Working Capital The Real Estate Podcast

The Impact of Rent Control and Eviction Moratoriums with Richard Epstein|EP52

May 5, 2021

In This Episode

Richard Epstein is the Laurence A. Tisch Professor of Law, at New York University, the Peter and Kirstin Senior Fellow at the Hoover Institution , and the James Parker Hall Distinguished Service Professor Emeritus and Senior Lecturer in the University of Chicago.

In this episode we talked about:

  • Richard’s background
  • Eviction moratoriums
  • Covid, dealing with crisis
  • Rent control
  • Richard’s book “Simple rules For a Complex World”
 

Transcript

Jesse (0s): Welcome to the working capital real estate podcast. My name is Jesse Fragale. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you’re looking at your first investment or raising your first fund, join me and let’s build that portfolio one square foot at a time.

Jesse (24s): Gentlemen, my name’s Jesse Fragale, you’re listening to working capital the real estate podcast. I have a special guest as always on the show. It is a lawyer, but not the typical lawyer we have on in real estate or securities. His name’s Richard Epstein. He’s the inaugural Lawrence eight-ish professor of law at NYU school of law, where he serves as the director of the classical liberal Institute, which he founded in 2013. He has served as the Peter and Kirsten Bedford senior fellow at the Hoover institution since 2000. Richard is a distinguished legal scholar, and I’m very happy to have him on the show, Richard, how you doing?

I’m doing fine. Thank you. So Richard, we were talking a little bit prior to the show and I thought what would be great to talk about today? And it was something you did recently on a, on another podcast was we talked a little bit about the eviction moratorium and the impact of that moratorium on both the Canadians that are, you know, tenants, landlords, individuals, businesses, as well as in the U S because I think the program that, you know, both of our governments are, have put forth is somewhat similar. So I think we can definitely talk generally, and we could talk about the implications of that moratorium and a little bit of what your thoughts are going forward.

And I thought maybe before we kick that off, you could give listeners that for some reason, don’t know your background or, you know, what, what you do, you can give a little bit of background of yourself and, and how you came to be in, in the position you’re at today.

Richard (1m 53s): Okay. Well, I think I had a pretty normal career going through college and the most conspicuous feature of my intellectual development was my other on a willingness to specialize in any area. And so I managed to get dispensation from the deans of the college of Columbia, New York. So I could do some math, some philosophy, some sociology. And then I went off to Oxford to study law. So Canadian and law in Oxford and English law, much more similar in the torts book I’ve used their 1964 was prepared by Canadian named sessile, right?

Big red book. And so I read a fair bit of Canadian cases there and became not immerse, but certainly much more familiar with them. We’ll walk into Commonwealth than most Americans. I also had much more of a classical education, which was by design in the sense that I studied there and still teach Roman law to this very day, teaching it again tomorrow, medieval history and stuff like that. And because I always was of the belief that a sort of a strong background in your historical origins, coupled with an analytical framework is better than doing one thing or another.

I come back to the United States and it’s a very different system. It’s federalism, it’s constitutionalism, there’s a deep emphasis on private law. And so my entire academic career has essentially, I’ve been trying to take the private law insights that I’ve developed and by the English common law system and use them to explain constitutional law on the American side, or this makes me somewhat of an odd ball. You said, why am I distinctive? Well, when I got out of law school, I had this odd record. I never did cork for anybody, which I think in retrospect was something of a blessing because I was not going into the beltway mentality of Supreme court law.

Instead I started teaching immediately at the university of Southern California when I was 25 years of age. And this is the end of my 53rd year of teaching. I’ve done a continuum those particular days. And sure enough, I basically did both. I started off teaching property contracts and torts is my Oxford background. And then slowly I realized that constitutional law had to face exactly the same problems, but they always seem to come out cockeyed. And so what I did is I took the private goal framework and started to develop a public law framework, much of which relates to property.

And I guess the watershed book on that was the book called takings that I wrote in 1985, taking private property and the power of them in a domain. And it was a close, constitutional exit Jesus of the takings. It’s not that long nor shall private property be taken for public use without just compensation. But it is that difficult. And what I realized is that many of the common schemes of regulation, if my analysis will correct would have the fall before the taking scores. One of those that would have to die in ignominious death would be a rent control statutes, which started in the United States in 1920 in a case called block, be hurt by, for sustained in the Supreme court.

The uniform approval has continued, but the nature of the rent control statutes have changed very mightily. And the essence of these statutes, which relates to the eviction question. So sort of get back into this is that the leases expire landlords are normal many times when absolute right of repossession, but under the rent and control statutes, the tenants are given a statutory right to remain at a rate to be determined by the state, which means that evictions are no longer possible except for non-payment of rent. And that’s extremely rare given that the rent is so heavily subsidized.

So non eviction is built into the ground floor with the rent control. And now what we do is we have rent control and non-writers all units. We have COVID and the governments in both Canada and the United States, particularly in the progressive side, they’re respected nations have decreed moratory for various lines. Whatever they do say is not the accurate situation, because you could renew a moratorium in one way or another. And what you do is you see these continuous situation. And so one has had to deal with both the rent control tradition on the one hand and the eviction tradition on the other hand, both of which essentially take property, which had to bite interest and convert them into situations where tenants have a rights to remain indefinitely.

Jesse (6m 3s): Interesting. So what I thought we would do is just as the, as kind of talking about the framework, number one, you know, Covid happens. It, it seems like what, you know, from the outside, especially with people, not in the industry, seems like a reasonable step. We have a, an emergency or crisis, a public health crisis, the government’s come out and they say, you know, what, what tools do we have at our disposal? And at the time I remember in our industry, me working more specifically in the commercial side, landlords and institutional landlords, they did not budge.

