Canada & Europe Tour

Published by Anonymous (not verified) on Fri, 15/06/2018 - 6:50pm in



July 7 -8  Mariposa Festival Orillia, Ontario
July 11  RBC Ottawa Bluesfest Ottawa, Ontario

July 13 Stewart Park Festival, Perth Ontario
July 14 Stewart Park Festival, Perth Ontario
July 14 The Heartwood Restaurant, Combermere, Ontario
July 18 Lula Lounge, Toronto Ontario
July 19 Starstop, Napanee Ontario
July 20 Old Church Theatre, Trenton Ontario
July 22 West End Centre Aldershot
July 23  ~recording London ~
July 24 Norden Farm Maidenhead
July 25 Exeter Phoenix
July 26 Emsworth Sports & Social Club, Emsworth
July 27 Port Eliot Festival, St Germans, Cornwall
July 28 Port Eliot Festival, St Germans, Cornwall
August 2  JamDays Festival Odense Denmark
August 3  Notodden Bluesfest  Norway
August 4  Notodden Bluesfest Norway
August 5  Speelplaats Baars Netherlands [email for tickets]
August 7  Roots in ‘t Groen Midsummer Special Heerenhuys23, Geldrop Netherlands
August 9  Festival InterCeltique Lorient, France
August 10  Festival des Filles Bergerac, France
August 14  Festival Relâche Bordeaux, France
August 17  Le Buis Blues Festival Le Buis, France
August 18  Festival Blues In Août Montreuil sur Mer, France
August 19 Swing Wespalaar Belgium

Cartoon: Allies of evil

Published by Anonymous (not verified) on Tue, 12/06/2018 - 9:50pm in

I have to say, the news from the past few days has me feeling more alarmed than ever. Trump's behavior at the G-7 summit was, as others have noted, nothing less than an effort to destroy the West. While it seems like textbook Putin, I also keep thinking of Viktor Orban, the far-right nationalist Prime Minister of Hungary, who has declared the era of liberal democracy to be over. Given the multi-pronged attacks on voting rights in the US, including Monday's appalling 5-4 Supreme Court ruling that Ohio can purge people from its voter rolls if they fail to vote frequently enough, I fear we may be farther down the authoritarian path than many Americans realize. And Trump is, unfortunately, just the tip of the fascist-berg. Not to be a downer or anything.

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Canada’s Trump Now Premier of Canada’s Largest Province

Published by Anonymous (not verified) on Fri, 08/06/2018 - 2:53pm in



So, Doug Ford, brother of the Toronto’s crack-Mayor Rob Ford, is now Premier of Ontario.

It wasn’t particularly close: 41% to 34%, although polls had shown it neck and neck. At a guess, youngsters didn’t show up at the polls, which always a risk. Without a Corbynite rock star politician who they actually believe in, they tend to vote less than they intend. Horwath, the NDP leader, is no Corbyn, but a relatively left-centrist pol with little charisma.

Doug Ford is accused of having stole from his brother’s wife, of driving his business into the ground, and was a drug dealer when younger. He didn’t bother to put out a costed platform, about a third of his candidates are under criminal investigation, and etc, etc…

He’s a stupid buffoon, and his policies, such as they were, don’t even make as much sense as Trump’s did (because he has no Bannon). However, what we can know for sure is that they will involve a lot of privatization and budget cuts, fire sales to cronies and so on.

Given the percentages, caveats about proportional voting and first past the post aside, it’s hard to say this isn’t what the most committed plurality of Ontarians want. I notice that Liberals don’t appear to have strategically voted all that much, as they always want NDPers to do (and as about a third of NDPers generally do do in close elections.)

Oh well, gonna be a sucky 4 years in Ontario, but that’s what a plurality of us voted for. And, yeah, Canadians, willing to vote for really shitty people, just like Americans. (Trudeau, by the way, has run a terrible policy regime in many ways. He just knows how to look good doing it.)

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CANADA: NABIG Congress 2018 in Hamilton, Ontario

Published by Anonymous (not verified) on Wed, 06/06/2018 - 5:00pm in


Events, News, Canada

The 2018 NABIG (North American Basic Income Guarantee) Congress happened in Hamilton, Ontario, from May 24th to May 27th at McMaster University. There were around 120 people presenting and attendance between 270-280 people. The conference was notably diverse, with attendees from across the income spectrum,  from people who have prospered in business, to people living in poverty. There were representatives

The post CANADA: NABIG Congress 2018 in Hamilton, Ontario appeared first on BIEN.

Single-Payer or Bust

Published by Anonymous (not verified) on Tue, 05/06/2018 - 3:15am in

By providing a single tier of coverage to all, with automatic enrollment, comprehensive benefits, and no cost-sharing, single-payer provides a distinct, egalitarian vision of universality.

