The CIO and rent control

The position of the CIO relative to rent control is deserving of much consideration from economists, social psychologists, and others. This union has been one of the main lobbies for rent-control extension, yet it was the group which first broke the line of general price control in 1946 when it demanded an end to ceilings on wages. Subsequently the CIO and the rest of organized labor took this position: "Price control is a wonderful thing for everyone but us." We should not impute dishonesty to labor because of this contradictory position for there is no doubt that it has been sincere.

The explanation to the thinking of the CIO member on this problem seems to lie in an underdog psychosis (an important segment of union folklore), a feeling of being poor and somewhat exploited by landlords and others in society. At the rent-control hearing in Lansing late in 1950 sincere CIO members expressed the idea that the poor struggling factory worker could hardly make ends meet as it was and surely could pay no more rent. Labor representatives implied that FIGURE 1. AVERAGE NUMBER OF HOUSES AND APARTMENTS FOR RENT AND WANTED TO RENT, LANSING AREA, NOVEMBER 1948-MARCH 1951

Nov.1948-Mar.1949 Nov.1949-Mar.1950 Nov.1950-Mar.1951

Source: Sunday issues of the Lansing State Journal.

the shop workers needed financial assistance which well-to-do landlords could easily afford to give them.

The feeling of inferiority (considered very important by some students of the labor movement) has had solid basis in the past and still has today in some respects. It is basically a good thing that working people have been unwilling to accept a position of inferiority. In regard to earnings, however, times have changed; shop workers have risen both absolutely and relatively-for which we should rejoice. In Michigan's 18 leading industrial counties in the second 6 months of 1950, production line factory workers' earnings were about $70 per week (41 hours); in addition, they received important fringe benefits. Such incomes compared very favorably with those of other groups. The really poor city people are the old people, not the members of the CIO. Of course union members have had low incomes during periods of prolonged unemployment, but these have not constituted a serious problem for many years.

In another way (besides price control) the union man seems to have a double standard. He insists on an adequate wage for his own service and will go on strike, even when the social consequences are serious, to get what he considers for himself a fair deal. When it comes to rent, however, he feels that it should be based on what he is willing to pay-a low figure indeed. Supposing landlords through concerted action should refuse to let people occupy their properties at the low rentals allowed under control; that is, supposing they should go on strike. Would organized labor defend their right to strike? Judging by the comment in the labor

press in January 1949, when there was talk of such a strike, unions would demand strikebreaking action.12

Council of Economic Advisers on Rent Control

From its birth until the present, the Council of Economic Advisers has advoIcated the extension of rent control. Its attitude may be found in the annual Economic Reports of the President and in the accompanying Reports on the Economic Situation. On studying these documents the economist finds much wanting since there is little evidence that the Council has weighed the economic problems posed by rent control extension. The key to the Council's attitude since January 1948 has been its continual preoccupation with the problem of pacifying organized labor. Year after year it has expressed concern that labor should exercise moderation in wage demands. Presumably rent increases would render moderation impossible; therefore property owners must be sacrificed. The Council appears to regard landlords as comfortably fixed people to whom extra income would simply mean more saving. It seems unaware that continued control causes a shrinkage of the supply of rental units; it expresses no concern for the future of truly private investment in this field (and what this means to the employment problem); and it seems to exaggerate the importance of rent in the cost of living.13 One wonders if the Council's position on this issue represents a victory for folklore and political pressure over economic science.

IV. CONCLUSIONS

Research results have never been presented to support the contentions which have been used to justify rent control since 1946. These contentions are that tenants have been particularly the victims of inflation; that rent control will ease the housing "shortage"; that rent control redistributes income from high to low income groups. Such research results as are now available refute all of these contentions. Therefore it is difficult to escape the conclusion that folklore ideas about landlords (that they are greedy, disagreeable people who collect more than they need) provide the key to explain the policies which have been adopted.

Experience here and abroad suggests that unless rent ceilings are allowed to follow the trend of other prices private capital will be driven out of the field, finally precipitating a supply crisis. The curtailment of private investment in this industry would be unfortunate not only because of its implications for living conditions; it would also complicate the matter of maintaining full employment during normal times. Another unfortunate result of artificially depressed rents is the hardship this brings to many old people who rely on small rental incomes for their livelihood.