At least at the beginning. They said that we have a long-term leases in place. We have contract contractual obligations. If you are in default, we have the remedies within our contract for default, however, like many States I know, especially here in Canada, individuals are different than businesses. They are they’re different animal. And the government basically said that we were going to postpone the ability for landlords to evict. What were the implications of that decision when it was made?

Richard (7m 7s): Well, I think the way you understand it best is to start with the commercial stuff and work backwards. What you indicated is that landlords took eventually a very powerful situation and what are their options. They can evict you for nonpayment of rent. Then they have to rent it out to somebody else. And they’re going to have to rent it out at a price much lower than the previous price because the market is tanked. And so after a while, what they realized is that sitting on your legal rights is not going to be appropriate. What you do is you negotiate some kind of reduction in rent in terms with some concrete stability associated with the business project.

And these are going to vary from case to case, but most landlords realize that it could come in with a 2% reduction or it’s not going to get you anywhere. So knowing nothing about the market, my guess is the reductions would probably be between the third and a quarter or something in that range, a substantial enough to make a difference. But the landlord is going to tell the tenants, look, I mean, if you pay me less than that, I can’t pay my expenses for staff, for coal, for heating and for anything else. And so you’ve got to live with it. And the sign, as I’ve told many, many years ago, by a great lawyer, a woman named Permian Brown, long deceased, I was 25 years old and starting to teach at the university of Southern California.

And she’s walking with me one day, utterly astonished at one of my aides would be allowed to teach. And she says, you know, you could always tell a good deal because both sides are happy. And you could always tell a fair settlement because both sides are sad. And that’s exactly what happened. Right? You look at these things, the landlords are upset that tenants are upset. Essentially what you have is a shrinking pond. And what the voluntary arrangements did is it allowed for each of these parties to take some kind of decade. And the threat positions were not worth it, or the ability to evict somebody does not get you a new tenant then.

So all of a sudden the landlord realized the tenant has got some leverage. And the tenant realizes that he goes out on the, and it gets a bad credit rating. He may not be the guy to get the new lease. He’s going to suffer serious business interruption revenues. So they cut a deal. What happened on the residential side is that the cut a deal, a model was essentially not allowed. And so what you could have done even by statute is to say, look over the duration of COVID. What we’ll do is we’ll look at the commercial side and we’re going to say, maybe we’ll give every pretended to 25% cut as opposed to protection against the eviction.

That’s not going to be perfect. Some tenants are quite well healed. They’re doing very well. They didn’t lose their jobs. And indeed, as we all know, there’s some people actually do better on the Covid then otherwise, because their services are much in demand, but there are many people who need a wipe down. So you get these kinds of arrangements. Yeah. You keep it. And it’s exactly the same logic tenant doesn’t want to go. Landlord doesn’t want to expel have to cover your cost. The moment you say no, what we’re gonna do is we’re going to put in an anti-eviction situation. And then you start inviting strategic behavior by tenants.

So at this particular point, they don’t have to pay any. And if they don’t pay anything, the promises, they will pay everything when they leave. But as we know, if you’re in residents, you have a threat to evict somebody. But if at the end of the lease, they decide to pick up and go somewhere else. You’re cause of action against that bankrupt tenant or, and tenant is not going to be worth very much. So the deferment is not there. The government, I would’ve said, we want you to do this and we’ll guarantee the payments because we don’t want you to do it. And the other way, but that puts the thing on.

And that’s the last thing they want to do because to guarantee the payments, you have to raise taxes against somebody else. So then yeah, they push it on the landlords. This is going to create the disruption. Patients I’ve talked about services are going to decline in their quality. Some of these landlords are going to go bankrupt. People had jobs for landlords will have to take cuts larger than they would have be laid off altogether. It turns out that what you’ve opted in for, or in a case of misery, is it zero one solution. One guy takes it. All the other guy takes none of it. But in practice, it’s going to be both guys that got to lose.

And what you’ve done is you have the regime, which is inferior to the one that you probably could have gone through voluntary renegotiation. So the position here is not that landlords are going to sit on it. Their rights are not budge. They’re going to do in a residential area, exactly what they did in the other area. They may cut different deals with different tenants based upon what’s going on. And that’s all right, that uniformity is not necessarily required, but generally we’ll start with a presumption of uniformity. And then you’ll start the DBA for special cases. I mean, I’m not the landlord, but I watched landlord behavior.

And in fact, every time one of my children renews the lease, I asked him, well, how did the negotiations go? And you’re told something like, well, the landlord said, we’re going to have a cross. The board 3% increase. I said, what does that say? It’s not a bad deal. Take it so, well, why are they doing it? Because they don’t want to negotiate individually. They don’t want to lose people. They know their expenses are going. So what they’re doing is they’re trying to keep their profit, roughly constant. And what they’re trying to do is to cover their expenses in a really strong market. It’s not going to be 3%.

It’s going to be seven or 8%, but you can’t get that in this market. So landlords essentially are not absolutely stupid. And they’re not absolutely ravenous. There are people like you and me, the good ones, the bad ones. And you can say the same thing about tenant. So I’ve always been very skeptical about the willingness to jump to an eviction remedy when it seems to me that the voluntary solutions, however, in perfect, are probably going to do better than the state and postings.

Jesse (12m 29s): Yeah, it certainly gives, you said for the commercial side, one thing, you know, I remember right at the beginning, just being in brokerage is that once we realized that this wasn’t going to, you know, it wasn’t going away in a month or two landlords started thinking more creatively, could we offer free rent? Can we offer inducements? Can we, can we take this tenant and move them somewhere else in our portfolio? Whereas just like commercial tenants, we have retail industrial, some that are doing very well as a result of this. Some that are doing very poorly, same can be said for tenants.

The question for me is once this happened, and then we realized that there was going to be an eviction, a moratorium. I think a lot of landlords, they suddenly said, I have hard costs are fixed costs, I should say. And then the, the argument or debate shifted to lenders. And I thought that was a bad move because when now we are starting to go from the landlords and now we’re going to go to the mortgage and then the, you know, the CMBS and then where does it end? So what would be the solution to that? Would we start at the tenant level and at the individual level and in a time of emergency buoy, the tenants, as opposed to trying to manipulate the, the chain?

