Chinese Investment in US Real Estate Tops $110bn

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Marie Howland, 19th Century Gender Equality Pioneer

Young girls ironing laundry

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.”

 

Woman working at Texaco Refinery
Port Arthur refinery, The Texas Company via photopin (license)

 

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.

 

Fairhope, Albama.
Fairhope, Albama. By Stratosphere (Own work), via Wikimedia Commons

 

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.

-Elizabeth Smith

Cover Image: Ironing Day- vintage stereoscope card via photopin (license)

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The Simple Two-Part Solution to Poverty: Universal Basic Income and LVT

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.

UBI has existed as a concept for hundreds of years. The idea was first posited by Johannes Ludovicus Vives in the 14th century and evolved via the work of Enlightenment figures like Thomas Paine and then,  in the 19th and 20th centuries, by Western economists and politicians . The idea even surfaced in the 1972 United States presidential campaign in the form of a negative income tax, with both candidates expressing some form of support.

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.

 

Child Living in Smokey Mountain Dump, Manila Philippines via photopin (license)
Child Living in Smokey Mountain Dump, Manila Philippines via photopin (license)

 

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.

Some economists warn that a UBI would be ineffective if not paired with other policy changes. A potential downfall of UBI is that the greater income of citizens would be captured by landlords via rising rents. Therefore, efforts must be taken to ensure that rents do not absorb government-supplemented income.

 

bbb low-cost housing, tegnestuen vandkunsten via photopin (license)
bbb low-cost housing, tegnestuen vandkunsten via photopin (license)

 

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.

Cover image: Money! via photopin (license)

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4 Lessons on Economic Populism

By Alexandra W. Lough

Numerous articles and studies published over the past eight years on the effect of the 2008 financial crisis on the future of America’s “millennial” generation have reached the same conclusion: at its best, the future is uncertain; and its worst, the future is downright bleak.  It’s not difficult to understand why.  While the most highly educated generation of young adults in the nation’s history, Americans born between 1980 and 2002 also carry the highest loads of student debt and suffer one of the highest rates of underemployment.  As a result of their strained economic situation, many millennials are delaying marriage, starting a family, and buying homes—once considered central components of the American Dream.

Despite all this, millennials report feeling “hopeful” about their own futures and that of the country. And many have channeled that hope into the 2016 presidential race, in which recent polls show that young voters aged 18 to 29 are participating in larger numbers in primaries and caucuses than in previous elections.  The two candidates who have thus far attracted the most support from millennials include Bernie Sanders and Donald Trump, the so-called “anti-establishment” candidates who have promised to radically transform America’s rigged political and economic systems.  Although they stand on the opposite sides of many issues, both Sanders and Trump employ a certain type of rhetoric called “economic populism,” that decries crony capitalism and especially resonates with millennials and others who have yet to benefit from America’s economic recovery.

California journalist and bestselling author, Henry George, circa 1879.
California journalist and bestselling author, Henry George, ca 1879.

Before millennials cast their vote for one or another of these candidates, however, they should consider the modern origins of economic populism and the particular lessons of one of America’s most famous “economic populists”—Henry George (1839-1897). Never heard of Henry George? Think again. If you’ve played the popular board game Monopoly, at the very least, you’re familiar with his ideas which inspired the game’s founder, Lizzie Magie.

In the wake of one of the worst economic disasters in the nation’s history—the Long Depression of the 1870s—George, a middling California journalist, set out to expose and explain why industrial and technological progress seemed perversely to deepen poverty, inequality, and economic instability. In 1879, George published his findings in the aptly titled economic treatise, Progress and Poverty. The work became an international success and likely outsold every other book published in the nineteenth century except The Bible.

More than 135 years later, Progress and Poverty still holds key insights into the polarizing character of American capitalism and helps explain why vast disparities of wealth continue to accompany economic growth. More importantly, George’s ideas—and the amazing story of their life—provide important lessons to those seeking to build a more just and sustainable economic system. George’s ideas not only provide the necessary context for understanding the origins of America’s broken economic system but also the steps for constructing a more just and viable one.

LESSON ONE

The failure to treat land and natural resources as the common property of all people—as opposed to the private property of individuals—perpetuates crony capitalism, accounts for the growing divide between the wealthy and poor, and causes the pernicious boom and bust cycle that has afflicted the American economy since the late-eighteenth century.

Daguerreotype of Henry George circa 1865
Henry George, ca. 1865

 

Living and working in California in the post-Gold Rush Era, George closely observed the new and perplexing realities of industrial capitalism. Over the past century, human civilization had experienced unprecedented levels of technological development and industrial production. New sources of power including steam and electricity as well as improved methods of transportation such as canals, turnpikes, and railroads enabled mankind to produce and distribute more goods than ever before.

Despite the fact that society could produce exponentially more food, families continued to starve. Despite the fact that the nation’s leading industrialists earned more profit than at any other time in history, workers struggled to support their families. Despite the fact that America’s economy had become larger and more diversified, the nation continued to face worsening financial panics and industrial depressions.

Unlike other social commentators of his generation who attributed these conditions to overproduction, under-consumption, or a unsound monetary policy—Congress had recently passed the Coinage Act of 1873, which drastically reduced the price of silver—George concluded that at the heart of this dilemma was land. As he explained:

The reason why, in spite of the increase of productive power, wages constantly tend to a minimum, which will give but a bare living, is that, with the increase in productive power, rent tends to even greater increase, thus producing a constant tendency to the forcing down of wages.

By “rent” George referred not only to the monthly fee a tenant paid to their landlord, but to “economic rent”—which economists define as the profit one earns simply by owning something of value, such as land.

George continued:

Land being necessary to labor, and being reduced to private ownership, every increase in the productive power of labor but increases rent—the price that labor must pay for the opportunity to utilize its powers; and thus all the advantages gained by the march of progress go to the owners of land, and wages do not increase.

