How Much Government Do We Need?

The Real Estate Espresso Podcast

How Much Government Do We Need?

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How Much Government Do We Need?

Welcome to the Real Estate Espresso podcast, your morning shot of what’s new in the world of real estate investing. I’m your host, Victor Menasce. On today’s show, we’re talking about government involvement in the economy. Countries vary widely in terms of the extent to which government plays a role in the total economy. At the extreme end of the spectrum, there are the purely authoritarian states based on communism, places like Cuba and the Old Soviet Union, where government literally was the economy.

We saw a massive spike in government spending, both in absolute dollars and as a percentage of GDP during the pandemic. But if we go back to the good old days in the late 1990s, there was the dot com exuberance, government involvement in the economy was at 33%. In the early 1960s, government spending made up 25% of the total economy. Now, when we say government spending, we’re talking about all levels of government, federal, state, and local. The number tends to fluctuate based on the economic health of a country. In times of economic recession, public sector output falls, but government tends to remain fairly stable, and in some cases it even increases to try and stimulate the economy. So in those circumstances, government spending as a percentage of GDP will actually go up during an economic recession.

Canada has a much higher percentage of government spending at 42.5%. That’s partly a result of political differences between Canada and the US, but it’s also a reflection of the much lower population density in Canada. The infrastructure costs of road and transportation are much higher considering that Canada is physically larger than the US, but yet has one ninth of the population.

We see countries whose economies are truly broken, like France. Their economy is at 57% government spending. Germany, which is the Economic Engine of Europe, has government spending of 48% of GDP. Italy is at 53%. I can tell you all about operating a business in France and how difficult that can be. I held an executive role in a company with operations in France. Those folks reported directly to me for several years from the period of 2004 to 2007. In France, the government is so involved in seemingly every aspect of daily life, there’s very little incentive for people to compete in the way we’re accustomed to seeing here in North America.

The UK has government spending at 44% of GDP. The UK is a strange economy, with in fact, two economies, there’s London and then there’s the rest of the country. Most of the wealth is concentrated in London. And since Brexit, investment in the UK has stalled considerably.

Now on today’s show, we’re taking a look at whether government interference in a business or in real estate undermines free market capitalism. The latest headline is that the US government might take an ownership stake in Intel. That’s no different, I suppose, than the Chinese government having an ownership stake of China’s largest chip manufacturer, SMIC. There’s a massive war of words happening in New York City, where Mayoral Candidate, Mondani is campaigning on the promise of opening government owned grocery stores that would sell groceries at lower prices than privately-owned stores.

See, the fact is, there’s very few examples of government doing things more efficiently than private enterprise ever. And that’s because government led initiatives don’t have efficiency which comes as part of the profit motive as the underlying driver for being in business. In fact, businesses that become overly reliant on government handouts are rarely competitive businesses. They don’t have to be. Memories are short about how disastrous the community owned housing projects were in New York City. Today, public housing still makes up a significant portion of the total housing stock in New York City. It houses nearly half a million people in 24 hundred buildings across city towers.

In the last couple of months, the state of Washington just implemented their own rent stabilization laws, which went into effect on May 7. That law puts a cap on rent increases. For most residential tenancies, the annual increase is capped at 7 percent plus the consumer price index or ten percent, which ever is less. For manufactured and mobile homes the cap is at five percent. In the first year of the tenancy, landlords are prohibited from increasing the rent during the first twelve months of tenancy. Then if they are going to increase, the notice period has been increased from 60 to 90 days. There is something called rental parity. Landlords cannot charge a rent that is more than 5 percent different from month-to-month lease verses a long-term fixed lease. The law includes some exemptions for certain properties, such as new construction for the first twelve years after a certificate of occupancy is issued. The State Attorney General’s office has the authority to enforce the law, and they have already started enforcement action against some landlords in the state.

As rent control laws go, this one is not the most onerous I’ve seen. I’ve frankly seen worse. It’s one thing for the state to own a business outright, but in many cases, when government exercises excessive control without ownership it’s almost worse than communism. It creates a situation where the business owner’s liability is greater than their upside. And when that happens, the short term impact is—well, the government gets its way. Business owners, though, they will comply in the short term when the new rules and politicians get the credit for fixing the problem of excessive capitalist greed. The problem is in the medium term and the long term. Nobody’s going to invest in a money-losing proposition. They don’t have to. They’re not compelled to. Governments are left wondering why the market has lost its competitive edge, and they rarely connect the dots to realize it was in fact their own doing.

As you think about that. Have an awesome rest of your day. Go make some great things happen, and we’ll talk to you again tomorrow.

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