Why do economists dislike rent control?

In July, President Biden called on Congress to enact nationwide rent control legislation that would cap rent increases at 5% for corporate landlords (i.e. those with 50 or more units). In a recent U.S. Economic Experts Panel question on the topic, only 2% of economists thought that this would make middle-income households substantially better off over the next 10 years. 

Some of the respondents took issue with the word “substantially,” saying that there might be some or no effect. However, many economists felt quite strongly that rent controls are a harmful policy. As Dr. Anil Kashyap from the Chicago Booth School of Business wrote “We have tried this kind of policy many times and it will benefit some people who get locked in below market rates, but raise costs for others who need to rent apartments that are not capped and supply will fall.” His colleague Steven Kaplan was less kind, calling this rent control proposal “an embarrassingly bad idea.”

Why are so many high profile economists so pessimistic about what is often a very popular policy? The answer boils down to the fact that economic theory generally suggests that price ceilings distort markets. The end result is theoretically a housing shortage, and some research has suggested this actually happens.

Essentially, people who are currently renting see some pretty significant benefits. This comes at the cost of people who are not currently renting, who may find it more difficult and more expensive to rent a new place. 

This may not always be the case however. Especially if the rent control is not a binding price ceiling then there should not be any market distortion. One study out of the University of Southern California found that a rent control policy did not have an impact on rent prices and housing construction. This study is a bit of an anomaly in the literature, however. 

One issue with rent control is that it doesn’t help people who are currently housing cost burdened. It may begin to help them if they remain in the same place and are able to increase their earnings, but it doesn’t make their current situation any easier.

The literature shows that rent control is an effective tool for reducing rent–for people in rent-controlled units. But this doesn’t mean rent controls produce socially optimal outcomes. Much of the literature revolves around the problem with rent control not only for economic efficiency, but for distributional outcomes, too.

Rent controls are a poorly-targeted policy with the goal of helping low-income people. The problem with rent control is that many upper-income people benefit from them as well. Upper-income households tend to be less mobile and have the ability to stay in one place for longer. Because of this, rent controls often are more advantageous for them (or more feasible for them to take advantage of) than lower-income households.

If a policymaker is looking to make housing affordable, tools like zoning reform and basic income are likely more efficient, effective, and equitable ways to solve this problem. As policymakers spur these options, they settle for second-best policy interventions.

Exempting tips from Ohio income taxes won’t help many service workers

Last week, Ohio state Rep. Jay Edwards of Nelsonville introduced a bill to declare intent to exempt tips and gratuities from income tax.

This comes a month after Donald Trump announced his intention to exempt tips from income taxes if elected president this year.

On its face, exempting tips from income taxes makes sense for someone trying to ease the burden for low-income workers. Edwards represents a swath of southeast Ohio that contains some of the poorest counties in the state, including Athens County, which consistently ranks as the poorest county in the state, even after adjusting for its large population of college students. Providing support for low-income workers makes sense here.

Exempting tips from income taxes, however, has been panned by analysts at think tanks across the political spectrum, from the conservative Tax Foundation to the liberal Center for American Progress.

Howard Gleckman is one of the most thoughtful and pointed analysts of tax policy in the country. He is a Senior Fellow for the Urban-Brookings Tax Policy Center, the leading tax policy think tank in the country.

Gleckman wrote about the problems with exempting tipped wages from income taxes in a commentary last month. The most straightforward problem with the proposal is that low-income workers often do not have large tax liabilities, if they have any at all.

In Ohio, the average waiter or waitress makes only $33,930 per year. Since Ohio only starts taxing income at $26,050, this means many waiters and waitresses are not paying income tax in the first place. Couple this with credits like the state Earned Income Tax Credit which reduce tax liability and this problem becomes more acute.

This is not a death knell to the policy’s potential effectiveness for low-income workers, however. Edwards’s proposal is currently abstract. By designing the policy as a refundable credit, this equity problem with the policy could be overcome.