George defined land broadly to include not just the surface of the earth, but all the materials, forces, and opportunities freely supplied by nature. To George, buildings, houses, farms and other improvements to land represented wealth or capital, whose values could be separated from land. Unlike the value of capital, land value increased not as the result of any effort on behalf of the individual owner, but to the increase in the demand for land as a result of advancing population, the building of a railroad, the construction of a school, or a multitude of other public improvements. In other words, George argued that land values are social in origin, completely dependent on the development of the surrounding community.

The relationship between public improvements and an increase in land values was especially apparent in California and other western states. Following the announcement of a new railway route, for example, land values skyrocketed and investors raced to purchase large sections near the planned route. Speculators made a killing following the completion of the railway when they could sell the land for many more times what they had initially paid. Railroad officials often colluded with speculators to increase the price of land to help finance construction.

Unbridled speculation in land values, George correctly surmised in Progress and Poverty, had preceded every major North American economic panic since the late-eighteenth century.

cartoon_george-henry_fighting-corruption-1886

LESSON TWO

To break the boom and bust cycle and prevent deepening wealth inequality, the federal government should replace all taxes that penalize the working and middle classes with one “single tax” on the full value of land rent.

Prior to the passage of the Sixteenth Amendment, which enshrined the modern federal income tax into the Constitution, Congress mainly relied on public land sales and tariffs—taxes on imported goods—to finance the activities of the federal government. State and local governments raised revenue almost entirely from the general property tax. Both tariffs and property taxes, George pointed out, unfairly privileged the wealthy at the expense of the poor and middle classes.

By design, tariffs protect manufacturers by restricting and raising the price of imported goods and materials. Defenders of high tariffs claimed such taxes protected American jobs by reducing foreign competition. Opponents like George, however, pointed out that high tariffs make most goods purchased by laborers more expensive and thus, reduce the true value of wages.

Property taxes also tended to benefit the rich by failing to differentiate between the economic value of land and the value added by capital improvements. In many places, only improved land—that is, land with houses, farms, buildings, etc.—reached tax rolls, while the owner of many acres of valuable albeit undeveloped land entirely escaped taxation. Additionally, the rich were rather adept at “hiding” certain types of property—valuable jewelry, stocks, paintings, etc.—while also convincing tax assessors to underreport the value of property they could not hide—land.

To reduce corruption and more fairly distribute the tax burden, George proposed to eliminate all taxes save one tax on the full value of land minus the value of improvements. As he explained,

Were all taxes placed upon land values, irrespective of improvements, the scheme of taxation would be so simple and clear, and public attention would be so directed to it, that the valuation of taxation could and would be made with the same certainty that a real estate agent can determine the price a seller can get for a lot…

A tax upon land values is, therefore, the most just and equal of all taxes. It falls only upon those who receive from society a peculiar and valuable benefit, and upon them in proportion to the benefit they receive. It is the taking by the community, for the use of the community, of that value which is the creation of the community.

George’s proposal became known as the single tax and those who supported it were called “single taxers.”

Henry George: Everybody works but the vacant lot
The New York Public Library, Astor, Lennox, and Tilden Foundation
A billboard erected by a single taxer demonstrating George’s argument to shift taxation onto land values.

Through the single tax, George hoped not only to reform the system of taxation, but also abolish the system of private property in land, which allowed individuals to horde resources nature bestowed to all of mankind and profit from the efforts of the entire community. According to George:

The wide-spreading social evils which everywhere oppress men amid an advancing civilization spring from a great primary wrong—the appropriation, as the exclusive property of some men, of the land on which and from which all men must live…

It is the continuous increase of rent—the price that labor is compelled to pay for the use of land, which strips the many of the wealth they justly earn, to pile it up in the hands of the few, who do nothing to earn it.

Beyond righting a wrong, the single tax promised a host of other social benefits. Taxing only land values would generate all the revenue needed to operate government and doing so would produce ever greater levels of opportunity, as man’s right to the bounty of nature and his desire for a productive life was strengthened. Taxing only land values would ameliorate and one day eliminate the hardship caused by continually bursting bubbles of land speculation. Taxing only land values, George believed, was not just the application of sound public policy, but the acknowledgement of a spiritual duty.

 LESSON THREE

The unprecedented popularity of the single tax and all that it stood for prompted the beneficiaries of crony capitalism—the defenders of the status quo—to accept half-measures such as the federal income tax, while at the same time burying George under a mound of lies and epithets.

The simplicity and inherent fairness in the single tax drew followers from different walks of life and from all over the world. In 1886, the United Labor Party selected George as its candidate for Mayor of New York City. In a hotly contested and nationally followed race, the Democratic candidate Abram Hewitt narrowly defeated George, who earned more votes than any other third party candidate in the City’s history. He also outperformed the Republican in the race, Theodore Roosevelt, who placed third.

George was a profound influence on the religious reform movement known as the Social Gospel, both in the United Kingdom and the United States. One of his best known followers was the popular New York City priest, Edward McGlynn, whose outspoken efforts to bring a Georgist solution to the deepening poverty and inequality led him to be ex-communicated—and then re-communicated, in his lifetime and under the reign of Pope Leo XIII.

 

In this 1886 cartoon published in The Judge, the workingman is presented as caught between two competing forces—the ideas of Henry George and those of the Catholic Church.
In this 1886 cartoon published in The Judge, the workingman is presented as caught between two competing forces—the ideas of Henry George and those of the Catholic Church.

 

George’s growing religious influence in Europe and the United States coupled with the McGlynn controversy prompted Pope Leo XIII to issue the famous 1891 Encyclical Rerum Novarum, in which he reaffirmed the Catholic Church’s support for private property rights in land and also reminded Catholics of their spiritual duty to charity and the less fortunate.

