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Welcome to the IVM Podcast Network.
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I had a bad dream the other night.
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I dreamed that I was sitting on an old wooden armchair in an apartment that I lived in on
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It was a massive apartment.
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My room was as big as a tennis court and this flat seemed endless with bedrooms and dressing
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rooms and halls and hallways and bathrooms and closets and kitchens and entertainment
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rooms, sports rooms, a couple of bars, perhaps even a torture chamber.
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This was an apartment you would have to measure not in hundreds of square feet, but in thousands
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of square feet, perhaps even in acres.
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And as I sat on my old wooden armchair, the same armchair on which Jawaharlal Nehru had
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once spanked Indira, I heard a loud noise.
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It was a kind of sound a house would make if a house could fart.
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I looked to my right and there was a huge crack on the wall.
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I heard the sound again and some cement dust fell on me.
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The ceiling was cracking now.
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I looked out through the window on my right and the building there collapsed.
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All around me, the cracks in the walls just grew.
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I looked through the inside door of the house and I found that half of Bedroom 44 had collapsed.
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My old poster bed on which Motilal Nehru's mother had given birth to Motilal was half
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in the room and half suspended in space.
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Clearly the house was collapsing.
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One of the cracks in the wall nearest to me widened and became a hole.
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A sparrow thrust its head through that hole.
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It made chirpy noises at me.
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And then it said in a human voice, aren't you going to leave the house?
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And I just turned to that stupid sparrow and I said, how can I leave?
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This is a rent control flat.
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I pay only 20 rupees a month to live here.
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I can never leave this flat.
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And the sparrow said, damn this rent control, damn this rent control.
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Welcome to the seen and the unseen.
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Our weekly podcast on economics, politics and behavioral science.
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Please welcome your host Amit Bhatma.
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Welcome to the seen and the unseen.
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My guest today is the American economist, Alex Tabarrok, who's here in Mumbai as a resident
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senior fellow at the IDFC Institute.
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He was a guest on the seen and the unseen a few weeks ago where he spoke to me about
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Today, he joins me to talk about rent control.
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Welcome to the show, Alex.
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So you've by now spent like three months in Mumbai.
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This is also known as the city of rent control.
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Yeah, that makes it fascinating for an economist to visit and see.
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So tell me the history of rent control in the USA.
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How did it pan out over there?
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So rent control has been particularly big in the United States, in New York.
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And they put into place rent control during World War II.
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And the thing about rent control is that it's great when you first start it because you
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can't run away with an apartment building.
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So the owners of the apartment building, it's already built.
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The government says, oh, you can't charge, you know, a high rent.
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That's the short run, however.
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In the long run, when you have rent control, there's no incentive for developers to build
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There's also no incentive for developers to maintain apartments.
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So what happened in New York is that over time, huge areas of New York actually really
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started to crumble away, almost as if they had been bombed.
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This was the time where you had movies like Escape from New York or Fort Apache, the Bronx,
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where New York literally looked like a hellhole that you wanted to escape from.
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And really, the reason was is that rent controls created kind of a devastating situation in
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which entire blocks started to crumble away.
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Now what happened in New York is that over time, the rent controls were loosened considerably
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so that new buildings did not have any rent controls, so that when somebody left their
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apartment building, you could raise the rent and things like that.
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So although New York still has some rent controls, particularly on the old stock, what has happened
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in the United States and in New York in particular is that rent controls have faded away over
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time and that has provided new incentives to build apartments.
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So the intentions behind rent control are obviously, they sound great, that poor people
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can't afford raising rents and therefore you keep rent stable for them and all of that.
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The unseen effects, like you mentioned, is that then the owners have no incentives to
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look after the property, to develop the property further.
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Isn't this, in a sense, a form of theft, you're destroying a lot of capital suddenly, it's
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almost like debt capital, not literally that, but...
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And the situation in Mumbai has been even worse than in New York because Mumbai put
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price controls, rent controls in, in something like 1949 and they have never raised them.
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They're still the same level, despite inflation, despite changes in economic circumstances,
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their rent controls haven't changed.
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So what this means is that if you're in a rent controlled apartment in Mumbai, you never
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want to give your apartment up.
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I mean, even if the apartment is falling apart, it doesn't matter because the rents are so
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ridiculously low that you don't want to give your apartment up ever.
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And this means that it's really difficult to build new apartments, to take a crumbling
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apartment and build something taller and bigger and better with more apartments and better
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It's really hard to do.
