Is The American Dream Dead in Northern California?

In 1931, historian James Truslow Adams said the American dream mandates that “life should be better and richer and fuller for everyone, with opportunity for each according to ability or achievement”, regardless of social class or circumstances of birth. But what does that actually mean?

For some, the vagueness of the American dream concept makes it difficult to quantify. Identifying a more specific metric of focus would offer a clearer picture of American opportunity for prosperity and success, and an upward social mobility for all people.

TechCrunch.com journalist Kim-Mai Cutler delivered a presentation at Earthsharing.org’s BIL Oakland 2016: Recession Generation event on July 9, in which she focused on the intersection between opportunity, technology, and land. To address this intersection, she referenced the research of Stanford University economist Raj Chetty.

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Figure 1

Chetty analyzed the family income records of 40 million children over the past 20 years and calculated the likelihood of a child born into the poorest 20 percent (lowest quintile) of society reaching a higher quintile in income. Isolating geography as a determining factor, Chetty found that, for example, the city of San Jose provides the best opportunities for a poor child to reach the 80th percentile in income distribution, compared to all other cities across the country. This is shown in Figure 1.

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Figure 2

Despite this, Figure 2 shows a trend reflected statewide and across the United States wherein median wages are increasing, but poverty is also on the rise, and homeownership is falling.

This trend in Santa Clara County flies in the face of conventional thinking, whereby poverty should decrease as incomes and opportunities multiply. If people are making more money, yet are less able purchase a home, the home price must be rising faster than the wage.

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Figure 3

Similarly, apartment rent is skyrocketing. There is a lot of job growth, which would tend to indicate that labor is more in demand and that incomes will be higher, but most of the new jobs do not pay well – most make less than 50 percent of the average median income (AMI), as seen in Figure 3.

To add insult to injury, Figure 4 shows that many lower-wage workers fall well short of average asking rents, and are therefore unable to work and live in the same area. These people must either cohabitate or commute long distances in order to secure housing that they can afford.

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Figure 4

These are direct consequences of Proposition 13, which greatly limits property taxation in the state of California. Proposition 13 defines what a parcel of real estate can be taxed, how much that tax can grow annually, and when the parcel’s value can be reassessed. Over time, this has created severe market distortions, as developers have no incentive to build additional housing that is affordable. This ultimately limits housing supply, forces workers to commute further from the urban centers, and leads to additional sprawl.

How does this all affect upward mobility? For starters, family commute times correlate with a child’s future success and earnings. Figure 5, from Chetty’s study, shows that a transit time of 15 minutes or less significantly correlates with a child’s upward mobility.

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Figure 5

If the American dream is precipitated by upward mobility from one income quintile to the next, it is becoming an unattainable dream for an increasing percentage of the population. Without significant policy change, it will become impossible for many families to escape wage slavery.

Remedies do exist – some to resolve the problem altogether, and others to mitigate it. Metro San Francisco has seen a significant growth of working professionals choosing cohabitation, as well as the tiny house movement of 100-400 square-foot spaces. Unfortunately, these behaviors do not address the structural inequities and land misuse created by the current policy environment and Proposition 13.

With this in mind, it would be sensible for new housing construction in the Bay area to occur where economic activity is most concentrated, namely downtown San Francisco. Downtown areas tend to have the greatest land values, but traditional strategies for construction in the city center tend to be very expensive, politically treacherous, or otherwise ineffective. While cohabitation and tiny houses might make the area more affordable for a few, government must incentivize urban development in high-demand areas to effectively turn the tide of this crisis. To this end, the city and state must consider a Land Value Tax.

The economist Henry George documented this phenomenon of market exclusion 137 years ago in his seminal work Progress and Poverty. George demonstrated how rent increases faster than wages, and to expedite new construction, he recommended eliminating taxes on work and consumption and shifting the source of revenue to Land Value Taxation. His idea was to encourage landowners and developers to increase residential and commercial space in order to pay the Land Value Tax, while generating a respectable return and providing value to others. Land Value Taxation naturally becomes even more effective wherever land values are higher, like the urban core of cities. Implemented in cities, Land Value Taxation leads to a substantial increase in both living and working space.

California faces a unique challenge due to the limits imposed by Proposition 13, and overcoming this would require a difficult voter-approved constitutional amendment to completely overhaul the property tax system. State legislators and regional and city planners would be remiss not to consider a Land Value Tax, which has had demonstrated success in increasing residential space in the United States and abroad.

 

Watch Kim-Mai Cutler’s presentation below:

 

Images: Keynote presentation by Kim-Mai Cutler at BIL Oakland: Recession Generation 2016

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Simulation Could Explain Why People Reject Smarter Economic Policy

If variety is the spice of life, then why are so many of us drawn to old habits? You might think of this phrase in the context of your Friday night plans, but economists are asking it about our approach to public policy. Despite a growing body of research indicating that the structure of U.S. property taxes could be vastly improved, we tend to be content with the status quo, and it hasn’t always been clear why. But now, using experimental economics, a professor at the University of Delaware is undertaking a one-year study to identify why people don’t respond to smarter economic policy that could greatly enhance their lives.  

