A thought experiment where the grocery store gets rent control too

Everything in the next few sections is a thought experiment. The supermarket is invented, the town is invented, and the law I describe does not exist anywhere. The idea is simple: take the rules of rent control, which many cities have applied to apartments, and apply them to a grocery store, to see whether they still sound wise when the thing being controlled is a gallon of milk. After the satire I step out of it, and for every joke I name the documented effect of real rent control that inspired it. If you read only one part, read that one.

Folks, I have a theory about why rent control remains popular. It is that nobody has ever had to live under rent control for their groceries. Housing is a thing you rent from one person for years, so the arrangement feels like a relationship, and relationships deserve protection. Groceries are a thing you buy weekly from a store, so the arrangement feels like a transaction, and the absurdity jumps out. So let us convert the transaction into a relationship and see how it goes. Our subject is the Greenleaf Market, which does not exist, on Elm Street, which also does not exist.

The law: the Grocery Stability Act

The town council passes the Grocery Stability Act, whose rules are borrowed, word for word in spirit, from the rent control ordinances of real cities. There are four.

1. Frozen prices for existing customers. A shopper who has been buying at the Greenleaf Market for a year or more is a "protected customer." The prices on that customer's regular items may not rise by more than a small percentage each year, whatever the store pays its suppliers.
2. Tenure rights to a shopping cart. A protected customer who has used the same cart for twelve months gains a right to continue using that cart, and the store may not reassign it, except for narrow causes.
3. Waiting list for scarce items. When the store cannot stock enough of an item at the controlled price, for example milk, the items are allocated through a waiting list kept by the town.
4. New customers pay the market price, for now. To protect the store's survival the law lets it charge whatever it likes to a first-time shopper, until the next amendment.

The council issues a press release calling the law "a victory for working families." I am assured that the press release was lovely and that the punch at the signing was not rationed.

Month one: the early reviews are glowing

For the first month, everyone loves the Act. Protected customers, who are a majority of voters, find their grocery bills steady. The council's newsletter publishes a testimonial from a shopper who has bought the same cereal for fifteen years and who says she does not know what she would do without the law. Nobody asks the store.

The owner of the Greenleaf Market is a patient person. Her costs, however, are not frozen. The dairy raises the wholesale price of milk. The trucking company raises its rates. The refrigeration bill goes up in summer. She can pass none of this on to her protected customers, who are most of her customers, and she can pass it all on to the new customers, who are few. The arithmetic is not complicated. A store that earns less on each gallon than the gallon costs it will eventually stock fewer gallons.

Month three: the store adjusts

The owner is not a villain, and she is not a fool. She responds the way people respond to a rule that reduces what they earn on something they sell. She changes what she sells. There are a number of ways to do this, and she uses them all.

She stocks fewer items. The shelves of the Greenleaf Market once held eleven brands of coffee. Now they hold three. A product that is covered by the Act and sells at a loss is a product that earns the store nothing, so it is the first to go. Products the Act does not reach, such as a new line of "artisan" crackers, appear in prominent display. The protected shopper discovers that the thing she wanted has been replaced by something she did not, and the law is silent about that.

She cuts back on upkeep. The freezers are older. A light in the produce aisle is out for weeks. The floor is mopped less often. The store is open for fewer hours. A shopper who objects is reminded that the prices are the same, which they are, and the quality is not, which is not a thing the Act measures.

She keeps the best stock for those who can make it worth her while. A protected shopper wanders in on Saturday for milk and is told there is none. A friend of the manager's cousin, by happy coincidence, has a half gallon. There is a list in the back, on the manager's desk, of people who are told when the good items arrive. Nobody has seen the list. Everybody knows someone on it.

Month six: the waiting list for milk

By midyear, milk has become the town's great mystery. The town's waiting list for milk is run by a municipal Office of Dairy Allocation, which has seven staff members and a handsome logo. A shopper who wants milk applies at the office, receives a number and waits. The wait is long. A man who put his name on the list in March has a number in the four hundreds, and the office has promised him a gallon "by the fall."

