Greg Mankiw:

At a faculty lunch yesterday, I heard about an ingenious scheme used by some universities in New York, where much rental housing is rent controlled. Here are the three key elements, as it was described to me by one of my colleagues:

1. The university buys a rent-controlled building. The purchase price is low, because the existing landlord cannot make much money renting it.

2. The university then rents the apartments to its own senior faculty, who view this as a great perk. In essence, the difference between the free-market rent and the controlled rent is a form of compensation for the professor. As a result, the university can reduce the professor’s cash compensation by an equivalent amount. The university is effectively earning the market rent for the apartment.

3. But it gets even better. The implicit rental subsidy is a form of non-taxed compensation. Normally, if an employer gives an employee a perk like this, the subsidy is taxable income (unless the perk is deemed a working condition required to do the job, like a hotel manager living in a hotel). But here, the university can claim there is no subsidy: It is only charging what the rent-control law requires. Because of this tax treatment, the implicit subsidy is worth even more to the professor than the equivalent cash compensation. This fact allows the university to reduce the professor’s cash compensation by an even greater amount. Thus, the university effectively earns even more than the free-market rent on a real estate investment purchased much lower than the free-market price would have been.

In the end, the goal of the rent control laws is thwarted (the low rents are enjoyed by well-paid tenured faculty rather than the needy), the income tax laws are thwarted (a sizable part of compensation is untaxed), and all this is done by a nonprofit institution (the university) whose ostensible purpose is to serve the public interest.

Of course, 93% of economists agree “a ceiling on rents reduces the quantity and quality of housing available.” Assar Lindbeck once called rent control “the most efficient technique presently known to destroy a city—except for bombing.”

It’s a prime example of how government interference in markets according to populist whims—”the landlords and insurers are evil, greedy, profit-mongering price gougers!!”—is a really bad idea.

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  1. Metavirus says:

    lame. i'm with you on rent control

    • Gherald says:

      But not, say, the parallel of community health ratings? They've done an excellent job of destroying New York's health insurance market.

      • "This fact allows the university to reduce the professor's cash compensation by an even greater amount."

        I'd like to see evidence of this. In my experience, New York City university faculty are very well compensated. Certainly on par with other major universities outside of the city. Also, I'm not sure I understand your conclusion of the "destroyed" New York health insurance market. Having lived here for 15 years I don't have a non-NYC frame of reference to compare it to, but I've never seen anything that I would describe as "destroyed."

        • Gherald says:

          Well compensated compared to what? It's NYC.

          In any event, your comment misses the point and exhibits a lack of understanding of economic models. We don't need an iota of evidence of what NYC compensation levels are in practice--all we need is the above logic, which shows that relative to places that don't have rent control, a university which can take advantage of this scheme can compensate their professors more cheaply.

          Whether they actually are generous with their professors or decide to prioritize other expenditures is entirely beside the point.

          • Metavirus says:

            that's a bit too dismissive of rupert's point. if nyc professors are actually paid more than their counterparts in other cities, that would seem to be at least some evidence against the assertion.

            • Yes, exactly. Gherald's Jedi Mind Tricks aren't working very good today. Besides the only institution I can think of that owns a great deal of NYC real estate is NYU (they are one of the largest real estate owners in the city) an institution I know pretty well. Yes, they rent apartments below market prices to professors in the West Village but this is all relative to a ridiculously inflated real estate market in that neighborhood. If you want to attract an academic luminary it might be easier if you don't have to tell them, by the way, living near the school will cost you upwards of $ 3,000/month for a very small, one-bedroom apartment. But this isn't rent control — this isn't even rent stabilization. This is a private entity, that owns a large chunk of the island of Manhattan, deciding to offer below-market rates as an incentive for attracting high-quality faculty. As a libertarian I would have expected you would have no problem with this. As for actual rent control (only 1.9 % of New York apartments), or rent stabilization (about half the city's apts), which is a very complicated system based on length of residency, how many apts in a building, how old the bldg is, etc. — I have mixed feelings about. The real estate market in New York City is quite honestly quite scary. Because of a multitude of reasons, many of which I'm sure I would agree with Gherald on, new housing in New York City never keeps up with demand. Even in this economic downturn rents are going up. So you can choose to have a system that allows all apartments to increase completely at a free market rate and kick out hundreds of thousands of old, middle and lower class families that have lived in the same apartment for decades so you can rent to more investment bankers, or you can have the hybrid system we have now. It's not perfect by any means and most of those who complain about it are trying to figure out how to get their hands on a 2-bedroom brownstone for $1500 a month, but it is a more humane one for current residents. As I said the actual "rent-controlled" apartments are diminishing as fast as their residents pass away, but if you want to complain about the rent stabilized apartments — keep in mind they are still on average well over a $1000/month for one room, can and do increase rent each year (the rates are set by a board where real estate developers have a very large, very loud voice and the increases tend to be 4-7 %) and once they pass beyond the magic $2000/month barrier they are completely off the stabilized system.
              It's nice having a blithe academic theory about things, but sometimes real life is more complicated and requires balancing values and interests.

              • Gherald says:

                General comments about rent control refer to both rent control and stabilization. The details of your post would be interesting for such a general discussion, and I think you for the information. But they don't bear on the part you objected to:

                "This fact allows the university to reduce the professor's cash compensation by an even greater amount."

                The fact is, if a university has a nearby rent controlled apartment available and uses the above scheme, it can compensate its professors more cheaply.

