How Do We Fix an Ailing Economy?

Georgists -- people who have read one or more of Henry George's books*, and are persuaded of the logic and truth of his findings and diagnosis -- have, for over 100 years, had an answer to share with the rest of us about how to make our economy more just, more honest, more vibrant and more stable; make equal opportunity real; protect the environment from despoilment; reduce the excessive concentrations of wealth and income without destroying incentives which encourage productivity.

* e.g., Progress and Poverty; Social Problems; Protection or Free Trade?; The Science of Political Economy; The Land Question, etc.  Henry George (b. 1839, Philadelphia; d. 1897, NYC) was among the most prominent and widely read Americans of the late 19th century, and no one has successfully refuted his observations or his prescriptions; yet few of us, even economics majors, are exposed to his ideas in the course of even a highly regarded college or university education.   More of us who know his ideas have found them through our own research, or through a course at a Henry George School (e.g., NYC, Philadelphia, Chicago, etc.) or online (henrygeorge.org)

Georgists know some things that other people don't seem to know.  It is common sense.  It is logical, not all that complex.

Paul Harvey's "thing" was to tell us about "the other part of the story."  Well, Georgists know a lot about the rest of the story.  We know that federal spending on infrastructure is only half the story of stimulating the economy (and even know that it is not necessary!)

If all we "do" is the federal end of stimulus, we aren't going to get anywhere.  We may even make some things worse -- unintentionally, of course, but worse nonetheless -- for a significant percentage of us. 

Armed with Henry George's observations, we would know how to fix this economy and create a better one.  We can reduce the need for consumer credit, freeing up more funds for productive investment by industry.   We can undo the machine which creates poverty and simultaneously enriches a particular class of us.

Barack Obama has a good mind and a good heart, but I'm willing to bet that he has never read Henry George, and may not even have heard of him.  He doesn't know, and he doesn't know that he doesn't know.  I don't blame him ... our educational system doesn't teach these ideas to even our best and our brightest.  His Cabinet doesn't know.  His and their staffs don't know.

Create the conditions for entrepreneurs to thrive, and to employ all who want to work.  Create the conditions for widespread prosperity.  Create the conditions for an economy that works for all.  Create the conditions which will slow, stop and then reverse urban sprawl.  Create the conditions where we get out of the way of entrepreneurs and get in the way of the speculators, who skim the cream off the top and leave the thin skimmed milk for the rest of us ... and tell us it is healthier for us and they're just taking what's theirs anyway.  Get in the way of the polluters.

He who knows?  He who knows not? He who knows not that he knows not?  He who knows that he knows not?   Ask Henry George.  Read Henry George. You'll know, and you'll know that you know.  And what you'll know can put us on the road to a sane, sustainable, just and prosperous economy, and a society where all of us can thrive.  

What's the #2 of the 1-2 punch?  It is a fine example of acting locally.  Every worthwhile infrastructure project, and many of the other things which will be done under the banner of "stimulating the economy," has the same effect: they raise land values.  Build a bridge where one is needed?  Guess what happens! For miles around either end of that bridge, land values will rise, for reasons which have absolutely nothing to do with the activities of whoever owns that land. 

• Plan A -- the way we do things now -- is to say that the local government might -- if it does regular and frequent and reasonably good revaluations of every property, collect a small share of that increase (perhaps 10% to 20% of the annual value) and leave the rest to the lucky landholders. If we don't do revaluations, we leave all the increase to the lucky landholders.  Meanwhile, if the locality needs more revenue, it may raise its property tax millage rate a bit, which has the unfortunate consequence of taxing buildings more, as well as land.
• Plan B -- a better way -- would be for local government to collect the rent which all this federal spending creates.  How do we do this without also taxing buildings?

1. Detach the tax rate on land value from the tax rate on buildings;
2. Do frequent revaluations, valuing land first, and treating the existing buildings as the difference between the total market value of the property and the value of the land itself
3. Decrease the millage rate on buildings and increase the millage rate on land value, gradually shifting away from taxing buildings, from taxing wages, from taxing sales of goods and services!

Communities which do this will collect for local purposes value that the federal spending creates, instead of leaving it in the hands of those fortunate enough to own the land which is most served by the government spending.

A few examples might help.

1. The federal government pays to replenish the beaches in many places.  Who benefits?  Those who own vacation homes there, whether they use them themselves, or rent them out to others.  Those who own businesses there ... and most of all those who own the property there, be it commercial or residential. 
2. The federal government pays to repair a bridge which might otherwise have become risky and required closing for months or years.  Who benefits?  All who use the bridge, yes.  But also employers and businesses who NEVER have occasion to cross the river themselves benefit.  In particular, landlords benefit.
3. The federal government finances a new subway line, the announcement of which begins to raise both rents and selling prices all along its line, and particularly in the areas which will be newly served, or served with more rapid service than already existed.
4. We build a new highway, or simply a new exit to an existing highway ... you can guess the rest of the story.
5. We build a new airport, with transportation systems to get to the nearby city. While the value of sites under the landing and takeoff routes might drop, at least for residential purposes, some will rise for commercial purposes, and site -- residential and commercial -- with improved access to frequent and inexpensive flights will rise in value.  Who should get the increase?  How do we compensate those whose land value decreased?  Through reassessment: their annual taxes will rise or fall, as the market values each property.
6. We build high speed railroads in certain corridors.  Land values rise in areas served by the stations on that route.
7. Highway repairs get undertaken at night, reducing the inconvenience to motorists; or, alternatively, highway repairs are approached as a 24/7 project, reducing the duration of the project by 67%.  Ultimately, such things show up in enhanced land values.  Ultimately, anything we do well shows up in land value!  (It was David Ricardo who noted that landholders grow rich in their sleep.)
8. The federal government funds, say, defibrillators in every police car in a certain community. Homebuyers and renters prefer to live there, and will pay more to live there than in the next town.  Who benefits?  Landholders.

