Author: Cascade Policy Institute

A Done Deal and a Bad Deal: Why Rent Control Won’t Solve the Housing Crisis

By Eric Fruits, Ph.D.

Oregon will soon be the first state to have a statewide rent control program. Last week, in my first week at Cascade Policy Institute, I testified in opposition to the rent control bill, SB 608. The bill has the support of the Governor Kate Brown, House Speaker Tina Kotek, and Senate President Peter Courtney. About 100 people signed up to testify, and supporters outnumbered opponents by 2-to-1. It’s a done deal and it’s a bad deal.

During World War II, the federal government instituted a national system of rent controls, establishing maximum rents for rental properties. New York City was the only city to retain this first generation of rent controls after the war. During the 1970s, rent regulations were introduced in many cities, including Boston; Washington, D.C.; San Francisco; and Los Angeles.

In contrast with pure rent control (a fixed maximum price), SB 608 is a form of “second generation” rent controls that allows annual rent increases, limited to 7 percent plus inflation. Rent controls under SB 608 apply to buildings that are more than 15 years old. The bill also places strict limits on “no cause evictions.”

Nobel laureate Paul Krugman wrote in the New York Times that rent control is “among the best-understood issues in all of economics, and—among economists, anyway—one of the least controversial.”[1] Krugman’s well known and widely used economics textbook describes the economic inefficiencies associated with rent control:[2]

Rent control, like all price ceilings, creates inefficiency in at least four distinct ways. It reduces the quantity of apartments rented below the efficient level; it typically leads to misallocation of apartments among would-be renters; it leads to wasted time and effort as people search for apartments; and it leads landlords to maintain apartments in inefficiently low quality or condition.

Proponents of rent controls argue that “second generation” rent controls reduce or eliminate the inefficiencies associated with “first generation” rent controls. For example, Kotek was quoted in the Oregonian:[3]

What you’re hearing from landlords about rent control is they have an idea of it that’s very much the model that began right after World War II where properties had hard, fast caps on rents. That’s not the kind of rent control we’re talking about. We’re talking about second generation rent stabilization where there’s a process for managing rent increases that protects investors and tenants.

Kotek is correct that second generation rent controls are not as bad as first generation rent controls, but it’s matter of degree. Second-degree burns aren’t as bad as third-degree burns, but a second-degree burn still hurts.

While many proponents see rent control as one way to address housing affordability, none of them indicated it would do anything to resolve what is widely perceived to be a housing shortage. In fact, an expert flown in from Berkeley by the housing committee admitted that rent controls in other cities have led to the conversion of apartments to condominium. He went so far as to suggest legislation that would ban the conversion of apartments to condos.

This suggestion lays bare the pernicious chain of regulation that rent control brings. Second generation rent control doesn’t “work” unless there are strict limits on the termination of month-to-month rents. Then, it won’t work unless there are strict limits on the conversion of units. One witness even suggested that apartment building owners should be forbidden from selling their properties.

The limits on providers’ ability to terminate leases will lead to providers becoming more selective in to whom they rent units. In this way, the ordinance misallocates rental units among would-be renters and may do the most harm to those whom the bill is intended to help, such as those with a history of homelessness, impaired credit, criminal convictions, or employment instability. An older woman testified about her horror story of trying to find an apartment with her retired husband in Medford, applying to dozens of apartments only to be told she’d be on a list. Her story will become more common as rent controls reduce the supply of rental units.

In addition to the inefficiencies identified by Krugman, SB 608 will ultimately lead to higher rents than would occur in the absence of the law. As rental units turn over, providers will factor in the expected cost of the law into the rents and other fees that they charge incoming residents. Some or all of the expected cost associated with SB 608 will be passed on to tenants. Ultimately, the law will have the perverse impact of increasing—rather than reducing or stabilizing—rents over time and reducing the amount of market rate housing available to low- and middle-income households.

[1] Krugman, Paul. “A rent affair.” New York Times. June 7, 2000.

[2] Krugman, Paul and Robin Wells. Microeconomics, 3rd ed. New York: Worth Publishers. 2013. p. 130.

[3] Friedman, Gordon R. “Portland’s Tina Kotek explains her rent control plans—and landlord pains.” Oregonian. February 4, 2017.

 

Eric Fruits, Ph.D. is Vice President of Research at Cascade Policy Institute, Oregon’s free market public policy research organization.

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Cap and Trade in Oregon: All Pain, No Gain

By Eric Fruits, Ph.D.

The Oregon legislature is expected to pass a carbon cap-and-trade bill this session.

