How Not to Build a Country: Canada’s Late Soviet Pessimism
palladiummag.com
palladiummag.com
“When innovative companies begin making decent profits, landlords raise the rents to adjust for the new ability to pay. As a result, these additional wages are neither reinvested, nor reflected in the disposable income of employees. This is the dynamic behind the mystery of stagnant wages. When workers in a particularly well-paid sector begin pouring into a city, landlords likewise raise the rent to absorb these incomes. It isn’t gentrification, but absorption through monopoly power.”
The housing affordability crisis is really a crisis of land owner cartels, especially in major urban centers. Short of some massive investment in public housing, there’s not much that can be done to course correct.
If workers are always only paying the amount that they are able to pay, no more and no less, then that means that any increase in salary, will cause rents to increase.
BUT, it also means that the opposite is true. If salaries decrease, such as because if a tax, then rents will also equally decrease.
Or in other words, the tax is purely borne by the landlord.
So it makes perfect sense to tax the landlord in that case.
Either the taxes are passed through to the renter, or the price of rent is determined by a renter's ability to pay.
These are conflicting statements that both can't be true.
If renters are already paying the most that they can, and increases in wages only causes rents to go up, then it is not possible for them to pay that extra tax.
In economics, if a consumer always pays as much as they are able to, IE, it is a constant willingness to pay, then this is called perfectly elastic demand.
The situation of taxes being passed in to consumers, would only happen if consumer demand is perfectly inelastic.
It is literally the opposite situation. Demand can't both be perfectly elastic and also perfectly inelastic at the same time. They are opposites!
If there is property tax, only the government owns the property and rents it to citizens.
No. Taxes are spent on goods an services, the same as any property owner spends rent income.
The outcomes of expenditures on each part is different (sometimes a plate tax is actually applied to road maintenance). But the concept of a slush-fund and no (or few) legal guardrails for expenditures means your tax dollars probably land in a pet project somewhere, or are consumed in the financial friction of government bureaucracy.
Luckily most governments and societies today respect a sort of legal Platonism where the law as an ideal both constrains the government and the owners of property even though the government is tasked with implementing it. It might not be empiricist enough for some people but it seems to play nicely with human psychology’s inclination towards the mystical. And of all the cultural fantasies we might share, we could definitely do a lot worse than human rights and the rule of law.
Simple equity demands that property taxes should at a minimum be equal to income taxes on the rental cost of equivalent property.
But there are niggles. Under most tax systems value you produce, even for own consumption, must be assessed and taxes paid on it. This is problematic if you take a crop for subsistence farming.
Income tax is not a good idea. You add value, why do we want to discourage you ?
Income tax is the best compromise I know of. If you want to participate in the economy-at-large then you pay it. If you don't want to, feel free to not participate. People who make more will pay more, but they will still make more.
Which is fine; lots of great stuff aren’t “the natural state of man.” But don’t bullshit about it, yeah?
You have people who have lived in their houses for a generation and may have even paid them off but when the land under their home - let alone their home itself - doubles in value every 8 years and the rate doubles in eight years, they have to sell to get out or lose their house anyway.
Then developers swoop in, tear down the houses, and build condos which are much more "economically efficient".
Capping property taxes is the same as rent control. It has the same challenges in its implementation, and the same downsides and costs.
If your house has gone from $200,000 to 700,000, having to pay $150k in deferred property taxes doesn’t seem over onerous.
> and build condos which are much more "economically efficient"
Why the scare quotes? They are.
I'm having trouble thinking of a realistic combination of numbers where the asset owner would exhaust the equity in their home under such a scenario, or is that "off limits" for some reason?
1) It is a lot more economically efficient, the situation has gone from 1 family living in a desirable area to multiple families. If we ignore the fact that one family had to move that is a big step up.
2) The alternate scenario, where the family just sits in their rapidly appreciating house, is grossly unfair. They are reaping huge benefits without doing anything. It is ok in principle but it is unfair on the other normal folk who can't move in that area and get priced out because there isn't enough housing. This concept is the justification of the land value tax and it goes to a very important principle - benefits should come from either hard work or by taking risks with saved money.
3) Since the economic and social benefits of tearing down single houses and building apartments are so huge (ie, lots of people get to live where they want instead of few people) it would be well worth looking for ways to keep the land value tax and mitigating the effect on the family that has to move rather than doubling down on the idea of people having a right to land. Taxes represent the government taking something people worked to earn. Taxing someone on land and they have to move is not that different from taxing their income and they have to give up some pleasure in life. That is what taxes do.
