Profit and Sauce: How

Much Do D.C.
Restaurants Really Make
Off of Meals?
Pulling back the curtain on food costs reveals some restaurants are more like magicians than
money-making machines.

by LAURA HAYESJANUARY 17TH, 2018

Photo by Laura Hayes

Kanom jeen nahm phrik was the most popular dish at Baan
Thai this past December. But Tom Healy, a partner in the
northern Thai restaurant on 14th Street NW, wishes it wasn’t. The
rice noodle dish with shrimp, chicken, and tempura watercress only
makes the restaurant 71 cents. “This is one of our more extensive
production dishes,” he explains. “I’d like to sell the cheaper dishes.”

The inclusion of shrimp increases the cost, especially in December,

when the price of America’s favorite crustacean can skyrocket
because of the abundance of shrimp cocktails served at holiday
parties. The food cost percentage for the kanom jeen nahm phrik is
about 50 percent compared to the restaurant’s many chicken dishes
that come in closer to 30 percent.

A dish’s food cost percentage is calculated by dividing the per-

portion cost of ingredients by the price the restaurant sells it for on
the menu—the lower the food cost percentage, the more money the
restaurant makes. For example, if a sandwich’s ingredients cost $1
and the restaurant sells it for $4, the food cost percentage is 25
percent.

But food cost is only one part of calculating a restaurant’s bottom

line. Operators must also shell out for labor, rent, utilities, and
other fixed costs that quickly add up. Because of razor-thin profit
margins, especially in a high-cost city like D.C., running a successful
restaurant can seem more like a magic trick than a money-making
enterprise.

Alcohol has long been the panacea for making up the difference.
“Liquor is everything,” Healy says. “The best thing you can do for a
restaurant is order a vodka soda.” Baan Thai marks up rail liquor as
much as 1,428 percent to make ends meet.

To better understand how much restaurants make off meals, Young

& Hungry asked five local eateries to break down food costs for
popular dishes. Baan Thai offered a complete cost breadown for one
dish, while the other four restaurants sent spreadsheets with
ingedient costs, but talked about labor and other fixed food costs in
interviews.
Baan Thai

1326 14th St. NW

The dish: Kanom jeen nahm phrik with Thai thin rice noodles,
coconut milk, peanuts, ground chicken, ground shrimp, red onions,
garlic, tempura watercress, chili powder ($15)

Healy calculated how fixed costs factor in to how much Baan Thai
makes off of this rice noodle dish. “Everything I make costs me
about $6 to put on someone’s table,” he says. To arrive at that
number he took the total cost of what it took to run the restaurant in
December, not including food ingredients, and divided it by the
total number of dishes and drinks sold that month.

“One of the biggest misconceptions is that if the restaurant is full,

you’re cranking money hand over fist,” he says. “You really have to
have a place packed out seven days a week with a line before you
start making huge numbers. We’re just a small business.”

Every choice the restaurant makes is profit-driven. When a couple

asks to sit at a table set for four, Baan Thai staff decline. “We are
waiting in the hopes that a four-top will come in,” Healy says.
“We’re not trying to be rude—we need the money. Please take this
slightly less awesome table so I can pay our employees tonight.”
That’s also why the restaurant charges for substitutions. Want
shrimp instead of chicken? That’s $3 extra. “Otherwise we take a
loss,” Healy says.

“Obviously we are making money—we wouldn’t be doing it if we

weren’t making money, but do not assume we’re millionaires,” he
says. “We’re always a heartbeat away from not making money and
that’s what drives us to be good at what we do.”
Tiger Fork

922 N St. NW

The dish: Kowloon buns with dairy cow beef, ginger, and black
vinegar ($10)

It costs Tiger Fork $2.93 to make one order of Kowloon buns at a

food cost percentage of 29 percent. Using a niche ingredient like
dairy cow beef from Virginia increases the expense, but chef and
partner Nathan Beauchamp says it’s worth it. “We use dairy cow
meat because the flavor is more reminiscent of what you’d find in
Asia—it’s what local beef tastes like in Hong Kong.”

