LVTFan's Blog

Land Basis to All Business, and Machine Age and Land Value

Exploring some old newspapers, I found a letter to the editor that I thought was a nice simple expression.  It was written by someone named Warren T. Lowe, of Media, PA, in 1930.

Land Basis to All Business

To the Editor of the Inquirer:

Mr. W. M. G. in criticizing my letter intimates that land can be used only for farming.  Many people make this error.  All business propositions use land.  All activities of life have it as their basis.  We use it before birth, after death and every instant between these events.

We stress value instead of area.  A farm of one hundred acres employs a few men; one acre, in the center of a large city, may employ a thousand.  There is a natural value of land due to the advantage one parcel has over another; there is also an artificial value due to speculation.  As business expands the latter rises until it permeates the whole structure, when it chokes further progress and is followed by business stagnation.

Henry George discovered the remedy, viz., Take in tax the annual ground rent, thereby killing speculation; then remove all other taxes, thereby giving the greatest "boost to business" it ever had.

---

And that same year appeared another LTE from the same fellow:

Machine Age and Land Values

To the Editor of the Inquirer:

Your correspondent, "Jersey" makes some good points, but with one of them I would differ.  Instead of the advantage of efficiency in the use of machinery going to owners of machinery it goes to the landlords, which is shown in the following three examples:

(1) Henry George was asked by a man, "If I owned all the money and you owned all the land, what would you do?"  Ans. "I would say to you, give me all your money or get off the earth."  He could have used marchinery or any other form of capital instead of money with the same result.

(2) Henry Ford put out a tractor which displaced eight horses and three men on the farm.  There were 900,000,000 acres of land below the margin of cultivation which this transaction raised above it. Did it raise wages? No; it raised the rent and selling price of that land.

(3) In the early days of California, wages of labor were $500 a month and interest on capital 24 percent; rent was nothing.  Today wages are but a fraction of that; the Government sells bonds for less than 3 percent; gilt-edged securities bring 4 to 5 percent interest; but rent is measured by the hundred millions.

Basic Principles of Ground Lease Agreements – Yes, a Contract!

Here are the opening paragraphs of a recent article about the complexities of Ground Lease contracts.  I commend the entire article to your attention.  It helps flesh out why and how the entire FIRE sector -- Finance, Insurance and Real Estate (as well as their attorneys) --  is receiving such a large share of the profits produced by the productive sectors of the economy.  The owner of land, and the entities which lend on land, and insure the buildings and the revenue flow, all reap significant shares of what the tenants labor to create.   Modern sharecropping.  And the recipients of the ground rent get to parade as self-made men, people of awesome foresight and wisdom -- and even philanthropists (think Brooke Astor, the Fishers, and others in your own community) when they donate a small share back to a charity!  As you read this, think both of Manhattan land and of land in your community's central business district, and along its major roads.  (Location, location, location!)

If one wonders why (true) small business struggles, one might consider the complexity and expense of their ground leases, and contrast that with the Georgist alternative: that one's taxes would be simply the current rental value of the land, while the value of the building remains one's private property, not subject to taxation or going pouf! at the end of a ground lease.

The land lord is "supplying" something he didn't create.  We ought to ease him out.  Land value taxation is the obvious tool for reducing, and -- slowly or not -- eliminating, his "take" on those who do create.  Think what it would mean if working people had that spending power, instead of the lords of the land.

All that land rent could be used to fund our community's needs, instead of lining the pockets of a few very "lucky" -- privileged -- duckies.  (The analogies to chattel slavery are not a long stretch, once one starts to think about it.  We should all own ourselves, and reap the fruits of our own labors.)

Basic Principles of Ground Lease Agreements – Yes, a Contract!.

