Rent Control: New York's
Self-Destruction

A week ago I castigated New York Mayor Mike Bloomberg over his attempts to tax the city back to prosperity. Yet the root problem is not the mayor, but the city's demented political culture.

This was nicely on display last week, as the state legislature gleefully overrode Gov. George Pataki's 119 vetoes of bills to raise state taxes and spending. He promptly also vetoed similar steps by the city, and the legislature is set to override these today. Meanwhile, "activists" found a friendly judge to roll back an announced increase in transit fares, and local officials started another suit to block plans to close eight of the city's 230 firehouses.

For its part, the City Council spent $75,000 of taxpayer money to send 31 busloads of protestors to Albany to block the steps and stairways outside the governor's office on behalf of the extension of destructive rent-control laws. This was about the only notice in the hubbub that the state Emergency Tenant Protection Act, authorizing the city's rent control and the euphemistically labeled "rent stabilization," is set to expire June 15 unless renewed.

"[R]ent control appears to be the most efficient technique presently known to destroy a city -- except for bombing," Swedish economist Assar Lindbeck observed in a 1972 book. Rent control is a big cause of the city's chronic financial mess, a huge cause of its notorious housing scarcity and a neat illustration of its political unreality. Ending it would be a big step toward unleashing a construction boom and boosting its economy to offset destructive tax increases.

New York has maintained price controls on rent since World War II, and as it took over buildings abandoned by landlords at one point it found it owned 70% of Harlem. The Koch administration borrowed $5.1 billion to rehabilitate abandoned buildings and return them to the market. The program has been largely successful, but interest on the borrowings costs $350 million a year, plus $100 million to operate the rehabilitation department. The city also has huge programs for public housing, publicly assisted housing and the homeless. William Tucker, the writer who has studied the costs most closely, estimates the direct costs of rent control at $2 billion a year, exclusive of the effect of shrinking the property tax base.

Rent control, in addition to bewildering zoning regulation and corruption in the building trades, has inhibited construction in the city. During the recession of 1990-91, the city actually lost more housing units than it gained. During the subsequent boom, its best year was in 1998, when developers completed 11,432 units and rehabilitated 6,967. However, household formation exceeded housing increases in every year of the decade, the peak reaching 44,700 in 2000. Prior to rent control, builders regularly completed 30,000 units a year, or 90,000 at the peak in 1927. Price controls do not apply to new, non-subsidized units, but do continue as an overhanging threat, so that the construction that does take place is concentrated in luxury development.

Price controls on housing, as with any other commodity, produce shortages and push up prices on whatever supply is exempt. In New York City, only 30% of rental units are exempt, so their rents naturally soar, and high prices are then used to justify price controls. Controls also reduce mobility in housing as long-term tenants stay with good deals even when they no longer need as much space. In a particularly lunatic provision of the New York law, tenants are allowed to pass along their tenant rights under rent control to relatives.

While many of the demonstrators the City Council sent to Albany chanted in Spanish, the poor do not tend to be long-term tenants who benefit from controls. The Manhattan Institute chartered an elaborate study by Henry O. Pollakowski, an MIT housing expert. He concluded, "tenants in low- and moderate-income areas receive little or no benefit from rent stabilization, while tenants in more affluent locations are effectively subsidized for a substantial portion of their rent."

Today the Institute will release a second Pollakowski study of the effects of terminating rent control in Cambridge, Mass. Harvard's home regulated rents from 1971 to 1994, when the practice was precipitously terminated by a statewide referendum. "Remember the tidal wave of evictions, the masses of poor senior citizens kicked out of their homes?" Boston Globe Columnist Jeff Jacoby wrote. "Of course you don't. It never happened. There was no crisis." Mr. Pollakowski found that Cambridge deregulation was followed by a boom in housing investment. Mr. Tucker says that 50-years of pent-up housing demand is an "ace in the hole" in reviving the city.

Yet at the moment deregulation seems to have no serious political advocates. The issue has been kept alive by Mr. Tucker in the New York Post and feisty New York Sun, and by Mr. Pollakowski and Peter Salins at the Manhattan Institute. But the Democratic Assembly has passed a bill actually strengthening controls, and at the turn of the year both Gov. Pataki and Senate leader Joseph Bruno said good words about extending the present law.

When the law was last extended in 1997, Mr. Bruno led a seven-month campaign against it, with the governor's nominal support. But in the end the governor double-crossed Mr. Bruno to strike a deal with Assembly leader Sheldon Silver. The 1997 experience shows the danger of negotiation for a "reasonable" phase-out of controls, while the Cambridge experience shows that warnings of a crisis with sudden decontrol are much overblown.

This year's budget debate, with all Senate Republicans joining Democrats in unanimous override votes, reflects rancor over both the 1997 double-cross and Mr. Pataki's own pre-election spending spree. But have New York Republicans totally abandoned free-market principles? I vividly remember an editorial-board meeting when a newly elected Gov. Pataki professed great eagerness to stop the 1997 renewal. If he is really returning to his conservative roots via the veto, the biggest imaginable step toward restoring New York City is his at the stroke of a pen.

Updated May 19, 2003