In 2010, the world’s 62 richest billionaires collectively held $1.1 trillion in wealth. At the same time, the poorest half of the world’s population held wealth amounting to $2.6 trillion. Just six years later, in 2016, those 62 billionaires had amassed a further $660 billion, and the poorest half had been stripped of the equivalent of more than $800 billion.
This should be the dying breath of trickle-down economics. Ahead of the World Economic Forum earlier this year, Oxfam Great Britain chief executive Mark Goldring said that “it is no longer good enough for the richest to pretend that their wealth benefits the rest of us when the facts show that the recent explosion in the wealth of the super-rich has come at the expense of the poorest.”
Oxfam senior economist and former special adviser to President Obama Didier Jacobs published a discussion paper in November 2015, called Extreme Wealth is Not Merited, in which he detailed the “six rungs” of the rent-seeking ladder: crime, cronyism, inheritance, monopoly, globalization, and technology.
He argues that few, if any, of these rungs allow a person to become extremely wealthy based on merit, and that “meritocracy calls for talented people to be rich, but not extremely so”. In an analysis of the wealth portfolios of the Forbes list of billionaires, Jacobs offers insight into the relative importance of each rung:
“Fifty percent of the world’s billionaire wealth is found to be non-meritocratic owing to either inheritance or a high presumption of cronyism. Another 15 percent is not meritocratic owing to presumption of monopoly. All of it is non-meritocratic owing to globalization.”
According to Jacobs, for the world’s richest, wealth begets wealth, and clearly the most prosperous avenues to enormous wealth are through currying favor with politicians or simply receiving a fortune as a hereditary right. All billionaires have benefited from globalization, population, and economic growth. Jacobs suggests that the world will inevitably see its first trillionaire in coming decades, and it will be the result not of some extraordinary talent but of continued growth in the global economy.
In a February 2016 interview with Inequality.org, Jacobs compared modern wealth with the merit of Johan Gutenberg. “He invented the printing press in 1439. Most of us would agree, I think, that the printing press amounts to an invention as least as important as Google. Yet Gutenberg did not become a billionaire…because the world economy in the fifteenth century was simply too small and too fragmented to support any billionaire fortunes.”
Jacobs says the idea of meritocracy makes sense for the middle class, and “an outstanding nurse is likely to make more money than an average one and would deserve that extra income”. But the kind of extreme inequality of wealth we see today cannot be justified by the same concepts of meritocracy, as these fortunes are so dependent on collective resources.
Henry George’s definition of land was actually very broad, encompassing “all natural forces and opportunities”. In this way, we can see applications of his principle of shared utility to not just land and natural resources, but to intellectual property, and the forces of globalization and ongoing economic growth. That we should begin to see the existence of trillionaires while so many still struggle to live on wages and are taxed on their labor is a great injustice.
George promoted the idea of the Land Value Tax as a way to fairly distribute economic rent, what would otherwise be unearned wealth, concentrated in the hands of the mega-rich. He also advocated a guaranteed basic income or citizens’ dividend, and a policy of this nature should be funded by taxing the economic rent from land. This way, when public initiatives and global systems create added value for businesses and the rich, that value will be returned to the public instead of being lost to further private stockpiling.
Jacobs says that today, every single billionaire’s wealth “depends on having access to a large population that’s linked through a globalized economy”. Those massive increases in wealth are crystallized in high land values, especially in ritzy locations in major global cities like New York and London. The rich can’t take their land with them to the Switzerland or the Cayman islands.
“The more this global economy grows, the richer our billionaires get. This growth happens independently from any one individual’s effort and talent, so we can’t say that billionaires deserve the profits that go hand in hand with economic growth.” Much of what appears on the balance sheets as profits for productive activities is really land holdings in global hubs. By simply taxing the value of land, we could capture that surplus, without taxing any earned wealth or reducing productive incentives. There would be enough to fund all healthcare, schools, transportation systems, etc without any taxes on normal people. We could have all of the wealth creation of a purely capitalist system while realizing the noble dreams of socialism.
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.
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.
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.
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 canafford.
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.
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
“He who receives an idea from me, receives instruction himself without lessening mine; as he who lights his taper at mine, receives light without darkening me.” -Thomas Jefferson
The Angelina Jolie Effect
In 2013, Angelina Jolie shocked Hollywood by announcing her decision to undergo a preventive double mastectomy. She cited a hereditary risk of breast and ovarian cancer and what she had been told was a 65 percent chance of breast cancer due to a mutation in her BRCA1 gene.
The discovery that certain mutations of the BRCA 1 and BRCA 2 genes increase risk of breast and ovarian cancer was made in the 1990s. The company that began the BRCA analysis test claimed that a mutation in either of these genes could increase risk to as high as 87 percent for developing breast cancer and 63 percent for developing ovarian cancer by age 70.
The ensuing publicity caused a surge in genetic testing in what has been named the ‘Angelina Jolie effect’. But the cost of a BRCA test is extremely prohibitive, at more than $3,000 in the United States. Jolie wrote in an op-ed that this was a huge obstacle for many women seeking tests for breast cancer, a disease that kills almost half a million people around the world each year.