On The Primacy Of The Inflation Target

Published by Anonymous (not verified) on Sun, 03/06/2018 - 11:00pm in

 Canadian Inflation And The Target Range
Neil Macdonald recently wrote the article "The Bank of Canada wields enormous power, yet decisions are made in relative secrecy," which questioned the Bank of Canada's secrecy, and its mandate. The article itself is somewhat curious, but it was written in response to a letter by 61 economists. The points raised by that letter appear to be more interesting. Given that I do not attach great potency to monetary policy, I am not particularly concerned about current arrangements. Even if the New Keynesians are misguided in their analysis of the economy, they cannot do a great deal of damage with interest rate policy.

My comments are directed at the Canadian situation, but could be applied to other some developed countries with some modifications. In particular, the European Central Bank faces quite different issues.

The Necessity for SecrecyAs a prairie populist, I am not enthusiastic about members of the Eastern establishment running a private club and making decisions behind closed doors. However, we have to remember that the Bank of Canada is a bank, and needs to operate like one.

The first area of contention is the question of lender-of-last-resort operations. As far as an outsider can tell, these have not been significant in Canada, but were a major bone of contention elsewhere. These operations have to be done in secret, and only announced after they are finished (when it is too late to do anything about it). This has to be done privately since announcing that a bank is about to fail would obviously exacerbate any run, and would magnify the size of the operation required. Very simply, how would you like it if your bank announced the details of your financial situation on the internet?

Since lender-of-last-resort operations are opaque, and opacity does not fit with current norms for government, the best course of action is regulate the banking system tightly so that such bailouts are not necessary. Canada did a better job than many other developed countries going into the Financial Crisis, but that is setting the bar very low.

The next point of contention is the interest rate setting process. One alternative to having the central bank setting the policy rate is to have the Minister of Finance do so. Since the Minister would likely rubber stamp the recommendation of the Bank of Canada most of the time, I do not see any particular advantage for politicians taking that power. The obvious risk is a situation like the Lawson Boom in the United Kingdom -- where the Chancellor allegedly held rates at too low a level to fuel a politically useful housing boom. Given that the main way in which interest rates interact with the economy is via housing in the current environment, I am not too enthusiastic about the prospects of an interest rate cycle keyed to the timing of elections.

If interest rate decisions remain with the central bank, the only plausible alternative is to open up the voting in a manner similar to that of the Monetary Policy Committee of the United Kingdom. It is clear that bringing in external voices adds to the entertainment value of central bank watching; we get to speculate about voting trends as there is more public dissension. That said, we just end up glorifying a handful of economists who are vying for public attention, and discounting the work of the rank and file researchers at the bank.

Additionally, my view is that central banks are too transparent about policy. I think we would be better served with brief statements with vague suggestions about the views on trends in economic data. Instead of engaging in lengthy textual analysis of policymakers' statements, central bank watchers would be forced to do their own forecasting and say what they think the central bank should do. In this way, central banks might actually get some useful information from the private sector, and preserve some mystique about their forecasting ability. Listening to certain Fed presidents yammering on for years about the grave threat of incipient inflation risks in the first half of the decade did not do a lot for the Fed's reputation.
The Central Bank MandateAlthough I do not think targeting 2% inflation is the most important objective of governmental policy, I do not think the central bank is in much of a position to do much of anything about any other objectives with interest rate policy. (The central bank is involved with regulatory matters, but those are largely independent of interest rate policy.)

For the purposes of this article, I am putting my "conventional economist hat" on, and arguing from what I see as the consensus economist views regarding monetary policy. It is entirely possible that the consensus is dead wrong about the effects of interest rates on the economy. However, it is up to the dissidents to prove the consensus wrong; it makes no sense to expect the central bank to set interest rates based on theories that are rejected by central bankers.

If we return to the figure at the top of this article, we see that the Bank of Canada hit its 2% inflation target. Even though I did my best to make them look bad by showing headline (all items) inflation, it stuck within the target range most of the time. If we compare those deviations to Canada's pre-1992 inflation track record (the worst of which is lopped out of the time axis), the deviations from target are laughably small.

If we ignore the textual analysis of the Bank of Canada's mandate, and statements by policymakers, I would argue that we could attach three different interpretations to the Bank of Canada's post-1992 track record. (Note that these arguments could be applied to the Federal Reserve during this period; the only difference was that the Fed had no inflation target mandate.)

  1. The only mandate for the Bank of Canada was to achieve a 2% average inflation rate.
  2. The primary objective for the Bank of Canada was a 2% average inflation rate, with a secondary objective of achieving the greatest possible real growth (or lowest unemployment rate).
  3. The primary objective was growth, with a secondary objective of keeping inflation near 2%.

