LVTFan's Blog

Pen's Parade: do you realize we're mostly dwarves?

.... and how we might correct the distribution.

I came across a spectacularly good graphic the other day.  I don't know that it will reproduce here, so I'll just provide you the link:

http://assets.theatlantic.com/static/coma/images/issues/200609/Height.jpg

Open it in another window, let it fill the screen, scrolling if necessary to see it in full -- and then continue reading here.

It comes from a 2006 article in The Atlantic Monthly entitled "The Height of Inequality," which lays out very well the extent of the income inequality we have in America, though it starts with an explanation done in 1971 by Dutch economist Jan Pen, describing the distribution of income in the British economy at that time. (I've put part of it into bullet format.) It begins,

In 1971, Jan Pen, a Dutch economist, published a celebrated treatise with a less-than-gripping title: Income Distribution. The book summoned a memorable image. This is how to think of the pattern of incomes in an economy, Pen said (he was writing about Britain, but bear with me). Suppose that every person in the economy walks by, as if in a parade. Imagine that the parade takes exactly an hour to pass, and that the marchers are arranged in order of income, with the lowest incomes at the front and the highest at the back. Also imagine that the heights of the people in the parade are proportional to what they make: those earning the average income will be of average height, those earning twice the average income will be twice the average height, and so on. We spectators, let us imagine, are also of average height.

Pen then described what the observers would see. Not a series of people of steadily increasing height—that’s far too bland a picture. The observers would see something much stranger. They would see, mostly, a parade of dwarves, and then some unbelievable giants at the very end.

• As the parade begins, Pen explained, the marchers cannot be seen at all. They are walking upside down, with their heads underground—owners of loss-making businesses, most likely.
• Very soon, upright marchers begin to pass by, but they are tiny. For five minutes or so, the observers are peering down at people just inches high—old people and youngsters, mainly; people without regular work, who make a little from odd jobs.
• Ten minutes in, the full-time labor force has arrived: to begin with, mainly unskilled manual and clerical workers, burger flippers, shop assistants, and the like, standing about waist-high to the observers. And at this point things start to get dull, because there are so very many of these very small people. The minutes pass, and pass, and they keep on coming.
• By about halfway through the parade, Pen wrote, the observers might expect to be looking people in the eye—people of average height ought to be in the middle. But no, the marchers are still quite small, these experienced tradespeople, skilled industrial workers, trained office staff, and so on—not yet five feet tall, many of them. On and on they come.
• It takes about forty-five minutes—the parade is drawing to a close—before the marchers are as tall as the observers. Heights are visibly rising by this point, but even now not very fast.
• In the final six minutes, however, when people with earnings in the top 10 percent begin to arrive, things get weird again. Heights begin to surge upward at a madly accelerating rate. Doctors, lawyers, and senior civil servants twenty feet tall speed by. Moments later, successful corporate executives, bankers, stock­brokers—peering down from fifty feet, 100 feet, 500 feet.
• In the last few seconds you glimpse pop stars, movie stars, the most successful entrepreneurs. You can see only up to their knees (this is Britain: it’s cloudy). And if you blink, you’ll miss them altogether.
• At the very end of the parade (it’s 1971, recall) is John Paul Getty, heir to the Getty Oil fortune. The sole of his shoe is hundreds of feet thick.

As Garrison Keillor ironically informs his listeners, not every child can be above average. But when it comes to incomes, the great majority can very easily be below average. A comparative handful of exceptionally well-paid people pulls the average up. As a matter of arithmetic, the median income—the income of the worker halfway up the income distribution—is bound to be less than average.

This is true in every economy, but in some more than others. Back when Pen wrote his book, incomes were already more skewed in America than in Britain. Over the past thirty-five years, and especially over the past ten, that top-end skewness has greatly increased. The weirdness of the last half minute of today’s American parade—even more so the weirdness of the last few seconds, and above all the weirdness of the last fraction of a second—is vastly greater than that of the vision, bizarre as it was, described by Pen.

The article goes on to point out that (1) at the time, the US giants were even taller than the British ones; (2) that in the intervening years, a highly disproportionate share of US income has gone to make the giants taller yet in proportion to the rest of us.   It quotes a study suggesting that a large share of the top income earners were sports and media celebrities and top corporate executives.   13,000 people in the 99.99th percentile, with total earnings of $83 billion in 2001.  (an average of $6.4 million, so some are much higher, many a lot lower.)   In 2001, there were probably relatively few Hedge Fund managers pocketing billions each (and their incomes are likely not shown as wages, but rather as "capital" gains, taxed at less than all but our lowest wage earners must pay in federal income taxes, and not subject to Social Security or Medicare taxes.