When Myriad Genetics discovered the ‘breast cancer genes’ in 1994 and 1995, it managed to acquire 20-year patents for the very genes themselves, as well as any current and future methodologies for examining them. This monopolization was a boon for shareholders, and in 2013 the BRCA analysistest brought in 75 percent of Myriad’s total revenue of $613 million.
Should Biological Phenomena be Ownable?
Conversations about property rights typically involve things that people have built, bought, or otherwise created throughout their lives. But as technology challenges our fundamental understanding of biology and ourselves, we are faced with a decision about whether to update our institutions to reflect new opportunities for ownership in nature.
In 2009, a group of organizations including the Association for Molecular Pathology and the American Civil Liberties Union filed a lawsuit challenging the BRCA gene patents, arguing that they amounted to patenting human life, robbed every person of a piece of self-determination, and violated basic human dignity.
The case was supported by testimony from many women who had been disadvantaged or put at risk by patent restrictions, from being denied a second opinion on tests, to being unable to afford testing, and having insurance rejected by Myriad. After a four-year legal battle, theSupreme Court ruled in 2013 that human genes cannot be patented in the U.S. because DNA is a “product of nature”.
This ruling annulled the patents related to more than 4300 human genes, stripping monopoly status from Myriad Genetics and dozens of other companies and institutions that had profited from them. “Myriad did not create anything,”Justice Clarence Thomas wrote in the majority opinion. “To be sure, it found an important and useful gene, but separating that gene from its surrounding genetic material is not an act of invention.”
What the landmark ruling didn’t cover, however, were methods for testing BRCA genes, possible new patents of these methods, or the patentability of synthesized DNA. Myriad’s two-decade monopoly has left it with a massive database of genetic data, maintaining its dominant position in risk factor analysis for BRCA genes compared to any competitor.
The main importance of the Court’s decision was establishing this boundary between innovation and appropriation of biological phenomena. In the same way that natural resource extraction methods can be patented and monopolized, so too can techniques for analyzing and repurposing genetic material. But the mere existence of compounds in nature should not be ownable in a free and clear way, not without some sort of duty to use these natural opportunities, opportunities that hold the potential to free us of a great deal of suffering and unleash human potential.
It’s not just genes that have been captured for exclusive license and rent-seeking. Consider Joseph Merrick, a so-called ‘freak of nature’ known as the Elephant Man. He spent most of his short life in circuses, where many entrepreneurs made a great deal of money exploiting Merrick’s condition. Until recently his bones were on display at the Royal London Hospital museum, andthere is no evidence to suggest he consented to this.
The most famous case of this sort of appropriation is that of Henrietta Lacks, an African-American woman whose cancer cells were harvested in 1951 and used to create an immortal cell line for scientific experimentation. In the process of radium and x-ray therapy, tissue was removed from her tumor and secretly sent to a lab at Hopkins University to be grown in test tubes.
Lacks died at the age of 31, leaving behind a husband and five young children. The family never received any financial support, and found out by chance that their mother’s cells (called HeLa cells) have been used in ongoing research. HeLa cells were used in developing the polio vaccine, were sent into space, and have been used for cloning, gene mapping and in vitro fertilization.
The practice of patenting materials in nature and people or aspects of cultural tradition is given the derogatory term ‘biopiracy’, and agrochemical and biotech company Monsanto offers an illustration which once again distinguishes between innovation and merely appropriating what freely exists in nature. In 2016, the European Patent Office revoked a Monsanto patent for a virus-resistant gene found in Indian melons. Monsanto introduced the resistance to other types of melons and managed to patent this as its own invention. But the gene responsible for this resistance was discovered in 1961 and plants containing it have been publicly available since 1966. Conversely, Monsanto has won many of its own lawsuitsagainstfarmers who infringe on patent rights Monsanto has on its seeds.
Monsanto and other institutions have appropriated these materials without obtaining consent. It then has turned around and charged monopoly prices to the same people for the right to use these materials. And while cultural remuneration is tricky, privatizing these cultural products anyway has sometimes resulted in important advances in medicine and other fields. However, in the context of patents, there has more often been a very real reduction in scientific and social advancement, as patent holders merely speculate on their patent claims. This forces real innovators to pay large sums of economic rent or go through contortions to avoid patents, all in order to add to the intellectual stock of humanity.
For example, there are hundreds of patents on Agrobacterium techniques alone, which has been the most common vector for companies like Monsanto splicing genetic code into plants. The reason there are so many is the risk of patent infringement. Researchers have come up with brilliant workarounds for these problems, but developing new ways to do the same things has huge opportunity costs. For scientists, it’s a purely bureaucratic hurdle, not a chance for real scientific advancement. Thankfully, tools are being developed to help reduce confusion over this, but they are not enough to encourage entrepreneurship without an army of lawyers.
In the mid-’80s, molecular biologist Dr. Richard Jefferson pioneered a genetic research technique that helped illuminate where genes are expressed in plant tissue. He distributed this helpful technique immediately to more than 1000 labs around the world.
Jefferson said in an interview that the litigious way in which genetic patent issues tend to be resolved is not constructive, and that both parties “end up trying to promote their particular worldview based on a lack of evidence on either side”.