Conventional economic beliefs explain why we cannot distinguish these three possibilities. The consensus argument is that interest rate policy can only nudge aggregate growth rates, and that inflation outcomes will be positively correlated with growth (assuming inflation expectations are anchored, which they were during most of this time interval).
The consensus during expansions -- which is the bulk of the time interval -- was that the economy was ready to accelerate, and that inflation risks were to the upside. (There was a brief period of pessimism after the Financial Crisis, but it still was a minority viewpoint.) Even if the economy was operating below potential, it was generally expected to be above potential by the end of the forecast horizon. Interest rate hikes were forecast as being needed to keep the economy from entering a dreaded inflationary spiral. (For evidence of those assertions about expectations, one just needs to consult government bond total returns during the post-1992 era. Either the term premium was crazily high, or investors were just plain wrong about policy rates. I view the latter position as more plausible.)
Even if the inflation target was viewed as secondary to growth, the growth was always expected to be coming. The only real disagreement would be if one believes that monetary policy should be extremely activist -- raising or lowering the policy rate extremely rapidly in order to try to speed up the economy's convergence to desired levels. (In control engineering parlance, this is referred to as "bang-bang control," and as one might guess from the label, it is frowned upon.) Such a strategy is a minority viewpoint, as it is related to the pump-priming tactics of earlier eras. Taking a more gradual approach to policy is now the consensus approach.

One could argue that everyone was wrong about interest rate policy setting. Although that is possible, it still not address the obvious problem with that criticism: inflation was still near target. Even if policymakers were wrong about the effects on interest rates on inflation, they did not miss by much.

A more targeted complaint is that the misses were of a particular type: the Bank of Canada cut off expansions too early. This has a political economy angle: wage increases at the end of the cycle are what helps restore the wage share of income. (I discussed the inflation/income share story in earlier articles.) So even though the overall inflation record was balanced, the capping of inflation had an effect on income distributions.

Although I have some sympathy for that view,  I would argue that the Canadian recessions of the post-1992 era were private sector led, not the result of policy. There was a fixed investment boom in the late 1990s (centred on technology) that ran out of steam when the tech sector imploded. A few rate cuts by the Bank of Canada would not have deflected that retrenchment. As for the 2008 recession, everyone is well aware of the deranged financial speculation that eventually blew up, taking out the real economy. The policy rate level was pretty much irrelevant in that environment. In other words, policy preferences of the Bank of Canada had little to do with the end of those expansions.

The only policy stance that is not consistent with observed behaviour would be the Bank of Canada to completely ignore inflation, and just try to set the policy rate in a fashion to maximise growth. In other words, to turn back the clock to the Old Keynesian era. The question is: what would that accomplish? If we implemented such a change now, all that would likely happen is that the housing bubble would get even bigger (and implode in an even more impressive fashion). One could debate such a change, but it would require getting the consensus to accept a very different theoretical viewpoint.

We are finally left with vague beliefs that the central bank can control inflation and simultaneously achieve other policy objectives. A typical argument is that the central bank should target financial system stability, and damp down on speculation.

It may be possible to reduce speculation via regulatory changes; I wish the regulators luck on that score. However, that has nothing to do with interest rate policy. Should policy rates be set to dampen animal spirits in the financial markets?

The problem is that central banks did make noises in that direction in the 1990s, and they ended up as laughingstocks. The entire institutional bias in the financial markets is to pump up risk asset prices. Everyone has high return targets, and the only conceivable way to get there is to jump into risk assets. The perma-bear community has been losing money for decades trying to bet against that tsunami of flows.

Furthermore, a few rate hikes would not do the job. Risk-free rates would have to be at least 5%-6% to be even a slightly attractive alternative to equities. In order for that to be consistent with the economy not collapsing into a major recession, the consensus has to be totally wrong about the economy's sensitivity to interest rates. The standard view is that if interest rates are raised by hundreds of basis points, growth and inflation would be much lower than a baseline scenario where they are unchanged. (In my view, the consensus is wrong about interest rate sensitivity, and the Bank of Canada could steer the policy rate to much higher levels with limited effects on growth and inflation -- modulo plausible worries about the housing bubble.)

In summary, it would only be worthwhile discussing changing the inflation target after the consensus changes its mind on how to model the effect of interest rates on the economy. Given that consensus has largely reverted to the economic thinking of the 1920s, I do not see that happening on any reasonable time horizon. Instead, the focus should be on using fiscal and regulatory policy to achieve objectives -- and those are the correct levers to be using.

(c) Brian Romanchuk 2018

Open Source Investigation: The War on Cash

Published by Anonymous (not verified) on Sat, 02/06/2018 - 8:00pm in

Following last nights shutdown of Visa’s payment system across large parts of Europe, we thought this would be good time to revisit the topic of money. Cold hard cash is on the way out, following a sustained global effort to undermine its usage. Is that a good thing? Does the Visa crash exemplify just how little power the consumer wields in a world of universally digital payments? James Corbett has been running his Open Source Investigation into the “War on Cash” since 2016, here we post some of the more concerning findings. Feel free to contribute BTL if there are any further developments, or get in touch with The Corbett Report directly here. The Cashless Society List ARGENTINA – Argentina’s currency crisis has been known for some time. In short, Argentinians don’t trust the peso and are willing to pay premium for any currency they perceive as “more stable,” especially US dollars which are traded on the black market as “blue dollars” at prices far exceeding the official exchange rate. That’s why Argentina has been …

Resilience: Building students to think for themselves

Published by Anonymous (not verified) on Sat, 02/06/2018 - 3:30pm in

Whenever world class education systems are highlighted, Singapore is always vaunted as a leading light internationally. Their system reliably produces students with good discipline, a ferocious work ethic and good grades. But what if these measurements have been useful but one dimensional? Especially now the world and the workplace have changed? What if the glorification of the academic individual only goes so far and actually service to your community or nation is more useful?

