Roofs, Not Ceilings
Surviving “earthquake shacks” at the Presidio in San Francisco (Wikimedia Commons)
By Amity Shlaes
This essay is from Amity Shlaes’s regular column “The Forgotten Book,” which she pens for “Capital Matters” as a fellow of National Review Institute.
Is there such a thing as a perma-shortage?
When it comes to affordable housing in the Bay Area, many conclude that the answer is “yes.” Rents are high, rentals are hard to find, and regulations slow the pace of fresh construction.
Lobbyists and politicians seem to believe the best way to widen availability of lower-priced apartments is to squeeze those who happen to operate on the supply side of the market. Especially those who are likely to come up with new forms of supply. It was less than two decades ago that two brave hosts in San Francisco established a kind of short-term rental that changed the way Americans travel: Airbnb. Anyone that brave also has the potential to race ahead in the marketplace and develop new kinds of housing for longer-term tenants.
Yet authorities instead opted to force these racehorses into servitude as cash cows: Last year alone, Airbnb passed along to California some $212 million in tourist taxes it collected on the government’s behalf from customers. And the Golden State’s cities and towns, like cities and towns elsewhere, continue to load additional burdens on short-termers where they can, whether as levies or fines.
Other plans apply more traditional pressures upon landlords or future landlords. These include restricting rent hikes where there is little rent regulation, or tightening existing restrictions on what landlords may charge.
Aping San Francisco and Oakland, the city council of the town of Concord, thirty minutes outside San Francisco, voted in February to introduce rent control. Come autumn, San Franciscans will join others across the state when they vote on the Justice for Renters Act. The ballot initiative would make it easier for local authorities to impose dramatic rent controls, including “vacancy control,” which would give local officials power to set the rent level for vacant apartments.
But what would happen if Bay Area owners were entirely free to charge any amount they liked? Even exorbitant-sounding prices for rentals, vacant or occupied? What if builders could build without environmental regulation, and with less attention to zoning?
Answers to such questions were offered in one of the earliest studies of a housing crisis, a playful little 1946 paper titled “Roofs or Ceilings?” The ceilings referred to rent-control ceilings. The point was that authorities have to choose: more roofs (supply) or more ceilings (rent control). Both are not possible. The paper also probed the terminology of the housing discussion, including the very meaning of the word shortage itself. The authors were Milton Friedman and George Stigler.
After the Earthquake
At the time, Friedman and Stigler were not yet en-Nobel-ed eminences, just younger scholars. The pair opened their paper with of one of the greatest housing shocks in urban history, the one that befell, as it happens, San Francisco: the Great Earthquake of 1906. The quake struck in the early morning of April 18. Its violence and the fires that followed claimed three thousand lives—by some counts, more.
“Horrors of Mount Vesuvius Are Outdone at ‘Frisco,’” read a headline reporting the scene in San Francisco during the aftermath. The disaster leveled the city. “Not a hotel of note or importance was left standing,” reported Major General Adolphus Greely, the commander of the U.S. Army’s Pacific Division. “The great apartment houses have vanished.” So had the smaller ones. More than half the city’s housing stock was gone.
Many who lost their homes simply left San Francisco. But tens of thousands remained, hunting for rooms, apartments, or shelter. To put it mathematically, as Friedman and Stigler tend to, the effect was that “each remaining house had to shelter 40 percent more people.”
Yet no great shortage alarm sounded, and no shortage emergency was declared. Indeed, Friedman and Stigler could not find the phrase housing shortage, or similar phrases, in the newspapers. The classified advertisements in the first edition of the San Francisco Chronicle printed after the disaster listed sixty-four places for rent and nineteen houses for sale, with only five advertisements seeking housing.
San Francisco’s disaster earned marquee billing as an insurance-industry crisis and a crisis in fire-code regulation. But never a crisis of “housing shortage.” Not three months after the quake, not six months later, not eighteen months later, and not three years later. The headline might have read: “Missing: One Housing Shortage.”
Shortage is a term we use when we don’t like a high price.
Free-Market Building Boom
What had happened?
From the beginning, private citizens stepped in, including the president of the California Jockey Club, who picturesquely offered to shelter ten thousand at the Ingleside Track. A private nonsectarian relief organization, Associated Charities of San Francisco, led construction of two- and three-room frame cottages. The army also played a role, erecting tents and, soon enough, some 5,300 structures for homeless families. Today, charging for such shelter would be considered taboo, but then, the army charged families $2 a month, to remind them of their responsibilities. These “earthquake cottages” resembled the fine “shoffices” people build behind their houses today—minus some of the conveniences.
Those families who still had homes invited the homeless into their residences, for free and for rent. Rents for empty apartments still standing rose dramatically—by some measures, 350 percent. The higher rents, note Friedman and Stigler, forced “some people to economize on space”—a single shared bedroom for a family, not two or three rooms. The economists’ point: Shortage is a term we use when we don’t like a high price. When we insist on affordability, and defining what is affordable, we try to moralize our way out of the iron parameters of life: supply and demand.