“So you’ll have businesses who will pound their wingtips on the table and say ‘we must have exclusive licenses, and… on the other side, you might have civil society or thoughtful social policy engagement that says ‘it’s all wrong, you shouldn’t do it that way, everything should be free’, but they may well not be aware of the very complex natures of risk mitigation businesses have to encounter,” he said.
“There’s no real evidence base that can guide real problem-solving for policymakers or for practitioners.”
One company might be better off if techniques for analyzing genes can be monopolized, but it is likely that the market for innovation and society as a whole would be better off if these medical techniques were somehow available to all. These returns to society could manifest as wealth creation, scientific innovation, and better health outcomes.
Open source success stories in the technology world – including operating systems, programming languages and web browsers – have not offered direct profit to its community of creators, but they have provided social value and a means to create wealth. Jefferson wrote in 2006: “Many ask, ‘How do you make money in open source?’ The answer: you make money not by selling open source, but by using open source.”
There are valid reasons both for patents as well as open source. However, might there be a synthesis, a solution that would give us the best of both worlds?
Incentives are Holier than Property
Friends of Earthsharing.org, Guido Núñez-Mujica and Joseph Jackson, had a great idea for helping poor people in remote areas of Latin America. They wanted to create a light and portable machine for copying DNA (PCR) so it could be used for all sorts of things, in this case testing for tropical diseases. A standard PCR machine is fairly heavy, at least as far as jungle treks go, so a light mobile version could have really helped a lot of people get tested and then obtain treatment. However, because someone had patented the mere idea more than 25 years ago, and done nothing with it, they could not patent it themselves. This vastly reduced the pool of investors due to the increased threat of competition.
Even if others have independently thought of the same idea on their own, they are restricted from using it by an existing patent. Such ideas should not belong exclusively to the person who merely filed the patent first, at least not in an absolute way. We can, for instance, say that a patent affords the holder the opportunity to invest more into creating their idea, but that right should be coupled with an incentive to use their monopoly privilege for productive purposes.
An innovative solution to this problem parallels that of 19th-century economist Henry George, who wanted to incentivize landlords owning prime real estate to make their land available to others. He proposed a tax on the value of urban land to invigorate landlords to use prime locations productively.
Where landlords have monopoly privilege over a particular geographic location, Myriad genetics and Monsanto had, and to some degree still have, a monopoly privilege over specific ‘nucleo-graphic’ areas of DNA, untouched by the artifice of human innovation. Just like landlords who own vacant urban lots for years and leave them undeveloped, patent owners should pay increasingly more to exclude others from developing ideas that will benefit humanity.
Patent Value Tax
Patents are important because the exclusive usage rights can often provide a predictable environment that can encourage production. Banks can feel confident that they can provide loans. Inventors can feel more confident that someone won’t just copy their work and get away with it. Patents are also important because it ensures that the discovery is publicly documented.
But as previously mentioned, patents also have drawbacks. Patent trolls use patents for idle speculation, holding valuable ideas for ransom. Patents contribute to a climate of high liability for new inventors, because with so many patents it is impossible to know when violations occur.
To ensure patents are only held by people who intend to use them, and only while they are intending to use them, a tax incentive system could be very helpful.
Patent values could be self-assessed by the inventor and changed at any time. The rate of tax will gradually rise over time, based on the self-assessment. If particular patent holders decide the taxes are too onerous, they can simply lower their assessment, or relinquish it into the public domain. Anyone is allowed to place bids that are higher than that self-assessed value, and this will initiate an auction. The proceeds go to the current holder.
Auctions would be open to anyone, including the government. This would provide a vehicle by which we can use the democratic process to incentivize scientific research. Since the government could buy the patent and release it into the public domain.
Some may argue that patents are nothing more than a right to sue for violation, and do not encourage innovation. This is particularly true today considering that many technologies require a combination of existing technologies, involving multiple patent holders who are often in it to speculate. However, this dynamic would vanish if patents had high holding costs and could be publicly auctioned at any time. Patent holders would have an incentive to work with others quickly because holding onto a patent would be like holding a very expensive hot potato.
Patents as a Privilege
Founding Father and third President of the United States Thomas Jefferson is the earliest authority on American patent law, but his view on the matter was characterized by skepticism unless patents were for the public good. He was generally opposed to any kind of monopoly, and believed that ideas were both unstoppably contagious and not fit to “be a subject of property”.
“Society may give an exclusive right to the profits arising from them, as an encouragement to men to pursue ideas which may produce utility, but this may or may not be done, according to the will and convenience of the society, without claim or complaint from anybody,” he said.
The attachment of property rights to biology, and all ideas for that matter should be treated with great care, both because the natural world was not created by any one of us, and because exclusive rights to innovate need to come with a duty to use the necessary natural resources well. It is not for us to plant our flag and claim ‘this is mine!’ but to consider ourselves stewards, with a duty to use natural resources in ways that will ultimately improve our lives and the lives of others.