PUBLISHED: JANUARY 7, 2013  

A lease is a lease is a lease – or so you may think. Yes, real property leases grant an estate in land to a tenant for a period of time. And yes, the tenant pays for that right of possession. But the action in a lease isn’t in the conveyance provisions; it’s in the contract provisions. Multiply out the rent and other annual monetary obligations by the length of the lease term (in years), and you’ll see that it might be (and often is) a big dollar contract. Even more important, unlike the vast majority of contracts whose obligations are satisfied in days or weeks, a lease contract goes unfulfilled for 50, 75, “99,” and even 500 years. That takes it beyond the life of the parties involved in its creation, and the future brings surprises. Neither Nostradamus nor Jules Verne got everything right. 

Why a Ground Lease? 

If a tenant has to build its own building (as is often the case), and has all of the burdens of ownership, why would it lease a property knowing that at the end of the lease term it has nothing left to show for its money and efforts? There are a number of common reasons, principal among them is that the owner won’t sell the land and the tenant has no alternative. 

Real property often carries a long term unrealized gain, waiting to be taxed upon its sale. 

Not every landowner is interested in making further active real property investments. This makes a like kind exchange unappealing. 

Ground leasing the same land keeps ownership in the family. At the owner’s death, because of the current estate tax “stepped up basis” arrangement, the built in gain may never be taxed.

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The Mortgage on the Farm

We worked through spring and winter, through summer and through fall.

But the mortgage worked the hardest and steadiest of them all;
It worked on nights and Sundays, it worked each holiday;
It settled down among us and it never went away.
Whatever we kept from it seemed almost as bad as theft;
It watched us every minute and it ruled us right and left.
The rust and blight were with us sometimes, and sometimes not;
The dark-browed, scowling mortgage was forever on the spot.
The weevil and the cutworm they went as well as came;
The mortgage stayed forever, eating heartily all the same.
It nailed up every window, stood guard at every door,
And happiness and sunshine, made their home with us no more;
Till with falling crops and sickness we got stalled upon the grade.
And there came a dark day on us when the interest wasn't paid.
And there came a sharp foreclosure, and I kind o' lost my hold.
And grew weary and discouraged and the farm was cheaply sold.
The children left and scattered, when they hardly yet were grown;
My wife she pined and perished, and I found myself alone.
What she died of was a mystery, and the doctors never knew;
But I knew she died of mortgage — Just as well as I wanted to.
If to trace a hidden sorrow were within the doctors art.
They'd ha' found a mortgage lying on that woman's broken heart.
Worm or beetle, drought or tempest, on a farmer's land may fall.
But for a first-class ruination, trust a mortgage 'gainst them all.

How much of a farmer's mortgage is for the value of the land itself, and how much for the present value of the improvements which previous owners have made, such as clearing, draining, fencing, irrigating, building structures, plus, perhaps, equipment purchased with the land and buildings?

For that matter, how much of a homeowner's mortgage is for the value of the land itself --including its access to community-provided services such as city water and sewer, fire hydrants, and the like -- and how much for the purchase price of the landscaping and structures on the property, built by any of the previous owners?

To what degree is the modern buyer including in his formal calculations or his underlying assumptions the notion that the land will increase in value during his tenure?  (See Case & Schiller, 2003.)

A Right-to-Life Platform -- 125 years old

As I listen to the 2012 party platforms, I am reminded of what they ought to be focused on, embodied pretty well in this platform from 1886-87. 

PLATFORM OF THE UNITED PARTY.
Adopted at Syracuse August 19, 1887.

We, the delegates of the united labor party of New York, in state convention assembled, hereby reassert, as the fundamental platform of the party, and the basis on which we ask the co-operation of citizens of other states, the following declaration or principles adopted on September 23, 1886, by the convention of trade and labor associations of the city of New York, that resulted in the formation of the united labor party.   

"Holding that the corruptions of government and the impoverishment of labor result from neglect of the self-evident truths proclaimed by the founders of this republic that all men are created equal and are endowed by their Creator with unalienable rights, we aim at the abolition of a system which compels men to pay their fellow creatures for the use of God’s gifts to all, and permits monopolizers to deprive labor of natural opportunities for employment, thus filling the land with tramps and paupers and bringing about an unnatural competition which tends to reduce wages to starvation rates and to make the wealth producer the industrial slave of those who grow rich by his toil.

