June 28, 2026

By Stephen Stofka

Last week I wrote about different types of authority, and whether authority without responsibility is legitimate. From last week: “Through its legislative authority and police power, a government controls the terms of contracts between private parties. It grants licenses to individuals and companies to conduct business. It sets rules that contracts must follow. Those contracts govern the distribution of wealth within a society. Does a government have an accompanying responsibility to ameliorate the economic outcomes from those contracts?”

A utopian economic model popular with some libertarian economists is laissez-faire economics. In this model, government has a limited role in commerce, but what are those limits? The term acts as a signaling device between pundits rather than a precise economic doctrine. Economists prefer to discuss the balance between market failures and government failures. Market failures occur when market participants don’t pay for a benefit or inadvertently cause harm. Pollution is a frequently used example. Let’s turn to government failures.

In his seminal work The Wealth of Nations, Adam Smith argued that governments provide essential institutions for commerce. These include defense, a court system to adjudicate contracts and protect property, provision of public works, a system of weights and measures, a reliable money to conduct business, and the granting of patents and copyrights. Smith supported public education, a controversial idea in the late 18^th century. He thought it would improve the labor pool and civic life. He thought there should be few regulations and few, if any, programs of redistribution  to people or businesses. He was very critical of grants of monopolies, which stifled competition and retarded commercial improvement.

Governments inherit a legacy of past arrangements, property rights and commercial licenses that were doled out by a king or some other royalty after a conquest. The island of Manhattan in New York City is some of the priciest real estate in the world. During the reign of England’s King Charles II, the English navy seized the island from the Dutch in 1664. The king granted the land to his brother, the Duke of York (Source). A common practice was to subdivide the land and sell it for money, or to secure key political allies. Our economic system is built on a legacy of colonial conquest and monarchical power and privileges.

A company may owe part of its fortune to its ownership of a key parcel of land in a harbor port like New York City. That ownership is based directly or indirectly on a conquest and land grant. These past arrangements have created economic advantages for some private parties who leveraged those assets over decades, then sold them to other private parties. Those advantages may have seemed right and fair several centuries ago, but standards of fairness change with the passing of generations, and each generation must deal with the legacy of those past arrangements.

Governments protect the transfer of property rights down through the generations to maintain a stable and predictable economic and legal system, the backbone of a flourishing society. Long lived governments like the City of New York inherited an authority of several centuries. They have an accompanying responsibility to rectify the unequal outcomes that have arisen from those ancient arrangements. Denying that responsibility diminishes their authority in the eyes of those they govern.

Naturally, those that benefit from those advantages fight to keep those benefits. They believe their wealth was entirely deserved and promote ideologies that champion the virtues of accumulated wealth. Descendants inherit the authority over the assets but reject any responsibility for the circumstances under which those assets were accumulated. Our legal system accommodates the inheritors of wealth because the rules were written by the inheritors.

When governments try to correct those inequalities of income and circumstance, they often make a mess of it. Frederich Hayek (1899 – 1992), a Nobel Prize winning economist, pointed out that market prices carry a lot of information that coordinates production and distribution. Government redistribution schemes distort that information system. To achieve their goals, governments can not access enough information to make prudent decisions. Inevitably, they distort the private marketplace and investment decisions. It’s a matter of opinion whether corrective redistribution programs do more good than harm to the people they are designed to help.

Prices in a market system provide both information and benefits that we take for granted. Let’s consider a textbook example of rent regulation in New York City. 1.6 million people live on the island of Manhattan in an area of 22 square miles. That’s a density of 73,000 people per square mile (Source), more than four times the density of Greater Tokyo. Brooklyn has 38,000 residents per square mile. Naturally, there is a strong demand for housing and this puts upward pressure on prices and rents. For many working families, housing costs can consume 50% of income, far above the 30% recommended threshold. I grew up in the city and left in my 20s because living costs were too high.

For over a hundred years, there has been some form of rent regulation in the city. Under the old systems, known collectively as rent control and phased out in 1969, rents were often frozen. Landlords skimped on building maintenance and tenants were reluctant to push too hard for repairs or improvements in case the landlord used that as a reason to do upgrades which terminated the apartment’s status as a rent controlled unit.

The Rent Stabilization program was created in 1969 and replaced the older rent control systems that had been in place for fifty years. There are more than two million rental units in the city and slightly less than half are rent regulated. Almost all of those units are under the new rent stabilization program. Unlike the older rent control program, annual rent increases occur without landlords having to apply to a government agency.

In a market system model, supply and demand regulate prices. In the Rent Stabilization program, a government agency called the Rent Guidelines Board sets a cap on these rent increases (see note below). The Board must review thousands of data points on the costs of providing housing to determine a reasonable percentage cap for rent increases (Source). In a market system, thousands or millions of people make choices that influence the price of the goods and services they buy.

Several economic studies have concluded that rent regulation reduces housing supply. An investor can’t simply buy an older building, move the old tenants out, demolish the building and build something new. Rent stabilized buildings have guaranteed lease renewal so it is very difficult to move the old tenants out. Rent regulations dampen investment in new housing. Even though new buildings are exempt from rent stabilization, policies can change and investors can not be assured that a newly constructed building will remain exempt (Source).

Rent stabilization reduces the turnover rate. Tenants remain in their rent stabilized units regardless of a change in their job location, income, or family size. This encourages mixed-income neighborhoods but the benefits of the program flow to high income families who don’t need the financial assistance. Critics say that housing vouchers would better target needy families.

Under a free market system, prices respond as people make choices to balance their income and needs. Given the cost of living in New York City, why don’t more people move to Clifton, New Jersey? The city has a population of 90,000, a density of only 8,000 per square mile and it’s a 35 minute drive from Manhattan. Housing prices are modest and the city gets a good rating at Livability.com. Why isn’t the free market system inducing more people to move from NYC to Clifton? The fact that prices and quality of living are not attracting more people indicates that the housing market has characteristics and constraints that place it outside of the free market model.

People buy more than square feet when they buy or rent a home. A home is an essential part of daily life and each family’s home package is unique. They purchase a housing package of resources that include job opportunities, schools, churches and other social institutions, transportation, shopping, green space, hobbies and entertainment, and networks of other people. A family may spend $3000 a month for housing in a city with adequate public transportation so that they do not have to spend $1000 a month on a car and gas to get to work, school and play activities. Another family spends $2000 a month for similar housing but has additional transportation costs that add $1000. Both housing packages cost the same.

When some pundits criticize rent regulation as government interference, it is important to keep in mind that, in those cities with rent regulation, the physical home is a small part of the entire housing package. One time when I visited my brother who lived in Manhattan, we went deep sea fishing during the day then attended a riverboat concert that night. We took public transportation and spent about $300 (2026 dollars) combined, including meals. That seems like a bargain but we need to add in the cost of apartment rent in Manhattan. Access to all the amenities that the city has to offer comprises the entire housing package and is capitalized into the cost of housing. That’s why rents and housing prices in New York City are so high.

Secondly, the free market model is a distortion of actual free market dynamics because most markets have frictions and ancillary benefits. When economists build their models, these frictions and benefits are assigned a Greek letter and added to the equation. Present day governments must negotiate a long history of entitlements and endowments that were themselves a distortion of the free market. With authority comes responsibility. When pundits complain about government distortions of the market, ask yourself if a government program is distorting the market more than the model itself. I hope to see you next week.

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Photo by Kaleb Nimz on Unsplash

Note: On Thursday evening, June 25, the Rent Guidelines Board voted 7-1 to freeze rents on units with 1 and 2 year leases. This is the first time in the 56 year history of the rent stabilization program (Source).