There's nothing liberal about rent control.
A single 38-year-old correspondent for ABC News is participating in an interesting program in New York City. Despite his salary of $70,000, he qualified for a roughly $1,000 discount in rent for his one-bedroom Manhattan apartment. He pays $560 a month. His secretary isn't quite so fortunate; she's not in the program. Although she makes less than a third of his income, she is paying $1,000 per month for an apartment half the size.
If the program were welfare, we'd call the lucky man a cheat; if he were a defense contractor, we'd say he is gouging the taxpayer. But the correspondent is a long-time New Yorker, so we'll just call him typical.
The program he has benefited from for the past ten years is rent control, and few New Yorkers are demanding an end to the inequity. Set up as a temporary curb against rapid wartime rent increases, controls have remained long after they were supposed to expire. Over the years, politicians have expanded the controls through a complex web of rules, governing rents for 1.2 million apartments, and more than half of the city's tenants.
Faced with a housing crunch, nine states, along with such major cities as Boston, Los Angeles, San Francisco and Washington, D.C., have instituted rent controls. As a result, 12 percent of the nation's housing is now covered by some form of control.
Liberal politicians and organizers tend to view rent control as the most effective way to combat abusive rent hikes by unscrupulous landlords and to guarantee cheaper housing for the poor. But rent control's track record in New York should make them think twice, not out of some abstract affection for the invisible hand, but because in practice rent regulations have benefited the well-off at the expense of the urban poor, fundamentally contradicting the principle of equity to which liberals subscribe.
Rent regulation has been inequitable in its application, as the case of the ABC correspondent shows. It has drained hundreds of millions of dollars from city treasuries, is open primarily to those with money and guile, and plays a role in exacerbating the housing shortage. Yet rent control has developed a culture of protective tenants frightened of an unregulated market and politicians who play to their fears, making rent control politically untouchable. It is a classic case of the majority gridlocking the political system for personal gain and in the process hurting the entire community.
As a World War II-era emergency measure, rent controls made perfect sense. New York was jammed with war workers, housing was scarce and housing speculation feverish. Congress enacted rent controls around the country in 1942 and repealed them in 1945. But New York retained its. Only 15 percent of the apartments in the city are now under the original rent control laws; the remainder fell under subsequent regulations. Rent increases are decided by a body called the Rent Guidelines Board, consisting of tenant and landlord representatives appointed by the mayor. Initially, rent regulations applied only to apartments built before 1947, but in 1969, in response to what tenants said were unjustified rent increases and landlords said was political pressure from the wealthy living in the new buildings, the city placed all existing buildings under rent stabilization. The rules governing rent increases are hopelessly complex in application but simple in principle: rent increases are controlled by the state, not the market. It would seem to boil down to a philosophical question of whether the market or the government can best balance equity and efficiency; a classic liberal/conservative split.
The first questions asked by liberals then, should be, are rent controls equitable? Do they help those who need it most? The answer is no. Consider the infamous Mayflower Madam, Sydney Biddle Barrows, who was paying $376.99 monthly on her apartment when her income from her "escort service' was more than a million dollars. Actor Darren McGavin held on to his $218.98 a month rent controlled apartment although he lived most of the time in his Beverly Hills mansion. Alice Mason, the celebrated hostess who brokers more than $100 million in co-ops and houses for the very rich, lives in a rent regulated apartment for a few hundred dollars a month. We found a vice president of an advertising company with a six-figure salary living with his wife in a huge apartment on the fashionable Upper West Side for $600 a month; an elderly woman who is active in Democratic politics with a full floor of a West Side brownstone paying $60 a month; and a university professor with two rent stabilized apartments who sublets one for a net gain of $300 a month. There are eight rent stabilized apartments in the posh Plaza Hotel in midtown Manhattan. Even Mayor Edward I. Koch pays $352.60 a month for a rent controlled apartment worth $1,200 a month on the open market, even though he lives in a riverfront mansion provided by the city and made approximately three-quarters of a million dollars in the past two years from his best-selling memoirs--on top of his $110,000 a year salary.