Richard (13m 39s): Well, you’re exactly right to say, landlords have deaths themselves. And you know, I do teach a course in banking and you can state the dilemma in about two minutes and you could spend two years trying to figure out how you best solve it. And the situation is really very quote, unquote, simple, the positive who put money in their bank. Occasionally they one time deposits, but most of them want to be able to get their money when they need it. So they have to be at will. People who are borrowing huge sums of money to make an investment will not take a loan that the landlord could call every day. Right? And so what you have to do is to give long-term protection.

And so what happens is essentially you get this mismatch in maturity. And if what you do is you tell the landlords that they can collect the tenants and they’re going to start the fall on their own particular debt. If it turns out the banks now have to start the foreclose, or there’s going to be an uneasiness and deposits will start to pull things out. And so what you do is you now have this thing going in four levels. So what’s the appropriate way in which to do it. Well, banks are grownups landlords that grownups you’re essentially going to have to meet, negotiate the mortgages.

And it’s the same basic principle. If both sides are unhappy, you got a good deal and they both are happy. Something’s wrong because it’s never going to be. And so you try to do it. If factory do that, then the positives will be relatively insulated. There is federal deposit insurance money in the United States. There’s another system in Canada, by the way, the banking systems in the two countries in many ways are quite different than the Canadian system has four or five major banks. And it turns out it’s much more resistant to downfalls and breakups. And as the American system, the basic logic of the Canadian system, which I have a great deal of respect for is four and five is big enough to have competition, but it’s small enough so that the banks don’t get weak.

Whereas the American banks, very small community banks, all sorts of bagels, they can’t keep their money. They have to constantly park it somewhere else. The American banking system has had much more difficult in its operation, given its polyglot nature than the Canadian system has happened, but there’s no way you could move from the American system to the Canadian system. So it means that this problem with anything is probably more important than the United States because the banks that we’re dealing with maybe less protected against this stuff than they are in Canada. But I think the basic argument starts to apply.

Is there room for government guarantees in this case? Yes and no. Everybody sort of likes to have them in the abstract, the difficulties you have to fund them. And the question is, how do you do that? And it has to be on budget. And so one of the reasons why you see these evictions taping place is at least in the short run, it doesn’t appear to have any budgetary implications for the coffin, right? And so you don’t have to go through the tax appropriation committee in order to get this done at the boat. The difficulty of course, is it has vast implications on the revenue side for the government because it, landlords are now running a bunch of red ink that they will do is they’ll take their profits from next year.

And they will basically be able to claim a refund because of the deductions that they’re titled this year. And so the government is going to lose on the tax side, perhaps as much money as it would have lost given guarantees. But as we know, the political structure of government is so strange that often you take an inefficient social solution, which meets the path of least resistance. And you have to make an appropriation in order to do taxes. That makes it explicit. Whereas if it just lose money because you could no longer get remedies and you have to give people refund, that’s not on the budget, it’s relatively conceal.

Nobody has to take the blame for it politically, even if it turns out that it’s a more inefficient solution. So we have these very complicated things going on. I think the reinflation that will take place with respect to the way the economy works will prove some degree of resilience. And so I think for the first time, at least in the United States, I gather it’s been a bit rougher in Canada. I think we actually see some light at the end of the tunnel. I all of a sudden see my university of Chicago saying we’re expecting to have classes in the fall.

I can’t tell you what a relief it is to know that you actually be able to talk to a student in person. But if the vaccine turns out to be inadequate against the new strains, we can have a reversal on this, which of course is one of the problems, which is the time horizons is still somewhat indefinite. Although I think that they’re shrinking. So what you do is you put this thing on larger context and in the end, what you do is you come up with the notion that a bilateral monopoly problem is probably easy to solve through negotiation. And then it is to have a government UK, which essentially creates these dislocations.

Jesse (18m 8s): Yeah. It’s definitely interesting to compare the two, especially from the baking perspective. I think recently I was reading a, I’m not sure if this is true. I, it was an older article from Thomas soil. Then he was talking about a friend. Yeah. And he was talking about a, at least partly the, the majority of banks that did fail in the States after the great depression were ones that for bade branch banking, which for us in Canada is just, is the, is the norm. But I think at the time it was, or maybe even still today in the States, it was limited. And local was the concept.

If we’re to shift gears, Richard, and talk a little bit more generally into an area that like you’ve, you mentioned in the intro have, have talked about and written about rent control. And before we, before we go ahead with it, just to define it, because I think people just assume rent control just means that you have a complete cap on rents, and I’m not sure how familiar you are with what we have in Ontario here in Toronto. Our rent control, basically like a lot of States that do have this form of rent control. It’s basically pardon me, stabilization stabilization, and a something index to what you could assume is CPI.

You know, whatever basket they want to call it. And basically the, the winners in these situations are, are landlords that have a tenant that moves out and you can Mark to market the rents and my favorite, you know, student rental investors that get a new crop every three years. So maybe you could talk a little bit about rent control, how it’s kind of unfolded in the States and yeah, a little bit of your thoughts on this. Okay.

Richard (19m 41s): Well, look, I will start with the time when I was a student and I was in my senior year and I wanted to live off campus. And my neighbor man named Sam Councilman had a bunch of units and he looked at me. He said, Ricky, my boy, as he called me. And he says, I love having students from Columbia, come into my units. Cause they’re gone in a year. It’s not that we go to New York to market rates in New York. At the time you went up 15%, but the tenants we display, this was a couple named Friedman. They had paid $68 and 7 cents or something like that.

