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Saturday, April 29, 2017

Rent Control Makes It Harder to Vote with Your Feet

Rent control is immune from owners' escaping by voting with their feet.

One advantage of a federal system is enabling people ill-treated by one government body to “vote with their feet” toward less abusive jurisdictions. That escape valve is one rationale for reserving some political policy determination for state rather than national government, or to local rather than state government. However, devolving political power to lower level governments does not serve citizens’ rights when it comes to rent control, because rent control paralyzes owners’ ability to escape imposed burdens by voting with their feet.

Virtually every rent control story focuses on local government policies. Less well known, however, is that a majority of states actually ban or restrict local governments’ power to impose rent control. And currently, in at least four states (California, Oregon, Washington, and Illinois), those restrictions are under attack. Municipalities want power they are currently denied so they can impose rent control, supposedly to give local citizens “what they want.” That raises the question of whether rent control policy should be vested at the state level or the local level.

The Good, the Bad, and the Ugly of Local Governance

In many circumstances, the option to vote with your feet favors local governance. It is generally less costly to leave a small local government jurisdiction whose benefits are not worth the cost, than it is to leave a similarly bad state government jurisdiction. By the same token, it is less costly to leave a state than it is to leave the country. The enhanced exit options provided at a more local level may better protect citizens’ rights.

Rent control is immune from owners’ escaping by voting with their feet, which is the usual basis for preferring local political determination.Citizens’ ability to cheaply leave smaller jurisdictions more tightly limits government’s ability to use them as cash cows rather than serve them better. This is true of sales and income taxes, for example. Dissatisfied residents can avoid those burdens by going somewhere with lower tax rates. However, the same is not true of rent control.

Rent control is immune from owners’ escaping by voting with their feet, which is the usual basis for preferring local political determination. Owners can move away, but if they maintain ownership of their property, they are still forced to bear the reduced earnings caused by government interference. If they sell their property, they bear the burden of a lower sales price. Consequently, even selling your property and leaving the jurisdiction provides no escape from its burdens.

Why would we expect to see rent control in majority-renter cities? Renters greatly outnumber rental property owners, so they have the votes to determine majority outcomes. Many of the far-outnumbered rental property owners cannot even vote on the issue. By stripping owners of much of their properties’ value, local majority power can provide renters with the greatest wealth transfer possible – often involving several hundred or even thousands of dollars in rent each month as compared to free-market prices. And given that rent controls give residents virtual tenure for as long as they choose to stay, that wealth transfer can reach well into six digits for a renter.

So, imposing rent controls in majority-renter municipalities targets the property rights of owners who cannot protect themselves by voting with their feet, and transfers very large monetary gains to the only group that benefits – people who are renting when price controls are adopted. Current renters get to vote, but prospective future tenants, who will be harmed by the reduced supply of available rental housing that results, obviously cannot vote. This is also true of renters in neighboring jurisdictions whose costs rise due to the reduced regional supply of rental units.

In other words, rent control guarantees that current renters in a municipality can vote themselves huge amounts of money out of outnumbered owners’ pockets, while the far larger number of those harmed – renters in nearby areas and those who will search for housing there in the future but find no vacancies – cannot even vote on the issue. It is piracy by local plebiscite.

State Governance Is the Right Governance

Those who would be harmed get to vote at the state level.That is why, unlike many other areas of governance, state-level determination of rent control policy may protect citizens’ rights and well-being better than local determination. Those who would be harmed get to vote at the state level. State-level determination allows owners who face robbery to more effectively unite against it. Even government officials outside the local municipality who face falling tax revenue from the reduced construction and income that results from rent control’s disincentives get a voice, rather than being ignored under local determination. The result is that citizens may be better served by making it harder for local renters to form a political juggernaut that can steamroll others’ rights and well-being at the state level.

It is important to note that state determination is no guarantee of appropriate rental housing policy. After all, a state could impose rent controls on every municipal area in the state. However, a statewide ban on rent control is perfectly consistent with the essential job of government – to protect individuals and their property against force and fraud. State prohibition of grand theft auto, regardless of the municipality, better protects residents. So would state prohibition of the grand theft, housing, which rent control represents.

  • Gary M. Galles is a Professor of Economics at Pepperdine University and a member of the Foundation for Economic Education faculty network.

    In addition to his new book, Pathways to Policy Failures (2020), his books include Lines of Liberty (2016), Faulty Premises, Faulty Policies (2014), and Apostle of Peace (2013).