STIMULUS: AN ECONOMIC IMPERATIVE

Both Americans and Canadians have been spending too much and saving too little. Consumption has become the economic & social imperative, as witnessed after September 11th, when the New York City’s mayor encouraged people to “go shopping”.

The example of mortgage deductibility and its inducement to take on debt is valid, and here Canada has a better tax policy. Even so, before we get too busy patting our own backs, we should remember that we had our own real estate assets-price inflation mess in the late eighties, and it came crashing down in the early nineties, bottoming out at about a forty percent decline. It took well-night ten years before house prices recovered to the eighties price levels. A major reason for this hyper-activity was the $ 500,000.00 capital gains deductibility (later reduced to $ 100,000.00 by the Liberal government; eventually cancelled all together) introduced by the then Conservative government. Many individuals became house-speculators and real estate “investors”. One fellow I knew, an ordinary hourly worker, had seven homes that he rented out. Some real estate agents did little else but buy and sell homes on their own behalf, and ordinary people bought homes and “flipped” them after a suitable capital gain. Many speculated in this way with their own homes, buying a new house with a long closing date, and then selling their own house after it had gained suitably in value. Builders were behind; there was a shortage of skilled workers, and six months or more was normal for a closing date. Buying first and selling your own home became the norm, and house buyers could pocket a substantial tax-free capital gain in between transactions. I knew of people doing so more than once a year –the family living like gypsies with the objective of eventually become mortgage free or living in a palatial home.

However, the chickens came home to roost and the bees returned to the hives in early nineteen-nineties, and many people got severely stung. I recall one older couple who had bought a smaller home in which to retire and were planning to pay off their mortgage. The builder gave them a six month completion date, and they held on to their old, large home waiting for it to appreciate. Well, the housing market collapsed in 1990-91, and they eventually had to sell their old home at a much lower price. The wife told me, with some irony, that they now had a smaller house with a larger mortgage! The difference in the US situation now, is that, in addition tax deductibility, the homebuyers were encouraged to buy more than they could afford, with little or no equity, and an artificially low mortgage payment for the first few years. This was initially a well meaning policy initiated by the Clinton administration, but it got out of hand with the laissez- faire regulations policy of the Bush administration, and there you are.

The old saying “buyer beware” is still valid –the government cannot protect everyone from their own greed and stupidity. A re-alignment between want and need is in order, and one would hope that one result of this economic mess is that people will come to their senses and realize that shopping and getting is not all this life is about.

Unfortunately, monetary policy is not a “sufficient remedy”, when there is huge demand destruction like we now are experiencing. Printing money is like pushing up a rope, and will only lead to massive inflation at a later stage. Lower interest rates are also useless when they are all ready close to zero; lenders won’t lend and potential buyers have no business growth and very little equity. Liquefy the banks, and lean on them to lend is, unfortunately, a necessity, though lending to unqualified buyers is what got them into trouble in the first place. It’s a veritable Hobson’s choice, and the banks are caught between a rock and a hard place. Ultimately, more stringent regulations and overview, especially of derivatives and other fancy investment vehicles to be dreamt up in the future, is a minimum. Meanwhile, fiscal actions such as infrastructure repairs and transportation development is the best options, and offers the most “bang for the buck”, since the working people will benefit from the wages earned on such projects, and spend most on it Such expenditures on capital projects will, hopefully, last longer than the deficit incurred by such activity. The much studied Windsor-Quebec corridor high-speed train service is one that comes readily to mind. It would kill two birds with one stone: economic stimulant and pollution retardant.