Give me some leverage and a place to stand...

[mangosteen]

Meta: I haven't posted here in ~2 years, and there are reasons for that, mostly due to using an actual paper journal, and staying away from Facebook because It's Bad For Me(tm). However, there's a gap called "sharing long-form ideas with friends, and actually getting meaningful feedback/discussion."

Context: I'd like to pressure-test an idea. I'm sure that most of you could rattle off ten valid viewpoints on homeownership and the economics thereof... including a values/morals argument on whether a home should be an investment. I'm of many minds on it, although I start from "well, it is right now, at least in the densely-populated parts of the US". So...

Assertion: Purchasing real estate is the only leveraged investment generally available to the middle class in the US.* I mean that both in terms of "opportunity to acquire" and "conceptually comprehensible". I can't think of another type of widely-available investment that allows you 4:1 leverage on your money to buy a class of physical asset that has a history of capital appreciation, and then keep the capital gains for yourself.

I believe that to be true. Sure, the ROI is usually less than investing in (say) an index fund, and yet we're back to leverage. The hardest part of accumulating capital is accumulating enough to have any appreciable return. "The first million is the toughest" is more flip than I'd like, but it's true.

What I'm I getting at? Great question, and I'm glad you asked!

Buying a home is a not-great investment for most people... and thinking of homes as investments leads to a bunch of perverse incentives including NIMBYism and fights over zoning that boil down to "don't touch my property values... this is all I have." Even places where racial discrimination is actually at the root of it, I suspect you'll often find "this is my life savings, and I'm scared" sitting down next to it with a cup of tea.

So... how do we fix that? What does it look like? How do we get there? I don't know, but "making a physical, immobile, illiquid asset be one of the most attractive and legible investment vehicles for the middle class" seems like an aspect of the problem that doesn't get talked about all that much.

---

* Yes, one can do highly-leveraged investments in the stock market, but the amount of individuals who can do that with any reasonable rate of return is negligible, so I'm putting that to the side for now.

Comments

[wotw]

Suppose you owe $1 in taxes today. Consider two scenarios:

1) The govt decides to cut your taxes by $1 and borrow $1 instead, planning to tax you in the future to pay back that $1 with interest.

2) The govt collects your $1 in taxes, then lends you back that $1, planning to demand repayment in the future with interest.

These two scenarios affect you in exactly the same way. They both put $1 in your pocket today and require you to pay (say) $1.50 in the future.

So running a deficit is exactly the same thing as making low-interest loans to **individual** taxpayers.

[sethg]

If the government borrows $1, and the effect of that borrowing is to reduce my tax burden, the $1-plus-interest will not necessarily be repaid by me. I might not even be alive by the time it’s paid off!

This is a knife that cuts both ways, of course: when some of the money I pay in taxes goes to paying interest on the national debt, that includes interest on debt incurred before I was a taxpayer, or even before I was born. (The US government hasn’t been completely debt-free since 1835.)

And when the government borrows money instead of raising my taxes, it is not necessarily doing so because I asked it to, or even because the programs it is borrowing for are things I want it to spend money on. In this respect, it is no different than a corporation that issues bonds to pay for some expense, instead of raising prices to customers or cutting expenses elsewhere.

[wotw]

Your first point is well taken: The person who gets the immediate tax cut is not always the person who bears the future tax burden. On the other hand, this point might not be too important as long as people view a dollar for their kids as equivalent (at the margin) to a dollar for themselves. The fact that people contrive to leave positive inheritances is some evidence for this view.

Your second point seems to me to be entirely off the mark, because the right exercise is to compare government spending financed by taxes to exactly the same spending financed by deficits. Whether you love or hate the spending doesn't matter because we're not debating how much the government should spend or what they should spend it on --- we're only debating the financing. So taking it as given that the govt is going to spend $100 of your money on project X, the only relevant effect of deficit spending is that, instead of taking that $100 from you today, it puts that $100 back in your pocket, with an implied obligation that you'll have to pay back (say) $150 some years from now. That is a loan to you. The deficit is not "to pay for some expense" because the expense was going to happen anyway.

The difference between the corporation and the govt is that if the corporation does not borrow, it might not be able to spend --- because corporations cannot tax their shareholders. But your govt can tax you, so its spending does not depend on borrowing. The decision to borrow is not a decision to spend more; it is a decision to defer your taxes. In other words, it is a loan to you.

[sethg]

You have fallen prey to the “ecological fallacy”—the assumption that some property of a group (in this case, US taxpayers as a whole) must also be true of each individual within the group.

If I, personally, saved $100 in taxes because of deficit spending, then who, personally, pays that $100 back with interest? I might not have children. They might be in a different tax bracket, such that their putative repayment is not proportional to my putative borrowing. The country might let in lots of immigrants, thereby reducing my children’s share of the tax burden. The country could in the future derive less federal tax revenue from personal income tax and more from other sources (corporate tax, import duties, lease of mining/drilling rights, carbon fees), muddying the waters further.

It is true that the $100 needs to be paid back somehow, from somewhere within the vast body of the US tax base—as Milton Friedman said, “to spend is to tax.” But that is very different from a debt in which I, as an individual, undertake to spend more now in exchange for spending less later.