Current policy recommendations.-It will be hard to construct an equitable and economically justifiable rental policy for the current period of national emergency engendered by the Korean War. As a general principle it is clear that when other prices are controlled rents should also be regulated. Property owners should be subject to the same regulations as any other group in society, and they ought to have the same opportunities as others for price adjustments. Specifically, a rent ceiling should be adjusted periodically to keep pace with the general trend of prices. In the administration of this principle an inspection of a property should be made to see if it is kept in good condition before an increase is granted.

Particularly difficult will be the task of arriving at the basic ceiling figures from which to build a rent-control program. It would not be fair to adopt the existing rent structure because it is a source of confusion and inequity with some prices high and others artificially depressed. For a unit that has never been under control the matter is not so difficult; its rental as of June 1950 may be used as the basic ceiling figure. For an older unit which as been under continuous control since 1942 the problem is harder. One approach which merits consideration is to allow the ceilings on these units to rise enough to offset the decline in the value of money which occurred between March 1942 and June 1950.

12 Because they considered the conditions of operation imposed on them by rent control very unjust, Tulsa landlords threatened to go on strike (withdraw their properties en masse from use by evicting tenants) early in 1949. The CIO through its national housing committee protested vehemently and needled the Housing Expediter to do everything in his power to stop this strike. The CIO demanded that injunctive relief be secured from the courts to prevent such action and said the announced plans of the Tulsa landlords constituted a conspiracy against the law of the land. Ironically, at this same time the union was conducting an all-out campaign against the Taft-Hartley Act (the "slave labor" bill) whose provisions were mild indeed compared with the CIO's program for landlords. (See the CIO News, January 31, 1949, p. 9.) Regarding the Tulsa threat the Housing Expediter announced he would take action to prevent mass evictions if lendlords were not withdrawing their units in "good faith." To withdraw a unit in “good faith" was interpreted by the Housing Expediter to mean withdrawing it permanently. That is, landlords could strike if they would remain on strike ever afterward.

13 If all rents under control in March 1951 were to go up 50 percent, it would cause an increase in the costof-living index of about 3 percent.

⚫ SECTION 105. COMMERCIAL RENT CONTROL

Mr. SNYDER. Witnesses who have appeared before the committee advocating imposition of Federal rent control on business accommodations have offered absolutely no factual information to support the demands for commercial rent control.

As a matter of fact, the report of the Senate Small Business Committee on a survey they made indicates that the increase of commercial rents is not out of line with the cost of living index. The Senate Banking and Currency Committee has unanimously agreed to hear no oral testimony on the subject of commercial rent control, because, as the chairman stated, there has been insufficient time to make a study of the situation and obviously no evidence to support the need. Witnesses have claimed that commercial rent control will assist in the over-all problem of preventing spiraling inflation. This statement is farthest from the truth. In all instances where percentage leases are used, the ratio of the rents paid to the total cost of doing business (and therefore the effect of rents on the prices of goods and services) is automatically adjusted by the lease contract. Whether the volume of business increases or declines, the prices of commodities are not influenced by changes in the rentals. The ratio of rent to the total cost of production or the total cost of goods sold is an extremely low percentage in almost all lines of business.

Mr. BROWN. Mr. Wolf, who testified here, said he and his associates paid an annual rent of around $2,000,000, and they were not complaining about the rents. His stores are in every section of the country.

Mr. SNYDER. Thank you, sir.

Administration of commercial rent control would be next to impossible because commercial properties are of every imaginable type and description and exhibit individual differences far greater than are evident in residential or any other kind of real estate. An attempt to establish a rent appraisal process would be immeasurably difficult. It would involve the establishment of criteria for determining which of the innumerable services rendered to tenants are considered to be "rents" subject to regulations.

It is difficult to imagine how the Federal Government could establish fair and adequate machinery to handle hardship cases, existing inequalities between tenants, and other standardizations which would be proper and fair to all business interests involved in transactions. These difficulties are intensified by the fact that the negotiation or renewal of commercial rental contracts cannot be unduly prolonged without great hardship to both tenants and owners.

Rent freezing could scarcely, with any equity, be applied only to leases which provide for fixed rentals. And if an attempt were made to freeze rents or rental rates under precentage leases, there would obviously be unfair discrimination in the treatment accorded the tenants and landlords operating under the two different kinds of leasing practice.

A survey conducted by the National Association of Real Estate Boards covering 152 cities reveals that in cities with population of more than 100,000 a median of 20 percent of retail business space is under percentage leases. In cities of 50,000 to 100,000 percentage leases represent a median of more than 10 percent of the total. În cities of 10,000 to 50,000 the median is about the same, 10 percent.