Beauchamp also priced out how much labor it takes to make one
order of buns. “Each bun takes three minutes to make and since
there are two per order it requires six minutes to complete the
dish,” he says. “That’s $1.40 of labor per plate based off a person
making $14 per hour.”
Tiger Fork is a Hong Kong-inspired restaurant and some diners
associate Cantonese food with affordability. “We sometimes
struggle with this,” Beauchamp says. Diners will say they can go to
suburban Virginia and get Chinese food for much cheaper. “We’re
not saying you can’t,” Beauchamp says, “but it’s mostly families that
are working in those restaurants and the labor is free.”

In addition to Tiger Fork, Beauchamp helped

open Calico and Primrose in 2017. They’re all in operation now,
but the restaurateur recognizes how easy it is for new businesses to
fail. “Food cost and labor cost are the two things you have to
manage and if they get out of whack, absolutely it can make your
restaurant fail fairly quickly.”
Centrolina

974 Palmer Alley NW

The dish: L’Inverno with warm roasted vegetables and garlicky
bagna cauda ($14)

To determine how much Centrolina makes off of its plate of

roasted vegetables served with a side of savory bagna cauda sauce
made from anchovies and garlic, chef and owner Amy
Brandwein calculated how much she pays local farms per pound
for various vegetables, and then how many ounces of the vegetables
she uses in a single order.

“We’re making about $9 off of it before labor and everything,”

Brandwein says. That’s 36 percent food cost. “It’s a misconception
that vegetables are cheap.”

In previous jobs, Brandwein was pressured to keep food cost closer

to 20 percent. “It was unattainable,” she says. “It was very hard to
manage like that not in a fast food atmosphere.” At Centrolina, she
says she could try to get down to 28 percent but it would be
difficult.

Brandwein pegs the cost of labor at $1.85 per L’Inverno order but
notes other factors that cause Centrolina’s food cost to creep up.
“We serve bread and olive oil and there’s no charge for that,”
Brandwein says. “That’s not cheap.” The restaurant spends $550
per week on bread service. “In an Italian restaurant, people expect
to have bread and oil and they get bent out of shape without it.”
Alta Strada

465 K St. NW

The dish: Fettuccine with wild mushrooms, truffle, and Parmigiano

($23)
The cooks at Alta Strada make pasta in house daily using
premium flour. The fettuccine costs the restaurant $5.81 to make,
putting the food cost percentage at 25.25 percent. Chef Matt
Adler, the culinary director of Schlow Restaurant Group’s Italian
concepts, hammers home the point that profit margins in
restaurants are thinner than lasagna noodles.

“Even if you’re going to a restaurant and you’re paying $20 for

pasta, it doesn’t mean the restaurant is profiting $10,” he says. “It’s
probably profiting $1.50 if it’s a good restaurant. If you’re running a
20 percent profit at a restaurant, you’re killing it.”

As far as labor goes, Adler notes the restaurant pays people to order
the ingredients, receive and store the food, prep the food, cook the
food, serve the food, clean the plates, and supervise all of these
activities. The D.C. minimum wage is currently $12.50 an hour.

“We pay between $12.50 and $17.50 depending on the position,” he

says. “Therefore, the total labor cost for producing this dish is
around $8.25. The cost of the ingredients, plus the cost of labor
means it takes $14.06 to make the fettuccine. That leaves Alta
Strada $8.94 to cover things like rent, cleaning supplies, insurance,
taxes, unemployment, workers comp insurance, employee benefits,
advertising, trash removal, repairs, utilities, and credit card
processing fees.

Adler explains that the Italian restaurants in Michael

Schlow’s portfolio shoot for a slightly lower food cost because the
labor cost is higher due to the effort it takes to roll fresh pasta and
knead pizza dough. He’s already preparing for increases in D.C.’s
minimum wage, which will reach $15 in 2020.

“The liberal side of me wants everybody to make all the money they
can and support their families, but the part of me that has to
operate a business knows how much it costs to pay people and you
have to run a successful business otherwise people don’t have a
job,” Adler says.
Bub and Pop’s

1815 M St. NW

The dish: Bub’s Italian Hoagie with Genoa salami, prosciutto,

capicola, pepperoni, aged provolone, arugula, Roma tomatoes,
hoagie relish, mayo, Bub’s vinaigrette, and pecorino Romano ($18
for a whole)

One of Bub and Pop’s best-known sandwiches isn’t doing the

Philly-inspired deli any favors. The food cost percentage on the full-
size Italian hoagie is 30 percent. “We price according to what kind
of profit we want to make,” says chef and co-owner Jon Taub. “We
have a general idea on our total formula to run the restaurant. We
don’t want our food cost to be over 25 percent.”