Because he campaigned against private ownership of land, George’s detractors labeled him a socialist. In supporting private ownership of capital, however, George was clearly not a socialist. Karl Marx vehemently opposed George and the single-tax movement for misleading workers into believing that landowners rather than capitalists were to blame for their suffering. “Theoretically the man is utterly backward!” Marx wrote of George in 1880.

Despite the economic nature of his subject, George wrote for the common reader. He rejected the idea that one must possess a good deal of formal schooling to grasp the laws of political economy. His lack of academic credentials and increasing popularity threatened a growing number of professional economists who dismissed George’s theories as “half-baked” and “dangerous.”

The widespread appeal of the single tax together with the growing demand to lower tariffs, led many in Congress in 1913 to support a federal income tax. Although a good deal more progressive than today’s version, the federal income tax was a poor substitute for a tax on economic rent. The main problem with an income tax, according to George, was that it failed to differentiate between incomes justly earned and those earned from the labor of others. As he explained:

Nature gives to labor; and to labor alone…

Now, here are two men of equal incomes—that of the one derived from the exertion of his labor, that of the other from the rent of land. Is it just that they should equally contribute the expenses of the state? …The income of the one represents wealth he creates and adds to the general wealth of the state; the income of the other represents merely wealth that he takes from the general stock, returning nothing.

Henry George, ca. 1897
Henry George, ca. 1897

LESSON FOUR

Despite attempts to discredit George, his ideas inspired a generation of social activists on multiple continents who successfully built the single tax into a number of Progressive Era reforms and programs—particularly at the state and local levels—that continue to provide such basic human services as clean water, electricity, and public transportation to large populations all over the world.

Although the single tax was never fully implemented anywhere in the world, George’s ideas animated many of the most notable social reform movements of the era of high industrialism. In particular, local government leaders of the Progressive Era pulled heavily from the single tax to justify their efforts to raise taxes on public service corporations and transfer the provision of water, power, and transportation from private to public suppliers—a movement known as municipal ownership.

Similar to George’s single tax, which aimed at reclaiming and distributing socially created land values, advocates of municipal ownership targeted the socially generated wealth of public service corporations, which amassed huge profits by providing services required by all residents and using public property, such as streets, waterways, gas lines, and franchises, to do so. As Ohio State Senator and single tax advocate Frederic C. Howe explained in 1907,

The value which these corporations enjoy in the market is social in its origin. It is created by the community itself. No act of the owner gives them the earning power which they enjoy…Moreover, the franchises and privileges that these corporations enjoy are granted by the people themselves. They are created by law. No labor enters into their making. They are a free gift from all of the community to a few of its members.

In states with constitutional provisions against municipal ownership, urban reformers utilized the single tax in their efforts to increase taxation on the property of public service corporations, particularly that of railroads and streetcars.

The reach of the single tax into such seemingly disparate movements as labor politics, religious reform, and municipal ownership testifies to the importance of land and natural resources to the fundamental dilemma facing democratic society: how to encourage economic growth and provide an equal opportunity to all persons to engage in and benefit from the advancements of human civilization. To George the answer was simple: one tax based solely upon the wealth produced by land—the resource from the time of its creation that has always existed for the benefit of all men.

As the presidential election rolls nearer, young voters might fare well to remember George’s lesson that so long as the government continues to treat socially generated wealth as the private property of individuals, the benefits of industrial progress and economic recovery will not be shared equally; instead, those benefits will flow to those who control the greatest shares of economic rent.

Alexandra (Alex) holds a Ph.D. in American History from Brandeis University. She currently serves as the Director of the Henry George Birthplace and is preparing a book manuscript based on her 2013 dissertation, “The Last Tax: Henry George and the Social Politics of Land Reform in the Gilded Age and Progressive Era.”

 

 

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How Cities Breed Poverty

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.

Proud, Distorted, Dream Job via photopin (license)
Proud, Distorted, Dream Job via photopin (license)

 

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.

Tightly Packed Moving Truck
All my worldly possessions… via photopin (license)

 

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.

 

A traditionally working-class neighborhood
The calm before the storm via photopin (license)

 

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.

 

Cover Image: gentrification, void places via photopin (license)

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The History Of The World: Land Grabs

This is Audrey. Audrey is a high achiever, likes nice things, and is lots of fun to be with. Her goal is to have a nicer house. She likes to share things, but her house will be her own.

Audrey has no interest in history or politics which is ironic because she causes them. Why? Because the desire for your own place is the driving force behind human history.

This is Audrey’s current house. Her parents grabbed it when it was cheap. Since then, house prices have skyrocketed, so it’s a nice little nest egg.

The woman in the picture cleaning Audrey’s steps is Jaanai. Jaanai attended the same college as Audrey and got the same grades. but Audrey got a good job, and Jaanai didn’t:  she wanted to be an architect, not a cleaner. So what went wrong?

This is Audrey and Jaanei’s college. Audrey spent her evenings networking, and developing a wide range of interests. After graduating she landed an unpaid internship at a prestigious company. Now she is climbing the career ladder.

Unlike Audrey, Jaanai spent her evenings working as a waitress. She thought she could pay her way through college. But an architectural degree is very long, and she miscalculated. She had to drop out and take another job.

The problem? Jaanei had to find $900 in rent every month. Whereas Audrey is free.

Jaanei would have been a really good architect. She could have built Audrey her dream home. But Audrey will never see that home, because Jaanei has to pay too much rent.

Audrey and Jaanei’s story is repeated a billion times around the world. Some people are free to reach their potential and some people are not.

Let’s look at how it all began.

How it all began

The story of mankind is the story of a hundred billion Audreys: we all want our own home, where we don’t pay rent to anybody.

