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.
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.
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.
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.
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 sustainablemeans of growth for the US economy.
Imagine if you did not pay rent for an apartment, or taxes on your wages. Think of all the excess income you would save, invest, use to take a vacation, learn a new skill, spend on an altruistic project, etc. What would you do with the money?
Some people actually have this luxury. They don’t have to pay rent or a mortgage. They own their apartment building, free and clear, and the property taxes they pay are minuscule. The value of the land under their New York City apartment building just goes up and up in value. As this happens, they are able to charge their tenants more rent.
Good for them, right? But do you know what that means for you? Your rent goes up and up too. It’s not like the landlord really had to renovate your apartment to charge you more. It’s not that they had to build more units to get more rental income. It’s not that they necessarily worked any harder than you. The value of their land just keeps going up, and that means that you are subsidizing their increasingly luxurious life style.
They have money to see a Broadway show and vacation in France precisely because you have to struggle to pay the rent. Wouldn’t it be fairer if everyone paid rent for the space they claimed? If they paid taxes on the rising value of their land, we could use that money to offset taxes on working and exchanging.
Imagine if you did not have to pay taxes anymore, and instead, when your landlord collected your rent, they covered those taxes for you with the rent money? It’s not like you would pay any more rent either. In fact, you would likely pay less.
What would you do with all the taxes you saved? What vacations would you take? What new skills and educational opportunities would you seize? What worthy causes would you give to? What Broadway shows would you see? This would all be possible if we lived in a world where land was the primary source of public revenue.
Howard H. Aiken, a pioneer in computer engineering, famously urged others to “[not] worry about people stealing [your] idea. If it’s original, you will have to ram it down their throats.”
This reminder is useful when considering the reasons that groundbreaking ideas often do not make it into mainstream culture or history textbooks. Marie Howland, a passionate advocate for women’s economic independence in the nineteenth century, is an apt exemplar of Aiken’s claim. A woman of revolutionary ideas, she is hardly a household name. Howland, a white working-class woman, was among the first of both her class and gender to publish a novel in America and to participate in the women’s rights movement by challenging fundamental social conventions that limited the influence of women to the household and domestic sphere. Like other authors such as Jane Austen, Howland was deeply troubled by the way social conventions served to reinforce women’s systemic economic dependence on men. This has hardly been resolved; “equal pay for equal work,” one of the cornerstones of Hillary Clinton’s current presidential campaign, is merely one example of the issues that remain to be addressed towards Howland’s goal of achieving economic equality among genders. What is most compelling about Howland, then, is how relevant her ideas for the economic equality of women continue to be today.
A concise statement of Howard’s philosophy is that she wished to see opportunities for women to achieve financial independence. This idea necessarily challenged traditional boundaries separating the domestic and public spheres. Whereas a man might have various opportunities for wage-earning work outside of the household, a woman’s work was typically constrained to the household and its value not so easily quantified. Early on, this distinction led Howland to embrace the writings of French intellectual Charles Fourier. She admired Fourier’s suggestion that women be empowered to select their work – primarily in a communal setting (phalanx) with other women – and be materially compensated. It is important to distinguish here that while many women in working-class families were, in fact, compensated for employment outside of the household, Howland recognized that this did not absolve them of traditional household duties. Women, in many cases, worked a “second shift” on the homefront, remaining trapped by this economic and social model. As Cliff Cobb states in his introduction to a special issue on Marie Howland in The American Journal of Economics and Sociology, “[T]he only way to let women out of [their domestic] prison[s] was to knock down the walls that have separated the oikos (household) from the polis (public arena), the domestic and the non-domestic spheres.”
The Fourierist model, which remains obscure relative to other alternatives to Capitalism such as Marxism, might best be characterized as a combination of the communal elements of Socialism, with a view of humanity as an evolving entity striving towards a state of universal harmony in accordance to God’s will. Fourier understood the Divine model for social evolution as requiring a move toward communal living, reducing the inefficiencies of individual households by consolidating and redistributing the work required by the community. Notably, domestic work such as cooking, cleaning, and childcare was included in this model. By normalizing domestic work within the community marketplace, Fourier’s plan for communal living also implies a redistribution of the power dynamics that have traditionally separated the genders, privileging white males above everyone else. It was Fourier’s hope that altering domestic work and power in this way would facilitate the sharing of power in other spheres.