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And you'll see this if you're driving down Marine Drive, for example, the Queen's Necklace
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and you have all these old buildings lining it up, which, you know, haven't been renovated
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And I know people who live in some of those old buildings in these sprawling flats and
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they're paying like 150 rupees a month for rent, which is so absurd.
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And there are tens and thousands of, you know, apartments like that all across Mumbai, which
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are essentially, they're debt capital, they're just lying there.
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The owners can't do anything with it, the buildings can't be broken down and redeveloped
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Now, tell me this, I want to understand how the political economy of this works.
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Who are the Baptists and the bootleggers in this?
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Yeah, so let me just add to that and then we'll come to the Baptists and the bootleggers.
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What is incredible in Mumbai is that the buildings become so dilapidated that they literally
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fall apart every single year.
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You know, as you have monsoon season come in and then these buildings are destroyed.
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So it literally sometimes it's killing people.
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Every few months there's a scandal and it's always sort of considered like a moral failing
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of the owner for not looking after the building.
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When you look at the poor guy's incentives, why on earth should he spend his hard-earned
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money when he doesn't in all practical terms own it anymore?
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The owners don't own the land anymore.
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That's exactly correct.
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Now on the Baptists and the bootleggers, you know, it's really hard to understand and I
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think this is another situation where we've just gotten into a negative equilibrium where
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hardly anybody is actually benefiting.
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Yeah, you have some Baptists.
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So I think we're in a situation where we've gone into a negative equilibrium where hardly
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anybody is benefiting from the equilibrium, but it's still very difficult to change.
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So on the Baptist sort of side, the politicians make it very easy to say that, well, we're
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for keeping rent controls and there are people who are currently in their apartments who
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are benefiting from that.
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The problem is that there are many, many more people who would benefit from more construction,
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who would benefit from better infrastructure, who would benefit from taking a two-story
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apartment building, which has a handful of apartments, pulling it down because it's about
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to fall down anyway, and building a 10-story or a 20-story where more people could live.
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The problem is that the new beneficiaries aren't voters.
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The new beneficiaries, they're not living in Mumbai now.
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They'd like to live here.
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There's plenty of people who would like to come in, but they're not current voters and
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they, I think, often don't see these issues.
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This is an unseen issue.
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It seems very simple to say, if we allow the greedy developers, the greedy owners to raise
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prices, people, poor people are going to be kicked out of their apartment buildings.
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And of course, there's some truth to that.
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The unseen part of it is that the only way you're going to house millions of people in
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India is by building more, and the only way you're going to build more is to create incentives
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to build more, for private developers to build more.
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The only way of building more housing is to create incentives for private developers to
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Now, here's the interesting thing.
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So I look at the voters of Mumbai.
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Obviously, the people who own rent-controlled flats, whose property have been taken away
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from them, are very few in number.
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A slightly larger number, a much larger number, are the people who actually live in those
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rent-controlled flats and would vote in favor of rent control.
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But an even larger number, which is everybody else, is people who don't live in rent-controlled
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flats or own them, but who would benefit enormously if rent control wasn't there.
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But they don't understand this.
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So how do you get these ideas across to people so they understand that, you know, rent control
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is bad, FSI, as we discussed in the previous episode, is bad?
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What's the problem with these ideas filtering through?
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I mean, as an economist, you often, you know, you teach economics, you speak to young students
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who are just coming fresh out of nowhere.
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Why are these ideas so hard to get across?
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Well, you know, Adam Smith talked about the invisible hand, the logic of the market.
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Well, the reason it's invisible, that means it's hard to see.
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And so that's the problem that we face as economists, to try and get people to see the
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And that's just very, very difficult to do.
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We almost need sort of constitutional rules to lock some of these things in place.
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Because it's very difficult to get people to see some of these things some of the time,
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even when it's in their interest to see these things.
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And I think something else which makes it difficult for people to see is that they do
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see the corruption in the system.
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And it is a corrupt system the way it is now.
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There's no question that developers will sometimes do, or owners will sometimes do, disreputable
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things to get people out of the apartments.
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Builders will pay bribes for various things.
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And that turns people off.
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So people see the corruption and they say, well, we need something to stop this.
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We need some government to impose some moral rules against these corrupt developers.
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What they don't see is that the corruption is generated by the law.
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The law is what is creating the corruption.
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If we could get rid of some of these laws to make it easier to build, easier to own
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property, to rent an apartment, if we could get rid of some of these laws, the corruption
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The corruption is not a feature of capitalism.