While there is some agreement that climate change can have a negative impact on livability in the Pacific Northwest and throughout much of the world, there has been little attention paid to how little Oregon contributes to worldwide carbon emissions.

Oregon emitted about 65 million metric tons of carbon dioxide equivalents in 2017. By way of comparison, total global emissions were about 37 billion metric tons. That means that Oregon accounts for less than two-tenths of one percent of global emissions. About one six-hundredth. That’s tiny.

In other words, even if Oregon were to reduce carbon emissions to zero, the state would do virtually nothing to change worldwide carbon emissions, which means it would do virtually nothing to slow or stop global climate change.

At the same time, the cap-and-trade program would hit the pocketbooks of every Oregonian. An earlier version of the bill estimated the state would sell about $700 million a year of carbon permits, with the costs passed on the consumers and businesses.

Oregon’s cap-and-trade bill fails the basic cost-benefit test: The costs of cap-and-trade to everyday Oregonians would be exceptionally high while doing nothing to stop or slow climate change.

Eric Fruits, Ph.D. is Vice President of Research at Cascade Policy Institute, Oregon’s free market public policy research organization.

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Portland Economist Eric Fruits Joins Cascade Policy Institute as Vice President of Research

FOR IMMEDIATE RELEASE

Media Contact:
John A. Charles, Jr.

503-242-0900

john@cascadepolicy.org

Portland, OR – Eric Fruits, Ph.D. joined Cascade Policy Institute February 1 as Vice President of Research. Fruits is president and chief economist at Economics International Corp. and is an adjunct professor of economics at Portland State University. Cascade Policy Institute is a nonprofit, nonpartisan public policy research and educational organization based in Portland.

Fruits has been a long-time academic advisor and contributing analyst for Cascade Policy Institute. His most recent report, Ride-Hailing as a Solution for TriMet’s High Cost Bus Lines: A Proposal for a Pilot Project, was published in January. As Vice President of Research, Fruits will lead Cascade’s policy team and serve as an expert analyst of Oregon state and local public policy issues.

As a consulting economist, Fruits has produced numerous research studies involving economic analysis, financial modeling, and statistical analysis. As an expert witness, he has provided testimony in state, federal, and international courts. He has written peer-reviewed articles on initial public offerings, the municipal bond market, real estate markets, and the formation and operation of cartels. His economic analysis has been widely cited and has been published in The Economist, The Wall Street Journal, and USA Today.

Cascade President and CEO John A. Charles, Jr. said, “Eric is an outstanding economist who will add depth and breadth to Cascade’s research programs. He is also an entertaining speaker who can effectively explain complex subjects to non-technical audiences.”

Fruits indicated he is excited about joining the institute: “Cascade has a long history of producing high-quality, well-researched analysis and commentary. It plays an important role both on the front lines and behind the scenes on some of the biggest issues facing state and local governments in Oregon.”

About Cascade Policy Institute:

Founded in 1991, Cascade Policy Institute is a nonprofit, nonpartisan public policy research and educational organization that focuses on state and local issues in Oregon. Cascade’s mission is to develop and promote public policy alternatives that foster individual liberty, personal responsibility, and economic opportunity. For more information, visit cascadepolicy.org.

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Rent Control Is a Steal

By Miranda Bonifield

Remember that emotional final episode of the now-classic sitcom Friends? As the group reminisces about the New York apartment that served as the stage for most of the show, Chandler tells his newborn child, “This was your first home…and thanks to rent control, it was a steal.”

His comment was more apt than the screenwriters probably realized. Rent control is a steal. It steals incentive from landlords who are interested in providing housing but can’t make ends meet when they’re no longer in charge of their rates. And especially in combination with aggressive anti-sprawl policies cities like Portland are so fond of, it steals housing opportunities from individuals who need them most.

Rather than solving housing problems, studies have found that in the long run, rent control policies increase housing costs and fuel gentrification. In San Francisco, researchers found that landlords frequently turned their apartment buildings into condominiums and invested in higher-value properties—making it even more expensive to live in the city. And unfortunately, landlords are less interested in maintaining rent-controlled apartments, which does nothing for the tenants’ quality of living.

If people are struggling to find housing, the solution isn’t to limit supply and destroy affordability. That just makes things harder. Instead, state leaders should reduce regulations that constrict housing supply, allowing developers to provide the homes Oregonians need so desperately

Miranda Bonifield is a Research Associate at Cascade Policy Institute, Oregon’s free market public policy research organization.

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How Ride Hailing Services Can Complement Bus and Rail—and Save TriMet Money

By Eric Fruits, Ph.D.