Most of us, as the article points out, have a big problem with sports or media celebrities receiving large incomes, considering it a "perfecting of the labor market."  But how is it that corporate executives get to harvest so much?  We know about hand-picked board compensation committees which reward their pickers with high incomes, whether or not performance has been strong.  But do we think about just how it is that there is so much for them to work with?  Do we know why so little goes to the rest of the parade in wages?    We're so used to the situation that we no longer examine it.  Even your family's college economics major probably has never been exposed to a serious examination of the question.  Air to the bird, water to the fish -- just the environment we live in, not even interesting enough to study, until it no longer supports life.

Here's an account of a talk Joe Stiglitz gave last summer during his lecture tour in Australia, which might shed some light on how so much is available for those corporate executives and their compensation committees, as well as for the shareholders:

Professor Stiglitz told a packed UQ Centre that Australia's economic stimulus package was the best designed in the world.

AND he said natural resources - coal, iron ore - should be properly valued at market just like the electromagnetic spectrum.

The government auctions the spectrum to the highest bidders who want to operate mobile phone networks, cable companies, television and radio stations. 

Basically, a country - like Australia - will end up poor if doesn't get the best price for its assets - and natural assets are not renewable, once they are gone they are gone. If the proceeds from the sale of these assets are not invested in infrastructure to support and grow other sectors the economy (manufacturing and value-adding, goods creation) then a country and it's people will not prosper - HELLO! HELLO! Drowning not waving.

"It should be subtracted from Gross Domestic Product (GDP)," he said. "You are selling off assets at a very low price if you don't have adequate taxes on mining - you are being cheated," he said to audience applause.

He thinks resources should be auctioned off to the highest bidder - the free market at work. Of course, the mining industry will make all kinds of threats.

To everyone's amusement he joked about how mining companies bamboozled, threatened and bribed governments of developing, fragile nations. 

"I assume that's not the case in Australia," he mused.

To prosper, a country needs to set up a stabilization fund (from a mining tax, if not a resources auction) for nation building.

This is what he calls an investment fund for building infrastructure and to grow value-adding industries, maintain education, job creation.

Not only that but the sell-off of natural resources should appear on a country's accounts as a kind of depreciation of assets - otherwise the accounts are not accurate. ...

He made these comments at the end of the oration after he explained the difference between the financial sector and the economy - the economy is not the financial sector.

The financial sector (the banks and regulators) are the culprits behind the global financial crisis which has crippled the global economy. Apparently, moneylenders have been skimming 40 percent of the profits from companies that actually make and produce things. His big point was that this is not really the role of the financial sector. The financial sector's job is to support economic growth, not cripple it. 

"Finance is a means to an end," he said. "The lack of balance between the financial sector and the economic sector was actually the real problem in this economic crisis (NOT the real estate bubble)."

Why aren't the workers getting more?  In large part because there isn't competition for their labor.  Why is this the case?  In part because our natural resources are being given out -- at bargain prices -- to corporations which have monopolized them.    And, while about half of us have some stock, stock ownership of publicly held companies is quite concentrated (top 5% hold 66.5%), and ownership of privately held companies (a larger figure at the household level) even more so (top 5% hold 88.1%).

So how do we create more competition for the services of workers?  How do we create more opportunity for all to employ themselves if they don't like their chances with other employers?  To find out, explore this blog, explore the ideas associated with the name of 19th century economist and philosopher Henry George.

Political economy is the science which deals with the natural laws governing the production and distribution of valuable goods and services.  I'll also reference Adam Smith's definition:

Political economy considered as a branch of the science of a statesman or legislator proposes two distinct objects, first, to supply a plentiful revenue or subsistence for the people, or more properly to enable them to provide such a revenue or subsistence for themselves; and secondly, to supply the state or commonwealth with a revenue sufficient for the public service. It proposes to enrich both the people and the sovereign.

Which people?  All people?

Great fortunes and the rest of us

We have no disposition to say anything about Andrew Carnegie's munificent benefactions. On the one hand there is nothing in this philanthropic spree of a modern Dives to call for commendation; and on the other, the expenditure by any man of what society concedes to be his own fortune, is a private matter outside the pale of criticism.