Further, it creates a legal and financial risk in the entire system where property becomes subject to the whims of whatever governing authority therefore discouraging investment and real ownership.
The Kelo decision was despicable, let's not encourage it.
If land values have truly doubled in 8 years it isn't like the family involved is out of pocket. They've made a small fortune. The idea they can make a small fortune and prevent land from being used is also morally gross. The only justification is that a large hurt is diffuse where the small hurt would be concentrated. That is a defensible philosophy but it is also one where eventually everyone is worse off. And it isn't like this is an erosion of property rights; they are being taxed on benefits that they are not responsible for creating. 1.5% land tax so people have to re-buy the land once a generation is as good an idea in tax law as any I've seen.
I agree that having to change a lifestyle because of taxation is pretty awful and the system should strive not to do it. But I've visited places like Hong Kong and seen the density of living there. We're talking an order of magnitude more people. The number of people who come out ahead from that sort of property development is so overwhelming we can't process it using intuition and positive stories about individuals.
This can be done by borrowing against the house from a financial institution or we can have the government place just place liens on the property if you can't pay.
Predatory pricing, also known as undercutting, is a pricing strategy in which a product or service is set at a very low price with the intention to achieve new customers (Loss leader), or driving competitors out of the market or to create barriers to entry for potential new competitors.
https://en.wikipedia.org/wiki/Predatory_pricing
I should have called it "price gouging" or perhaps "profiteering".
https://en.wikipedia.org/wiki/Price_gouging
There isn't really a great word for long-term exploitation of an easy structural advantage, though. Landlords don't have to form a cartel, since (a) everyone has to buy from them, (b) land is limited in supply and (c) the barrier to entry is high. Maybe it's a "natural cartel".
So a cartel doesn't have to be any particular size.
It’s funny how people can observe cartels in other basic inputs into the economy, like energy, but miss them entirely for the equally basic input of land/housing.
In my opinion there are two issues: #1: Land owners are not taxed for the un-earned value of their land. Making lots of money for just owning a piece of land is absurd. Normally this doesn't matter due to how large the USA is, but you can see its ugly result when land is very constricted like in major cities.
#2: Land owners are very limited by what they can build on their land by local laws and such, which prevents development of high density buildings, which would lower rents due to the increased number of units and efficiency at which these can be built. A land tax would even necessitate this sort of construction so that it would be profitable for the landlord to even keep the land.
The essay falls on its face with its central thesis that 2010's Canada = 1970's Soviet Union, which beyond being absurd on its face the author fails to make any case for other than observing, correctly, that bureaucracy exists in Canada and that individuals that are established in a social hierarchy take advantage of it. The underlying motivation for this screed seems to boil down to 1) rents are too high in Vancouver, and 2) firms don't want to pay techies enough in Vancouver. This is then extrapolated linearly to mean 'Canada'.
As for the observation on the housing situation, this is recognized generally as a problem in many markets, but his actual argument here is that these high rents thus smother "wealth creation". This may be true in Vancouver, but doesn't seem to be true in other areas like the Valley or NYC, which remain hotbeds of economic activity. Vancouver's specific problem seems to be that the Soviet leadership in British Columbia has been unable to curb the very capitalist problem of money laundering profits from the People's Republic of China into Canadian real estate.
It's not just money laundering, but an entire "industry" of investment and tax fraud schemes:
https://www.theglobeandmail.com/real-estate/vancouver/out-of...
The rest of AB is basically smaller agricultural towns, with a few oil towns that are basically glorified work-camps (Grande Prairie and Fort McMurray) and then a few mountain towns that have their own crazy dynamic due to national park regulations.
> The word hypernormalisation was coined by Alexei Yurchak, a professor of anthropology who was born in Leningrad and later went to teach in the United States. He introduced the word in his book Everything Was Forever, Until It Was No More: The Last Soviet Generation (2006), which describes paradoxes of Soviet life during the 1970s and 1980s.[3][4] He says that everyone in the Soviet Union knew the system was failing, but no one could imagine an alternative to the status quo, and politicians and citizens alike were resigned to maintaining the pretense of a functioning society.[5] Over time, this delusion became a self-fulfilling prophecy and the fakeness was accepted by everyone as real, an effect that Yurchak termed hypernormalisation.[6]
To the point where a typical house requires $250k+ family incomes in a place where typical family incomes are one fourth to one half of that.
https://www.amazon.co.uk/Progress-Poverty-Henry-George/dp/09...