Another problem Gleckman raises with exempting tips from income taxes is the policy’s potential to compete with a more effective policy for supporting tipped workers: equalization of tipped minimum wage with standard minimum wage.

Ohio’s most viable minimum wage proposal is a citizen initiative called the Ohio Minimum Wage Increase Initiative. It failed to qualify for the ballot for 2024 but may be on the ballot in November of 2025. This minimum wage initiative would increase the state minimum wage for all occupations to $15. This would have a significant impact on non-tipped minimum wage workers, who currently make $10.45 an hour, but would have a larger impact on tipped workers, whose current minimum wage is $5.25.

While eliminating income taxes for tips will help many high-wage tipped workers (like waiters and waitresses at high-end restaurants), it is likely not the best tool for providing relief for low-income workers. Expansion of the state earned income tax credit or increasing the state minimum wage are much more likely to support low-income workers as a whole. That being said, it is encouraging to see policymakers focusing on the plight of low-income workers and working to design policy to support them.

This commentary first appeared in the Ohio Capital Journal.

What happens when policy analysts disagree?

In public policy analysis, competition can lead to higher-quality analysis. The best way to spur competition between analyses is not completely clear, however.

Often, at the state level, budgeting is driven by a competition of projections between the executive and legislative branches.

For instance, in the state of Ohio, the Governor’s Office of Budget and Management makes projections for what tax revenues for the state will be over the upcoming year. The Legislative Service Commission, the research arm of the Ohio General Assembly, makes their own estimates.

When I worked for the legislature, I was told legislative leaders usually used the Office of Budget and Management’s projections rather than the projections from the Legislative Service Commission. This was because the projections from the Legislative Service Commission tended to be more conservative than the projections from the Office of Budget and Management, even though the Office of Budget and Management projections were usually less accurate.

An alternative to presenting two separate forecasts and having policymakers decide which forecast to use is to create some sort of structure for creating consensus between forecasters.

The state of New York, for instance, has a system for creating a consensus report for its budget forecast between its executive and legislative branches. The state holds a consensus budgeting conference and members of the legislature and executive branches agree on a forecast based on testimony.

The essential tradeoff policymakers have when making policy that is relevant to policy analysts is the tradeoff between time and information. From the analyst perspective, the tradeoff comes from giving up the amount of analysis a policy analyst is able to do. But from a policymaker perspective, they often need to take competing opinions and decide which one to follow.

One way to think about this problem is to think about the policymaking process as one that encompasses policy analysis. Policymakers (those who make the decisions about policy) hire policy analysts to understand policy and to give them information on the impacts of public policy. It is then up to policymakers to confront tradeoffs between different public policy goals (like effectiveness, efficiency, and equity of competing policy options) and to make a decision.

If a policymaker has competing sources of information, which can be thought of as competing policy analysts, then the policymaker has to find a way to evaluate these policy analysts against one another.

One way a policymaker can evaluate policy analysts is through ethos heuristics. Basically this is asking the question “who do I trust the most?” This is driven by perceptions of objectivity and prestige of analysts. It also may be driven by whose “side” the analyst is on: a legislator is more likely to trust a legislative analyst than an executive office analyst, all other things being equal.

Another way is through a process heuristic. The example of the “use the conservative number” heuristic used by the Ohio General Assembly is an example of this. This can be useful if you have a good heuristic to fall back on that makes sense with the policy goal.

Consensus budgeting provides a different approach. It leans on our intuitions about “wisdom of the crowd,” hoping that good analysts will be able to fall back on reason and information when given the choice. Some states are deploying this approach with promising results.

The cost of analysis: when is more study worth it?

Last week, Rob and I were helping lead a workshop on uncertainty analysis for the Society of Benefit Cost Analysis. During this workshop, we discussed different methods that could be used to measure uncertainty, ranging from qualitative discussion about key assumptions to full-on probabilistic analyses that involve Monte Carlo simulations.

One question that the participants of this workshop kept returning to was “if all of these are ways to do uncertainty analysis, how do we know which one is best for our study?” 