Joshua Duke, Professor of Applied Economics at the University of Delaware, sees a big problem with how cities and municipalities in the United States tax property. Governments levy taxes according to the value of buildings and productive activities on the land instead of the land value itself. While property tax is by far one of the best taxes, especially over wage and sales taxes, it is still not as good as a land value tax. A land value tax is virtually the same as a property tax except that the tax is on the land value only, not the building. Property taxes have been structured this way for centuries, but Duke believes we could implement an alternative tax structure that raises tax revenue and stimulates economic development. This would run in contrast to the existing tax structure, which tends to generate and exacerbate wealth inequality by taxing regular people for working and exchanging, but fails to tax unearned income like that from passively owning an ever appreciating vacant urban lot.

By InSapphoWeTrust from Los Angeles, California, USA (Lower East Side) [CC BY-SA 2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Wikimedia Commons
By InSapphoWeTrust from Los Angeles, California, USA (Lower East Side), via Wikimedia Commons.
Duke’s interest lies primarily in land value taxation, a theory popularized by 19th century economist Henry George in which taxes are determined by the inherent value of land rather than what sits on it.

“The idea is that if you’re going to tax anything in society, probably the best thing to tax is the value of land. Not the value of the improvements on land, like a house, just the value of land, and the reason is that it’s non-distortionary**. That means that it doesn’t provide the incentive to do less property improvement than is optimal,” Duke said.

Duke is not the only economist to advocate for land value taxation . Professor Joseph Stiglitz, Nobel Laureate in Economics and author of ‘The Price of Inequality’ is one such prominent proponent of a land value tax.  Stiglitz considers rent-seeking behavior, like the privatization of land values, to be the primary element that generates inequality of wealth. Other economists, like Mason Gaffney, Fred Foldvary, Nic Tideman and Fred Harrison also support implementation of land value taxation.

According to Duke,“[land value taxation] really would make society a lot better. It’s one of these major things we could do. We don’t have to create anything, we can just change the way things are taxed and [as a result] increase society’s wealth,” Duke said.

Determined to understand why land value taxation is so rarely used, Duke is harnessing the power of experimental economics. He is constructing a virtual city, in which land value taxation is financially advantageous to all citizens. The citizenry will be composed of 100 students of business, economics, and engineering. Ultimately, Duke hopes to identify why people, given the option of introducing financially advantageous land value taxation, tend to reject this tax structure.

San Francisco California Before the Sun Rises via photopin (license)
San Francisco California Before the Sun Rises via photopin (license)

“Economics is all about simplifying reality. What we’re trying to do is reduce problems to the fundamental incentives that we want to study. You have an amount of income; how much of your income do you devote to improving your land and how much do you devote to consumption? Then do you feel that, over time, you’re being treated fairly by the tax system and do you vote to reject it? So we set up a little democracy using our computer program where participants in our experimental economics platform can vote,” Duke said.

Duke is already planning his next study. After the completion of this one-year project, he will use his findings to identify ways to help citizens overcome political objections to land value taxation initiatives. Ultimately, he hopes to aid economists and policy experts who are eager to see cities and municipalities usher in smarter economic policy.

 

 



**Distortion, in the most basic sense of the word, simply means change. In economics, it is almost always considered a harmful mutation in an idealized market, where there is perfect competition and no externalities, e.g. almost all taxes vis a vis reducing productive incentives, misallocating resources, etc. Just as breaking up inefficient monopolies encourages competition and benefits the market, land value taxation encourages competition and captures distortionary externalities. This encourages behavior that is good for markets and for people, which is what Duke means when he says that land value taxation is “non-distortionary.” In fact, shifting to land value taxation actually increases productive incentives, what we might call a positive distortion.

 

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Robin Hanson On Life With Replicable Robots

BIL: Oakland 2016 Recession Generation was an Earthsharing.org event which took place on July 9th, 2016 in Oakland, California. Keynote speaker, Robin Hanson, shared a fascinating vision of the future in which cheap, replicable robots are able to do most human work, and the implications of such a possibility.

Hanson presents an idea divergent from what he says are the two most prevalent in the world of artificial intelligence, those being either slow, ongoing developments in AI research over the coming decades, or some “grand new theory” that hasn’t been discovered.

“The third scenario is where we port the software that’s already in the human brain,” Hanson says.

“If we have good enough models for how each of the cell types work, we have a good enough scan of a particular brain, we have enough cheap, fast computers, then we can make a model of that particular person’s brain on those computers; and if it’s cheap enough, you could run that simulation cheaper than you could rent the human, that changes everything.”