The post Resilience: Building students to think for themselves appeared first on Renegade Inc.

Principles Of Canadian Municipal Finance (And Why A Land Value Tax Is Inferior)

Published by Anonymous (not verified) on Sun, 20/05/2018 - 11:00pm in


Canada, Housing, tax

 Canadian Local Government Revenue As A % Of Total GovernmentThe funding of Canadian municipal governments is not normally thought of as interesting topic; even Canadian fixed income investors are not particularly excited about it. However, there are two side issues that are of general interest. The first question is: what happens to Canadian municipalities if the housing bubble pops? (As a spoiler, not very much.) The second question is the feasibility of a Land Value Tax (LVT) which is a concept that gets some people on the internet very excited. I will then outline why a LVT is inferior to the Canadian property tax system (which is not that different than the American system for that discussion).

Canadian Municipal BasicsIn interests of brevity, I will focus on how the Canadian municipal government system differs from that the United States. (Since I never saw opportunities to look at sub-sovereigns elsewhere, I will not discuss the comparison to other countries.)

The big difference for government finance between Canada and the United States is that Canadian provincial governments have much bigger economic footprints than American states. Canada has a larger welfare state, and it is largely implemented at the provincial level. Furthermore, Canadian provinces do not have balanced budget laws (which would make implementing the welfare state at the provincial level impossible). Modern Monetary Theorists would argue that the welfare should be implemented at the Federal level, but the Canadian Constitution trumps economic common sense.

When we drop to the municipal level, I believe that Canadian municipalities have less independence than is the case for American municipalities. For example, the Quebec government unilaterally decided to merge municipalities as a move towards cleaning up administration in the early 2000s. (The citizens revolted, and a number of those mergers were unwound.) I believe that most American states lack the authority to do anything similarly obnoxious.

Municipalities exist within a legal framework set by the province, and revenue raising has to be using specified means. (The British North American Act divided up the revenue pie between the Federal and Provincial levels of government.)

Details obviously vary across the country, but as in the United States, property taxes are a major source of municipal revenue. (Taxes for schools and utilities like water or garbage collection would be at this level. I think that school tax rates are linked to property tax rates, but might not be included in the property tax numbers in the chart I show below.) To distinguish a property tax from a Land Value Tax, a property tax is levied on the value of both the land, as well as the buildings on the land.

Property taxes are based on an assessed value. In my municipality, there is a periodic reassessment of property values (every few years) based on market pricing, plus you will get your assessment bumped up if you foolishly do major renovations (which I am about to do...). Since all property transactions are registered by the municipality, they have a very good idea what prices properties are transacted at. My feeling is that the assessed property values are pretty good estimates, but with a tendency to be slightly low (across the board). Having the assessed values being somewhat below the true market price is a useful way to keep the number of challenges to assessments limited. The only way the market value of your property is far below the assessed value is that you have some serious hidden defects. However, most homeowners know enough to not run to the entity that has the power to condemn properties as unfit for human habitation to argue that their assessment needs to be lowered because of mould on their  house's framework.

Since the assessment is close to where everyone feels the market price is, I'd argue that the tax is viewed as fair. (As a spoiler, this is no longer the case for a Land Value Tax.)
Less Cyclical than the United StatesCanadian municipal finance rules are straightforward. The municipality just follows the given algorithm.

  1. Determine the sum of all assessed property values in the city.
  2. Figure out how much property tax the city wants to raise.
  3. Divide (2) by (1) to get the tax rate.