After teaching an evening class at Portland State University, I walked up to the kiosk showing TriMet arrival times. My bus was coming in five minutes. Good news. One of my students was standing there, too. She shook her head, looked at her phone, and said, “My next bus is in 30 minutes. I’m just going to Uber home.” Her situation wasn’t unique. Across the country, more and more commuters see ride hailing as a reliable and affordable substitute for mass transit.

Transit agencies should see services such as Lyft and Uber as an opportunity rather than a threat. Toward that end, Cascade Policy Institute recommends TriMet pursue a pilot project that replaces one or more of its high-cost bus lines with ride hailing services supported by a subsidy funded with the cost savings from eliminating the high-cost line. The experiment likely will find that replacing high-cost bus service with ride hailing will improve ridership and save money.

TriMet faces a challenge of declining ridership in conjunction with rising costs. Ridership has declined for many public transit providers in the U.S.—TriMet reports bus boardings have dropped 13 percent from their 2009 peak. As the Portland Tribune reported, the agency thinks many factors have contributed to the decline in ridership, including gentrification in Portland, the growth of urban centers inside and outside the city, and the development of self-sufficient walkable neighborhoods that has reduced the need for bus trips.

Longer travel times likely are another factor that explains the decline in bus ridership. From 2007 through 2017, the average vehicle speed for TriMet buses has dropped by almost nine percent. Portland city commissioner Amanda Fritz recently tweeted that Portland’s new speed limit law has made her bus commute five minutes longer. Over a year, that’s about 30 extra hours sitting on a bus. With longer travel times, the costs to commuters of using public transit increase, leading to a decline in ridership.

As with any mass transit enterprise, TriMet operates a number of high-cost, low-ridership bus lines. For example, the agency reports the 97 (Tualatin-Sherwood Rd) bus line has about ten riders per hour at a cost of more than $18 per ride. The fare for a ride hailing service covering the same distance as the average bus trip would be less than $8. Service on this route could be completely replaced by ride hailing services and save TriMet thousands of dollars a week.

While ride hailing can replace mass transit, it can also complement bus and rail service. Recent research finds that ride hailing services have the largest positive effect on rail service in cities with large public transit systems already in place, such as Portland. In 2015, Lyft conducted a nationwide survey of riders and found that 25 percent of riders use Lyft to connect to public transit. Uber reports that nearly 25 percent of Uber trips in suburban Portland began or ended within one quarter-mile of a MAX or WES station.

More than a dozen cities in the United States currently have programs running similar to the pilot project we propose. Detroit’s program, “Woodward 2 Work,” runs late at night and is aimed at those who work late shifts when mass transit does not run. San Clemente replaced two high-cost bus lines with ride hailing. Marin County’s service is designed to boost ridership on commuter rail by making it more convenient for riders to get to and from rail stations. Several of the programs that began as pilots have been extended because of their success in serving commuters and saving money.

Many of these cities have developed procedures to accommodate users who do not have a smartphone and users with ADA-related needs. In approving ride hailing services in Portland, the city mandated a performance standard that called for wheelchair accessible vehicles to reach riders in thirty minutes or less. In Detroit’s program, riders without bank accounts can use prepaid gift cards.

The pilot project we recommend would be a low-cost, low-risk test of potential synergies between public transit and private ride hailing. If successful, the lessons learned can and should be applied to additional high-cost transit lines.

Eric Fruits, Ph.D. is an Oregon-based economist, adjunct professor at Portland State University, and Academic Advisor at Cascade Policy Institute, Oregon’s free market public policy research organization. A version of this article appeared in The Portland Tribune on January 24, 2019.

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What’s at the Root of Oregon’s Rock-Bottom Graduation Rate?

By Kathryn Hickok

Last week the National Foundation for Education Statistics released the 2017 high school graduation rates for all fifty states. Oregon ranked 49th, at 76.7%. On the same day, Oregon officials announced an 80% statewide graduation rate for 2018. Even if Oregon’s graduation rate is making modest year-to-year gains, Oregon is still almost last in the nation.

During the past year, the Oregon legislature’s Joint Committee on Student Success asked local communities what constitutes “success” and began to work on a plan for legislative action to improve public schools. The committee published its report this month.

The committee could have saved some trouble, though, by listening to what one former Oregon college student—Steve Jobs—said about education in 1996:

“What’s wrong with education cannot be fixed with technology….It’s a political problem….The problems are unions. You plot the growth of the National Education Association and the dropping of SAT scores, and they’re inversely proportional. The problems are unions in the schools. The problem is bureaucracy. I’m one of these people who believes the best thing we could ever do is go to the voucher [school choice] system.”

With an almost-last-in-the-nation graduation rate, it’s time to free education from both union control and bureaucracy, and put the power of choice in education into the hands of parents. Oregon has tried everything else.

