Tuesday, September 8, 2009

NEW YORK RENTS & THE FREE MARKET : A LITTLE PROFIT IS NOT ENOUGH

OESTERHOUDT STRIKES

Most people know that it is expensive to live in New York City. But most people do not realize just how expensive. Rent in Manhattan is truly exorbitant when you consider how little your money buys. While it has always been relatively more expensive to live in New York as compared to any other city in the country (exception: San Francisco), prices have accelerated especially quickly over the past 15 years. One-room studios in Greenwich Village used to cost $900 a month in the mid-1990s. Now they can cost up to $2900. That is acceleration, baby.

What caused this? Do landlords suddenly deliver more value in 2009 than they used to deliver in 1994? Do you get free champagne service and a complimentary shoeshine with your apartment now? No—you get the same thing you got in 1994: a semi-trashy walkup with old fixtures. Your landlord is just making a much bigger profit than he used to. Real estate markets in other States took a beating in recent years. But not New York. Things just kept on marching skyward here. And now virtually no one can afford it except wealthy publishing heirs, Japanese industrial magnates, Hollywood celebrities and various prematurely gray, professional workaholics with no lives who hire nannies (weekends included, because they work then, too).

I often write about profit and the “ugliness” of commercial enterprise in general. Rent in New York City encapsulates my views on the subject like no other. Why are rent prices in New York so high? If landlords are not delivering more value now than they did in the past, what entitles them to keep charging more? According to free market principles, price is a function of “supply and demand.” Applying those principles, it is easy to see why New York rent prices increased so much since 1994. There is a very limited supply of apartments in Manhattan (it is a pretty small, narrow island, after all), and demand for them has steadily increased since “Giuliani time” (ie, the era during which many Americans began to feel that hoodlums, bandits and various “minority thugs” no longer ruled the streets).

Not many apartments. A lot of people want them. They’re going to cost a ton. That’s the free market for you. The same thing happens with umbrellas when it rains: Not many umbrellas. A lot of people want them. The hawkers can charge anything they want to exploit the sudden demand. An umbrella that costs a dollar on a sunny day costs $40 in a downpour. People call this “price gouging” when a street hawker does it. But when a Manhattan landlord or industrial baron does it, it’s called “prudently reacting to progressive market trends.” No matter what you call it, it adheres to the same principle: Make as much profit as you possibly can in the circumstances.

I find this all atrociously ugly. In the free market, those with “goods in demand” suddenly obtain the power to screw everyone else simply because they can. I have written about this power in other circumstances. Banks, for instance, charge fees for ATM use—up to $4.00 for taking out $20.00—because they can. They don’t need to charge that much to cover their cost and make a modest profit. In the free market, modest profits are not enough. Those with the power to make a profit want gratuitous, gluttonous, bountiful, excessive, disgusting, fattening, overflowing, sumptuous, fat-dripping profits. They don’t want to make $1 per unit; they want $100 per unit. This is just the way the free market works. When someone has the unique power to provide goods or services in demand, he or she can throttle the public for far more than the goods or services are worth. Modest profits are no good. In the free market mind, only luscious profits are appetizing. After all, why go into business if you can’t really cash in?

At this point, someone will naturally object: “Prices reflect operating costs and factor in some margin for profit, but nothing excessive.” This might be true in markets in which goods are not in special demand. But it is not true in the New York rental market. Consider this example: My friend’s father co-owned an apartment building in Manhattan starting in 1959. In 2001, he said that he could make a decent profit on a one-room studio (450 square feet) by charging no more than $715 per month. He sold the building the same year. The company that bought it began charging new tenants $2900 for the same apartment in 2002.

Overhead cannot possibly have increased that much in one year. The landlord did not increase the rent by over 300% in order to defray new costs. He increased the rent because he could; and demand was so high he could actually get away with it. He was not satisfied with the “modest profit” he could net from $715 per month. He wanted the bulging, luscious profit he could wring by charging four times as much. This is the free market at work: Take demand and drain it for all it’s worth, no matter how shameless the “gouging.”

I do not write all this in order to abolish the free market. I know the Soviet Union failed, so spare me that standardized objection. I mention it only to point out there is nothing at all dignified about free market forces. Some have the good fortune to own goods or offer services at a time and place in which they are in special demand. Everyone else needs the goods and services. This arms those who possess the goods or services with unusually disparate economic power. The party with power has discretion whether to exploit it by overcharging and making a huge profit or acting “fairly” and making only a modest profit. When it comes between big profits and small profits, which one do you think the true free marketeer will choose? This is not just natural human avarice at work; institutional factors come into play, too. Corporations, after all, are fictional entities established for one reason: To maximize shareholder wealth. “Maximize” means “get the most you can in the circumstances.” As such, corporations have a legal duty to “gouge” as much as possible for the goods or services they sell (subject always to laws that would cost more to violate than ignore).

I do not like tilted playing fields like this. That is why my blood boils when I read about New York rents. Landlords essentially charge thousands of dollars for something that is really worth hundreds. I know for a fact that they do not need to charge as much as they do. They do it only because they want to gorge themselves on profit. At the profit table, New York landlords are not content to nibble or even eat their fill. They need to stuff themselves with profit with orgiastic relish. And even then they are not satisfied. The same apartment that cost $4200 a month last year will go up to $4500 a month next year, and on and on until you have to flee, making room for the next fully-bankrolled trust fund heiress. In my view, this is just disgusting.