Originally this was not a problem. There was plenty of land. If somebody said “this is my land” people could just say “OK” and move somewhere else. So mankind spread across the planet  (See the appendix for details.)

File:Human migration out of Africa.png

You could walk almost anywhere. There were no borders, and the ice age was ending, so there were convenient land bridges/ As the ice receded more land became available.

But some land was much better than others. Soon Audrey’s ancestors were fighting over the best bits, like the warm fertile coasts and rivers of the middle east. Often they were willing to share the land, but only if Jaanai paid them rent. Because Audrey got there first.

But once land was scarce, Jaanai’s ancestors could not move on. They had to pay Audrey’s ancestors rent. This changed everything. Audrey’s ancestors were now rich, and Jaanei’s ancestors were now poor.

Audrey’s ancestors no longer had to be “better” to own the land: they could pay other people to do the fighting and thinking. All they had to focus on was keeping the rent coming in.

Some people said “let’s share the land” but the kings explained that this was impossible: “you need a king to protect you!” In reality the opposite is true: democracies tend to be stronger than monarchies, and more equal societies tend to be stronger as well. But the king usually has plenty of supporters, either because they believe his claims or because they want to be rich like him.

Since kings own the land that people need, people have to do what they say. So even those who disagree with the king become his unpaid servants.

Unpaid servants can never reach their potential. They cannot make their own decisions and they cannot invest in their own future.Just as bad as the lack of investment is the lack of critical thinking. Kings must discourage people from questioning their authority. A third weakness, besides the lack of investment and the subjugation, is war. The quickest way for a king to increase his power and income is to have a war: grab more land and collect more rent (called taxes). But wars are expensive and destructive.

The combination of no investment and periodic wars meant most nations were dirt poor and stayed that way for thousands of years. Some nations however won the wars, and gained more land. This made it easier to win the next  war. Gradually kingdoms became empires, and empires grew bigger.

But the unwillingness to share land made the empires weak. Pliny the Elder (the Great Roman statesman) identified the problem:

“latifundia perdidere italiam”

(“the great estates destroyed Italy”)

Every rich person wanted to grab land; soon the land was covered by a few gigantic estates. These estates were so big that they became self sufficient. They no longer cared what happened in the city of Rome. So, Rome became weaker and weaker, and eventually fell. Other kings grabbed the land.

The common people didn’t like this endless war and poverty. A lot of them preferred the teachings of “holy men” who said we should share. But the words of “holy men” could be used selectively, allowing rulers to say “we must be the chosen people” and grab even more land.

Eventually “new” lands were discovered (such as America), leading to more land grabs.

Gold (and other loot) from America allowed Europe to finance even more land grabs. Soon Europe had the biggest empires of all.

Britain grabbed the most land, because as an island it had the best navy. France grabbed the second largest amount because it had Napoleon.

Africa was a popular place to grab land, as it was nearby. The Europeans just walked in, measured it up, and took almost everything.

The Europeans were still fighting each other, of course. In this picture the German leader tries to grab all of Europe in the First World War .

Meanwhile something amazing was happening in America.

Earlier we saw how concentrating land is economically inefficient, as the poor people cannot reach their potential. The people who moved to America learned from this: they decided to have no kings, but to share the land a little more. So America quickly changed from just another colony to being the most powerful nation on Earth.

But the same old forces still applied. Americans who grew rich grabbed the land. America produced a different kind of king: the global corporation. Big farms bought smaller farms. Railroads bought land for the rails plus a lot of land on each side. Businesses that did not need land found ways to influence the government (the effective landowners) and get favorable rules. This picture shows Standard OIl, a corporation that grabbed most of the oil bearing land and made everybody else pay.

And so history continues as it has always done, as one big land grab. That is the history of the world in a nutshell. Like children, we often do not want to share. Children fight over sweets, but adults fight over land. Because whoever grabs the land wins.

So when Audrey wants to own her house without paying rent, and Jaanai has to pay too much rent, they are acting out the history of the world, and ensuring that it continues as usual.

The problem with grabbing too much land

1. Even the rich eventually lose.

People with the most land always want more. So the land, especially the most valuable land, goes to fewer and fewer people.

The game of Monopoly (originally called The Landlord’s Game) was invented to show why this is a bad thing. If you don’t share the value of land then one by one everybody goes bankrupt.

It’s fun for the winner, but only for a short time. Because once everybody else is bankrupt there is nobody left to give you money, and it’s game over. Society ceases to function.

2. Even when they win, they lose.

Being a king has its downsides. You can never sleep easily. Somebody somewhere is always out to kill you: they all want your job.

Worse, by keeping other people poor you stop scientific progress. So when a really big problem appears, you can’t solve it. If the next kingdom is more efficient, you lose. And if you get sick you are more likely to die.

Audrey will never get the house of her dreams because Jaanai could never become the architect she was destined to be.

All those poor people who can’t pay their rent could have been doctors and scientists, architects and great thinkers. They could have solved our biggest problems. However, they never reached their potential, and that hurts everyone -even the rich.

The Rise of Earth Sharing

After thousands of years of war and poverty, things did began to improve a little. Science began to advance. Hunger began to go down. Why? Because a few more people gained the freedom to reach their potential.

Gradually more people gained some land. They then created laws to reduce poverty. This gave more people the freedom to reach their potential. More people could get an education and then invest in their futures. They created businesses, machines and ideas. Each advance led to another advance, so progress accelerated.

How people began to break free

How did more people gain land when the king wanted to be all-powerful? Largely due to war. Not sharing leads to war, and war shakes up the economy. After each war a few more people gain land: this is why:

Wars drive down incomes, so landowners have to charge less in rent. But after a war the government has to rebuild, so more people have jobs. There is a brief period when land is cheap but people have more jobs . Remember Audrey’s parents? They bought their house soon after World War II, before prices went up and jobs went down again.

