Why Rent Control Will Never Die
I have relatively little to add to a brilliant post by Pedestrian Observations (a fantastic urbanism blog) about the economically and politically toxic nature of rent-control regimes, and the difficulties in transitioning away from them. It’s worth excerpting two big chunks. The first is a good explanation for the path dependency rent regulation creates:
As the gap between the regulated and market rent grows, landlords have a greater incentive to harass regulated tenants into leaving. This is routine in New York and San Francisco. Community groups respond by attacking such harassment individually, which amounts to supporting additional tenant protections. In California, this is the debate over the Ellis Act. The present housing shortages are such that supporting measures that would lower the market rent has no visible short-term benefits, and may even backfire, if a small rent-controlled building is replaced by a large unregulated building.
Here is what is in my mind the key section for understanding the deeper reason why rent regulation battles rip cities apart:
Instead [of market pricing], cities give preference to people who have lived in them for the longest time. Rent control, which limits the increase in annual rent, is one way to do this. City-states, i.e. Singapore and Monaco, have citizenship preference for public housing to keep rents downfor their citizens. Other cities use regulations, including rent control but also assorted protections for tenants from eviction, to establish this preference. Instead of market pricing allocation, there is allocation based on a social hierarchy, depending on political connections and how long one has lived in the city. People who moved to San Francisco eight years ago, at age 23, organize to make it harder for other people to move to the city at this age today.
I’d simply add that this is a classic situation of Polyanian fear of the market. Polanyi’s great insight was that the “free market” was a utopian dream – when left to their own devices, people rarely self-organize into market provision for crucial goods. In fact, when the state intervenes to attempt to bring a market where traditionally goods where provided socially, it generally provokes a violent backlash. Rent control is a great example of this – it creates two parallel systems, one a free-market system and the other where apartments are provided via a social hierarchy primarily based on who was there first. Ending rent control not only can raise prices for the current insiders, but much more threateningly erases a market of their social status. I hadn’t quite ever thought of rent control as “provision via social hierarchy”, but in that light it makes it much more clear the personal rage that the subject inspires.
Anyway, read the whole thing.
The Positive Feedback Loop of Urbanization
There is something of a debate about why people make more money in cities, and whether at the individual level it’s wisest to make more money in a higher-cost city or less money in a lower-cost city. Emily Badger has an excellent piece on economist Rebecca Diamond’s work on the growing educational/economic divide across American cities. Diamond found (unsurprisingly, if you’ve ever compared Boston and Detroit) that places with more college graduates are expensive, but tend to be nicer and to offer higher-paying jobs. In short, even after you account for the higher cost of living big, well-developed cities tend to come out ahead. That doesn’t surprise me, but this did – places with higher concentrations of college graduates tend to pay college graduates more!
This suggests that the urbanist case is actually right – that people are more productive in cities than rural areas. There are two countervailing forces that could act on the wages of highly-skilled workers in areas with many of them, greater supply and greater productivity. We should expect to see lower wages for college grads in cities with lots of them, and the fact that the opposite holds true suggests that there are in fact quite substantial productivity benefits gained by embedding in a local economy with more specialization and more opportunities to apply specialized skills.
Urbanization is a positive feedback loop of productivity. Urban workers produce more – while they have to pay more in housing costs, there is a positive net social benefit that increases the more people take up the opportunity. This is actually the opposite of a collective action problem, a situation where everyone is incentivized to take actions that make everyone else better off. Even better, this generates surplus income that can be taxed to make rural residents better-off, something the state does now through taxing income and spending on services/infrastructure in rural areas. The main thing standing in its way is structural constraint, namely the limited housing available in the densest and richest urban areas.
Arguably, by preventing development rich urban landholders are extracting rents from the rest of the country. Certainly from the rest of their states.
