Calls for extending the foreign home buyer tax

Image source: http://vancouver.ca/about-vancouver.aspx

If you have been watching the news, there have been recent calls to extend the Vancouver foreign home buyer tax (a 15% tax levied on foreign buyers of real-estate) from Vancouver to Toronto and Victoria as well.

some of these news articles can be found here, here, and here.

What I find amazing about these arguments for a foreign homebuyer tax is the covert racism that underpins it. That somehow, only foreigners are able to afford homes in such quantities that it stimulates demand and pushes up prices!

Specifically, (in my opinion at least) the problem is not foreigners willing to pay obscene amounts for homes - if they plan to reside in said homes. Rather, the problem becomes when individuals (whether domestic or foreign) are willing to pay obscene amounts for these homes because they view these as an investment rather than a form of shelter.

Let's compare and contrast two similar and current situations.

First, Imagine if you will, an individual from China decides to move to Vancouver and purchased a  $1 million dollar condo to live in, paying a $150,000 tax because they are not a Canadian citizen or permanent resident. However, this individual has planned to live in this home - maybe attending school, working, or starting their own business, all in Canada and contributing to local economy.

Meanwhile to contrast.

Second, a Canadian investor from elsewhere in Canada buys a condo in Vancouver for $1 million. Because this investor is domestic, he (she) pays no foreign homebuyer tax. At the same time, this investor is not residing in the condo, nor are they renting it out, as they are betting on the market appreciating and earning capital gains through this price appreciation.

What is the difference between these two cases?

In both cases, there was a new purchase of real-estate, adding to the demand for real estate in Vancouver.

the difference rests in what is done with that purchased real-estate.

In the first case, the foreign national has purchased the condo to live in, using it as shelter, thus jointly adding to the local economy, spending their money and spurring economic activity. (even if they are also hoping to sell in a few years for capital gains!).

In the second case, the domestic investor has purchased the condo to sit empty. thus adding to the demand for real-estate, but other than the initial contribution to the FIRE (Finance, Insurance, Real Estate) industry, there is no prolonged contribution to the local economy.

The question then - which scenario is more damaging?

Well, if real estate is viewed as just another good, then neither case is overly damaging, as in both cases both the buyer and seller are obtaining value from their transaction - which is why they transact!

However, if real estate is understood to be the primary form of shelter (a basic human need) then the second case clearly carries more social costs (increased demand pushing up the price while excluding others the use of the shelter.).

While the first case also adds to the demand, pushing up the price and excluding others the use of the shelter - we are also experiencing a continued contribution to our economy, through an addition to the labour force, additional consumer spending, and possibly investment, all of which helps spur the economy which may not happen in the pure real estate investment situation.

To wrap up, my personal feeling, and opinion. Is that there is a problem with the current real estate market, but that foreign buyers are not in themselves the problem, but rather an easy target. The problem lies in the use of real estate as an investment - something to be bought to earn a return rather than something to be used as a shelter. In this case, it is not that foreigners are the problem, but real estate investors in general, whether they be domestic or foreign.

Thus a foreign homebuyer tax is discriminatory, and perhaps even violates trade agreements which require laws to be enacted fairly over both domestic and foreign individuals and companies. Specifically, what should be evaluated is a changing tax structure to penalize real estate speculation in general, regardless of ethnicity - however, this is clearly easier said than done!

What are your thoughts on this? feel free to comment below.

EDIT: I want to clarify, real-estate investment in terms of a rental property is not really an issue in my mind and in fact should probably be encouraged. The issue becomes real estate investment in vacant properties for capital gains and given the recent census and many investigative news pieces, this appears to be a growing problem.

"Why Trumponomics fails"

link to an interesting blog piece by Robert Reich called "Why Trumponomics fails".

Specifically great are the comments Trump recently made about the new Boeing being made in the US (realistically assembled). but more relevant to the topic at hand, the situation of the workers who do the majority of the manufacturing of the components which are then assembled in the US.

To quote Reich below he states the following when speaking about the workers in the countries where a good chunk of the production takes place:

Notably, these companies don’t pay their workers low wages. In fact, when you add in the value of health and pension benefits – either directly from these companies to their workers, or in the form of public benefits to which the companies contribute – most of these foreign workers get a better deal than do Boeing’s workers. (The average wage for Boeing production and maintenance workers in South Carolina is $20.59 per hour, or $42,827 a year.) They also get more paid vacation days. 

These nations also provide most young people with excellent educations and technical training. They continuously upgrade the skills of their workers. And they offer universally-available health care. 

To pay for all this, these countries also impose higher tax rates on their corporations and wealthy individuals than does the United States. And their health, safety, environmental, and labor regulations are stricter.

Not incidentally, they have stronger unions.

All of this initially seems like it would result in much higher costs (higher wages, high taxes, more vacation days, etc.) so why doesn't Boeing manufacture these parts at home (America) using their cheaper American labour who take fewer vacations?

to answer this with another snippet from Reich:

The way to make the American workforce more competitive isn’t to put economic walls around America. It’s to invest more and invest better in the education and skills of Americans, in on-the-job training, in a healthcare system that reaches more of us and makes sure we stay healthy. And to give workers a say in their companies through strong unions. 

In other words, we get a first-class workforce by investing in the productive capacities of Americans  – and rewarding them with high wages.

It’s the exact opposite of what Trump is proposing.

That is - despite the higher wages, taxes and vacation days being enjoyed by workers abroad, their high level of education and technical training translates into high quality, and high productivity work, allowing these workers to produce a superior product at a cost that must meet if not be below the cost which would be incurred domestically.

