industry and may require layoffs and/or increasing prices. Our connected economy is a real inconvenience.)

The upshot is that the current law will deal with parts of the immediate crisis.  There are crises to come.  What will drive out landlords, have them take their money and move to Kansas?  Beats me.

The moral here is not “Woe betide one who messes with capitalism.”  We mess with capital all the time with various degrees of success. But the moral is that if you DO mess with capitalism, (1) you also mess with labor, (2) you don’t solve all of the problems, and (3) you cause new problems that will have to be dealt with in the Fullness of Time.

Mizpah!