Late in life, Howland resided in the Georgist community of Fairhope, Alabama, which was based on the ideas of American political economist Henry George, favoring land value taxation rather than taxation on improvements or property. These ideas, implemented both in the United States as well as abroad, have yielded enormous economic gains. Not surprisingly, Howland found these ideas compelling and even necessary for realizing a more egalitarian world.
To be clear, none of this demonstrates that the core of Howland’s vision for economic liberation of women could not be better adopted by our contemporary society. If Aiken’s words are to be believed, we might argue that Howland’s ideas continue to pose challenges so significant that they are resisted by mainstream culture. The virtues of Howland’s ideas lay principally within the uncomfortable questions they pose. It is interesting, for example, to consider the widespread negative perceptions that persist regarding “feminism” as a disruptive – rather than restorative – social influence. The myth of an America offering equal opportunity to all regardless of gender, race, and other minority identifications persists. Which groups stand to lose ground should continuing inequality be recognized, and what type of social and economic justice, as envisioned by Howland, ought to be pursued? The economic theory of great disparity as a necessary evil (social Darwinism) remains so deeply ingrained in our national narrative that it is often revered as unassailable, forestalling conversations that might otherwise pose promising alternatives but that have the potential to alter our current economic paradigms.
If there is anything we can learn from Howland’s ideas, it’s that just work relations cannot be achieved within the Capitalist system, in its current form, nor can they be achieved by simply redistributing property. To secure a just system for women, Howland argues that the caretaking duties that women are often burdened with also need to be redistributed.
Berkeley, California, has long been a bastion for artists, intellectuals, and their progressive ideals. It is home to UC Berkeley (3rd-ranked university in the world), which hatched the politically seminal Free Speech Movement, as well as Telegraph Avenue and People’s Park, epicenters of the counterculture movement of the later 60s and early 70s, and the first enactments of a number of progressive policy measures including a soda tax and the first handicapped-accessible sidewalks. Now, however, skyrocketing housing costs are threatening Berkeley’s inclusive character, as the rising cost of residential rental housing space forces more and more lower and middle-income families to leave.
In 2010, the average monthly rent for a new apartment in Berkeley was $1,975. Today, that number stands at $3,308, a staggering 60% increase in just 6 years. With Berkley’s median household income of $65,283, such staggering rents can easily consume two-thirds of a family’s gross income, leaving little money for other expenditures.
Housing costs in Berkeley are being inflated by forces affecting the entirety of the San Francisco Bay: a burgeoning population, an increase in the number of well paying jobs, and a lack of new housing construction chief among them. A recent survey revealed that 78% of Berkeley residents believe affordable housing is the number one issue the city should be tackling. Elected officials are starting to take action.
In early June, Berkeley City Council unanimously approved a November ballot measure to levy a 1.8 percent gross-receipts tax on landlord rents. The tax, if passed by voters, is expected to raise $5 million annually, which would then be spent on affordable housing projects. It’s a clever way of circumventing California’s Proposition 13 which, along with a long list of municipal revenue limitations, caps the amount that real estate (encompassing both land and buildings) can be taxed at 1% of market value.
Low taxation on real estate–or, more to the point, on land values–effectively encourages the purchase of land for the sole purpose of speculation. Low property (land value) taxes paired with high taxes on improvements (structures) discourages commercial or residential development of that land, as rising land values reap financial reward for property owners without their having to undertake the risk and trouble of adding any improvements. Often times this means there is little, if any, incentive for property owners to build the quality low-cost housing needed by growing communities. In turn, they benefit from the resulting artificial housing scarcity much more than active building ever would.
In response to these condition and their effects, Stephen Barton, Berkeley’s former Director of Housing, has become a major proponent of what is being dubbed the “landlord tax.” Barton, drawing from the ideas of Henry George, explains that landlords are not creating the value that is leading to skyrocketing rents. Land values are a social product, directly inflated by a growing population and its subsequent economic development, which, in the case of the Bay Area, has in turn been buoyed by the region’s diverse culture and ample public infrastructure.Proposition 13’s limiting effect on the land portion of property taxes has enabled landlords to privatize this socially-created value for their own personal profit.