Most of the wealth being generated in Silicon Valley is the result of advanced engineering, risky venture capital and cut-throat business acumen in the face of rapidly-evolving competition. Visa, HP, Intel, Adobe, Ebay, Apple, Google, Facebook – the concentration of multi-billion-dollar enterprises in this tiny pocket of Santa Clara Valley is staggering.
But not everyone making big money in Silicon Valley had to major in a STEM field or produce any real wealth to do so. For those who have speculated on rising land values, the last 40 years has been a gamble that keeps paying off. In the 1960s, when the land in Santa Clara Valley was producing prunes instead of circuits, John Arrillaga Sr. and Richard Peery could see the wheels of a new boom beginning to turn. These young entrepreneurs spent the next decade building the corridor through which much of Silicon Valley’s world-changing innovation would pass.
By constructing custom and cost-effective office units quickly for emerging tech companies, Arrillaga and Peery dominated the region and became its go-to developers. Their signature, low-slung concrete buildings called tilt-ups made for cheap and quick construction early on. The pair was also among the first to build before tenants were confirmed, in the hopes that immediate availability would be attractive to businesses. The land they had bought up as young men began to generate formidable returns, and the speed of technological progress coupled with an apparently insatiable demand for more space created today’s Silicon Valley, synonymous with skyrocketing land values. While this new value injected into Santa Clara Valley draws people to the area and creates prosperity for those in innovative industries, it also attracts speculation where it is possible to capture significant wealth simply by owning land.
Arrillaga is worth more than $2.5 billion, a fortune earned in part from unparalleled skills as a developer, but also because he was able to extract a great deal of unearned wealth. The contribution of pioneering land developers to economic growth is undeniable, but unfortunately, taxation structures have not kept pace with the rapid transformation of unproductive land into a cybercity of millionaires and billionaires. The wealth that has been obtained from constructing buildings is hard earned, but the enormous increase in rental income resulting from rapidly-increasing land values has not been earned. It’s not as if aging structures have grown more valuable, it’s the land underneath them that has skyrocketed in this hub of innovation, land values created by an aggregation of economic activity not attributable to any one person, developer, or tech company. The value of this land is indeed a socially-created value.
Today, the success of entrepreneurs starting tech companies has made Silicon Valley the most expensive place to live in the United States. As these tech giants grow, the reach of their impact on the housing market spreads, and migrant employees move with their money to suburbs farther and farther out from where they work. In so doing, they shape land values and make other lasting changes to the urban environment. The gains generated by developers like Arrillaga and captured by speculators can ripple out into the wider community and inflate the cost of living.
The incredible wealth now being generated by high-tech industries in Silicon Valley has put a premium on all surrounding land, both commercial and residential. Working-class residents can only hold on to rent-controlled accommodation for so long before the profit motives of private developers see them evicted, and their housing demolished. According to the Guardian:
Between 2000 and 2013, the number of low-income households in the Bay Area increased by 10 percent, but the region lost 50 percent of units defined affordable for this population, according to researchers at the University of Berkeley, California, who have closely studied gentrification and displacement.
The proliferation of wealth in our communities is a wonderful thing; the only reason it causes such polarization is because systemic inequalities go unaddressed.
We can have the best of both worlds. For men like Arrillaga and Peery to have the opportunity to create these cash cow business parks and bring thousands of talented professionals to Silicon Valley is incredible, it should be celebrated.
As people have come together to produce a great deal of wealth in the tech industry, land values have boomed. Those who were able to get on the property ladder before an oncoming swell in land values simply sell or rent for huge windfall gains, unearned wealth, while prior tenants are displaced. Incoming renters are squeezed or turned away entirely by the high rent.
The problem is not the tech companies or their workers, and it is not the vulnerable tenants; it’s not even the landlords who benefit from, perhaps unconsciously, playing the working class renters and the angry anarchists off the techies. It’s our system of property taxation. The best and simplest way to correct the imbalance, to give justice to everyone, is to implement a system of Land Value Taxation while reducing taxes that harm the poor and the production of new wealth.
From the developer’s’ perspective, a Land Value Tax would in no way detract from the incentive to build in the first place, as the taxes on buildings would be eliminated, after sales and wage taxes. Furthermore, the incentive to build on unused, centrally-located land would increase. They would have an even greater incentive to build immediately because owning the land without having tenants would leave them in the red after paying their Land Value Tax bill each month. The site would not be a speculative asset, but one that only yields a positive return if a developer uses it well to meet people’s needs.
For Arrillaga and Peery, the taxes due on their development portfolio would have grown with the unprecedented business success of their tenants, from dirt cheap taxes on empty lots to large tax bills on lucrative land accommodating high-end office buildings. This would have generated a massive amount of public revenue without harming incentives toward innovation. The seeds of gentrification are nurtured by insufficient housing supply, but Land Value Tax would mean that centrally-located land would be developed to accommodate increasingly more people at comfortable densities.
This policy encourages landowners to maximize the revenue they can generate by constructing and maintaining buildings of the highest caliber to attract tenants. As opportunity brings more people to an area for work, demand for housing pushes land values even higher, which increases revenue from the Land Value Tax even more. A landowner can then create more housing, often vertically, to cover the larger tax, or if they are unable or unwilling, sell to a developer who will. This applies not just to Silicon Valley, but to any in-demand area where the concentration of jobs forces living costs higher than many can afford.