'“Holding, moreover, that the advantages arising from social growth and improvement belong to society at large, we aim at the abolition of the system which makes such beneficent inventions as the railroad and telegraph a means for the oppression of the people and the aggrandizement of an aristocracy of wealth and power. We declare the true purpose of government to be the maintenance of that sacred right of property which gives to every one opportunity to employ his labor, and security that he shall enjoy its fruits; to prevent the strong from oppressing the weak, and the unscrupulous from robbing the honest; and to do for the equal benefit of all such things as can be better done by organized society than by individuals; and we aim at the abolition of all laws which give to any class of citizens advantages, either judicial, financial, industrial or political, that are not equally shared by all others."

We call upon all who seek the emancipation of labor, and who would make the American union and its component states democratic commonwealths of really free and independent citizens, to ignore all minor differences and join with us in organizing a great national party on this broad platform of natural rights and equal justice. We do not aim at securing any forced equality in the distribution of wealth. We do not propose that the state shall attempt to control production, conduct distribution, or in any wise interfere with the freedom of the individual to use his labor or capital in any way that may seem proper to him and that will not interfere with the equal rights of others. Nor do we propose that the state shall take possession of land and either work it or rent it out. What we propose is not the disturbing of any man in his holding or title, but by abolishing all taxes on industry or its products, to leave to the producer the full fruits of his exertion and by the taxation of land values, exclusive or improvements, to devote to the common use and benefit those values, which, arising not from the exertion of the individual, but from the growth of society, belong justly to the community as a whole. This increased taxation of land, not according to its area, but according to its value, must, while relieving the working farmer and small homestead owner of the undue burdens now imposed upon them, make it unprofitable to hold land for speculation, and thus throw open abundant opportunities for the employment of labor and the building up of homes.

While thus simplifying government by doing away with the horde of officials required by the present system of taxation and with its incentives to fraud and corruption, we would further promote the common weal and further secure the equal rights of all, by placing under public control such agencies as are in their nature monopolies: We would have our municipalities supply their inhabitants with water, light and heat; we would have the general government issue all money, without the intervention of banks; we would add a postal telegraph system and postal savings banks to the postal service, and would assume public control and ownership of those iron roads which have become the highways of modern commerce.

While declaring the foregoing to be the fundamental principles and aims of the united labor party, and while conscious that no reform can give effectual and permanent relief to labor that does not involve the legal recognition of equal rights, to natural opportunities, we nevertheless, as measures of relief from some of the evil effects of ignoring those rights, favor such legislation as may tend to reduce the hours of labor, to prevent the employment of children of tender years, to avoid the competition of convict labor with honest industry, to secure the sanitary inspection of tenements, factories and mines, and to put an end to the abuse of conspiracy laws.

We desire also to so simplify the procedure of our courts and diminish the expense of legal proceedings, that the poor may be placed on an equality with the rich and the long delays winch now result in scandalous miscarriages of justice may be prevented.

And since the ballot is the only means by which in our Republic the redress of political and social grievances is to besought, we especially and emphatically declare for the adoption of what is known as the “Australian system of voting,” an order that the effectual secrecy of the ballot and the relief of candidates for public office from the heavy expenses now imposed upon them, may prevent bribery and intimidation, do away with practical discriminations in favor of the rich and unscrupulous, and lessen the pernicious influence of money in politics.

In support or these aims we solicit the co-operation of all patriotic citizens who, sick of the degradation of politics, desire by constitutional methods to establish justice, to preserve liberty, to extend the spirit of fraternity, and to elevate humanity.

High Rent as the Best Manure

"High rent is the best manure ever land got."

This quote is attributed to the Irish landlords, in an 1835 piece by Thomas Ainge Devyr entitled "Natural Rights: A Pamphlet for the People."

