Rent Control and the Triumph of the Incumbents’ Economy

Rent control is back on the political agenda, sort of. In the New York legislature, Democrats have agreed on a complex set of proposals to expand rent control by reducing vacancy decontrol, owner re-occupation, and decontrol based on high income renters or “luxury” rents. In Seattle, city politicians are lobbying for a repeal of the state’s statute banning rent control. A similar effort to repeal the Costa-Hawkins Act failed in California last November but will be back on the ballot in 2020.

My own view is that rent control is symbolic of the essentially conservative character of the Left in the Age of Trump. As I wrote here in a WaPo op-ed, rent control is a brick in the wall of what I call the “incumbent economy.” An “incumbent economy” is any system insuring that people who already hold an entitlement get to keep it, even at the expense of newcomers. Beneficiaries of the incumbent economy include tenured profs like myself, tenants with a rent-controlled apartment, taxi medallion owners before the arrival of Lyft and Uber, public employees in a firmly ensconced union, homeowners surrounded by a snug little wall of zoning, and so forth. There are advantages to protecting economic incumbents: By insuring them against big losses, one can reduce their opposition to changes that increase or redistribute overall wealth.

People who style themselves as “the Left,” however, do not generally trumpet the benefits of protecting the status quo. That is why the single-minded focus on rent control seems a little odd to me. Rent control is fine as far as it goes – but it does not go very far to remedy economic inequality unless it is accompanied by a big expansion in housing supply. Otherwise, rent control might actually undermine equality by impeding the efforts of non-resident migrants to move to high-wage, high-demand cities. After the jump, I speculate that, despite brave AOC-style rhetoric words about “socialism,” New York’s the Left might not have the stomach for a fight with homeowners, the most powerful political incumbents now reaping the rewards of regional economic inequality.

Consider, first, how rent control benefits insiders at the expense of outsiders. As Krugman noted almost twenty years ago, there is a broad consensus that rent control tends to reduce the quality and quantity of housing. A 2012 IGM survey of economists indicates, that consensus remains unchanged today. Two recent empirical studies from 2014 and 2018 confirm the basic intuition that rent control, taken by itself, makes neighborhoods shabbier and rental housing scarcer.

The inefficiencies of rent control are a familiar story. Rent control’s distributional inequities, however, ought to give Left special reason to demand that rent control be matched with policies that increase the supply of housing. The problem is that rent control benefits exclusively tenants who already have leases in high-demand cities. If one cares about wealth inequality, however one needs to focus on the inability of non-residents to move to the cities with the highest wages As Peter Ganong & Daniel Shoag showed back in 2015, the inability of non-residents to migrate to high-demand cities has slowed the convergence in regional wealth: Coastal haves have walled out flyover have-nots. Moreover, regional inequalities in housing wealth, according to Matthew Rognlie, is responsible for a giant share of overall wealth inequality. Owner-occupants of Brooklyn brownstones and San Francisco painted ladies, even more than Wall Street financiers and Silicon Valley tycoons, are sucking up the wealth created by new technologies and urban agglomeration. Giving incumbent tenants a share of that wealth spreads that wealth around a little bit – but, unless rent control is accompanied by policies that increase housing supply, one is leaving out a major group of economic have-nots. Indeed, one might be exacerbating their plight: According to Stanford economists Rebecca Diamond, Tim McQuade and Franklin Qian, “it appears rent control has actually contributed to the gentrification of San Francisco” by speeding up the conversion of rental units into owner-occupied condos.

New York’s Democrats, however, created no link tying the creation of new housing to the protections for existing tenants. This indifference to housing supply is all the more surprising, because rent control can easily be leveraged to overcome NIMBY opposition to new housing. At the level of the individual building, state law could override local zoning that prevents the construction of new “inclusionary” developments that use market-rate units to finance a state-specified percentage of below-market units. California’s Density Bonus Law provides a good model for such a state override of local zoning. New York’s lawmakers also could have imitated California housing advocates who attempted to buy off NIMBY opposition to new housing with a “CASA Compact” linking caps on rents and anti-eviction rules to the requirement that land in transit-rich neighborhoods be zoned for higher densities.

Why is the Left content to protect the status quo of incumbent renters while leaving local zoning undisturbed? Part of the reason might be anti-market ideology: Tenant advocates are curiously indifferent to the evidence that zoning limits on market-rate housing has adverse effects on the supply of low-income housing. (I have compared such supply-side skepticism to Republicans’ denial of the evidence for climate change). On reflection, however, I speculate that political expediency might be an equally powerful explanation. Incumbency is a powerful motivator, and few entitlements are more powerful motivations for incumbents’ political activity than owner-occupied residential real estate. As Bill Fischel has shown almost two decades ago, the “homevoter” fights hard to preserve the zoning status quo. The stymied efforts of California State Senator Scott Wiener to push through S.B. 50 limiting local exclusion of new housing is evidence that even a grave housing affordability crisis cannot easily defeat an alliance between local officials and homevoters.

Small wonder, then, that New York Democrats chose the better part of valor and played rent control small ball. Sure, they rolled the big commercial real estate interests like REBNY – but they avoided a fight with the even more powerful Brooklyn brownstoners and other NIMBY interests.