Land Value Tax can be used as a source of revenue to fund great social programs, even while reducing wage and sales taxes -from health vouchers to housing for mentally ill homeless people, or even a universal basic income. Without a Land Value Tax, however, the benefits these social programs create will simply be captured by landlords through higher rent charges. Thus, the positive effects of these social policies would nearly be wiped out, funneled into the pockets of landlords as rent hikes. For example, if everyone was given a $10,000 basic income each year, all else being equal, what would happen to the cost of rent? It would go up by a comparable amount, and largely cancel out the benefits of basic income to the most vulnerable people. However, with Land Value Tax, incentives to increase housing supply would result in people being able to protect their basic income from rent hikes.
Governments will not be able to subsidize their way out of this housing crisis with palliative measures. Creating a system of incentives in which the market is enabled to correct itself is the most sustainable way forward, and offers the best hope of ensuring affordability for all while simultaneously giving a boost to incredible growth in future industries.
The San Francisco Bay Area is in the midst of a severe housing affordability and displacement crisis, the result of years of inadequate public policy, a clash of generational attitudes, and ubiquitous obstruction of new housing projects. At the BIL Oakland: Recession Generation conference, hosted by EarthSharing.org on July 9, a panel of four housing advocates shared their thoughts on where to go from here.
Zac Shore, Stephen Barton, Alex Lofton and Tim Colon described a multi-faceted crisis requiring concurrent and complementary solutions.
Zac Shore is the director of development for Panoramic Interests, a construction company focussed on affordable student housing, workforce housing and homeless housing in San Francisco.
The company has a modular construction ethos that crystallized when they traveled to the U.K. and witnessed the construction of 190 apartments in eight days using shipping containers.
“When we saw that, we were convinced, and now we’re starting to build with it on a large scale in San Francisco.”
Panoramic Interests has built hundreds of apartments for students and workers, and is now beginning to build for the homeless. Shore cited demonstrable cost savings associated with housing homeless, cutting down on chronic use of emergency services and offering an economic incentive alongside the humanitarian one.
Stephen Barton represented the Bay Area Community Land Trust and the Committee for Safe and Affordable Homes. Barton has a PhD in city and regional planning from the University of California, Berkeley, and was director of the Housing Department and deputy director of the Rent Stabilization Program in Berkeley, California before retiring recently. He has written widely on housing policy and co-authored Common Interest Communities: Private Governments and the Public Interest.
Barton argues that new construction does not have the ability to solve the Bay Area’s housing crisis.
“It’s not to say that increasing the housing supply is not important, because it’s desperately important,” he said. “But of course we have Prop. 13 here in California and its progeny designed to protect real estate investors’ windfall profits, and of course encouraging land speculation because people who own vacant and under-utilized land hardly pay anything in taxes.”
Using taxes to treat rental property like a business rather than personal real estate would be a step in the right direction, “to recapture through taxation the value that we and those who came before us have created,” Barton said.
“If you applied a two percent tax to rental property in the whole Bay Area, you would raise $500 million a year and it could lead to construction of as many as 50,000 affordable apartments.”
“About half of the rent that tenants pay in the Bay area is not, in fact, necessary to profitably operate and maintain the housing once it’s been built and the construction costs are amortized. Instead, it’s basically an admission charge – ‘welcome to the magic kingdom, here’s how much you have to pay to be here in the Bay area’.”
Alex Lofton is a co-founder of Landed San Francisco, a community-based brokerage organization that raises capital from investors interested in local real estate, and uses that money to support first home-buyers with down payments.
“Our whole system is set up on the intergenerational transfer of wealth: you’ve got to ask your mom or you dad, or brother or sister, or grandparents to help you buy your first house, especially in expensive places. So we just say ‘Why can’t there be other options than mom and dad…to borrow that money?’”
“You live in a place like this and you question if you’ll ever become an owner…the leap from renter to owner is just impossible.”
While affordability was the main problem with Bay Area housing, requiring greater supply and higher incomes, another way forward was thinking about the concept of ownership differently, and coming up with creative ways for whole communities to help people get started in the property market.
“There isn’t a silver bullet, it does take a lot of solutions.”
Tim Colen, at the time of conference, was executive director of the San Francisco Housing Action Coalition, an organization promoting well-designed and well-located housing. Prior to this, he was president of the Greater West Portal Neighborhood Association, and spent 25 years working as geologist.
San Francisco is cursed by having a red-hot economy, and highly-skilled workers flooding into a city that has a history of under-producing the amount of housing it needs.
“We have chosen policies for the last two or three decades that have led us to this position where our population is growing by about 10,000 residents per year… a city that has a historic production rate [of houses] somewhere around 1700-1800 units a year.”
“It’s already a city that’s become hostile to the young, young families, seniors, immigrants, the artists, the weirdos, the hippies, everybody. It’s going in the direction of becoming a luxury resort with a certain amount of housing we can afford to subsidize.”
In Sacramento, liberal democrat Governor Brown has taken a bold step by introducing “by-right housing”, whereby if certain conditions are met by developers then new builds cannot be obstructed.
