When running for president, Joe Biden often praised California’s governance and promised to nationalize many of the state’s policies. While Biden mostly has promoted the state’s infamous Assembly Bill 5, which was an attempt to largely outlaw independent contracting, the president also seeks to mimic the state in another way: imposing national rent controls.
The White House, of course, has not called its recent initiative national rent control, but rather a Tenant’s Bill of Rights. The federal government, through executive orders from Biden, would become directly involved in numerous facets of property leasing, including limiting rent increases and regulating ways property owners can deal with their tenants who are arrears on their rent or damage their property.
As with most executive orders created to do an end-run around the legislative process, Biden has found a “hook” via the fact that the government mortgage entities Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) are guaranteeing nearly 90 percent of mortgages in this country. If the federal government has a hand in these financial matters, so the legal logic goes, then it has the legal duty to regulate them.
Whether or not this latest order – like Biden’s decision to use executive orders to “forgive” some student loan debt – passes U.S. Supreme Court muster waits to be seen. However, it should never fall on the courts to put the brakes on destructive economic policies. Like so many other things coming from Washington, this latest policy, if put into place, will severely damage housing availability nationwide and make finding a decent and affordable place to live even more difficult.
Inflation, COVID-19 restrictions and faulty economics
There is no doubt that rents have gone up quickly in the past couple of years, but that hardly should be a surprise, since the COVID-19 lockdowns and restrictions, along with a massive surge of inflation forced up prices of just about everything. For example, in places like St. Paul, Minn., rents shot up, leaving some tenants unable to pay and not being able to find affordable places to live.
Unfortunately, these rent hikes (and the increases in most prices in the past few years) have been framed as a surge in greed from profiteering landlords and property owners, as though this past year dwelling owners suddenly conspired to force up rents to ruinous levels. When activists and politicians look to rent control as a solution, however, it is hard for clear-thinking people to resist that tide because of the inflammatory rhetoric that makes for good sound bites and quotes.
The Biden White House apparently has no concept whatsoever about the economic effects of price controls, and falsely claims that price controls “lower costs.” For example, Biden has claimed that his $2,000 annual cap on prices of drugs sold to seniors “reduces costs” of prescription drugs, as though costs were mere monetary outlays by consumers.
In reality, economists understand costs as opportunity costs, something given up for something else. When scarcity prevails (as always is the case when labor and capital are involved in producing something), one can gain something only by giving up the next highest alternative good or activity.
Price controls do not decrease costs; they simply shift them. Over time they reduce opportunities for production. Thus, as Biden’s drug price controls become increasingly binding, fewer drugs will be available, creating shortages and increasing the real costs of producing and obtaining them. The short-term effects of lower drug prices for seniors ultimately will result in higher real prices for everyone. When that happens, those in power will blame the producers, not their own policies.
Likewise, rent controls have followed the same pattern. First, renters pay lower rents than they would have without the controls. However, as the controls destroy incentives of owners to build new rental housing and to maintain existing housing, shortages develop and the real cost of housing increases. As in the case of drug producers, politicians and their media will blame the landlords and demand even harsher and more punitive measures, making the problem worse.
Bad laws and bad policies
Like many regulatory initiatives, this one is based upon the perception that there is a problem that only government can solve. Once regulation advocates decide the imposition of new rules is what is needed, they then look for a legal “hook” that will enable them to expand regulatory power. In this case, as noted earlier, the Biden White House is proposing the Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac, regulate rents for dwellings that have their mortgages guaranteed by these government mortgage entities.
At the present, this is a creative legal theory, but such theories in past times have morphed into federal control, and this bears watching as well. The kind of federal control that the Biden administration is proposing – meeting the demands of the left wing of the Democratic Party, including Sen. Elizabeth Warren of Massachusetts and Rep. Alexandria Ocasio-Cortez of New York – would have a disastrous long-term effect upon housing in the United States.
As noted earlier, there is the basic economic arguments against rent control that have been extensive and accurate. Rent controls have the long-run effect of creating housing shortages. While not all rent-controlled cities look like the South Bronx in New York City in 1980, nonetheless when government places costly restrictions on landlords and then prevents them from recouping their losses, the logical result is less housing.
The late William Tucker wrote volumes on the problems caused by rent control and noted that not only does rent control hasten deterioration of existing housing and discourages new home building, but it creates interest groups that gain a foothold and will not give up their positions no matter how much harm they cause. Furthermore, Tucker notes that in the long run, rent controls make housing even less affordable due to the fact that cities with rent control have fewer vacancies than places with no such controls.
Economic analysis is not optional, nor is it possible for historically bad policies to suddenly have different and favorable results. Furthermore, if Biden is able to empower federal agents to come down hard on landlords who raise rents, one can bet it will be the small building owners that are hit hardest. Over time, the small-time landlords will sell out to the larger corporate owners as the government squeezes property owners, just as it did during the COVID-19 lockdowns.
If Biden is able to carry out his plans, there are two other problems that will have a huge effect on rent prices. First, the initiative would drive more property and building owners into short-term rentals, such as Airbnb, which are not regulated, which means fewer apartments and houses would be available for long-term rental, further skewing the housing market.
Second, if federal officials come down hard on landlords with government-guaranteed mortgages, they risk forcing losses on owners and making these properties vulnerable to bankruptcy and foreclosure. Christian Britschgi writes in Reason that such policies would conflict with the FHFA’s legal mission to minimizes losses with Freddie Mac and Fannie Mae.
In other words, if the government forces up costs on landlords and damages their finances, it would put its own mortgage entities in financial peril. Furthermore, it would make Fannie and Freddie mortgages less attractive, reducing their market share.
Expect depressing results
While there are political benefits to imposing national rent controls, the picture is much clearer when economic and legal matters are factored into the mix. Depending upon how draconian the policies would be (and one can be sure that politicians like Warren would love to run landlords out of business), the Biden “Renters’ Bill of Rights” would produce the same depressing results that rent controls and other tenant-based restrictions have had in cities like San Francisco and New York. It’s only a matter of time.
William L. Anderson is an editor with the Mises Institute and Emeritus Professor of Economics, Frostburg State University, Frostburg, Maryland.