SF’s Unstable Housing Equilibrium
Much as I hate to say it, TechCrunch has a surprisingly thoughtful and insightful piece on the housing crisis in San Francisco. I loved living in San Francisco, and what’s happening there makes me sad. Unfortunately, I think that rather than a realistic reassessment of housing policies, it is more likely that the city will drift into a de facto historical museum inhabited solely by the rich.
However, the endgame seems fairly obvious to me. There will be some insightful mayor somewhere on the Peninsula who realizes the deadweight loss generated by restrictive housing policies in SF and the Peninsula. Backed by huge amounts of real estate dollars, he steamrolls over NIMBYs and throws the gate open to development in his municipality. Skyscrapers start rocketing up and urbanization (or “Manhattanization”, as SF residents disdainfully call it) takes place in the blink of an eye. VC money and residents start flowing in, and in the space of a few years the nexus of energy and investment has moved from Palo Alto and SF to our new tech metropolis. My guess is one of the relatively worse-off towns or cities mostly missed by the tech boom – perhaps South San Francisco?
The current equilibrium is unstable, and price pressures are building to incredible levels. And if a trend is unsustainable, it will stop. Either the tech industry will leave the Bay Area, or someone somewhere will break the dam on development and reap the rewards. The latter simply seems more likely.
As a side note – if “anti-capitalist” protestors are currently fighting a development that replaces a Burger King with mixed market-priced and affordable-housing, it seems like their priorities got awfully strange along the way.
Better Bike Sharing
Some interesting and encouraging news on New York’s Citi Bike program: it’s doing great! It’s beating benchmarks from other large cities, most likely because it’s really well-suited for the public transit system. Nobody really wants to commute across the city on a bike; but a lot of people might prefer a 5-minute bike ride to a 20-minute walk or 10 minutes spent idling waiting to transfer to another subway line. New York, with its dense transit network, is probably an especially good fit for a bikeshare program.
While this is encouraging news, it’s actually a little discouraging for urbanists. It’s another reminder that in urbanization, path dependency is really important and success begets success. Bike share works better in New York because it’s a complement to its other transit options and in some small way the bike share is similarly enhancing the value of the New York City subway system. You can’t just plop a bike share down in Austin or Raleigh and expect similar results. Bike shares are complementary to the overall technological package that is the modern city, definitely not a supplement for more serious transit options. For that, you really have no choice but to bite the bullet and put in the heavy rail (subway) that makes the whole thing work.
For an optimistic case, Citi Bike is a great bed to see if successful public programs really do create constituencies. Rich people went balls-to-the-wall to stop Citi Bike, but Bloomberg pushed them through. Now that they’re actually here, commuters have adopted them with aplomb. And I kind of like them too – all the people zipping around on the bikes do actually lend the place more of a communal neighborhood-y feel (especially when you’re outside of Midtown and the people on bikes are actually residents). It will be interesting to see whether this becomes a self-reinforcing program. If so, it’s a neat test bed and suggests that urbanists should fight hard for small practical projects rather than “one big shot” projects, because the projects that get built in a timely manner will strengthen their constituencies and make the next step easier.
The Political Economy of “Less Is More”
Nemo Incognito writes a great note today on a topic I have spent a fair amount of time wondering about, namely the possibility of a secular decline in “stuff”. He points out that the proliferation of gadgets and appliances that took place towards the end of the 20th century has been replaced by a paring-back and replacement with more general-purpose devices supplemented by services. For example, replacing a desktop + laptop combo with a tablet and a proliferation of paper notes with Evernote. Beyond simply electronics, a car can be supplemented by Uber/Lyft and Zipcar. I’ve written about this in terms of “asset efficiency”.
This trend is unmistakable in American society, with technophiles like Nemo representing the leading edge. The much-discussed trend of Millenials moving to cities is part of this; replacing capital-centric consumption (big hosue in the suburbs) with experiential consumption (New York in September). Even without a truly cornucopian economy, if you assume a certain amount of technologic consolidation along with a slowing rate of population growth, the US economy is likely to need fewer capital-intensive goods in 2033 than in 2013.