The statement bears thinking about: when private landlords collect high rents, they force their tenants to work quite hard -- keep in mind that they still have to pay taxes on various things in order to support local spending -- while the landlord has provided them NOTHING that he has made (and nothing he has bought from the fellow who made it, either).

But at the same time, it is worth considering what happens when the community collects reasonably high rents on the land, particularly urban land.  When the community collects high rent, there are no vacant lots.  There are relatively few underused lots.  There is housing for all who want it.  All this economic activity creates jobs -- for those who would design, those who would build, those who would maintain, those who would improve, those who would expand, those who would protect.  All those workers' needs and spending create more jobs.  Wages rise, as jobs chase workers.  

So the phrase is not simply an 18th century rural one, but highly relevant in 21st century U.S. cities, towns and rural areas.  When the community collects the land rent and recycles it to serve local needs -- schools, parks, well-maintained roads, public transportation systems, police, ambulance, fire protection, courts -- communities become good places to live.  When we permit private landlords (be they individual or corporate, universities or trusts) to pocket those funds -- and perhaps "invest" the excess in acquiring more land on which to pocket the rent, those good things, if they happen at all, must be financed by high taxes on productive activity.

One is a virtuous circle; the other a vicious one.  Which one is consistent with our ideals?  If Life, Liberty and the Pursuit of Happiness are for ALL of us, then I think we have to opt for the virtuous circle.

 

Resource Rentals for Revenue -- The 3 R's of fixing our economy

I came across an excellent site at http://www.resourcerentalsrevenue.org, and thought their FAQ page particularly worth sharing.   The links will take you to answers.

We don't HAVE to burden ourselves and our economy with taxes which throw a wet blanket on jobs, on production, on homes.  There is a better way to finance our common spending!

Resource Rentals for Revenue.

The following list comprises the most commonly asked questions about the concept of making land and resource rentals the source of revenue for government. As you continue this study, you will see the value from giving resources the respect they deserve and the benefits resulting from the freeing of labour, production and exchange from taxation. If you have any questions which are not covered here, or observations you would like to put to our panel, please feel free to do so by sending your question as an e-mail query and we will attempt to respond.

The inclusion of land and resources in the economic equation is central to any solution for revenue raising. A taxation solution which does not consider the nature of taxation itself and allows the continuing private monopolisation of community land and resources fails to recognise the essential role land plays in the economic equation and will not work. Land is the only element in the economic equation which is both fixed and finite. It can be monopolised. It is a unique class of asset which must be treated accordingly. If we were to wrest not the land itself, but its unimproved value from private monopolies and return the value to the community — whose very presence creates it — then we would have reduced many problems in one stroke with great benefit to production, to the environment and to the cause of individual freedom and justice.

On the subject of land and resource rents, Henry George said this:

The tax upon land values is the most just and equal of all taxes. It falls 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. It is the application of the common property to common uses. When all rent is taken by taxation for the needs of the community, then will the equality ordained by nature be attained.

1.Understandings

• What’s with all the terminology?
• Won’t the site rent be passed on to the tenant?
• It sounds too simple
• What is the difference between Land Value and Land Price?
• What is meant by ‘unimproved’ value?
• Why is income from land ‘unearned’ income?
• There is no such thing as a free lunch.
• There is no unimproved land value!
• This tax, like a debits tax, ignores two of the basic principles of raising tax
• It’s incorrect to suggest that income derived from holding land or resources out of use is not a productive activity. It is, since it produces income for the owner.

2.Interest Groups

• Will I be better off with Resource Rentals?
• Are resource rentals fair?
• Wouldn’t the wealthy simply find some way of evading it?
• Wouldn’t the wealthy sell up and flee with their wealth?
• Won’t the poor get caught, while the rich escape as usual?
• Would farmers be able to afford the tax?
• How will it affect multinationals (MNC’s)?
• How will it affect lenders and borrowers?
• Entrepreneurs and Manufacturers?
• Exporters and Importers?
• Environmentalists?
• Won’t it fall harder on the prince in his mansion than on the pauper in his hovel?
• How would old age pensioners on valuable sites be able to pay the site rent as suggested?
• What happens to the self-funded or partly self-funded retiree?
• Unemployed adults - currently untaxed but perhaps owning their own home? Will they have to pay as well?
• The investor in a site has taken a risk, and tied up their capital – who else could possibly be entitled to their capital gain?