Again this simply reiterates the point made during an earlier post that the liberalization of trade (free trade) is not in itself the problem being faced by the US. Instead, the problem has been decades of misplaced policy resulting in a lack of investment in education and technical skills, leaving a vast amount of the American labour force unable to compete against global labour pools. Where this is no longer a case of being unable to compete due to lower wages being paid to workers in Asia, but rather unable to compete due to the higher skill sets and levels of productivity of workers in Europe as well other developed countries.

What are your thoughts on this, what are the solutions? protectionism? or evaluating some alternatives which pay prove the be quite costly in the short-run in order to play catch-up?

Feel free to comment below.

On the loss of American Manufacturing jobs.

Just as the semester is wrapping up we have had the chance to cover the final two chapters in Micro and Macro.

In Micro we had the chance to briefly look at environmental economics -- which has been making some prominent headlines in the news with the discussion of a federal carbon emission tax ... but we will save these headlines for a follow-up post.

First, I bring attention to an interesting article I came across in "The Atlantic" by Jared Bernstein and Dean Baker titled "Why Trade Deficits Matter".

For those of you in my Macro class - to relate this to what we discussed, this article falls right along the line of the familiar, traditional, almost mercantilist argument of "Exports are good, imports are bad", that is the false underlying belief that trade is a zero-sum game.

The argument which Bernstein and Banker make is that the view held by us economists that current account deficits are harmless and no different in effect than current account surpluses are, in fact, wrong.

The argument which they are referring too ... as far as I could decipher at least, follows the basic premise:

1. Following trade liberalisation, industry in each country will align itself along the sectors with a comparative advantage (lowest opportunity cost of production). 
2. Thus industries in the export sector will expand, while industries in the importing sector will contract -- however given a basic premise of scarce resources, in order for the export sector to expand, it needs to utilise the released resources from the contracting import sector. 

Thus my interpretation of the argument being made is that because we have a prolonged trade deficit, (Imports are greater than exports) then this must mean that more jobs have been lost in the import sector (manufacturing) than have been gained in the export sector. 

Thus it is due to a prolonged trade deficit that we have weak demand (aggregate demand) resulting in a persistent recessionary output gap and high rates of overall unemployment. Thus to fix the problem Bernstein and Banker argues that we need to restore the trade balance and reduce the current account deficit. 

while it may be the case that there has been a correlation between the trade deficit and higher rates of unemployment in the states, I was extremely sceptical of the argument being made by Bernstein and Banker. I had a feeling that this was a case of correlation, not causation. (Remember just because A and B are correlated does not mean that A causes B or that B causes A, In fact, there could be a C that causes both!)

Specifically, I would have expected trade to have the effects mentioned above - regardless of trade surplus or deficit. 

As the US economy reallocates its resources to support its export industry (contracting the import industry) - jobs are created in the export industry, while jobs are lost in the import industry. The problem is, many of the skills or education held by the recently laid off labour (and capital) in the import industry may not be relevant for employment in the exporting industry. 

Although the exporting industry wants to hire more workers, the present labour force does not have the skills or education which is demanded by the export sector. As a result, we have a rising level of structural unemployment. I felt this would especially be the case given the exceptionally high cost faced by workers in the US to retrain due to the high cost of schooling.

This was at least my thoughts on the matter, however, these were based on some grand assumptions as I lacked (and lack) the actual data and information about the US economy, as well as other economies who may be experiencing the same thing, but with a current account surplus. 

Then by luck, I came across this article on Forbes by Tim Worstall "Memo for Trump...". Worstall does not comment on the rise of structural unemployment the same ways I hypothesised above, rather Worstall argues that manufacturing jobs are on the decline globally, and this holds for countries both with trade surpluses and deficits. 

Worstall makes the argument, which seems well founded from my view, that through the rise of new manufacturing technologies, productivity has risen, and as a result, there has been less demand for manufacturing jobs. Thus, the manufacturing worker has found themselves hard pressed for employment regardless of if they find themselves in a country where manufacturing is the export/import sector, or if they find themselves in a country with a trade surplus/deficit. 

With this bit of insight (and data) in mind, it would seem that the US manufacturing sector has two serious headwinds to face. 

1. The manufacturing industry in the US does not have a comparative advantage in relation to foreign countries, and thus finds itself in the position of the import sector - struggling to remain competitive. As a result, firms struggle to maintain a profit, and exit the industry, releasing their capital and labour for the export sector to utilise. however, realistically, we will first see a period of higher structural unemployment as the labour retrains and the capital is 're-purposed'.
2. Globally, manufacturing is shifting to capital intensive methods of production. this rise of technology, further displaces manufacturing workers, further adding to the structural unemployment. 

With these two headwinds in mind ... what can be done to save American manufacturing jobs? we could ignore the changing economy and put up protectionist measures in order to save these manufacturing jobs ... but this just delays the inevitable. (and , could potentially slow the shifting of scarce resources to the trying to expand export industry, thus limiting national income). 

Or alternatively, we could rethink the institutional makeup, and craft some forward thinking policies aimed at reducing the structural unemployment caused by these pressures. Specifically, subsidised education reduces the enormous cost of retraining, allowing laid off workers (who are already facing a cost of lost wages and uncertainty of future job prospects) to retrain, and reenter the job market at a much more rapid rate than we are potentially seeing. 

However this last point I make without any hard evidence, other than looking at other countries (Canada, Germany) which also have witnessed pains in their manufacturing sectors, but through subsidised education, have greatly reduced the cost of retraining, allowing these workers to upgrade their skills rather than be relegated to low-paying, low-skill jobs, which is what I am continually being told is happening to these manufacturing workers by the US media.

There is of course much more to this discussion! please feel free to continue the conversation in the comments below.