Proposition 98 and Rent Control - the Policy Issues:

Much of the opposition to Proposition 98 - the only one of the two California initiatives taht will be voted on June 3 that will actually protect property rights against eminent domain - has nothing to do with takings. Instead, it is focused on the provision of Prop 98 that would phase out rent control. In this post, I argue that this opposition is misguided. If enacted, Prop 98 will actually have only a modest effect on rent control in California. Even if you think that rent control is a boon to poor tenants, it is important to recognize that this group has far more to gain from Prop 98's protection against eminent domain than it stands to lose from its rent control provision. Moreover, if Prop 98 does succeed in abolishing rent

If time permits, I will do a follow-up post on the political aspects of the rent control provision, where I will argue that including it in Prop 98 was a tactical mistake by the initiative's sponsors. Here, I focus on the policy merits.

I. The Modest Impact of Prop 98 on Rent Control.

One of the key reasons why Prop 98 is likely to have only a minor impact on rent control is that most California cities are already forbidden to enact rent control ordinances under Sections 1954.50 and 1954.53 of the 1995 Costa-Hawkins Rental Housing Act. However, the Costa-Hawkins Act does exempt those California cities that already had rent control laws in 1995, which include major metro areas such as LA and San Francisco. Even in these areas, the impact of Prop 98 will be less significant than some opponents claim because Prop 98 exempts current tenants of rent-controlled housing units. Thus, it is not true that anyone will be "thrown out on the street" as a result of Prop 98's anti-rent control provisions.

Even more important, the rent control aspect of Prop 98 will be easy to reverse if California voters want to do so. The California constitution is easy to amend by referendum initiative, as numerous past examples show. Given the popularity of rent control, a pro-rent control initiative could likely be passed on during the next election cycle in 2010. In the meantime, very few tenants will actually be affected by Prop 98's rent control provisions because current tenants are grandfathered in. Local government and urban planning groups strongly support rent control, and they would have both the money and the incentive to put a pro-rent control initiative on the ballot if Prop 98 passes. These groups, of course, were easily able to find the money to sponsor Proposition 99, the anti-property rights initiative they put together to counter Prop 98.

This point is crucially important. If you oppose Prop 98's rent control provision because you believe that rent control is an important protection for poor tenants, you have to weigh the anti-rent control aspects of Prop 98 against the important protections it offers to poor tenants against eminent domain. As I explain in my recent LA Times op ed, the use of eminent domain routinely expels numerous people - most of them poor - from their homes, and the rival Proposition 99 will do nothing to protect them. Indeed, Proposition 99 specifically excludes tenants from even the very minor protections it would provide for homeowners. Because of their political weakness, the poor are routinely targeted for condemnation. Since World War II, some 3 to 4 million people (most of them poor minorities) have been expelled from their homes as a result of "urban renewal" and "econoimc development takings" (see pg. 269 of this article for the data). As an Institute for Justice study points out, California is no exception to this pattern and is in fact "one of the most active states in condemning properties for the benefit of other private parties." Overall, poor tenants have far more to gain from Prop 98's protections against eminent domain then they might lose from its rent control provision. And this is true even if you believe that rent control is good for tenants on balance.

II. Why Rent Control is Poor Policy.

To the extent that Prop 98 might succeed in undermining rent control, this is actually a good result. Like other price controls, rent control reduces the quantity and quality of the good in question. If apartment owners can't charge market prices for their units, they are likely to put fewer apartments on the market and take worse care of the ones they do offer for rent. That is why jurisdictions with rent control - including in California - often suffer serious housing shortages. All of this is basic economics, and is broadly accepted by most economists from across the political spectrum. If you want a more detailed statement, see this essay on rent control by economist Walter Block, in the recently published Concise Encyclopedia of Economics. As Block points out, rent control is opposed by the overwhelming majority of American and Canadian economists (over 90 percent), including liberal ones.

There are many far better ways to help low-income tenants. For example, as I explain in this post, zoning regulations artificially increase the costs of housing in many urban areas. California cities have some of the harshest zoning laws in the country. Cutting back on restrictive zoning laws would help poor tenants far more effectively than rent control.

If you prefer a more active government role in helping the poor, rent control is still the wrong choice. The government could instead subsidize rental payments for the poor (as some states already do), or give them tax breaks on rent (as many states do, though I don't know if California is one of them). The government could also subsidize the construction of low income housing. All of these alternatives are superior to rent control because they don't have the negative side effect of reducing the quantity and quality of available housing. In addition, unlike rent control - which is often exploited by tenants who are far from poor - the benefits of these alternative policies can be targeted to the poor tenants who actually need them.

The alternatives are also far more just than rent control. If society has an obligation to subsidize housing for the poor, there is no reason to arbitrarily impose this burden solely on apartment owners who rent to poor tenants. The costs should instead be shared by all taxpayers or at least by all of the relatively affluent. To the extent that rent control does succeed in helping poor tenants, it does so only by arbitrarily singling out a single social group to bear the cost. Most landlords who rent to the poor are not particularly wealthy themselves, and there is no reason to force them to bear the full cost of a societal obligation that should be shared by all of us.