23 March 2018

How Real Estate Has Made Trump's Economic Policies so Dangerous

Probably the most insidious way that real estate has shaped 
Trump's mind is that it has given him a zero-sum worldview.

An acre next to the Empire State Building would have cost $90 million in 2006, 30,000X what an acre in Kansas costs. New York's real estate market is dominated by corporations and family wealth and if your grandfather didn't have the bravado or wisdom to buy an acre of Manhattan, you probably don't own one now. Jared Kushner and Donald Trump didn't move from Kansas as young men and buy acreage; they come from real estate families.

Trump Tower Chicago, photo from Ron Davison
Real estate is a weird industry and it colors Trump's worldview in a variety of ways. It makes him better understand family dynasties and prefer the certainty of dictators to democracies, think of wealth as something just created "out there," and - worst of all - gives him a zero-sum worldview.

Dynasties and Development

If Angela Merkel loved Trump, it wouldn't noticeably change his odds of getting a Trump Tower Berlin. If Vladimir Putin loved Trump, it enormously changes his odds of a Trump Tower Moscow.

Real estate developers need permits and dictators are better able to provide those than democracies, and this is one of the simple, often overlooked reasons why Trump pays a disproportionate amount of attention to dictators rather than presidents.

Real estate also needs financing.

In 2007, just before the mortgage crisis bust, the Kushner family paid roughly $2 billion for 666 5th Avenue. It has caused them trouble ever since. Mueller is investigating Kushner family finances. (Jared's dad has already served time in prison.) For instance, the Kushner family met with Qatar for financing for their 666 property and later, after Qatar said no, Kushner worked with the Saudi's on a blockade of Qatar. Financing is key to success in real estate and Trump and Kushner have trouble getting loans from American banks, which also explains their fondness for dictators. (For more on these stories and Jared Kushner, listen to Robert Wright's interview with Elizabeth Spiers.)

This entanglement with foreign powers - from Russia to Saudi Arabia - is key to understanding how Trump and Kushner see politics. They aren't going to offend the entities who may be a source of loans or approvals for big developments. Presidents of a democracy cannot make you rich; dictators can.

The Magical Origins of Wealth

Homes in Detroit cost $44,600 and $1.3 million in San Francisco.  For the same price, you could buy one home in San Francisco or 29 in Detroit, where you could sleep in a different home every day of the month.

People who bought an apartment building or couple of rental homes in San Francisco 30 years ago have "done well" in spite of the fact that what they actually did is no different from what people who bought real estate in Detroit did. Real estate is derivative; if it is located in a community that knows how to create jobs and wealth, its price goes up.

William J. Bernstein claims that the simplest predictor of home prices is the mortgage payments folks can afford. What someone buying or selling real estate does isn't the determinant of whether it sells for $50k or $500k; that price is determined by what the local community is doing to either create jobs that pay $15,000 a year or $150,000.

Had the Trump and Kushner families settled in Detroit and owned real estate there, they'd either be small time or even bankrupt as a result of borrowing heavily to buy property that dropped - rather than soared - in price. Given they had the good sense to be born into New York real estate families, they are rich. Or at least have really big mortgages.

If you own or develop real estate in a prosperous area, it's easy to think of wealth as something that just magically happens. Trump never mentions economic development plans that involve investment in R&D or education. In his mind, it is enough to simply deregulate and let economic development happen.


Probably the worst way that real estate has shaped Trump's worldview, though, is this: real estate is probably the most zero-sum industry in the US and success in it can easily drive a win-lose or at best win attitude.

The first economy, an agricultural economy from about 1300 to 1700, was land based and the easiest thing to see about an acre or oil well is that if you get it I won't. One of us wins and another loses. War and the emergence of standing armies, guns, cannons, and artillery defined a great deal of this time and the conquest of land was key to prosperity.

You were likely born in the third economy, an information economy from about 1900 to 2000. If I give you an acre and you give me an acre - assuming they are comparable acres - neither of us comes out ahead. By contrast, if I give you an idea and you give me an idea - assuming they are comparable ideas - we both come out ahead.

In this fourth economy, an entrepreneurial economy from about 2000 to 2050, collaboration is even more important. 20 years ago, a typical product development team I worked with would sub out about 10% of its work to an outside company; now it is more likely to be a third. Specialization and the drive for the best collaborators has made teams even more reliant on outside companies, and folks working on teams who have either moved from another country or now work in another country. Customers will only buy a world-class product, whether that means incredibly cheap or incredibly good or both. To get a world-class product you need to collaborate with team members from all over the world and everyone in the process needs to benefit.

If the third economy was win-win, the fourth economy is win-win-win-win-win; investors, employees, partners, customers, and entrepreneurs all have to win for an enterprise to work. If even one of those groups thinks they'll lose, they can scuttle the whole enterprise.

Trump's zero-sum sensibilities are at odds with modern economic realities. Acreage is zero-sum. If you get that building at 666 5th Avenue, I don't. Deal-making is critical to success and Trump's deals are win-lose. The thought that Canada, Mexico AND the US could all be winning from NAFTA is laughable to Trump; in his mind, someone is either winning or losing in trade relationships. (And apparently his measure of who is winning or losing is the trade deficit, an odd scorecard that distorts so much.)

The real estate industry has to be one of the most zero-sum industries in the US. The fact that this is the industry Trump rose out of makes him far more likely to take a win-lose approach with other nations, whether in trade wars or real ones.

In his book Sapiens, Yuval Noah Harari makes an interesting point about California. If a foreign power conquered it in 1850, during California's gold rush, they would get most of the wealth. If a foreign power conquered California today, it would chase away all the wealth that now is in the form of people and their ideas, networks, companies and industries rather than in the form of gold nuggets that could be seized along with the land. Once upon a time conquest captured wealth; now it destroys it.

In this willingness to go to war to "win," Trump shows a lack of understanding of how modern economies work, a failure to understand that it is networks of trade and idea exchange that spill across borders that need to be protected and not land that neatly fits within borders. Taking a win-lose approach to fourth economy realities threatens the wealth and jobs that make a community prosperous.

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