He thinks this means “humans retire” and become completely replaced in the labor market by these emulated brains. However, he says humans “start out owning everything” and “their investments double as fast as the economy, i.e. every month.” So he thinks this means that humans who have access to wealth, and he mentions real estate in particular, will profit tremendously. He implies that those who don’t have wealth will suffer.

This parallels a lot of the discussions we usually have at EarthSharing about the need to fairly share the fruits of nature, so that we can all benefit from technological progress. Even these far-future forecasts aren’t, ultimately, so different from ages past. In the Guilded Age, we had industrialists profiting enormously off resource wealth and land during a time of rapid technological growth.

What this discussion shows is that no amount of technology can be relied upon for solving the problems of political economy. Poverty, in particular, cannot be solved without economic justice.

 

Robin Hanson is associate professor of economics at George Mason University and a research associate at the Future of Humanity Institute of Oxford University. He is known as an expert on idea futures and markets, and he was involved in the creation of the Foresight Institute Foresight Exchange and DARPA FutureMAP project. He invented market scoring rules like LMSR (Logarithmic Market Scoring Rule) used by prediction markets such as Consensus Point (where Hanson is Chief Scientist), and has conducted research on signalling.

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EarthSharing.org on Stanford Radio KZSU 90.1 FM Promoting the Recession Generation Event

WKZSU 90.1 FM Stanford University Radio Interviews EarthSharing.org

 

July 5th, 2016, Edward Miller and Jacob Shwartz-Lucas were invited onto Stanford University Radio to discuss an event they would organize in Oakland a few days later. The event was titled BIL Oakland 2016: The Recession Generation.

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The discussion revolved around the event’s aim of helping young adults to navigate the challenges of living in our harsh economic climate and rapid technological disruption.

Jacob and Edward discussed their motivations for putting on the conference. This included explaining their backgrounds, and what changes they want to see in the world.

photo credit: Jane Says via photopin (license)
photo credit: Jane Says via photopin (license)
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Chinese Investment in US Real Estate Tops $110bn

The lessons of the 2008 financial crisis are quickly being forgotten. That market collapse was precipitated by an extraordinary rise of US land values, which was driven by the emergence of subprime lending on a mass scale.

Prices of residential and commercial real estate are once again on the rise. A major driver of this astounding rebound has been Chinese real estate investment. Chinese investors, seeking promising investments and a way to move their money out of the slowing Chinese economy, have poured $110 billion dollars into US real estate in the past five years. By contrast, the Chinese real estate market, which is putting a drag on the Chinese economy, has been called by many the largest land bubble in history. Chinese investments in the US market are inflating housing prices across the country and placing home ownership further out of reach of many Americans.

Over the past several years, Chinese investment in commercial properties has captured headlines. For example, in 2015, the Anbang Insurance Group purchased the Waldorf Astoria Hotel for $2bn and attempted to purchase Starwood Hotels for $14bn. However, the vast majority of Chinese speculative investment has been in the residential market, to the tune of over $93bn. Cities with the most rapidly rising housing costs–San Francisco, New York, Los Angeles, and Seattle–are popular markets with Chinese buyers. But as housing stock across the country continues to gain value, buyers are now turning their speculative intents to Chicago, Miami, and regions of middle America.

Chinese buyers are eager to speculate in the US real estate market. Not only because they see a lucrative investment opportunity, but because of concerns about the slowing Chinese economy. As the economy continues to slow and the value of the Yuan falls, citizens are eager to move wealth abroad and into dollar-backed assets, particularly in the form of land speculation. Despite efforts by the Chinese government to encourage domestic investments, speculation in US real estate by Chinese nationals is expected to exceed $200bn over the next 5 years.

photo credit: IMG_0953 via photopin (license)
photo credit: IMG_0953 via photopin (license)

When people speak of rising real estate prices, they certainly aren’t talking about bricks, they are talking about land. As a consequence of all this land speculation, Americans are finding it harder to obtain affordable housing and commercial space, and not only because of rising prices. Close to 70% of Chinese buyers pay cash, which is more appealing to sellers because deals can close much faster. This puts US residential buyers who require a mortgage at a disadvantage. Bidding wars with deep-pocketed foreign speculators also has the effect of pressuring US buyers with more limited liquid assets to sign off on larger mortgages than they can financially handle.

Prospective home buyers are not the only ones feeling the crunch. As homeownership becomes more unaffordable, the number of people in the rental market increases, driving up rents across the country. In 2016, rent increases are expected to outpace wage increases by about one percentage point. Faster than the general rate of inflation.