This question is important not just in uncertainty analysis, but in all aspects of a policy analysis. We always have varying levels of complexity to try and apply, but how are we supposed to decide on what is best for a given problem? 

At the core of this question is a tradeoff. We can exchange additional resources, usually time and some prerequisite data, in exchange for more detailed information in our analysis. The question that we as analysts need an answer for is whether the additional information we are getting is worth the additional cost. 

One thing that I’ve noticed about this question now that I’ve been a policy analyst for a few years is that often the biggest unknown is about the cost of additional information. It appears to me as though by working on a project, I often have a fairly good understanding about what information we will get from additional work. For example, if I build a model and generally understand what the variance is on some of the inputs to that model, then I have a good intuitive idea of what additional information a Monte Carlo simulation will provide. 

The cost of additional information is much more variable and context specific. The two most common barriers I’ve encountered in my work so far are time and data availability.

Usually at Scioto Analysis, we have strict deadlines that we need to budget our time within. We always try to give ourselves some extra time to be flexible at the start of every project, but because that is such a limited resource for us we place a lot of value on it.

In our situation, we need to decide whether the cost of doing a more complex type of analysis is worth more than having more time to write and edit our final report. 

The other most common barrier is the cost associated with finding data to use. The majority of our work is based on publicly available data. The Census, the American Community Survey, tax data, these datasets are involved in almost every project we do. 

When we need data that isn’t publicly available, or that is difficult to access for whatever reason, the costs of our projects go up substantially. We often don’t have the capacity to try and get non-public data unless it is a clearly defined part of our analysis at the beginning. 

There are no specific rules about whether or not additional complexity is worth the costs on a project. Over time, we can get a better understanding of when more research is warranted and when the costs are too high.

Can a new kind of credit reduce property tax burdens in Ohio?

Last Monday, an innovative piece of bipartisan legislation was quietly proposed in the Ohio House.

House Bill 465 is a bill to create a tax credit for homeowners and renters whose property taxes or rent exceed a certain threshold in relation to income. This means that if you have high property taxes or rent in relation to your burden that you could be eligible for a new state tax credit.

Tax credits are among the most important anti-poverty programs in the United States today. The federal earned income tax credit pulls more working-age people out of poverty than any government program. The child tax credit expansion in 2021 led to the largest reduction in poverty on record in the United States and its expiration in 2022 led to its largest increase in poverty.

House Bill 465 provides resources for households in a new way, contingent on cost of housing. This is a new kind of credit for me–I haven’t seen a tax credit that focuses specifically on easing the burden of people who face housing costs. But there are a few elements of this proposed policy that make it an effective anti-poverty program.

First, it is generous and targets low-income households. The credit is worth $1,000 for households with resources of $60,000 or less, which comprises a little less than half of the households in the state. This then steps down $200 for every additional $10,000 a household makes before completely phasing out at $100,000 of household income. While this stepwise phaseout will create some work incentive problems on the margin, they are concentrated in middle-income households that don’t have as many “benefit cliff” problems as low-income households.

Second, it is refundable. This means that households could claim the credit even if it exceeds their state tax burden. This is especially important because the households that are most in need of this credit are most likely to not have large state income tax burdens since they are low-income in the first place. Making this credit refundable makes it certain households with the most need will be eligible for the credit.

Third, it applies to renters as well as homeowners. Believe it or not, property taxes are actually regressive taxes. This is because even renters have to pay property taxes since property owners can pass these taxes on to them. Since low-income people tend to spend a larger proportion of their income on housing than upper-income people, low-income people spend a larger proportion of their income on property taxes than upper-income people. The bill includes renters by allowing taxpayers paying 15% of their rent in excess of 5% of their income to also be eligible for the credit. 

By also allowing renters who pay toward property taxes for property owners to collect the credit, as House Bill 465 does, the burden of property taxes is relieved for people who need it relieved the most.