                This says nothing about what the magnitude of that compensation is or should be.
                All it says is that regardless of those levels, the University can compensate professors more cheaply with this scheme than without it.

                To illustrate this for you, let's suppose professors in NYC are compensated at 3x the national average and 2x what people in normally similar-paying NYC jobs make. These are all arbitrary numbers; let's just suppose.

                The reasons why NYC professors are compensated at such high rates wouldn't matter to us as pertains to this scheme. What does matter is that the University could take a professor who was making, say, $100,000, provide them with an apartment that would cost $3000 at market rates, and only charge them the rent controlled price of, say, $1500. So the University's net compensation is $101,500, but taxes are only payed on the 100k portion, so it's even better than flat out increasing the salary to $101,500.

                Again, these are arbitrary numbers. Their magnitude doesn't bear on this scheme's point--what matters is the relation.

                • "The details of your posts are interesting for a discussion of rent controls in general, and I thank you for the information. But what you say bears not at all on the part you quoted"

                  I had moved to the broader question of the whole post and the pluses and minuses of rent control, but I guess we'll leave that. In any case, if you want to focus on faculty compensation — I think the problem here is the facts from the original post aren't clear. It's cocktail party gossip without any specifics and that's always an easy straw man, Gherald. Assuming this mystery university does somehow find a peculiar loophole in the rent control laws to rent to their faculty below market and to pay their faculty less as a result, then we are all in agreement that's not good. My point is this whole thing sounds very fishy and is more likely a misunderstanding of a case similar to the one I pointed out above with NYU renting non-regulated properties they own to faculty at below-market rents in order to entice luminaries (in other words, the state and city have nothing to do with it). They don't subsequently pay these faculty less — in fact, anyone who goes to NYU can attest to the fact that they pass these costs quite mercilessly off to their students. Besides NYU and Columbia there isn't much "faculty housing" in NYC to speak of and both schools pay well. Most other colleges here leave it up to the faculty to find their own place to live.

                  • Gherald says:

                    The particular facts aren't detailed because whether this is actually being done at certain universities isn't as interesting to an economist as the fact that it could be done. Greg Mankiw and his colleagues aren't paid to cocktail gossip about the particulars of administering any given NY University's payroll and benefits, so don't really care what's going on there. What they do care about is identifying clever schemes like this that any employer could be making use of (including, say, one hiring those investment bankers you so love)

                    • Or knowing just enough to feed their own ideological prejudices and not caring enough to know if there is any truth to their story. Not looking to pick a fight, but Mankiw is being pretty glib in his post and given his background it doesn't really surprise me that he didn't do due diligence before posting. If it was something goring his ideological oxen I assure you he would have.

                      By the way, I have a clever scheme to rob the Louvre … I haven't ironed out all the details yet, but I know that things have been robbed from there before and people are sloppy, so I'm pretty sure it will work in theory and if you want anything I suggest you get your plan together too before we clear everything out.

                    • Gherald says:

                      This isn't a question of whether something works in theory vs. practice, so there goes that.

                      You're raising the question of who exactly is making use of this scheme and to what extent, but it's an irrelevant question to the point being made so we're going to go on being 'glib' and ignore you.

                    • LOL, pretty weak sauce.

                    • Metavirus says:

                      agreed with you there. this whole post is premised on some perhaps apocryphal anecdote without any hard numbers.

                    • Metavirus says:

                      you're being a bit more snitty than usual on this topic. fact for the fun: my apt in hell's kitchen in NYC was technically rent stabilized but guess how much my 800 sq ft 1-br shoebox went for? $3000/mo.

                      you aren't supporting your arguments with facts here. it's not reflecting well. i'm generally with you on rent control but i greatly doubt that profs are getting put up in pads going for anything less than $2k a month

                    • Gherald says:

                      The anecdote about professors in NYC serves as an illustration, not an argument from fact. Again, the argument--that this scheme is possible and dastardly clever--stands on its own, regardless of who is actually making use of it.

                      You're getting hung op on an illustrative anecdote instead of appreciating the point of how people can use this to their advantage.

                    • Metavirus says:

                      weak tea indeed. if something is possible but very rarely taken advantage of in the way you describe, why is it worth bitching about?

                    • Gherald says:

                      Fuck you man. Seriously, the post was liked by a ton of people on google reader because it's a really interesting and clever scheme, not because we need to give a fuck about how widespread its adoption is.

                      It would be odd if this anecdote was made up out of whole cloth and not in use by at least one university, but again, nobody really gives a fuck.

                      I bitched about rent control in general, not this scheme. This scheme is a thing of wonder and if you don't want to appreciate it that's your own damn problem. I've explained several times why your concern is irrelevant to the point.

                    • Metavirus says:

                      whoa there darlin, too much coffee? i still love you. we just simply disagree. and can agree to disagree. i believe your premise requires some evidence of abuse. you don't think so. fine. we can end it at that. can I buy you a nice decaf? ;-) makeout session? >;-) lol

                      and yes, again, I agree with you on the concept of rent control generally

                    • Metavirus says:

                      ps. one fact to add to the mix: the primary, overwhelming reason why schools in NYC like NYU, Columbia and the law school I went to in Brooklyn Heights own lots of residential real estate is: in order to enable students to have affordable housing while under a crushing debt load so they all don't have to commute from jersey. i lived in a school-owned building both while I was in law school and while my ex was in film school at columbia — and all the residents were students and the rent was much less than the market would rent the places out for — and therefore I/we didn't have to commute from jersey (thank jeebus)

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