Any productivity gains flow into land. "Everybody works but the empty lot"
If you consider the city counsel a land owner cartel, I guess I can agree.
Cities where land owners can build what they want on their land does not have this problem. WHat a central government can do is ban most zoning, and make sure cities have incentives to welcome new inhabitants.
In California Prop 13 make cities lose money when people live inside them, with predictable result.
Remote work allows the people to place themselves in better, affordable places, while helping companies get the best from all over, rather than bound to a physical location.
This works unless the companies/investors are doing a dual strategy of having real estate that they collect on while having their companies located in them that they are investing in. So a big part of the investment never leaves the building. I suspect a large part of Silicon Valley has a scheme like this, investors are usually real estate investors as well, they like people concentrated in areas and supply/demand to benefit them.
The other bigger wage absorber right now is healthcare tied to a job. When healthcare goes up, wages are diverted into healthcare and healthcare and housing have teamed up to sap all wage growth in actual dollars in pockets of consumers,. 'Real compensation' or 'total compensation' doesn't go into cashflow/liquid assets at the individual level and means nothing to consumer spending power which needs to go to housing and life.
Once there is a supply chain, an industrial hub with a concentrated supply chain will outperform a disparate network of workers. At that point, market forces will optimise to use the industrial hub for everything. Workers who live in the industrial hub will have an advantage over those that do not.
However, large companies have remote offices in different cities that rely on virtual communication to one another. This just moves the remote/virtual aspect further down the system to the individuals/teams. This push would also make supply chain work more virtual, the long tail of industry.
It could work if they give massive tax breaks for remote workers, when it is a financial benefit and reward for pushing virtual workplaces, it will take hold.
Remote work pushes also have immense impact on carbon production / climate change and making sure local communities thrive from higher salaries in more remote locations. This would allow for infrastructure to also be better more widely dispersed.
There will always be hubs, but even large companies eventually get many hubs themselves and require virtual communication and remote capabilities. Company cities have been around forever, but remote working / virtual communication needs to be a priority and can help fix or improve many problems, not just housing costs.
The mobile device generation will most likely bring about these remote working changes more widely.
That is a bold prediction. My money is on the precise opposite. The more talented and successful the employee is, in the main, the closer they are going to be to the heart of a geographically located industrial hub.
Reduced communication costs will make it easier to identify the hubs and increase the competition to move there until the cost of moving is similar to the benefit of being in the hub.
If mobile devices and better communication suddenly causes an on-average decentralisation of wealth generation that would be (1) welcome and (2) shockingly unusual.
> This would allow for infrastructure to also be better more widely dispersed.
Probably going to burn a lot more resources spreading the infrastructure out than is saved by letting everything centralised. There'd be wins cutting down on the daily commute, but would also be costs to decentralising. Similar benefits might be more easily found by designing dense cities to be easy to navigate by bike and foot; which would also let workers keep the advantages of centralisation. Lots of room for improvement there, no doubt.
Its a loser mentality and it sucks.
The only thing that its going to ensure is the same forces take over basically every livable city, why don't we stand up and fight them?
Yes, there are regional centres: regulation, language, and culture can create the necessity for localised services, so that film also has national traditions (Bollywood, China, Japan, small local productions in the UK and continental Europe, and a few smaller hubs), banking (London, Frankfurt, Tokyo, Shanghai), etc. But to the extant a single hub can dominate, it often does.
It's the support sectors especially which create anchors. For film, casting departments, carpenters, electricians, caterers, props, lighting, riggers, and a whole host of services and suppliers are best met within central hubs. Software operates similarly -- VC, training, presentations, networking services, and the like, tend to focus on major cities such as San Francisco-San Jose, Seattle, New York, and a number of also-rans. Trying to get highly-qualified services outside those areas is difficult at best.
And even if you do manage to allow software and design folks to work remotely, it's the other staff, often far less-well paid, who still have to show up at the office. And who pay the eye-bleeding rents.
Remote work isn't the solution.
Rents, as a claim to all consumer surplus, can be ameliorated through a land value tax. That's the solution which is badly needed.