Since 1943, we come in and he puts in the bill. I still remember this at $75 and 4 cents. And it gets it back from the New York rent control district. And the number is now $75. And we sent that as they watch pour over every time. And then you saw what happened. So, you know, we want to put in a new refrigerated, the tenants of doubt we was thinking, why is that? Because the refrigerator cost two a hundred dollars and what the rent increase is $5 per month, but it goes on indefinitely. So after you’ve paid off the first 20 months, you’d get a 5% increase.

So you’d get all these crazy inversion. So I took the Sam Coffman deal and I left. And at the same time, there’s some girls upstairs and they will live in the same unit. Basically bought is nice, maybe a little nicer, but they paid essentially 67% more than me. So what happened is I started to think about how this thing happened. And there was another incident. I saw this terrific apartment on a hundred and 10th street and I wanted to get in and the landlord was always playing hard to get. And I did not understand what was happening.

Why would he not want to show an apartment? And somebody came up to me, he says, you utter naive. Did you not Shamir the landlord? I said, I don’t even know what it means or schmear, not the landlord. The super, what they said is the rent is $140. The apartments with 300. If you give the super $50, he’s going to give you a chance to go in. And so essentially what happens is part of the gains that you get from rent control are going to be dissipated by the side payments that you have to make.

And it turns out that many people may make them. So it’s a standard scam in New York city. You take these kinds of smears from 10 different people. You’ve got yourself now $500 and they all don’t get the apartment. Then they post who, what me give it back. It’s not going to happen. So it was from those experiences that I decided to think about this more seriously. When I wrote my book on taking, and then in 1988, I went back to Brooklyn law school to give a lecture on rent control. And I began with my student experiences and then tried to figure out, well, what is it’s going on in this particular case?

And why is it unconstitutional or not? So I don’t know if you want me to go through the gory complications, but it’s very interesting. Yeah. First I’d love for you to expand on it. Okay. Well, the first rent control needs and I did state’s case, and this was before Canada did, it was in 1920. It was a case called block B first. And what had happened in the aftermath of world war one large numbers of people came to Washington DC to run the various programs. One of the things that typically happens is when you get a war and its aftermath is greater centralization of pals and rent started to go up.

And what they do is they put into place a two year rent control statute, which has tied it to the historical rates because they said there was a temporary emergency of one kind or another. Nobody said that this was a, was not a taking, they conceded that it was a taking, but it said it was only for two years. So it’s justified by the police path. And in fact, two years later, the same rent control scheme came back and the United States Supreme court would use to extend it, which gives you an idea that they really did think of it. So at the time, essentially rent control was thought of as a justified taking things start to go forward.

And all of a sudden magically you’re putting a tenant and then possession of the premises in perpetuity if they pay them. Right. But it’s not a taking it all. And so they said, it’s a mere use arrangement or regulation. So under American takings law, essentially these so-called use arrangements, a mere restrictions of one kind or another. And so there’s a very rational basis test. That’s nice. And it turns out you can always satisfy that by saying, even though the landlord is hurt, the tenant is benefited. And so the situation works in New York.

They keep tightening the noose. As I mentioned to you, there was the 15% rule. Then in 1970, they introduced a new system for rent stabilization. And it basically uses the public utility model, which means in effect, you show us what the cost increases are. Yes, I was saying, so you’re giving an example. If you have an apartment that rents for $300 and your costs go up by say, 5%, your rent goes up to $315 and maybe a little bit more for the profit on the expanded base. But if the market is really surged and the unit is now with $400 that other $85 in appreciation belongs to the tenant.

And so what happens is, as this goes on, you could figure out the enormous wealth transfer that starts to take place because you capitalize $85 a month for the next 12 months, build an increases for the future years is that gap between market and the, and regulated rates increase. And all of a sudden in New York city to give a typical kind of number, the maximum you could charge under our rent stabilization statute in many cases is $2,500. And if you basically took the current system and then liberalized only that unit will be worth 10 pounds.

So in some sense, it’s basically a hundred thousand dollars a year subsidy for the tenant. Now, if you decontrolled the whole system, everything would start the change. The increases would actually be much lower. And it’s important to understand what rent control leads to systematic under utilization of space. And so the very common situation is you get yourself a three bedroom apartment. When you’re in the 1980s, got a couple of kids at home. Husband dies. Often wife is a widow. She’s going to leave a three bedroom apartment, which is costing a $2,500 to move next door into a one bedroom apartment that will cost a $4,500 not going to happen.

Right? And so what you do is you see people having these large places, then they try to find ways as you’re allowed to do in New York to leave them as an inheritable interest to their own children or grandchildren. So the landlord is kept out of these things. And if you could want to decontrol system, several things would start to happen. One is the price of rent. Uniformly would not go up anything like they would have a single unit with decontrolled when everything else remained control, they would go up. But in the unregulated market, they would go down in order to do this. And the key thing to understand is you don’t have to build a single more unit.

If you just take these units, which have one or two people in them, and then we reconfigure it. So they will all of a sudden hold families. Or you can for several hundred thousand apartments managed to add one or two persons per unit, very conservative. And you’ve got another space for 450,000 people. At the same time, the landlords are going to say, well, you know, the value of this property is determined by rent control. So when we pay our taxes, we have to pay it on a reduced basis. Even though the reduction in rent control, doesn’t reduce the cost of public services, garbage streets and everything else.

So you do not get a fiscal shortfall. And so, so you get tenant. Rigidities you get underutilization of spaces, you get insufficient, public revenues, you get political battles, the likes of which you have never seen. And this system manages to go. You go to a place like Chicago, they got some tenant protection laws. There’s often a fight over the security deposit, but you know, that’s small potatoes, right? A security deposit, one or two months rent. You’re not talking about a hundred thousand dollars premium. So what happens in Chicago? You like the neighborhood, your kids from you give up the big apartment and you buy a little one, three doors down or rent it.