It is only when the question of how a millionaire ought to use his wealth is brought forward in connection with these charitable performances that the subject becomes one of public concern. Then it is of public concern only to the extent of justifying the retort that it is nobody's business but his own how any millionaire uses his wealth, provided he does not use it prejudicially to the rights of others.

The vital question is not how millionaires use their wealth, but how they get it. Not how they did get it, for what has happened has happened, and by-gones should be by-gones; but how they are getting it now.

Have they a hoard of goods formerly accumulated, from which they draw? Then their getting it hurts nobody.

Do they earn it as they go along? Then their getting it benefits everybody.

Or do they merely possess legal authority to levy continually upon the common earnings for their own enrichment? Then their getting it is a present and continuing wrong, which is of incalculable public concern.

-- From "The Public," March 23, 1901

 

One might be led to ask whether the FIRE sector is levying upon the earnings of the larger community a toll they don't actually rightly earn.

David Cay Johnston: Call Their Bluff, Mr. President

129tn0933.pdf (application/pdf Object). (courtesy of Paul Caron's taxprof.typepad.com blog)

I commend the whole article to your attention (it runs 3 pages). But I'll focus on a few paragraphs which particularly intrigue me.  DCJ begins,

Will President Obama cave on yet another of his campaign promises, this time by giving in to Republican demands to extend all of the temporary Bush tax cuts? The president signaled this on his Asia trip when he said his principal concern was retaining the middle-income tax rates.

Republican congressional leaders have said they will let all of the Bush tax cuts expire unless the president bows to their demand that the top 3 percent of Americans be included in any tax cut extension.

Obama should call their bluff. 

I don’t think the Republicans are so stupid that they would let all the Bush tax cuts expire if they cannot continue tax cuts for billionaires and the affluent on all of their income. But let’s assume that the Republican leaders on Capitol Hill are that dumb, or so beholden to the antitax billionaires funding their campaigns, that they would force universal tax increases.

skipping ahead,

The Republicans cannot pass any legislation the Democrats choose to block. Further, the Republicans have no chance of overriding a veto, which requires a two-thirds vote of those present in both houses. The Republicans control the House, but they have only as much power to enact laws as Obama and Senate Democrats give them.

More important than any political gain, however, is what calling the GOP bluff could do to get our nation back on the path to prosperity and to stop policies that are pushing us into economic disaster, thanks in huge part to the Bush administration’s combination of revenue-losing tax cuts, wars, and wild spending.

By calling the Republicans’ bluff, Obama can get us talking about taxes and the future of America, instead of protecting what the richest among us already have.

The president could speak about Wall Street handing out record bonuses this year — an estimated $144 billion to a relative handful of people, many of whom get richer by destroying wealth, including assets of state and local government pension funds whose losses we have to make up for with more taxes.

Those bonuses, by the way, are about 2.4 times expected Wall Street profits.

How about a presidential lecture on entitlements focused on Lloyd Blankfein, whose firm’s bad bets taxpayers paid off at 100 cents on the dollar? The Goldman Sachs boss whines about making only $9 million last year because of his ‘‘sacrifice’’ and plans an extra-big payday this December to make up for last year.

The president could change the terms of our economic debate by talking about how much the vast majority props up many of those at the very top, starting with Blankfein. He could tell people about the trillion dollars a year of tax favors for corporations and the rich, as documented by the Shelf Project. (For the article, see Tax Notes, July 5, 2010, p. 101, Doc 2010-13081, or 2010 TNT 129-4.) Obama should explain how soak-the-middle-class and sink-the-poor policies damage economic growth.

Obama could also talk about how America has stopped being number one in many other categories because of tax policies that are hollowing out our nation’s economy and destroying the commonwealth on which private wealth building relies.

I am an admirer of DCJ, appreciate his two books, and look forward to his third -- but I don't think he yet sees the half of it!  (And need I say that none of our current parties do either?)

Skipping ahead again:

Calling the GOP’s bluff would let the president raise the issue of whether we want to cut Social Security and Medicare benefits so Peterson and his peers can have even more. Is Peterson’s use of a multimillion-dollar helicopter just to avoid the summer traffic between Manhattan and his Hamptons mansion enough? Or should we all pay more so he can buy a new helicopter?

