Saving the US Economy - the Canadian Way

[Admiral Yi]

The dollar has been getting its ass kicked recently anyway.

Frum must have some serious pull.

[crazy canuck]

I wonder what Frum means when he says Canada "allowed" the currency to depreciate. 

Through the 80s Canada had a pretty aggressive policy of keeping interests high to make the currency more attractive.  It was a very contraversial policy as many argued keeping interest rates artificially high to protect the currency did more harm then good.  The shift away from that policy is what Frum is talking about.

I have no idea what he is going on about in the rest of the article.  Canada has many of the same mortgage features he is complaining about.   The only ones that stand out as being different are that in the US mortgages are tax deductable (which does tend to encourage people to take on more debt) and the other is his description of US non recourse loans although from previous discussions I seem to recall rules vary among States on that.

I am also proud to say that I have brought up the average square footage of Canadian dwellings.

[Admiral Yi]

Through the 80s Canada had a pretty aggressive policy of keeping interests high to make the currency more attractive.

OK, that makes sense.  Thanks.  Though obviously not an option for the US right now.

[crazy canuck]

OK, that makes sense.  Thanks.  Though obviously not an option for the US right now.

No, I agree.  In fact I have no idea why he thinks that anything Canada does appropriate in the US.  Your economy and currency are completely different.

I used to think Frum had some interesting things to say.  This piece is just silly.

[alfred russel]

There are reasons that mortgage interest should be deductible.

Everyone has to live in a home: either as a renter or a homeowner. If you are a renter, the owner can deduct the interest as a business expense--just like any other business related interest. If a homebuyer can't deduct the interest, the financing costs are going to be greater on an after tax basis, everything else being equal. In effect there is an incentive for people to rent homes versus purchase them.

[crazy canuck]

There are reasons that mortgage interest should be deductible.

Everyone has to live in a home: either as a renter or a homeowner. If you are a renter, the owner can deduct the interest as a business expense--just like any other business related interest. If a homebuyer can't deduct the interest, the financing costs are going to be greater on an after tax basis, everything else being equal. In effect there is an incentive for people to rent homes versus purchase them.

Fine.  That policy reflects the social policy emphasis in the US to encourage everyone to own their home.  We are more conservative in that we prefer not to encourage debt as a general rule.  Generally speaking you are a nation of risk taker while we are a nation of curlers.

[alfred russel]

There are reasons that mortgage interest should be deductible.

Everyone has to live in a home: either as a renter or a homeowner. If you are a renter, the owner can deduct the interest as a business expense--just like any other business related interest. If a homebuyer can't deduct the interest, the financing costs are going to be greater on an after tax basis, everything else being equal. In effect there is an incentive for people to rent homes versus purchase them.

Fine.  That policy reflects the social policy emphasis in the US to encourage everyone to own their home.  We are more conservative in that we prefer not to encourage debt as a general rule.  Generally speaking you are a nation of risk taker while we are a nation of curlers.

I'm not a huge proponent of the deductibility of mortgage interest--there are arguments for and against. But what I posted previously doesn't reflect a rationale of encouraging home ownership in the US, it reflects that Canada is actually discouraging it through its tax policy while the US is seeking to stay neutral.

[crazy canuck]

This is the first time I have heard someone claim mortgage deductability was not a policy to encourage home ownership.

[alfred russel]

This is the first time I have heard someone claim mortgage deductability was not a policy to encourage home ownership.

It is. But at the same time ordinary tax law discourages home ownership.

[Admiral Yi]

Fredo, I thought your point was going to be that either the rental property developer or the homeowner is going to be doing the borrowing, so from a total national indebtedness POV it doesn't make a differerence.

[Sheilbh]

The dollar has been getting its ass kicked recently anyway.

Only as much as was the norm prior to the recession.  In terms of dollar strength a collapsing global economy really seemed to help

[grumbler]

Fine.  That policy reflects the social policy emphasis in the US to encourage everyone to own their home.  We are more conservative in that we prefer not to encourage debt as a general rule.  Generally speaking you are a nation of risk taker while we are a nation of curlers.

The point Alfred (and Yi) are making is an interesting one, actually.  Canadian policy on the face of it seems less to discourage owning homes, as it is to discourage anyone to own homes except as a business of owning homes.  Business interest is an expense and so deductible, no?

I am not saying that this is how it works in practice, mind; I don't know that.  I am just pointing out an interesting consequence of their argument taken by itself.

[alfred russel]

Fredo, I thought your point was going to be that either the rental property developer or the homeowner is going to be doing the borrowing, so from a total national indebtedness POV it doesn't make a differerence.

I really just wanted to make a point regarding home mortgage interest deductibility.

[crazy canuck]

The point Alfred (and Yi) are making is an interesting one, actually.  Canadian policy on the face of it seems less to discourage owning homes, as it is to discourage anyone to own homes except as a business of owning homes.  Business interest is an expense and so deductible, no?

I am not saying that this is how it works in practice, mind; I don't know that.  I am just pointing out an interesting consequence of their argument taken by itself.

Its not an either or situation as Yi suggests.  Mortgage deductability encourages people to take larger loans and then encourages people to not pay off those debts.

Both those things have impacts on the economy.  Encouraging people to take larger loans then they otherwise would also encourages home builders to build more expensive homes then they might otherwise build.  I think this is the point Frum was trying to make when he was comparing average square footage of households in the US and Canada - although admittedly the fact that your society is on average more wealthy then ours is more of a cause of that difference then this tax policy.

If American consumers have more exposure to home debt and they keep that debt then if things go bad (incomes drop or interest rates rise) then banks start to fail and consumer spending goes down.  One thing I do think the Americans can learn from us is how we regulate our banking system in relation to residential mortgages.  No Canadian banks failed and in fact turned in large profits while American banks were being fed billions by the US government.

If there was not mortgage deductability then home builders would build smaller less expensive homes, on average because the average consumer could afford less and would want to pay off that debt sooner. 

[Malthus]

The point Alfred (and Yi) are making is an interesting one, actually.  Canadian policy on the face of it seems less to discourage owning homes, as it is to discourage anyone to own homes except as a business of owning homes.  Business interest is an expense and so deductible, no?

I am not saying that this is how it works in practice, mind; I don't know that.  I am just pointing out an interesting consequence of their argument taken by itself.

Its not an either or situation as Yi suggests.  Mortgage deductability encourages people to take larger loans and then encourages people to not pay off those debts.

Both those things have impacts on the economy.  Encouraging people to take larger loans then they otherwise would also encourages home builders to build more expensive homes then they might otherwise build.  I think this is the point Frum was trying to make when he was comparing average square footage of households in the US and Canada - although admittedly the fact that your society is on average more wealthy then ours is more of a cause of that difference then this tax policy.

If American consumers have more exposure to home debt and they keep that debt then if things go bad (incomes drop or interest rates rise) then banks start to fail and consumer spending goes down.  One thing I do think the Americans can learn from us is how we regulate our banking system in relation to residential mortgages.  No Canadian banks failed and in fact turned in large profits while American banks were being fed billions by the US government.

If there was not mortgage deductability then home builders would build smaller less expensive homes, on average because the average consumer could afford less and would want to pay off that debt sooner.

That's mostly my read of it as well.

Having mortgage interest as deductable means that it makes sense to - get a bigger mortgage and/or not pay it off as quickly. It also changes the dynamic of choice between owning & renting, if money paid in rent is not deductable.