The periodic bubbles in real estate markets are a symptom of this rush to pocket the rising value of land, whether by foreigners or citizens. So far, the United States is not taking steps to curb either domestic or foreign speculation in real estate. Instead, Congress is going in the opposite direction by encouraging foreign “investment” in US property.

However, other countries are taking a stand. Hong Kong and Singapore have instituted a 15% tax on properties purchased by foreign buyers, a move that has slowed the rise in housing costs. Citing decreasing affordability of homes, Australia has instituted a similar tax. The Australian government also used legal means to intercede in the attempt by Chinese investment group Dakang Holdings to purchase the Kidman Farm empire, which controls 1.3% of the Australian landmass.

photo credit: Lavender Valley 2407 via photopin (license)
photo credit: Lavender Valley 2407 via photopin (license)

An alternative to such measures, which numerous eminent economists recommend, is a tax on land values. Land value taxation (LVT) is a twist on conventional property taxation, whereby improvements to the land are not taxed, but the land itself is taxed. Proponents argue that we ought to shift as much taxes as possible away from productive activity and onto land values. While other strategies would serve to limit foreign land purchases, taxing land values would actually halt idle landholding in general by making the speculative ownership of raw or underdeveloped real estate unprofitable.

When markets are operating correctly, profits are simply a return for productive activity, not a windfall that is achieved by excluding others as with the landed gentry in the feudal era. With LVT in place, Chinese or other foreign investors who wanted to make money by purchasing land would have to actually develop that land. They would need to attract residential or commercial tenants by providing desirable amenities and reasonable rents, and shouldering the risks involved in any sort of productive activity.

This would result in a growth of construction activity and an increase in US housing supply. Increased construction activity and decreased cost for commercial and residential real estate would stimulate the rest of the US economy, simultaneously decreasing unemployment and raising wages.  In effect, taxation of land values would convert the current Chinese desire for US land into a sustainable means of growth for the US economy.

Featured image photo credit: Light River via photopin (license)

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Economists Predict an Upcoming Financial Crisis

Crumbling building

The U.S. economy often seems unpredictable. However, according to economists Steve Hank and Amar Manzoor, it has followed a set cycle for nearly 200 years and if trends continue, 2016 will see the beginning of another financial crisis. Economists have begun to sound the alarm on what may be an unprecedented recession marked by sudden and crippling home and land prices.

The real estate market will play a key role in the impending crisis. According to Fred Harrison, UK-based economist and director of the Land Research Trust, the value of land rises and falls on an 18-year cycle. Once land prices pass their peak, economic mayhem ensues.

Abandoned construction site
Maybe I Feel Like I’ve Been Gathering Dust via photopin (license)

It may seem surprising that the rise and fall of land values could uphend the entire U.S. economy. However, nearly one-fifth of the GDP is based on residential investment and housing services, and when one portion of the economy falters, a ripple effect occurs. According to Steve Hanke of the Cato Institute, rising and falling land values have “a domino effect on the construction cycle, the business cycle, and then the overall economy.”

Averting disaster is possible, but it won’t be easy. 19th-century political economist Henry George was the first to present a solution. He noted that government tax incentives to purchase land are directly responsible for the land-value cycle. As the value of land increases, due to consumer demand and tax incentives, fewer people have the capital to buy into the real estate market. This slows growth and inevitably causes the value of land to rapidly decline, thereby causing a recession. Henry George recommended that governments shift tax burdens from income and profits to land value in order to minimize fluctuation in land prices and increase access to the real estate market.

Abandoned unfinished building
c i r c u m s t a n c e s via photopin (license)

According to Fred Harrison, Henry George’s strategy has helped stabilize land values in some countries, such as Taiwan and Denmark. Unfortunately, the largest economies in the world remain tied to this cycle. In the 1960s, the communist party of China seized all land and kept it under the control of local bureaucrats–a grave mistake that may help trigger another, much larger, financial crisis. China’s housing market is on the verge of collapse, and as the second largest economy in the world, this collapse will shake global markets. Economists predict that commodity and bond markets will be particularly hard hit. Although another recession is definitely coming at some point, it probably won’t occur this year. However dire the consequences, we ought to be proactive and implement policies, like the land value tax, which keep land prices from spiraling out of control.

 

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99 Homes: A Film That Captures the Hardship Caused by the Crash

Rosemary Williams Evicted from 3138 Clinton Avenue South from Flickr via Wylio

Lacar Musgrove & Jacob Shwartz-Lucas

On a July night in 2009, Sophia Ramos and her two grandchildren pitched a tent on a family-owned patch of property in a rural area of Hawaii. The two boys were crying. These weren’t spoiled kids reluctant to go camping –they were homeless.