The president could explain that the tax system helps Peterson’s billions float on a sea of tax credits, tax breaks, and tax deferrals. Obama could read to people from 1950s newspaper stories about old ladies eating cat food. The president could stop in at food banks where families who worked hard and played by the rules were crushed by the machinations of Wall Streeters.

He could talk about how a single working person making the median wage of just over $26,000 paid nearly a third larger share of her income in federal taxes than the top 400 taxpayers, who each made almost $1 million a day in 2007.

And Obama could tell taxpayers about all those people with billion-dollar annual incomes who legally pay no current income taxes, while the rest of us get dinged before we get paid. Let me play speechwriter for Obama on this one:

The Republicans took away your tax savings, every penny of it, but first they made sure that hedge fund managers will not have to pay any taxes this year unless they choose to.

Hedge fund managers make billions of dollars each year, but they get to delay paying their taxes for years or even decades — and then pay taxes at less than half the rate that other highly paid people must pay.

Do these hedge fund managers build factories?

Do they create software or new technologies?

Do they create the jobs America needs?

No! They are speculators, speculating with borrowed money.

The Republicans want to cut your Medicare and cut your Social Security.

Now if that’s what you want, then I urge you to support the Republicans. But if you think the highest-paid workers in the history of the world — people who can and often do make a billion dollars in a year — should pay taxes, pay their taxes in full, and pay them now, then you need to show your support for my policies.

If you want your tax cuts back, you need to  stand with me. You need to petition, to demonstrate, to call and write to your representative and senators, telling them this kind of favoritism has got to stop and stop right now.

I'm glad to see that DCJ is calling attention to this particular form of speculation -- skimming the cream off the economy without producing anything.

Recall that Joseph Stiglitz made remarks to this effect, speaking in July at the University of Queensland in Australia:

... moneylenders have been skimming 40 percent of the profits from companies that actually make and produce things. His big point was that this is not really the role of the financial sector. The financial sector's job is to support economic growth, not cripple it. 

"Finance is a means to an end," he said. "The lack of balance between the financial sector and the economic sector was actually the real problem in this economic crisis (NOT the real estate bubble)."

I've not heard of Stiglitz saying this where the American media might catch on, but appreciate his willingness to state it elsewhere.

How do we encourage the sorts of business activity which create jobs, create housing which is welcoming and affordable for people at all points on the income and wealth spectra?  By getting our incentives right, and by straightening out what we tax, what we don't, and the rates at which we tax each.

A 2007 OECD study compared some of the commonly-used tax bases for their effects on economic growth, and concludes that the personal income tax is an inferior tax.  What does it endorse?  Interestingly, the conventional property tax!  Those who read this blog regularly know that the conventional property tax is an unfortunate marriage of two taxes with very different effects -- one quite desirable, and the other largely negative in its effects.

Elsewhere, I came across this table:

Distributional Effects of Allowing All Expiring Tax Provisions to Expire, 2011
	Increase in Federal Taxes
Income Category	Millions of Dollars	Percent
Less than $10,000	117	1.0
$10,000 - $20,000	3,721	19.9
$20,000 - $30,000	11,654	20.8
$30,000 - $40,000	12,869	14.1
$40,000 - $50,000	11,238	10.6
$50,000 - $75,000	26,705	9.2
$75,000 - $100,000	28,517	9.8
$100,000 - $200,000	62,309	10.6
$200,000 - $500,000	26,871	8.7
$500,000 - $1 million	10,620	8.3
$1 million and over	32,708	11.0
Total, all taxpayers	227,330	10.4
Source: Joint Committee on Taxation (July 30, 2010

If I am reading the table correctly, it says that while the folks in the $1 million plus income category would experience an 11.0% increase in their federal taxes, those in the $10,000 to $20,000 range would see a 19.9% increase, and those in the $20,000 to $30,000 range would have a 20.8% increase in their federal taxes.  Admittedly, these are small numbers -- I assume that they exclude social security and medicare payroll taxes, which are much higher than federal income taxes for perhaps 75% of us.    But does it make sense to increase income taxes on those whose incomes are sufficiently low that they likely spend virtually 100% of what comes in by twice as much as the income taxes on those who have plenty of discretionary income?

We need better taxes.  Search this page for the OECD study, or search for "canons of taxation" on the wealthandwant.com website.  Smart taxes are smart.  Dumb taxes are dumb.