L.A is not a tech hub because the omnidirectional traffic kind of wrecks the whole thing, while the bridges in the bay area mean that the worker bees are rate limited in their ability to get in and out of the nice places in cars somewhat lessening the omnidirectional traffic nightmare for the rich people who invest in companies. Have you ever watched people trying to get to the east bay over the bay or peninsula bridges during rush hour? That's rate limiting for ya.
Rents are demand and offer, if the offer is perfectly static (no new housing/rental units are being made available) then if you have immigration in an area you should see rental pricing increasing according to that, rather than increase according to medium income.
EDIT: As for solving this with public housing, that'll simply make it that the market price is not reflecting the demand, but it doesn't change the underlying issue that there is more demand than offer. Which means that there will be other ways to "fight" for those limited units (instead of market price it will be "favors" or lottery or "first come first served" which tends to favor existing residents over newer ones).
The key to acquiring wealth in this country is creating bottlenecks by saturating public and private institutions with members of this class. """
So true. The general feeling that incompetence at these big companies has no consequence.
The depresssing and true: """This is how much a developer should make. We’re not paying a penny more."
Sorry to say, but tech is not valued in Canada by Canadian companies. American companies operating in Canada have a better mindset.
The downside is that often these jobs end up with a pattern of 'branch plant' or 'nearshore' perceptions; I've had several jobs where the relationship between the Canadian office and the U.S. one was strained due to an assumption of command and control from the American office.
This almost reads as if there is a cast system, where there is place for everyone to be comfortable with and shut up demanding more...
In New Zealand the price of housing has skyrocketed, and exists in a similar plane to Canada's housing market. We have the same issues of low productivity and relatively low wages as well.
There's a toxic cycle that's created. Boomers made all of their money in housing appreciation, and heavily encourage millennials to continue the cycle (which, taking the most optimistic view of it all, makes sense). But a house doesn't cost 2.5x your income now - it costs 8-10x. So you're married to a mortgage (which unlike America has its interest rate fixed for <5 years), have probably got a lot of your parents money invested as well (because you aren't earning enough to come up with a $200k down payment on your own).
Because real estate has 'proven' results, and the media make a lot of money advertising houses for sale, that's a lot of what you get told to do. As an individual you're so heavily indebted you can't afford to take risks, but at the same time, companies aren't trying to improve their productivity - because the best ROI has been in the property market. So wages suck too.
New Zealand is a bad place to be a young person. That's why I don't live there anymore. And I don't think I'll move back anytime soon unfortunately.
This windfall provided a massive generational wealth transfer from young to old, and with interest rates near the zero lower bound cannot be replicated. This makes housing a far worse bet for our generation, even for those of us earning sufficiently more than our parents to be able to take a shot at home ownership.
The weird bit is that San Francisco prices make more sense than where I grew up (suburban New Zealand). Sure a house in SF might cost $1.2m but two people working in tech can expect to make $250-300k all in by their early thirties. That's only $200k more than a house in New Zealand, but you're working with an income that's easily 2x the size.
Moving from Britain to the US I've seen the income of my profession as a software engineer move from the 75th to 90th percentile and the variance of the income distribution widen so an income of the 90th percentile earns 2.6x rather than 2.0x the median. We're far richer here than we were at home.
That is not true. It seems like it is true because we can look at our parents and grandparents and see that the house they bought in 1980 for $300,000 is worth a million dollars now, but that's not a great return. It seems like it because they are millionaires, but you'd have been better off in bonds with a better return and a whole lot less risk.
Perhaps I should have been more precise: the perception is that the best ROI has been in the property market.
While I agree that landlordism tends to increase income inequality -- especially in the form Vancouver suffers, where protests convince the city to reject the construction of new housing even when the land is already appropriately zoned and the proposed building complies with the approved local development plan -- but it's wrong to refer to a worsening of income inequality.
Income inequality in Canada increased substantially through the 1980s and 1990s, but it peaked around 2004-2007 (depending on exactly which measure you use) and has been steadily declining since then.
Don't have a ton of time ATM but we're in dire need of deregulating a lot of industries and breaking up cartels.
According to wikipedia, mining, oil and gas make up 8.1% of GDP. Below manufacturing (which we're told is dead in Canada) and real estate.
And yet if you look at the TSX, and the make-up of most mutual funds people are invested in, it's heavily heavily biased towards the oil and gas sector.
Not to mention the CAD being basically a petro dollar at this point.
Not exactly set up to win in a post-carbon world, are we?
Everything was mandated by a bureaucrat, how many factories there could be, how many goods they could produce. There was no concept of supply and demand, instead there was five year plan from the central government and that was what would be implemented regardless of the ground reality.