And everything turns over that, coordinate the shifts in at least in Chicago. But the rule is leases are generally calibrated to indeed on May 1st to October 1st. So it’s nice weather at both ends of these things. And yet then start the shift over. And the thing about it is the Dallas market imaginable. Why is that? Because everything essentially is it a market time and in New York people basically have this Jack hammer hitting them on the head. And after a while, they kind of liked the music that seems to be coming in between the year.

So you can’t get rid of it here because to do so would mean that you’d have to do it by votes and tenants will not vote against themselves. So you get this equilibrium of lousy units and low rents. And the meantime nobody’s willing to really build outside for fear, that stabilization tool will start to come along. The other units go with huge premiums. This has real consequences because that new family, which now has two kids and they can’t afford to live in New York city in the unregulated sector, they moved to Kansas city or they moved to the suburbs.

And so the whole thing becomes an absolute nightmare. And the moment you start to suggest something about this, what happens is you basically are a terrorists preying upon innocent, helpless tenants under these circumstances. And the culture in New York city is one of systematic self-destruction. And so what do they do in 2019 before the market collapses? Because of COVID they extend the rent control protections in very important ways. That essentially mean that they’re more price rigidity than you would ever have. The tragedy about New York city is it’s killing itself because of its politics.

It does it with when control, then these mavens come up with another great idea, and they’re going to start to increase the taxes on the people of great wealth who live in this city. Never see me to get the point. That’d be really doing $5 billion a year, which you know, iron that every month now, I don’t, you know, you have mobility that people who are in less money, don’t have, you have multiple businesses, you have multiple residences and so forth. So you pull out of New York and you decide maybe you live in Florida. There was a famous case of some billionaire who’s rental and New York.

If he was a New York resident was $25,000 a day or some enormous fee. So what I’m used to do is to keep absolutely scrupulous records. It fly into Newark, and it would turn into New York on his days at 1203 in the morning and leave at 1157 at night. And he kept all this document and they took him to court and he wants, but you know what he did anyhow? He says, Florida’s perfectly not. Why do I have to go through this grief? And so all of a sudden, you, it’s not that you getting anywhere, you’re getting no revenue. And 25,000 times zero is a lot less than 5,000 times, three 65, but New York does not understand that you start looking at what happens.

Let me just give you one measure. You know, about the electoral votes system in the United States, right? Essentially, it’s the sum of your senators in your Congress? People, how many electoral votes did New York have in 1940, 47? Okay. Then 45, then 43, then 39. Right? So they’re in the mid twenties now and Texas has gone up and Florida has gone up. So the empire state is a decline in forth. It’s not alone. You’ve got Connecticut doing a little bit better than New Jersey and other basket case Pennsylvania.

They allow fracking. So it’s kind of on the edge, right? It’s a little bit better Illinois, where I used to live. I’ve actually moved out of Illinois because we’re in Connecticut. Now this situation has gotten bad to worse, and it’s all the same type of situation. It’s the combination of high taxes and restrictive regulation that drives people at the other location and somehow or other the response, since everybody believes, if they’re in government, that demand is inelastic. So no matter how much they charge you, you really have to live in New York.

Well, there aren’t many people who really have to live in New York, but they’re always people who are at the margin by Jessie, which means that a movement of a penny and they’re out, and you never know where that penny is. But if somebody says a penny can’t make a difference, well, then two pennies don’t make a difference. But at the time it doesn’t the $10,000. Doesn’t make a difference. There is something known as a reservation price, the maximum you’ll pay and a penny above it means you’re gone. And even if we don’t know where that is, or the number may shift over time, you start looking at the exit from major cities in the United States, and it all follows the twin situation of bad taxes, bad governance.

And in New York city, often very bad services on a whole variety of dimensions. So it’s a kind of a very troublesome saga rent control is something that can turn an entire city around.

Jesse (32m 2s): Yeah, it’s funny. Yeah. There’s always a slope on that demand curve, but you, you mentioned a good point in it. It hearkens back to this idea of commercial and residential. And by that, I mean on the commercial side, you know, there’s a million different ways to structure a lease. You could structure it as rental increases with CPI. You could have a triple net lease. You get there’s all these different mechanisms. And my fear is, I mean, New York is a good case study, but my fear is even in cities, like the ones here, whether it’s Montreal, Vancouver, Toronto, or, you know, West coast in the States where I’ve seen on the institutional side, the residential institutional side.

So apartment buildings is that all of a sudden when they know that there are caps for increases, there’s this cap X or, you know, this discretionary funding amount. And it’s basically for tenant buyouts, it’s basically to go to tenants that are severely under market, give them a 10,000, 15,000 whatever dollar amount it is. And, and it’s kind of reminds me of the example you gave with New York of paying off the super, just at an institutional level. And it seems from a, from the totality of it, if they had backed off on the rent control, those monies would have made their way.

And instead they have to be done in some kind of a nefarious back alley way that’s being done now.

Richard (33m 17s): Well, one of the proposals that you have to worry about is how do you transition, right? And, you know, first of all, in order to transition, you have to have competence that you have a stable regime that will last for at least five years, but this is the simplest way of which you’ve been doing. You say, every year you have rent control, it’s now gone. And so the rents can go up 10% every year for five years. And then therefore what’s going to happen is amazingly you’ll discover some says, I can’t raise it 10%. I can only get 6%. And so what you will do is you will start to get validation to the fact that as the supply expands, the increases that you’re going to get are smaller than you would otherwise have thought.

And the thing will stabilize out a little bit more quickly, but there’s always the case of the fiendish landlord, who does some vicious things with respect with some 10 often, because they’re trying to pry them out with a Crow, Bob, because rent is too low. And that takes the entire profession. You’ve tried to do this through courts in many ways before COVID at the New York state courts are absolutely. And the old federal second circuit was hopeless. The interesting question that we have to deal with in the United States is the impact of the Trump judiciary.

