Land Value Taxation will solve many of the 21st century's most serious social, economic and environmental problems, and promote justice, fairness and sustainability. We CAN have a world in which all can prosper.
Progress and Poverty, by Henry George Here are links to online editions of George's landmark book, Progress & Poverty, including audio and a number of abridgments -- the shortest is 30 words! I commend this book to your attention, if you are concerned about economic justice, poverty, sprawl, energy use, pollution, wages, housing affordability. Its observations will change how you approach all these problems. A mind-opening experience!
Henry George: Progress and Poverty: An inquiry into the cause of industrial depressions and of increase of want with increase of wealth ... The Remedy This is perhaps the most important book ever written on the subjects of poverty, political economy, how we might live together in a society dedicated to the ideals Americans claim to believe are self-evident. It will provide you new lenses through which to view many of our most serious problems and how we might go about solving them: poverty, sprawl, long commutes, despoilation of the environment, housing affordability, wealth concentration, income concentration, concentration of power, low wages, etc. Read it online, or in hardcopy.
Bob Drake's abridgement of Henry George's original: Progress and Poverty: Why There Are Recessions and Poverty Amid Plenty -- And What To Do About It! This is a very readable thought-by-thought updating of Henry George's longer book, written in the language of a newsweekly. A fine way to get to know Henry George's ideas. Available online at progressandpoverty.org and http://www.henrygeorge.org/pcontents.htm
Where Else Might You Look?
Wealth and Want The URL comes from the subtitle to Progress & Poverty -- and the goal is widely shared prosperity in the 21st century. How do we get there from here? A roadmap and a reference source.
Reforming the Property Tax for the Common Good I'm a tax reform activist who seeks to promote fairness and reduce poverty. Let's start with the enabling legislation and state requirements for the property tax. There are opportunities for great good!
Has no one in California figured out that when the calf is deprived of mother's milk, starvation is inevitable?
It has taken 34 years, but it is coming about.
Feeding calves grain, or seaweed, or sunflower seeds isn't as smart as letting it consume its natural food.
Taxing wages, sales and buildings isn't as smart as collecting the lion's share -- calf's share, if you will -- of the land rent for public purposes.
Proposition 13 was designed to make sure that the cows' milk was kept for the Irvines, the big landowners, the commercial property owners, and the longtime homeowners, while providing a diminishing fifth of it to the calf and supplementing with grain, seaweed and sunflower seeds.
The calf's digestive system has blown up because it was deprived of its proper food, and "nourished" with stolen fake food.
How to Bring The Cost of Housing Back within Reach of All American Families C. Lowell Harriss, et al. [A pamphlet published by the Robert Schalkenbach Foundation, 1978]
Introduction by Dr. C. Lowell Harriss, Professor of Economics, Columbia University
1. Land Supply Constraints in the United States Excerpt from the Final Report of the Task Force on Housing Costs, William J. White, Chairman
2. The High Price of Land by P. I. Prentice, Chairman, National Council for Property Tax Reform
3. Modernize, Don't Abolish, the Property Tax From a report by the Subcommittee on the City of the House Committee on Banking, Finance, and Urban Affairs of the U. S. House of Representatives, Rep. Henry S. Reuss, Wisconsin, Chairman
Introduction by Dr. C. Lowell Harriss
The number of Americans who lack adequate housing is much too high. While both opportunity and promise life in the long-established principle of providing satisfactory shelter for everyone, many are still not well housed. Population grows, and the existing stock of housing grows older. For years to come, much new construction, expansion, and modernization will be needed.
Rapidly rising costs, however, present formidable obstacles. One of the heaviest costs is one which also rises most rapidly. And it is the cost of something created not by sweat and thrift, but by nature.
It is land.
The rising prices paid for land itself must be distinguished from the portion of the price of a building site which represents cost of preparation for use. The land elements alone go up and up in price. But land price increases do not change the quantity of land in existence. Here is a rising price which does not add to supply.
Land is different.