In America, who are likely to be the big losers in such a situation? Nemo points to the growing economies of Asia that supply all those capital-intensive goods, which is true as far as it goes. Domestically, it would be the capital-intensive producers. Consumer-goods producers will have to adjust, but the Fords of the world will survive – they have outsourced all of that stuff to smaller contractors who will be hammered until a new equilibrium emerges. The locus of the hurt will probably be large companies who either engage in capital-intensive extraction or production, like the loggers and miners Nemo mentions. If distributed solar truly takes off, the power companies will be the absolute hardest-hit and will be nationalized en masse.
What are the political-economic consequences likely to be? One would expect that the most-affected companies will attempt to fight back by non-market means. Regulatory weapons are powerful, and these producers should be funneling money to opponents of greater density – urbanization is a threatening force to them. Minimum home size and lot size requirements, along with required on- and off-street parking, are the best friends of the power companies, the manufacturers, and the resource-extractors alike. Obviously, rules meant to protect “neighborhood character” should be marshalled against residential solar panels.
Incidentally, these measures are sacred principles of American land-use policy today. So it should be fairly easy to paint rank and odious rent-seeking policies as “American values”. Perhaps that happens today; it should be fairly easy for the Chamber of Commerce to slip just enough dollars into local elections. If they don’t do that, they ought to consider it.
If anti-density measures are also a form of rent-seeking, that might be the best explanation for the higher prosperity of dense metros. Richard Florida and many others suggest that “agglomeration effects” drive this; but it might just be avoiding the deadweight loss caused by all sorts of market-distorting land-use measures. Could be a good topic for research.
The Driverless, Auto-Oriented Urbanist Future
I was glad today to see that the California Public Utilities Commission lifted its fines against Lyft, of which I am an avid fan. Lyft, for those of you who don’t know it, is an incredibly awesome app that lets you call a car with your phone for below-taxi rates. Disclosure – a friend of mine works there. It’s very interesting, in that it moves in an industry that seems at first competitive but actually turns out to be a highly regulated industry. Which is weird – given the vast number of cars and people capable of driving them in a large city, it seems supply shouldn’t be a constraint. But the taxi lobby is a powerful one in San Francisco, Lyft’s home, and in most cities.
Serious question – how do the taxi operators and car companies survive the introduction of driverless cars combined with the Lyft business model? Right now the supply of cars is huge, but at any given time they’re mostly unused. The business model of Lyft alongside driverless cars seems pretty obvious – use spare driverless cars to deliver people where they want, when they want. Given the vast supply of currently-spare-capacity, it seems that the need for raw numbers of cars should plummet. The taxi industry can be killed without the need for driverless cars, but they will make it quicker. However, it’s harder to see how the car companies can continue to sell current volumes as the demand for cars collapses.
Of more immediate interest, to what degree should this future scenario disincentivize urbanists from pursuing mass-transit expansion today? TaaS (transport-as-a-service) should render obsolete most transit options other than extremely-high-capacity subway service and intercity rail – it’s easy to see it killing off a lot of bus service, especially once the cost-per-vehicle-mile-traveled starts to drop dramatically as the technology gets cheaper and older cars are retrofitted.
It makes me think that if you’re in favor of an urbanist agenda, the number-one priority should be zoning reform. Maybe that seems roundabout, but here’s my thinking – if the driverless car revolution happens sooner than we think, a lot of the investments in transit will turn out to be white elephants. Who needs an expensive light-rail line when grabbing a robotic Lyft-type ride is easier? On the other hand, if we can succeed in getting greater density than the economics of developing the robot-Lyft-company gets easier and easier sooner and sooner. In the meantime, things like buses can serve as a gap solution.
So basically, driverless cars => abandon the cause of transit investment in favor of greater density. The non-car-oriented city will follow in time.
Market Failure 