With every idea offered as a serious “solution,” it becomes clearer why California has a housing crisis. The thinking is stuck on policies that aggravate rather than improve.
The latest ill-considered proposal picking up support would enact price-gouging laws to keep rental costs in check. Los Angeles Mayor Eric Garcetti, Oakland Mayor Libby Schaaf, and Sen. Scott Wiener, D-San Francisco, have publicly endorsed the idea. Gov. Gavin Newsom has carved out a similar position, railing in his State of the State address against “rent spikes,” and promising to sign “a good package on rent stability this year” if the Legislature sends him one.
Wiener sees price-gouging legislation as a temporary step, telling KPBS News “we need to take action to keep people stable in the housing that they have.” What it will do instead is ensure new units will never go up. If price-gouging laws bar owners from charging market rates, there’s little incentive to build.
Price-gouging laws would be especially damaging in California, which continues to suffer through a brutal housing shortage. The state needs about 100,000 housing units built each year in addition to the 100,000 to 140,000 units that are usually built, says the nonpartisan Legislative Analyst’s Office. Stealing the profit motive won’t get that done.
We’re dealing with an easily understandable law of economics. The record shows, says University of Michigan-Flint economist Mark J. Perry, that “the unintended and unseen adverse consequences of enforcing price-gouging laws are predictable, unfortunate, and avoidable.” Those consequences are artificial shortages.
When government halts the price increases that spontaneously occur due to shortages that follow natural disasters, it would on the surface appear to be a response no decent person could object to. But it’s those few who speak out against price-gouging laws who are the true humanitarians.
Here’s what happens when the law sets limits on the prices of high-demand items after natural disasters: Supplies are exhausted, leaving some empty-handed. Both established businesses and entrepreneurs will rush goods to these consumers, often from long distances and at heavy costs, but only if they can make a profit. Price caps, however, prevent suppliers from earning profits, which means those who need lumber, generators, fuel, food, and other emergency goods will go without.
One story shows how poisonous price-gouging laws are. In 2005, a Kentucky man bought 19 generators, rented a truck, and drove to Mississippi where hurricane victims were in desperate need of power. He priced the generators at twice the cost he paid to cover his investment and earn a profit. Instead, he was arrested for price gouging, the generators were seized, and 19 Mississippi families who could have had power were forced to further endure 19th century conditions.
Placing rents under price-gouging laws would have the same effect as rent-control laws, as would Newsom’s “good package” of rent-stability legislation. All create a disincentive for developers to increase the housing stock. They won’t – in fact, cannot – build unless they are able to earn a profit.
Like the Carolinas in the aftermath of the hurricane, California’s housing market is also a disaster area – though not due to natural calamity. It’s been wrecked brick by brick through compounded human error. Lawmakers have for decades passed legislation, starting with the California Environmental Quality Act in 1970, and approved local ordinances that have consumed the profit motive needed to build. The tangle of policy, which includes affordable-housing mandates, building-permit snares, county and municipal regulations, and unchecked NIMBYism, is an effective barrier to new housing in California.
While Newsom, Garcetti, Schaaf, Wiener, and others in Sacramento think about strangling an already-wheezing market with price-gouging laws, a coalition of developers, politicians, tenant activists, business leaders, and union representatives has dreamed up something called the CASA Compact “to confront the housing crisis in the San Francisco Bay Area.”
The 10-point plan makes some good points, particularly regarding regulatory and zoning relief, expedited permit and approval processes, and better utilization of public lands. But it also proposes to “establish a Bay Area-wide rent cap that limits annual increases in rent to a reasonable amount.”
Every member of the coalition should know better – and they probably do – than to support rent-control laws. It’s no secret that they discourage building. Even Paul Krugman, the political left’s go-to columnist who once played an economist, acknowledges that rent control’s negative effects are “among the best-understood issues in all of economics, and — among economists, anyway — one of the least controversial.”
That rent control is perpetually floated as an answer to California’s housing crunch helps explain why the crisis has become intractable.