The city will need to take into account property tax rates in nearby municipalities, but that is about it.
The flexibility of the tax rate means that changes in house prices alone have no effect on property tax revenue. (There are other channels, noted below.) If assessed house prices rise by 10%, they just cut the tax rate by 10%. This means that homeowners just need to look at the tax bill (and scream); the assessed property value is there for entertainment purposes only.
This means that Canadian municipalities are not going to be crushed by falling house prices by themselves (which is different than what was seen in some American municipalities). There would be some forced austerity at the local level, but it would be small potatoes. A housing development boom does help municipal finances, via new developments raising property values, as well as the Orwellian "Welcome Tax" (a tax paid when buying a house). Those positive factors would reverse, but it would not force widespread retrenchment. In a deep recession, the worry would be about the provinces, and whether they are "too big to fail."
(In any event, attempting to short Canadian municipals seems like a suicidal trade. Very few institutional investors trade the things, and so one would face extreme short squeeze risk.)Is the Property Tax a Good Tax?Before I get to the Land Value Tax, I want to first discuss the desirability of its close cousin: the property tax. My discussion here is extremely Canada-centric -- although I would argue that the situation is not that different in the United States. For other countries, there are differing institutions and political constraints. In interests of space, I am not going to discuss all issues with the tax, rather a more practical question: is it possible to greatly increase the property tax?
The first problem is constitutional, that appears applicable to both Canada and the United States. Property taxes are levied at the municipal level, and that is the wrong level of government to get a massive revenue boost. Us Keynesians who want "big government" don't refer to municipal governments -- as they do not provide much in the way of welfare state coverage. If we increase municipal governments, rich municipalities will get even more services relative to poorer ones. If your objective is to even out economic opportunities across the country, this makes the problem worse. (Another practical issue is that this would have to be implemented by municipal politicians. If you want to run as a municipal politician on a "let's raise property taxes" platform, expect to get less votes than the Marxist-Leninist candidates.)
The macroeconomic problem is that property taxes have no counter-cyclical properties. They tend to be flat across the cycle, and so they will not help counter-act recessions, nor are they particularly good for inflation control. Municipal governments are too small to apply Functional Finance principles to, but we need to worry about Functional Finance for aggregate behaviour.
Finally, the key problem is that property taxes are levied with no strong link with the capacity to pay. If you want to get theoretical about it, you are levying a tax on a stock, while incomes (and taxes) are flows. Believers in 19th century economic theory might believe that "economic rents" are constant over time, whereas casual knowledge of capital market behaviour tells us that it has to vary with time (assuming it exists..).
The basic law of taxation is that you can't get blood from a stone. No matter what your personal political animus against the stone is, it just ain't happening. Property taxes fight against that principle.Insignificance of Property Taxes In General Revenues For Big Governments Canadian Property TaxThe chart above shows percentage of "real property taxes" in total revenue for the General Government sector (which includes contributions to the Canada Pension Plan, which are indeed taxes). (As a disclaimer, this data set from Statistics Canada is new, and I am unsure about the details. It may be that some of the local government taxes are levied based on property values, and might be lumped in with property taxes.) As can be seen, it is a small number.
In order to help personalise the issue, I will discuss some back-of-the-envelope numbers for my local municipality. If you have a single earner household that has not bought an insanely large house, the property taxes would drop to about 10% of all taxes paid at an income level somewhere below $100,000. For those of you not familiar with our funny-money currency, $100,000 is a solid upper middle class salary -- more than a junior financial analyst, but probably less than what a competent plumber is making right now. (Since homeowners are often married, the ratio more generally would depend on how income is distributed.) Since all-in marginal income tax rates in the People's Republic of Quebec is around 50%, the importance of property taxes rapidly collapses as incomes rise above $100,000.
Let us imagine what happens if the property tax were doubled? For this hypothetical household, it's a 10% rise in the total tax bill. An annoyance, but survivable. (Since property taxes are not deducted at source -- and the typical Canadian household has almost no financial assets -- such a move would be psychologically painful in the short term for many. However, since many people roll their property taxes into their mortgage payment, the effect might get smoothed out.) 
However, this no longer the case for seniors. The Canadian system has dealt with the problem of senior poverty by letting them putter around in their houses. This is achieved by giving them a minimal Canada Pension Plan (Quebec Pension Plan) and Old Age Supplement (plus need-based transfers). They can survive on low pre-tax incomes since they pay little taxes (mainly the value-added tax). Raising property taxes is a direct assault on their limited fixed incomes.
In other words, raising property taxes will be a mosquito bite for the rich, and you will end up liquidating the class of senior citizens. "Why do you hate old people?" is the correct response to anyone advocating a massive increase in property taxes. Anyone with knowledge of Canadian seniors is that they are ornery, and taking them on politically is suicidal.
I lived in England, and I grasp the historical tribal class divide between land-owners and renters in European politics. From what I have observed in England, it seemed to me that this distinction was breaking down. In Canada (and the United States), that binary division does not fit the political facts on the ground.
I grabbed the following quote from the summary of this Statistics Canada study: Income from owner-occupied housing, 1969 to 2011

From 2006 to 2011, home ownership rates increased from 27% to 35% among 20- to 29-year-old households, and from 67% to 71% among households aged 70 or older.