“It’s the first tool we’ve seen in ages that says ‘you can’t appeal projects to death anymore’,” Colen said.
The dominant conversation around housing has been one of intergenerational change, and the desire of previous generations to keep things the way they are, Colen said, and this has tipped the balance of power toward those who say no to development and increase construction costs.
“We’re strangling ourselves,” he said. “There is not enough money in the world to subsidize our way out of this problem.”
This panel discussion highlights a struggle between established residents and newcomers, who should be joining forces against an entirely different threat. Renters are being squeezed out of the Bay as prices surge, while would-be newcomers, many of whom are tech workers, are kept out by the same phenomenon. Both blame each other, yet it is landowners who are making a killing off the skyrocketing costs for space in the Bay Area.
Yes, tech workers drive up the cost of land, but freezing new construction also makes apartment rents artificially high. Both groups are right, but it is unfettered and untaxed landlordism that is the real problem.
There is a way to help protect those in danger of being forced out of the Bay, while also giving access to newcomers in innovative industries: tax the rising value of land and reduce taxes on working and exchanging. A citizen’s dividend paid out of the revenue from a land value tax, what some call a basic income, should be given to everyone to be spent as they wish. They would use this money to subsidize their apartment, while construction could boom in downtown San Francisco and elsewhere in the Bay. With more people able to fill the new units in the central locations, this would take pressure off areas even slightly outside the central business district. This in turn would retard the rise in rent from what it otherwise would be, while putting more money in vulnerable people’s pockets to secure housing.
Significant changes to any system of taxation require significant upheaval, and perseverance from citizens in and out of government. EarthSharing.org spoke with land value taxation proponent Joshua Vincent earlier this month, in a conversation covering attitudes towards land value tax, its applications, and the activism required to advance it. Watch the interview below, broken into three parts.
Vincent has been executive director of the Center for the Study of Economics since 1997. He has consulted for more than 75 municipalities, counties, NGOs and national governments. He works with tax departments and elected officials to promote land value taxation, and has testified as an expert witness on its impact. Vincent is the editor and publisher of Incentive Taxation.
Best Valuation Methods
Vincent lays out best practices for calculating land values, most of which “rely on values that have already been established by the assessor.” By looking at sales prices in an area, particularly of vacant lots but also of derelict buildings set for demolition, a fairly accurate picture of land value can be obtained.
Building values are more complex, but still absolutely necessary for revealing land values: by subtracting building value from a property’s total value, the ideal taxable land value can be calculated. Vincent says that “if we want to help capital and labour escape taxation we have to figure out what the building is worth, because that’s where the labour and the capital goes.”
The most effective valuation systems are in states that “update their assessments on a fairly regular basis, and they also change the percentage of land value to building value to reflect essentially what the market is,” Vincent says.
Using the example of an Atlantic City casino, Vincent says that while 20 years ago the property value would have skyrocketed due to market dominance and profit levels, today that profit has been reduced substantially. “Right now the land value is half of the total parcel value, because the building has lost its revenue-generating capacity,” he says.
Approaching City Officials
A land value tax is not just an end unto itself to reduce inequities in wealth. Vincent says the focus of any campaigners for land value taxation should be its application to almost any pre-existing problems in a city.
“You have to identify a problem that the community suffers from,” Vincent says, whether it be blight, population loss, or perceived high taxes. City officials will usually tend toward enlightened self-interest, and the revenue-neutral tax abatements that a land value tax allow are attractive to public representatives whose priorities are job creation and citizen well-being.
“We would then propose: well how about a universal permanent abatement on all buildings, and not just new buildings, not just condos, but all buildings past, present and future?”
One discussion is not enough to effect real policy change, and Vincent says any correspondence should be followed up with a second meeting, further information, and a push for the council to crunch the numbers of what is a very practical, “nuts-and-bolts” policy.
“The mistake a lot of reformers of all types make is they march into a city council chambers or a mayor’s office and say ‘here’s a reform, do it’, and then they turn around and leave. I think what we are putting forward is something that is practical, it is doable, and you can demonstrate immediately how it is doable.“
Who Is Likely To Oppose Land Value Taxation?
Entrenched interests exist that have made fortunes extracting rent from populations without investing back into them, and these interests comprise the most likely and vigorous opponents of land value taxation. Vincent points the finger at speculative, “absentee owners who have a business model that depends on blight and the decay of the neighborhood.”
“A lot of people that oppose land value tax are people that have adopted business models and used tactics to thrive in a declining city,” he says. “You extract rent, literally, from the tenants but you don’t put anything into the property; you let it run down. That’s the successful business model. And they will oppose a land value tax, because their buildings have fallen apart to such a degree that they wouldn’t benefit from such a land value tax.”
Automobile-intensive businesses are another example, and in the past, owners of flat-surface parking lots have voiced opposition to changes of the tax structure. Vincent says these businesses feed off the value of urban land, itself the product of the people and the government, but “they’re doing nothing to create that value, and they’re doing nothing for the community”.
Vincent points out that some among these interests have actively funded anti-land value taxation campaigns, like in Allentown in 1997.