3.Implementation

• How would such a system be implemented?
• What would happen to Land Prices?
• If resource rentals are such a good idea, why don’t we have them?
• Why would anyone want to own land under this system?
• How do I buy a property?
• If site values fall, won’t revenue fall too?
• How will it curb unemployment?
• Wouldn’t we run out of space?
• Who wins; who loses?
• Will pensioners and retirees - currently untaxed but living in their own property, be liable for site rents? Will they be reimbursed for past taxes paid?
• New enterprises - yet to realise any profit but paying tax on the property from which they operate? If you tax them, won’t they fail?
• Why don’t we impose reciprocal import duties?
• What about anti-pollution tax rebates?
• What about a Debits Tax?
• Site Rent for Revenue is a crackpot idea.
• Why put the entire burden of taxation on one area of economic activity?

Good questions -- and good answers!

The Earth-for-All Calendar: March 27 -- Paine and Penn

Every proprietor, therefore, of cultivated land owes to the community a ground rent (for I know of no better term to express the idea) for the land which he holds.

— THOMAS PAINE, Agrarian Justice, Paine's Writings, Vol. III., p. 329 (1795-6).

If all men were so far tenants to the public that the superfluities of gain and expense were applied to the exigencies thereof, it would put an end to taxes, leave never a beggar and make the greatest bank for national trade in Europe.

— WILLIAM PENN, Reflections and Maxims, Sec. 222, Works V., pp. 190-1.

The Land Questions: #37

37.  Our ancestors bought or stole the land which the ancestors of some of those now identified as "Native Americans" relied on.  How should we and our children pay back them and their children?

A. By giving them the privilege of selling cigarettes without taxes, forgoing revenue that could help meet the health costs associated with smoking, both for smokers and for those who live with them.

B. By giving them the privilege of running casinos, even if a percentage of that revenue must be contributed to the state, and even if gambling is creates tremendous problems for some individuals in society, beyond those who actually gamble.

C. By collecting from everyone who owns land and natural resources the annual economic value, and giving everyone a per-capita share of those resources, every year, forever.  (Similar to the Alaska Permanent Fund)

D.  By collecting from everyone who owns land and natural resources the annual economic value, and giving everyone a per-capita share of those resources, every year, forever, and providing a double share to those who are starting from a disadvantaged position for some fixed number of years

E. By collecting from everyone who owns land and natural resources the annual economic value, paying the costs of government and common spending from that source, producing equal opportunity for all.

F. Your suggestions?

 

The Land Questions: #29 -- Selling the Toll Roads

29. The states need money.  Should they sell their toll roads to private companies? 

A. Sure!  That would provide a nice pot of money that would help with this year's budget and next year's, and after that, we can leave the problem to a future group of legislators and a new governor!

B. Sure! The private sector will take better care of them and turn a profit to boot!

C. No.  The taxpayers paid for those roads to be built, and have a right to more control over them than would exist after privatization.

D. No. The taxpayers own that land, a unique right of way, and selling it off forever is irresponsible and wrong!

E. No. Our society -- any society -- is highly dependent on our infrastructure, and control over it must remain in the public sector.

F. No. Those highways are built on land that was bought or taken from individual property owners for the public good.  To turn them over to the private sector, for profit, would be wrong.

G.  No.  Those highways will increase in value over the coming decades and centuries, and should not become anyone's private property, at any price.  Both their economic value and the control over them belongs in the common sector.

H. No.  Even if it looks as if it might make sense for our generation, what of future generations?  Should we permit the privatization of a common asset they will likely be dependent on?

