In his 1935 nightmare political satire, “It Can’t Happen Here,” Minnesota novelist Sinclair Lewis imagined a totalitarian demagogue rising to power in America by promising “plans to make all wages very high and the prices of everything … very low … .”
Such magical thinking sounds like something that might be disgorged from the volcano of humbug in the White House, whose eruptions have just begun their second year.
But Donald Trump is hardly the only politician in America today who claims the power to command the economic winds.
In big-city governments from Seattle to Baltimore, ever-more-impatient progressive officeholders are pushing economic agendas aimed at making incomes higher and the cost of things lower — by City Hall’s decree.
The daredevil $15 minimum wage — a level high enough to raise fears of labor market distortions far beyond the ranks of free-market purists — is being phased in by cities across the country. Minneapolis is already among them, and St. Paul’s newly elected mayor and City Council are working on following suit.
And it appears that long before we know how that experiment turns out, the housing market may come in for remodeling by architects of the “equity” agenda.
“Rent control now!” chanted protesters at new Minneapolis Mayor Jacob Frey’s inauguration earlier this month. That demand may get louder as the city’s freshly elected, strikingly left-leaning City Council grapples with what is widely proclaimed an “affordable-housing crisis.”
Out in California, where many hair-raising policy ideas emerge, a renewed push for expanded rent control faltered (for now) just 10 days ago, when a legislative committee rejected a bill that would have allowed cities to enlarge their local rent control regimes — which are widespread in the Golden State but have been blocked from expanding for many years thanks to state intervention.
As it happens, California has also just produced some impressive new research on the effects of rent control, just in time for the looming debates. Minnesota policymakers who truly hope to improve the housing situation should give it a careful look.
The January 2018 study by Stanford University economists Rebecca Diamond, Timothy McQuade and Franklin Qian was published by the National Bureau of Economic Research. It capitalizes on the fits-and-starts history of rent control in San Francisco to construct a kind of natural experiment. It concludes that rent control “has actually fueled the gentrification of San Francisco, the exact opposite of the policy’s intended goal.”
When, roughly four decades ago, San Francisco first enacted rent control — basically, caps on rent increases during a tenant’s stay in a unit, but no restriction on raising rents when tenants move and are replaced — city leaders initially exempted small, owner-occupied buildings. They later changed their minds. But for various reasons, including state action, they were left with an inconsistent regulatory scheme.
Small rental buildings constructed in San Francisco before 1980 are rent-controlled, the researchers report; newer ones are not.
This state of affairs allowed the Stanford scholars to isolate two populations of similar buildings, tenants and landlords — where the key difference is that one group has been governed by rent control and the other has not — and then to follow what happened over many years.
The simple version of what they found is that rent control delivered large benefits (worth thousands of dollars per year) “to the households that were lucky enough to receive rent control.” These gains came at the “great expense” of essentially everyone else, and especially at the expense of “future inhabitants” of the city.
What happened, of course, is that landlords prohibited from charging market-rate rents did anything they could to slip free. They converted apartments to condos. They moved into properties themselves (allowing them to evict rent-controlled tenants). They demolished rent-controlled buildings and constructed new, noncontrolled ones. They “bought-out” tenants with hefty payments (some $30,000 on average). This allowed tenants to “take their rent control with them,” as the researchers put it, but didn’t help new renters.
Landlords did such things eagerly in “hot” neighborhoods where market rents were rising fast (making the payoff from shedding rent control high) but much less often in struggling neighborhoods.
The net effect, the researchers say, was a decline in the supply of rental housing — including a 30 percent drop “in the number of renters living in rent-controlled apartments.” The result for San Francisco as a whole was “a citywide rent increase of 5.1 percent” (compared with what rents would have been).
The loss to some households from the landlords’ adjustments to rent control “completely undoes the gain” to other households, these economists conclude. And the effects on the character of the community and its housing should perhaps be the most concerning finding for champions of equity.
Replacements and conversions combined to accelerate a trend toward “a housing stock which caters to higher income individuals” and “the combination of more gentrification [while] helping rent controlled tenants remain … has led to a higher level of income inequality in the city overall.”
The trouble with rent control is the trouble with all attempts to centrally regulate who pays and who receives what and from whom. Confronted with such rules, people adjust to better their own position, resulting in a final rearrangement of costs and benefits that may be very different from what the rulemakers intended.
The complexities of the housing market mean such rearrangements could be particularly hard to predict — not just with rent control itself, but with any policy that would tend to make providing lower-cost rental housing a less attractive business proposition than it already is.
The Stanford economists end by suggesting that “[i]f society desires to provide social insurance against rent increases” it might want to offer direct public subsidies to hard-pressed renters.
That might not be so easy politically. But the data show, these researchers insist, that “forcing landlords to provide insurance against rent increases leads to losses to tenants.”
D.J. Tice is at Doug.Tice@startribune.com.