Home ownership is not the mark of the ultra-rich; it's 71% of the senior population. Furthermore, there is no guarantee that the renters are poor; luxury apartments and old folks homes are a thing.  It may only be the well-to-do households that can afford to move out of their homes into rental dwellings once they have difficulties getting up and down the stairs. (Admittedly, a class division might be more obvious in the larger Canadian cities, but less of a factor in the smaller population centres.)
Furthermore, rural incomes tend to be lower than urban. However, land is cheap, and there are almost no building code enforcement. Anyone who has been working for most of their life should be able to afford a shack somewhere in rural Canada.
Class warriors might think that renters will be spared. It is likely that in the short term, property taxes will not be passed through into rents. However, it is only possible to squeeze landlord profit margins, but there will always be profits. There will be no rental supply forthcoming at a loss. Large increases in property taxes raise the cost of doing business for landlords, and they will be passed through to renters.
This is what happens when you impose taxes that are not linked to the capacity to pay. You have to go where the money is, and only income flows point us to that location. This is why modern welfare states are powered by income and value-added taxes.
(If one is a free marketeer that wishes to shrink government, a reliance on property taxes helps limit its size. This because you hit pain capacity constraints relatively quickly.)Land Value Taxes: SuboptimalIn addition to the modern revival of Social Credit on the internet, Land Value Tax bugs have arisen from the ashes of dead economic theories. Fans of the proposals are very happy to send you 200 page PDF's that describe its merits. (As regular readers might guess, I did not bother reading any of those 200 page PDF's. I try not to waste my readers' time, nor my time.)
If you live in a jurisdiction without a competently-run property tax system, a Land Value Tax might be a good idea. It may also be easily implemented in ridiculous postage stamp countries like Singapore, or on targeted districts like Manhattan. My comments here refer to the merits versus a property tax, and for countries like Canada that are large enough so that swinging a cat around by its tail does not involve having its nose pass through several border controls.
Taxing land alone would be a straightforward change to the property tax system: we zero out the value associated with the building on the assessment, adjust tax rates accordingly, and send out the new property tax bills. However, no municipality in Canada is crazy enough to do that. Why?
The first problem is that it would be a steeply regressive change to the distribution of tax. In urban areas, plot sizes are relatively uniform within a district, while building values are not. Taxing land alone redistributes taxes from young people living in McMansions to old people who live in bungalows. "Why do you hate old people?"
Within city cores, you will be subsidising high rises (in case any of my readers are liberals, that includes Trump Tower) at the expense of the various low rise support buildings around them. Once again, the rich get richer.
Furthermore. this exacerbates the breakdown between the taxes imposed and the capacity to pay -- which was already a problem for property taxes. Since you are now squeezing the poorer income segments even harder, you will probably have to lower the aggregate tax take.
I had interlocutors on Twitter object to this. Might not development plans change? Sure, if you have a magic want that can costlessly restribute land and buildings. Even if there eventually was a new equilibrium that was in some sense reasonable, there is no assurance that we can get here from there.
There is no guarantee that the high density utopia that Land Value Tax devotees appear to favour would appear. More dense construction practices implies a greater need for local government services. (For example, a high rise with lots of apartments raises the number of tots that show up in the local school.) If the government does not get increased revenue as a result of the development, it is financially suicidal to approve the development plans.LVT Administration IssuesThe next problem with a Land Value Tax is that it breaks the administrative process. We know exactly what people pay for properties -- but the values for land are not observed. Since mortgages are based on property value, there is a large private sector infrastructure for home valuation. This infrastructure keeps property assessments in line with the facts on the ground.
Conversely, in urban areas, land values are purely hypothetical. Almost all transactions involve properties with buildings on them. In my district, my guesstimate is that there was exactly one land deal for sure over the past decade, and possibly a couple more where the houses involved burned down.
Furthermore, as soon as such a tax was imposed. everyone with a couple of brain cells to rub together would throw sand into the land valuation process. At the extreme, every single property transaction would involve a pair of (linked) transactions, with the land given a nominal value of $1, and the building getting the rest of the value. Since mortgages are assessed on both (and lower tax values raises the credit capacity of the borrower), everyone has an incentive to structure deals this way. Since these are the only observed prices, any market-based approach to valuation would have to use them. (Even if a plot of land had no building, people would just slap a pre-fabricated shack on the property to suck up the valuation.)
An idealist might say that the government should pass a law against such abusive tactics. However, the law is what a judge says the law is. Most judges own houses. The government would have its posterior handed to it in court.
The government is stuck with assessing taxes on a purely administrative basis, removed from market pricing discipline. (This will be just as efficient as the tax on windows.) In a big country like Canada, there are three options.

  1. It is a flat tax imposed on a per-square-meter basis across the country. However, if one glances at a map, one realises either that the tax rate would be laughably small, or it would wipe out the farming industry.
  2. It is administered solely at a local level. The problem is that if the local governments control it, the local governments involved would tell the LVT backers exactly where they could put their LVT, and it would not be implemented.
  3. A central government (probably provincial in Canada, courtesy of the BNA Act) imposes guidelines based on broad categories (rural versus urban zoning, etc.)