 

Wages in America (2009)

The Social Security Administration released some interesting information a few weeks ago (and corrected it after David Cay Johnston called attention to some anomalies in the data, which turned out to have resulted from false W-2's from two individuals; what's reported below is the corrected data) on 2009 wages.

First, here is a summarized table of the 150.9 million individual wage earners in 2009. 

• 75% of wage earners earned $50,000 or under; 25% earned less than $10,000 
• Nearly 94% of wage earners earned less than $100,000.  (Is this how you pictured it?)
• The 6.3% of us who earned over $100,000 received over 30% of the wages.
• In total, 32% of wage earners deferred any wages; the deferrals equaled just 3.56% of aggregate wages.

Net Compensation Interval	Number of Wage Earners (1)	Percent of Total Wage Earners (2)	Cumulative Percent Wage Earners (3)	Aggregate Wages (4)	Percent of Aggregate Wages (5)	Cumulative Percent Aggregate Wages (6)
$0 to $10,000	38,369,374	25.42%	25.42%	$152,896,917,802	2.59%	2.59%
$10,000 to $30,000	44,608,322	29.56%	54.98%	$874,364,572,885	14.83%	17.43%
$30,000 to $50,000	30,936,472	20.50%	75.48%	$1,208,601,910,795	20.51%	37.93%
$50,000 to $100,000	27,553,085	18.26%	93.74%	$1,882,156,087,994	31.93%	69.87%
$100,000 to $500,000	9,151,298	6.06%	99.80%	$1,445,445,607,843	24.52%	94.39%
over $500,000	299,182	0.20%	100.00%	$330,569,524,083	5.61%	100.00%
Total	150,917,733			$5,894,034,621,403
memo: contributions to deferred compensation plans	48,534,389	32.16%		$209,685,825,910 average: $4,320	3.56%

These data do not include funds received by hedge fund managers which most of us would consider wages, but which get treated as capital gains, and taxed at a much lower rate than do all but the lowest wages.   It would be interesting and useful to see those data arranged next to these.

One might use these data to consider whether there should be a separate bracket for higher incomes.  Keep in mind that these are individual wages, net only of 401(k) type deferrals of income, not adjusted gross income at the taxpayer/household level.

The next table examines the amount of wage income which is represented by the portion of wages over $100,000, just below the current level at which one stops paying social security withholding.

Net Compensation Interval	Number of Wage Earners	Percent of Total Wage Earners	Cumulative Percent Wage Earners	Aggregate Wages over $100,000	Percent of Aggregate Wages	Cumulative Percent Aggregate Wages
$100,000 to $500,000	9,151,298	6.06%	6.06%	$530,315,807,843	9.00%	9.00%
over $500,000	299,182	0.20%	6.26%	$300,651,324,083	5.10%	14.10%
total	9,450,480	6.26%		$830,967,131,927
14.10/85.90 = 16.4%

So how does all this relate to this blog's focus on Land Value Taxation?  

The focus is on smart, just, efficient taxation -- and on ending the privileges which enrich some people and impoverish the vast majority of us. 

Many of the ways that people "earn" large salaries are in large part the result of our permitting privileges: the privatization of the value of natural resources; the privatization of the value of urban land; and structures which permit some sectors of the economy to skim off value created by all of us.  (Did anyone yell FIRE?)

We have to hold the feet of our elected representatives to the fire: make it worth their while NOT TO obey the requests of their huge campaign contributors and TO listen to the rest of us and reconfigure the structures which funnel wealth and income into the pockets of the currently-and-traditionally-privileged folks.

Are you ready?   

I think there were some signs in this recent midterm election that voters in several states were not bowled over by the well-constructed advertising and heavy media buys of some very rich candidates for office, and I find that encouraging.  Connecticut's Foley and McMahon, California's Fiorino and Whitman, and a number of entities enabled by the Citizens United ruling by the Supreme Court spent large amounts of money, with very uneven results.   

Khosla, Sun Co-Founder, Uses Capitalism to Help Poor

Khosla, Sun Co-Founder, Uses Capitalism to Help Poor - NYTimes.com.

MUMBAI, India — Vinod Khosla, the billionaire venture capitalist and co-founder of Sun Microsystems, was already among the world’s richest men when he invested a few years ago in SKS Microfinance, a lender to poor women in India.

But the roaring success of SKS’s recent initial public stock offering in Mumbai has made him richer by about $117 million — money he says he plans to plow back into other ventures that aim to fight poverty while also trying to turn a profit.

