Reason’s Christian Britschgi just offered us a glimpse at retrograde economics.
It’s happening – no surprise -- in Oregon, where, thanks to leftist politicians, the State Senate is hearing a bill that will implement rent control state-wide.
Which raises a simple question: Don’t these people bother glancing at the rules of economics and the track record of price controls?
The bill is called SB608, and is being admired in committee right now. What will it do?
(SB 608) would forbid landlords from increasing rents during the first year of a person's tenancy and would cap future rent increases at seven percent per year plus inflation thereafter. These caps would apply to all rental properties save for those built within the last 15 years, and for landlords who are providing reduced rents as part of some sort of government housing program. There are no vacancy controls in SB 608, meaning that landlords would be able to raise rents an unlimited amount once a tenant moves out. For this reason, the bill also bans no-cause evictions: A landlord will have to show a government-approved reason for kicking a tenant out.
Which inspires anyone who’s studied economics to ask the next question: Do these people not understand the price system and how it reflects supply and demand, allowing resources to be allocated where consumers want them?
It's pretty simple, as most of us know. The price is a signal that incentivizes people to change the supply of something or demand for something. If an item, resource, or service is in high supply and lower relative demand, the price will decrease, indicating to those in the field, and those thinking about getting into the field, that it’s over-saturated and not worth expanding. In fact, the low price tells market participants that they ought to devote their resources (physical, temporal, skills, and labor) to other products or services.
If the item, resource, or service is in relatively low supply compared to a strong demand, prices rise, signaling suppliers to increase supply, and signaling potential market participants to enter and compete. This new competition sees prices mediate as supply grows.
Eventually, the price system allows suppliers and consumers to achieve “equilibrium”.
If price is not allowed to rise, there will be no signal to potential new suppliers to enter the field, and little to no incentive for new or current suppliers to increase the quantity supplied, as a result, consumers will see scarcity relative to their demand. This is what happened when Richard Nixon applied price controls on gas in the 1970s – people encountered massive shortages. Traffic jams are another example, wherein the supply of government-run roads is insufficient to meet demand, and there is no market incentive to increase road space relative to the need.
Yet many of Oregon’s leftist politicians, including Democrat Governor Kate Brown, are gushing about the idea, revealing that they have yet to grasp one of the most fundamental axioms of economics.
Britschgi notes that the fifteen-year exemption on new buildings owned by the builders will shift behavior, smothering the incentives for builders to create space for other clients.
The policy would have a greater impact on the majority of developers who construct buildings with the intention of selling them off to investors. The longer-term caps on rent increases reduce how much those investors are willing to pay for a project. That lowers returns for developers looking to sell, thus dissuading many of them from going through with the projects in the first place.
And SB 608 will also incentivize landlords to turn apartments into condos:
While SB 608 bans no-cause evictions, it does allow a landlord to evict tenants if they plan on renovating a unit or moving into it themselves. That leaves open the door for landlords to kick tenants out, renovate units, and then put them back on the market as condominiums that they can sell for whatever price they want.
Meanwhile, Britschgi notes, the Oregon ban on city rent control has actually seen positive results.
Indeed, in Portland—the largest city in Oregon—record apartment construction in the last two years has resulted in a fall in rents. According to the website Apartment List, year-over-year rents (rental prices) in Portland declined by 1.2 percent and are likely to keep falling… ECONorthwest estimates that only 5 percent of buildings in Portland increased rents above what would be allowed by SB 608 in 2018. That compares to 25 percent of buildings in 2015 and 2016.
Why are so many Oregon state politicians foaming at the mouth to pass a politically visible command-and-control law when they have examples of how the price system works to fill demand and decrease prices for everyone?
And if these politicians are so unhappy with the way others treat renters, why don't they engage in peaceful activity and compete, privately creating their own, low-rent, apartments?
Instead, they prefer to tell others how to handle their own property and voluntary association.
There’s a saying about insanity, that it can be defined in one way as someone doing the same thing over and over and expecting a different outcome.
It appears that this is the case with Oregon’s leftist drive for rent control. As usual, they’d prefer to overlook economics and tell others how to live, rather than allow the market to peacefully answer consumer demand.
That’s not how sane people behave.