The Ramos family lost their home amid the mortgage foreclosure crisis that began in 2007. The story is a familiar one. Like so many homeowners’, the roots of Ramos’s troubles were in a loan she took out against the value of her home. She was, at the time, free of debt, having bought her family a modest house in Florida outright with the proceeds of the sale of her mother’s home back in Hawaii. Ramos, her three grandchildren, and her elderly parents shared the three-bedroom home. In 2004, Ramos took out a loan against the property to buy a lawn-care business to support the family. She was a hard worker and enjoyed mowing grass. Everything was going well until 2005, when driver pulled out in front of her minivan.

Ramos suffered a broken arm and other injuries, rendering her unable to work. Six months later, she fell behind on her mortgage payment. Bills piled up. Collections agencies started calling. Ramos was desperate. And then help came—in the form of another mortgage. Less than a year later, still unable to work and after months of financial struggle, Ramos took out yet another, much larger, loan. At this point, she owed $240,000. This may seem like an alarming amount of debt for someone with no job, but at the time, Ramos’s home was valued at around $400,000 and expected to keep gaining value at $40,000 a year. In that light, her loans seemed conservative. She just needed a little help until things turned around. It was December 2006, and Ramos’s financial world was about to collapse, along with that of the entire country.

 

Foreclosure Auction
Foreclosed home in Riverside for auction via photopin (license)

 

Ramos’s plight is one of millions that followed similar trajectories in the mortgage foreclosure crisis. Last week, at Columbia University, I (Jacob) attended a screening of Rahman Bahrani’s thriller film 99 Homes, which dramatizes the human toll of the foreclosure crisis through the fictional story of Dennis Nash, an Orlando construction worker supporting his mother and son. Dennis falls behind on his mortgage payments when he becomes unable to find work in the construction industry. In the beginning of the film, Dennis pleads with a judge, explaining that the bank said it was trying to modify his mortgage. In the next scene, the Sheriff arrives and the family is forcibly evicted from their home. As the panicked family packs up everything they can in the few minutes they are given, Rick Carver, the real estate agent in charge of the eviction, drawls, “This ain’t your house anymore, son.”

 

Following the screening was a panel that included Nobel economist Joseph Stiglitz, whom I had the pleasure of meeting after the event. Dr. Stiglitz discussed the causes and conditions of the mortgage meltdown. From 2004 to 2006, housing prices skyrocketed in a bubble fueled by frenzied speculation and the availability of cheap loans. Like so many Americans, Ramos pulled funds from the rapidly growing equity in her home. In those two years, Americans extracted 1.5 trillion dollars from the value of their property. Just as Ramos did, a large portion of them did so through subprime loans. Subprime loans are loans made to risky borrowers, usually at high interest rates. Subprime loan brokers encouraged homeowners to borrow huge amounts of money against the speculative rise in the value of their homes–to pay off debts, improve their properties, to start businesses, or just to spend on luxuries such as vacations and new cars.

Keep in mind that to say people were speculating on “homes” is somewhat misleading. Often times, the lot a house is on is worth more when the structure is removed. This is because structures, like all physical assets, depreciate over time, while the location of the property appreciates, as it did rapidly in the years preceding the crash. So, it was really the land–or more precisely the location of the home–that was being speculated on, not the home itself. We’ll talk about the importance of that later.

 

Wells Fargo Home Mortgage
107/366 via photopin (license)

 

The loans for such land speculation came with variable interest rates that could double or triple, as well as large penalties for paying them off early. In many cases, the borrowers could not afford the loans, and the brokers knew it. Unscrupulous mortgage brokers had incentive to make bad loans, as they could simply take their hefty servicing fees and then sell the loans off to investment firms. Often they used fraud, including falsifying people’s incomes, to get the loans approved. Then, such loans were packaged with hundreds of others and sold and resold. A block of subprime loans might be owned by thousands of investors in mortgage-backed securities.

Beginning in 2007, the bottom fell out of the housing market and the economy tanked. As unemployment climbed, people defaulted on their mortgages, many of them subprime loans that they couldn’t afford in the first place. With housing prices on a steep decline, people could no longer sell their homes to pay off the debt. All too often, those homes were now worth less than what they owed.

This all became a self-perpetuating cycle as the value of mortgage-backed securities dropped, the economy crashed, and more and more people lost their jobs—especially those in the construction industry. As people struggled to make payments on their mortgages, it fell to the mortgage service companies (often banks) to deal with the avalanche of defaults, which cost them money to actively manage. They also saved on payroll by under-staffing the offices handling the defaults, often with under-qualified employees, leading to massive mismanagement of paperwork and wrongful foreclosures.

 

'Foreclosure' published on Flickr by Matt Hampel
Matt Hampel, Flickr | CC-BY

 

In 2009, the Obama administration launched the Home Affordable Modification Program, a $75 billion program meant to help homeowners avoid foreclosure by offering banks incentives to modify mortgages for borrowers who were in trouble. However, applications for loan modifications were egregiously mishandled by the loan servicers in the form of delays, errors, and lost paperwork. According to sworn statements by Bank of America employees, they dealt with the glut of paperwork by routinely denying applications en masse with made-up reasons such as missing documentation. Foreclosure proceedings went on in parallel with the mortgage modification process, meaning homeowners who qualified for the program lost their homes before they could be approved.