Now let's do a thought exercise.  Let's say that the microcredit projects are extremely successful, leading to abundant economic activity for thousands, hundreds of thousands, even millions, of women and their families. 

Among the effects of that increase in economic activity will be an increase in the value of land in the places where that activity is taking place.  That means that those who own land will be able to charge those who do not own land more for access to it.  If the recipients of microcredit are already landholders, they will benefit as rents rise in their community.  If the recipients of microcredit are not yet landholders, they will find themselves paying more rent to those who are.   The tenants become sharecroppers, sharing their product with a landholder who provided no value added.  Landed gentry.

Q.  So how do we make microcredit's benefits accrue to the community as a whole, rather than simply to the landholders?

A.  We encourage nations and communities to place more -- even all -- of their revenue collection onto the value of land and of natural resources, rather than permitting that value to accrue to those who claim title to the best land

Socialize that value -- treat it as the common treasure of the entire local community, rather than as the private windfall-collector of any individual or group.  Collect that rent, rather than letting it accrue to the benefit of an individual.  Use it to build schools, to dig wells, to clean water, to fund public services.

That is how to help whole communities.  That is how we can end poverty.

Microcredit alone will make winners out of a fortunate few.  But it won't improve life for the community, or create opportunities for the next generation.  Collecting the increase in land value that the increase in economic activity creates WILL.

Does this take anything that the borrower created, either by their efforts or their risk-taking?  No.  They get to keep that.

Quarter days

Quarter days - Wikipedia, the free encyclopedia.

In British and Irish tradition, the quarter days were the four dates in each year on which servants were hired, and rents were due. They fell on four religious festivals roughly three months apart and close to the two solstices and two equinoxes.

The significance of quarter days is now limited, although leasehold payments and rents for business premises in England are often still due on the old English quarter days.

The quarter days have been observed at least since the Middle Ages:

"These have been the days when accounts had to be settled, days when magistrates paid their visits to outlying parts in order to determine outstanding cases and suits. There is a principle of justice enshrined in this institution: debts and unresolved conflicts must not be allowed to linger on. However complex the case, however difficult to settle the debt, a reckoning has to be made and publicly recorded; for it is one of the oldest legal principles of this country that justice delayed is injustice. Among the provisions that the barons wrested from the extortionate and unjust King John in Magna Carta of 1215, a safeguard for gentry like themselves and hungry peasants alike, was the promise that 'To none will we sell, or deny, or delay right or justice'. Days of assize ensure openness, assurance and timeliness of justice, justice not sold, not denied, not delayed."

In England

The English quarter days (also observed in Wales and the Channel Islands) are:
* Lady Day (25 March)
* Midsummer Day (24 June)
* Michaelmas (29 September)
* Christmas (25 December)

Lady Day was also the first day of the year in the British Empire (excluding Scotland) until 1752 (when it was harmonised with the Scottish practice of 1 January being New Year's Day). The British tax year still starts on 'Old' Lady Day (6 April under the Gregorian calendar corresponded to 25 March under the Julian calendar).

The cross-quarter days are four holidays falling in between the quarter days: Candlemas, May Day (1 May), Lammas, and All Hallows (1 November). The Scottish term days, which fulfil a similar role as days on which rents are paid, correspond more nearly to the cross-quarter days than to the English quarter days.

Well, I sometimes think that part of why people dislike the conventional property tax is that it is billed twice a year, and one must write a fairly large lump sum check.   Those who escrow their taxes as a condition of their mortgage aren't faced with this.  The vast majority of one's income taxes and payroll taxes are withheld biweekly or monthly.

Technology has come a long way, and it would probably make sense for our land value taxes to be paid once a month, just as mortgage payments are.  Many people would opt for an automatic withdrawal from their checking account, as mortgages and car payments are often handled.

Sidelight: my understanding is that Candlemas, which is on the same date that the US celebrates Groundhog Day, is the middle of winter, and one should have remaining half the candles one needs to get through the winter.

How to Increase America's Saving Rate: Rich Americans Save Tax Cuts Instead of Spending

Rich Americans Save Tax Cuts Instead of Spending, Moody's Says - Bloomberg.

Well, from time to time, we hear that Americans aren't saving enough, and sometimes columnists ask for suggestions of how we might increase America's savings rate.