What happens when we fail to collect that land rent for public purposes?  The selling price of land -- with or without improvements on it -- rises, and becomes unaffordable to more of us.  Yes, it funds retirement for a few lucky ones.  But look at the other side of it: anyone who needs a place to live (that is, all of us, and all of our children and grandchildren) must pay a large share of their wages to a seller (or a mortgage lender for the following 30 years) for something the seller didn't create.

What else happens?  We still need revenue for local purposes ... for schools, for roads, for sidewalks, for police and fire and ambulances, for public health, for local infrastructure like water, sewer and stormwater runoff ... if we collect it through the conventional property tax, we tax buildings, too, which discourages construction, maintenance, use of green technologies, etc.  If we collect it through sales taxes, we discourage demand and burden the poor.  If we collect it through taxes on wages, we discourage workers from supplying labor.  So people who need a place to live must pay twice ... once to the person from whom they bought (and then the mortgage lender, with interest) and again in taxes!  No wonder the cost of living is so high!

We've tried all these dumb taxes.  Let's try smart ones for a change.  Let's make the federal spending work for entire communities instead of just for those who own the best-served land.  A lot of the complaining about pork would disappear. 

Every one of these projects creates more in land value than it costs.  But our accounting procedures don't capture it.  There are cities in Pennsylvania which haven't done a revaluation in decades.  So new highways might have raised property values -- land values, since houses don't appreciate -- in some neighborhoods, but not in others, but the local tax burden is being shouldered in proportion to property values as they were 20 or more years ago!  Some neighborhoods, well served, will be paying a low proportion of their current market value in property tax; others, poorly served, are now overpaying.   

In California, things are even stranger.  As a result of Proposition 13, there are properties which haven't been reassessed in decades; their assessments have risen only 2% per year, for as much as 34 years -- while neighboring properties which changed hands recently may be paying on the basis of recent purchase prices, sometimes 5 times as much for similar properties!  And when a fine bit of federally-funded infrastructure raises property values, virtually 100% of the gain goes into the pocket of the long-time owners!  (And when California needs more revenue, Prop 13 prevents them from taking even a tiny percent more of the annual value of land -- the property tax is capped at 1% of assessed value -- and forces them into sales taxes and wage taxes.  Or into borrowing and foisting the payments off on future generations.   (Do you think there is any point in funding infrastructure projects in California, in order to stimulate the economy? Virtually everything we create goes directly into private pockets.)

So if the goal is to stimulate the economy, local government must get the enabling legislation to divorce the millage rate on land from the millage rate on buildings, so as to avoid uptaxing buildings.  And then they need to move toward high quality frequent reassessment of property, valuing the land first.  They -- we! -- can motivate the private sector to do things which will benefit the community.

If the goal is to create affordable housing, the same technique will work. Owners of choice sites which are unused or underused will find themselves re-evaluating their situation.  Higher taxes on the land value will nudge them into thinking about how they can better use the site; and the lower (or no) tax on the building will also encourage them to put the site to its highest and best use.  If they choose not to develop it themselves, the selling price will be lower than it would have been with a lower land tax, making it affordable to the fellow who will develop it, and he can optimize his profit with a smaller single family home than would otherwise have been necessary.  Plus, there is no penalty for incorporating solar, or other energy-saving measures.   Or the site might be in a neighborhood that was once firmly single-family residential, but now might be shifting toward multi-family housing (townhouses, or low-rise condo, or midrise) or commercial.  A single-family home is a distinct underuse of a site so well served by taxpayer-provided infrastructure. 

If the goal is to create a vibrant downtown, with the sort of density that creates a platform for effective public transportation and a walkable downtown, this same tool is a good one.  Obsolete 1- and 2- story buildings from prior decades, which are no longer a good use of downtown sites will give way to buildings suitable to this decade and the next one.  Some will become housing, perhaps serving older people who want the amenities a central business district can offer, a smaller and technologically current home with lower maintenance costs. Some will become multi-use ... retail on the first floor, offices on the next few, and residential above that.  Some will be offices, with many tenants or commercial-condo owners splitting a land value tax which would be completely unaffordable for, say, a single-story diner -- and there might be a coffee shop on the street level.

If the goal is to slow, stop or reverse urban sprawl, this same tool is a good one.  A downtown acre, well-developed, can save a dozen acres on the fringe from premature development.  And in the current economy, one of the trends, among those who can afford it, might be a movement closer to the city, to a shorter commute which consumes less time, less energy and fewer dollars, and produces less pollution.

This is too long.  Let me suggest some other things you might read. A couple of them come from another era, and some others are very current.

First, a piece from the early 1920s: Unemployment and our Revenue Problem

Second, a short radio speech from John Dewey (1933), entitled Steps to Recovery

Third, a short article by Henry George called How to Help the Unemployed

Fourth, two articles by Mason Gaffney: The Great Crash of 2008 and How to Thaw Credit, Now and Forever