To stay in the black, Taub has made profit-driven decisions, include

ceasing production of the restaurant’s addictive potato chips. “If Le
Diplomate made those chips in a bistro environment, they’d sell
them for $12 with the dip it comes with,” he says. “I’m selling the
same bag for $2 and only making five cents. It requires a skilled
cook to make them, so it got to the point where it wasn’t worth it.”

Two years ago Bub and Pop’s upped its prices by about $2 per
sandwich and customers recoiled. “One guy said he was going to
boycott us,” Taub recounts. “The minimum wage just went up, all
cooks have to go up.” Minimum wage increases have ripple effects.
If a dishwasher makes $15 per hour, for example, a restaurant must
pay its more experienced employees even more.

Taub says his mom, Bub and Pop’s co-owner Arlene Wagner,
typed up a letter to the disgruntled customer explaining the
rationale behind the price hike. “You want everybody to come in
and enjoy your stuff but you have to know what you’re getting into
and if you don’t like it, don’t patronize the business,” Taub says. “I
don’t roll into a Bentley lot and say, ‘Dude, I can’t afford this shit.’”
How Uber could become a
nightmarish monopoly
What if every time you took a taxi, you were charged the absolute maximum
you could afford?

Photo Illustration | Images courtesy iStock

RYAN COOPER
FEBRUARY 9, 2017
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What if every time you took a taxi, you were charged the absolute maximum
you could afford?

If you live in a city, chances are you've got a taxi app on your phone. Right
now, there are a number of choices: Lyft, Sidecar, Uber, and a few others.
But imagine a future where there is only one option — and all the traditional
taxis have been driven out of business. A time when if you need a cab
somewhere, it's Uber or bust. Imagine further that sophisticated pricing
algorithms have enabled the company to determine exactly how much you'd
be able to pay for a ride.

This might all sound implausible, when Uber and Lyft are locked in
ferocious rate-cutting wars and trying to poach each other's drivers. But there
could easily come a time when one finally defeats all its competitors. It could
be any of them, but the smart money would be on Uber, a notoriously
aggressive company, scornful of existing legal regimes or industry norms
that has already captured much of the taxi business.

With traditional cab companies collapsing and most cities reticent to tackle
ride-sharing apps head on, Uber would have a chance to dominate the
American taxi market to an unprecedented degree. And because any such
nationwide taxi monopoly would also have powerful high-tech tools at its
disposal, it could be the first company in history to be able to attempt perfect
price discrimination — adjusting individual prices so that every taxi
customer pays as much as she can afford.

A worst-case scenario would mean a technological arms race between Uber

and consumers, abuse of lower-class people, and an erosion of the financial
base of public transportation. Every time you take a ride across town, Uber
would be leveraging surveillance data to soak you for every penny it possibly
could — and either you'd eat the cost or engage in a lot of expensive and
complicated counter-espionage.

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Now, price discrimination itself is restricted at the federal level under the
Robinson-Pateman Act of 1936, but the law's conditions only govern
commodities, putting any taxi company outside its reach. And while Uber
has never indicated it wants to adopt such a pricing strategy, plenty of online
companies have — and they were never presented with as great a temptation.
(Uber did not respond to our request for comment.)

The looming taxi monopoly

Corporate consolidation is a background condition of the modern economy.

Since the Reagan years, endless waves of mergers have swept across
American business. From agriculture to banking, a few behemoth companies
now control up to 80 percent of all sales (or even 90 percent, in the case of
computer chips and Intel). As a result, corporate competition often takes the
form of excluding rival products from marketplaces, rather than beating them
on quality or price.

Some of America's monopolies, like Monsanto, might sound like throwbacks

to the days of U.S. Steel. But others — like Facebook and Google — have a
more modern sheen. And investors are betting that Uber will be one of the
next digital behemoths to join their ranks.

