Capitol Ideas / Rent Asunder
Bethell, Tom
CAPITOL IDEAS RENT ASUNDER by Tom Bethell I've reluctantly come to the conclusion that the ability to understand the price mechanism, the most important idea in economics, is beyond-the power of...
...Why did its ill-effects show up in California in the mid-seventies...
...Rents thus began to rise rapidly, and that is why the rent-control initiatives were put on the ballot, or, in some cases, were simply voted in by the city council...
...Obviously, construction costs per unit rose rapidly- so much so that developers found they would have to charge (say) $1500 per apartment per month to recover their costs and make a profit in excess of what they could make by leaving their capital in a money market...
...Is it surprising, then, that the price of the average new house in Los Angeles is about one-third higher than in the rest of the country...
...The basic point-terribly difficult as you will see!-is that a price represents the point at which buyer and seller are in agreement...
...Earlier in the decade the various city governments of Southern California adopted no-growth laws in the guise of protecting the environment...
...They see themselves as morally superior to businessmen because most reporters are paid less than their level of education demands...
...Charles Isham, 37 years old, owns two 12-unit apartment buildings, one in Santa Monica and one in L.A...
...Here we come to the crux of the issue...
...If politicians do not allow prices to move up then demand will exceed supply and the politicians will be rewarded with shortages, queues, urgent demands for new bureaucracies, the political allocation of scarcity, and, in the end, additional police to enforce the ban on price increases: a heavy price to pay for a ban on voluntary transactions...
...And that is why so many journalists-an overwhelming majority-tend to regard themselves not as watchdogs of government, but as watchdogs for government (against business...
...It is the same with cities...
...To say that choosing the latter represents "the business point of view" is absurd...
...This is no good as an explanation, of course, because if greed does indeed animate entrepreneurial activity, then surely it always has...
...Meanwhile, ever-increasing numbers of apartment seekers began bidding up the price of the constant (or dwindling) supply of apartments...
...The problem here is that the economic sequence of events I have outlined does not represent a "point of view" at all...
...The Los Angeles outcome ten or twenty years hence can be observed at first hand in New York today...
...That is, they could earn more if they were willing to "sell out...
...You never read anything about the economic repercussions of zoning changes in the newspapers...
...Until the early to mid 1970s, you could build a new house on 5000 square feet of land...
...The permit procedure in City Hall makes it almost impossible for officials themselves to know whether the new units are apartments or condos...
...Someone in the L.A...
...CAPITOL IDEAS RENT ASUNDER by Tom Bethell I've reluctantly come to the conclusion that the ability to understand the price mechanism, the most important idea in economics, is beyond-the power of most college-educated mortals...
...What was the result of these zoning changes...
...The interesting thing about all this is that, although the arguments are elementary from an economic point of view, and the facts are not contested by anyone I have spoken to, there is a peculiar silence surrounding the subject...
...Thereupon landlords refused to lower their rents, as they had promised to do...
...I have frequently discussed these matters with journalists in recent weeks...
...Los Angeles, I predict, will start "moving" in the years ahead, building by building, to Houston...
...It is a universal reality that would apply even to a journalist in the unlikely event that he were to try his hand at the risky business of making something and then attempting to sell it...
...And when you think about it, no-growth itself is an utterly spurious ideal, one that is based on the fantasy of stasis-the horizontal line on the graph that never exists in reality...
...or, as is increasingly happening, a building in Los Angeles or one in Houston (where they don't have no-growth or rent control laws...
...Galbraith and other socialists both inside and outside the Soviet Union (where it has been practiced, without conspicuous" success, for over 60 years...
...a medium-priced house or an expensive one...
...Prices thus express voluntary transactions between consenting adults...
...The upshot was that only luxury apartments were built...
...Within the last two years Los Angeles (county and city), Beverly Hills, and Santa Monica have all enacted rent controls, the last in exceptionally severe form...
...But a chronological survey shows that some of the rent-control initiatives were already underway-petitions being circulated, and so on-before Proposition 13 passed...
...Today you can only build on 50 percent of the lot...
...Prices shift up and down over time, and in so doing they equalize supply and demand...
...You know what the real explanation is...