These examples have a Reagan-like, "welfare-Cadillac-queen' feel to them. But they are not isolated cases. Anyone who has lived in Manhattan knows several other people with similar "great deals.' And the evidence of inequity goes beyond anecdote. Tenants in rent regulated apartments are much wealthier than the average city renter, according to both a 1984 city-sponsored study and a 1985 Arthur D. Little study commissioned by city landlords. The average upperincome household in Manhattan, with an annual income of $40,000, pays $522 per month in rent or 15.5 percent (far below the national average of 30 percent), the Arthur Little study reported. Meanwhile, households in the lowest income groups pay more than 60 percent of their income for rent, largely because they don't get the good rent control deals. "It appears that there is little in the financial structure of New York City's private housing that protects the poorest households from paying very burdensome proportions of their income for rent,' the study concluded. "On the other hand the [rent control] structure seems to provide quite liberal housing cost benefits to the better-off households.'
In short, rent control is a government program that helps the rich. Okay, there are plenty of government programs that help the rich en route to helping the poor. A standard argument in defense of Social Security is that although it benefits the rich, it at least provides a cushion to the poor. And certainly there are hundreds of little old ladies living on a margin who would be thrown on the streets but for the rent regulations. But even that argument--as questionable as it is in the case of Social Security, given the tremendous waste--cannot be applied to rent controls because the system freezes out thousands of needy. Only a small percentage of tenants in rent regulated housing live near or below the poverty line. Most of the poor live in public housing (half a million) or in areas so run down that rent controls are irrelevant. For that reason The Amsterdam News, New York City's leading black paper, opposes rent control. A 1976 editorial entitled "End Rent Control' argued that rent control had not "moved minority groups toward better and less expensive housing.'
Rent control locks out the needy by locking out newcomers. The only people who benefit from it are those who have managed to get a lease and then never move again. But it's the poor who lose their leases most frequently. The 1981 Housing and Vacancy Survey of New York showed that those searching for rent stabilized apartments have lower incomes than those already in them.
A recent arrival to Manahattan might visit a friend who lives in one of these dream apartments and wonder how he might come upon one. But a quick check of "for rent' ads shows a few new apartments at astronomical prices--$1,500-plus monthly for a one-bedroom hutch in an average Manhattan neighborhood--and not much else. The newcomer will then be initiated into the local caste system. His friend will explain that the various laws and regulations create different classes of renters, and only a certain class of renters is eligible for the rent control program.
There is a "means test' for rent control: inheritance, longevity, determination, wiliness, connections, or bribery. An advertisement in a recent issue of New York magazine showed one strategy for landing a rent controlled apartment: huge finder's fees. In this case, the ad offered a $20,000 bounty for a primary lease (read lifetime) on a two-bedroom, rent regulated apartment. In many cases, rent stabilized apartments become a family heirloom, handed down from relative to relative. Or, a landlord might just give the apartment to a family friend or to someone he owes a favor. A few years ago, one highly paid editor of The New York Times was given a rent stabilized apartment on Park Avenue at a savings of some $12,000 a year over market rents by Rudin Brothers, one of the biggest and most politically connected landlords in the city. One young attorney won the right to pay $900 a month for a one-bedroom apartment on the West side only after her father, a stock broker with connections to the building management company, came up with a $10,000 bribe. "That's the way it's done,' she said.
Stop making sense
Once tenants get their coveted rent controlled apartments, they rarely give them up, even when their kids move out or when they buy a house in the suburbs. If the tenants do need to move on there are other ways of evading housing laws to keep "title' and make profits. Metropolitan Life, which owns Stuyvesant Town and Peter Cooper Village, two middle-class Manhattan developments, estimates that 40 percent of its tenants are illegally subletting. Many of the primary tenants, the management found, permanently moved to Florida or upstate New York years ago, keeping their apartments as a tax-free retirement investment that yield $200 per month. Often people will buy a condominium and rent out their apartment to pay for the purchase.