Especially supply. For in 1906, the most important source when it came to providing new homes was not charity. It was the freedom enjoyed by the private sector’s supply side: builders and landlords. Absent the “complex, expensive, and expansive machinery” of rent regulators, landlords felt free to raise rental charges. “The rationing was done by rents,” note the punctilious Friedman and Stigler. Profits from those rents inspired investment in new housing. Motivated builders began clearing rubble and laying foundations at a pace we today associate only with China, and continued to do so for decades. The boom in the emerging market called San Francisco was palpable, and so was the enthusiasm: “The Kind of Building You Want in San Francisco,” read one builder’s 1919 advertisement.
The relationship between builders’ freedom to charge what they liked and increased construction was direct, concluded Friedman and Stigler: “The high rents act as a strong stimulus to new construction.” It is this benefit that the rent-control advocates of 2024 opt to ignore.
Regulation—or, to be precise, the lack of it—mattered as well. In those days, occupancy limits were fewer, or less strictly enforced. Regulations on construction were likewise absent, or uneven in the enforcement. Today, we are accustomed to watching domestic construction projects slow down. In the San Francisco of 1906, the pattern proved the opposite.
“The reconstruction of San Francisco is proceeding with daily increasing rapidity,” commented an Associated Press report on July 23. The same article also noted that authorities had advised “the abolishment of free soup kitchens”—and this a scant three months after the catastrophe. The tenants in the “earthquake cottages” were offered the opportunity to buy their units—but also enjoined to dismantle and rebuild the structures on their own property themselves. Some could not manage that. Some were forced out on public-health pretexts when authorities cleared sites after an epidemic hit the city. Still, even a progressive like the late Philip Fradkin rated the cottage program following the quake “a short but successful experiment in self-sufficiency for the less affluent.”
Were the results of a free-market building boom supported by voluntary charity always pretty?
No.
Were they fair?
Not in the snapshot sense which today’s activists would force on the rest of us: that San Francisco’s recovery from the 1906 quake was of the excluding and gentrifying type. But allowing rents to rise following the earthquake over time proved “fair” or, simply, fair: The amount of construction that resulted in San Francisco was so vast that rents trended down in the years that followed, even for many lower earners. And that happened without a giant state or federal force intervening in reconstruction.
Subsidies and Ceilings
The reason public policy after San Francisco’s 1906 earthquake caught Friedman and Stigler’s attention was the contrast it provided to the policy response to housing troubles in their own Big State era. World War II’s Office of Price Administration, or OPA, had imposed rent ceilings, which the electorate considered a success. Even after troops came home, politicians were arguing for sustaining rent ceilings, which struck the institution that printed the Friedman-Stigler paper, the Foundation for Economic Education, as ominous. “This particular method of expropriating property rights, and restricting opportunity in peacetime,” commented FEE president Leonard Read, “is something new in the United States.”
Would that more economists emphasized such hazards today. They don’t. Economists today even go so far as to downplay evidence.
Friedman and Stigler, for their part, noted the cruel paradox: “The very success of OPA in regulating rents has therefore contributed greatly to the demand for housing and hence the shortage.”
They wouldn’t have been Friedman and Stigler if they hadn’t thrown out a proposition just to provoke, and they did. Perhaps Americans felt entitled to rent levels lower than were reasonable. Aggregate income had just about doubled overall since 1940, the authors noted, yet rents had scarcely budged since then.
But the economists’ main points were dead serious: Prices contain valuable information. Suppressing them is a form of deceiving the market. And crisis action perpetuates crisis action: “As long as the shortage created by the rent ceilings remains, there will be clamor for continued rent controls.”
One might paraphrase that for today to read: As long as constraints weigh down supply, apartments will rent for prices that the affordability gurus consider too high. When the constraints loosen, lower-priced units will materialize. This last is so for two reasons. Wealthier customers free up supply for middle-income renters when they move out to upgrade to fancier new buildings. And builders, like anyone in business, are not snobs: They will build for the middle class or poor when returns become competitive. Though the sanctimonious among us won’t concede it, what holds for Walmart can hold for housing: “Cut the price, make the money on the volume.”
To remedy the troubles of 1946, Friedman and Stigler recommended “the speediest possible resumption of new construction,” something that California’s leaders nowadays also suggest when they float fresh plans to subsidize construction. But Friedman and Stigler reminded readers of what was recognized even then, and applies in all areas, including education: Prices rise in tandem with subsidy. “The use of a building subsidy,” they concluded, should be ruled out. Especially “in the midst of high money incomes and urgent demand for housing,” characteristics of the postwar period but also features of our 2024 market.
In recent years, the discussion over rentals has stuck to two reforms: building subsidy and rent control. Thank goodness, some signs of awareness that those parameters are too narrow have emerged lately, as in the proposal to suspend environmental regulation or soften zoning in downtown San Francisco. Missing still, however, is recognition that what held for San Francisco back in 1906 also holds for every state in our housing-obsessed nation today: A price is not an enemy, it’s a messenger.
Amity Shlaes chairs the Coolidge Foundation, is the author of Great Society, and is a fellow of National Review Institute. This article first appeared in National Review’s “Capital Matters.”