Winston Churchill once remarked that “if you put two economists in a room, you get two opinions, unless one of them is Lord Keynes, in which case you get three opinions”. Sadly for policymakers, economists offering up multiple opinions and caveating even themselves has never been a uniquely British trait. Harry Truman became so sick of hearing “on the one hand this but on the other hand that” from his economic advisers that he asked to be sent a one-armed economist.
Reasonable and eminently qualified practitioners of economics often disagree with each other. That is one of the things which keeps the discipline interesting. Those disagreements can be rooted in differing interpretations of empirical evidence or in differing theoretical understandings of an issue. The simple fact is that the real world is a complicated place. The best answer to a policy question or the response to a policy proposal often starts with “it depends”. A phrase that often crops up in economics is “all things being equal” (sometimes translated into Latin as ceteris paribus in order to sound more impressive), but all things are rarely equal in practice. The expert panel polls that the Clark Center oversees also include the option for panelists to answer that they are uncertain and, in many cases, uncertainty scores highly in the results. This makes the surveys which do show truly decisive results all the more interesting.
Last week’s survey of the US expert panel was a nice reminder that there are still issues on which economic opinion is mostly settled.
The Biden administration’s proposals to cap rent rises for corporate landlords at 5% per annum might be politically popular with some voters but it certainly did not go down well with economists.
US rents, alongside home prices, have been rising at an uncomfortably fast pace. But economic logic – together with decades of empirical evidence – suggests a cap will simply make things worse.
Even before delving into the notion of a cap, it is worth noting that the proposal – which is unlikely to clear Congress in its current form in any case – would only apply to landlords with more than 50 units. The administration reckons that would capture 20 million units but that represents well under half of the 48 million plus rental units identified at the 2018 census. The cap would be enforced by removing Federal tax breaks from landlords pushing ahead with 5% rent rises, which may – or may not – prove to be effective in terms of lowering rent increases.
The standard argument against such measures – and one that the panel mostly agrees with – was well set out by the St Louis Fed earlier this year. In the short run, lower rent increases do benefit current renters but in the longer run unintended side effects come into play. The incentive to build new units and add to the housing stock is diminished. What is more, with rental income streams looking less profitable some of the current units in the rental sector tend to be removed as owners decide it is more in their interest to sell them on. Maintenance spending often falls too, leading to a falling quality of rental housing.
Rapidly rising rental prices are usually a symptom of a shortage of rental accommodation, it is the imbalance between supply and demand which pushes the price up. Rent controls provide a short-term amelioration of the symptom but usually make the underlying problem worse. And those problems get worse over time.
In the case of national rent controls only applying to landlords with 50 units or more, the potential distortions to the market by the 5% cap could lead to a host of other issues. It is hard to see by what logic a landlord with 49 units should be able to ask for whatever rent rise they deem necessary, whilst one with 50 units was limited to 5%. Landlords with 40-something units may well drop expansion plans and those with a few units over 50 would be incentivised to sell units quickly.
Asked whether the proposed cap would make middle-income Americans substantially better off over the next decade, 74% of respondents – weighted by confidence – either disagreed or strongly disagreed. Just 16% were uncertain and only 2% agreed.
The mechanism through which a cap would mean middle income Americans were exactly what theory suggests: lower supply. Asked whether such a cap would substantially reduce the amount of apartments available to rent over the next decade, 72% of respondents – again weighted by confidence – either agreed or strongly agreed and only 7% either disagreed or strongly disagreed.
Finally, the panel was asked if such a cap would substantially reduce US income inequality over the coming ten years. Uncertainty, weighted by confidence, was a little higher at 21% but 57% disagreed and 22% strongly disagreed. None of the respondents either agreed or strongly agreed.
It is nice to see there are some issues on which the panel still show a strong consensus view of the economic profession. It is just a shame it has taken such a counterproductive policy proposal to reveal it. When it comes to rent controls, Harry Truman would have found his one-armed economist.