It's not hard to see how rent controls limit apartment turnover, which in New York is less than one-third the national average. Apartment hunting in New York is famous for being nasty, brutish, and long. Small wonder that once they get a lease, New Yorkers almost never let it go. With little new rental construction in the city, rent control helps explain the 2 percent vacancy rate. Even if the number of housing units remained constant, rent regulations would make it difficult for apartment have-nots to become haves. Unfortunately, since 1951 New York City has lost more than 500,000 rental units--about half the current stock of private regulated rentals. Two thousand apartments are demolished or turned into cooperatives every month. The borough of the Bronx has lost 30 percent of its apartments in the past 43 years. New York had the greatest population gain of any city in the nation last year. With a limited number of apartments on the market, rent regulations surely bid up their price.
Although liberals are quick to dismiss conservative arguments that rent control is at fault for much of the rental housing shortage, the system has surely contributed to it. Sam Lefrak, the country's largest landlord with over 50,000 moderately priced apartments in New York City, recently shifted most of his activity across the Hudson River to New Jersey, where he is investing $2 billion to create 40,000 middle-income apartments. "I went to the politicians in Jersey City and told them I couldn't live with rent controls. They passed a law that I would be free of rent controls forever. That's why I went across the river. Nobody can build in New York City. You will get hotels and office towers. But no rental apartments.' Surely part of the reason 71,000 condominiums have been created in New York City in the last decade is that rent control has frustrated the Sam Lefraks.
But if a developer's public pronouncements aren't convincing, then listen to what the investors say to each other. In a 1981 issue of Mortgage Banker Magazine--hardly a forum for public propaganda--Michael Blum, a vice president of General Electric Credit, summed up the opinion of a panel of investment bankers by stating, "We won't finance any new construction in an area with rent control. It doesn't make sense.'
With evidence like this, conservatives are quick to argue that rent control is the demon behind all housing problems, but they overstate the argument. All of New York City's housing problems cannot be blamed on rent control. There are other reasons why developers are more interested in building luxury apartments and condominiums. They are, for example, more profitable enterprises. Factors such as white flight, bad urban planning that ruined neighborhoods, cutbacks in government subsidies for low and moderate income tenant housing, rapid increases in the cost of construction, and a general widening in income gaps go a long way toward explaining the housing shortage.
Still, liberals refuse to recognize that rent controls play a role in warping the housing market. Is it really that difficult to believe that developers would be less likely to build a new moderate-income apartment building if they knew the levels of rent they charged would be unpredictable and out of their hands? Developers who built apartments after the war thinking they would be decontrolled, had the rug pulled out from under them in 1969, when New York City stabilized all apartments retroactively. That's not the kind of behavior that's likely to bring builders around to do business again.
Moreover, while rents for stabilized and controlled apartments have increased significantly in recent years, they have not increased as much as the cost of maintenance and operations. So it makes sense to assume that rent controls contribute to housing deterioration. Nine percent of New York's housing stock is dilapidated, compared to a 3 percent average nationwide.
Trends such as these led Gunnar Myrdal, Nobel Prize-winning economist and the architect of Sweden's welfare state, to write that rent control "has constituted the worst example of poor planning by government lacking courage and vision.'
People don't usually think of rent control as a government subsidy program because, while there are clearly some winners, it's not evident who is paying for their good fortune. The losers are those who cannot get a rent regulated apartment and must pay artificially high market rates, in the $1,000-per-month range and higher. If only 30 out of every 100 apartments have unrestricted rents, clearly those rents will be higher than if all 100 are unrestricted. In that sense those without rent stabilized apartments are subsidizing those with--including the wealthy. The cost to the taxpayers of rent subsidy for those in rent controlled apartments amounts to hundreds of millions of dollars. That's how much additional tax revenue the city would collect if rent controls did not exist.
Are landlords being hurt by these regulations? Some are, but most find ways of surviving. For example, some brutalize and harass tenants into leaving their buildings so they can convert them into cooperatives or condominiums. Specialists in tenant harrassment have become New York's entrepreneurs. Take the case of 332-334 West 19th Street, where the owners a few years ago hired a management company to empty out the building. They smashed doors, beat tenants, and helped prostitutes and junkies move into empty apartments. Others let service and maintenance deteriorate to bolster their profit margin. In short, landlords make profits not by providing better services but by decreasing services; not by protecting their property but by destroying it (or standing by idly while tenants destroy it); not by building more apartments but by demolishing them; not by building trust in tenants but by kicking them out on the street.