With 28 sponsors and cosponsors from both sides of the aisle, it looks like legislators in the Ohio House are taking this proposal seriously. Maybe the burden of property taxes is the encouragement the state needs to fund a significant program for poverty alleviation in Ohio.

This commentary first appeared in the Ohio Capital Journal.

How can we improve housing affordability in Ohio?

Last week, the National Low Income Housing Coalition and the Coalition on Homelessness and Housing in Ohio reported that a full-time worker needs to make nearly $21 an hour in Ohio to afford a two-bedroom apartment.

Housing affordability is a growing concern in Ohio. According to Apartment List, the average apartment price has grown from under $800 in 2017 to over $1,100 in 2024. While wages have also risen over this time period, this is still increasing costs for households across the state.

So what can we do about rising rents? Policymakers have options to address housing prices for residents.

Zoning Reform

The number one strategy for keeping the cost of housing under control is reforming zoning. Many communities across Ohio still zone specifically for single-family homes, even when people would be happy to move to a neighborhood where duplexes or small apartment buildings are available. This creates a serious barrier to entry for people entering a given neighborhood and can create economic gates for entry.

Reducing barriers to constructing the range of housing residents desire can ease the pressure on the market for housing and reduce the rapid rise in cost of housing throughout the state.

Housing Subsidies

A direct way to help people afford housing is to provide payment assistance to people for rent. This can even be deployed with programs like the Families Flourish (previously “Move to Prosper”) program that provide assistance for people to move to new neighborhoods with more assets. This demand-side intervention will help close the gap between the cost of housing and the ability to pay of renters by providing extra resources to families to pay rent.

Affordable Housing Development

Another approach is for state and local governments to put the thumb on the scale of the market to spur more development of affordable housing, either through tax incentives, subsidies, or some other intervention. This can increase the supply of affordable housing by reducing the cost of constructing it. Developers under this model could be traditional, non-profit, or even public sector. 

While this approach does not provide the family and development flexibility of zoning reforms or housing subsidies, it can be a third-best policy intervention that can sometimes be more feasible than these more straightforward approaches due to governments’ comfort with providing subsidies through tax incentives

Cash Assistance

The easiest way to fight poverty is to give people money. Cash assistance works the same way a housing subsidy does, but without the strings attached. Maybe rent is paid for the month but a family is running out of baby formula. Maybe a family needs to buy a car to get to work to be able to pay rent. Maybe a family needs to pay down a credit card to improve their credit to qualify for a mortgage. Cash assistance acknowledges the lack of knowledge we have at the top and trusts families to make choices in their own best interest. This may be what the housing crisis needs most.

While there’s a trope in public policy that there is no silver bullet for a given problem, we have a cylinder full of bullets that can improve housing affordability in Ohio. Now it’s up to policymakers to pull that trigger.

This commentary first appeared in the Ohio Capital Journal.

Ohio economists agree algal blooms hurt the economy

In a survey released this morning by Scioto Analysis, 9 of 13 economists surveyed agreed that harmful algal blooms lead to significant economic loss for Ohio. The other four economists were uncertain, and none of the respondents disagreed. 

A study from 2018 of every state’s Genuine Progress Indicator found that Ohio had the fourth highest cost of water pollution per capita, trailing only New Hampshire, Hawaii, and Delaware. Harmful algal blooms are a significant contributor to Ohio’s poor water quality, especially on the Western shores of Lake Erie near Toledo. 

Will Georgic from Ohio Wesleyan wrote “There is an abundance of peer reviewed evidence indicating that Ohio suffers significant economic losses each year attributable to harmful algal blooms. Harmful algal blooms cause a decrease in property values (Wolf, Gopalakrishnan, and Klaiber 2022), a fall in fishing license sales and associated economic activity (Wolf, Georgic, and Klaiber 2017), and changes in recreational behavior such as swimming at the lake (Wolf et al. 2019; Zhang and Sohngen 2018).”

In recent years, the state has created the H2Ohio program to help address this issue. Scioto Analysis’ evaluation of the voluntary nutrient management plan initiative funded by H2Ohio found that it has so far been very successful in improving Ohio’s water. 