Moody's has provided the answer: cut federal income taxes on the highest income people, and they will save a significant portion of it.   (The question arose because some say that in order to facilitate job creation, we ought to avoid increasing federal income taxes on the portion of taxable income over $250,000 per year.)

If the goal is to produce savings at the median, or at the 25th or 75th percentiles, or at the 10th or 90th percentiles, reducing taxes on the highest-income 2% or so is not going to serve the purpose.   But it will satisfy the "increase America's saving rate" goal.

Before we went into this recent "bust" portion of our 18-year boom-bust cycle, a shocking proportion of Americans lacked sufficient savings to provide even a poverty-line existence for their families for as short a period as 3 months.  (Edward Wolff of NYU wrote the study on this.)   Most of us live paycheck to paycheck.

The notion of saving for a "rainy day," or even of saving to buy one's next car for cash, seems quaint and of-another-era, with so many of us paying more than 40% of our income for housing.  (Yet we don't complain about owing our soul to the company store.  Now it is the FIRE sector we owe.)    And look at the measures we've used to substitute for people's inability to save a 20% down payment on a starter home!

But the best-off among us -- both those who have large amounts of wealth and many of those who receive high wages or high profits on their "labor" (even if their labor consists of reaping that which other people sowed, they do regard it as labor, and sometimes the IRS does, too -- unless they run hedge funds, in which case it gets treated just as if they'd actually invested their own capital in a way a corporation could use to enhance its operations!) -- can and do save and invest.   And clearly this is an aspect of the wedge driven through society which Henry George described 130 years ago, driving some up and the vast majority down.

The wealthiest among us own, and take opportunities increase their holdings of, the corporations -- public and private -- which hold our best land (urban, oil-laden, etc.) and our non-renewable and/or otherwise finite natural resources.  (See "stock ownership" in the tag cloud at left for the data.)  We praise them as if they are somehow self-made, and let them parade about as such, and we gratefully accept their charity -- tulips and swimming holes on Park Avenue -- as if it made up for what they and their ancestors stole from us and ours, and what their children will reap from the labor of our children.   We don't see the structures by which they do it -- we're so used to them that they are, like the air we breathe, invisible to us.   But 120 years ago, most Americans did understand them.  (Explore the free NYT archives, 1880 to 1900, for the name of Henry George, and do some reading.  I suspect even the American history and American Studies majors will be surprised.)

 

FIRE Sector Strikes Again: Resale Fees That Only Developers Could Love

Resale Fees That Only Developers Could Love - NYTimes.com.

What a story!  The developers of some subdivisions have slipped into their covenants a 1% resale "commission" which anyone who sells a property they developed must pay them ... not just once, but at every transaction for 99 years!    How's that for a tax imposed by the private sector?   Here are some excerpts from the article.

"But four months later, when a local television reporter was doing a story on housing taxes in their subdivision, the Dupaixs discovered that their sales contract included a “resale fee” that allows the developer to collect 1 percent of the sales price from the seller every time the property changes hands — for the next 99 years. ....

A growing number of developers and builders have been quietly slipping “resale fee” covenants into sales agreements of newly built homes in some subdivisions. In the Dupaix contract, the clause was in a separate 13-page document — called the declaration of covenants, conditions and restrictions — that wasn’t even included in the closing papers and did not require a signature.

The fee, sometimes called a capital recovery fee or private transfer fee, has been gaining popularity among companies that have been frantically searching for new ways to gain access to cash in the depressed housing market. ...

Freehold Capital Partners, a real estate financing firm founded by the Texas developer Joseph B. Alderman III, has been leading the charge. According to William White, Freehold’s chief operating officer, the firm has signed up more than 5,000 developers who are adding the covenant to developments worth hundreds of billions of dollars that will be built out over the next decade in 43 states.

Many developers see the resale fee as a creative way to get new financing. They are hoping to one day use the trickle of cash from these fees as collateral for a loan, or to get cash up front if pools of the fees are packaged into securities to be bought and sold on Wall Street. Freehold has begun shopping the idea of securitizing the resale fees, much as subprime loans were packaged and sold to investors.

Someone selling a home for $500,000, for example, would have to pay the original developer $5,000. If the home sold again two years later for $750,000, the second seller would have to pony up $7,500 to the developer, and so on. Even if a home declines in value, the seller still must pay the 1 percent fee. Freehold gets a cut of the resale fee; if the fees are securitized, it retains a percentage of the cash generated from the securitization.

