Bob Herbert wrote, in his 3/11/08 column entitled "Sharing the Pain", in part,
The American dream is on life support because men and women by the millions who want very much to work — who still have in their heads the ideal of a thriving family in a nice home with maybe a picket fence — are unable to find a decent job.
For years, families have been fighting weakness on the employment front with every other option imaginable.
- Wives and mothers have gone to work.
- People have been putting in more hours and working additional jobs.
- And Americans have plunged like Olympic diving champions into every form of debt they could find.
Who has gotten the benefits of women spending many more years and many more hours per year in the workplace? Who has benefited from Americans carrying more and more debt? How does this relate to the run-up in the price of housing? I said I'd write about these issues in another post. This is it.
I think a strong case can be made that the biggest beneficiary of all three of those trends has been the same: the landholders. Let me suggest just a few of the ways:
1. As Elizabeth Warren and Amelia Tyagi pointed out in their 2003 book "The Two-Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke" a young family today with two employed adults likely has less disposable income -- after covering their most basic fixed costs -- than a similar family a generation ago had with a single employed adult. And the difference is not simply childcare, or the second car, or the other costs associated with a second person being employed.
2. The increased income provided by having a second adult employed has driven up the price of housing. More precisely it has driven up the price of the land on which housing is built, since buildings do not appreciate. (It may also have contributed to the renovation industry -- with more income, people can afford to hire others to enlarge their existing houses. But keep in mind that most renovation projects do not pay back even close to 100% of their cost in terms of resale value; the exceptions seem to be the addition of a second bathroom to a house with only one, and sometimes the addition of a deck.)
3. Less stringent lending standards have allowed people to borrow more on the same income, borrow a larger portion of a residential property's value for purchase, and then borrow against the increases in equity that the rising values -- fueled by these changes in lending standards -- have produced. A vicious loop!
So who are these landholders who have benefited, and will continue to benefit?
1. Some are ordinary folks, who own just the single residential lot under their only home. In some places, their net worth has risen more in a year as a result of their homeownership than the amount of their annual gross income, and certainly more than their annual savings and investments, even taking into account 401(k)s. Their portfolios of other assets have risen more slowly than their "housing wealth." Some might argue that this is not real, since they need a place to live. But the case can also be made that they need not stay in the single family home in which they raised their families for the rest of their lives, particularly if it is too large for them to maintain, clean, heat, cool, even get around in as they age. And they no longer need the proximity to jobs they no longer hold. They could relocate to a condominium in the same town, sharing a plot of land with a few or many other households. Or they could sell their family-sized house on a valuable lot and move to a smaller town, in the sunbelt perhaps, in a place where schools are of lesser quality and there is a concentration of older residents. There, on lower property taxes per property, the lower proportion of children may -- possibly -- be adequately educated.
2. Some are those who we say had "foresight" or whose ancestors had foresight. They looked ahead and realized that they would be very smart to buy up far more land than they themselves could ever put to good use. Some of the land they kept vacant, even as development went on around them. Some of the land featured a "WILL BUILD TO SUIT!" sign, which has now grown gray with age. Some of the land they sold off, an acre here or there, to pay a child's tuition or finance a wedding. But they sat and waited, and lobbied for the pork spending that would produce the interstate highway, or the new exit ramp, or the new bridge, or whatever would make their land suddenly valuable at someone else's expense. They may even have run for office themselves -- locally, county, state legislature, U.S. Congress or Senate -- to promote the very public spending that would drive their land values upwards.
Should we honor that foresight, and call them "self-made men?" Should we accept their crocodile tears when they complain about sharing a portion of their so-called "capital" gain with the public who paid for it? (See yesterday's piece on real estate fortunes.) Or should we amend our tax structure to collect back for the commons the land value we create when we-the-people invest in a new highway, or a new highway exit, or a new bridge, or the maintenance of an existing one? I'm not talking just about increasing the "capital" gains tax, or even about increasing the estate tax, which gathers some of that value once in a generation (though a tiny fraction of it, due to hilarious valuations for estate tax purposes) but in the form of an annual, even quarterly or monthly tax on the current value of the land.
3. Some are large trusts, absentee landholders, domestic and foreign corporations,
rich individuals (American and foreign), perhaps with more
sophisticated understanding of the workings of economic rent, perhaps
merely inspired by "Hey! It works for me! I like this deal!" Our low
valuations (for tax purposes) on land, particularly vacant land or
underused land, and our low tax rates on land value have made this a
quite realistic business plan. (A recent NYT refers to a 2-story building on the corner of 72 and Fifth as a "taxpayer."
Precisely! Just enough to pay the bills, while the owner waits for his
moment to sell at an awesome profit -- which we euphemistically call a
Think of what we could do with the revenue such a tax would produce. Think of how we could eliminate the sales taxes which burden the economy with what economists call deadweight loss or excess burden, reducing prices of the goods we all buy and increasing the demand for those goods. We could finance the next project, and the one after that, from the revenue that past projects have created. Today, we let that revenue permanently reside in the pockets of the landholders.
But I've digressed from the original point. The increased earnings of women who are spending more of their lives in the workforce; the earnings of men and women who work more hours per week than they did 10 and 20 years ago; the borrowing power that those increased earnings have provided, and the borrowing power of less stringent lending practices have all conspired to drive up the proceeds of land sales, making some of us wealthy at the expense of others, who must continue to work more years and longer hours, commute further and further from land they can afford to jobs that pay well.