When people got a phone line installed in their house, the neighbours would come over to marvel as if visiting a new born baby.
When my uncle got his allotment for a scooter after two years, he distributed sweets to his co-workers. It was a great occasion.
The middle class and the poor did not have access to International Direct Dialling because the central telecom commission had not accepted the demand for more international connectivity. There were no private telecom companies only state owned because we were good socialists. And International Direct Dialling was a luxury reserved for the political elites and the rich industrialists.
No what we had to do was book a "person-to-person" call. They would give you a 2-3 hour time slot in which the call might be connected and you would have to wait by the phone. And when it was connected the operator could hear everything.
This is mid-1980's I am talking about haha
Canada is a market economy with very low corporate taxes and when compared to European economies regulation is actually very light. Our business norms and regulations are tied in most part very closely to the United States.
But the investment culture is very conservative and the economy is tied excessively to resource extraction.
And yes, there is a long history of a few families having strong dominance over everything, and of businesses/companies gaining monopolistic positions through regulation. An example of this is the wine industry in Ontario -- I could go on a long rant about that... but I'll restrain myself.
It was the fur industry and logging then, now it's crappy oil from the tar sands that sells for little more than it costs to dig it up; but nobody in Calgary has the balls to admit it.
I have American friends who talk about Canada in glowing terms as a place without the same corruption as the US. It's just a different kind of corruption, that this article aludes to throughout.
And yes, nothing ever gets done. Everything goes over budget. Not a problem confined to B.C. by any means.
The author discusses that for a country to be successful there must be institutions that encourage working hard and entrepreneurship. More, the political system should be organised in a way that stimulates creation and support of such institutions. The negative consequences for politicians supporting oligarchy must be worse than for ones who introduces changes that can improve lives of regular people.
My guess the problem is not in real estate speculations - it is just consequences of underlying system inefficiencies.
I see Canada has good educational system, right? But as they say in the article, there is not a lot of motivation and places for smart engineers to do their best.
There are barriers to make changes in many areas like medicine, real estate (based on the article).
The government seems to be in a situation where due to corruption and lobbies it does not do appropriate changes. They know what to do, but they do not find it good for them personally. Oligarchy wants to keep their positions unchallenged.
It is just my guess and pure speculation, I do not know much about Canada.
EDIT: added more on concequences
In the U.S. and in most developed countries, we've had (1), in some cases (3) but (2) is become scarce.
In my opinion, there are very few modern cities that are able to provide cheap housing these days. It requires an activist government fighting two very powerful forces: existing home owners and corporate landlords. Truth is that the lobby of those interest groups are way more powerful than low income renters.
The other problem is that expanding the housing stock is not sufficient, governments have to provide basic services: water, public transportation access, sewage, etc.
Who is going to pay for them? In most cases, the cost is paid via property taxes (existing homeowners and corporate landlords)
The truth is that we have disincentivized the creation of new housing stock and until we fix the underlying issues of bringing more supply to the market, this issue will continue to worsen.
https://www.zillow.com/research/new-construction-shortgage-2...
Arrogant baby boomers driving around in luxury in the pitch black night, with the lights out, running into each other on the lake -- and then shirking all responsibility.
it would crash the BC economy hard though. There's very little left there that isn't driven by foreign purchases. (quite a lot of it illegal in their home countries, eg the USA)
I can dream....
Of the total population here 50% of people live in the capital city. It's getting to the point where everyone will have to move 30 minutes to an hour away.
There was a story in the local paper about a front porch being offered for rent. Living in someone's front porch! I think someone actually took the offer.
The 30 year mortgage reminds me of a former co-worker who got a brand new truck. His salary was half what I made and he worked four days per week. The dealership had a seven year payment plan. My co-worker friend thought that was a great deal. I just shook my head.
Baby boomers have a death grip on everything.
A cartel is an agreement between organizations/people throughout a supply chain. Landowners twisting their mustaches and rubbing their hands together do not make a cartel. Rule of thumb, at least 3 steps in a supply chain. What they would be, is a trust. They're at the same level of the supply chain working together. If you're going to cry "late stage capitalism", for fuck's sake actually know how capitalism works and how to cheat the system properly. There are rules on how to cheat in capitalism. A 10 minute youtube video won't do that for you or the rantings of a crazy frenchman.
Counterpoint, definition 2: