Econobabble: Rent control and market forces

Rent controls reduce rent. Some argue that market forces also reduce rents. So why are the arguments about what happens next so contradictory in these cases?

Richard Denniss calls much of the garbage that passes for economic analysis and commentary econobabble.

But economics is not just a set of analytical tools – it is also a powerful language that can conceal simple truths from the public. I call this language ‘econobabble’, and it includes two things: incomprehensible economic jargon, and apparently simple words that have been stripped of their normal meanings.

When public figures and commentators use this sort of language in order to dress up their self-interest as the national interest, to make the absurd seem inevitable or the inequitable seem fair, or even to make the destructive seem prudent, they are econobabbling.

Every day, econobabble is used by powerful people to silence democratic debate about our nation’s priorities and values, and to conceal the full range of policy options that we have at our disposal.

The housing debates of the 2020s are unfortunately full of econobabble. Jargon like the word supply is used in a variety of incompatible and incomprehensible ways, while simple words like affordable have been stripped of all meaning.

One of the areas in housing debates where econobabble is rampant concerns rental regulations. First, the term rent control is used to make it sound like something abnormal; as if there aren’t regulations across all markets regarding pricing practices.

Second, the economic analysis applied to rental regulation is very different to that applied to other ways that rents can fall. For example, lower rents from rental regulations apparently have terrible effects on property owners’ incentives to maintain their property and build new dwellings. But then lower rents due to market forces are claimed to have the exact opposite effect, being that landlords will outcompete each other with more investment. I call this The Great Housing Supply Contradiction.

Third, if rent control leads to the unintended consequence of higher rents for new and unregulated dwellings due to supply effects, as many claim, there would be a strong financial interest for property developers to lobby for rent control, rather than against it. Indeed, we instead see developers lobbying against rent control and for upzoning, which they claim will decrease rents due to market forces from additional competition. Yet if these claims were true—that rent control increases rents of new housing, and upzoning decreases rents for new housing—then property developers are acting against their own financial interests.

These three reasons are why you should understand that most of what you have heard about housing policy, from rent control to upzoning, is econobabble.

To show how weird econobabble is in this housing context we can show that the same sentences and arguments make sense whether we call the thing that reduced housing rents market forces or rent controls.

Guess which words best fill in the blanks in the following quotes.

QUOTE 1:

From Swedish economist Assar Lindbeck.
“In many cases, ____________ appear to be the most efficient technique presently known to destroy a city — except for bombing.”

a. rent controls
b. market forces

QUOTE 2:

From a Twitter follower.
______________ lower profits. Lower profits = less incentive to build. Less new construction as a result = shortages

a. rent controls
b. market forces

QUOTE 3:

From The Economist.
______________ are a textbook example of a well-intentioned policy that does not work. They deter the supply of good-quality rental housing. With rents capped by _____________, building new homes becomes less profitable. Even maintaining existing properties is discouraged because landlords see no return for their investment.

a. rent controls
b. market forces

QUOTE 4:

From Robert Murphy.
To someone ignorant of economic reasoning, ______________ seems like a great policy. It appears instantly to provide “affordable housing” to poor tenants, while the only apparent downside is a reduction in the income flowing to the fat-cat landlords, people who literally own buildings in major cities and who thus aren’t going to miss that money much. Who could object to such a policy?

______________ reduce the supply of rental units through two different mechanisms. In the short run, where the physical number of apartment units is fixed, the imposition of __________ will reduce the quantity of units offered on the market. The owners will hold back some of the potential units, using them for storage or keeping them available for (say) out of town guests or kids returning from college for the summer.

In the long run, a permanent policy of _____________ restricts the construction of new apartment buildings, because potential investors realize that their revenues on such projects will be artificially capped.

a. rent controls
b. market forces

So what?

If there is a strong argument that declining rents have harmful effects on the rate of new housing supply, then this must also be true when the cause of declining rents is market forces. For a property owner it makes no difference which external factor controls their rental income—competition or regulations. It is the same financial outcome. But because we use econobabble to disguise what were are saying, few notice or care that the whole debate is based on nonsense and contradictions.

It is true that loopholes in rent regulations create new incentives for property owners—incentives to evict tenants paying below-market rents in order to get market rents, and incentives to avoid repairs (though this incentive change seems overstated, since making basic repairs usually doesn’t change the market rent either).

These incentives may be different when market forces control rents rather than regulations. This is one reason I propose using market forces by creating a public competitor housing provider to give tenants cheaper alternatives, rather than promote rent control as the main way to make housing cheaper.

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Here are some previous posts about rent control

1. Evil rent control revisited

2. Rent control is totally normal price cap regulation

3. The Great Housing Supply Contradiction