At present, Proposition 13 allows landlords in Berkeley (and all across California) to capture the increasing land values. When a tenant leaves a unit, even if it is rent-controlled, a landlord has the opportunity to increase the rent as much as the market allows. As a result, landlords have increased overall rents by $100 million annually, an amount well beyond what constitutes a fair return on investment. “This has been a massive income transfer from tenants to landlords,” Barton said. “It’s deeply hurtful to low-income people.” The result of this excessive transfer of income also serves to gentrify the poor right out of Berkeley.
The this new landlord tax is a distortion of land value taxation (LVT). LVT was originally proposed by American political economist Henry George, who recognized that land values are a social product (affected primarily by the size and productivity of the nearby community) and should be taxed so that their value can be returned to the community. The difference between LVT and the landlord’s tax arises when considering raw, vacant and underdeveloped land. LVT is a tax on land values, independent of improvements, that provides incentive for landowners and landlords to put all land to its best use. By comparison, the landlord tax depends on gross receipts, punishing those that increase tenancy and rewarding that hold their land idle, which is not a good way to encourage walkable and well-maintained communities with ample housing.
Taxes on land, in comparison to the ubiquitous tax on improvements we have in the United States, has been shown to actually increase the supply of both residential and commercial space by preventing the privatization of of socially-created land values by landlords. A sufficiently high LVT makes the ownership of land expensive, which then forces the landowner to develop the rental space needed to pay the higher land value tax. Conversely, the tax on improvements has the opposite effect, penalizing the construction of rental space by increasing the amount of one’s property taxes at pace with an increase in building.
The Berkeley Rental Housing Coalition, a landlord’s organization, says the proposed tax is too burdensome. They plan to put a similar, albeit smaller, tax proposal on the November ballot. Charlotte Rosen of East Bay Housing Organizations fears that two landlord tax measures on the ballot could split the vote and cause both measures to fail, which would be the landlords’ first preference. If the landlord tax measure proposed by the Berkeley City Council passes, cities across the Bay Area will be watching closely to see whether the new policy does actually stem the housing crisis.
Eleven years after the federal levee failures following Hurricane Katrina ravaged New Orleans, the city’s tourism industry has rebounded to pre-storm levels. In 2014, 9.52 million people visited New Orleans and spent a total of $6.81 billion, the highest recorded tourism spending in the city’s history. But while the revenue from increasing tourism has been a boon to the city’s economy, the market for affordable housing has been strained as property owners and investors increasingly convert residential properties into short-term rentals.
Short-term rentals are furnished homes rented to tourists as an alternative to hotels. Although they have existed for some time, websites like Airbnb and VRBO, which make it easy for homeowners to connect with those seeking accommodations, have led to a rapid proliferation of short-term rental units over housing for the city’s workers. While they benefit property owners with a source of additional revenue and are often less expensive for tourists than a hotel, these short-term rentals are decried for straining the housing market in cities with limited housing stock.
This trend suggests that homeowners, despite the city’s economic resurgence, are finding it necessary to generate additional income. This may result partially from a lack of economic opportunity in other sectors, forcing property owners to venture into the short-term rental market. New Orleans renters have also suffered displacement as investors and landlords, seeing bigger dollar signs in reach, convert entire properties to short-term rentals, often evicting long-term tenants.
Housing advocates across the country, particularly in San Francisco and New York City, have rallied against this practice, citing increasing rents and a trend of landlords removing properties from the residential rental market to use them solely as short-term rentals. In New Orleans in particular, where rents have increased 20% over the past 14 months, shrinking housing inventory is squeezing out the lower-income renters and prospective homeowners who are already struggling to find affordable housing.
Such short-term rentals, though prevalent, are illegal in New Orleans. Local ordinances state that an entire home may not be rented for a period of less than 30 days, and citations can result in financial penalties in the amount of $500 or more. However, the city lacks the resources and personnel to enforce these laws. Of an estimated 2,000 to 4,000 illegal short-term rentals, only 72 properties received citations in 2015.
New Orleans housing advocates, concerned about the effect of these rentals on housing stock and rising rents, have issued recommendations for how the city should manage these properties. They recommend that legal short-term rentals, defined as the rental of a room within a home versus the entire home, be subject to taxes, the revenue from which would be used to construct low-income housing. This would be equivalent to introducing a new sale/income tax hybrid for homeowners seeking to create the value or income that some need to make ends meet. For illegal short-term rentals, housing advocates are requesting assistance from sites such as Airbnb in identifying them and recommend that fines be increased from the current $500.
