The War On Prices Continues
More on price controls this week
Rent Control Misallocations in New York
The New York Times reports on social media influencer Hattie Kolp, who obtained her parents’ rent-stabilized 1,200 sq ft apartment in New York City when they retired and moved to Virginia.
Kolp pays just $1,300 per month for her rent-controlled dwelling in an neighborhood where the average rent is $4,500. This allowed her to make a living as an influencer posting videos of her decorating her place. Funnily enough, despite having mixed feelings about her career at various times, “she was certain that she had figured out her living situation.” I bet!
Kolp acknowledges the apartment is “roomy for one person.” She admits “I’ve never been interested in many of the things that people want to come to New York for. That whole hustle and bustle culture just does not appeal to me.” But, since the place is so cheap anyway, she’ll obviously stay. In fact, she says “I definitely will always keep the apartment, for sure. And if I have children who would like to keep it as well, then, absolutely. I would love that.”
There’s an economics lesson here: market prices ration goods to those who value them and so are willing to pay more. If you hold the price of a product below the market price, there’s no guarantee that the person who obtains it will be someone who values it highly. Kolp doesn’t put a particularly high value on living in New York City at all, has an apartment too big for her needs, and intends to hold it irrespective of her life circumstances. That is inefficient.
This is a well-known distortion of rent control. Rent control, by holding rents below market prices, raises the risk the accommodations people live in are too big, too small, have or lack other features, or are in the wrong location for their needs, and so do not reflect tenants’ true willingness to pay.
These are not mere anecdotes: Ed Glaeser’s 2003 paper on New York City found that 21 percent of tenants in rent-controlled units had more or fewer rooms than similar tenants in a free market. Rent price ceilings gum up labor markets too, as workers are unwilling or unable to move to better opportunities that enhance productivity. One 2019 study on the San Francisco housing market found that rent-controlled tenants there were 19 percent less likely to move than other tenants.
Tenancy Rent Controls Disappoint in Scotland
Scotland introduced tenancy rent controls last year, whereby in-tenancy rent increases are capped at 3 percent each year (actually, for the first year, they were frozen entirely), but no rent cap applies between tenancies.
When I wrote about this form of tenancy rent control almost a decade ago, I explained that such controls were likely to have four effects:
landlords would seek to front-load rents to pre-empt making losses later in tenancies
landlord-tenant relations would worsen, because when rents weren’t keeping up with market rents within tenancies, landlords would seek to drive tenants out to obtain the ability to increase prices
the extra risk placed on landlords within tenancies, coupled with the fear that these controls were the precursor for cruder controls, would encourage landlords to take properties off the market, reducing the supply of rental properties
these rent controls would disappoint activists, because they wouldn’t actually make the rental market more affordable in the long-term. Campaigners would then demand stricter controls with no exemptions between tenancies
Well, what do you know? The Daily Telegraph reports:
“The cost of rent in Scotland is rising more rapidly than anywhere else in the UK…with rental growth in Scotland climbing 12.7pc in the last year, compared with 10.5pc nationally and 12.4pc in London, according to property website Zoopla…Richard Donnell, executive director of Zoopla, said that the SNP’s rent laws meant that landlords were left with no option but to “push rent [up] as hard as they can” between tenancies, when prices can be increased by more than the cap.
The Financial Times:
“Landlords say the regulations have made Scotland’s rental market unattractive, almost to the point of being unviable, especially in the context of high inflation. Unable to claw back surging costs for maintenance, many are withdrawing from the market altogether.
…
Ponty at Arc Property says the rent controls are backfiring because they encourage landlords, who are fearful of future regulation, to increase rents while they still can. In the past, they would have prioritised keeping good tenants happy in the knowledge that both parties had the ability to renegotiate terms if their financial positions changed, he added.”
Surprise, surprise: there are reports too of landlords telling tenants they want to move back into their properties for owner occupation, to try to get tenants to leave. That’s because landlords want ways of triggering new lease agreements. In shared tenancies, that only requires one tenant changing. If “one tenant in the three-person flat share is planning to move out,” the FT reports, that constitutes a new agreement. It pays for landlords to divide and rule!
The response to these foreseeable consequences has itself been pretty predictable. Landlords raising rents between tenancies is now described as a “loophole” by tenants that needs to be closed off. Just toughen up the laws, is the cry. That, of course, would worsen the supply crunch further by holding prices definitively below market rents.
EU Wants to Impose Blanket €0 Price Caps On Bodily Fluids
“The European Parliament has approved a draft regulation banning payments for breast milk, sperm, blood and other “substances of human origin” (SoHO).
Billed as an attempt to increase safety across the bloc, the ban allegedly aims to ensure that those who are financially disadvantaged within the bloc are not subject to undue pressure to donate their cells and bodily fluids.
Donors can be compensated for any costs accrued as part of their donation, though this also will be subject to strict rules to ensure it does not serve as an incentive to poorer donors.”
This amounts to imposing a price cap of €0 on these substances across the whole of the EU, practically guaranteeing shortages.
This isn’t just about codifying what already happens either:
Cash incentives for the donation of some SoHOs do exist in some EU states, with financial compensation being in place for some forms of blood donation in Germany, Austria, Hungary and the Czech Republic, while sperm donation is paid for in countries like Portugal and Denmark.
The rationale for banning payment is notionally so the poor do not feel pressured to donate these fluids to obtain money. But where will the EU get its human origin substances from if the price controls cause shortages of European demand exceeding supply?
Right now the EU has to import lots of blood from the U.S., a country which does allow payment for blood donations. News reports suggest a lot of fertility treatments across Europe obtain sperm from Denmark, where payments are currently legal. Once the Danish see such payments banned, one suspects U.S. sperm will be relied upon by Europeans too.
By the EU Parliament’s own warped logic: is it moral to rely on the financially disadvantaged in the U.S. for Europeans’ health needs? Do Americans see themselves as exploited?
It’s remarkable to me that the EU would tolerate higher risks to health and worse well-being for its citizens for the sake of such a speculative, fuzzy moral claim. Remember, this ban is actually curbing Europeans’ rights to make voluntary decisions to sell their own bodily fluids as they see fit.
Not just that: this is yet another example that shows the EU’s unquenchable thirst for centralization and harmonization in all fields (whatever happened to subsidiarity?)
National Conservatives for a Higher Federal Minimum Wage
About 5 years ago, in an email to a colleague, I predicted that Republicans would raise the federal minimum wage significantly before Democrats did. I could see the plates shifting and the emergence of the “pro-worker” right.
Now, a bunch of Republicans, including the national conservative Senator J.D. Vance, have proposed raising the federal minimum wage from its current $7.25 per hour to $11 per hour over four years.
I’ve written an economic case against a significant increase in the federal minimum wage before (although the Republicans’ push for $11 is obviously much less than the $15 or $17 that many Democrats seek). But if you’re going to have minimum wages in the U.S., it surely makes more sense for these wage controls to occur at the state and local level.
As, indeed, they already operate. As a result of policy moves within states and cities, and the scale of populations living under different wage floors, the average effective minimum wage across the whole United States was already $11.80 per hour back in 2019. That average is obviously substantially higher now, and far above the level Republicans are pressing for.
Even if the federal minimum wage were raised today to $11 per hour, it would only raise the state wage floor in 28 states. The places it would affect are overwhelmingly the poorer, rural, and old industrial regions of the country with lower productivity levels and wage levels. We’d expect the economic downsides of the minimum wage hikes - in terms of lost jobs, hours, and work amenities - to bite much harder in such regions.