So many people gained a share of land after World War II that unprecedented numbers of people were free to try new ideas. Science and technology exploded, as did funding for new science. People could see a better world.

Those who control the world’s resources are still very powerful. There will be setbacks. But Earth sharing is happening, slowly. And every tiny step makes the world a better place.

Conclusion

Most people are kept back from reaching their potential because they don’t have their share of the planet. They cannot take chances and invest in their future because they must spend all their spare money on rent just to live.

We are losing generations of scientists and artists and thinkers because they are not free to develop. This hurts everybody, including the rich.

Life can be many times better for everyone, wonderfully better, if we just let everybody reach their potential.

Appendix: early land monopoly

On territoriality (i.e. grabbing land as your own):

“As with other vertebrates, the territoriality of protohominids and early hominids had a significant influence on their behaviour. In the case of primates quite generally, the relevant territory is that of the band as a whole, i.e. the group’s territory. […] the defence of the territory is taken on by all the fit members (males) in the group. However, while both protohominids and their arboreal forebears were group-territorial, the nature of their territories differed. When the ancestors of humans became hunters, their group territories went from being relatively small and vegetation-dense to being large and open, encompassing the whole of the area in which they migrated throughout the year.”
(“Too Smart for Our Own Good: The Ecological Predicament of Humankind” By Craig Dilworth, Cambridge University Press, 2009, p.172)

On fights over who controlled the land:

“Attempts to exclude others and utilize a territorial system provide advantages if there is competition for available resources. Among early hominids this was probably the case. Starting out as omnivores, they probably competed with members of the same species, and with other species, for the same food sources. Thus, if members of one group were able to exclude others using some type of territorial strategy, they were preserving more resources for themselves and thus enhancing their fitness.”
(“Human territorial functioning: An empirical, evolutionary perspective on individual and small group territorial cognitions, behaviors, and consequences” by Ralph B. Taylor, Cambridge University Press, 1988, p.37)

On how people left when other land became available:

“[There is no evidence that early humans migrated due to learning new skills.] However, as a result of the warmer climate conditions, the habitats to which East African australiopithecines became adapted may have shifted ever further away from the equator. Although paleobotanical evidence for vegetation conditions is largely absent in the Pliocene, it can be assumed that the southern part of the East African Rift Valley might have served as a prime corridor linking eastern and southern Africa.”
(From the chapter “Origins of human territorial functioning” in “The Global Prehistory of Human Migration” by Immanuel Ness and Peter Bellwood,  Wiley-Blackwell, 2014, p.11)

On how increasing wealth led to increasing investment in keeping others out:

“Given the emergence of elite groups marked by warlike status kits, it would be very surprising if competition and wealth accumulation did not extend to land and to the crops and stock it supported: the substantial palisades around the major settlements presumably served to keep the stock inside and the raiding party outside.”
(“Prehistoric Farming in Europe” by Graeme Barker, Cambridge University Press, 1985,  p.150)

Notes and images

The names are fictional, but the situation is a simplified composite of a common scenario: one person is able to get a better education due to parents not having to pay a mortgage or rent. The name “Audrey” means “noble strength.” The name “Jaanai” means  “answering afflicted, made poor”.http://www.meaning-of-names.com/israeli-names/jaanai.asp

The house steps image is from the out of copyright magazine Punch, October 3rd 1917, via Project Gutenberg.

The school image is the author’s own work, based on the public domain image “Arsenal Technical High School” from the Historic American Buildings Survey, via Wikimedia.

The migrations map is “Human migration out of Africa” by “Ephant”, Creative Commons 3.0 (sharealike), via Wikimedia.

The fertile crescent sketch map is from the out of copyright book “Ancient Man”, by Hendrik Van Loon, via Project Gutenberg.

Other sketch maps and similar graphics: from the out of copyright book “The Story of Mankind”, by Hendrik Van Loon, via Project Gutenberg.

The painting of Columbus is from “The return of Christopher Columbus; his audience before King Ferdinand and Queen Isabella.” by Eugene Delacroix (who died in 1863), via Wikimedia.

The slaves painting is from “Israel in Egypt” by Edward Poynter (1867), via Wikimedia.

The crusaders image is from the out of copyright book “The Story of the Crusades” by E. M. Wilmot-Buxton, via Project Gutenberg.

The Cecil Rhodes image is: “The Rhodes Colossus” from the out of copyright magazine Punch, December 10th 1892, via Wikimedia.

The assassination image is from the out of copyright book “Beacon Lights of History, Volume X, by John Lord” via Project Gutenberg.

The dying aristocrat image is from the out of copyright book “History of France” by Guizot, Volume I,  via Project Gutenberg.

The Pliny the Elder image is public domain, via the National Institutes of Health, via Wikimedia.

The Kaiser eating the world is “Guerre 14-18-Humour-L’ingordo, trop dur-1915”: an out of copyright propaganda image from 1915, via Wikimedia.

The Standard Oil Octopus is from the out of copyright magazine “Puck”, v. 56, no. 1436 (7th Sept 1904) via Wikimedia.

The Landlord’s Game is an out of copyright image (from 1906) via landlordsgame.info.

The image of carving up the world is from the out of copyright image “plum pudding” by James Gilray, via Wikimedia.

The other charts’ copyright details are printed on the charts.

All other art is by the author, Chris Tolworthy.

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Counting the Zeros: Fighter Jets vs Trains

by Lindy Davies

I once introduced a paper at a conference with the laugh line, “Many of the papers you’ll hear this week make extensive use of mathematics, but mine is a bit different: it makes extensive use of arithmetic.” The economists in the audience knew what I was getting at: minutiae can be examined in fascinating (sometimes Nobel-winning) detail, but often the really important points are made by keeping track of the relevant orders of magnitude — in other words, by counting the zeros.