Kathryn Hickok is Executive Vice President at Cascade Policy Institute, Oregon’s free market public policy research organization.

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Education Savings Accounts: Fiscal Analysis of a Proposed Universal ESA in Oregon

By Eric Fruits, Ph.D.

Executive Summary

Education Savings Accounts deposit a percentage of the funds that the state would otherwise spend to educate a student in a public school into accounts associated with the student’s family. The family may use the funds to spend on private school tuition or other educational expenses. Funds remaining in the account after expenses may be “rolled over” for use in subsequent years.

Empirical research on private school choice finds evidence that private school choice delivers benefits to participating students—particularly educational attainment.

Currently, Arizona, Florida, Mississippi, North Carolina, and Tennessee have active ESA programs that are limited to particular groups of students such as those with special needs. The proposed Oregon ESA bill would introduce a universal ESA program for all K–12 students.

ESAs are frequently designed so the amount of funding provided to families is less than the amount the state would otherwise pay for a student to attend public school, with the state recouping the difference. In this way, ESAs can be designed to produce a net fiscal benefit (i.e., cost savings) to state and local government budgets.

A fiscal analysis of the proposed Oregon ESA bill finds that it would cost the state approximately $128 million a year but would lead to savings of about $130 million a year to local school districts, for a net state and local impact of approximately $2.2 million in reduced costs. There is virtually no net impact on per-student spending for students who choose public K–12 education. ♦

READ THE FULL REPORT

CLICK HERE FOR A ONE-PAGE FACT SHEET ON SB 668

Eric Fruits, Ph.D. is president and chief economist at Economics International Corp., an Oregon-based consulting firm specializing in economics, finance, and statistics. He is also an adjunct professor at Portland State University, where he teaches in the economics department and edits the university’s quarterly real estate report. His economic analysis has been widely cited and has been published in The Economist, the Wall Street Journal, and USA Today. 

Dr. Fruits has been invited to provide analysis to the Oregon legislature regarding the state’s tax and spending policies. He has been involved in numerous projects involving natural resources and Oregon forest products such as analysis for Ross-Simmons v. Weyerhaeuser, an antitrust case that was ultimately decided by the United States Supreme Court. His testimony regarding the economics of Oregon public employee pension reforms was heard by a special session of the Oregon Supreme Court.

Dr. Fruits has produced numerous research papers in real estate and financial economics, with results published in the Journal of Real Estate Research, Advances in Financial Economics, and theMunicipal Finance Journal.

 

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More Money for Schools Is Meaningless Without Controlling PERS Costs

By John A. Charles, Jr.

Several members of the Portland Public Schools Community Budget Review Committee recently co-authored an essay entitled, “The under-funding of schools must end.”

The authors assume that all money problems at public schools are the result of insufficient tax support; but the reality is that schools have been unable to control costs, especially related to pensions.

For example, in 1998 Oregon schools were required to send premiums equal to 9.9% of their salaries to pay for their share of the Public Employee Retirement System (PERS).

Since then, those rates have gone up steadily and will reach 18.3% later this year—an increase of 84% over two decades. Some school districts will pay much more. Sherwood school district will pay 27% of salaries for their PERS Tier 1 and Tier 2 obligations. Tigard-Tualatin school district will pay 28%. Tillamook Community College will pay 21%.

School support from the Oregon general fund has doubled since 2001, but it doesn’t do much good when tax money entering the front door of schools leaves out the back door for retirees. In many cases, those former workers are earning more in retirement than they did when they were actually teaching.

Unless the legislature is willing to take strong measures to control the cost of PERS, there will never be enough money to satisfy public school advocates.

John A. Charles, Jr. is President and CEO of Cascade Policy Institute, Oregon’s free market public policy research organization.

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Press Release: Hillsboro CPA and Former Oregon State Legislator Katie Eyre Joins Cascade Policy Institute Board of Directors

FOR IMMEDIATE RELEASE

Media Contact:
John A. Charles, Jr.
503-242-0900
john@cascadepolicy.org

Portland, OR – Katie Eyre was recently elected the newest board member of Cascade Policy Institute, a nonprofit, nonpartisan public policy research and educational organization based in Portland. Eyre, a Certified Public Accountant, is a Tax Partner at Fordham & Co LLP in Hillsboro and is a former Oregon state legislator. The Cascade Board of Directors elected Eyre in late 2018 to begin her term in January 2019.

Katie Eyre joined Oregon accounting firm Fordham & Co in 1998 after gaining broad tax experience in several long-term positions with other firms. She assists business and individual clients with complex tax and compliance issues.

