Rent Control: another such victory, and we are done
Frank Schäffler // 5 May 2021
Last month, the Berlin Rent Control Act was found to violate the German constitution. This was the right call, but the Federal Constitutional Court justified its decision with overly formal arguments. Instead of highlighting the fact that the rent control scheme represents a profound intrusion into property rights, the court cited the precedence of national over regional legislation. As the federal government had previously regulated rent increases in 2015, regional governments have no further right to legislate on the matter.
Accordingly, the spectre of price regulation will most probably not vanish after this ruling. On the contrary, it is much more relevant than most people will admit. Liberals like to cling to the illusion that Germany still operates under the free-market approach developed by Ludwig Erhard and others after World War II as the “social market economy”. However, Erhard never conceived of the social market economy as a hybrid between capitalism and socialism, but as a market economy which creates beneficial outcomes for all segments of society. It creates jobs, which brings about social welfare. It develops sufficient housing, which brings about social welfare. And it allows everyone to build a life for themselves and their loved ones, which brings about social welfare.
These simple truths notwithstanding, Germany has been neglecting the principles underlying them for quite some time. Even more depressingly, housing is not the only sector Germany is we are currently suffocating with complex rules and political interference. The consequences are dire: overregulation pushes up the cost of construction which leads to higher rent. Construction permits outside of municipal boundaries are almost never granted, which impoverishes small towns and villages. Complicated planning provisions and lengthy authorisation procedures deter developers, resulting in bottlenecks particularly in metropolitan areas. The need to expand state-of-the-art digital infrastructure to rural communities has been ignored for years now, making them even less attractive. The national restrictions on rent increases above are a drag on development in cities. In other words, the rapid surge of rent prices in metropolitan areas is largely the result of political interventions. Supply does not adapt quickly enough because government regulations render construction costly and complicated.
Housing is just one item on a long list of sectors affected by similar government overreach. In areas as diverse as health, energy, finance and transport, politicians and bureaucrats are imposing their own priorities on businesses. To be clear, these are often important and worthy – tackling the pandemic, fighting climate change, or propping up the currency. However, they usually serve as justifications to infringe on property rights. Private authority over one’s property is gradually replaced by democratic majoritarianism. As a result, business decisions are increasingly made by politicians, bureaucrats and parties rather than by entrepreneurs and employers. This situation is quite different from a genuinely free market. It is, as Ludwig van Mises once quipped, “lectern socialism”: closeted socialism that poses as free-market liberalism. Against that, we should keep in mind that risk-taking and accountability are fundamental principles of any free market. As Walter Eucken put it: “Those who profit must also carry the losses.”
Clearly these problems are not limited to political meddling in the housing sector. Instead, we are facing a wholesale conflict between government interventionism on the one hand and individual liberty on the other. Our future, what we want it to look like and how we want to prepare for it, are all at stake. For these reasons, the Court’s April ruling was merely a modest victory. Hopefully, it will not prove pyrrhic. After besting the Romans in the battle of Asculum in 279 BC, King Pyrrhus I of Epirus confided in an advisor: “Another such victory over the Romans, and we are undone.”
The original article was published on the Prometheus blog in German.
EPICENTER publications and contributions from our member think tanks are designed to promote the discussion of economic issues and the role of markets in solving economic and social problems. As with all EPICENTER publications, the views expressed here are those of the author and not EPICENTER or its member think tanks (which have no corporate view).