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Uber is notoriously secretive when it comes to its internal information, so it's

hard to know exactly how big it is. Bloomberg got access to internal data in
December (the most recent leak) showing revenues of $5.5 billion in
2016. Uber operates at least somewhere in every state except Alaska and in
over 70 other countries. It officially employs roughly 6,700 people, although
that figure does not include drivers (not classified as employees, in a bid to
avoid labor regulations) of which there are many hundreds of thousands.
Uber's business strategy might best be described as "rulebreaking." In city
after city, they have crashed in and undermined the existing taxi market with
cheap fares and violation of existing regulations. Two years ago it fended off
an attempt at regulation from New York City with a massive PR blitz, and it
has threatened to leave Maryland if that state insists on toughening up its
driver background checks. And that's not all — one Uber executive openly
speculated about using their ride data to blackmail journalists (after a
firestorm of criticism, he apologized).

It's pretty clear Uber is banking on total domination. The company has raked
in at least $15 billion in outside investment — including a massive $3.5
billion in a single shot from Saudi Arabia. Some quick arithmetic done by an
analyst at Naked Capitalism demonstrates that Uber's fares only cover about
40 percent of its costs — the rest being subsidized out of investor cash. That,
plus the fact that the entire American taxi market has yearly revenues of only
$11 billion, suggests one of two things. Either investors are fooling
themselves, or they "are assuming this will be a monopoly service," says
Frank Pasquale, law professor at the University of Maryland. The strategy
would be to undercut competition with investor-subsidized fares, and then
when everyone else is driven out of business, jack prices through the roof and
collect monopoly profits. Indeed, the firm claims it already controls over 80
percent of the taxi app market.

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Uber's big opportunity

Here's where it gets interesting. A monopoly in the age of the internet raises
unusual economic questions, particularly that of price discrimination.

There are several ways to charge individuals differently for the same product,
but let's focus on what's called "first-degree" price discrimination. This
means perfectly individualized pricing, where each consumer is charged their
absolute maximum willingness to pay. (In economics lingo, this is called an
exact reservation price.)

For most of history, this was thought impossible. "The hard part in the old
days was finding the reservation price," says William Black, professor of law
and economics at the University of Missouri-Kansas City. Figuring it out for
a single person means determining how much money she makes, what sort of
things she wants or needs, how badly she craves it, and so forth. Thus, it not
only involves a great deal of intrusive surveillance across the entire market,
but also managing tremendous quantities of data.

But computers and the way the internet economy has developed have
demolished these barriers to perfect price discrimination. The constant
acceleration of computing power and data storage technology has made
sorting millions of personal data portfolios quite straightforward. Ordinary
web browsing and shopping now means history, purchases, relationships, and
more are comprehensively tracked and assembled into dossiers, compiled and
traded in a $156 billion industry (as of 2014).

Apps themselves also assist in personal surveillance. Installing a taxi app

necessarily requires access to much of one's personal information, even aside
from when and where you are going.

Assistant economics professor Benjamin Shiller of Brandeis University

modeled the potential business benefits of price discrimination in a 2014
paper, given reasonable assumptions. He found that Netflix could have
increased its profits by 0.8 percent using simple demographic data — but by
12.2 percent using the detailed information available from browser
surveillance.

However, it's still risky. "Even if you can do it, it's unwise due to backlash,"
says Carl Shapiro, professor of economics at UC Berkeley. Some businesses
have experimented with quasi-perfect discrimination and gotten caught at it,
to their regret.
In September 2000, for instance, Amazon was discovered offering higher
DVD prices to customers whose browsers identified them as regular Amazon
shoppers. CEO Jeff Bezos apologized, swore his company wouldn't do it
again, and offered refunds to people who had gotten the higher price.

But Uber might be different.

First, the company is already well-known for constantly fiddling with prices
with its "surge pricing" function, which supposedly adjusts prices to fit
demand — part of Uber's self-presentation as a mere marketplace. However,
unlike a usual market, it controls pricing across its entire fleet, and its pricing
mechanism is opaque. When you receive a surge price alert on the Uber app,
you take the company at their word that everyone in the area is also getting it.

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The opportunity for camouflaging price discrimination is obvious. Uber
"could usher in price discrimination under the banner of dynamic pricing,"
says Lina Khan, a fellow at the New America Foundation's Open Markets
Program.

Suppose you're a lawyer on the way back from a business trip. You make a
fair bit of money, but you don't mind taking public transportation when
you've got the time. But on returning from this particular trip, you learn your
wife has gone into premature labor. And Uber, armed in this hypothetical
with a granular analysis of your personal dossier — who you've been calling
and texting, what things you've been buying, and so on — figures this out.
You've simply got to take a taxi to the hospital from Dulles — except this
time, it's going to cost you $750. There is no other option, so you grit your
teeth and pay up. Meanwhile, a broke college student leaving the airport five
minutes later is charged only $15.

