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Rent control rebuilds its own support
A calm first year
Take a developer who has already paid 20% of the cost of a building when a new rent control law lowers the project's present value by 15%. Finishing it still makes sense, even though in retrospect it was not worth starting. So a year after a stricter policy, tenants are paying less and housing supply looks unaffected.
The political loop
Supply constraints keep prices high, which keeps housing affordability a live issue. Voters who remember that the world did not end the last time rent control passed can decide it is a decent solution this time.
The breaking point
Things eventually reach a breaking point. In the 1970s, an empty lot full of rubble was worth more than a rent-controlled building standing on it, especially if the building was insured, so landlords burned them down. Landlords grew less popular as some of them committed deadly crimes, and the link back to policies that made arsonists the high bidders for those properties was indirect enough to miss.
How does insurance make burning a building pay?
Fire insurance pays out based on the insured value of a building, and that value can stay high even when the building earns little rent. When the payout exceeds what the property is worth to its owner, the owner has a reason to see it destroyed. Economists call the general problem moral hazard: a person who is protected from a loss takes less care to avoid it. Insurers try to limit it by paying actual cash value, which falls as a building ages, instead of the full cost of rebuilding.
Why does policy uncertainty slow construction?
Economists Avinash Dixit and Robert Pindyck argued in their 1994 book Investment under Uncertainty that a project that cannot be undone carries a value of waiting. If the rules might change, a developer can hold off until the picture clears, and that option raises the return a project must promise before it gets built. In 2016, Scott Baker, Nicholas Bloom, and Steven Davis published a policy uncertainty index in the Quarterly Journal of Economics, built partly from newspaper coverage. They found that higher policy uncertainty was associated with lower investment in policy-sensitive industries.
Why do concentrated benefits beat spread-out costs?
Economist Mancur Olson argued in his 1965 book The Logic of Collective Action that small groups with a lot at stake organize more easily than large groups with a little at stake each. The same logic helps explain why a policy can keep winning support when its costs are scattered and arrive years later. U.S. sugar import quotas are a textbook example, where a small group of producers gains a great deal while each consumer pays a small amount.
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