LVTFan's Blog

Social Problems

I came across a nice description of Henry George's book "Social Problems" and thought it worth sharing here:

This work of Henry George is one of the best to give to someone who has no knowledge whatever of the Georgist philosophy.  It consists of 22 essays written in George's down-to-earth language and deals with problems which exist in all generations such as "The Rights of Man," "Public Debts and Indirect Taxation," "The Functions of Government," and "The Increasing Importance of Social Questions."

He tells in such simple and direct language "What We Must Do" about the land problem that it should arouse interest on the part of one knowing nothing of the land question to find out more about it and hopefully become involved in our work.

You can find these chapters online here, with a list of some of the themes in each one.

FDR on revenue and spending

"One sure way to determine the social conscience of a government is to examine the way taxes are collected and how they are spent.  And one sure way to determine the social conscience of an individual is to get his tax-reaction.  Taxes, after all, are the dues we pay for the privileges of membership in an organized society."

-- Citation: Franklin D. Roosevelt: "Address at Worcester, Mass.," October 21, 1936.

Online by Gerhard Peters and John T. Woolley, The American Presidency Project. http://www.presidency.ucsb.edu/ws/?pid=15201

Here are some more extended quotes; the full speech will follow.

In 1776 the fight was for democracy in taxation. In 1936 that is still the fight. Mr. Justice Oliver Wendell Holmes once said: "Taxes are the price we pay for civilized society." One sure way to determine the social conscience of a Government is to examine the way taxes are collected and how they are spent. And one sure way to determine the social conscience of an individual is to get his tax-reaction.

Taxes, after all, are the dues that we pay for the privileges of membership in an organized society.

As society becomes more civilized, Government—national, State and local government—is called on to assume more obligations to its citizens. The privileges of membership in a civilized society have vastly increased in modern times. But I am afraid we have many who still do not recognize their advantages and want to avoid paying their dues.

It is only in the past two generations that most local communities have paved and lighted their streets, put in town sewers, provided town water supplies, organized fire departments, established high schools and public libraries, created parks and playgrounds—undertaken, in short, all kinds of necessary new activities which, perforce, had to be paid for out of local taxes.  ...

He continues,

New obligations to their citizens have also been assumed by the several States and by the Federal Government, obligations unknown a century and a half ago, but made necessary by new inventions and by a constantly growing social conscience.

The easiest way to summarize the reason for this extension of Government functions, local, State and national, is to use the words of Abraham Lincoln: "The legitimate object of Government is to do for the people what needs to be done but which they cannot by individual effort do at all, or do so well, for themselves."

Taxes are the price we all pay collectively to get those things done.

To divide fairly among the people the obligation to pay for these benefits has been a major part of our struggle to maintain democracy in America. ...

(Readers new to this website might be surprised that Georgists will take issue with "ability to pay," as the phrase is commonly used, as a good criterion on which to judge taxation, and those same readers may have a visceral negative reaction.  If you're among that group, you might take a look at this page.)

FDR continued,

Here is my principle: Taxes shall be levied according to ability to pay. That is the only American principle.

Before this great war against the depression we fought the World War; and it cost us twenty-five billion dollars in three years to win it. We borrowed to fight that war. Then, as now, a Democratic Administration provided sufficient taxes to pay off the entire war debt within ten or fifteen years.

Those taxes had been levied according to ability to pay. But the succeeding Republican Administration did not believe in that principle. There was a reason. They had political debts to those who sat at their elbows. To pay those political debts, they reduced the taxes of their friends in the higher brackets and left the national debt to be paid by later generations. Because they evaded their obligation, because they regarded the political debt as more important than the national debt, the depression in 1929 started with a sixteen-billion-dollar handicap on us and our children. ...

and

For the average American we have reduced the individual income tax. Any family head who earns an income of less than $26,000 a year pays a smaller income tax in 1936 than he paid for 1932. That means that less than one percent of the heads of American families pay more than they did; and more than 99 percent pay less than they did, for more than 99 percent earn less than $26,000 per year. If you want the answer to this talk about high taxes under this Administration—there it is. Taxes are higher for those who can afford to pay high taxes. They are lower for those who can afford to pay less. That is getting back again to the American principle—taxation according to ability to pay.

You would think, to hear some people talk, that those good people who live at the top of our economic pyramid are being taxed into rags and tatters. What is the fact? The fact is that they are much farther away from the poorhouse than they were in 1932. You and I know that as a matter of personal observation.

A number of my friends who belong in these very high upper brackets have suggested to me, more in sorrow than in anger, that if I am reelected they will have to move to some other Nation because of high taxes here. I shall miss them very much but if they go they will soon come back. For a year or two of paying taxes in almost any other country in the world will make them yearn once more for the good old taxes of the U.S.A.

One more word on recent history. I inherited from the previous Administration a tax structure which not only imposed an unfair income tax burden on the low-income groups of this country, but also imposed an unfair burden upon the average American by a long list of taxes on purchases and consumption- hidden taxes.

In 1933 when we came into office, fifty-eight cents out of every dollar of Federal revenue came from hidden taxes. Leaving out of account the liquor tax—for liquor was illegal in 1933—we have reduced these indirect taxes to thirty-eight cents out of every dollar.

 

It is worth including the whole speech here. 

Borrowing on Expectations of Land Appreciation

Borrowers Refuse to Pay Billions in Home Equity Loans - NYTimes.com.

Here is an excerpt from an article in the NYT of 8/12/2010.  I am sharing it here for several reasons:

1. It demonstrates how ignorant most of us are about land economics;
2. 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!

Michael Hudson: The Road To Serfdom (2006)

Hudson: The Road To Serfdom

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.