Would price discrimination really be so bad?

If Uber were to go this route, it would have its defenders.

Some researchers argue that price discrimination could actually benefit the
poor. "Given reasonable assumptions, there will be a redistributive effect,"
says Glen Weyl, a senior researcher for Microsoft Northeast. This is because
while a single price will be higher than many poorer people would be willing
to pay, it might still be profitable to sell to them at a lower price. For
example, price discrimination allows poor nations access to prescription
drugs that would be otherwise unaffordable.

Or consider internet content services, where the cost of one additional

download is essentially zero. Perfect discrimination for Netflix might mean
that the very poorest people get access for a pittance, while more expensive
subscriptions from the rest of the income ladder would provide the bulk
revenues necessary to keep it in business.

The theory checks out — but it's Panglossian in its optimism.

The progressive result depends critically on price discrimination

happening across the entire market. If it is restricted to bottom- or middle-
income tiers, regressive outcomes may be the result, possibly even with poor
consumers paying absolutely more than wealthy ones.

This was the finding of a 2012 Wall Street Journal report on Staples.com
pricing. They discovered that the website varied its prices based on the zip
code of the search, giving somewhat higher prices to shoppers who were far
from any competitor. Because poorer zip codes generally have fewer retail
options, giving Staples greater market power, "areas that tended to see the
discounted prices had a higher average income than areas that tended to see
higher prices."

Such a market strategy could also be combined with use of Uber's tiered
service levels. Surveillance could predict people who are on the verge of
upgrading to a more expensive level (moving from UberX to Uber Black, for
example). They could then be nudged into it with strategic price changes —
surging on the cheaper service but not the more expensive one. This wouldn't
be price discrimination, strictly speaking, but the overall effect would be
largely similar.

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The dystopian future of taxis

So let's imagine what might happen if Uber manages to achieve full market
domination and attempt price discrimination. It wouldn't be pretty.

First, it's important to realize that there would still be certain barriers to
implementing price discrimination across the entire market. The reservation
price of people at the top of the income distribution, for instance, is likely to
be very high. Obscuring the difference between $20 and $30 with opaque
algorithms is one thing, but it would get harder and harder if the price, say,
automatically rises into the thousands of dollars.

People also tend to react angrily to discovering that they pay higher prices
simply based on identity alone. Just as with the Amazon experiment, the
Staples discrimination experiment caused a storm of controversy and a quick
reversal and apology. A dominant Uber would be different due to its
monopoly and greater ability to camouflage, but anyone who is charged
$25,000 for a trip from Manhattan to Brooklyn is going to raise a stink even
if they're extraordinarily wealthy. Instances in which discrimination is
accepted, such as need-based college tuition pricing or the progressive
income tax, are explicitly framed as a morally praiseworthy subsidy of those
with lesser means. Calmly accepting a price tens or hundreds of times greater
than the next person, simply to juice the profits of a large corporation, is far
less likely.

Therefore, "people will think, 'I'm going to try and hide my identity,'" says
Shapiro. But wealthy people are far more likely to have the education and
technological sophistication necessary to challenge corporate surveillance, or
be able to hire someone to do it for them.

This would have the likely side effect of sparking an escalating battle
between the monopolist attempting to discriminate, and those wealthy or
savvy enough to foil the surveillance technology. Browsing "trackers" can be
defeated by other browser plugins, use of no-tracking search engines like
DuckDuckGo, encrypted email, and other strategies. Corporate counter-
tactics, such as charging a great deal more to people who refuse to provide
personal information, might be foiled by tech services providing a low-
income identity presentation, and so on.

Finally, America's already-lousy public transportation would rot, as the taxi

monopolist uses its political influence and market power to force people into
using taxis wherever possible. A taxi app could be an excellent complement
to public transport, helping people get to and from the bus stop or train
station, but a taxi monopolist is certain to view those services as just another
competitor to be stamped out. The resulting congestion — as trains and buses
are capable of tremendously more throughput than cars — would be abysmal.

Given an Uber-style market setup, perfect price discrimination will become

more and more feasible the further one goes down the income ladder.
Wealthy people are likely to have the means and social influence to make
perfect price discrimination more trouble than it's worth, while the poor will
probably just accept it as just one more thing for which they have to pay an
extraordinary premium. All the while, a good deal of economic product will
be squandered in a zero-sum technological fight between the monopolist and
their customers.