Finding a new apartment in a competitive housing market can be exhausting: constantly scouring classified ads, racing from one showing to another, hoping that your credit history and persona can charm potential landlords. But just when you thought finding an apartment couldn’t be more difficult, prospective tenants are finding themselves in rental bidding wars, as landlords exploit competitive real estate markets to maximize revenues.
It is not uncommon for prospective renters to conduct searches spanning months, which can cause substantial disruption in their lives. But some landlords are now taking steps that will exacerbate this problem – once you find an apartment in your price range, bidding wars between applicants will probably increase the list price.
As Devin Cox and his roommate hunted for an apartment in Vancouver, they noticed that approximately a quarter of all rental applications asked prospective renters to list the maximum amount above the asking price they would be willing to pay. According to Cox, multiple landlords notified them of higher offers and gave them the chance to increase their bid.
This practice is not illegal, and is even being highlighted in classified ads. A recent Craigslist posting for a studio apartment noted that monthly rent would be determined by an on-site auction. While this practice might be gaining steam in Vancouver for the first time, it has plagued US cities with limited housing stock for several years, particularly New York City and San Francisco.
Housing advocates cite bidding wars as a reason to implement stricter rental laws. At present, Vancouver officials are taking no action to curb this practice. Bidding wars have been blamed for worsening Vancouver’s housing crisis, although no studies have investigated the full extent of their effect.
Bidding wars are another way in which landlords are taking advantage of Vancouver’s economic success. Yet, they are just a symptom of deeper issues. The city’s infrastructure, people, and businesses are enticing large swathes of educated workers to relocate there, increasing the value of land in the metropolitan area. This increasing land value is a social product that should be reinvested in the community. Unfortunately, this value is being depleted through rising rents that are far outpacing wages.
If Vancouver will not take steps to eliminate bidding wars, it should at the very least take steps to increase residential space. Government officials should consider implementing a land value tax (LVT).
American political economist Henry George argued that taxing productive activity discourages production. Taxing buildings punishes those who build vertically, and results in a reduction in urban housing and worksites. To encourage more construction, he proposed abolishing the building taxes altogether, and shifting all taxes onto land. He argued that land is our common inheritance, and we can achieve justice by sharing the revenue from land.
There are many nuanced arguments in favor of this strategy. George argued that sufficiently-high land value taxation would actually encourage landowners to develop residential and commercial space, adding value for others, in order to pay the land value tax as well as provide themselves a respectable return. This additional housing inventory would ultimately reduce housing costs. But also the increase in construction and development would create a high demand for labor, thereby reducing unemployment and improving wages.
Given the extreme nature of Vancouver’s housing market, officials should move quickly to keep Vancouver a place where all people can afford to live and live well. The Vancouver mayor and council can be contacted online, over the phone, in person, or using a mobile app, details of which are listed at vancouver.ca. Read more on the problems of bidding wars and speculation.
Earthsharing.org organized BIL: Oakland 2016 Recession Generation on July 9th in Oakland, California. The Optimal Taxation Panel participants were Yoram Bauman, Joshua Vincent, Fred Foldvary, Robin Hanson, and Kris Nelson. The panel moderator was Edward Miller (bios below).
The discussion revolved around the essential role that natural phenomena play in all economic activity and how to fairly treat these resources vis a vis taxation. Resources like land, minerals, access rights, the electromagnetic spectrum, domain names, and atmospheric carbon were discussed.
Joshua Vincent: Executive Director at theCenter for the Study of Economics since 1997. Vincent has consulted for more than 75 municipalities, counties, NGOs and national governments. He works with tax departments and elected officials to restructure taxation to a land-based system, and has testified as an expert witness on the impact of land value taxation. Vincent is the editor and publisher of Incentive Taxation, a journal on land value taxation.
Fred Foldvary: Board member at Robert Schalkenbach Foundation (RSF), a non-profit organization established in 1925 to spread the ideas of the social and economic philosopher Henry George (1839-1897). Foldvary received his B.A. in economics from the University of California at Berkeley, and his M.A. and Ph.D. in economics from George Mason University. He has taught economics at the Latvian University of Agriculture, Virginia Tech, John F. Kennedy University, California State University East Bay, the University of California at Berkeley Extension, Santa Clara University, and currently teaches at San Jose State University. Foldvary is the author of The Soul of Liberty, Public Goods and Private Communities, and Dictionary of Free Market Economics. He edited and contributed to Beyond Neoclassical Economics and, with Dan Klein, The Half-Life of Policy Rationales. Foldvary’s areas of research include public finance, governance, ethical philosophy, and land economics.
Kris Nelson: Principal at Phoenix Finance, which provides access to capital without collateral to small businesses and startups. Nelson also serves as Legislative Director of Common Ground OR-WA, a non-profit organization that promotes a more democratic treatment of land and natural resources. Previously, Nelson worked as a Principal at Genomics Consulting, where he helped launch a clean technology venture capital firm. He holds a Master’s degree in Business Administration from Willamette University and a Bachelor’s degree in Journalism from Evergreen State College.