I mean, these are for the most part, extremely strong appointments. I’m happy to say that I have many former students who my account amongst these racks and, you know, they’re my very best. They are Trump appointments a much stronger than the Obama appointments. I’d be just look at their back credentials where they went to law school. Were they on law review? Did they work for the Supreme court? What kind of practice did you as professor throw on that book? I, it, the university of Chicago used to have not very many, but I’ve spent a lot of time trying to help my students get clerkships and to get judgeships and so forth.

And I knew some of the people who work with the Trump administration so that I can actually write letters of assistance. And, you know, I see these splendid students on the court, but that doesn’t mean that they would be. And so the great problem that the Democrats or the new Trump judge has faced is they believe in two things that are ultimately somewhat incompatible. They do not believe that judges should essentially extend their influence to deal with what they would call political question. And they also believe that they should be faithful to the constitutional right.

Well, it turns out that the taking of scores is written in very broad language. It covers all private property, and there’s no way you can make sense of it to say that you haven’t taken property. When you tell somebody what the government’s doing is it’s not letting you go in. And then the roaring you to keep a tenant in there, that’s simply taking over the possession of the unit. They’ve authorized it, they’re responsible for it. And so the question then comes is are they going to be judicial restraint times and continue with the current policy of assuming rent control raises no serious constitutional issues, no matter how dumb the rent control rule turns out to be, or they’re going to start to say, well, this is a plane.

Meaning it’s as clear as the first amendment, not perfect, but better. And this stuff doesn’t go, Oh, they will be hard cases, but this is not one of them. We do not know which way they’re going to do. I can tell you having worked with a number of landlord groups in the years before the Trump appointments made, it was like hitting your head against a brick wall. There was nobody in either the second circuit or in the New York court system that had the slightest interest in all of these things. When I wrote my takings book, which I mentioned was the time at which I had first said that rent control statutes were unconstitutional along with lots of other stuff.

And you should have seen the liberal reaction to that time. When the book came out like a shaggy dog, this book will tempt every, pass it by to give it a kick. He was away. One review began was changed before publication, but I saw the original version. And you know, I’m still pushing this line. I don’t think it’s been refuted. And I, I think in effect that it’s not a question when you’re talking about property rights, what you’re trying to do is to upset social welfare function. I’ve given you an indication as to what the consequences of rent control off and socially, it turns out that they are disastrous.

So this is not a case in which you’re trying to privilege the rich against everybody else. You’re doing that when you give them monopoly protection against new nice coming in. And I’m, you know, this as well as I do, Jesse, you put up an ice building on one side of a main street in Toronto. You’re quite happy to zone the guy across the street from you. And so then he has to have only a five and 10, right? So, I mean, it’s not that landlords don’t play games, but if you’re going to be serious about this, the same scrutiny you bring to rent control laws has to be brought to zoning laws so that people can not pull up the bridge after they’ve gotten their building permits, because that creates all sorts of crazy incentives.

You’ve been a fortunate to get a building permit because one of the things you’re getting along with it as an exclusive, and that’s worth a lot more

Jesse (37m 58s): That it kind of hearkens to just the idea of we’re a, you know, melted Freeman where you would always say that I’m pro pro-free enterprise. I’m not pro business. And yeah. Often than not, those things are completely at odds for like one example of yeah. If I can get a preferential treatment, whether it’s it’s, you know, renting through, through the political process or it’s through a zoning regulations, for sure why one day, but I just wanted to ask you on the, on the takings book, was that not the book that during the Robert Bork hearings, it was brought up.

I don’t know if it was, it

Richard (38m 30s): Was your book. It was Clarence Thomas,

Jesse (38m 32s): Clarence Thomas, and somebody had bought it. It was Joe Biden. Yeah. I’ve heard of that guy

Richard (38m 39s): Of this guy, you know, this, this great constitutional scholar bag graduated the bottom 20% of his class in the law school. And it was not at that strong law school. He takes the book out from under his desk. He puts it in front of Clarence Thomas, and he says, anybody who believes anything that’s written in this book is sort of not a fit to serve on the United States Supreme court. Thomas didn’t know what to say. So his response as well, private property is mentioned in the constitution within a day, I got a phone call from one of Biden’s assistants. One of my former students, fellow named Greg Peck said, would you like to testify?

I said, not on your life. All you’re going to do is put me on the stand and her rang me and not letting me speak. So tell the Senator, if he would like to debate this on and perform, I’m more than happy to do so. And what happened is I never heard from them again. And then the takings book, it was never pushed very effectively by the Harvard university press at the time. But what happened is Anita Hill came along and when it comes to the question of a sex scanned war, rent control standard, you know, which is going to take up all the oxygen in the air. And so takings was never heard of, again, it did come up a bit in the Bri hearing in which it was the incantation of the sort, well, you do not agree with the Epstein theory of regulation to which the answer was.

Of course, I do not agree with the theory of regulation, but I am Briar essentially, as you know, he’s, he’s good on certain administrative law questions and antitrust questions because he knows them, but on other things like patents and so forth and on certain kinds of administrative issues, he’s just always on the wrong side. Most recently on a fair use case so-called involving who against the Oracle, in which he wrote the opinion saying stealing thousands of lines of code from a competitor to put them in your own program helps innovation.

And so therefore it’s fair use under the patent law, there is no fair use exception under the patent law. There are actually, there’s under the copyright law because code is copyrightable. But you can understand, as you start talking about computer Pope is this is not reading dictates. And in fact, the line between where the copyright begins in the patent ends is kind of tricky, but the fair use does not belong in cold cases, which is what he used to prepare.

Jesse (40m 44s): Well, hopefully once this, you know, we all get better and, and life’s back to normal, a bunch of us from the university of Toronto, we’re going to go head down to see one of the cases I’ve never been before. So that’s, that’s on the list. I want to be mindful of your time, Richard, but we do have four questions. We typically ask all guests. So if that’s okay with you, I will, I’ll hit you with those.