It is useful to consider what the waiting list does and does not do. It does not produce a single additional gallon of milk. It decides who gets the gallons that exist. The people who get them are the ones who got on the list early, who know the rules, who are patient, or who have a friend. This is the opposite of what the Act's supporters intended, and I think the supporters would be the first to say so. But it is exactly what happens when the price is not allowed to do the rationing. Something else has to, and the something is usually luck, timing and connections.

New customers, meanwhile, can buy milk at the market price whenever there is any, and there is a little more of it than before because the store has noticed that its only profitable sales are to people who are not covered. The town's newcomers pay more, and they pay it for the very same product at the very same store. A young family in the new development discovers that the shopper in front of them in the line, who has had the same cart for years, is paying half what they are. The family is not in a position to vote on the Act, since they arrived after it passed.

Month nine: nobody opens a new store

An entrepreneur is looking at the town. She has a plan for a bright, modern grocery store with fresh produce and a bakery on the corner of Maple and Fourth. She runs the numbers. She notices that her store, once it has customers who have shopped there for a year, would be bound by the Act, and its prices frozen against costs she cannot predict. She notices that existing stores are already in trouble. She does the sensible thing and opens her store in the next town, where the rules are simple.

The town now has one grocery store, in decline, and no prospect of a second. The Act's supporters observe that the solution to the problem of scarcity is clearly more rules. An amendment is introduced to prohibit the store from closing. A second amendment prohibits it from changing the items it sells. A third prohibits it from reducing its hours. The owner, reading the newspaper over breakfast, wonders whether anyone has asked whether the store should be allowed to be a store.

The tenure right to a cart

I promised a word about the cart. It is the silliest of the four rules and the most faithful. Real rent control often confers a kind of tenure on the existing tenant: the right to stay in an apartment long after the original reason has passed, sometimes with the right to pass it to a relative. That tenure is the thing that people find hardest to give up, and it has a price that is invisible: the apartment is not available to someone else.

A shopping cart is a joke. An apartment is not. The joke is that a person with a tenure right to a cart will keep the cart long after she needs it, because giving it up means losing a valuable right. She will have two carts if she can manage it. The store will have fewer than it needs. A newcomer will have none. I told you it was silly, but here is the point: when a right attaches to a particular object and cannot be sold, people hold on to the object even when it would be better for everyone if someone else had it.

Stepping out of the satire: what real rent control does

Now the serious part, with the claims I am certain of. Each joke maps to something in the record.

Frozen prices and the supply of housing. The best-known modern study is by economists Rebecca Diamond, Tim McQuade and Franklin Qian, who examined San Francisco's 1994 expansion of rent control to certain small multifamily buildings. They found that landlords of affected buildings reduced the supply of rental housing by about 15 percent, by converting buildings to condominiums, redeveloping them or selling them to owner-occupiers, and the authors concluded that the lost rental supply likely drove up market rents in the long run. Tenants who were covered benefited. The city as a whole, and its future tenants, paid. That is the fewer-items joke, in numbers. The paper appeared in the American Economic Review in 2019, and you can read its abstract for yourself.

The upkeep joke. The tendency of owners under rent control to spend less on maintenance is widely discussed in the economic literature, and for good reason: if the price is fixed and the tenant stays regardless, the owner has less reason to invest. The effect shows up in many accounts of controlled housing. It is the same logic as the dim light over the produce aisle.

The secret list. Where rents are held below what the market would charge, goods that are scarce get allocated by something other than price. In Stockholm, where rents in much of the housing stock are regulated, the wait for a controlled apartment through the city's queue is widely reported to be very long, and you can look up the current figure from the city's housing agency. I take up the record from Stockholm to San Francisco in Rent control's record from Stockholm to San Francisco is the same story. The waiting list for milk is the Stockholm queue with the nouns changed.