There is no way to establish a satisfactory device for removing any regulation of commercial rents once it is imposed. The very process of regulation would prevent the building of new space required to bring the market into equilibrium.

The whole point is that the use of commercial property constantly changes, and there are hundreds of factors changing from month to month that enter into the determination of rent for such properties. Residential property is put to one constant and single use, that of occupancy by a family or families. Commercial property is subject to any one of a hundred different uses. For example, right here in Washington, D. C., on Fifteenth Street there is a bank building which was used later as a brokerage office, still later as a night club and is presently a motion-picture theater. It was remodeled each time to meet the needs of the tenant.

With the change of type of business in commercial property comes the demand for change of interior, and frequently exterior, to suit the property to the type of business. New fronts may be added, improved lighting fixtures, entirely different type of store fixtures. Obviously, the fixtures for a meat market are entirely different from the fixtures needed for a haberdashery shop. One type of commercial enterprise may use a basement, another may not want the basement. With these changes falling on the property owner, an increased rental is the only way to compensate the owner of the property. The tenant wants the changes to enable him to do business. Such changes are written off over the period of the lease.

Municipalities depend to a great degree upon ad valorem taxes for local government operation. Ninety-one percent of the cities reporting in our survey indicate an increase in taxes over 1940, with a median increase of 25 percent. The assessed valuation of commercial property has increased by 30 percent over 1940 in 98 percent of the

cities.

The following table represents the increased costs of operation reported by the 152 cities based on the estimate of the change since 1940 in cost per year to the lessors of commercial property:

In conclusion, there is one general observation I would like to make in behalf of our industry, prompted by the far-reaching powers requested in this bill, to only some of which we have taken exception. The Congress faces a situation which may last for many years, when the resources and the manpower of the Nation are not committed to war, but the personal and property rights of individuals are so committed.

The Congress may be legislating into existence a pattern of control that might very well become part of our social fabric in our lifetime. Bit by bit economic controls, although servicing temporary exigencies, do so at the expense of fundamental law. Rent control is almost a perfect case in point, serving at intervals since its inception different "temporary" exigencies, thereby breeding a Constitution-ignoring spirit which is a serious menace to our future.

I ask the committee to recall and give fresh thought to the considered judgment in the 1949 case on the constitutionality of rent control (Woods v. W. Miller Co., 333 U. S. 138). Mr. Justice Jackson in a concurring opinion merely underscored the reasoning of the majority opinion when he said:

No one will question that [the war] power is the most dangerous one to free government in the whole catalog of powers. It is usually invoked in haste and excitement when calm legislative consideration of constitutional limitation is difficult. It is executed in a time of patriotic fervor that makes moderation unpopular. And, worst of all, it is interpreted by judges under the influence of the same passions and pressures. Always, as in this case, the Government urges hasty decision to forestall some emergency or serve some purpose, and pleads that paralysis will result if its claims to power are denied or their confirmation delayed. As Mr. Justice Douglas said in the same case, any power is subject to abuse, but the Supreme Court could not assume that the Congress is not alert to its constitutional responsibility of invoking the war power only for purposes reasonably and directly related to the war effort.

We respectfully recommend that—

A. The existing Federal rent-control law be permitted to expire June 30, 1951, and

B. No new Federal rent controls on either residential or commercial property be imposed.

We suggest that the matter of rents be left to local and State decisions.

SECTION 106 (A). CREDIT CONTROLS

Our industry also wishes to protest against the extension of credit controls to embrace all real-estate credit.

There is no need of such legislation, and similar proposals have been rejected by the Congress in the past as recently as last summer when the Defense Production Act of 1950 was approved. The need for such control is no greater today than it was last summer when the Congress decided it was unnecessary. The prices of existing housing have not increased as alarmist proponents of more rigid credit controls would have had us believe.

Present controls on real estate cover FHA-insured and VA-guaranteed loans on new as well as existing houses and conventional credit on new construction loans. The only segment not under control is conventional loans on existing houses. Such loans are, in the majority of cases, already limited to 66 percent of the purchase price by law, custom, or supervisory practice. We submit that a case has not been made for the changing of the present law on existing houses and all real property; but, on the other hand, the evidence is overwhelmingly against it.

During a period of great economic change our people must be free to move about where change of employment and necessity may compel

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