As this catastrophe unfolded, fingers pointed in all directions–mostly to “irresponsible” homeowners or “predatory” lenders–to cast blame. Hands were wrung and barrels of ink spilled by economists trying to explain just what went wrong and how we could prevent it in the future, including many reasonable proposals such as not lending money for land and avoiding the inflation of location values caused by artificially low interest rates. All of this, however, could have been prevented by a simple fiscal measure –taxing the value of land. Taxing land value would have stopped the bubble from inflating in the first place. This is because a strong land value tax would have reduced land’s selling price in the same way that our current low property taxes do to a small degree–by creating a liability on the part of the de facto owner, the holder of the deed or the bank that owns the mortgage, to regularly pay a tax. Think of it this way: the greater the tax you will have to pay for holding onto land, the less you will be willing to pay up front. Pay more now, pay less later. Pay less now, pay more later. For this reason and others, Dr. Stiglitz is a supporter of the land value tax as a means of keeping such bubbles from inflating in the first place.

“One of the most important but underappreciated ideas in economics is the Henry George principle of taxing the economic rent of land…” -Joseph Stiglitz

 

Belongings of an Evicted Homeowner in Yard
Mortgage Crisis via photopin (license)

 

Behind all the statistics, terminology, and tangled interplay of economic mechanisms that caused the foreclosure crisis are the tales–each unique in the manner of snowflakes–of families whose worlds were turned upside down in their pursuit of the fabled “American Dream” that, in those two heady years of economic boom, seemed so vivid.  In 99 Homes, Dennis and his family find themselves living in a motel filled with other families in like situations. Desperate to save them from this fate and get his house back, Dennis goes to work for Carver, the unscrupulous real estate agent who had evicted them. Under Carver’s direction, he starts by cleaning up foreclosed homes and stealing the appliances only to replace them–for a cut of Carver’s ill-gotten gains. In an ironic twist of fate, Dennis is groomed to carry out evictions himself. The morality play of the film unfolds as Dennis accepts handfuls of cash from Carver to show up to door after door and throw people just like him out of their homes.

In one scene, Carver places the blame for his decisions on the system. His father, he says, was “a sucker,” a construction worker who played by the rules but lost his home anyway. Carver is determined to “survive.” While we must hold the Carvers of the world morally accountable for their decisions, we also need to turn a critical eye to the system that pushes them toward such despicable tactics in the first place. If people can make more money speculating on the rising value of land than they can working an honest job, then we have a problem much deeper than a group of greedy bankers.

We need to attack the root of the problem–taxes on wages and subsidies for owning land. In this drama, we are the serfs, and the financial institutions are acting as lords of the manor. We pay taxes on our earnings and pay the rest to them in the form of rent and mortgages. But who rightfully owns the land? We the people, or the oligarchs? By forcing them to pay a tax on land value, we can take back our earnings and fix the root of the problem.

 Note: The story of Sophia Ramos was taken from Paul Kiel’s article on ProPublica, The Great American Foreclosure Story: The Struggle for Justice and a Place to Call Home.

Cover Image:  © 2009 Tony Webster, Flickr | CC-BY | via Wylio

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Everything Like This Has Happened Before

Henry George: Everybody works but the vacant lot

Kim-Mai Cutler’s recent article “Nothing Like This Has Ever Happened Before” puts forth a sophisticated argument critiquing the naïve sentiments suggested by her title. As a whole, Cutler emphasizes the longue durée of economic history over the immediate, citing the work of economist Carlota Perez to demonstrate a rich historical pattern of bubbles and recessions followed by “golden ages” of prosperity.

The topic resonates with many Americans who are still recovering from the 2007-08 financial crisis and experiencing the effects of increasing income inequality. For many, the promise of a “golden age” to come seems a far-off reality. This sentiment abounds in the San Francisco Bay Area, where in recent years poverty has spiked as profoundly as housing prices. The immense wealth and venture capital being poured into Silicon Valley both exemplifies a new frontier of financial opportunity while presenting new challenges for ensuring that large swaths of Americans are not left behind. But if history can teach us anything, Cutler suggests, it may be time to revisit the nineteenth-century ideas of political economist Henry George.

Many Americans today would identify with Cutler’s portrait of George: a man who was hard-working, but at times could not find enough work to make a living. At his lowest point, he was forced to beg for money to feed his wife and newborn child. Whereas it can be argued that Silicon Valley is responsible for San Francisco’s current housing crisis, in George’s era it was the monopoly that the booming railroad industry had over the land and its inflated prices.