The final option might attract some LVT fans, but it would be rejected by anyone with any knowledge of politics. The objection is straightforward. Imagine you are in the position of a Democrat living in a blue state. You should be very concerned about the possibility of handing the Republican-controlled Federal government the power to levy an arbitrary tax that can be targeted on the basis of ZIP codes. Unpopular minorities (like English-speaking Quebecers), tend to cluster geographically; giving central governments the power to target people on a geographic basis would raise civil disharmony.
In order to avoid obliterating farmers (a political group that is almost as ornery as seniors), farm taxes per square foot have to be lower than urban land taxes. This creates a massive problem on the border of almost every urban area. If you start of at the centre of a town or city and walk in selected directions, you will eventually hit a border line between a suburban and rural land. The typical case is that on one side of a road is a farm, and on the other side there are houses. Under a property tax system, those houses pay way more tax per square foot. If a LVT were assessed on the value of land, it would be the same as the farm on the other side of the road. In order to avoid obliterating farmers, the administrative rule would have to impose higher rates on the households -- which they could avoid be being zoned as farms. Since practically all suburbanites have tomatoes in their backyards, we would suddenly have pressure to have most of the country declared as rural properties. The central government would suddenly be facing off in court against most of its voters in swing ridings. Good luck with that.Concluding RemarksIf your model suggests that a Land Value Tax is more efficient than a property tax, your model is wrong.
(c) Brian Romanchuk 2018

Canadian Housing And Perpetual Motion

Published by Anonymous (not verified) on Wed, 16/05/2018 - 11:00pm in


Canada, Housing

 Canadian Dwelling Prices
Canadian policymakers have blundered into a perpetual motion machine, which is more commonly referred to as the housing market. By underwriting the credit risk of the mortgage market, the government has allowed the funding circuit to continue in an uninterrupted fashion. The lack of a crisis has frustrated economic bears, and there is no obvious catalyst for their vindication yet in sight. In addition to outlining the Canadian situation, this article discusses some of the theoretical issues, as well as the policy implications.

The figures above and below are the twin hockey stick charts. (The dwelling price chart above is a series I am not familiar with; its back history matches data that I worked with. It includes both houses and condos.) We can see that mortgage debt (as a percentage of GDP) and average home prices were relatively stable during the slow growth 1990s. The Canadian economy underperformed until the end of the decade, coinciding with an extended austerity campaign. However, starting around the year 2000, home prices and mortgage debt went on a tear.
 Canadian Mortgage Debt
The divergence between Canada and the United States (as well other markets where housing bubbles popped, like Ireland) continues to attract scattered commentary. The key difference is straightforward: the monetary circular flow (discussed in my previous article: "Housing Bubbles and their Financing" ) was not snapped in Canada, despite a temporary freeze in 2008. The more brittle financing arrangements in the United States snapped, as weaker players failed. Meanwhile, the equivalent to sub-prime mortgages in Canada are those mortgages that require mortgage insurance, and that insurance was continued to be provided by CMHC.

My previous discussion of the circular flow of money in household lending deliberately simplified the difficulties associated with credit . As noted, there is no issue with financing any increased amount of mortgage debt (which is why debt levels can easily outpace nominal GDP growth): there is no need to find savers in advance. In the case of housing, the cash outflow from the home buyer is injected into the financial system, which allows for the mortgage borrowing. (Admittedly, there would need to be a certain amount of initial liquidity to allow the transaction to proceed, but it is refreshed as the financing flows through the system.)

In a pure banking system, only banking system capital/liquidity requirements will act as brakes. However, the financing of housing has largely migrated to the non-bank financial sector, where such capital/liquidity requirements are not really a concept. (For example, it makes no sense to talk about the capital requirements of a bond or pension fund; in most cases, they have no debt, and so the entire balance sheet is "capital.")

Instead, the brake on the non-bank financial sector is that money often ends up in the hands of entities that are unable or unwilling to take credit risk. For example, foreign central banks will typically keep reserves in central government bonds. Other investors can counter-act the tendency for capital to accumulate in investment pools that do not take credit risk by allocating from government bonds to credit, but they will eventually reach a point where they can no longer sell government bonds. Once that reallocation limit is reached, the monetary loop might be broken.

The non-bank financial sector allows financing to continue by having other entities absorb credit risk, but without providing net funding. There are two main mechanisms to achieve this.

  1. Leverage. A levered fixed income investor purchases the risky debt, and finances it (typically in the repo market). The investor injects a small amount of equity, but otherwise the funding is coming from its lender.
  2. Credit guarantees. Some entity guarantees the credit, either via a formal guarantee (like the CMHC), or through the credit default swap (CDS) market.

