Mason Gaffney: How to Revive a Dying City

Sharing the Surplus

Because urban rents are a social surplus, not a payment for anyone's making or supplying land, parties other than the landowner have a claim. A good deal of American politics deals with how to assert that claim and share in the surplus.

Dividing a big pie seems a pleasant enough task, but Confucius knew better: "It is easier to face a common enemy than to share a surplus." The common ways of sharing surplus are clumsy, divisive, and destructive; they bear some responsibility for dead cities. With too much quarreling over spoils, there are no spoils to dispute. Consider how spoils are shared, and how we might do better.

Rent Control
Rent control, which shares surplus with tenants, is a tempting route that several cities follow. Renters feel abused and neglected by tough managers and anonymous landlords. Supply is inelastic, at least in the short run, so owners can't cut and run. Poetic justice is served. But there are several spots on this policy:

• Limited number of beneficiaries. The original tenants carve out an equity in the landlord's estate, but benefits spread no wider. Tenants may sublet to others, becoming landlords themselves. Rent control is at best a zero-sum game among the few, not a social reform.
• Lower incentive to maintain supply. It becomes unattractive to build new rental units, which are allowed higher initial rents but are vulnerable to future caps. So rent control is worse than a zero-sum game, it becomes negative-sum. Rent control confiscates land income and building income alike; buildings do not receive needed maintenance if there is no return. Too, land can be reallocated to uncontrolled uses, such as condominium-ization. A new wrinkle in Santa Monica is to buy a cheap rent-controlled apartment building and convert it to a single-family residence for the new owner.
• Wasted space. Tenants lose incentives to economize on space that is underpriced to them. In the extreme, tenants move away, but retain their apartments to use a few weeks of the year.
• New class society. Old renters become a privileged class. A lower new supply, and wasted space, force uncontrolled rent on new buildings above the market level.
• Owner-tenant clashes. An owner's main goal under rent control is to evict and repossess. Nastiness and intimidation have become routine, and the war stories legendary. In Tokyo, outright extortion and violence are frequent.
• Aborted incentive to maintain and improve. Landlords, and tenants retaining precarious tenures, lose all economic motivation to maintain or improve property.
• Dogged obstructionism. Sitting tenants, who cannot gain by site renewal, fight it every way they can. Obstructionists have a vested interest in the status quo, however obsolescent, however decayed, however inappropriate to the site.
• Undertaxation. Equity that tenants carve out of landlords' estates has no market value, because it is inalienable (at least legally). Assessed values and tax yields drop. The privileged class pays low rent and avoids supporting public services. Higher tax burdens are dumped on others, and worsened public services are suffered by all. By way of analogy, I am a small farmer with canal company shares that allow me to buy water below the market price, but no right to sell my water. So I and my fellow shareholders waste water and create a chronic, artificial southern California water shortage.

The rationale is that housing or water is too important to leave to the market, and must be price-controlled. The result is regulation much worse than anything a market could accomplish. Around 1973 there were shortages of coffee, raisins, and even toilet paper. These were too unimportant to regulate, so their prices rose, demand fell, supply rose, and the crises quickly disappeared. Rent control ensures that we will not overcome the housing crisis so simply, if at all. ... read the whole article