Elizabeth F, of St. Louis, Missouri, is yearning for something different. “I don’t know what it is, but I just want to get out of my car for once,” she says. “I feel like I am in a cage all the time. I want my city to seem more like a neighborhood and less like a huge mesh of cul-de-sacs. I want to actually be able to walk places; to take public transit, without having to move to New York. I love St. Louis, but we have to start planning better. I just want to be able to walk to the park or the store instead of driving there. I want to see my neighbors more. I just want…more connection.”
Elizabeth is not alone. The development goals of many metro areas are changing with the times. Sprawl is out; compacted development is in. Public transit and pedestrian by-ways are taking the place of the public-private space of the personal car. Many communities are devoting more time and more planning to the process of Transit-Oriented Development (TOD). TOD focuses on building up rather than out in order to provide more walkable neighborhoods. These pedestrian-friendly neighborhoods both include a healthy mix of retail, residential, and industrial areas centered around public transit and encourage the interpersonal connection that has been lost.
City planners across the country are taking residents such as Elizabeth and others seriously and are making strides in TOD planning. Because TOD planning is unique to each region, cities and towns are learning from the implementation successes and mistakes of others, and they are creating individualized plans for future development.
This radical change in developmental demeanor has its costs–mainly the destruction of affordable housing and a lack of sustainable funding for capital improvements on public lands. The Land Value Tax can curb the potential negative consequences of TOD and ensure its success in the future.
How Do Transit Costs Affect Disposable Income in Lower-Income Households?
Residents of auto-dependent exurbs, the wealthier areas of cities that sprawl past the suburbs, spend up to 25% of their incomes on transportation costs. However, communities that have more public transit options spend considerably less on transit–only 9% in “location efficient environments.”
Lower-income households in compacted development areas retain 59% versus 43% of their disposable income. This difference goes to pay for any expense that is not transportation or housing related. As incomes decrease, available disposable income also decreases. Decreasing disposable income by even a few percentage points can be the difference between financially making it, or not, for lower-income families.
Arlington County, VA: A TOD Success Story
Arlington County, Virginia, is often cited as a successful metro area that has addressed their transit and lower-income housing issues. It has not only created an environment where affordable housing is preserved, but it has taken steps to cluster affordable units around public transit hubs.
How Does Arlington Pay for TOD?
Some of the tactics used by Arlington County include:
Federal tax credits that rely on transportation as a stipulation: HUD’s Low-Income Housing Tax Credits, which are distributed to each state, allow individual states to determine the criteria for which projects are funded. Some states use transportation as a factor in the allocation of these funds.
The Special Affordable Housing Protection District: The Arlington Special Affordable Housing Protection District mandates that affordable housing units near transportation hubs are to be replaced on a one-for-one basis in new developments.
Together, these tactics create an environment in which transportation and housing are able to develop in tandem.
Elizabeth’s hometown of St. Louis plans to mimic Arlington’s success.
Case Study: Transit and Housing Development in the St. Louis, MO, Metro Region
How can Transit-Oriented Development Planning be used to protect low-income housing units while maximizing transit options and new development?
Released in January of 2011, the (TOD): Best Practices Guide outlined the first regional attempt to marry long-term transit planning with sustainable development.
How Does St. Louis Plan to Pay for Transit-Oriented Development?
Funding is the primary killer of TOD. TOD is a good idea that, unfortunately, will remain a good idea without the money to back it. Land Value Tax could be the answer to the financing dilemma TOD-planning creates. LVT naturally incentivizing high-density development goals and provides more housing options that for lower-income families.
However, the St. Louis Metro Area plans to rely heavily on federal block grants to fund regional improvements. St. Louis also focuses on sales and property taxes as a way to fund TOD.
Avoiding Increased State Income Tax: Sales and Property Taxes
The St. Louis Metro Area has historically used sales tax to fund capital improvement projects while avoiding raising income tax. As it stands today, there are areas of St. Louis County and St. Louis City, which are burdened by sales-tax rates in upwards of 10%. Sales-tax is highly regressive and downgrades the spending power of every citizen. Sales tax is especially harmful to those who do not generate enough income to offset the tax. High property taxes come with another set of problems.
High taxes on the development of the land creates disincentives to develop the high-density, pedestrian-friendly neighborhoods that the region craves. By taxing capital improvements on the land near transportation hubs, the St. Louis stakeholders encourage blight and reduce economic competitiveness.
The primary goals of TOD are similar to the Land Value Tax. The emphasis is on creating pedestrian friendly, higher-density urban and suburban areas. TOD and LVT also protect low-income residents by reducing the amount of time and money spent on transportation. Finally, property values increase as a result of intrinsic capital-improvement incentives.
Elizabeth is optimistic about TOD planning in St. Louis. “It’s going to take a long time; it’s a huge shift in the way we all think about our neighborhoods. I’m willing to stick with the process, though,” she says. “This is my home, and I think if we do it right, we can make it whatever we want it to be.”
If you’ve considered moving to San Francisco recently, you might have abandoned the idea when you learned that median rent for a 1-bedroom apartment is an astonishing $3,500 a month, essentially requiring an income of over $100,000 for a basic standard of living in the city. Those figures are very real. San Francisco rents are out of control.
As a San Francisco resident, Eric Fischer wanted to know exactly what was driving those figures. He dug into housing data and discovered that comprehensive records on city-wide rents only go back to 1979, which is coincidentally the year that rent control became law and mere months after the passage of Proposition 13, which effectively limited both the amount of growth and rate of property taxes statewide. This information inspired Fischer to unearth and examine previous data trends and answer the question of how rent control has affected rent prices.
Fischer spent hours studying pre-1979 “for rent” ads in the San Francisco Chronicle archives, amassing sufficient data to draw conclusions about rental rates from 1956 to 1979. He released a number of informative charts in his blog post on the topic. I have included one of the more telling charts below:
The chart above shows the increase in median rents over the past 70 years. This chart is surprising for two major reasons. First, with the exception of the tech boom around the year 2000, rent prices have consistently risen 6.6% each year, which is about 2.5 percentage points above inflation. Second, rent control had no effect on year-by-year rent increases.
After tracking trends in rent prices, Fischer wanted to figure out exactly why rent prices have increased at this rate and what we might do to slow, and even reverse, this incline.
As the chart above shows, Fischer identified key variables affecting rental rates: total housing inventory, the number of jobs in San Francisco, and the total amount of money paid to every person with a job in San Francisco. Based on this information, Fischer has an idea for how we can drop the cost of housing in San Francisco by 66%. According to Fischer, “It would take a 53% increase in the housing supply (200,000 new units), or a 44% drop in CPI-adjusted salaries, or a 51% drop in employment, to cut prices by two thirds.”
Fischer’s discovery mirrors an idea from the 19th century British political economist, David Ricardo. Drawing from Adam Smith, Ricardo formalized what is known as the Law of Rent. It shows that the productivity of labor compared to the best available rent-free land determines rents. Just like in Fischer’s data, if productivity goes up, rents go up, and vice versa. By extension, real wages are determined by the best available alternative to renting. In his day, the New World was full of decent opportunities to homestead, and this gave laborers bargaining power in the labor market. You can’t force someone to sell their labor for less than what they could go out and make for themselves. Workers in the Old World of Europe didn’t have this luxury.
Extending Ricardo’s law of rent, the American political economist Henry George argued that tax policy canes on buildings penalize building, resulting in a dearth in both housing and commercial sites, and reducing the wages left over to working people. To encourage more construction, he recommended abolishing taxes on buildings, and, crucially, argued that high land value taxation would encourage landowners to put more residential and commercial space on the market in order to meet the cost of the land value tax.
Both in the United States as well as abroad, this concept of shifting taxes off buildings and onto land has proven to increase residential supply and provide a general economic boost. The barrier to this in California lies in the limits imposed by Proposition 13, the altering of which would require a voter-approved constitutional amendment. Whether the political will exists to enact such a change remains to be seen.
Considering Fischer’s findings and the reality of what’s happening in San Francisco, the situation looks particularly precarious. Heeding his conclusions could prevent similar crises in rapidly growing urban centers like Denver, Portland, and Seattle. The biggest takeaway for these cities: either build sufficient housing to accommodate a growing population or face an out-of-control rental rate crisis like the one in San Francisco.
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.
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.
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.
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.
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.
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.”
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.
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.
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.
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.
On a July night in 2009, Sophia Ramos and her two grandchildren pitched a tent on a family-owned patch of property in a rural area of Hawaii. The two boys were crying. These weren’t spoiled kids reluctant to go camping –they were homeless.
The Ramos family lost their home amid the mortgage foreclosure crisis that began in 2007. The story is a familiar one. Like so many homeowners’, the roots of Ramos’s troubles were in a loan she took out against the value of her home. She was, at the time, free of debt, having bought her family a modest house in Florida outright with the proceeds of the sale of her mother’s home back in Hawaii. Ramos, her three grandchildren, and her elderly parents shared the three-bedroom home. In 2004, Ramos took out a loan against the property to buy a lawn-care business to support the family. She was a hard worker and enjoyed mowing grass. Everything was going well until 2005, when driver pulled out in front of her minivan.
Ramos suffered a broken arm and other injuries, rendering her unable to work. Six months later, she fell behind on her mortgage payment. Bills piled up. Collections agencies started calling. Ramos was desperate. And then help came—in the form of another mortgage. Less than a year later, still unable to work and after months of financial struggle, Ramos took out yet another, much larger, loan. At this point, she owed $240,000. This may seem like an alarming amount of debt for someone with no job, but at the time, Ramos’s home was valued at around $400,000 and expected to keep gaining value at $40,000 a year. In that light, her loans seemed conservative. She just needed a little help until things turned around. It was December 2006, and Ramos’s financial world was about to collapse, along with that of the entire country.
Ramos’s plight is one of millions that followed similar trajectories in the mortgage foreclosure crisis. Last week, at Columbia University, I (Jacob) attended a screening of Rahman Bahrani’s thriller film 99 Homes, which dramatizes the human toll of the foreclosure crisis through the fictional story of Dennis Nash, an Orlando construction worker supporting his mother and son. Dennis falls behind on his mortgage payments when he becomes unable to find work in the construction industry. In the beginning of the film, Dennis pleads with a judge, explaining that the bank said it was trying to modify his mortgage. In the next scene, the Sheriff arrives and the family is forcibly evicted from their home. As the panicked family packs up everything they can in the few minutes they are given, Rick Carver, the real estate agent in charge of the eviction, drawls, “This ain’t your house anymore, son.”
Following the screening was a panel that included Nobel economist Joseph Stiglitz, whom I had the pleasure of meeting after the event. Dr. Stiglitz discussed the causes and conditions of the mortgage meltdown. From 2004 to 2006, housing prices skyrocketed in a bubble fueled by frenzied speculation and the availability of cheap loans. Like so many Americans, Ramos pulled funds from the rapidly growing equity in her home. In those two years, Americans extracted 1.5 trillion dollars from the value of their property. Just as Ramos did, a large portion of them did so through subprime loans. Subprime loans are loans made to risky borrowers, usually at high interest rates. Subprime loan brokers encouraged homeowners to borrow huge amounts of money against the speculative rise in the value of their homes–to pay off debts, improve their properties, to start businesses, or just to spend on luxuries such as vacations and new cars.
Keep in mind that to say people were speculating on “homes” is somewhat misleading. Often times, the lot a house is on is worth more when the structure is removed. This is because structures, like all physical assets, depreciate over time, while the location of the property appreciates, as it did rapidly in the years preceding the crash. So, it was really the land–or more precisely the locationof the home–that was being speculated on, not the home itself. We’ll talk about the importance of that later.
The loans for such land speculation came with variable interest rates that could double or triple, as well as large penalties for paying them off early. In many cases, the borrowers could not afford the loans, and the brokers knew it. Unscrupulous mortgage brokers had incentive to make bad loans, as they could simply take their hefty servicing fees and then sell the loans off to investment firms. Often they used fraud, including falsifying people’s incomes, to get the loans approved. Then, such loans were packaged with hundreds of others and sold and resold. A block of subprime loans might be owned by thousands of investors in mortgage-backed securities.
Beginning in 2007, the bottom fell out of the housing market and the economy tanked. As unemployment climbed, people defaulted on their mortgages, many of them subprime loans that they couldn’t afford in the first place. With housing prices on a steep decline, people could no longer sell their homes to pay off the debt. All too often, those homes were now worth less than what they owed.
This all became a self-perpetuating cycle as the value of mortgage-backed securities dropped, the economy crashed, and more and more people lost their jobs—especially those in the construction industry. As people struggled to make payments on their mortgages, it fell to the mortgage service companies (often banks) to deal with the avalanche of defaults, which cost them money to actively manage. They also saved on payroll by under-staffing the offices handling the defaults, often with under-qualified employees, leading to massive mismanagement of paperwork and wrongful foreclosures.
In 2009, the Obama administration launched the Home Affordable Modification Program, a $75 billion program meant to help homeowners avoid foreclosure by offering banks incentives to modify mortgages for borrowers who were in trouble. However, applications for loan modifications were egregiously mishandled by the loan servicers in the form of delays, errors, and lost paperwork. According to sworn statements by Bank of America employees, they dealt with the glut of paperwork by routinely denying applications en masse with made-up reasons such as missing documentation. Foreclosure proceedings went on in parallel with the mortgage modification process, meaning homeowners who qualified for the program lost their homes before they could be approved.
As this catastrophe unfolded, fingers pointed in all directions–mostly to “irresponsible” homeowners or “predatory” lenders–to cast blame. Hands were wrung and barrels of ink spilled by economists trying to explain just what went wrong and how we could prevent it in the future, including many reasonable proposals such as not lending money for land and avoiding the inflation of location values caused by artificially low interest rates. All of this, however, could have been prevented by a simple fiscal measure –taxing the value of land. Taxing land value would have stopped the bubble from inflating in the first place. This is because a strong land value tax would have reduced land’s selling price in the same way that our current low property taxes do to a small degree–by creating a liability on the part of the de facto owner, the holder of the deed or the bank that owns the mortgage, to regularly pay a tax. Think of it this way: the greater the tax you will have to pay for holding onto land, the less you will be willing to pay up front. Pay more now, pay less later. Pay less now, pay more later. For this reason and others, Dr. Stiglitz is a supporter of the land value tax as a means of keeping such bubbles from inflating in the first place.
“One of the most important but underappreciated ideas in economics is the Henry George principle of taxing the economic rent of land…” -Joseph Stiglitz
Behind all the statistics, terminology, and tangled interplay of economic mechanisms that caused the foreclosure crisis are the tales–each unique in the manner of snowflakes–of families whose worlds were turned upside down in their pursuit of the fabled “American Dream” that, in those two heady years of economic boom, seemed so vivid. In 99 Homes, Dennis and his family find themselves living in a motel filled with other families in like situations. Desperate to save them from this fate and get his house back, Dennis goes to work for Carver, the unscrupulous real estate agent who had evicted them. Under Carver’s direction, he starts by cleaning up foreclosed homes and stealing the appliances only to replace them–for a cut of Carver’s ill-gotten gains. In an ironic twist of fate, Dennis is groomed to carry out evictions himself. The morality play of the film unfolds as Dennis accepts handfuls of cash from Carver to show up to door after door and throw people just like him out of their homes.
In one scene, Carver places the blame for his decisions on the system. His father, he says, was “a sucker,” a construction worker who played by the rules but lost his home anyway. Carver is determined to “survive.” While we must hold the Carvers of the world morally accountable for their decisions, we also need to turn a critical eye to the system that pushes them toward such despicable tactics in the first place. If people can make more money speculating on the rising value of land than they can working an honest job, then we have a problem much deeper than a group of greedy bankers.
We need to attack the root of the problem–taxes on wages and subsidies for owning land. In this drama, we are the serfs, and the financial institutions are acting as lords of the manor. We pay taxes on our earnings and pay the rest to them in the form of rent and mortgages. But who rightfully owns the land? We the people, or the oligarchs? By forcing them to pay a tax on land value, we can take back our earnings and fix the root of the problem.
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.
John Oliver recently quipped that infrastructure is “important but not sexy.” Maybe that’s because “Hollywood promotes unrealistic standards of infrastructure beauty. That’s not what a real road looks like! Real roads have curves!” To the contrary, we’re setting our standards too low. There is plenty of money for improving infrastructure when you consider that such infrastructure will pay for itself, and then some.
There’s no reason we have to accept rickety NYC train cars, for instance. We can have the ultra fast and sexy maglev trains being built in other countries, and we can do this without sacrificing economic productivity. How? The answer is right under your nose. This morning on The Brian Lehrer Show, Jessica Gould and Brian discussed how to save the region’s public transportation infrastructure. The question is what is the best way to raise the money? One of the solutions mentioned was “value capture.” I called in today to explain how it works. Though I glossed over the subtleties, and did not explain the difference between land value capture and land value taxation in general, this was necessary given the limited time available for comment. Click the play button below to hear my commentary:
More people than ever are seeking to move to cities, and rent is skyrocketing as a result. The problem has always been land speculation, under-using prime locations. In the late 19th century, it meant that there was artificially limited space available for housing, as many tenement dwellers crammed together.
This lead to unsanitary and dangerous living conditions. When the cost of transportation fell in the 20th century, people could afford to live in the suburbs and commute to work in the city. This created a great deal of environmental problems, and left inner-city communities underserved; the suburbs were able to suck government revenue into their communities, “milking the center to feed the borders” as economist Mason Gaffney has described it.
“In the 20th century, tumbling transport costs weakened the gravitational pull of the city; in the 21st, the digital revolution has restored it. Knowledge-intensive industries such as technology and finance thrive on the clustering of workers who share ideas and expertise. The economies and populations of metropolises like London, New York and San Francisco have rebounded as a result.” -The Economist
These cities have perhaps rebounded, but at what cost to the inner city communities, where gentrification is displacing large groups of people? Today, the political left claims that rent control/stabilization is the solution, largely ignoring the fact that this will limit the supply of housing for those seeking it. The political right claims that lifting all zoning restraints is the solution, allowing buildings to be taller and ignoring the fact that such housing will be catered to rich residents.
There are attempts to offer subsidies to build if a certain number of the units are stabilized. However, these complex sets of rules are really just spider webs for the rich, with their armies of legal consultants to decipher the rules, chains for everyone else. The bottle neck is simply to incentivize the optimal use of space within whatever zoning requirements exist, some reasonable some not. How do we do that? Well, as this article from the economist points out, the value of land needs to be taxed so that more housing will be brought onto the market.
“Whereas a high tax on property can discourage investment, a high tax on land creates an incentive to develop unused sites. Land-value taxes can also help cater for newcomers.” -The Economist
The Economist gets that right, but does so in an insensitive way, emphasizing zoning over simply making use of all the vacant lots and ground level buildings where, say, 10 story buildings might be more appropriate in terms of people’s needs. You can still utilize rent control until people feel more secure in the idea that they will have access to affordable housing. They will likely start to see their rent controlled apartment as unattractive compared to all of the more affordable, spacious and higher quality units on the market. In the absence of fear, they’ll even want to get rid of certain types of zoning that restrict supply. The idea is to remove people’s chains before taking away their crutches.
Despite my criticism, I appreciate that The Economist has been trying to bridge the ideological divide, to demonstrate how, using the land value tax, we can reconcile what’s best about the left and the right.We don’t need more skyscrapers and luxury buildings to solve the housing crisis, and stabilizing the rent of people who already have housing will not help those looking for it. We need to increase the supply of housing for regular people and utilize sensible zoning practices simultaneously. The only practical way to do that is a land value tax. Justice isn’t about splitting the difference. Don’t compromise. Reconcile.
Detroit, in the mid 20th century, was a vibrant center of American industrial manufacturing with a prospering middle class. It is now the poster city of blight and urban decay. As industry has collapsed across the region, job scarcity, white flight, and soaring crime rates have driven hundreds of thousands of people out of the city. Thousands of homes, retail spaces, and civic buildings sit empty and dilapidated. Today, due to the faulty set of incentives implemented to encourage investment, real estate investment–a force that was once thought to have the potential to save Detroit–is worsening blight and costing the city millions of dollars.
After decades of declining investment in Detroit, locals were excited when, beginning in 2013, investors began to purchase large swaths of residential properties. Jimmy Lai, a billionaire based in Hong Kong, purchased 32 homes at a tax foreclosure auction. At the same auction, local real estate agent Wendy Briggs walked away with a staggering 428 properties. Despite the hopes of local residents, it became obvious right away that Jimmy Lai, Wendy Briggs, and the myriad others snatching up Detroit real estate had no plans to invest in their properties. Instead, they anticipated that Detroit would experience a real estate boom in the next several years, allowing them to unload their properties at a large profit.
Thousands of homes owned by speculators have fallen into disrepair as their owners wait for a real estate boom that does not appear on the horizon. In the meantime, a house at 3383 15th Street, owned by Jimmy Lai, partially burned down in 2015. To date, he’s made no effort to clear the wreckage, which poses a safety hazard in the neighborhood. At one point, Detroit paid over $200,000 demolishing a single speculator’s properties after they fell into disrepair and then into foreclosure.
So what factors are driving this mess? A big cause is real estate taxation in Detroit. Facing debilitating revenue shortages during the 2008 financial crisis, Detroit over-valued residential properties with the hope that increased revenue from property taxes could help the city stay afloat. They did this without the understanding that increasing property taxes reduces incentives to build or rebuild. Without this understanding, Detroit’s taxing strategy proved disastrous. In 2016 alone, the city sent 38,000 foreclosure notices due to unpaid taxes. The majority of tax bills totaled less than $2,000. If overdue taxes couldn’t be paid, the homes went up at tax foreclosure auctions, where speculators would subsequently make the majority of their purchases. It simply was too easy for speculators to game the system–with minimal cost to them and minimal gain for the city.
Many speculators fail to consider taxes in the total cost of their investment, now owing Detroit millions of dollars in back taxes. Wendy Briggs alone, who purchased 428 properties for just $379,000, owes $4.7 million in back taxes. 95% of her properties will be auctioned in 2016. In fact, nearly 80% of all properties purchased at the 2013 tax foreclosure auction are back in foreclosure. So not only do speculators let their properties fall into decay, they fail to pay their taxes, which deprives the city of a critical revenue stream and puts homes back into the tax foreclosure auction. This cycle continues to repeat itself.
Detroit and Michigan are taking steps to reduce the number of foreclosures and ability of investors to hoard properties. The state has cut interest rates on tax repayment plans by two-thirds, reducing the number of homes foreclosed due to unpaid taxes. Wayne County has closed a loophole that allowed speculators owing back taxes to purchase additional properties at auction. In addition, property assessments are expected to drop. The next step would be to eliminate taxation on buildings and focus solely on taxing land values. Both measures, if implemented worldwide, are predicted by experts to induce landlords to either immediately develop their properties or to sell to those who will.
These measures have cooled investor interest in Detroit. In 2016, the top ten investors bought nearly half as many homes than they did in 2013. Although housing activists applaud this progress, they believe more can be done. Local residents propose making it easier for people in poverty to file property tax exemptions and further decreasing the number of real estate investors in the market. However, this could have the opposite effect, as low property taxes decrease property owners’ incentive to develop their properties.
Detroit residents, having learned that speculators tend not to care about their communities, are thrilled to see them go. “They think Detroit is just a bunch of criminals who don’t care and the city is meaningless to them. The idea of a neighborhood or community is a foreign concept to these people,” says Bill Cheek, a resident in the North Corktown neighborhood. The challenge, some believe, will be keeping them out. By implementing sufficient land value taxation and exempting buildings from taxation, they should be able to do just that.
I have always been left-leaning. I believe there should be economic justice and equality of opportunity for all. My biggest early influences were FDR, Olaf Palme, and Nelson Mandela. My first serious political involvement started when I attended a 2008 Democratic presidential rally for Hillary Clinton. I attended with my mother and her friends in my hometown of Springfield, Missouri. My family is dedicated to the tenets of modern liberalism: equality, universal prosperity, and a moderate amount of government regulation of the economy. Since 2008, I went even further to the left, identifying myself as a social democrat, and promoting a large expansion of social programs.
Scandinavian Socialism, Only Better
I first became interested in the idea of Earth Sharing, particularly Land Value Taxation, about a year ago. I believed that the only, or at least the best, way of achieving such ends was more regulation, higher income taxes, new wealth taxes, and expansion of government programs in general. I still believe that doing these things would be far better than what we have now, but Land Value Taxation seems to be the most important bottleneck to reducing inequality.
Land Value Taxation fell in my lap when I was browsing Wikipedia (yes, I am one of those people). I looked at it and thought that this was a good tax; it collects quite a bit of revenue and it could fund social programs. But I was skeptical of its benefits. Would it be enough to fund a welfare state?
The Best of Both Worlds
Earth Sharing made me aware of the possibility that equality need not be at odds with economic efficiency. I started appreciating more of the benefits of the market economy. The following ideas aren’t necessarily Earth Sharing stances, but they’re still relevant to understanding my intellectual evolution. I started to grow less wary of some forms of deregulation. I was worried about getting rid of certain occupational-licensing laws, but then eventually accepted that doing so can reduce the cost of hiring.
Soon after, I committed an anathema for a social democrat, questioning the minimum wage. While minimum wage is a beneficial reform, I found something even better, something that lifts people out of poverty, is less expensive to administer, allows a large degree of freedom, and doesn’t hurt the economy—the basic income.
A Basic Income for All
A basic income is just that, a minimum income that all citizens get -regardless of lifestyle choices. A basic income for all provides people with a social safety net, without discouraging them from working, unlike unemployment compensation. If you are currently getting unemployment benefits, and you start working, you stop getting those benefits. This makes getting a job less enticing. This wouldn’t happen under a basic income because everyone would get money, regardless of whether they worked. This would be an immediate safety net for everybody, enough for food, shelter, and medical care.
A basic income is less costly to administer than unemployment benefits. This is because it’s expensive to monitor and hassle the unemployed about whether they are looking for employment, or if they are being paid for unreported work. Why not just give that money, currently being wasted on bureaucracy, directly to all citizens?
Sharing the Earth to Save the Earth
What’s the best way to fund such a basic income? While it’s not the only way, Land Value Taxation would do the most good. Land Value Taxation has many other benefits as well. It increases the housing supply and curbs gentrification. It opens up vacant lots in urban areas for housing, jobs, parks, and other public places. Land Value Taxation also reduces sprawl, and thus the tremendous environmental damage it inflicts.
In general, Earth Sharing offers the highest impact way of reducing inequality, but also does so without harming individual freedom, the will to work, or the market as a whole. I still support social liberal policies, but they do not have to be so bureaucratic and wasteful. There are better ways to achieve a world of freedom, equality, sustainability, and justice.
How a Libertarian Came to Earth Sharing
by Daryl Sawyer
I have been asked to share the story of how I became a supporter of Earth Sharing. This story may be of interest to readers on this site due to the personal transformation it describes: how a right wing libertarian came to be someone who, in the eyes of many of his former compatriots, is a communist. I began as someone who believed that, while poverty was unfortunate, it was necessary to ensure that every person does their part.
In the middle of my transition, from right to left, I was prepared to support a “grand bargain” between libertarians and what are commonly called “liberals” or “socialists” to replace the existing welfare system with some sort of direct income subsidy (whether by the name “Guaranteed Minimum”, “Reverse Income Tax”, “Citizens Dividend” (my preference), or what have you.
Progress and Poverty
It started with Carl Milstead’s holisticpolitics.org. It was kind of a revolutionary approach to someone who had spent most of his life as an embittered and cynical libertarian. There I found “quiz2d” which steered me toward Henry George.
I read Progress and Poverty and was enthralled by it. I was particularly impressed by how land theory creates a space for the State and a certain amount of (p)redistribution in a mind then immersed in anarcho-capitalist theory. It was a revelation: a political philosophy that was pragmatic without abandoning principle by so much as a single jot.
Want Liberty? You’ll Need Equality.
Over the years, I’ve come to realize that a lot of the libertarian sacred cows just aren’t really that important. Economic injustice is the cause of our lack of freedom, not the other way around. So while others talk about a “grand deal” in which the existing welfare system is replaced by a basic income, I’m perfectly comfortable just cutting the checks, and then relying on a financially liberated populace to pare back the State wherever it seems to make sense, and leave it in place where it doesn’t. In the paragraphs below, I will describe precisely how I managed to get to here from there.
Growing up Conservative
You might say I was “born libertarian”. My father was a non-religious conservative, a supporter of men like Ronald Regan and Barry Goldwater. It is from him I absorbed that most basic of libertarian ideals: that it is better to leave people alone, let them handle their own problems their own way, than to meddle in other people’s affairs.
But, like I said, I also spent a lot of time on the Internet taking personality quizzes, political quizzes, and so on, and in the process discovered holisticpolitics.org. This was the first place I encountered serious thinking about ways for traditionally opposed political factions to compromise in ways that advance the interests of both sides. Having spent most of my life as a cynic, it was a revelation. But even more interesting was one particular thinker, and one particular book: Henry George’s Progress and Poverty.
Progress and Poverty
I devoured that book like a starving man. I found the hopefulness of his prose every bit as appealing as the novelty of his theory. Up to this point, I knew nothing about land other than it was one of three “factors of production” in classical economic theory, and I think the last time I’d heard anything about that was high school economics. Henry George explored the nature of land and the role that land ownership plays in the distribution of wealth. The conclusion, that our institutions of land tenure are the cause of the gap between rich and poor, and that addressing this would go far to remedy that gap.
Getting in Touch With My Left Side
Up to that point, I considered the ideal political arrangement to be an unattainable one: one in which every person’s liberty and property are respected. Under such a system, I believed, there was no room for government; government is necessarily the compromising of some liberty and property to achieve certain ends.
Rather than making the “left wing” parts of my philosophy conditional on acceptance of the “right wing” parts, I now do precisely the opposite. This might be due merely to the extraordinarily bad behavior displayed by the American right wing in recent years, but I think it goes deeper than that.
Most Libertarians Have it Backward
Libertarians believe that excessive regulation leads to a stunted economy, which leads to a perversion of the distribution of property, which leads to suffering. I now believe it is the unjust distribution of property that leads to a stunted economy, which leads to suffering, which makes the population vulnerable to every kind of demagoguery (both right wing and left wing). This leads to regulation, which is a mixed bag in terms of what makes things better and what makes things worse.
Same Values, Enlightened Application
But understand this: underlying this entire process, that most basic ideal, the one I acquired as a child, has not changed. I bring this up because I see, in the Geoist community (and more so in the larger egalitarian economics community), a profound distrust of libertarian types. It’s understandable. The libertarian “program”, fully implemented, would indeed result in a plutocratic dystopia. But among sincere supporters, this is not the goal. It is, rather, the result of an incomplete understanding of economics.
My impulses are still “libertarian” in nature. I still prefer less government to more. This is why I favor a larger dividend instead of a larger government, for example. The goal, the vision I would like to see implemented, is the same now as before: one in which every individual is free to live their life as they prefer, provided their choices do not prevent others from doing the same. Only my understanding of how to achieve this has changed.