I. No. Future taxpayers will build more highways intersecting with these current tollroads, and increase their value; were these to be privatized, it would be the private corporation who would reap the benefit of that future public investment.

J. Your suggestions?

The Land Questions: #27 -- Financing a New Subway Line

27. A new subway line costs $2 billion.  Suppose that its construction increases the surrounding land values by $2 billion. (Assume 5 miles long, 10 stations, 0.5 mile radius, average lot size of 0.10 acre.   How should the new subway line be financed?

A. Taxes on sales of groceries, clothing, etc. within those 1/2 mile radius areas

B. Taxes on sales of groceries, clothing, etc., all over the city the subway line connects to

C. Taxes on sales of services within those 1/2 mile radius areas

D. Taxes on sales of services of all kinds, all over the city the subway line connects to

E. Taxes on wages of those working in those 1/2 mile radius areas

F. Taxes on wages all over the city the subway line connects to

G. Taxes on wages of those living within the 1/2 mile radius areas

H. Taxes on capital gains and dividends of those living within the 1/2 mile radius areas

I. Taxes on capital gains and dividends of those with residence anywhere in the city

J. Taxes on all real estate within those 1/2 mile radius areas

K. Taxes on all real estate, all over the city the subway line connects to

L. Taxes on just the buildings within those 1/2 mile radius areas

M. Taxes on all the buildings, all over the city the subway line connects to

N. Taxes on the land value within those 1/2 mile radius areas

O. Taxes on the land value, all over the city the subway line connects to

P. Transfer taxes on either or both of buyers and sellers whenever a property within the 1/2 mile radius is sold

Q. Transfer taxes on either or both of buyers and sellers whenever a property anywhere within the city is sold

R. An inheritance tax when a house or commercial property is transferred from a decedent to a survivor.

S. Your suggestions?

 

The Land Questions: #26 -- Revenue Sources for Financing Transportation

26. Fares on inter-city public transportation may not be high enough to finance all the costs of providing the transportation.  What revenue source should be used to pay for the remainder of the costs?

The Land Questions: #22 -- Infrastructure and Land Values

22.  The creation of a new subway line raises the land values near each of the stations.  Who should reap the benefit?

A. People who own homes there

B. People who own businesses there

C. People who own land there, whether or not there is a highest-and-best-use building on it

D. Corporations who own land there

E. Universities and other private landholders who own land there

F. Foreign corporations and private equity funds who own land there

G. Pension funds and sovereign wealth funds who own land there

H. The community as a whole, since the community paid for it

 

Download Fred Harrison's book, "Wheels of Fortune"

The Land Questions: #21 -- Paying for Transportation Infrastructure

21.  The creation of a new subway line raises the land values near each of the stations.  Who should pay for the building of the subway line?

A. Riders of the new subway line

B. Riders of all subways in the system.

C. Riders of all mass transit in the metro area.

D. Drivers of cars and trucks, all over the metro area, via taxes on their fuel purchases (that is, in proportion to miles driven and the fuel efficiency of their vehicles)

E. Drivers of cars and trucks, all over the metro area, via an annual surcharge on their registration

F. Drivers of cars and trucks, all over the metro area, in proportion to the value of their cars, owned or leased

G. Drivers of cars and trucks, via tolls when they use bridges and tunnels, or HOV lanes, or certain highways

G. The taxpayers, via increased sales taxes on their purchases

H. The tourists and business travelers, via hotel occupancy taxes and taxes on rental cars.

I. Passengers in taxis, via a surcharge on their fares.

J. The homeowners, via taxes on their homes

K. Drivers, commercial and individual, via taxes on fuel purchased within the city

L. Employees all over the metro area, via a payroll tax

M. The tenants of commercial buildings in the heart of the central business district

N. All landholders, paying equally (a parcel tax)

O. All landholders, in proportion to the size of their lots

P.  Landholders, in proportion to the value of the land they hold, without regard to the buildings or their contents.  Those whose land values are raised by their proximity to the new line will see a proportional increase in their share of the tax burden; those far from the new line will not.