Businesses are built within legal structures created by the state. Uber, like
every company, could not possibly exist without property law, securities law,
and corporate law. There is every reason to use state power to prevent the
U.S. taxi market from becoming a wasteful, nightmarish monopoly.
This is the first article in a two-part series on Uber. Stay tuned for the second
installment.
Is Natural Gas Too Cheap to Drill?
By Matthew Philips April 17, 2012

The price of natural gas is right around $2 and even traded below that level for
the first time in a decade on April 11. Since peaking at $10 per 1,000 cubic feet
in June 2008, natural gas prices have steadily declined as new horizontal
fracking techniques have unlocked massive amounts of shale gas. As prices
have declined, so has the number of operating gas rigs. There were only 624
operating in the U.S. as of April 13, the fewest since April 2002, according
to Baker Hughes (BHI), a Houston oil- and gas-services company. Gas rigs
have been disappearing particularly fast since late October, the last time prices
were above $4.
Essentially, gas is so cheap that it’s no longer profitable to drill.

“Producers typically need $5 [per 1,000 cubic feet] to break even,” says David
Greely, an energy analyst at Goldman Sachs (GS). The industry hasn’t seen
prices consistently over $5 since September 2010, back when there were
nearly 1,000 rigs operating in the U.S. The number of gas rigs peaked near
1,600 in mid-2008, when prices peaked at $10. (The boom was effectively
confirmed in June 2009, when a Colorado School of Mines report showed that
U.S. natural gas reserves were 35 percent higher than previously estimated.)
VIDEO: Natural Gas May Be a Good Investment in 2013

Other analysts say $5 is too high and that the average gas producer can still
make money with the price between $3 and $4, depending on the well because
different types of wells have different cost structures. Newer, high-production
wells can turn a profit even with prices below $2, while older wells that are
just trickling out gas need much higher prices to make money. That’s probably
why there’s been stronger demand for horizontal rigs that specialize in
fracking. Even those numbers have started to diminish in the last couple
weeks.

Still, a fair amount of activity persists in the field. Low borrowing costs have
helped spur a healthy appetite to invest in gas drilling despite low prices, with
a lot of funding coming from equity markets and in the form of joint ventures.
According to Greely, producers have continued drilling, despite low prices, in
an effort to expand volume and hold on to leases, which require that they
continue drilling.

With weather unseasonably warm this winter across most of the nation,
demand for natural gas fell off precipitously, leading to a huge rise in surplus
storage—from less than 100 billion cubic feet in December to nearly 900 bcf
last week. “The primary driver of low prices right now is the lack of winter and
lack of demand,” says Craig Shere, a natural gas and utility analyst at New
York-based energy research firm Tuohy Brothers.

STORY: Why Gasoline Isn't $4 Per Gallon Nationally

While many analysts believe natural gas prices will remain depressed through
the rest of the year, Shere feels that the market is overly bearish about the
price of gas, discounting in particular the longer-term production declines
from falling industry capital expenditures, as well as increased demand from
power plants that are switching from coal to gas. The U.S. Energy Information
Administration (EIA) expects demand for natural gas from the power sector to
increase by 9 percent this year.

“We’re seeing switching levels that no one imagined,” says Shere. As a result,
gas will supply more of the electricity generated during the hot summer
months than its customary 25 percent. Couple that with expected lower
production rates in the coming months, and Shere believes supplies will
tighten before the end of the year. “We will eat off this excess storage and
prices will rise as a result.”
Rent Control
Needs
Retirement, Not a
Comeback
The definition of policy insanity is to
repeat the same mistake and hope for a
different, better outcome.
According to the Wall Street Journal, rent control seems to be making a
retro comeback. Most forms of intelligent life could be forgiven for asking
why.

Serial experimentation with this policy has repeatedly shown the same
result. Initially, tenants rejoice, and rent control looks like a victory for the
poor over the landlord class. But the stifling of price signals leads to
problems. Rent control starts by producing some sort of redistribution,
because the people with low rents at the time that controls are imposed
tend to be relatively low-income.