Prior to joining Fordham & Co, Eyre served as controller at a financial service company with more than $1 billion under management, all in multi-family housing. There, she gained experience in integrating and consolidating the financial operations of multiple companies. Since joining Fordham & Co, she now manages the firm’s tax practice as well as providing tax consulting services for closely held business, mergers and acquisitions, and estate planning.

Eyre represented House District 29 in the Oregon House of Representatives during the 2011-12 Oregon Legislative Session. She has also served on the Hillsboro Planning Commission for more than ten years, most recently as President.

Katie Eyre joins nine current Cascade board members, including Chairman William B. Conerly, Ph.D., Vice Chair Gilion Dumas, Cascade President and CEO John A. Charles, Jr., Michael L. Barton, Ph.D., Manuel Castañeda, Pamela Morris, Ruppert Reinstadler, William Udy, and Peter Wendel.

Cascade President John Charles stated, “Katie Eyre has a long record of community service at both the local and state levels. She also understands complicated tax-related problems. Her life experiences and leadership skills will significantly strengthen Cascade’s capacity to design innovative public policy solutions.”

About Cascade Policy Institute:

Founded in 1991, Cascade Policy Institute is a nonprofit, nonpartisan public policy research and educational organization that focuses on state and local issues in Oregon. Cascade’s mission is to develop and promote public policy alternatives that foster individual liberty, personal responsibility, and economic opportunity. For more information, visit cascadepolicy.org.

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Press Release: Report shows Oregon’s “smart growth” policies make housing less affordable for Oregonians

FOR IMMEDIATE RELEASE

Media Contact:
John A. Charles, Jr.
503-242-0900
john@cascadepolicy.org

PORTLAND, Ore. – Cascade Policy Institute has released a new report examining the links between anti-sprawl, “smart growth” regulations and increasing housing costs in Oregon. The report measures the extent of supply restrictions in Oregon and their impact on housing prices. It concludes that “smart growth” policies contribute substantially to the decrease in affordable housing and single-family housing options in Oregon.

The report, The Housing Affordability Crisis: The Role of Anti-Sprawl Policy, was written by Randall Pozdena, Ph.D. Pozdena is president of QuantEcon, Inc., an Oregon-based economics consultancy.

Over the last fifty years, many states have adopted “smart growth” or “anti-sprawl” policies. Enough time has elapsed for the effects of these policies to be studied. The evidence shows that many urban areas now have housing prices that make either home ownership or rental increasingly unaffordable.

In the face of resulting “affordable housing crises,” cities and states are currently considering additional regulations and subsidy policies to attempt to provide residents with more affordable housing options. There is virtually no public policy discussion of whether regulatory interventions precipitated the housing crisis in the first place, let alone consideration of abandoning these damaging policies.

In The Housing Affordability Crisis, Pozdena examines the links between anti-sprawl regulations and the spectacular increases in housing costs and the virtual disappearance of affordable housing in many markets. Specifically, he measures the extent of site supply restrictions and its impact on housing prices using an economic model of housing markets, data on the economic conditions in housing markets, and trends in development revealed in satellite inventories of U.S. land uses. At the national level, using state and Metropolitan Statistical Area data, Pozdena concludes:

  1. Twenty-three of the 50 states studied fail to provide housing units at a volume adequate to keep housing prices and incomes growing at a rate consistent with affordability. On average, these states under-provided housing units by 6.4 percent of their current stock of housing units.
  1. Those states that fail the affordability and supply adequacy test are overwhelmingly those with documented adoption of one or more aggressive anti-sprawl growth regulatory initiatives.
  1. Annual housing price inflation exceeded annual income growth by 14 percent each year during the study period in those states that failed to provide housing in sufficient quantity to keep it affordable. Extrapolating the findings to the nation, the housing stock is smaller by as much as 4.5 million housing units than it should have been to preserve affordability.

Cascade Policy Institute President and CEO John A. Charles, Jr. said, “Oregon land-use planners have long pretended that Urban Growth Boundaries and other site restrictions have no real effect on housing supply. Dr. Pozdena’s analysis clearly shows that this is wrong. We cannot solve the housing crisis by simply ‘throwing money’ at public housing projects; growth controls need to be reduced or repealed if we want to make the American Dream affordable.”

The full report, The Housing Affordability Crisis: The Role of Anti-Sprawl Policy, can be downloaded here.

Founded in 1991, Cascade Policy Institute is Oregon’s free-market public policy research center. Cascade’s mission is to explore and promote public policy alternatives that foster individual liberty, personal responsibility, and economic opportunity. For more information, visit cascadepolicy.org.

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