With rents rapidly inflating, New Orleans must take immediate and drastic action to ensure that housing remains affordable for its citizens. The proliferation of short-term rentals–and its negative effects–stems from the rising popularity of New Orleans as a tourist destination, the lack of alternative income-generating opportunities, and the lack of any incentive system for landowners to build the necessary structures to increase in the city’s housing capacity.
The current rise in land values, a socially-created product of the city’s diverse population, manifests as increasing rent, which is a major draw for landlords. This means that this increased value, created by the community, is being captured by landlords rather than the community itself.
The government must enact policies that re-invest the rising value of land (created by city’s permanent residents) back into the city for the people. The best approach would be to implement a sufficiently high land value tax (LVT) as originally proposed by American political economist Henry George. George recognized that land obtains its value from the government granting legal privilege to exclude others from a portion of our common inheritance, the Earth. It is thus necessary for those benefitting from this exclusive use to compensate those they exclude.
In comparison with the ubiquitous property tax (which includes a tax on buildings) common in the United States, LVT has been shown to actually lower speculation of both residential and commercial space by preventing the privatization of socially-created land values by landlords. A sufficiently high LVT makes the ownership of underdeveloped land expensive, which then makes it necessary for landowners to develop rental space to generate revenue to cover the higher land value tax–especially when the land is most valuable, as in any city. By contrast, the portion of the traditional property tax which falls on improvements has the opposite effect, penalizing construction of residential and commercial space by increasing the amount of one’s property taxes via the higher tax on improvements. Without the developmental incentives of land value taxation, the success of New Orleans’ expanding tourism industry will continue crowding its underdeveloped housing market. The cruelest aspect of this is that travel and tourism workers, who are the backbone of the entire industry and often musicians and artists, often find themselves priced out of their own neighborhoods as the tourism industry that depends on their labor booms. Efforts to enhance the affordable housing supply, therefore, are essential to maintaining the stock of service workers, artists, and musicians who entice tourists to love, and go spend their money in, New Orleans.
Laura Luevano, a homeless woman struggling with severe diabetes and arthritis, failed to find an apartment in Los Angeles after searching for several months–despite holding a federally subsidized rental voucher. She is one of more than 2,000 people in Los Angeles who remain homeless despite holding these rental vouchers. Her story represents one of many that demand a fair and just solution.
In Los Angeles, a city known for its pristine beaches and Hollywood glamour, 35,000 people are without homes, and the situation is not improving. Just last year, the homeless population increased by 5.7%, which has been deemed a crisis by Peter Lynn, the executive director of the Los Angeles Homeless Services Authority. City and state officials are hoping that rent vouchers will help abate this crisis, but that measure so far has shown poor results.
Rent vouchers are, in the eyes of officials, a quick and easy solution to the increasing homelessness problem. The voucher, subsidized by the federal government, can be used to pay rent to a landlord. But quick fixes often fail to provide long-term solutions, and the rent voucher approach has been no exception.
While vouchers increase the capability of the poor to access housing, they provide minimal incentive for landlords to increase the residential housing supply. Thinking in terms of supply and demand, vouchers serve to increase demand, but a lack of increase in supply to meet that demand ultimately defeats the program’s purpose. People tend to attribute the lack of supply to zoning and rent control–and indeed these issues are a part of it. However, the most overlooked factor is that the supply of land is fixed, and thus the owners can make an easier buck just sitting on undeveloped property and waiting for it to rise in value.
As a result of these simple market dynamics, recipients of vouchers are facing a harsh reality – the Los Angeles rental market is crowded and extremely competitive. LA County currently has very little housing inventory available for immediate rental – an incredibly low 2.7% rental vacancy rate. At a vacancy rate below 5%, the power dynamic between landlords and renters shifts dramatically towards landlords. Landlords can afford to be selective about tenants, choosing those that are least likely to fail to pay their rent. Often, the tenants that lose out are veterans and minorities.
These landlords have been reluctant to take on the homeless as tenants, citing concerns that they will be troublesome tenants and will fail to pay rent. But the County is taking action to erode these barriers by providing financial incentives to landlords. Through the voucher program, the city guarantees first and last months’ rent, as well as a security deposit, to landlords. Santa Monica County has gone a step further and gives landlords a $5,000 bonus for accepting rent vouchers.