But then incomes rise, and rents don’t. People with higher incomes have
more resources to pursue access to artificially cheap real estate: friends who
work for management companies, “key fees” or simply incomes that
promise landlords they won’t have to worry about collecting the rent. (One
of my favorite New York City stories involves an acquaintance who made
$175,000 a year, and applied for a rent-controlled apartment. He asked the
women taking the application if his income was going to be a problem; she
looked at the application and said, “No, I think that ought to be high
enough.”)

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So the promise of economic justice erodes over time, as lucky insiders come
to dominate rent-controlled apartments, especially because having gotten
their hands on an absurdly cheap apartment, said elites are loathe to move
and free up space for others.

The longer the rent-control policies remain, the more these imbalances
grow. The gap between the rent that is charged, and the rent that could be
charged in a competitive market, widens. Deprived of the ability to make a
profit, landlords skimp on maintenance and refuse to build new housing. If
you loosen the law to incentivize renovation, or new building, this only
creates new forms of dysfunction: discrimination against tenants who
might stay longer than a few years (limiting the ability to raise rents); a
decontrolled market that has to absorb all of the excess demand created by
locking up so much of the housing market in rent-controlled leases that
rarely turn over; even landlords who renovate too often, the better to raise
the rent. This arrangement is very good for the people who happen to have
gotten their hands on a rent-controlled apartment, and very bad for
everyone else, especially newcomers to the city.

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realme

These failures are well-known – see, for instance, this lengthy literature
review from Blair Jenkins, or the most recent addition to the canon,
a Stanford study on rent control in San Francisco. They help explain why
rent control went out of fashion among policymakers. So what’s going on in
the minds of lawmakers in California, Illinois and Washington who are
pushing to repeal laws that forbid rent control and limit the ability of cities
to regulate rent increases?

Well, one thing that’s happening is simply that lawmakers, like everyone
else, tend to forget. When rent control was creating problems, lawmakers
could see those problems. Now that rent control regimes have been eased in
many places, those problems have become invisible.
In the meantime, other problems have become more apparent. Rent control
is one of the most effective ways to destroy a city’s housing stock, but it’s far
from the only one. You can also enact extremely strict building codes, with
lengthy and highly bureaucratic processes, which will restrict the supply of
housing. This is what has happened in many American cities, even as the
disparity between the wealth creation in cities and that in the countryside
has widened.

This has created a real problem for activists and lawmakers. The people
who have most benefited from the shifting of national wealth toward a
handful of urban centers are using their money to bid up the cost of scarce
housing. Even if politicians in those cities loosen the building restrictions,
new supply will take years to come online, and there are people who are
struggling with rent right now. And of course, making it easier to build is
unlikely to be popular with local homeowners who want to keep their
community intact and their home prices high. If you’re in that situation --
and too young to remember the problems that rent control created -- price
controls seem pretty appealing.

But policymakers should remember that a price is just the intersection of

supply and demand. If you alter the price, but don’t alter the supply or the
demand, the problem doesn’t go away; rationing just shows up in different
forms. There will still be too many people who cannot find housing in your
area.

Worse still, price controls actually make the scarcity worse. They increase
demand — who wouldn’t want to live in New York City in a $600-a-month
apartment? 1 Meanwhile, price ceilings reduce the supply because they
decrease the incentive to build, and can make it downright imperative to
remove rental housing from the market and turn it to some other use --
condos, warehouses, anything that won’t trigger the rent controls.
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And in the long run, the situation for the very low-income people you’re
trying to help probably gets worse. After all, if you take price signals out of
the market, something has to ration the limited supply of housing: years-
long wait lists, or personal friendships, or credit scores, or side payments to
people lucky enough to have some housing. The wider the gap between
supply and demand gets, the worse that rationing will be. And the people
left out by those forms of rationing will be every bit as needy and deserving
as the people currently being forced out by higher rents; given the
deleterious effects on the supply of rental housing, possibly more so.

If politicians actually want to make sure everyone who needs a place to rest
their head has one, there’s only one way to do it: Build more housing.
Which means, in turn, loosening the legal restrictions and community veto
points that make it so hard to add supply. Because there’s no way to escape
the fundamental math: Unless you build enough housing to shelter the
people who want to live in your city, a whole lot of people will be left out in
the cold.

1. Yes, yes, I know — “Lots of people!” But there are a lot more people who would be interested
in living in New York on $600 a month for a studio than at $2,000.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and
its owners.