Friday, June 14, 2019

The Problem with Governments Intervening in the Market

You may have heard that the New York State Assembly recently passed a law that re-invigorates rent control in New York. If you're not a conservative, you probably think that's a good thing, since rents in New York and other big cities have been soaring.

But rent control does not help everyone equally:
Manhattan renters get a steep discount from market rents in the same neighborhood: about $1,000 a month per apartment, up to nearly $2,000 a month in Manhattan’s Upper West Side. In many less affluent working-class neighborhoods, regulated rents are no different than, or only slightly below, market rate rents in the same locale.

….In all of Manhattan, median regulated rents were 53% below median market rates in the borough. In Queens, 8.6% were below market rates; in the Bronx, it was 13.5%; and in Brooklyn it was 16.7%, the analysis found.

….More affluent renters also received a bigger discount from market rent. A typical renter with an income in the top quarter of all New York households paid about $1,650 in rent, compared with $2,700 in rent for a similar renter paying market rents, a discount of 39%. For a renter in the bottom quarter of income the difference was 15%.

White renters in rent-protected apartments benefited more than any other race group, the analysis found, with a discount of 36% from market rates, compared with 16% for black renters and 17% for Hispanic renters.
This is because landlords are entitled to a rent that will cover the expense of maintaining the building, the mortgage payments, and the like, and in a working class neighborhood their margin above that is just not very large. Renting to poor people is a rough business. So there is only so much the government can do to hold down rents.

That doesn't mean that rent control does no good for ordinary folks; a 10% discount may still be important for people on a strict budget. Rent control also keeps rents from rising rapidly should a neighborhood gentrify.

But the overwhelming share of the benefits flows to upper middle class folks in Manhattan, and even to millionaires.

You could easily end this problem by setting an income limit on benefiting from rent control. This hasn't been done 1) because it would just incentivize landlords to seek out rich tenants, and 2) because the upper middle class people who benefit from rent control scream bloody murder every time it is suggested.

Not that rents in New York are the crucial thing we should worry about, and who wins this struggle between rich landlords and rich tenants is of no great consequence for the republic. But it points to an important problem with regulation. In any democracy the people who are engaged wield disproportionate power, and in general it is the well-educated and well-to-do who are engaged. Poor people don't vote or organize or protest nearly as effectively, so it often happens that measures taken under the guise of helping them often help someone with more power at least as much.

This is why I think we should support programs like Social Security that help everyone; they help the poor more than they help anyone else, but because the middle and upper middle classes who control our politics also benefit, they have powerful defenders. Special interest provisions that (for example) only help New Yorkers lucky enough to have rent-controlled apartments do not impress me as particularly useful, or worth fighting for.


JEL said...

There is also, of course, simply the question of ability to work the system, which the well-off and educated are most likely to have. I have come to call this the "Deutsche Bahn ticket machine problem." These machines are wonders of German engineering that allow you to buy tickets for trains (of many types) trams (including rural trams) and buses, at various prices depending on your age, the number of travelers, and whether you wish to convey a dog or a bicycle. There are also a dazzling array of discounts available: for groups of five (but no more or fewer), for travel on weekends entirely within the _Land_, to specific destinations on specific days, and so-on. But operating the machines is, therefore, inevitably, highly complex, and so the discounts go almost entirely to well-educated persons with good German. The poor and ill-educated press the minimum number of buttons and thus pay the higher rack rate.

Related is also the problem with influence, which also tends to be concentrated in the hands of the same people. Canada has, in principle, entirely socialized medicine: no doctor can work except for the state. So the medical outcomes should be relatively similar for rich and poor, right? (setting aside issues like smoking, which afflict the poor more than the rich). It does not work that way. Rather than having medical care rationed by ability to pay, it is rationed by contacts: who knows socially a doctor who can pull strings and get their friend an appointment. And who knows doctors socially? And so much the same people get good care in Canada as would get it in the States, and the same people bad care.

Conclusion: any system is regressive in proportion to the difficulty of using it, and if it available to the well-off, the well-off will inevitably get the greatest benefit from it.


G. Verloren said...


And yet, while the rich in Canada, might be able to get strings pulled and get relatively better care compared to the poor, the poor in Canada still get vastly better care than the poor in America do.

It doesn't matter so much if the well off can get a greater comparative benefit out of a system - what truly matters is that the system adequately serves the needs of the most underprivileged.

If no one ever went hungry in a society because even the poorest people had more than enough good and healthy food to eat, then it wouldn't really matter if the rich could find ways to game the system and get even more food beyond that.