With the level of inequity that is present in this system, the tax losses it creates for the city, and the probability that it contributes to housing shortages, why does rent control still exist? Because the debate over rent control is really not a matter of political philosophy over the role of government; it is a matter of mathematics. A simple majority of tenants in New York are in rent regulated apartments and don't want to give them up. The city is paying the price.
In fact, a culture of rent control has developed that rationalizes the preservation of these "good deals.' It relies on the age-old hatred of the landlord. In smaller towns, people know their landlords and building owners, who are often people of modest incomes and respectable reputations who bought into a building as an investment. But in New York, landlords are seen as no better than muggers in business suits. Rent control seems to be depriving landlords of something they want, so it must be good (even when the landlord is a small investor or local church). It is a badge of honor to be a rent-controlled tenant. Mayor Koch seems to keep his apartment as a gesture to show he is just plain folks after all. His apartment is just a latter-day log cabin, a la Abe Lincoln. "I happen to think that if I do have a bargain . . . I'm not giving it up,' says Koch. "Nor do I intend to return there for seven days every week until at least four to eight years from now. I don't know who people resent it. Maybe you pay more rent and don't like the fact that somebody else pays less.'
As damaging as rent controls are to New York City, they are among the most politically secure laws around. By now, two generations of New Yorkers have grown up under controls. "Politically it's an impossible issue, not one the voters can understand, even though controls are an anachronism,' says David Garth, the political consultant who has managed campaigns for Mayor Koch and former Governor Hugh Carey. "It's a standard of living that we are used to. Like we have the Mets and the Jets and the subways.' Facing an interest group so huge, Democratic and Republican politicians universally have adopted a covenant of silence about the destructive aspects of rent controls. For a New York City politician to question the fairness or efficiency of rent regulations would be to give up all hope of a future in electoral politics. Privately, many of them admit the system is hopelessly flawed, but public debate has been closed. "It is political suicide to bring it up,' said Maureen Connelly, who managed a city council president campaign. The New York Daily News recently reported that a panel created by Governor Mario Cuomo to study rent controls may recommend decontrolling apartments for the very wealthy. But officials involved have agreed to keep the study under wraps--until after the election. A recent New York Times poll found that 62 percent of New Yorkers believe rent controls are necessary to make sure people could afford housing. More than half of those identifying themselves as conservatives or Republicans agreed.
On an individual basis, this makes perfect sense. Why would you volunteer to be priced out of your home, particularly when no one seems to be hurt by your good fortune? Simply abolishing controls, as some conservatives suggest, would force huge, immediate increases and tremendous dislocation for many who aren't wealthy. James Tobin, a liberal, Nobel Prizewinning economist from Yale, noted that there is a consensus in the economics profession that rent controls are "very inefficient. The only difference between liberal and conservative economists is that conservatives would like to do away with them without putting anything in their place. Liberal economists would like to come up with something more efficient.'
What should be done? Communities contemplating rent controls to address housing affordability problems should concentrate on income subsidies rather than rent controls. In cases where rapid rent escalations and price gouging make rent controls necessary, they should be imposed temporarily and the rich should be excluded.
Cities in which rent controls already are entrenched have a much more difficult problem. Removing controls altogether would create pandemonium that would make the current system seem rational and fair. New York should phase out controls gradually, in a way that spares current tenants unaffordable rent hikes and harassment. Most important, government must commit itself to a massive program to increase construction of low- and middle-income housing. Depreciation for office buildings has led to so much construction that there is now an office vacancy rate of as much as 20 percent in many major cities. If government could create such a massive office building glut with generous tax writeoffs, then surely it could do the same for moderate income housing, which is, after all, more important. If liberals expended as much creative energy to find ways to construct new housing as they have defending a clearly inequitable system of rent controls, New York would undoubtedly be able to ease its housing shortage.
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|Date:||Jun 1, 1986|
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