Here’s an example, to get us started. How many days, months, whatever, does it take for a million seconds to go by? I whipped out my calculator and discovered that a million seconds equals about 11.6 days. Surprised? Well, then, how about a billion seconds? That’s a thousand times longer: 31.7 years. The next one is easier, because we’re sticking with the same unit, but it boggles the mind nevertheless: a trillion seconds equals 31,709 years.

Let’s explore the wonders of zero-counting by comparing and contrasting a couple of lines in the budget of the United States.

Amtrak’s Northeast Corridor Passenger Rail ServiceThe F35 “Lightning” Joint Strike Fighter
— relatively inexpensive; mildly profitable— most expensive weapon in history
— deeply maligned, desperately underfunded— despite criticism, lavishly funded
— used by over 11 million passengers annually— appropriations shared by contractors in 46 states
— ridership increasing as highway congestion worsens— not yet cleared to fly in inclement weather

Dear reader, you can probably see where I’m going with this, but please bear with me: the numbers involved are noteworthy.

owow

The F35 is, in terms of its design parameters, one seriously groovy airplane. It is a “fifth-generation” fighter jet, intended to supersede a number of the fighter jets that are now in use. It is called “joint strike” because the basic plane would be used, with some modifications, by various branches of the military in different missions: fly from carriers for the Navy, take off and land vertically for the Marines, evade radar detection, and locate enemy fighters long before they’re able to locate it. Its pilot will wear a helmet designed to make the plane an extension of his brain; all manner of information will be displayed right before his eyes; next-level optics will allow the pilot to see through the plane as if it were transparent. This is majorly awesome, sci-fi stuff. Lockheed Martin puts it this way:

The supersonic, multi-role F-35 represents a quantum leap in air dominance capability with enhanced lethality and survivability in hostile, anti-access airspace environments…. Missions traditionally performed by specialized aircraft — air-to-air combat, air-to-ground strikes, electronic attack, intelligence, surveillance and reconnaissance — can now be executed by a squadron of F-35s.

However, alas, the F35 is also far behind schedule, and way over budget. “A single Air Force F-35A costs a whopping $148 million.” writes Winslow Wheeler, for the Project on Government Oversight. “One Marine Corps F-35B costs an unbelievable $251 million. A lone Navy F-35C costs a mind-boggling $337 million. Average the three models together, and a ‘generic’ F-35 costs $178 million.” That’s per plane — and, because the F35 is being tested as it is produced, and faulty systems must be retrofitted on planes that are already being flown, the per-plane cost is likely to increase.

The following cost figures for the F35 program were reported by CBS news: $400 billion will be spent to buy 2,400 aircraft — twice as much, in constant dollars, as the Apollo program. To date, the F35 program is $163 billion over budget. It will cost approximately $1.5 trillion over the life of the program. In 2014 we spent approximately $6 billion on the F35.

Maybe you didn’t hear me. I said: twice the cost of the Apollo Program.

Reasonable people can disagree about the urgency of the United States’s need for this airplane. The stated mission is to assert overwhelming superiority, in any aerial combat mission, over any plane the Russians or Chinese might plan to build in the foreseeable future. The US already has a fifth-generation fighter in service, the F22A Raptor — which itself costs some $150 million per unit and, according to the US Air Force, “cannot be matched by any known or projected fighter aircraft.” Only Russia has any plane that is even remotely comparable, and Russia is obviously throwing much less money at the problem than the US is.

Political Engineering

The thing about the F35, though, it that its development and manufacture is distributed with great skill through a multiplicity of key Congressional districts. “Lockheed takes every opportunity to remind politicians that the airplane is manufactured in 46 states and is responsible for more than 125,000 jobs and $16.8 billion in “economic impact” to the US economy….” wrote Adam Ciralsky in Vanity Fair. “Political engineering has foiled any meaningful opposition on Capitol Hill, in the White House, or in the defense establishment.”

To make a long story short: it is virtually certain that — whether we need it, or can afford it, or not — we’re going to have the F35 “Lightning” Joint Strike Fighter. That nickname, by the way, is ironic, because the F35 has not yet been cleared to fly within twenty miles of a thunderstorm.

f35

Fixing Our Trains

Amtrak, the US’s much-maligned passenger rail system, operates 21,300 miles of routes. But, for the purpose of our present comparison, we’ll concentrate on the 471-mile segment that actually turns a profit: the Northeast Corridor. This is the rail service between Washington, DC and Boston, on which Amtrak carried 11.4 million passengers last year. It is only on this route that Amtrak operates its Acela express trains, which can go over 150 mph — they can, at least, on the few sections of track that are in good enough repair. Amtrak owns and maintains these tracks, which are also used by commuter-rail systems in DC, Baltimore, Philadelphia, New York and Boston — and some of them have gotten quite rickety over the years.

To pick one of many examples, the Portal Bridge over the Hackensack River in New Jersey is 100 years old and carries 450 trains a day — if things stay on schedule. The old swinging drawbridge causes many delays. It would cost $900 million to replace it with fixed bridge. Republicans have harshly criticized Amtrak for many years — and they can’t all be wrong; it’s likely that there is some significant degree of inefficiency and inertia in Amtrak’s program. The House of Representatives recently voted to cut Amtrak funding for the coming year to the tune of one and two-thirds F35s ($260 million) — the very day after a deadly derailment outside of Philadelphia.

