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Rent Control and Minimum Wage Laws Harm Those Who Are Supposed to Benefit

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10/16/2018

Jacob Bronowski wrote, in The Common Sense of Science, that “at the basis of human thought lies the judgment of what is like and what is unlike.” That is, useful analysis requires treating that which is like similarly, and that which is unlike, differently. Unfortunately, public policies often mistakenly treat people that are unlike in crucial ways as if they are like, and people who are alike in crucial ways as if they are unlike.

There are several issues in housing policy alone that illustrate this point.

Not All Renters Are Alike

The most recent example involves California’s Proposition 10, which would allow local governments there to once again impose rent control without restriction from the state. An October 6 article in the Los Angeles Times was titled “Will Prop. 10 help or hurt state’s tenants?” The problem is that such a question assumes all tenants can be treated as part of the same group. However, imposing rent control will treat different groups of tenants in sharply different ways. It would be a massive windfall for current tenants from landlords’ pockets, forcing rents below market value, with tenancy protections guaranteeing the windfall into the future. Los Angeles Mayor Eric Garcetti wasn’t wrong when he called getting a rent-controlled apartment “like winning the lottery.” But rent control does not benefit all renters. It would harm the far larger group of people who seek rental housing after rent control is imposed. The progressive reduction in the quantity and quality of the housing stock over time will increasingly face prospects with “no vacancy” signs rather than available or affordable units. But the usual focus on current renters as if they represent all renters hides that radically different treatment of present tenants and future tenant hopefuls.

Another recent example is inclusionary housing policies, such as San Jose’s 2010 ordinance requiring housing developers of over 19 units to sell 15% of their units far below their market value. The mandated units were presented as proof politicians were “doing something” to increase housing availability. However, the mandate increased the costs of non-subsidized new housing, reducing the number of new non-subsidized units constructed. And the large decrease in non-subsidized housing construction swamped the much smaller effect on mandated construction, reducing the future supply of homes, raising home prices for everyone except those who “win” a subsidized home, including everyone who met the same qualifications as the winners. But looking at the lucky as representative of all prospective buyers again hides radically different treatment.

Rental housing subsidies are still another violation of Brownowski’s insight. Those who meet the program criteria are eligible for the subsidies. But funding is far less than sufficient to give aid to all those eligible. Those who actually receive the aid benefit. But their subsidies increase the market demand in that sector of the rental housing market, which harms all those who are eligible, but who remain on nearly endless waiting lists, or give up, by increasing the rent they must pay. Again, looking only at the lucky disguises harm to the unlucky from the same group.

Examples of this phenomenon also extent beyond the housing market. The minimum wage provides another illustration. Supporters assert “the poor” will gain. However, in labor economist Mark Wilson’s words, “evidence from a large number of academic studies suggests that minimum wage increases don’t reduce poverty levels.” Yet even if “the poor” in aggregate would gain income, we must ask how low-income individuals fare. They are often harmed. Some lose jobs. Others lose hours of work. For those who keep their jobs and hours, on-the-job training and fringe benefits will fall, or required effort will rise, to offset hiked wages. And higher current wages are often less valuable than what is given up, particularly on-the-job training, which enables people to learn and earn their way out of poverty. Further, those with fewer skills, less education and job experience face greater employment losses. But treating low-income workers as if they form a single group disguises the fact that lucky low-income workers gain, while many others lose, some to the point of being unemployable.

Beyond such examples are other related ones. For example, subsidies that go to one group—e.g., the elderly, young, poor, etc.—but not others, also increase the market demand for the goods in question, harming those not subsidized by raising the market prices they must bear. That means we must carefully investigate whether there is a sufficient reason to treat those affected in such a disparate manner.

In the cases we have discussed, at the basis of policy formation, there is all-too-frequently a failure to adequately distinguish like from unlike. Such failures in beginning premises can undermine or invalidate policy conclusions drawn from them. Consequently, we need to question current policies based on such errors and recognize similar errors as red flags for any new policy proposals.

Gary M. Galles is a professor of economics at Pepperdine University. He is the author of The Apostle of Peace: The Radical Mind of Leonard Read.

 

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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