We can let this balloon continue to get bigger, or we can acknowledge that a simple and wise tax reform can gently let the air out of it. Which solution is just? Which solution will make a better world for our children? Which solution will treat all of us as equals? Which solution will create a society in which all can prosper?
I want to return to the "foresight" issue -- should we be rewarding foresight (and particularly foresight coupled with the excess dollars) to buy up land? A passage from one of my favorite books comes to mind.
The truth is self-evident. Put to any one capable of consecutive thought this question:
"Suppose there should arise from the English Channel or the German Ocean a no man's land on which common labor to an unlimited amount should be able to make ten shillings a day and which should remain unappropriated and of free access, like the commons which once comprised so large a part of English soil. What would be the effect upon wages in England?"
And in response to another question, "What would be the effect on rents?" he would at a moment's reflection say that rents must necessarily fall; and if he thought ,out the next step he would tell you that all this would happen without any very large part of English labor being diverted to the new natural opportunities, or the forms and direction of industry being much changed; only that kind of production being abandoned which now yields to labor and to landlord together less than labor could secure on the new opportunities. The great rise in wages would be at the expense of rent.
Take now the same man or another -- some hardheaded business man, who has no theories, but knows how to make money. Say to him: "Here is a little village; in ten years it will be a great city -- in ten years the railroad will have taken the place of the stage coach, the electric light of the candle; it will abound with all the machinery and improvements that so enormously multiply the effective power of labor. Will,in ten years, interest be any higher?"
He will tell you, "No; the wages of common labor will not be any higher; on the contrary, all the chances are that they will be lower; it will not be easier for the mere laborer to make an independent living; the chances are that it will be harder."
And if, under such circumstances, you take his advice, you need do nothing more. You may sit down and smoke your pipe; you may lie around like the lazzaroni of Naples or the leperos of Mexico; you may go up in a balloon, or down a hole in the ground; and without doing one stroke of work, without adding one iota to the wealth of the community, in ten years you will be rich! In the new city you may have a luxurious mansion; but among its public buildings will be an almshouse.
It is very appealing to want to be the one to capture such a windfall, or keep the door open for one's children to capture such a windfall for themselves. But we ought to be thinking beyond what is good for ourselves (IF we were lucky or smart enough to stumble upon such an opportunity), to what it is that makes a society and an economy work for everyone.
The reason the game of Monopoly is such fun is that, within fairly short order, one player is the winner and the rest are losers. That is the opposite of sustainability. We ought to be working for a society in which all of us can make enough to meet our needs, without working ourselves to death, and in which individual effort is rewarded, without some of that reward being the organized theft of what others have produced. (See, for example, the chapter on Captain Kidd and his descendants, in The Land Question.)
Let us suppose that Captain Kidd, having established a large and profitable piratical business, left it to his son, and he to his son, and so on, until the great-great-grandson, who now pursues it, has come to consider it the most natural thing in the world that his ships should roam the sea, capturing peaceful merchantmen, making their crews walk the plank, and bringing home to him much plunder, whereby he is enabled, though he does no work at all, to live in very great luxury, and look down with contempt upon people who have to work. But at last, let us suppose, the merchants get tired of having their ships sunk and their goods taken, and sailors get tired of trembling for their lives every time a sail lifts above the horizon, and they demand of society that piracy be stopped.
Now, what should society say if Mr. Kidd got indignant, appealed to the doctrine of vested rights, and asserted that society was bound to prevent any interference with the business that he had inherited, and that, if it wanted him to stop, it must buy him out, paying him all that his business was worth – that is to say, at least as much as he could make in twenty years' successful pirating, so that if he stopped pirating he could still continue to live in luxury off of the profits of the merchants and the earnings of the sailors?
What ought society to say to such a claim as this? There will be but one answer. We will all say that society should tell Mr. Kidd that his was a business to which the statute of limitations and the doctrine of vested rights did not apply; that because his father, and his grandfather, and his great- and great-great-grandfather pursued the business of capturing ships and making their crews walk the plank, was no reason why lie should be permitted to pursue it. Society, we will all agree, ought to say he would have to stop piracy and stop it at once, and that without getting a cent for stopping.
Or supposing it had happened that Mr. Kidd had sold out his piratical business to Smith, Jones, or Robinson, we will all agree that society ought to say that their purchase of the business gave them no greater right than Mr. Kidd had.
We will all agree that that is what society ought to say. Observe, I do not ask what society would say.
For, ridiculous and preposterous as it may appear, I am satisfied that, under the circumstances I have supposed, society would not for a long time say what we have agreed it ought to say. Not only would all the Kidds loudly claim that to make them give up their business without full recompense would be a wicked interference with vested rights, but the justice of this claim would at first be assumed as a matter of course by all or nearly all the influential classes – the great lawyers, the able journalists, the writers for the magazines, the eloquent clergymen, and the principal professors in the principal universities. Nay, even the merchants and sailors, when they first began to complain, would be so tyrannized and browbeaten by this public opinion that they would hardly think of more than of buying out the Kidds, and, wherever here and there any one dared to raise his voice in favor of stopping piracy at once and without compensation, he would only do so under penalty of being stigmatized as a reckless disturber and wicked foe of social order.
I'll leave it to you to seek out the remainder of this argument, here.
I titled this post "Working Harder, Making Others Richer." I hope those who are concerned with poverty, in their own communities, in America, in other parts of the world, will explore further to see how we have systematically set things up so that some of us can capture the wealth created by others. And that correcting it is not all that complex or harsh.
What sort of economy do we want our children and grandchildren to live in? What are we doing to make it better?