I do not lightly use the word “disgust.” Generally, I criticize the concept because people use it to underscore perverse moral judgments on many subjects. But I honestly feel disgust when I learn about people who make excessive profits on goods or services that should not yield so much profit. After all, there are so many people who struggle in this country for next to nothing. Millions worry in desperate fear whether they will lose their home or go bankrupt because they can’t pay for an unexpected medical expense. Yet there are those who sit in offices and rake in billions simply because they had the good fortune to own choice property. Their hunger for profit drives everyone else to despair. The irony is that they really don’t need to charge as much as they do, not even close. But they charge $5000 for a $1000 apartment because they can. I find that disgusting.

I have no solution to this. Perhaps it is humanity’s fate to endlessly seek maximal profit at others’ expense. Perhaps there is nothing we can do to temper the human urge to maximize profit when opportunity permits. Perhaps this is just the way we are. Commerce, after all, is warlike. By nature, man is a violent creature. He seeks to dominate his fellows. But in civilization, he can’t assert his dominance with brute force, so he uses “civilized” means, such as economic tyranny and legal oppression.

Commercial struggles replace the struggle for survival in the wild. And just as survival in the wild requires total victory over natural foes, so too does commercial dominance require total victory over every conceivable foe. The urge to maximize profits reflects that desire for “total commercial victory.” Modest profits simply do not cut it.

What would the world come to if landlords only charged “what they needed to survive plus a little extra?” Sadly, people only take risks in our society if they know they’ll get a chance to gorge themselves at the profit buffet. No one would risk all for a mere chance to nibble or snack. Although this hunger for excess might lead to “progress” and “prosperity,” it sure makes life bitter for everyone else who has to tribute food to the buffet.

3 comments:

SteveW said...

Without charging exorbitant amounts for very limited resources, how do we ensure those resources actually go to those that need them? I have never paid an exorbitant rent in my life, and I'm not at all worried that some greedy landowner will ever have the ability to do that to me.

Exorbitant prices are never charged for long where competition is allowed, as a more efficient provider always steps in if the prices remain high. If prices remain exorbitant, then you know competition is not allowed, and the culprit is ALWAYS the government, because only the government has the power to block out true competition. I'm not sure of the specific situation in New York, but you generally need look no further than rent controls, historical districts, onerous building codes, and other government constraints that block out competitors, or that increase the risks for landlords (e.g. blocking out the ability of landlords to evict tenants, banning certain types of leases). Those risks must be mitigated in the only way they can, which is by raising the prices.

I'll take the exorbitant profits of the ugly free market any day as long as the exchange is voluntary.

Balthazar Oesterhoudt said...

Steve, I need to read Ayn Rand in order to fully grasp "The Voluntariness Doctrine" that underlies so many of your ripostes to my essays on economic fairness. Truth be told, I've shied away from Rand for a long time, but I've found it always helps me when I read doctrine that diametrically contradicts my own beliefs. Smith's "Wealth of Nations," for instance functioned as a sort of "negative manifesto" for me: I believed the opposite of everything he believed.

Frankly, since law school I've always been wary of "voluntariness" arguments. Contract law, for instance, is grounded in the mythical assumption that both parties to a bargain are equal, and that each suffers detriment precisely to the extent the other benefits. Yet this abstraction rarely corresponds with reality. In reality, some have resources, others don't, and those with resources will try their best to screw those who don't. So while those who don't have resources technically "voluntarily" enter bargains with those who do, it is illusory, unsubstantial voluntariness. They "voluntarily" assume unfair conditions because those with resources have the power to dictate terms. And how else will the person without resources get them if not to kowtow before the person who does?

You are right that competition would ease all these problems. In New York, however, there is not much competition. Landlords are a "clique" and they act in concert to further their interests. You might think that government is to blame for stamping out competition, but I see it another way. Landlords own the government here. They don't have to worry too much about regulation because they own everything. Government works for them, not the other way around. And because landlords here are small in number, they can negate competition by simply banding together and "working cooperatively" to keep things the way they are.

Still, all transactions with New York landlords are technically "voluntary." Nonetheless, when a person "voluntarily" bargains with them, they willingly do business with a party armed with drastically more power than they could ever dream to have.

SteveW said...

"Government works for them, not the other way"

Exactly. It often seems the only difference between you and I is that you think government can be otherwise.

I know that "voluntary" is often at least a bit illusory, but it is more real in every private setting than any government setting. If I want to buy a computer, yeah Microsoft owns most of the operating systems and they muscle some people so they can be in more systems than the quality of their software dictates. Nevertheless, I continue to have options. When government says I must do "X", I must do just that.

We have created a magic entity that can wave a wand and do the right thing, and we call it government. We know insurance companies should not act unfairly, and we create an authority that tells them they must act fairly. The problem is, we have now created an institution that wields such power, and now those with money and influence will flock to that institution trying to control it. They will always try to control it, and they will always succeed.

Even if we have a perfectly intelligent and benevolent person in charge of the institution when we bestow it with the power, that power will remain when he is gone, and he will be replaced by those that wish to use it for the control of others and the comfort of themselves.