In general, subsidies such as guarantees and bonuses have much the same effect on housing supply as vouchers. Subsidies of all kinds spur demand without any significant increase in supply, resulting in even higher rents for everyone. This goes to benefit landlords while hurting renters.
The city is educating landlords to reduce stigma and make the benefits of accepting vouchers clear. Vouchers are guaranteed rent, and voucher tenants have substantial support from the city in the form of case managers and tenant mediation, helpful in the case that a disagreement arises. The city also hopes that appealing to landlords’ sense of civic duty will increase their willingness to accept vouchers. Convincing hesitant landlords, however, is just one piece of the homelessness puzzle.The best additional measure would be one that encourages building more housing units.
Rent vouchers cannot be applied to 1- and 2-bedroom apartments that rent for greater than $1,150 and $1,500, respectively. With housing costs in Los Angeles soaring, and new rentals averaging $2,094 per month, federal vouchers cannot be applied to a large swath of available housing. Some counties have eased restrictions on these caps but have still not seen an increase in the number of voucher recipients renting apartments. This further validates the notion that this is a supply problem that calls for incentives to build the necessary units.
The voucher program is, in addition, actually squeezing low-income families that do not qualify for vouchers, creating a problem where there previously wasn’t one. When a homeless person receives a voucher, they are competing for the same rentals as low-income families, says Santa Monica housing administrator Jim Kemper. So while the program has had some success in taking homeless people off the streets, it is often at the expense of the working poor, making a bad situation even worse. Legal analysts have long criticized the City and State for focusing on voucher programs instead of building new units at the rate necessary to decrease rents. Ultimately, for the voucher program to succeed, Los Angeles must enact policies to ease its housing shortage.
To address the housing crisis, Los Angeles should consider implementing a land value tax (LVT) to replace its current, traditional model of limited property taxation, which may well require changing California’s constitution via voter initiative. In the late 19th century, political economist Henry George observed that a tax on property improvements reduces a landowner’s incentive to build, as improving the value of his or her property would increase the amount of taxes owed. Henry George hypothesized that, by eliminating the tax on improvements and implementing a relatively high LVT–which depends only on location value and surface area–landowners would be incentivized to increase residential and commercial space in order to create the necessary revenue to pay the LVT while generating desired return on investment.
Despite the proven success of the LVT in several countries around the world, Los Angeles cannot, at present, implement such a change. The California constitutional change known as Proposition 13 makes it exceedingly difficult to enact any measure of change to either land or building value taxation. Enabling such changes would require either changing or circumventing Proposition 13’s limitations.
At present, the human cost of inaction is quite severe. While a reaching an effective long-term solution requires bold measures, the humanity in us demands that we commit to positive change for all.
Imagine a society in which each citizen is guaranteed a minimum monthly income. People do not work to survive; they instead work to contribute to their country, supplement their income, and enrich their minds and bodies. Poverty rates have plummeted, and socioeconomic divides across an entire populace have shrunk. It may sound like a socialist utopia, but a number of countries are considering the idea of a Universal Basic Income (UBI), with some poised to implement it in 2016.
The concept of a UBI has found support across the political spectrum. The Cato Institute, an American Libertarian think tank, has proposed that a UBI could be the better way for governments to redistribute income versus complex entitlement programs. Andy Stern, former president of one of the largest unions in America, the Service Employees International Union, believes a UBI is an effective way to target poverty at its core – a lack of income.
Centuries of hypothesizing notwithstanding, there have been few concerted efforts to implement a UBI until now. Y Combinator, a Silicon Valley-based company that provides seed money to startup companies, will be giving 100 families in Oakland between $1,000 and $2,000 per month for up to one year. Researchers will measure “happiness, well-being, financial health, as well as how people spend their time.” Finland is currently drafting a proposal for a UBI that would give each citizen 800 euros per month, and the Labour Party in the United Kingdom is considering backing a similar initiative.