Q. Your suggestions?

The Land Questions #19 -- Beaches

19. Storms continue to erode the resort beaches up and down our coasts.  Who should pay for beach restoration every few years?

A. The federal government, from income tax revenues.  (why?)

B. Taxes on pollution should be used to pay for this, on the basis that pollution produces the climatic conditions that make storms slower moving and more destructive.

C. State governments along the coasts.

D. Local governments, town by town, paid for by sales taxes.

E. County governments along the coasts.

F. Local governments, town by town, paid for by taxing wages.

G. Local governments, town by town, paid for by summer parking revenue, hotel bill taxes and taxes on rental properties' revenue;

H. Local governments, town by town, paid for by property taxes, taxing both buildings and land, in proportion to current market value

I. Local governments, town by town, paid for by land value taxation.  Land values close to the beaches rise and fall with the sand, and properties further from the beaches are far less effected by the presence/absence of beach sand than those near the beaches. 

J. Local governments, town by town, paid for by transfer taxes on sold properties, so as not to burden long-time owners who aren't selling.

K. Estate taxes

L. Your suggestions?

 

The Land Questions: #13 -- Electric Utilities

13. Electric utilities have long been regarded as "widows' and orphans'" stocks.  Safe, if not high income.  A few years ago, they were deregulated.  A recent study has shown that retail electricity prices have increased faster in states that adopted competitive pricing than in those where rates continue to be set by government agencies.  We all need reliable electricity.  Should we permit the licenses to generate and distribute electricity to be an opportunity to make a windfall profit?  (Or should we encourage municipal ownership of vital utilities?)

A.  Sure!  People and businesses are quite free to move from states without regulation to states with regulation if they choose.  They may not mind paying 20% more for their electricity, if other conditions are good. And didn't the utilities earn it?

B. Sure.  If local regulatory agencies decide that local best interests conflict with the interests of the corporate shareholders, they can re-regulate.  After all, the corporations don't vote.

C. No. Electricity is important and we ought to do what we can to keep the price down so that poor people can afford electricity and still have funds for other costs of living.

D. No.  Electricity is vital to the economy, and we ought to do what we can to keep it affordable to ordinary people, and not a source of corporate windfalls.

E. No.  Natural monopolies ought to be publicly owned, the prices kept low, and any excess revenue accrue to the public treasury, not to the benefit of private investors.

F. your suggestions?

 

Gavin Putland: All the way with Hazlitt - as far as he goes -

from Gavin Putland:
All the way with Hazlitt - as far as he goes - On Line Opinion - 25/1/2012.

The reader of a book review will rightly want to know the ideology of the reviewer. Very well: being of Georgist persuasion, I divide the "means of production" into two categories: those that can be produced or reproduced by competitors, and those that can't. On the former category, I'm as far Right as you can get, believing that such assets should be privately owned and exempt from tax, to encourage capital formation.

That may explain my mostly sympathetic reaction to a book much admired by advocates of free markets and small government: Economics in One Lesson (1946; revised 1978) by Henry Hazlitt (1894-1993). ...

... How should the offending taxes be replaced?

That brings us to the other category of "means of production" -- assets that can't be produced or reproduced by competitors. Georgists contend that the market values of such assets, being publicly created, are the proper source of public revenue. The most important example is land, whose value can be tapped by means of rates, "land tax" and "capital gains" tax.

Hazlitt doesn't have "land" in the index.

In three places in the text (ss. 11.4, 15.2 and 16.2), he lists the factors of production as land, labour and capital, but doesn't distinguish between them for purposes of argument. In s.16.2 he also mentions the "poorest land", "least competent farmers" (labour) and "poorest equipment" (capital), but again doesn't distinguish further.

Similarly in the chapter on credit, he doesn't care whether borrowed funds are spent on farms (land) or tractors (capital).