In these three articles on land value taxation, the first, "Land Supply Constraints in the United States," points out that the sharp rises in land prices result in part from man-made factors. Arbitrary, artificial, and unconstructive restrictions on land supply boost prices and threaten our housing future. New building will therefore be kept below levels which unfettered economic conditions would otherwise achieve. But tax policy which would encourage use, rather than underuse and withholding of land can increase the effective supply. Need more be said?
Yes. And in the second selection, "The High Price of Land," Mr. Prentice says more. He points to many avenues by which the harmful effects of restricted land supply spread through the economy. Developers and builders, laborers, supplier, subcontractors, and others all suffer. They have less work, operate under conditions of disadvantage, and receive poorer rewards because of essentially needless obstructions to the optimum use of land. The full and true price of land includes burdens above and beyond the dollar prices of building lots. We shoulder burdens of lost opportunity of many kinds. They are largely hidden but indeed real. The quality of too much new construction deteriorates instead of improving as an advancing society should expect. And, to repeat, the tragedy is that the rising prices for land do not create an more surface on the earth.
What to do? The third article, "Modernize, Don't Abolish, The Property Tax," points to the reform outlined generations ago but here presented in modern form: reduce the property tax burdens on structures and make up the revenue by higher tax rates on land value.
The benefits from relying more fully on taxation of land values, rather than taxation of buildings, would include greater pressure on landowners to put land to better use. Withholding land -- which reduces the current effective supply -- would become more costly if land value taxes were higher. Thus some land formerly held for speculation would be sold, and new building would be encouraged on the increased supply of land.
A careful study of probable results in Washington, D. C., showed, among other things, that taxes on present homeowners would generally fall. But this result is not the one which most justifies support for reform. More significant and constructive would be a combination of forces producing incentives for better land use. Upgrading of housing in older urban centers would be expected. Positive incentives at many points would contribute to improving America's housing.
The newest issue of Progress, an Australian Georgist publication, is online here. The motto is "Sharing the Earth So All May Prosper."
There is a lot of good material, and I'll share some of the things that caught my eye.
An article about a film entitled "Real Estate 4 Ransom" which I commend to your attention, wherever you live. (I'll keep you posted on the film itself.)
“Economist James Galbraith has noted that only 12 out of 15,000 economists in the US noticed the US$8 trillion dollar housing bubble” (page 6)
We propose a change in the tax mix so that future infrastructure pays for itself by expanding the tax base without increasing the tax burden. (page 9)
Infrastructure adds enormous value to land in prime locations according to proximity and serviceability. Land Value Capture (LVC) is a simple technique to recycle the publicly funded windfall gains that accrue to land owners. Importantly, these windfalls are captured over the life-cycle of the infrastructure, such that one generation is not hit with the total infrastructure costs (ie as per the current preference for Developer charges). (page 10)
Windfall gains from infrastructure add up to several times the cost of the infrastructure to surrounding properties. We propose that a sufficient contribution from this windfall be recycled back to the government so that other infrastructure projects can be funded without substantially burdening one generation over another. At present land speculators baulk at paying barely 10% of the land bounty (windfall gain) back to the community via government’s Land Tax, Council Rates, Stamp Duties and Capital Gains. (Page 11)
“Henry George did more than draw ‘the deadly parallel of riches and misery.’ He recast the science of political economy by working out the natural laws of the distribution of wealth. He destroyed the current academic theory of wages and capital. He amplified and extended Ricardo's law of rent. He dug to the root of the wealth distribution.” (John Dewey, quoted on page 22)
If you could choose the sort of society that you were to be born into, would you choose one in which the distribution of wealth is guaranteed to be equal? (page 28 -- and don't miss the illustration cartoon on "trickle-down economics"!!)
The world faces a series of worsening crises, climate instability, rising energy costs, economic apartheid, and erosion of democratic institutions. What is required is not a set of technical instruments that try to resolve these, one at a time. We need a new social philosophy that addresses all these crises simultaneously. (page 38)
All 17th century authors took it for granted that God had given the earth to all people in common, not just to those who had claimed title to a part of it. Starting with that premise, the difficulty lay in justifying private ownership of nature. They saw that private property in land or ocean or other gifts of nature was an obvious usurpation of the rights of the rest of humanity. Private ownership was deemed a necessary evil to achieve more productive use of nature, but it was clearly an evil, never an institution that was good in itself. (page 39)
The idea of charging a fee for the use of nature and sharing the revenue equally might seem like a proposal that would not be threatening to powerful interests, but it is. The wealthy at present take a disproportionate share of the common stock of resources, both renewable and non-renewable, and they aim to keep it that way. (page 40)
“Ironically, what comes closest to being sacred in modern societies are individual rights, private property, and personal freedom.” (page 41)
“It seems that most people are concerned only with the future of their own children, not with the next generation as a whole.” (page 43)
A lot of good material -- and I've barely mentioned the graphics!
The unexpectedly deep plunge in home sales this summer is likely to force the Obama administration to choose between future homeowners and current ones, a predicament officials had been eager to avoid.
Over the last 18 months, the administration has rolled out just about every program it could think of to prop up the ailing housing market, using tax credits, mortgage modification programs, low interest rates, government-backed loans and other assistance intended to keep values up and delinquent borrowers out of foreclosure. The goal was to stabilize the market until a resurgent economy created new households that demanded places to live.
As the economy again sputters and potential buyers flee — July housing sales sank 26 percent from July 2009 — there is a growing sense of exhaustion with government intervention. Some economists and analysts are now urging a dose of shock therapy that would greatly shift the benefits to future homeowners: Let the housing market crash.
It seems as if the suggestion is that we ought to let the housing market crash, and then hope that we will pick up again where we left off, and experience this boom-bust cycle again.
There doesn't seem to be much discussion of the factors that produce the boom-bust cycle, or of the notion that we can actually prevent the next boom-bust cycle through wise policy.
What policy? A tax shift. Shift taxes off wages (starting at the bottom); off sales (starting with essential items); off buildings of all kinds and equipment. What's left to tax?
That which we should have been taxing all along: the value of land. Henry George (b. Philadelphia, 1839; died NYC, 1897) introduced the idea in his 1879 book, Progress and Poverty, which remains 130 years later the best selling book ever on political economy. It sold over 6 million copies by 1900, and George, Thomas Edison and Mark Twain were perhaps the three best-known public figures of their day. George's "remedy" came to be known as the "Single Tax." It was a recipe for small government -- right-sized government, funded by the only legitimate revenue source: value created by nature and by the community. Land, to the classical economists -- Adam Smith, David Ricardo, John Stuart Mill, Henry George, etc. -- was distinctly different from capital. (The neoclassical economists -- and those who only know their sort of economics -- can't seem to see the difference, and conflate them, leading to all sorts of stupid -- and unnecessary -- messes!) Land includes not just the value of locations (on earth, in water, in space) but also electromagnetic spectrum, water rights, non-renewable natural resource values, pollution "rights," and lots of other like things. (Mason Gaffney provides some excellent lists.) Those locations include urban land, land made valuable by favorable climate, water supply, access to ports, to transportation systems, to desirable views, to vibrant cities with jobs, cultural amenities, educational opportunities; geosynchronous orbits; congestion charges; parking privileges, etc. Those of us who claim title to a piece of land ought to be required to compensate the community in proportion to the value of that land, for the right to exclude others from it. That compensation should be paid month in and month out, to the community.
Our current system is perverse. We must purchase the rights to the land from the previous holder at whatever price the market will bear, or what the seller's circumstances require him to accept. Rich landholders can hold out for higher asking prices; poorer ones may be forced to accept lower prices. Few of us enter the market with more than a few percent of the asking price in hand; we mortgage our future earnings in order to pay the seller's asking price.
In most coastal cities, that price is predominately for the location, not for the building itself. A May, 2006, Federal Reserve Board study found that land represented, on average, 51% of the value of single family housing in the top 46 metro markets in 2004; in the San Francisco metro, land represented 88.5% of the value, and in no metro in California did it represent less than 62%. Boston metro was around 75%, NYC metro was about 70% (I'm doing this from memory), Oklahoma City about 20%; Buffalo about 28%. Extrapolating from some of their tables, I found that the average value of a single-family structure across the 46 metros was about $112,000, with a range from perhaps $88,000 in the lowest metro to a high of perhaps $130,000 in the highest. The range of average land values across the 46 metros, though, was much wider, from perhaps $25,000 to $750,000!
Suppose we did let the housing market crash, and then shifted over to George's proposal, collecting our tax revenue first from land rent, and only after we'd collected the lion's share of the land rent, tapping other less desirable revenue sources such as wages, sales and buildings. What would happen?
The selling price of housing would drop to approximately the depreciated value of the structure in which one would live. A large new house would be more valuable than an older house of the same size. A large house would cost more than a smaller one. But one would not pay the seller for value that related to the location of the home.
One would pay, month in and month out, the rental value of the land on which the house sits. Fabulous locations would require high monthly payments; less fabulous ones would have lower monthly payments. Small lots would pay less than larger lots nearby. Owners of condos in a 20-story building would share the cost of the land rent for the site, perhaps in proportion to the quality of their location within the building (fabulous views would pay more than ordinary ones; larger footprints and/or more floors occupied would pay in proportion to their share of the total space).
That monthly payment would go to one's community, and would replace one's property tax, sales taxes, wage taxes. A portion of the payment would be forwarded to one's state, and at the state level, a portion would be forwarded to the federal government.
The selling price of housing would drop, requiring one to borrow far less. The difference would be quite pronounced in San Francisco, Boston, NYC, etc. One's monthly mortgage payment would be significantly lower.
Housing would no longer be an investment, in the sense that one expected to sell a property for more than one paid for it.
Housing would be more liquid; one could own a home, but have a reasonable expectation of being able to sell it if one wanted to move elsewhere.
The credit not used to purchase homes would be available for businesses. Businesses, too, would not be "investing" in land, but would have capital available to invest in equipment and to pay better wages to their employees.
Land which under our current system is both well-located and underused would either be redeveloped by its owners, or come onto the market so that someone else could put it to use. There would be no incentive to keep it underused, as there is today. The redevelopment process itself would create jobs in construction-related businesses, and the resulting buildings would either provide housing or commercial venues -- or both: whatever the market was asking for. And that housing would be at a wide range of points on the income spectrum and the ages-and-stages spectrum: young people starting out, families, retirees, singles, couples -- not just the luxury market. And those newly-created homes would be closer in to the jobs which would support them, rather than separated by long commutes and drive-till-you-qualify.
Land made valuable by public investment in infrastructure and services would provide a continuous revenue stream to the community, providing funding for next year's services, instead of funding for self-selected individuals' retirement.
So if one can't hope to get rich from the appreciation of the land under one's home, how is one to have security? How does one participate in the economy? By investing in businesses that serve customer desires. And when one's housing plus taxes are lower, one has more left over for that. When there is enough housing for all, one isn't paying so much of one's income for it. When no one expects to grow wealthy automatically, people can dream up the business which they will enjoy working in. And with so many businesses competing for workers, wages will tend to rise. With so many businesses competing for customers, services will improve, and specialization increase.
Back to the title of the article: "Grim Housing Choice: Help Today's Owners or Future Buyers?" Maybe economics doesn't HAVE to be the dismal science. Maybe our choices are not so grim after all. Maybe we can put ourselves on a firmer footing, without the boom-bust cycles we've been experiencing so regularly. (See Mason Gaffney's recent book, After the Crash: Designing a Depression-free Economy. And while you're on that site, you might read "The Great Crash of 2008" and "How to Thaw Credit Now and Forever.") Maybe we can leave our children a society in which all can prosper.
Not too much to ask for, is it?
Or shall we leave them a society in which 10% of us are receiving 48% of the income, and 10% of us possessing 71.5% of the net worth.
This is an excellent article which I encourage you to read. I want to share the response which a friend posted to a global listserv we're both on.
Before I do that, though, I think it is worth considering that the much reported downturn in the market for new housing, as opposed to resale, might relate to a flight to quality. New subdivisions are on the fringes. Often they are beyond the fringe, surrounded by farmland -- sometimes described as checkerboard development. (I've even seen townhouses surrounded by farmland!)
If you have a choice between a new home in a distant subdivision and a resale home in an established location, served by established transportation systems, schools, jobs, shopping, cultural amenities, etc., which will you choose? Maybe the explanation of why new houses are not selling is that buyers now have a wider choice of homes they can afford, and are choosing the better locationsover the newly constructed houses on or beyond the distant edge of the community.
If I'm correct, it bodes well for smaller builders who are doing infill and redevelopment of existing neighborhoods. Wise policy can promote infill, while unwise policies lead to sprawl. I suspect the sprawl-folks have a lot more lobbying money than the infill-oriented ones, so can only appeal to good sense.
Here's Ed's response to the sprawl article, which I found to be well reasoned and well stated:
"A colleague of mine forwarded the link of this article to me for
comment, as my professional work in the United States has been in
community revitalization and the development of quality affordable
What I came to understand midway in my career was that land markets are made dysfunctional
by law that favors the landed over those who develop and utilize
locations. There are many issues causing sprawling development
patterns, but one of the most consistent is the struggle to gain
control over land that allows for profitable development. And, of
course, developers are not concerned with the infrastructure costs of
bringing roadways; water, sewer and other utilities, hospitals,
libraries, schools, and other public goods and services to
newly-created subdivisions. These costs are passed on to property
owners, working people and businesses.
There is only one measure that will redirect development inward,
leaving more distant land available for agriculture, recreation and
habitat for other species. This is for government to fully collect the
annual rental value of every location within its geographical
boundaries, while exempting improvement made thereon from the
tax/revenue base. What this change in policy will do is easy to see.
First, profit from speculating in the hoarding of land will disappear.
Thus, investors will acquire control over land only when profitable
development is possible.
Second, existing owners of land parcels will not be able to continue to
ignore land they hold because the cost of doing so will (particularly
if the and parcels are centrally-located) make this costly. They will
either develop land based on highest, best use or sell the land to
someone who will.
Third, the cost of property assessment will fall dramatically once property improvements are removed from the tax base.
Fourth, removing speculation and hoarding of land will bring down the
price (but not the annual rental value) of land parcels. This will make
it far less costly for public agencies to acquire land for needed
public buildings and (if still required given household incomes) to
construct decent, affordable housing units for the housing-deprived.
In summary, what will curtail sprawl is public policy that encourages
the renovation of existing structures and in-fill construction of new
buildings where infrastructure already exists, while at the same time
requiring land owners to compensate the community for the value that
comes to locations because of public goods and services."
Almost a month ago (7/12), Martin Wolf, the Financial Times' chief economics commentator, posted a piece to his blog under this title. The last time I looked, perhaps 10 days after his initial post, there were about 150 responses. I circled back recently, and found that the comments count had risen to over 350.
This ended up as a heated debate. Nobody will be surprised if I conclude
that the result of the debate (often surprisingly ill-tempered) was
pro-LVT 10, anti-LVT zero. I am surprised by some of what the anti-LVT
proponents have said. I would have thought they would wish to open their
minds a bit. I did and was persuaded of the case, as a result. Is not
the purpose of such exchanges to learn from one another?
Some of the arguments addressed at the case for LVT are quite extraordinary.
The essential point is quite simple: the value of resources is created
by the economic activity of other factors of production. The owners of
these resources can become hugely wealthy and are often untaxed on that
increase in wealth: the Duke of Westminster is the richest Englishman
simply because he owns a large amount of land in a valuable part of
London. So why should he have command over the labour of so many other
That wealth is, in the strictest sense, unearned. If that rise in wealth
were taxed away, other taxes -- those on labour, capital and
entrepreneurship -- could fall. This would be both efficient (because
taxes on rent do not create distortions, as Ricardo showed) and also
just, because the wealth was unearned. Now, surprisingly, the UK allows
foreign landowners to enjoy the increase in value created by the British
economy, entirely tax-free. This is utterly crazy.
Let me add four other points.
First, throughout history, the main source of wealth was land-ownership.
The parasitic landowner became wealthy on the efforts of others --
peasants, tenants and even developers. Sometimes the parasite was also a
farmer or developer, but that does not change the fact that these are
two distinct economic roles. The parasite built fine castles and palaces
and often sponsored music and culture. But he was still a parasite. The
beauty of capitalism is that many of the wealthiest are no longer
parasites. This is good. But many of the wealthy still are parasites.
Moreover, now everybody wants to get rich by being a mini-landowner.
That is a huge diversion of effort.
Second, the financial system's ills are the result of unchecked
credit-creation. Yes. But unchecked credit-creation would be impossible
without collateral. Land is always the principal form of collateral
(buildings are a depreciating asset). That is why financial bubbles that
do not create credit booms (like the dotcom bubble) are economically
benign, while property bubbles are potentially catastrophic. When the
value of collateral collapses, the financial system implodes.
Third, there is really nothing new about this understanding of the role
of resource rents. They were central to the classical system, from which
modern economics, in its various forms, derives. Ricardo's analysis of
rent remains intellectually impeccable.
Finally, as Herman Daly has noted
(http://steadystate.org/modernizing-henry-george/), today economically valuable
resources are much more than just land (and what lies below it). They
include all the services of the biosphere - those that are appropriated,
those that are appropriable and those that are non-appropriable. If we
do not think seriously and intelligently about how to price resources,
we are likely to go seriously adrift, perhaps even into disaster. Here
land is the least of our problems -- it is appropriable and, by and
large, appropriated. So, at least, the price mechanism works, even
though the distribution of the gain is grossly unjust. But, in other
cases, no appropriation is possible, or at least it is not easy. Nobody
can appropriate the atmosphere. It is nigh on impossible to appropriate
the oceans. How do you own species diversity? These are serious
So, I conclude where I started: resources matter. It was a great mistake
to exclude them from the canonical neo-classical model. It is also a
great mistake not to tax their owners to the hilt.
Here is an excerpt from an article in the NYT of 8/12/2010. I am sharing it here for several reasons:
It demonstrates how ignorant most of us are about land economics;
It demonstrates how important this ignorance has been, and how expensive it has been to ordinary people.
Here's the NYT excerpt:
Lenders wrote off as uncollectible $11.1 billion in home equity loans and $19.9 billion in home equity lines of credit in 2009, more than they wrote off on primary mortgages, government data shows. So far this year, the trend is the same, with combined write-offs of $7.88 billion in the first quarter.
Even when a lender forces a borrower to settle through legal action, it can rarely extract more than 10 cents on the dollar. “People got 90 cents for free,” Mr. Combs said. “It rewards immorality, to some extent.”
Utah Loan Servicing is a debt collector that buys home equity loans from lenders. Clark Terry, the chief executive, says he does not pay more than $500 for a loan, regardless of how big it is.
“Anything over $15,000 to $20,000 is not collectible,” Mr. Terry said. “Americans seem to believe that anything they can get away with is O.K.”
But the borrowers argue that they are simply rebuilding their ravaged lives. Many also say that the banks were predatory, or at least indiscriminate, in making loans, and nevertheless were bailed out by the federal government. Finally, they point to their trump card: they say will declare bankruptcy if a settlement is not on favorable terms.
“I am not going to be a slave to the bank,” said Shawn Schlegel, a real estate agent who is in default on a $94,873 home equity loan. His lender obtained a court order garnishing his wages, but that was 18 months ago. Mr. Schlegel, 38, has not heard from the lender since. “The case is sitting stagnant,” he said. “Maybe it will just go away.”
Mr. Schlegel’s tale is similar to many others who got caught up in the boom: He came to Arizona in 2003 and quickly accumulated three houses and some land. Each deal financed the next. “I was taught in real estate that you use your leverage to grow. I never dreamed the properties would go from $265,000 to $65,000.”
Apparently neither did one of his lenders, the Desert Schools Federal Credit Union, which gave him a home equity loan secured by, the contract states, the “security interest in your dwelling or other real property.”
How soon will we forget the learning experience we've just undergone as a nation, as an economy, as a society? When will we start to make sure that ordinary people understand the importance of land, and the workings of the market in land, and, most important, how this force can be turned to public good?
Those who are familiar with the ideas of Henry George know this, and most others are operating in ignorance. I do not say this as an accusation; I say it in sadness. Fortunately, ignorance can be remedied.
And if enough of us studied the topic, perhaps we would reach the conclusion that this is a fine time to enact Henry George's wise remedy, so that this will never happen again.
Where might one study this? If you're in NYC or Chicago or Philadelphia, classes are available at the Henry George School of Social Science. Otherwise, you might explore the online course offerings at the Henry George Institute or start reading on your own. Start with Progress and Poverty, in a modern abridgment or one of the essays in George's book Social Problems.
A few more lifts from the same article:
“No one had ever seen a national real estate bubble,” said Keith
Leggett, a senior economist with the American Bankers Association. “We
would love to change history so more conservative underwriting practices
were put in place.”
Since the lender made a bad loan, Mr. Hairston argues, a 10 percent
settlement would be reasonable. “It’s not the homeowner’s fault that the
value of the collateral drops,” he said.
It might be relevant to note that it isn't the homeowner's fault when the value of the collateral rises, either. He didn't create that value; it is due to the increase in the value of the land, which is a result of the activity of the community, not of the landholder or his tenant.
A lot of people have grown wealthy on our ignorance. The FIRE sector loved it, and there are those who are ready for a repeat of the upside of the bubble. Like Aleve, it works for them!
Doing some housecleaning, I came across the May, 2006, issue of Harper's Magazine, whose cover story was entitled "The Road to Serfdom: An Illustrated Guide to the Coming Real Estate Collapse." On the promotional half-cover, the headline said "THE HOUSE TRAP: How the MORTGAGE BUBBLE Will Bankrupt Americans -- in 20 East Steps."
I looked online, and found a copy of the article in PDF format here, which permits me to throw away my hardcopy.
Never before have so many Americans gone so deeply into debt so willingly. Housing prices have swollen to the point that we’ve taken to calling a mortgage — by far the largest debt most of us will ever incur — an “investment.” Sure, the thinking goes, $100,000 borrowed today will cost more than $200,000 to pay back over the next thirty years, but land, which they are not making any more of, will appreciate even faster. In the odd logic of the real estate bubble, debt has come to equal wealth.
And not only wealth but freedom — an even stranger paradox. After all, debt throughout most of history has been little more than a slight variation on slavery. Debtors were medieval peons or Indians bonded to Spanish plantations or the sharecropping children of slaves in the postbellum South. Few Americans today would volunteer for such an arrangement, and therefore would-be lords and barons have been forced to develop more sophisticated enticements.
The solution they found is brilliant, and although it is complex, it can be reduced to a single word — rent. Not the rent that apartment dwellers pay the landlord but economic rent, which is the profit one earns simply by owning something. Economic rent can take the form of licensing fees for the radio spectrum, interest on a savings account, dividends from a stock, or the capital gain from selling a home or vacant lot. The distinguishing characteristic of economic rent is that earning it requires no effort whatsoever. Indeed, the regular rent tenants pay landlords becomes economic rent only after subtracting whatever amount the landlord actually spent to keep the place standing.
Most members of the rentier class are very rich. One might like to join that class. And so our paradox (seemingly) is resolved. With the real estate boom, the great mass of Americans can take on colossal debt today and realize colossal capital gains — and the concomitant rentier life of leisure — tomorrow.
If you have the wherewithal to fill out a mortgage application, then you need never work again. What could be more inviting — or, for that matter, more egalitarian?
That’s the pitch, anyway. The reality is that, although home ownership may be a wise choice for many people, this particular real estate bubble has been carefully engineered to lure home buyers into circumstances detrimental to their own best interests. The bait is easy money. The trap is a modern equivalent to peonage, a lifetime spent working to pay off debt on an asset of rapidly dwindling value.
Most everyone involved in the real estate bubble thus far has made at least a few dollars. But that is about to change. The bubble will burst, and when it does, the people who thought they would be living the easy life of a landlord will soon find that what they really signed up for was the hard servitude of debt serfdom.
From there, Hudson proceeds to list the 20 steps, each illustrated with a graphic. I encourage you to look up the original; the graphics are generally quite helpful to making the point -- but the text is valuable here.