The addition of a Land Value Tax (LVT) to funding the UBI would limit, if not eliminate, the amount of income absorbed by rents while providing the necessary revenue stream to support it. Martin Farley, author of the “Transformation Deal,” has calculated that this approach would create a revenue stream to support at least a moderate UBI. Furthermore, since the burden of an LVT is on landlords, excessive rents captured by them would be recouped by the LVT and re-injected into the UBI program. In addition, LVT has been shown to promote the best use of land, generating more lower-cost yet high-quality residential and commercial space, a further benefit of UBI. It has been argued by many that the dual combination of LVT and UBI would work extremely well together to resolve a number inequities in any economy.
Economists from across the political spectrum will be watching Y Combinator, Finland, and other test programs closely as they experiment with a UBI. Success could mean an entirely new approach to the welfare state. Most important will be whether and how socioeconomic conditions change. And from those changes, new understandings may well arise to support ideas such as Land Value Taxation. For now, the world is watching.
Richard Florida’s The Rise of the Creative Class posited that the clustering of knowledge-based, or “creative” occupations in cities and metropolitan areas drives urban economic growth. Florida now says, though, that such clustering also “generates distinct winners and losers both across and within cities and metros.” This is the central takeaway of the recently published study that Florida conducted in collaboration with Roger Martin, Melissa Pogue, and Charlotta Mellander, his colleagues at the Martin Prosperity Institute.
Florida’s work distinguishes between knowledge-based occupations in science, technology, and design and “routine” occupations in the manufacturing and the service industries. This most-recent study combines that approach with the work of Michael Porter, author of the landmark work The Competitive Advantage of Nations, published 25 years ago. Porter’s work, which looked at the role of industrial clustering in economic development, distinguishes between locally-oriented industries and traded industries—those that export goods beyond their immediate geographical areas. Florida and his colleagues at MPI have synthesized these two approaches to generate four occupational-industrial categories–creative-in-traded, creative-in-local, routine-in-traded, and routine-in-local. By analyzing data across 260 metropolitan areas comprising three quarters of the U.S. population, they have shed light on the role these four types play in innovation, economic growth, and inequality.
What They Found
There is a clear connection between traded and creative industries. 45 percent of those working in the traded industries are in creative occupations, compared with 36 percent in local industries. “Not surprising,” says Florida, “as traded industries compete on innovation and creativity.” These creative-in-traded jobs are distributed very unevenly around the country, with high concentrations, or geographical spikes, in a few cities, with the highest concentrations on the East and West Coasts. Creative-in-traded employment is a key driver of both innovation and economic growth and has the most positive association with higher wages. Of the four categories, creative-in-traded occupations have the highest wages by far, with average wages 31% higher than than the next highest category, creative-in-local, and 182% higher than the bottom category, routine-in-local—which makes up 45% of all workers. Both routine-in-local and routine-in-traded occupations fall below average wages, and the wage gap between creative and routine workers has grown over time.
What troubles Florida and his colleagues is the strong link between a concentration of creative-in-traded employment and economic disparity. The higher a metro region’s share of overall creative-in-traded jobs, the greater the income inequality. While all four categories see higher wages on average in metros with a higher proportion of creative-in-traded occupations, routine occupations do not see wage increases high enough to make up for the higher housing costs driven by a city’s desirability among those in higher-paying creative occupations. As a result, those in routine occupations, especially routine-in-local, are pushed to less advantaged metros with fewer high-paying jobs, creating a vicious cycle in which the disadvantaged sink lower and lower into poverty.
What can be done?
The most difficult challenge, according to Florida, is that there are simply not enough creative jobs to go around. The proportion of creative jobs is increasing, but only very slowly—at about 1.4 percent per year. The solution, says Florida, is the conversion of routine occupations to creative occupations. He calls on business and industry to lead this transformation “by increasing the creative content of what is currently routine work,” and says that there is much to be gained in doing so in terms of productivity, customer service, and quality. Those cities that are able to convert more of their workforce from routine to creative occupations, he says, will be more competitive.
The economist Henry George noted this puzzling phenomenon over a hundred years ago. He asked why it was that as production and density increases so, too, does poverty. You would think that as society is able to produce more wealth in cities there would be more wealth to go around. However, it is precisely because certain people earn more that landlords are able to charge more rent.
