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In the article “Roofs or Ceilings? The Current Housing Problem” M. Friedman and G. Stigler discuss the housing shortages that occurred in 1906 and 1946 in San Francisco. The authors briefly describe both housing shortages and compare methods of dealing with these housing crises and particularly the measures undertaken by legislative authorities. The shortage of 1906 was caused by the earthquake and three day fires that brought the destruction of nearly half of dwellings in San Francisco. During the housing shortage in 1906 the city legislature didn’t impose rent ceilings and, in Friedman and Stigler’s view, not imposing them is what provided the condition to overcome this crisis successfully. The housing shortage in 1946, by contrast, was caused by rent ceilings imposed by the city authority in order to avoid high prices could happen due to the post-war situation exacerbated by the return of veterans and increasing immigration to the US. Friedman and Stigler focus on policies could have been made to overcome the housing shortages theirs advantages and drawbacks. They suggestions are: to divide available dwellings using public rationing (rationing is to be done by some public institution), to make division by “favoritism or by chance” (the same as doing nothing) or to let prices of housing run free and thus allow the market to self-regulate.

As Friedman and Stigler explain, the public rationing seems to pose too many questions and place too many demands on the rationing institution, i.e. for who living space is needed and how much. According to the authors, solving even these two questions would take a lot of time. Another question regarding this form of rationing is: Is it fair to force the person to leave his or her house or share it with a stranger? The apartments were cheap, which is why people were unwilling to share flat with someone else. Concerning cheapness of the dwelling important point was willingness to double-up. The authors argue that tenants in 1946 didn’t value each living square meter because of low rents. Thus, it is wise decision to raise rents; it would be a good incentive factor to double-up. This argument convinces that rent control should be abolished.

 The second option of rationing “by chance and favoritism” is also eliminated by Stigler and Friedman as ineffective from the social point of view. Here the authors claim that the apartment, a person gets from relatives, friends or by any other chance, can be far away from his place of work, forcing husbands to sacrifice better job opportunities and take any job opportunity to stay with family, while economic reality required high mobility to survive.

The last means of solving the housing shortage is price rationing, that is the only person who has money to afford an apartment will get it. Friedman and Stigler advocate and analyze in detail this method of rationing. Stigler and Friedman manage to turn the alleged disadvantages of price rationing into the advantage of the free market. Namely, Friedman and Stigler state that landlords reap benefits from the rent business and will invest in a building, which is going to be a long-term solution for possible housing shortages in the future. But there are drawbacks to absolute price rationing the way that Friedman and Stigler present it.  If rents are deregulated all at once, prices will likely rise steeply in the short run. According to Bangs, in the short-run the housing supply is very inelastic and depends on the price of limited materials; since the materials market is not controlled and materials’ prices will go up with rents, raising cost of construction. This cost would discourage landlords from investing in construction, and instead they pocket the profits (Bangs, 1947). Namely, landlords can take the control over the housing market without any incentive to develop it, only reap all possible profits and oppress social welfare this way. 

Let us discuss if landlords could get the control over the housing market. It is made clear from the article that not only San Francisco suffered from housing shortages in 1946, but this phenomenon was spread all over the US. Thus, if demand was considerably higher than available supply of dwellings, on the market could emerge the situation which is reminiscent of a monopoly, with each monopolist facing high demand.  Friedman and Stigler try to overcome this possibility of excessively high demand and monopoly creation by claiming that the ratio of the US population to inhabited buildings did not change compared with the prewar period so there shouldn’t be any shortage of housing. Whereas Robert Bangs in his review to the article “Roofs or Ceilings?” argues that the authors used the census, which could distort the real situation. The point is that the poorest people used nonresidential houses and the census did not account for this fact in the housing shortage. Thus, there were prerequisites the market control by one group, particularly by landlords; this unavoidably leads to losses in social welfare (Bangs, 1947).  

Now we turn to investing of extra profits to the new construction. As there were mentioned above the entire abolishment of the rents will raise rent prices, this in turn will raise the materials’ prices. This seemed possible due to the fact that rents were held under the rent control for a long time (Lewis & Muller, 1950). Since costs of construction will be too high and the fact that landlords actually are not interested in supplying the dwelling to each person it will more likely that landlords keep their incomes from investing in construction.

 Finally, if the rents were deregulated and allowed suddenly to rise above the market level, the share of income spending on housing by Americans would increase substantially, causing a favorable environment for inflation processes. The price of housing is of tremendous influence on CPI (Consumer Price Index). People having the same incomes spend much more on housing; that is they won’t be able to afford the same bundle of goods as before the raise of rent. In other words, rise in rents would sharply increase spending and thus purchasing power of money will fall, those threats with inflation (Bureau of Labor Statistics. Thus, if we take into account the situation observed on the housing market in 1946, the fatal increase in rent level seemed realistic and so did inflation.

Even though the pure price rationing, suggested by Friedman and Stigler, might not be a promising solution because of the inflationary threat, it would still be reasonable to set the rent ceiling to the level of market rents. Such a decision is reasoned by economics as well as by psychology of tenants possessing apartments. Friedman and Stigler tell us that rents increased very little from the 1940 rents, while incomes of many Americans almost doubled. That is why Americans were willing to have more space to live: it was cheap. People with an apartment were unconsciously selfish, causing an inefficient distribution of housing, whereas situation required extremely efficient use of housing. The only way of effective division of apartment space is public rationing; however under these conditions tenants might perceive this division as imposition on their rights. The authors state that some rise in rents would force people to value living space more, and to give up some share of space. In other words, to solve the housing shortage it was required to transform social welfare into personal welfare.

The efficient distribution of housing, as Friedman and Stigler state, is indeed reasonable argument to lift the rent ceilings gradually. Bangs suggests graduate rise of rents every half a year to exclude possibility of sharp rise in rents (Bangs, 1947). That means rents should be lifted but gradually and very carefully.

Having discussed all arguments given above, it can be admitted that Friedman and Stigler are right that rents should have been raised in 1946 to market level; but it should be done very carefully to exclude any possibility of inflation. The grounds of this conclusion are the following: in short-run prices might rise too fast, and this, together with the fact that the price of housing has a big share in consumption basket, could lower purchasing power of money spiraling inflation. Inflation should be under rigorous control and that control could be implemented by controlling the rent level (Gramp, 1950); that’s why sudden deregulation of the rent was not the wisest means to overcome 1946 housing shortage.

References:

1.      Friedman, M., & Stigler, G. J. (1946, September). Roofs or Ceilings? The Current Housing Problem. Published by FEE in pamphlet form as part of a series called "Popular Essays on Current Problems".

2.      Bangs, R. (1947, July). A review of the article “Roofs or Ceilings”.

3.      Bureau of Labor Statistics. (n.d.). The Consumer Price Index—Why the Published Averages Don't Always Match An Individual's Inflation Experience. Retrieved December 7, 2008, from U.S. Department of Labour: http:\\www.bls.gov/cpi/cpifact5.htm

4.      Gramp, W. D. (1950, April). Some Effects of Rent Control. Southern Economic Journal , Vol. 16, pp. 426-447.

5.      Lewis, T. J., & Muller, A. R. (1992, September). Contracting out of Rent Control. Canadian Journal of Political Science / Revue canadienne de science politique , Vol. 25, pp. 557-572.