This seemed an exceptionally spiteful move, even for Congress. This particular accident was probably caused by human error. But it could have been prevented, had a “Positive Train Control” system been in place; a 2008 law requires it to be implemented by the end of this year. Such systems are routinely used across Europe. Amtrak, however, is strapped for funds. Its “Vision Statement for the Northeast Corridor” laments:

In the New York vicinity, some areas are operating at 100% capacity, resulting in significant delays from even minor operating disturbances. The [Northeast Corridor] consists of a mix of aging infrastructure, much of it built 80-150 years ago, that will require extensive repair for safe and efficient operations at current traffic levels.

Folks, that’s like commuting to work every day at 70 mph. in an old VW beetle that only goes that fast (and has a tendency to overheat). Nothing against the beetle, but — how long could you count on that?

 

late

Reasonable people can disagree about the efficacy of subsidized passenger rail service in the megalopolis between DC and Boston. I don’t think anyone disputes, however, that the highways in that region are getting more congested all the time, and that reliable, reasonably-priced intercity rail service wouldn’t be a bad thing. But, can we trust Amtrak to provide that? Not according to Rep. John Mica (R-FL), who said this on the day of the budget vote: “The problem is you give Amtrak the money and they blow the improvements or squander it. Congress does not trust Amtrak. They’ve given them the money before.” Mica’s largest campaign contributor is the air travel industry.

Let’s talk numbers

Amtrak’s overall operation was $329 million in the red for 2014, but its Northeast Corridor service made a profit of $286 million. You heard that right: that means that the 20,829 miles of non-NEC Amtrak routes are subsidized by over half a billion dollars a year! That’s fully ten percent of what we spend annually on the F35 “Lightning” Joint Strike Fighter! (And, it’s eight percent of what the British government spends annually on passenger rail.)

Amtrak’s “Vision for the Northeast Corridor,” offers various proposals for improving service and reliability, which are echoed in somewhat greater detail in a report by the by the Federal Railroad Administration. The proposals are graded, A through D, in escalating wish-lists. The ones in section A amount to simply maintaining existing capacity (which nevertheless calls for some rather expensive catching up). The suggestions in section D, though, are the stuff of Republican apoplexy; they propose to:

transform the role of rail, so that the rail system would accommodate a significantly higher percentage of travelers and passengers, enabling new travel patterns and new markets to be served… positioning rail as a dominant mode. This would be accomplished through a major increase in the capacity of the NEC along its entire length, service to new markets, and a dramatic reduction in trip times.

What the heck, you might as well ask for what you want. This dramatic vision (including such luxuries as replacing the Portal Bridge in Hackensack), this pie-in-the-sky wish list, way more than Congress would ever appropriate, this tremendous infrastructure enhancement that would make life so much more efficient and convenient in the Northeast (not to mention conferring significant environmental benefits) — this commie-liberal subsidized rail boondoggle — would be gradually implemented between now and 2040, at a projected cost of $151 billion. That would amount to about $6 billion per year. Does that figure sound familiar? It’s the amount that we spent in 2014 on the F35 “Lightning” Joint Strike Fighter.

To reiterate: the total projected cost of the most ambitious plan for a long-term upgrade of Northeast Corridor Rail infrastructure is $151 billion. The amount by which the F35 program is over budget, so far, is $163 billion. It really helps to count the zeros.

Two P. S.’s

1) It is widely known by economists and smart people everywhere that quality public transportation facilities increase real estate values. The city of London has capitalized on this obvious fact to fund rail improvements with levies on the windfall gains that the railroads have created. In Florida, a private concern, Florida East Coast Industries, has bought up lots of land around the terminals of a passenger rail service it plans to introduce between Miami and Orlando. Indeed, this is exactly the way the transcontinental railroads in the US were financed. Financing passenger rail improvements with taxes on land values is an easy, sensible and fair policy; we should start doing it immediately!

2) By the way: If you really want to get your mind boggled, you gotta check out Wikipedia’s page on Orders of Magnitude!

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Marie Howland, 19th Century Gender Equality Pioneer

Howard H Aiken, a pioneer in computer engineering, has famously urged others to “[not] worry about people stealing [your] idea. If it’s original, you will have to ram it down their throats.”

Such reminders are especially useful when considering the various reasons that groundbreaking ideas don’t always achieve notoriety in history textbooks or mainstream culture. Marie Howland, a passionate advocate of women’s economic independence in the nineteenth century, is an apt exemplar of Aiken’s claim, for although she was a woman of revolutionary ideas, she is hardly a household name. As a white working-class woman, Howland was among the first of her class and gender to publish a novel in America and to participate in the women’s rights movement, challenging fundamental social conventions that limited the influence of women to domestic sphere. In alignment with authors like Jane Austen, Howland was deeply troubled by the way social conventions served to reinforce the systemic economic dependence of women 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 work that remains to be done 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 summation of Howard’s worldview would be to say that she wished to see opportunities for women to achieve financial independence; this idea, however, necessarily challenged traditional boundaries separating the domestic and public spheres. Whereas a man might have many opportunities for different kinds of paid work outside of the household, a woman’s work was restrained to the household, where economic value was not so easily quantified. It was this distinction that, early on, led Howland to embrace the writings of French intellectual Charles Fourier. She admired Fourier’s idea that women ought to 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 home front and remained relatively imprisoned 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, “The 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” (74.5, 859).

 

Woman @orking at Texaco Refinery
Port Arthur refinery, The Texas Company via photopin (license)

 

The Fourierist model remains relatively obscure when compared to other alternatives to capitalism, such as Marxism, and might best be characterized as the combination of the communal elements of socialism with a view of humanity as an evolving subject striving towards a state of universal harmony in accordance to God’s will. Fourier believed that the divine model for social evolution required 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 community living also implies a redistribution of power that has traditionally separated the genders, privileging white males above everyone else. It was Fourier’s hope that, by altering domestic work and power in this way, it would facilitate the sharing of power in other spheres.

