Minnesota’s Economic News – W/E 4/9/21
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Recently, the Star Tribune carried an article titled ‘Minneapolis City Council begins research on rent control‘. THey might as well begin research on alchemy.
The article began
The Minneapolis City Council is considering whether they should move forward on another controversial step to protect tenants: rent control.
But this, of course, commits the basic error of confusing intentions for outcomes. Rent control policies are nothing new. An old but excellent and still sadly relevant book titled Verdict on Rent Control examines episodes from a number of countries and finds:
[I]n every country examined, the introduction and continuance of rent control/restriction/regulation has done much more harm than good in rental housing markets—let alone the economy at large—by perpetuating shortages, encouraging immobility, swamping consumer preferences, fostering dilapidation of housing stocks and eroding production incentives, distorting land-use patterns and the allocation of scarce resources—and all in the name of the distributive justice it has manifestly failed to achieve.
A recent paper by economists Rebecca Diamond, Timothy McQuade, and Franklin Qian titled “The Effects of Rent Control Expansion on Tenants, Landlords, and Inequality: Evidence from San Francisco” found:
[L]andlords of properties impacted by the law change respond over the long term by substituting to other types of real estate, in particular by converting to condos and redeveloping buildings so as to exempt them from rent control. This substitution toward owner occupied and high-end new construction rental housing likely fueled the gentrification of San Francisco, as these types of properties cater to higher income individuals. Indeed, the combination of more gentrification and helping rent controlled tenants remain in San Francisco has led to a higher level of income inequality in the city overall.
It wasn’t intended, but it was an outcome. This might “protect tenants”, but only at the expense of these other consequences.
This is why, when, in 2012, economists were polled with the following question:
Local ordinances that limit rent increases for some rental housing units, such as in New York and San Francisco, have had a positive impact over the past three decades on the amount and quality of broadly affordable rental housing in cities that have used them.
The analysis of rent control is among the best-understood issues in all of economics, and — among economists, anyway — one of the least controversial. In 1992 a poll of the American Economic Association found 93 percent of its members agreeing that ”a ceiling on rents reduces the quality and quantity of housing.”
As the economist Assar Lindbeck put it, “In many cases rent control appears to be the most efficient technique presently known to destroy a city—except for bombing.” There. I’ve just saved Minneapolis city council whatever money they were planning to spend studying this stone age policy.
John Phelan is an economist at the Center of the America Experiment.