Knowledge And Decisions

Artificially low prices under rent control facilitates the disaggregation of existing families or living units into smaller groups of individuals with separate households, and facilitates the use of more space per person in existing households, so that very quickly “no vacancy” signs appear almost everywhere. After that point, people who find themselves having to move for compelling reasons may have to double up or live in garages or other makeshift, overcrowded housing, precisely because of the general use of more space per person in the country as a whole. While young couples with growing families may find themselves increasingly overcrowded in housing that was once adequate, older couples whose children have left home have little financial incentive to give up larger housing units that the family once needed, because rent control makes the larger unit affordable and leaves few alternative places to move into. In the absence of rent control, there is an incentive for a continuous interchange of different sized housing units among families at different stages of their life cycle. The growing young family trades off other things for housing incrementally, while the older family with children “leaving the nest” can trade off excess space for other things they want. Prices convey effective knowledge of these ever-changing trade-offs, directing each set of decision makers to where they can get the most satisfaction — from their own respective viewpoints — from their respective assets. Rent control distorts — or virtually eliminates — this flow of information. The same set of people and the same set of physical assets continue to exist, but the simple fact that they cannot redistribute themselves among the assets in accordance with their divergent and changing desires means that there is less satisfaction derived from a given housing stock. Though it is the same physical matter, its value is less.

The losses resulting from rent control are not losses of physical matter or of money. Both can exist in the same amounts as before — and therefore cannot be measured in “objective” statistical data based on the relevant transactions (renting). The reduction or nonexistence of desired transactions is precisely the loss and no numbers or expertise can objectively measure thwarted desires. The most that can be objectively documented are waiting lists, illegal payments to landlords, and other scattered artifacts analogous to the broken pottery and remnants of clothing available to anthropologists studying prehistoric peoples. In a longer time perspective, rent control prices convey distorted knowledge not only about the optimal allocation of existing housing but about the trade-offs people would be willing to make to get new housing. Renters are forbidden to convey the full urgency of their desire for new housing, in the form of financial incentives that would reach landlords, financial institutions, and builders. This urgency may be growing as the old housing continually deteriorates and wears out, but the effective signal received by builders may be that there are few resources available to be traded off for more housing. The effective signals received by landlords with old buildings may be that there is little available to be traded off to get the maintenance and repair needed to keep them going — even though the tenants might prefer paying more rent to seeing the building deteriorate or the landlord abandon it entirely, as has happened on a mass scale in New York City, where rent control has persisted long after World War II.