One option the state has yet to implement is a tax on fertilizer use, which 11 of the 13 respondents agreed would be an efficient way to address this issue. As Kevin Egan from the University of Toledo wrote “No industry wants regulations. But efficient regulations are there to limit pollution and fertilizer runoff is polluting our water.” 

The Ohio Economic Experts Panel is a panel of over 40 Ohio Economists from over 30 Ohio higher educational institutions conducted by Scioto Analysis. The goal of the Ohio Economic Experts Panel is to promote better policy outcomes by providing policymakers, policy influencers, and the public with the informed opinions of Ohio’s leading economists. Individual responses to all surveys can be found here. 

How much do you save by pumping your own gas?

I have a lot of family that lives in New Jersey, and every time I go out to visit them I am always surprised to remember that I am not able to use a gas pump by myself. For those of you who have not had the pleasure of driving a car through New Jersey (or until quite recently Oregon), it is against the law to pump your own gas at any station within the state. Each gas station is staffed by attendants whose job is to do this for you. 

The stated reason that New Jersey has a self-service ban is because of fire hazards, an idea that was lobbied by full-service gas station owners in the late 40’s. Today, the majority of New Jersey residents still oppose fully self-service gas stations. A Monmouth University poll found that 55% of residents say that New Jersey being the only state that does not allow self-service is a good thing for the state.

Another question asked by Monmouth University was whether or not New Jerseyans would prefer full self-service if it meant that gas was 15 cents less per gallon compared to full-service. To this, 70% of people said they’d prefer to pump their own gas at lower prices. 

This is interesting because we might expect that full-service gas stations would charge slightly more for their gas than self-service. They have an extra employee to pay, after all. 

According to AAA, New Jersey has the 29th cheapest gasoline prices in the country. How much more would drivers be saving if New Jersey did switch to self-service gas?

According to a new study by Vitor Melo from Clemson University, the answer is about 4.4 cents per gallon. This study used the 2018 partial repeal of Oregon’s self-service ban in order to better understand what the impact on prices was. 

In 2018, Oregon passed a law that lifted the self-service ban in certain counties (with populations below approximately 40,000). This exogenous policy change within the state was perfect for a difference-in-differences analysis.

Gas prices can be a challenging thing to study because they are so unstable, so it is difficult to understand whether they are changing because of a policy or just because they are gas prices. After the partial repeal went into effect however, the change in prices for the affected counties was consistently less than the change in prices for the control counties. 

The total savings over a year for a family with three licensed drivers would likely be about $90. In his conclusion, Melo speculates that this effect might be larger in urban areas where gas stations may have to pay attendants higher wages. 

For policymakers, this is new evidence that helps them better understand the impacts of a self-service ban. While it does support the jobs of gas station attendants, those costs are passed on to all other drivers through the form of higher gas prices. 

Is allowing self-service gas stations worth it for New Jersey? That’s for them to decide. What we do know is that if one day New Jersey lifts its ban, we should expect lower gas prices to follow.

How can we do capital budgeting better in Ohio?

Late last month, the Ohio Senate sent a $4.2 billion capital expenditures budget to the Governor’s office.

Ohio’s capital budget is a budget of long-term investments in projects and infrastructure across the state mostly financed by debt. This year’s version of the capital budget includes $3 billion in new debt taken on by the state to finance these projects.

The capital budget is usually a fairly noncontroversial bill passed every two years. This might be strange for a bill that allocates billions of dollars. But this is because every legislator that votes for this bill can build projects across the state without having to allocate dollars today.

Nonetheless, the capital expenditures budget is not costless. Over time, taxpayers will pay for the capital expenditures budget. Even in the short-term, the state has a constitutionally-mandated cap on debt it can take on. So projects we fund crowd out funding for other projects. There is an opportunity cost to the projects funded by the capital expenditures budget.