No new stores. Builders and lenders respond to the expected return on a project. Cities that adopt rent control tend to exempt new construction for a period of years, precisely because those who write the laws know that applying the rules to new buildings would stop them. The exemptions are an admission. If rent control is good for housing, why does the law carve out the housing it hopes to see built?

The tenure right. The reluctance to leave a controlled apartment, and the practice in some places of passing one down, is the cart joke. It is a real feature of controlled markets: the person who holds the right has little reason to move, so the unit does not turn over.

The unfairness of the new customer. Under rent control, the newcomer, who is often younger and poorer than the long-term tenant, pays more. That is a transfer from the newest members of a community to those with tenure, and it is not obviously a transfer from rich to poor. A long-term tenant may be wealthy; a newcomer may be a nurse on her first job.

The strongest case for rent control, fairly stated

I have been having fun, so let me give the other side its due. People who favor rent control have a genuine concern. A tenant who has lived in a neighborhood for decades, whose rent jumps sharply, may be forced out of a community where he has family, a church and a job. That displacement is a real cost, and it falls hardest on the old and the poor. Stability matters. A law that protects people from sudden shocks is responding to a real harm.

There is also some evidence that controls help the covered tenants, at least in the short run, and the San Francisco study found just that. And not every economist agrees on the long-run effects. A well-known study of Cambridge, Massachusetts, where rent control was ended by a statewide ballot question in 1994, is reported to have found higher rents and higher property values in the city after decontrol, which critics of rent control cite. Read the research itself, Autor, Palmer and Pathak's paper on housing market spillovers, before you rest an argument on it. It is a data point for the critics, and not the last word.

My answer is that the problem the supporters identify, a family priced out of a home, is genuine and that the tool is the wrong one. If the goal is to help people afford housing, a direct payment to those who need help does it without telling a building's owner to lose money. If the goal is lower rents, more homes is the way, and the cities with the least room to build are the ones with the highest rents. Rent control treats a shortage as a villain and ignores what made it. See also The 2008 housing crash began with Washington's push for easy mortgages, which shows what can happen when Washington tries to solve a housing problem with a policy instead of with supply.

A word about principle

There is a Founding point under this, and I will make it briefly. The Fifth Amendment says that private property shall not be "taken for public use, without just compensation." A law that caps what an owner may charge for the use of his property is not a physical taking, and the courts have generally allowed such regulation, so I will not claim the Constitution forbids it. But the principle behind the clause is that the burden of a public purpose should be borne by the public, not loaded onto one class of citizen. When a city decides that housing for some tenants is a public good, the fair way to pay for it is out of the public treasury, and a rule that makes landlords pay is a rule that hides the cost.

Another conservative principle is also at stake: that prices carry knowledge. The supermarket example is silly because everyone can see that milk has a price that tells a farmer, a trucker and a store how much milk to produce. An apartment is the same, and the information is the same. For the larger economic case, see inflation hurts the poor most, and the arithmetic of a fixed paycheck, and for the companion satire about the committee, a thought experiment where every price in town is set by a committee. If you want to see the German story of what happened when the controls came off, read Ludwig Erhard ended price controls on a Sunday and launched a miracle.

The case in brief

1. Apply rent control's rules to a supermarket and the effects are plain: fewer products, worse upkeep, a secret list and no new stores.
2. Real rent control has documented effects of this kind, including a measured decline in rental supply in San Francisco after its 1994 expansion.
3. Controlled markets ration by queue and connection when price no longer does it, and the people with tenure gain while newcomers pay.
4. The concern for displaced tenants is real, but direct help and more building address it without telling owners to lose money.
5. The record from Stockholm to San Francisco is the same story, and the satire only makes the shape visible.

What you can do: before your city council votes on a rent cap, read the ordinance's exemptions for new construction and ask a member why the policy it favors is not good enough to apply to the buildings it hopes will be built.