Richard (41m 7s): Okay. And then would that, but I’m happy to do it.

Jesse (41m 11s): So basically question number one is what is something, you know, now whether it’s your legal career or otherwise that you wish you knew at the beginning of that career?

Richard (41m 21s): I think what I wish I had known at the beginning, and I learned it in the middle was the simple proposition that the best way to address the technical audience is to be clear to a lay audience. That’s that is, there’s a tendency to use terms that a little bit unnecessarily, and you, you reach a larger market in and outside of your own profession. If you can do that. The other thing which I’ve learned it’s may sound strange is I’ve been very fortunate to be able to figure out how it is. You could take graphs and translate them into words.

I mean, in my mind, I mean, just kind of talk it through and you don’t want a podcast. You don’t have the Blackboard. And as you know, every time you go into a meeting and somebody puts a PowerPoint, slide up, everybody goes, they know that the, the, the words in the slides will mesh for the most part, unless you’re very skilled. So being able to actually talk is more important. I couldn’t have known that in 1968, cause we didn’t have power.

Jesse (42m 20s): That’s a great point. And it just reminds me of two books that I came to reread after years, my undergraduate was predominantly economics and it was Henry Hazlitt. I knew you’d say that. And then the number two was at which I only read some chapters of, but you know, maybe you’ll know it by this description. He said at the beginning, there will be no economic graphs or calculations in this book. And it was basic economics by Thomas soul.

Richard (42m 45s): So yeah, and they both have the same gap. They also are very good at the use of anecdotes and drawn from history, growing general election, Henry hassled, of course, the famous illustration has to do with the broken windows. Right. And you know, it’s something which really does resonate. It was a very influential book in the 1940s, a soul. I mean, everything he writes has that kind of trench and power to it. Even at age 90, he’s a fellow at the Hoover institution.

She’s retired now. So it doesn’t speak as much probably, but occasionally he’s basically so angry by the public situation that he does speak down does have an amazing gift of compressed language, a skill that everybody could advance and use myself included.

Jesse (43m 31s): Absolutely. All right. Next one, here, we’ll change this one up a little, just because of the flavor of this conversation, what’s a, a legal book or a book on law that you’d recommend to the lay person.

Richard (43m 43s): Ah, I, I will give two books. One that I wrote was called simple rules for a complex world, which I think is probably the clearest exposition of how it is an ideal legal system wants to be put together from very simple kind of building blocks. And it is exactly the same thing. Let’s get the basic stuff, right. And leave the refinements to later, which I think is there, the book that I actually recommend and I teach in my Roman law course is a little book called Gaius is institutes. I don’t know if you could read it through or read it without assistance.

But when I take my students through this, we go line by line. We will have a seminar that lasts for two hours and do two pages, but it turns out the reason it’s such important is it’s the book which set out very early on in our legal history, the basic for legal institutions and rules that still hold today. So it’s kind of a book that I actually relied on a lot when I wrote my simple rules for a complex law book, because being a Roman lawyer, I think there’s one of the most important things in my career.

So I was giving a lecture today, the Texas federal society, and showing up one of the two people who was talking about she had, when one of my students in the woman law class that I had. And over the years I’ve had, I guess probably 20 or 30 Supreme court courts coming out of that class, many judges and so forth. It is essentially an alternative way to look at the universe, which doesn’t become obsolete over time. But it’s amazing how we’re busted turns out to be and other great books. HOA Hart, the concept of law is a pretty good book, but it’s not substantive enough in my judgment is more interested in procedure.

Blackstone is amazingly good. If you read the third book in Hughes previous, a human nature man, heavily influenced by Roman law. He really has some astonishing insights and some incredible bloopers. So I mean, it’s that I think reading the great books is very important and I read them all. I mean, Kai cadre Holmes, the common law Politan Maitland. The history of English law is actually written by Maitland, not polic, but he Pollock was senior at the bar.

It took you up to 1307. But when I was in law school, when I was in the summer of 65, I stayed at a place called Bentham hall at university college on Cartwright garden. And I took that book and I read it from cover to cover and I took notes all the way through. And it was a very fine investment in terms of intellectual development, reading the classics is underrated today and it’s something which everybody wants to do.

Jesse (46m 19s): It’s funny, you mentioned that I recently re-read John Stuart mill on Liberty and I didn’t, I guess I forgot how much of an easy read that it, that was easy in terms of understandable, you know, part at the end, it fell apart at the end, but it, you know, him, Adam Smith, as opposed to if somebody, the first classical they read are not classical, but say political economies, Ricardo, you know, when you get, you don’t get a particularly good writer or it’s so far back that it’s almost arcane. Whereas

Richard (46m 48s): He did, you know, the principle of comparative advantage and the Ricardo equivalence theorem and two great achievements, but they’re a bit rugged. The problem that John Stuart mill had, I actually wrote a piece of the Toronto war journal about 27 years ago, it was called the harm principle and how it w that is home. If you start as a Roman lawyer, right? It has to do with a kid around killing, breaking things. And that’s the Lexa quote. By the time you start hearing mil it’s anything that I do that makes you worse off than you were before.

And then you have to figure out what do you do with competition and what do you do with error? And so it turns out as you expand the harm principle by God, what becomes home, somebody under selves, you and drives you out of business that’s harm. Somebody refuses to do business with you because they don’t like your religion or your politics that turns out to be home. If you have home define that broadly, essentially you get the modern welfare state, even worse and mill was not fully aware of that problem. And so he begins with the most famous statement about the only one for getting involved with somebody who’s not as own welfare, but the protection of harm against others.

And at that point it sounded like beating up is what he’s thinking about, but he didn’t do the rest of it. Why is it because he wasn’t disciplined enough in this strange sense? There was a real problem about bringing brilliant as he surely was things come too easy. And what he had to do was to go back and see, I lost you with go by by last do or not. I got you here. You have to go back and do it. So the great advantage about Roman law as a method, and I wrote a book called skepticism and freedom, they were brilliant incrementally.