Edward Miller: Co-organizer of the Recession Generation event. Miller is the Administrative Director of the Henry George School of Chicago, a non-profit educational organization which provides educational opportunities to the public on the topic of classical political economy. He serves as a board member for the Center for the Study of Economics. Previously, he has worked with the Institute for Ethics and Emerging Technologies.
Natural resources play a foundational role in a country’s economic development. As natural commons, they provide economic assets via space, raw materials, and energy that can be used to create other assets and opportunities in the form of industry and wealth. But because these commons are finite, their mismanagement often leads to a boom and bust pattern of economic development. Norway, however, has set a solid example for how to properly manage natural resources, including one of the most sought after – fossil fuels.
In the 1950’s, European countries began to speculate that vast oil and natural gas deposits lay under the North Sea. This theory was confirmed in 1959, when the largest natural gas field in Europe was discovered in the Netherlands. Excitement grew around potential future discoveries, particularly in the area of Norway’s continental shelf. Anticipating the discovery of reserves, the Norwegian government passed legislation in 1963 stating that the State owns all natural resources. The legislation also stated that the government is the only authority that can grant licenses for exploration and production. This legislation put Norway’s natural commons firmly into the hands of its citizens.
Initially, the Norwegian government gave private energy companies limited licenses to explore and tap Norway’s reserves. These companies can be credited with developing the country’s first oil and gas fields. However, in an effort to maximize national revenue, in 1972, the government moved quickly to create a government-owned petroleum company called Statoil. From that point forward, any foreign energy company granted a license was required to split 50% of the work with Statoil.
In the 1990’s, the government created the Government Pension Fund – Global (GPFG), informally known as the Norwegian Oil Fund, as a place to deposit all excess oil profits. The value of the fund stands at a staggering $850bn, and officials estimate that sum will surpass $1 trillion by the end of 2019.
So what has Norway been doing with all this money? Well, not much. And that is the point. The government capped annual withdrawals at 4% in order to prevent hyperinflation and to secure a surplus of money to survive in a looming post-fossil fuel world. This decision has proven wise recently as a drop in oil prices has moved Norway to declare its petroleum industry in crisis.
Norway’s natural commons management is a shining example of the prosperity that results when revenue from national resources is shared by all citizens. Norway has used this wealth to create social and economic programs that help each citizen. This wealth has also built a massive pension fund that can support the country during periods of economic hardship. It is a powerful equalizing tool not often seen in nations rich in oil and other natural resources.
Some economic scholars draw comparisons between Norway’s approach to natural commons (referred to as “petro populism”) and the theories of Henry George. Henry George, an American economist and political theorist from the 19th century, postulated that land is social commons, and that the profits drawn from land should be shared by all citizens via the use of land value taxation (LVT). In the case of Norway, they have taxed the revenue drawn from oil rich land at the very high rate of 78% and both redistributed and saved that revenue. In addition, they have carried over such sustainable thinking towards other natural resources, such as lumber and fisheries, and seen the same successes as with petroleum.
Resource-rich nations should take lessons from Norway on how to fully profit from and intelligently invest revenues from the utilization of our natural commons. The discovery of lucrative resources can inevitably lead to a boom and bust economy. Avoiding that requires managing those resources appropriately and wisely, as the Norwegians have, by using wealth derived from them to create an equitable and healthy society for all.
But all nations, whether “resource-rich” or not, have at least one socially-created resource of enormous value which can be tapped: the rental value of land.
Audio podcast on Norway and it’s oil management system. Courtesy of NPR online.
Chelsea Roff Discusses non-profits at BIL Oakland 2016: Recession Generation. Chelsea leads Eat Breathe Thrive, a Los Angeles based non-profit focused on treating and preventing eating disorders. Eat Breathe and Thrive began as a free program that Chelsea began at local clinics, as her personal passion, in her free time. After some timely and fortunate media exposure, the opportunity suddenly arose for her to convert this program into a meaningful career as part of a non-profit organization.
Chelsea was one of the featured speakers at BIL Oakland 2016: Recession Generation. The event served as a skill-sharing event for those interested in social, economic, environmental justice. In addition, a myriad of revolutionary ideas aimed at promoting greater social, economic and environmental justice like land value taxation were introduced and discussed at length.
In the talk, Chelsea introduces the similarities and differences between non-profit and for-profit businesses. During it, she explains how to effectively manage and fund raise for a non-profit. In particular, Chelsea carefully introduces the potential revenue streams available to non-profits and how the unique status afforded to nonprofits serve to better enable their sustainability, all while satisfying the extensive byzantine legal requirements that the IRS places upon all 501 (c) non-profits.
About Chelsea Roff (bio)
Chelsea Roff is the Founder and Director of Eat Breathe Thrive, a nonprofit organization that prevents and helps individuals overcome disordered eating and negative body image. An internationally recognized author, speaker, and yoga teacher, Chelsea has spent the past seven years pioneering integrative health programs for people with mental health challenges. Prior to her work in mental health advocacy, Chelsea worked as a researcher in a psychoneuroimmunology laboratory. Her research explored how stress affects mental, emotional, and social health, and how mind-body practices like yoga can improve the outcome of chronic immune diseases like HIV/AIDS and cancer.