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The corruption is a feature of a controlled system in which all of the logic says, you
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know, we want to build because we've got so many people who need apartments, so many people
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This is a big demand for houses, and yet the supply is constrained.
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So the logic is pushing people to build, and the government says no, so of course you're
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going to have bribes, and in fact the bribes are the only thing which makes the system
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If it weren't for the bribes, there'd be even fewer houses, there'd be even less development.
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So the corruption in this case actually, in the end, serves some kind of good purpose.
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At least it allows some building, but it looks bad.
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It looks distasteful, and people don't like to see that.
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And people don't get that government is at the heart of the corruption.
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If not for government discretion and bad rules, there would be no corruption to begin with.
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You know, living in Mumbai, I often tend to be pessimistic because in all my years of
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living in India, what you tend to see is that government just grows and grows and grows.
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You can talk of reforming it, but it's just very hard to reform it in any way, and to
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break down bad rules like this because you seem to be stuck in a vicious circle.
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Do you, coming from where you are, have a more positive view of things?
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Like for example, will Mumbai forever be rent controlled the way it is now?
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The one thing which gives me hope is that the gains from trade here are so large that
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they're pushing in favor of development and building and so forth.
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So clearly, India is becoming a urban society, and what that means is that hundreds of millions
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of people are moving from the rural areas to the cities.
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So India must build new cities.
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That has to happen, and it's in that building of the new cities that I think there's a
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chance to change a lot of these rules.
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The old cities may be stuck in this negative equilibrium, but entirely new cities are going
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New cities with millions of people.
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So I think that there's a chance here to have some demonstration projects, to have in, Paul
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Romer talks about charter cities.
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But all we need, I think, is a few demonstration projects to illustrate what could happen with
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better rules, and I think that would change people's point of view quite a bit.
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And when I look at the political economy around rent control in particular, to bring the subject
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back there, I often see that, sure, the interest groups in favor of rent control remaining
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are the tenants who stay in the house or award bank and so on, but they should logically
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also be powerful interest groups who want rent control removed.
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For example, builders, who are an extremely powerful lobby in Mumbai, if not the most
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powerful lobby, would benefit if rent control was removed because then they would have so
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much new construction to do.
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Given that, where's the resistance?
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Yeah, it's hard to understand.
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I think the point you raised earlier is correct.
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There is just a huge social ballast is that the views of the people in general are pro
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rent control, and that makes it very difficult, even given the incentives of the builders.
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But because the builders look corrupt, then even though they have all the right incentives,
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the power of the people actually is too strong here.
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However, I think if we had some new cities, that we would not get these rules in place.
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I think there's enough understanding, and that's one of the amazing things about India,
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is I think actually, though maybe you'll disagree with me here, I think actually the intellectual
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class understands these issues quite well.
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In speaking with people, economists in India, and even people in government at the top levels,
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I think they actually understand these issues quite well, but they also feel frozen in place.
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They also feel that they can't do much about them.
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However, if we had some new cities, maybe then that there would be an opportunity to
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Well, India's future is in the cities, and I hope we'll see you more often, both in
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Mumbai and in our new cities.
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Thank you so much for coming on the show.
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To check out Alex's writings, do hop over to MarginalRevolution.com.
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Marginal Revolution is a brilliant blog that Alex co-writes with Tyler Carvin, and while
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I often say that the age of blogs is over, Marginal Revolution is an exception.
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Anyway, I'm out of here for now, but do come back next week so I can tell you about another
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Next week on The Scene and the Unseen, Amit Verma will be talking to Pawan Srinath about
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the ban on dubbing in the Kannada film industry.
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For more, go to sceneunseen.in.
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If you enjoyed listening to The Scene and the Unseen, check out another show by IVM
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podcast, Simplified, which is hosted by my good friends Naren, Chuck, and Shriketh.
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You can download it at Audioboom or iTunes.
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Menu mein Scene Unseen hai, Podcast hai, Encore se, Cyrus se, Married in India, Rediscovery
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Project, Empowering Series, Sexwax hai, IVM Like se, Simplified hai, Keeping it Queer
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hai, Tings and Destination se, My Neighbor Zuckerberg hai, Aur The Fine Garage hai, aapko
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Ek baar repeat kazeinge kya?
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Repeat repeat nahi karta hai, aap jaao ivmpodcast.com pe aur suno yeh sab, yaafi download
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kron ka app, sab aapki ungliyon pe.