Late in life, Howland would reside in the Georgist community of Fairhope, Alabama, which was founded on the ideas of American political economist Henry George. These ideas, implemented both in the United States as well as abroad, have yielded enormous economic opportunities. Not surprisingly, Howland found these ideas compelling and even necessary for realizing a more egalitarian world.

 

Fairhope, Albama.
Fairhope, Albama. By Stratosphere (Own work) [GFDL (http://www.gnu.org/copyleft/fdl.html) or CC BY-SA 4.0-3.0-2.5-2.0-1.0 (http://creativecommons.org/licenses/by-sa/4.0-3.0-2.5-2.0-1.0)], via Wikimedia Commons

To be clear, none of this demonstrates that the core of Howland’s vision regarding the economic liberation of women cannot 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 disadvantaged identities persists. Should continuing inequality be recognized, which groups stand to lose ground, and what type of social and economic justice, as envisioned by Howland, ought to be pursued? The idea of great disparity as a necessary evil (social Darwinism) remains an economic theory 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 revise our current economic paradigms.

If there is anything we can learn from Howland’s ideas, it’s that justice in work relations cannot be achieved within the current capitalist system, nor can they be achieved by simply redistributing property. To secure a just system for women, said Howland said, the caretaking duties that women are often burdened with also need to be redistributed.

Cover Image: Ironing Day- vintage stereoscope card via photopin (license)

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Celebrity Economists: What causes inequality and how do we fix it?

New Economic Thinking

Thomas Piketty’s book Capital in the 21st Century has been flying off the shelves. It’s full of data indicating that the world is rapidly becoming more and more unequal. But if most people are just trying to make ends meet, who has time to read it? Last night, Piketty participated in a high profile talk with economics Nobel prize winner Joseph Stiglitz at a New Economic Thinking event in Paris.

Piketty’s thesis is that extreme inequality results from the observation that income grows faster than the general economy. Stiglitz agrees that inequality is on the rise. The key difference between the two economists however is that Stiglitz emphasizes the importance of rent-seeking, as the primary source of inequality, as opposed to “capital” in general.

They each propose systemic solutions.

What are the solutions you ask?

 “It’s about the rules of the game… What is driving the growth of inequality? Minor tweaks in the economic system are not going to solve the problem… Yes, it’s important to improve our education system… Yes, it’s important to improve minimum wages… These will make a big difference, but they won’t solve the underlying problem. The underlying problem is the whole structure of our economy, which has been oriented more at increasing rents than increasing productivity and real economic growth that would be widely shared in our society… a tax on land, rents, would actually address some of the underlying problems… leading to a more equal society.”

-Joseph Stiglitz, Nobel Laureate, economics

Stiglitz has a point. Banks and large corporations make a killing out of playing the real estate market. Much of a company’s’ worth is comprised of its speculative land holdings, separate from the profits attained via selling products and services. Those giant Wal-Mart parking lots are not there simply to accommodate customers, although many homeless people are driven to sleep in them. Ray Kroc, the founder of McDonald’s once said: “Ladies and gentlemen, I’m not in the hamburger business. My business is real estate.”

Parents often admonish their children to get on the property ladder as soon as possible. They’re right in giving such advice. Wages have actually decreased in recent years while rents soar; Meanwhile, someone who does not necessarily work can make more money speculating on land than doctors and engineers make as part of their normal wages.

What does Piketty Mean by “Capital”?

On one hand, capital can mean buildings and factory equipment.  Yet, it is often used to refer to money lent to companies to invest in such assets, and more generally as the sum of all economic assets.  If this is how capital is defined, then things like land  and other natural resources are subsumed under that definition too.

Why is that important? Well, if you are trying to bake a cake and you assume that baking soda is just another type of flour, you’re going to end up with a pretty disgusting, globally impoverished, cake. Yet, this is how Piketty defines natural resources, just another type of capital. In Stiglitz’s view, land and natural resources are different from man made buildings and manufacturing equipment.

A Global Tax on Wealth?

Piketty recommends a global tax on all capital, all wealth as he defines it, regardless of type. However there are some practical problems with this solution. One is getting all countries to coordinate all taxation. What if tax havens like Switzerland don’t follow suit with the rest of the world? The rich will simply continue to hide money there. As Stiglitz says in the video above, economic models show that such a tax on global capital would simply be shifted on to the poor, regardless of who was nominally billed. There is however a much deeper problem caused by thinking of resources as mere capital; the difference between what ought to be shared and what ought to be private is rendered arbitrary. It is used to justify bizarre conclusions from those on the left and right alike.

For example,  Nestlé’s CEO  has said that water is not a human right; everyone should pay him for the privilege of drinking. On the other end of the spectrum, communists claim that nearly everything should be collectively owned and managed; even people’s personal possessions, such as pots and pans, were confiscated during China’s “Great Leap Forward.”  Both ideologies base their conclusions on the same faulty assumption -all sources of wealth are the same. If however, we can separate what is earned from what isn’t, and implement a sustainable system around this principle, we have a sound basis for creating a fair, meritocratic, and humane society.

The Earth Belongs to Everyone

We all have an equal right to drink clean water, breathe clean air, enjoy land and Earth’s other natural resources. None of us created the earth, it’s ours to share. Instead of taxing regular people for working and exchanging, we ought to tax earth’s natural resources, both their use and abuse. Chief among these resources is land.

 

tax haven

“Unlike other assets,
land can not be moved to a tax haven.”

 

As stated before, real estate, more precisely land, is a major source of inequality. Unlike other assets, land can not be moved to a tax haven. Thus, realizing the benefits of taxing land value does not require persuading every country in the world to participate in such a tax regime.  Countries that do implement  it  however will see an enormous reduction in inequality.

For a more in depth response to Piketty, and to learn more about how a land value tax would reduce inequality, click here.

 

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