Until about ten years ago it was widely understood that the purpose of New York's rent regulation system was to eliminate the ability of landlords to charge excessive rents during an ongoing housing shortage. Since the late 1980's a growing number of elected officials, editorial writers and policy analysts have quietly discarded the traditional "fair rent" objective of the system. Many now accept and echo the more conservative notion that tenants who reside in rent regulated apartments are the beneficiaries of subsidies which are unfairly paid for by their landlords. This subtle transformation has overwhelmed and distorted the more important debate about whether New York's rent regulations have secured reasonable rents for tenants, provided fair returns for owners and offered sufficient incentives to preserve and improve the housing stock.
The idea that rent regulations were designed to secure "fair" rents is clearly evident from the history of New York's responses to housing shortages and affordability problems. Those problems are not new. Jacob Riis documented dangerous and overcrowded housing conditions in the late nineteenth century. In the worst slums of New York's lower wards, rents were from 25 to 30 percent higher than in the better uptown apartments. New immigrants crowded into subdivided and overpriced cold water flats at great peril to their health and safety - and at great profit to unregulated landlords. Open markets failed to address the problems described by Riis, and by the turn of the century and again following World War I the City witnessed mass evictions and growing tenant unrest. With waves of new immigrants fueling the demand for apartments and driving rents ever higher, the City finally instituted rent controls in 1920. An unprecedented housing construction boom produced by a tide of national prosperity in the 1920's allowed for a relatively painless phase out of those controls in 1929.
Apartments were plentiful during the Great Depression of the 1930's but widespread unemployment caused severe affordability problems to resurface. Many families doubled up to pool incomes and expenses. Evictions for non-payment of rent multiplied and the City witnessed some of the most severe rent strikes in the nation's history.
Why were rent controls overlooked as a policy option during the 1930's? In the absence of a housing shortage rents could not be described as abnormally high. While public authorities had long recognized a right to control volatile and abnormal prices and rents, instituting price or rent controls solely to provide assistance to unemployed, elderly or impoverished citizens was never a part of our national experience. Rather, rents, like railroad rates, grain elevator fees, cab fares, electric and water rates, hotel rates, milk prices and wages had been subjected to regulation when special conditions were perceived to foster unfair bargaining relations.
When the Federal Office of Price Administration implemented rent controls as part of a larger effort to curb war time profiteering during World War II, the Roosevelt administration was understandably interested in protecting all consumers and tenants - rich and poor alike - from those who would exploit war time shortages. Concern also existed for the displacement of families and the hardships experienced by those on fixed incomes. But the main objective of federal rent controls was to eliminate unfair market advantages bestowed upon landlords by the decline of new housing starts during the war effort - not to subsidize the poor. Similarly, in the late 1960's when new zoning rules and rising construction costs stalled the production of new apartments and caused rents to skyrocket in uncontrolled post-war buildings, rent stabilization was adopted to counter the new found market power of landlords who owned those buildings.
Today, high labor costs, a demanding building code, strict zoning rules and a shortage of usable building sites, still place the price of newly constructed housing beyond the reach of most City residents. These constraints on supply are matched by strong demand pressures. A fresh waves of new immigrants and historic changes in the family structure - with a rise in the number of one person households and single parent families demanding more units - has turned the temporary housing shortage into a long term problem.
The need for stable housing markets is particularly compelling when one considers the probable consequences of allowing landlords to fully exploit the ongoing shortage: the displacement of families rooted in neighborhoods, schools, civic and religious organizations, and the gradual balkanization of the city into homogeneous class enclaves. While rent regulation cannot guarantee an affordable home for everyone, it has limited the kind of disruption that the shortage would otherwise inflict.
The rise of the trendy idea that rent regulations force owners to subsidize tenants can be traced to a 1988 study sponsored by the Rent Stabilization Association - the city's largest owners group. That study - A Financial Analysis of Rent Regulation in New York City by Peat Marwick Main & Co. - and a more expansive report produced by the Citizens Budget Commission in 1991 suggested that tenants residing in New York's upscale neighborhoods reap disproportionate benefits or "subsidies" from rent regulation. Both studies apparently influenced Albany lawmakers who, in 1993, adopted a means test for a narrow slice of rent regulated tenants who earn over $250,000 per year and reside in apartments renting for more than $2,000 per month. Following the law's enactment, John Gilbert, then head of the Rent Stabilization Association, was quoted as saying "[t]he biggest victory here is that people have finally acknowledged that rent regulation is a subsidy." Daniel Margulies, the influential head of another large landlord's group, the Community Home Improvement Program, was equally explicit: "they have applied a means test and exposed the system for what it is, a subsidy system."
This engineering of a conversion of rent regulations from a fair rent system to a subsidy system in the public consciousness parallels similar public relations efforts by landlord organizations in California and Massachusetts. There, media campaigns, large donations to politicians hostile to rent regulations and the sponsorship of reports critical of rent regulations by policy "experts" led to the end of rent controls. As in New York, the financial resources of tenants to counter the landlords' public relations efforts were minuscule by comparison.
As an analytical tool, economists who examine regulatory systems have often described differences between market prices and regulated prices as subsidies. Nonetheless, even economists recognize that the analytical framework they operate under often departs from ethical, cultural and constitutional traditions. Otherwise, economic efficiency as narrowly defined in classical models would trump every other public value. Morality would be reduced to the point at which supply intersects demand. The eclectic values of a democratic polity, constituted as it is by diverse sources of public experience, would fall prey to something that might best be described as an economic theocracy. We would be instructed on the price of everything and the value of nothing.
As former Secretary of Labor Robert Reich recently stated: "It has never been economics alone that defines America. If we choose as a culture to push back against economic forces that would otherwise divide us, it is within our ability to do so. And the consequence of choosing otherwise - by pretending that the choice is not ours to make - is to cease being a society."
The semi-conscious nature of the transformation of New York's "fair rent" system to a "subsidy" system deprives us of a fair opportunity to explore that choice.
Timothy L. Collins is a partner in the law firm of Collins & Dobkin. He served as Executive Director of the New York City Rent Guidelines Board from 1987 through 1994.