It started with the first principle. They weren’t quite sure how to defend it. You have to work on that, but they knew how to grow by state. So in the question of causation, they begin with <inaudible> by the body to the, I mean, basically hitting you on the head. There’s no theory of necessarily a sufficient conditions, but for causation or any of that elaborate stuff. And then for them, it’s a real struggle to find somebody responsible when they put a cup of poison in front of you, not telling you what it is and you drink it and die because now there’s a new app and they slowly started to go back and they do it with exceptional clarity and great sophistication.

And by the time we were done and you compare their solutions with a lot of the modern solutions, even though they don’t have the conceptual framework in which to describe it, it turns out they actually do a better job than modern alternatives theory. And so this very strange situation of mouth is that you sit there explaining what, if you really knew what the Alexa Qualia, the Roman law on torts said about this, you’d be a lot better off in some cases than knowing the restatement of torts, which were develop, you know, 2000 years later.

Jesse (49m 36s): Well, I hear, I hear John you sign here on the Roman law aspect, but super interesting. We’ll third of four, more of a substantive question. And then the last, one’s a fun one mentorship for younger individuals, students, people getting into practice. What are your thoughts on that? Wow.

Richard (49m 55s): I regard that as my primary obligation, in some sense, getting people into law school occasionally, but certainly clerkships and teaching positions at the classical liberal Institute, which my friend, Mario Rizzo, and I direct, we have fellows and we spend an enormous amount of time helping them get positions in teaching of one kind or another web. Pretty good at it. But you know, you may have to write 10 or 15 letters for somebody, coach them on interviews, call people up, but I’m, you know, I’m now 76, no, wait, no, I’m almost 70 years old.

So I take that back and be president. Well, I mean, he’s a little older than me, so I don’t have quite his richness of experience. Yes, no, I think it’s important. And so, for example, when you know, the judgeships come up under the Trump administration, I wrote many, many letters on behalf of people made phone calls and so forth to try to get folks through clerkships. It’s always a constant struggle. You have relationships with judges and they trust you at least until you give them a bad clerk. And so I probably spent 10 hours a week in one form or another, just working on these kinds of mentorship issues.

And I don’t regret the time at all. I think that, you know, the trying to get the people in their twenties in their thirties established, if you could help them a bit. And they’re really able people, God blessed I’ll do it. Even the people want is if I can figure out some way to help them. And so, yes, I take that extremely seriously. I don’t regard this as a burden. I have a standard rule that there’s somebody in whom I have competence. And they asked me to write a letter of recommendation. I will never tell them I’m too busy. I think it’s just, but then it’s also on papers.

I mean, you can, it’s strange. If you tell somebody know this is a dead end, you could say them a hundred hours of work, two minutes of conversation. And if you say this is live, it’s fine. But the key thing about making a mentor, there’s another element in this is you’re not trying to make little lips. There’s a temptation of people, particularly when PhD program to try to create students in their own image. I don’t run a PhD program, but I always try to do, I’m pretty good at doing it.

I think as you tell me what you’re interested in, I’ll try to figure out how I can help you with your project, not with my project. And that’s the virtue of having taught so many different courses in law school and related subjects that there’s nothing which is completely foreign to me. And I don’t know what they told them. Max said, tell me more about it. And then we’ll kind of work it out. So it’s a, it’s a, basically, it’s a, I think it’s an act of love and it’s a kind of an essential duty.

Jesse (52m 30s): I was reading a book a little while ago. I can’t remember the one, but it was something, it was a German scholar, I think, in the 19th century. And it said about the America and he said, his only problem is he has a PhD, but the last question fun, one stole from Bloomberg as listeners know first car.

Richard (52m 47s): Oh, well, I mean, it was a used car. And I think what it was is I came back from Oxford. I’m going to Yale and I had a 1963 value, but that’s not the really heroic story. The heroic story is my in doing drive this training, where are my first two accents. Okay, there you go. Driver’s training. Yes. Not to drive and said, well, they both took place in my garage, Tupac garage. And what happened is I would try to back the car out and the driveway was at 90 degree angles to the garage.

And so the first time I come and I turn it on and I bashed the front right fender, the other side. And then I say, my father takes it into the stuff. And the next time I’m well, calf, what I do is I only hit it hard instead of bashing it. And so my father brings that thing back then a mechanic. He said, well, what again? He said, he did not want to reveal his son’s red, talented wrecking cars. But what did happen is my oldest sister basically taught me how to draw, not my parents.

Jesse (53m 47s): There you go. All right, Richard, for those that would like to reach out, just see any of your writings, your past work, your books, where would be the best place for them to go online? Google. Yup. That’s what I say. I still ask people though. I mean, Google your name, Richard Epstein.

Richard (54m 3s): Yeah. I mean, I, I guess I’ve written 20 odd books. I don’t know how many articles is. Okay. My view about it is just do it. Don’t count them. It’s a much better strategy than accounting and not do it. I, as I said, if there was one book that kind of tries for the layman, I think the simple rules book is the one I would recommend. If somebody wanted to find a book which was consciously transformative, I would say it was the takings book. If they wanted a book which was systematically comprehensive on constitutional issue, it was a book called classical liberal constitution.

If they want a critique of the administrative state, I just recently wrote a book called the dubious morality of the modern administrative state. So I mean, there’s a Schmidt.

Jesse (54m 46s): My guest today has been Richard Epstein. Richard, thanks for being part of working capital.

Richard (54m 50s): My pleasure. And I’m glad that you worked so hard.

Jesse (55m 3s): Thank you so much for listening to working capital the real estate podcast. I’m your host, Jesse for galley. If you liked the episode, head on to iTunes and leave us a five star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one. Take care.