On top of the failures of mortgage lenders, the U.S. system failed in 2008 because the major suckers institutions providing CDS protection got blown out of the insurance-writing business, and the non-guaranteed federal housing agencies were put into receivership. 
By contrast, the credit guarantees in Canada are provided by the CMHC, which is generally believed to be backed by the full faith and credit of the Canadian Federal Government. (Disclaimer: I must emphasise that I am not a securities lawyer (nor credit expert); I have no way of judging whether there are any weak links in the guarantee of CMHC.)
We can now return to the "hockey stick" charts. The trend change in the late 1990s was no accident; it was the direct result of policy changes at the CMHC. The standards for getting mortgage insurance were gradually loosened, with the trend peaking at the ability to get mortgage insurance with no down payment. Having seen the pandemonium in the United States first hand, some sanity returned to Canadian lending regulation, and standards were gradually tightened after 2008.
I have been discussing the Canadian situation since I started my blog in 2013. (I have been a perma-bear on Canadian housing since much earlier. Luckily for me, my wife bought a house before we got married.) I would point interested readers to my review of "When the Bubble Bursts" (by Hilliard MacBeth) for more background. (The book gives an excellent background from the perspective of Canadian personal finances.)

There is no reason for the Canadian housing market to implode solely because debt levels hit some magical tipping point. Unless there is some Achilles Heel to the financial system that I am unaware of, the housing bubble will be free to slowly inflate, which is what it has been doing pretty much after the roller coaster dip around 2008. The risk that hangs over Canada is some "shock" that causes widespread job losses; this would easily cause contagion in the housing market. And given the importance of the construction industry as an employer, a destabilising feedback loop would easily result. That said, since I do not see any particular trigger for such an event, so I am not forecasting such an outcome on any horizon.

I will conclude with a discussion of theory, and policy.
Theoretical ImplicationsThe behaviour of the Canadian household sector makes a mockery of the entire DSGE macro premise that we must have economic models that are based on optimising decisions of households. Instead, households are acting in a purely Pavlovian fashion: they will borrow every last cent they can get their dirty mitts on, and plow it into the housing market. To a certain extent, policymakers could attempt lead the economy by the nose by changing credit standards on mortgage insurance. (Note that policymakers in most other countries lack this ability.)

Unfortunately, they have no good way to calibrate the effects of this policy tool. If they tightened standards too much, they could trigger the long-waited (by the bears, at least) housing market crash. Cascading job losses from an imploding construction sector would trash the fundamentals of the housing market, and it is very much unclear when the rubble would stop bouncing. As a result, cautious tightening is about all they can do (and did).

However, this clouds our ability to analyse the Canadian economy from other modelling perspectives. One standard analysis track is to attempt to model the effect of interest rates (or whatever) on growth. That is, we want to stick some time series into some statistical blender, and infer coefficients on their relationship. This only works if the economy is actually being driven by those time series variables. If the driver is actually credit standards on mortgage insurance, any other relationships that might be picked up would be spurious. This then suggests that we should include the effect of mortgage insurance in our models. The difficulty is that it is unclear how we can quantify the changes in CMHC lending policy. The only obvious candidate is to use the data on mortgages (stock or flow). However this runs into the obvious problem that debt growth is mechanically linked to housing market activity (as discussed in the previous article). Debt growth and economic growth are two sides of the same coin; we know there is a direct relationship, and so looking at debt growth is not really adding new information to a growth model.

(I expect that I will return to the modelling issues raised by housing market dominance in other articles. I wanted to keep this article relatively focused on Canada.)
What Should the Canadian Government Do?(Anyone who does not want to read unpopular political opinions might as well stop reading now.)

In the absence of access to a time machine, there is not a whole lot differently the Canadian government can do now. Earlier policymakers did spectacular damage to the Canadian national interest, but they all went off through the revolving door. Right now, the only "sensible" course of action is to hope Canada will never have a recession again.

The debate Canadians should be having: why do we think high house prices are a good thing? Although there is consternation regarding inequality in some quarters, many of the proposed solutions are political fairy tales. If we look at retail inequality, the housing market is a major engine, and there is an obvious policy lever to improve the situation.

High house prices are damaging to all young Canadians who have not received massive gifts from their parents. When I lived in southern England in the early 1990s, it was clear that the key advantage for the Canadian standard of living (in most of the country) was the low cost of shelter. (Toronto and Vancouver were relatively expensive, but they were still seemed reasonable when compared to London.) The explosion in home prices since then generated wealth gains for some, at the cost of dragging down living standards for everyone else. If this were purely a market outcome, one could argue that this is just a removal of a market inefficiency. However, this was not the case -- this house price rise was almost solely the result of governmental policy decisions.

The most obvious way to improve living standards for most Canadians is to engineer a fall in the house price/wage ratio. Rapid wage growth is not compatible with the inflation target. This leaves us with a controlled implosion of house prices as a policy objective.

Admittedly, the housing market might do this for us (as pointed out by the bears). Alternatively, the CMHC maximum loan size will need to be slowly reduced from its stratospheric $1 million level. Yes, that means that we are throwing Vancouver (and possibly Toronto) real estate under the bus. However, locking the Canadian economy into a permanent zombie state so that real estate lottery winners in Vancouver can hold onto their winnings is hardly in the national interest.

(c) Brian Romanchuk 2018