Unlike creative ventures, which require innovation and risk-taking, owning a vacant lot in the middle of a city requires relatively no effort or risk, as land values in these areas are continuously going up in value. If an urban property owner waits long enough, they can realize an enormous return without lifting a finger. The creative industries popping up around their rental properties will enable the slumlord to charge much higher rents. This slumlord needs neither assume the financial risk of building a new structure to house more of the new creative industry workers nor continue to house the routine workers. Rather, the slumlord will often just charge increasingly exorbitant rents to the routine workers, effectively forcing them out, and then house the creative workers in the same conditions for higher rents. The creatives are willing to pay these rents due to the desireable location and the short supply of rental units. Supply is suppressed because other landlords are also complacent and prefer to avoid the risk of developing their land to its highest and best use. Some will just knock down the buildings altogether to lower their property tax bills.
If, however, landlords were taxed on the basis of the value of their land, they would be incentivized to provide more housing units in order to pay the tax and make a profit. People would still move around based on the demand for particular locations, but there would be more housing for everyone. Thus, all things being equal, rent would be lower overall. What we think of as the peripheral areas of the cities, where the routine workers can afford the rent, would likely be twice as close to the city center as the areas they can currently afford to live in. We would not need other taxes if all or most revenue was coming from land. If we scrapped all of the taxes on routine workers’ wages, food, transportation, etc., these things would become more affordable, too, dramatically increasing creative employment and reducing poverty in cities. To see what that would look like, you can read our article Visualizing Earth Sharing.
Consumer groups in Italy have banded together to file an anti-trust complaint against McDonald’s with the EU’s executive commission. The complaint alleges that McDonald’s has used its current strength in the market to gouge franchisees and, ultimately, consumers. The fast food giant is reportedly charging rents to franchisees that are ten times normal market rates. Additionally, they set 20-year franchise contracts with non-compete clauses that all but force the franchisees to stay with the brand. The coalition claims that these practices violate EU anti-trust rules. According to a December 8 statement by the EC regarding an anti-trust complaint against Qualcomm, “Under EU anti-trust rules, dominant companies have a responsibility not to abuse their powerful market position by restricting competition.” These monopolistic business practices are nothing new. Common consensus holds that McDonald’s financial success stems not from its food service business but rather land speculation. The corporation’s founder, Ray Kroc, once said, “Ladies and gentlemen, I’m not in the hamburger business. My business is real estate.”
Through its vast real estate fortune, McDonald’s has been able to leverage its formidable power. They can literally crowd out competitors from the physical landscape via their ownership and wasteful use of prime locations. More on that later.
Because of both the high rents it charges its franchisees and the restrictive contract terms, says the EC complaint, franchisees are forced to charge consumers inflated prices. In Bologna, 97% of menu items at McDonald’s franchise stores are priced higher than at corporate-owned ones. This figure is 68% in Rome and 71% in Paris. As for how much higher the prices are, the complaint cites the price of a small order of fries as 64% higher in Paris, 72% more in Marseille, and 25% more in Lyon.
In a joint statement, the groups said, “We urge the Commission to examine McDonald’s franchising system in detail, and take all appropriate action to ensure that the unfair burdens on the company’s franchisees end, and can no longer harm consumers.”
In response to the allegations, McDonald’s claims that the arrangements have worked well for both parties for many years and that they are transparent when it comes to the costs that are associated with being a franchisee, including the investment for equipment, signage, seating, décor, and rent as well as royalties for using the brand.
The complaint has drawn support from the Service Employees International Union, which has over 2 million members in Canada and the United States and is currently backing a campaign for raising the US federal minimum wage to $15 per hour. Scott Courtney, the organizing director for the SEUI, says McDonald’s abuse of its powerful position in the market hurts consumers and franchisees as well as workers.Several American fast food workers travelled to Brussels for the dual purposes of putting pressure on the European Commission to investigate the anti-trust complaint and to publicize their movement for increased wages for US fast food workers.
Currently, the European Commission is investigating McDonald’s tax arrangements in Luxembourg. The commission also believes that the US-based company may have avoided paying taxes in both the US and Europe on royalty profits from franchises in Russia and Europe.
The most expedient remedy for making sure that McDonald’s pays its fair share of taxes is to tax the value of its land holdings. This would make it very hard for McDonald’s to avoid the tax. If the company’s income is taxed, they can simply hide it in offshore accounts. Taxing the value of the land, however, would hit McDonald’s where it hurts and force them to give up some of their giant parking lots to accommodate competitors. These competitors would offer better deals for franchisees, employees, and consumers alike.