So how can we choose the best projects to fund with the capital expenditures budget? Surely there is someone in charge of assessing these projects and seeing which ones will have the largest returns to the residents of the state.

Unfortunately, that is not the case. Capital expenditures are largely a function of the judgements of legislators, uninformed by objective analysis of the economic, equity, or other impacts of these projects.

What would a better system look like?

Ideally, projects selected for a large spending bill like this would have some sort of analysis conducted so policymakers would be informed about the impact of the projects on the public. Having Office of Budget and Management or Legislative Service Commission staff in charge of scoring proposals for fiscal, economic, and equity impact would bring valuable information to the table for policymakers making decisions on these projects.

This would mean a policymaker would be able to assess the economic impact, fiscal impact, equity impact, and other impacts of a potential project and the tradeoffs of one against one another when making a funding decision.

These sorts of decisions could have substantial impacts on the state economy. $4.2 billion is a lot of money. Just a 1% increase in efficiency of these allocations could mean an additional $42 million in state GDP. If this created jobs at the value of the median household income in the state, that would mean an additional 640 jobs created statewide by more efficient allocation of these resources.

More equitable allocation of these dollars could have an even larger impact as dollars could be targeted toward projects that would help people in poverty or who live in struggling parts of the state.

The state government is a powerful economic force. Whenever decisions are made blind, we lose the opportunity to grow our state economy, reduce poverty and inequality, and improve lives for residents of Ohio. More intentional allocation of state resources could have a substantial impact on Ohio’s economy, people in poverty, and the well-being of residents across the state. Understanding what these impacts could be is the first step.

This commentary first appeared in the Ohio Capital Journal.

What does "right-to-work" really do?

In January of last year, we asked our Ohio Economic Experts Panel about what the impacts of a “right-to-work” law might be in Ohio. Right-to-work laws prevent unions or employers from mandating union membership. The tradeoff here is that union bargaining power is reduced in order to lower barriers to entry for new employees. The economists we surveyed thought at the time that right-to-work would likely increase inequality, and they were split on whether or not it would increase overall employment.  

Much of the conversation around right-to-work laws focuses on the employment impact. It’s why advocates use the name right-to-work. However, unions are responsible for negotiating all aspects of a work environment.

That is why a recent paper published in the Journal of Policy Analysis and Management, authors Rania Gihleb, Osea Giuntella, and Jian Qi Tan from the University of Pittsburgh explored the impact that right-to-work laws have on other aspects of employment. 

In particular, this paper focuses on the impact that right-to-work laws have on long working hours. Long working hours have been shown to have negative effects for employees, including increased risk of injury in the workplace. 

By using a stacked difference-in-differences approach, these researchers determined that right-to-work laws led to a 6% increase in the proportion of workers who worked long hours. This effect was concentrated in industries that are characterized by higher unionization rates, such as construction and manufacturing. 

Other industries with lower unionization rates such as education and public administration showed less of an effect on the proportion of workers working long hours, and instead exhibited an increased likelihood of non-standard working hours. 

I found this paper interesting because it is an important reminder of the fact that policy changes can have extremely far reaching impacts. Even though much of the debate on right-to-work is focused on employment and wages, we need to be aware of what the whole range of impacts might be. 

At its core, right-to-work laws are about how much power unions have, and unions are involved in a lot more than just wages and employment. 

I’ve written in the past about the unintended consequences that some policies can have, but I would argue that these types of unintended consequences are not the same. In that previous blog post, I talked about college admissions and employment for people with criminal records. In both cases, there was an unexpected change in behavior that reduced the effectiveness of those policies. 

In the case of right-to-work and its impact on long hours, it is an issue of not looking closely enough at the expected outcomes. A thorough policy analysis will miss an unexpected outcome (this is why program evaluation is important), but it should always let us know about the expected outcomes. If someone took the time to perform a full cost-benefit analysis of right-to-work, we might find lots of impacts on all of the aspects of work that unions are able to negotiate. Policymakers who care about creating the best outcomes for their constituents should care about policy analysis.