 

Hotel Development
Hotel canyon via photopin (license)

 

When he published Progress and Poverty in 1879, then, George was understandably committed to advocating for a system that would provide better financial stability in the economy at large. His proposed solution “was a single land value tax that would replace all other government revenue sources”. Because the land value tax would be based on the actual value of the property itself, the urban landlords, often the wealthiest citizens, would face the largest tax burdens. It is easy to imagine how such a concept would slow the displacement of poorer residents through gentrification and disrupt sharing economies like AirBnB, both of which have steadily out-priced local residents in places like San Francisco to the benefit of those with the capital to invest in property.

The reasons for circling back to George’s idea of a land value tax are in alignment with Perez’s documentation of the cyclical nature of bubbles, or what she refers to as periods of “gestation,” in which new technologies are developing, and the so-called “golden ages,” when these same technologies reach maturity, usually after a period of recession or depressed activity. The model has been selectively adapted by the private investment community, however, which often undermines one of Perez’s central arguments: that the turning-point in technological revolutions is contingent upon governmental institutions adapting by passing appropriate regulation in response to these new economies. As Cutler explains in her interpretation of Perez’s work, government plays an essential role “in creating an equitable framework that allows everyone to participate in benefits of technological change.”

Which brings us back to George. While Cutler floats the idea of George’s single land value tax as a potential avenue for regulation by keeping land bubbles from inflating in the first place,  she does not actively pursue the idea in a modern context.* The question of how it might affect employment, rent, and the use of space in cities is fascinating. Speculation on urban land creates a lot of wasted space; think of central urban locations with vacant lots, derelict buildings, uninhabited units, short buildings in an area with lots of tall ones, etc. With the “buy low, sell high” mentality that pervades our current real estate system, there are incentives to waste space and speculate on the rising value of urban land. That is to say, if the number of housing units are kept artificially low through speculation, and if there are more people seeking housing than units available, the result is artificially high rent as people compete with each other for scarce space. The same is true for businesses. If there is an artificial scarcity of physical space for businesses to operate in central locations, then this negatively affects employment opportunities among those looking for work.

 

Weeds in a Vacant Lot
Weeds in Vacant Lot via photopin (license)

 

A land value tax would kill two birds with one stone by increasing access to space in the choicest locations for both housing and jobs. Much of this comes down to better urban planning. Landowners in dense cities who prefer sprawling residences more typical to the suburban landscape would be financially liable for this excess. In short, they would be paying for the housing that doesn’t exist due to poor urban planning. In a piece for The Economist, Edward Lucas details some of the more compelling arguments for a land value tax, which many economists agree would have a socializing effect on the economy. It is worth mentioning here that the land value tax idea is not unprecedented, though it may sound foreign to many Americans. According to Lucas, “more than 30 countries have some form of land-value taxation.” Moreover, many Americans are unaware of versions of the land value tax that currently have a shaping influence on policies at home. In the comments section on Cutler’s article, Joshua Vincent, the director of the Center for the Study of Economics, reminds readers that “over 20 cities and counties in the USA use a form of Henry George’s land value tax.”

But there are obvious perceived barriers that are worth consideration, as well. Industries that require enormous physical space would lose in a dramatic transition to full LVT from the current tax system. While many environmentalists may not have much of a problem seeing golf courses and huge parking lot car dealerships pushed to the edge of financial viability, more would perceive problems with the way that the same policy might make public services, like parks, less feasible. Some may argue that public services like this would not be affected, since the land value tax would only be levied on private land; however, in an era where government institutions are being increasingly defunded, it is easy to see obstacles that would arise from land set aside as exempt from taxation.

In other instances, one might speculate that a land value tax could inadvertently encourage practices that do more harm to the environment. Lucas gives the example of “urban homeowners with gardens,” who may feel pressure to develop their land to offset new expenses that the land value tax would impose. There is a give and take here, for while it is true that some urban retreats like this may disappear under a land value tax system, it would also encourage a smarter management of urban resources. Perhaps this urban garden is merely transplanted to the rooftop, thereby creating innovative green spaces, opening urban housing to a former city commuter, and reducing car exhaust to boot.

 

Rooftop Gardening in Manhattan
Tribeca via photopin (license)

 

Another key distinction is one of moving from public ownership to community collaboration.  As Visualizing Earth Sharing explains, there are many potential economic and social benefits to the land value tax. The public could still protect ground-level gardens and urban farms as part of greater community infrastructure, and because there would be a strong financial incentive to use space well, rooftops and other parts of buildings could be used to grow food. Without taxes on regular people’s wages, hiring people to work in/on urban farms would be less expensive, too. More people would be able to live near the urban farms that employed them, for a rent that was compatible with this type of employment. Building owners might even use such activities to attract urban tenants longing for more green in what is now a concrete jungle.