In s.15.2 he adds that for an economy in "equilibrium", these factors are limited "at any moment", thus glossing over the fact that the supply of capital can build up or decay. Although Hazlitt is usually said to be of the Austrian school, this snapshot view of "equilibrium" is neoclassical, not Austrian; it was pioneered by J.B. Clark for the purpose of making capital look like land, so that land could be called a form of capital. Hazlitt includes Clark in his recommended reading list.

Earlier (s.6.2), Hazlitt cites the "limited" supply of capital as an argument against government-guaranteed home mortgages, claiming that they cause "oversupply of houses as compared with other things" -- not that they pump up land prices.

But he mentions the need for capital accumulation elsewhere, especially in the chapter on saving, where his examples of "capital" include schools, colleges, churches, libraries, hospitals, private homes, and "the most wonderfully equipped factory", all of which include land components. This conflation of capital and land is neoclassical.

In contrast, Austrian economists emphasize that capital, unlike land, must be constantly renewed, that its life cycle may be long or short, and that loose monetary policy causes overinvestment in long-life capital, whose value then collapses, contributing to recessions.

Meanwhile Georgists notice that recessions follow bursting "property bubbles", which are really land bubbles because land prices, unlike prices of buildings (prime examples of "long-life capital"), are not constrained by construction costs.

Hazlitt's failure to make these distinctions may explain why his explanation for depressions (s.23.5) is so vague: "the real causes, most of the time, are maladjustments within the wage-cost-price structure... At some point these maladjustments have removed the incentive to produce, or have made it actually impossible for production to continue... Not until these maladjustments are corrected can full production and employment be resumed." All clear now?

Those who call themselves free-traders too often fail to apply their own standards to trade within their own countries. Witness those misnamed "free trade agreements" in which each country promises to impose the other's monopolies on its own citizens.

Hazlitt falls into this error in chapter 4, where he considers an extra bridge between Easton and Weston and declares that "For every dollar that is spent on the bridge a dollar will be taken away from taxpayers." Not necessarily, because any such bridge will lower barriers to trade between Easton and Weston, especially the indispensable trade between employers and employees.

The benefit of the additional trade, net of any bridge tolls, will be shown in prices of access to locations served by the bridge -- in other words, land values. If the benefit exceeds the cost, it will be possible to cover the cost by clawing back a sufficient fraction of the uplift in land values, in which case the cost, although clawed back through the tax system, will not be "taken away from the taxpayers" but will be part of the new value created by the bridge.

The rest of that new value will be a net windfall to the property owners.

Hazlitt then turns to the Norris Dam (a New Deal project) and rubbishes the claim that "private capital could not have built it", because it was indeed built by private capital "expropriated in taxes... taken from people all over the country", causing the loss of "the private power plants, the private homes, the typewriters and television sets" that the expropriated funds might otherwise have bought. Thus the people of one district got richer at the expense of the rest of the country.

But it didn't have to be done that way. The earlier Don Pedro dam (completed 1923) was built by two Californian irrigation districts and financed entirely by local land-value taxes. The affected land owners were fiercely in favour of it because they knew the increase in their land values would outweigh the taxes. Even if the land-value taxes had been imposed by a higher level of government, the financing of the dam would still have been local, because only the local land values would have been affected by it. Private capital did not build it, because the uplift in land values that paid for it would not have occurred without it. Private agencies could not have organized it, because they would have had no way of tapping the uplifts in land values.

With an eye to current debates, I should conclude by praising Hazlitt for an insight that his latter-day admirers have ignored.

In explaining why "Taxes Discourage Production" (chapter 5), he says:

"When a corporation loses a hundred cents of every dollar it loses, and is permitted to keep only 52 cents of every dollar it gains, and when it cannot adequately offset its years of losses against its years of gains, its policies are affected." If individual investors "lose the whole dollar when they lose, but can keep only a fraction of it when they win," they are less likely to take risks.

The entire article is worth your time.