The iconoclastic liberal economist Dean Baker is famous for discovering the housing bubble years before better-known economists did so. Baker is the co-director of the Center for Economic and Policy Research in Washington. He visited Rhode Island on Thursday to speak at the Economic Progress Institute’s annual budget conference.
Baker sat down with WPRI.com after the event for a wide-ranging interview about the economic issues facing Rhode Island. The Q&A will run on Nesi’s Notes in multiple posts. In this section, Baker offers his take on Providence’s vacant “Superman” building and how to deal with properties like it.
The transcript has been lightly edited for length and clarity.
One of the proposals you presented today was for the creation of a “vacant property tax.” Empty properties are a big problem here, particularly in Providence – what’s the idea with that?
The idea is that to get properties occupied, we want to bring prices down. You have all these people running around and talking like high home prices are a virtue – no, that doesn’t make any sense. I like to joke about the “unaffordable housing policy.” I understand it: I’m a homeowner, I want my house to be worth $1 million.
But I’m not, so I don’t.
That’s exactly right – for young people who aren’t homeowners, they do not have an interest in high property prices. And the reality is for most of us, as homeowners, when I’m living there it doesn’t matter to me – I’m actually going to pay somewhat higher taxes the more my home is worth, so it’s not like it does anything for me.
So the idea is to get property values down, get them in balance, get people using the property. And if you have low-cost property, that’s an incentive to business. We were talking a moment ago about taxes – well, businesses look at property prices, too, so if you knock down property prices, you make it that much more attractive for businesses to come here. They know they can move to Providence and get really cheap rent for their startup; that’s a great thing.
And then the other point I was making is that, from the standpoint of workers, we want everyone to have higher wages. Well we can’t do that – but if we reduce the rent that they pay by 10% – again, I’m pulling that out of the air, but let’s just assume that’s a doable thing – well, rent’s 40% of most people’s spending roughly, so that’s the same as a 4% increase in their wages. It would be great if we could give people a 4% increase in their wages.
There’s no point in having a wasted resource. I say the same with labor; we don’t want people to be unemployed – that’s more of a crisis, but there’s a simple economic argument – if people want to work, we should be able to use their labor. But it’s the same sort of thing with property. We have property that could be used, but it’s not being used – let’s give people more incentive, let them see, “Hey, you should be renting this out.”
Why don’t people see that? Well, people get irrational – that’s why we had the housing bubble.
I had a personal experience as the co-director of my institute. We were moving about a decade ago, and we needed a bigger place. There was a place down the street, and the guy was asking for rent that was clearly out of line with the market because we’d looked in other places. We made him an offer that was about 20% below what he was asking and we figured he’d respond. No response. OK, well, that’s weird.
Well, we were looking way in advance and as the end of the lease was getting closer we’d found a place we were happy with, but we figured, well, his place still has a sign up. So we went there and we made an offer in the middle and said, OK, he’s got to respond to this. And he did. He responded. Then we’re waiting for the lease, and he’s delaying. Finally we get the lease, and he’s thrown all these things in there – he wants us to pay his property tax – things you would negotiate, you don’t just throw in. So we said, this guy is nuts.
Anyhow, he ended up having the place vacant for over a year. Now if he’s at all rational he would have made the deal with us, because even if we’d have given him the 3% less than the rent he wanted he’d still have come out way ahead.
Because instead there was nothing.
Right. He was getting zero.
So if you could prod these people – I mean if he still wants it vacant, fine, but at least he’s going to pay a penalty for it and give some money to the government.
This is very timely, because Providence’s tallest building is just becoming vacant and there’s a big debate over whether the state should give the developer a bunch of tax credits to help pay to get somebody in there. Your point is, actually, we should sort of force a market-clearing price – we should add to the cost of that, not make it less expensive for people to keep it vacant until they get the rent they decided they want.
Yes, exactly. That’s the last thing on earth you want to do. Get people in there. And you’ll get businesses that way. It’s absolutely crazy that the city is thinking of paying money – using taxpayers’ dollars – to keep rents high.
We’ve heard they’re thinking about giving $40 million or maybe much more to the developer of the building so they can convert it into apartments.
No. No. No. Let them sell it!
But when you say that people respond, “What if they can’t sell? What if it’s” -
So what if they can’t? Then fine, then it’ll go into bankruptcy and whoever the creditors are are going to sell it. These people want it occupied. It doesn’t make any money sitting vacant. Everyone knows that.
The developer doesn’t like that idea, though.
(Laughs) No, he doesn’t. No, he doesn’t. Don’t these guys believe in the market? The developer made a mistake.
People say your line of thinking is crazy because the Superman building could sit empty.
This is why I wrote the book “The End of Loser Liberalism: Making Markets Progressive.”
As I understand it, the book argues that just promoting policies to help poorer people who are in trouble misses a whole broader range of policies that liberals should be looking at. What’s your argument?
Tax-and-transfer is kind of the Band-Aid. That’s really the last place we want to address the problem.
The point is that people didn’t just end up really rich. And this is my joke about loser liberalism – it’s not just that some people end up very rich because they worked hard or they’re smart – that may well be true, on average they may be smart and hard-working; I’m sure that’s true for at least many of them – and the people who end up poor, it isn’t just that they’re stupid and that they didn’t work hard; it’s that things were rigged.
You have market structures that make it possible for some people to do very, very well, and market structures that make it very, very difficult for others to get a decent standard of living. What I want my focus to be is on those market structures. We should have market structures that are designed to have broadly shared prosperity, and if some people get rich that’s fine – the point is that most people are seeing the benefits of growth.
That’s what the book’s talking about: here’s how you shape the markets. You make sure you have a strong labor market so people can get jobs and that they’re in a position to demand higher wages, so when there’s productive growth they get their share of it. Where you have clear cases where there are market imperfections, let people make out like bandits – Too Big to Fail banks, these are banks operating in essence on a government subsidy and many people are getting very, very rich by that – you get rid of those. You let the market act. Rents from doctors, who are able to prevent competition both abroad and domestically – they limit the number of slots in med schools.
There’s all sorts of things you could point to that let some people get very rich and make it very difficult for others just to earn a decent living. So I focus on the market structures. In that sense I’m 100% with the conservatives – the last thing on earth I want to see is a lot of people who need food stamps. People who need food stamps, I want [those people] to get them – but I don’t want a society where a lot of people need food stamps. We should have it so that people are working at jobs that pay them enough wages, and it’s not an issue that they can afford food.
Check back for more from the Nesi’s Notes interview with Dean Baker. •