Cutler concludes that modern developments such as automobiles, suburban sprawl, and greater home ownership have made George’s ideas less relevant in terms of igniting an overhaul of the tax system.. While these things may have helped ease absolute poverty to some degree, they have resulted in an environmental nightmare that has slowed material progress and left us isolated in suburbia. Furthermore, land prices and rent in suburban areas are still rising faster than wages. The land problem is just as damaging as before; we’re just less aware of it.

The increasing polarization of American politics–especially evident in the rise of more radical  political agendas such as those of   Donald Trump, Ted Cruz, and Bernie Sanders–suggests that citizens are pushing with more energy to move the pendulum away from the status quo. And, as new initiatives like Obama Care have demonstrated, any new, paradigm-shifting regulation will inevitably be a work-in-progress. Things are changing in unpredictable ways, though. It is more important than ever that we start to think about fundamental issues such as restructuring our tax system, not just in terms of how high or low taxes are, but what types of activities are taxed. On Earth Sharing, we back the spirit that George promoted in his advocacy for a land value tax: to create a world in which everyone can participate equally in prosperity rather than one in which  the influence of speculative practices works to enrich the wealthy at the detriment of progress and environmental justice.

-Elizabeth Smith

On July 9, 2016, EarthSharing.org is hosting a conference in San Francisco around this topic. The conference is titled The Recession Generation, and will focus on what young people in particular  can do to find gainful employment while making a difference for a number of good causes. If you are interested in participating, please let us know: info@earthsharing.org/files1. There is currently an early bird discount for registration. If you have any questions or concerns, please let us know how we can help.


In fact, modern economists who have studied George’s theory of boom bust cycles actually believe that rising land values create the incentives necessary for sprawl, and at some point peripheral land is actually over-supplied with basic infrastructure. This counterintuitive oversupply actually causes land prices to drop, but prices can’t just smoothly level off because loans were extended on the assumption that land prices would go up forever. Once this illusion is exposed as nothing more than irrational exuberance, the market panics; the collateral for all loans (land) is suddenly not worth what everyone thought it was. The land value tax would reduce the price of land because the return to speculating on its rising value would be taxed away. As a seller you would not hold out decades for a higher price if the rising land value was continuously taxed away.

Cover Image: “Everybody works but the vacant lot,” Henry George. [A postcard.]  The New York Public Library, Astor, Lennox, and Tilden Foundation

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The Landownership Cycle

 

By Martin Adams

Many of us know that capitalism creates wealth, but also that it causes inequality and destroys nature at the same time. But we don’t seem to understand how: For example, how does capitalism lead to financial insecurity for many, even for those who, by all accounts, shouldn’t have to worry about money? And how exactly are we destroying our planet in our frantic conversion of nature into digits and little bits of paper we call money?

One of the main reasons capitalism does not provide equal benefits to everyone is because the commons—the gifts of nature—have been privatized. This privatization of nature is one of the root causes of economic recessions, ecological destruction, as well as social and cultural decline—even in a world of plenty.

All of nature is community wealth, including—and especially—land. People give value to land through the goods and services they provide to their communities. For example, because people offer more goods and services in the city than in the countryside, urban land tends to be much more expensive than rural land. As communities become more attractive to live in, some property owners—but mostly the financial institutions that finance them—then extract this value by making money from real estate—money that in truth belongs to everyone—, and this extraction is one of the root causes of wealth inequality, ecological destruction, and even economic recessions.

Land—even undeveloped land—costs a lot of money in our society. Why is that? It’s because land has an intrinsic value to human beings: We all need land. And because we all need land, those that own land can make money by buying and selling land at the expense of other people who have to pay money to live on it. Under our current land ownership model, property owners only pay other property owners for land as well as the banks that finance property ownership.

While land can certainly be privately used, its value is created by the community and therefore belongs to the community. Land has to be owned in common, and whenever people use land, they need to reimburse their local communities for their exclusive use of it. They can do this by making community land contributions for the land they use. A land contribution approximates the market rental value of land, and the rental value of land is a measuring stick that reveals the financial value of the benefits that land users receive from their exclusive use of land.

In most nations around the world, land has already been privatized: If communities were to suddenly impose land contributions upon existing property owners, property owners would end up having to pay twice for their ownership of land—first to the previous landowner (from whom they bought land), and a second time to their local communities.

In order to transition from a land ownership model to a land stewardship model, local governments and community land trusts would either have to financially compensate existing property owners for the land value portion of the properties in question or cancel their existing mortgage debts. Land users would then be required to share the value of land with all members of their community through community land contributions. And finally, these contributions would then have to be redistributed to all community members in the form of a Universal Basic Income to prevent gentrification, reduce wealth inequality, and create a truly fair economy for all participants.

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