In 2020, Berlin implemented a rent cap that applied city-wide to both new and existing rental housing contracts. The policy was later found to be unconstitutional and so as of April 2021 this is no longer in place. But for a brief period of time, and for better or for worse, Berlin had a blanket rent control policy. Berlin is, of course, not alone when it comes to rent caps. They are seen by some as a solution to rising home prices, gentrification, and displacement. But do they actually work?

This recent working paper argues that the answer is no. And that there are other better tools available. Yes, overall rents do tend to decline. But when you have a city-wide policy, it means that rents also decline for high-income households. And in this paper, the economists argue that this tends to benefit the rich more than the poor. Rent caps also tend to decrease overall housing supply, which, as we all know, is counterproductive when you're trying to make something more affordable/accessible.

But perhaps the key argument is this one here: Rent controls create a misallocation of housing that can actually decrease overall welfare for lower-income households. The reason behind this is that homes stop getting allocated to those who value it and need it the most. Instead, you get people who may be overhoused or underhoused, but who remain firmly put because of what are below-market rents.

There are a number of ways in which this distortion might play out. But it could involve someone with a very large older apartment who now no longer needs a large apartment, but is staying put because of their favorable and irreplaceable rent structure. This in turn precludes someone who desperately needs a large apartment from finding a suitable place. And since overall supply has also decreased because of the controls, the problem is exacerbated.

It can all get a bit complicated, but if you're interested in this topic, here is another technical research paper from Edward Glaeser and Erzo Luttmer that deals specifically with the misallocation of housing under rent controls.

I jus pre-ordered a copy of Edward Glaeser and David Cutler's new book called, Survival of the City: Living and Thriving in an Age of Isolation. (I'm usually a hard copy kind of guy, but I decided to try this one out on Kindle / my iPad). The official release date is September 7, 2021, so if you're reading this post in your inbox, the book is now available online.

I'm not familiar with the writing of David Cutler (he's a public health expert), but I am a follower of Edward Glaeser and have written about his work on a number of occasions. Glaeser's last book, Triumph of the City, was a kind of celebration of the wonders of urbanism. After reading it, you couldn't help but feel that cities are our best chance at creating healthy, sustainable, and wealthy communities.

But in listening to Glaeser throughout this pandemic I have noticed that his commentary on the future of cities hasn't been filled with unbridled optimism. You get the sense from him that cities are at a crossroads. This is not to say that city life will not persist, because it will. Cities are powerfully resilient. But not all cities are created equal. Some will continue to flourish in this new economy, but others will not.

This is one of the arguments that they make in this new book and I'm looking forward to reading it once it lands in my Kindle app.

Harvard economist Edward Glaeser has a new paper out talking about "urbanization and its discontents." In it, he argues that while cities today are working remarkably well for highly skilled people, they don't seem to be delivering the same upward mobility to lower skilled people. The "urban wage premium" for this segment of the population has seemingly disappeared.

The posited causes of this discontent will likely resonate with many of you:

Urban resurgence represents private sector success, and the public sector typically only catches up to urban change with a considerable lag. Moreover, as urban machines have been replaced by governments that are more accountable to empowered residents, urban governments do more to protect insiders and less to enable growth. The power of insiders can be seen in the regulatory limits on new construction and new businesses, the slow pace of school reform and the unwillingness to embrace congestion pricing.

Unfortunately, this paper isn't available for free online. If you're interested, you'll need to purchase a copy, here.