...Price controls transform a free market into a black market, and turn customers into potential criminals...
...Galbraith never quite grasped it...
...But it is just this kind of "choice"-i.e., no choice at all-that a businessman faces when he decides whether to build apartments or condos...
...When they stop growing, they start dying...
...True...
...Similar density changes and requirements that parking be underground, with two to three parking spaces per rental unit, were enacted in Los Angeles...
...But why the decline...
...A common variant on the greed theme is to say that rent control only surfaced after Proposition 13 passed...
...Again, they would more likely be condos if they were intended for the well-off...
...The new growth feeds the whole body, not just the new tissue...
...Obviously, however, no-growth legislation was and is a terrible idea...
...That is, city governments ruled that renters who were willing to pay the asking price must not pay so much...
...Which would you prefer...
...be more expensive...
...Department of Building and Safety told me that he did not know of any new apartments being built in the city, although it is possible that a few luxury units are going up...
...The one in Santa Monica was built in 1965," Isham told me...
...If landlording was so profitable, why were no new apartments being built...
...Certainly the author J.K...
...Price controls are always best described from the point of view of the buyer, just as minimum-wage laws are best described as injunctions against sellers: preventing people from selling their labor for less than a certain amount...
...Today," the man at Building and Safety told me, "City Planning will hardly ever grant permits to build unless the lot is 7500 or even 10,000 square feet.'' Land costs account for one-third of the final price of the house...
...And of course logic itself belies the argument...
...In fact, as we shall see, these laws were intended primarily to protect those who had already arrived against newcomers...
...These thoughts have been prompted by the recent imposition of rent controls in Los Angeles...
...With a look of moral superiority they will say: "You're just expressing the point of view of the business interests...
...So condo construction replaced apartment construction...
...Similar zoning changes have affected the price of single family homes...
...It is everyone's point of view...
...With the rent-control laws on the books, apartment construction halted completely...
...he will reply...
...Or better yet, condominiums...
...Many reporters, alas, never quite grasp this...
...Local journalists, I notice, will at this point sometimes adopt the following fall-back position...
...In newspaper articles about rent control, it is quite uncontroversial and routine for reporters to relegate the points I have made to a buried, penultimate paragraph-no one can then say that "the business point of view" has been excluded-while the overall thrust of the story is to represent rent control as a victory forged by a coalition of government and little guys against businessmen...
...The first nets you nothing...
...You used to be able to build on about 80 percent of the lot...
...Finally, many people (not just journalists) regard no-growth laws as above reproach because they were swept in on a high tide of good intentions...
...Any journalist could understand this if someone came to him and said: "I will offer you one of two deals...
...Supporters of rent control say that apartment construction in Los Angeles was already declining before the various rent-control initiatives were put on the ballot in the late 1970s...
...The journalist will take a puff or two from his cigar and give me a sidelong look...
...Its obvious appeal is that it puts the blame squarely on the shoulders of landlords...
...The second nets you ten thousand dollars...
...It's greed...
...When a body stops growing, it starts deteriorating...
...To criticize them retroactively because they turn out to have had bad consequences is thus seen as a retreat, a failure of nerve, a confession of past inadequacy...
...A typical conversation might go like this: "If you require people to build houses or apartments on larger lots," I might say, "then they are bound to...
...People will more willingly buy condos because they do so with borrowed money, the repayment value of which steadily erodes with inflation, and they get a tax break into the bargain...
...As a result, I have concluded after a brief investigation, there arc no privately financed apartments under construction in Los Angeles today...
...If it burned to the ground today I would have to replace it with a 6-unit building, because of zoning changes requiring lower density construction...
...This explanation won't do either, however...
...Here's a real-life example, illustrating what happened...
...Its principal effect has been to make life a good deal harder for those on the bottom half of the socio-economic ladder...
...Tenants, angered by thoughts of this unshared windfall, retaliated with rent-control initiatives...
...Military economics is the appropriate name for this form of warfare by governments against citizens, and it has had an abiding appeal for Mr...
...Their refusal to do so leads to the perception that they lead disinterested lives, untainted by self-interest, in sharp contrast to businessmen...
Vol. 14 • June 1981 • No. 6
