Wealthy Expats in Mexico City are the Functional Equivalent of a Progressive Tax
Crude materialism has explanatory power, sometimes
Some Mexico City locals like to complain about the flood of expats the city has seen in recent years, blaming it for rising prices, especially for housing (i.e. rent). The mechanism is fairly simple: a large increase in the number of human beings demanding a room to sleep in, which isn’t accompanied by a large increase in the housing supply, pushes rent up. Since the newcomers have much higher purchasing power than the locals,1 they are able to outbid them.
The funny thing about this issue is that the people whining tend to be well-educated, relatively high-earning urbanites in the trendiest neighborhoods of the country, in other words, elites. This is natural, since the largest rent increases have materialized in the nice, “bohemian” neighborhoods of northwestern Mexico City, where these types unavoidably congregate. The upshot is that the “conversation” is heavily loaded with academic jargon, much of it copied from American left-wing activists, because that’s the way the local brahmins opine on things. Thus, the hysterical poster shown above is not a consequence of plain bien-pensant anti-Americanism, but a manifestation of pure class interest. Much ado is made about colonialism,2 racism, imperialism, and a host of other -isms, but the fact that this is an inter-elite (the local elite vs. the global one) fight belies any depiction of it as a struggle between oppressed and oppressors. Forget Fanon: what matters most is the housing and restaurant prices that the once-comfortable yuppies now face.
The Discreet Charm of the (International) Bourgeoise
A large number of people commute from the east of Mexico City to its west. Put briefly, western Mexico City is richer and more dynamic than its eastern counterpart. Here’s one way of visualizing this fact:
This map shows the municipal results of the 2021 mayoral election, where red represents the left-wing coalition and blue represents the center-right one. While having a low income has become dissociated with leftist electoral preferences in most (all?) First world democracies, the link between low earnings and voting for the left remains quite strong in Mexico. The map, therefore, suggests stark economic segregation. Here’s a straightforward map of trimestral incomes:
Wages are higher and jobs more plentiful in the west, but living in the area is expensive and has been for a while, so much of the low-skill labour in the fashionable neighborhoods is done by people commuting long hours. The costs of a large influx of people into the trendy part of town are borne by the people who can afford to live there in the first place, not by those who simply work in the area; since local college graduates and digital nomads share housing preferences, prices increase precisely in those neighborhoods enjoyed by the local upper class.
On the other hand, because the wage level at an establishment ultimately depends on the amount of money it earns selling its products, replacing locals with richer foreigners represents a net gain for the workers3 of businesses (and the businesses themselves) in the trendy zones. Thus, workers commuting east to west see a net welfare gain, because their wages increase while the prices they face, in their neighborhoods, remain unchanged4. Needless to say, low-skilled workers from the east are quite a bit poorer than the local yuppies, so the final result is the impoverishment of relatively rich locals and the enrichment of a poorer stratum. In other words, wealthy expats in Mexico City are the functional equivalent of a progressive tax. The net effect is necessarily progressive because any worker that can’t afford to live near the rapidly developing neighborhoods virtually must be poorer than someone for whom the effect is ambivalent due to rent increases (i.e. a worker whose wages and rent increase because his neighborhood is also gentrifying).
The lot of poorer Mexicans is also improved because expats supply the State with tax revenue, which may or may not be insignificant but definitely exceeds whatever the government spends on the welfare of the foreigners, who can’t vote (so their vote isn’t buyable), don’t have access to social insurance schemes, and largely don’t use the court system. Even if we asssume expats pay nothing but the Impuesto sobre el Valor Agregado (IVA), the local VAT, their per capita contribution could be substantial, as IVA makes up 24% of the government’s tax revenue. Since government taxation and spending is, on net, (slightly) progressive, it is reasonable to assume that expats play a small role in lowering economic inequality.
Focus on the growth
Progressive taxes are good and nice, but I hardly consider instituting them a categorical imperative. While “regressive” and “progressive” are strictly technical terms that belong to the realm of positive economics, these words are, for many, quite loaded. This is unfortunate, because some regressive policy schemes, like subsidizing advanced scientific research (physics PhDs tend to be rich) are obviously beneficial. Some progressive ones, like heavily taxing investment (investors tend to be rich), can be quite stupid.
On the other hand, increasing the welfare of some human beings without decreasing the welfare of any other group of human beings is strictly good. Fortunately, it is possible to avoid the adverse effects of the expat influx while retaining the positive ones. At the moment, regulatory hurdles make constructing buildings difficult, which means that increases in housing demand tend to go unmet by supply, increasing costs. Perhaps more importantly, important informal barriers exist, including Mexico’s infamous corruption. While cleaning the civil service is more or less impossible, the amount of contact points between the bureaucracy and developers is a policy choice. Deregulating the sector would lead to more housing construction, which is everywhere associated with a drop in housing prices, and less corruption. The government should also institute a land value tax to encourage high-density growth in the most desired neighborhoods and capture (and redistribute) the economic benefits of rising land prices. Developers, on the other hand, should propose building desings that are moderately eye-pleasing, since so much of the opposition to new housing arises, understandably, out of aesthetic preferences.
A very well-paying job in Mexico City will, to choose a round number, pay 50,000 pesos monthly, which is about 2,500 USD. This means an American with a yearly salary of 30,000 USD, while reasonably poor in the US, commands a nominal income well above that of most Mexicans.
Which is quite rich, considering many of those neighborhoods were first “colonized” —and made expensive— by the “creative” class a couple decades ago.
More technically, the marginal product of labour, which determines the wage level, increases if the value of whatever the company produces increases. Since expats have higher incomes, their demand curves are more to the right than those of the local elite, which means that businesses producing the exact same amount of goods or services see the value —the price— of their aggregate production increase. And thus…
This is excellent, both diagnosis and approach. I hope the data on the ground supports it. If it's available, you should flesh it out and then try to get it in front of decision-makers.
Question: Would these approaches adequately address the anger expressed in the poster, or should there be more to ease the social adjustments?
Interesting post. I know that NIMBYism in the US and a few other countries is substantially driven by fears about higher crime rates due to underclass migration, which has a lot to do with zoning restrictions limiting new housing construction. Do you think anything similar would apply in Mexico?