Freehold’s principals and lawyers have been aggressive in sales pitches to developers, but have declined to give details on their clients, securitization efforts or the company itself. Freehold moved its corporate office from Round Rock, Tex., to New York this year as it stepped up efforts to securitize the resale fees.

Mr. White characterizes the resale fee as a win-win deal for the developer and the home buyer. The fees let developers spread out the cost of building the roads, utilities and other infrastructure across all homeowners in a subdivision, rather than just the initial buyers. As a result, he said, the developer can lower the initial price of a home to the first buyer.

For example, he says, a typical $250,000 home may be able to sell for about $5,000 less. “The fee is a fair and equitable way to spread development costs, and results in lower costs to the average consumer,” Mr. White says. ...

Jeff Moseley, founder of Badger Creek Development in Brunswick, Ga., says he signed up with Freehold after watching his business tank with the economy. “I can’t sleep at night,” he says, adding that he had laid off all 32 of his employees.

He is hoping Freehold’s resale fee program will breathe new life into his business. “I thought it was an intriguing and compelling story,” says Mr. Moseley, who owns two development projects, encompassing about 220 lots.

Under his deal with Freehold, he will get about two-thirds of the revenue from the securitized fees while Freehold and other parties will get one-third. ...

A COALITION of real estate trade groups, including the National Association of Realtors, the American Land Title Association and the Center for Responsible Lending, opposes resale fees and is lobbying federal and state authorities to ban them.

“The idea that someone who has no ownership stake or interest can continue to collect revenue off of a property that they may have built up to 99 years ago exploits an already complex transaction and doesn’t pass the smell test,” says Justin Ailes, director of government affairs at the land title association. The fee could hurt real estate values in the future if buyers are reluctant to purchase properties that have a 1 percent fee attached. ...

The Federal Housing Finance Agency is considering a proposal to prohibit the transfer fees on all mortgages financed by Fannie Mae, Freddie Mac and the Federal Home Loan Banks. And 17 states have either banned or placed conditions on the practice.

Some bankers say Freehold will have a tough time selling the idea to Wall Street. The uncertain economy and housing market have made it next to impossible to predict when and how often a home will sell, or where home prices are headed — information that is needed to estimate cash flows to value the securities.

And some worry that an all-out ban of resale fees by states or the federal government could make the securitized paper worthless.

Dave Ledford, a senior vice president at the National Association of Home Builders, says he’s not sure Freehold can deliver on its big promises. “It’s almost in the category of ‘too good to be true,’ ” Mr. Ledford says.

Mr. White dismisses the criticism as sour grapes. He contends that Realtors oppose the fee because homebuyers might pressure them to lower their commissions to offset it. “Apparently 6 percent to a Realtor is justified, yet 1 percent to pay for roads and utilities isn’t,” Mr. White says. He says he believes title companies are worried that they might face legal claims if they miss the fee during a search.

 

LVTfan here: 1% to pay in 2050 or 2090 for roads built in 2010?   Right ....  Tell us another one.

See also http://www.wealthandwant.com/docs/Gross_Rent.html  Rent-seeking is alive and well -- and these folks are reaping what they didn't sow -- and won't sow.   It doesn't come out of thin air.  It will come out of the pockets of future owners and users of the property.

Shouldn't we-the-people -- the public sector -- get that benefit?

This seems a bit like the Baltimore land rent story: private parties getting to collect value today, in return for someone paying a bit less 50 or 100 years ago to buy a house. 

And both situations ignore what those who have read Henry George know: that land rent ought to be used by the commons to finance our common spending, not privatized by any individual or corporate entity.

Little people pay the taxes ... and we're paying to the wrong parties.  When private entities get to collect what we-the-people create, there's something badly wrong with the structure.  It forces us to rely on sales taxes, wage taxes, building taxes, and other taxes which burden the economy and steal from those who produce in order to enrich those who speculate in land value.

Wise states will implement the legislation necessary to wipe out such structures.

Housing Choice - Help Today’s Owners or Future Buyers?

Housing Choice - Help Today’s Owners or Future Buyers - NYTimes.com.

Here are the opening paragraphs:

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.

Which side are YOU on? 

Small Investors Flee Stock Market Even as Companies Recover

Small Investors Flee Stock Market Even as Companies Recover - NYTimes

I wonder to what extent this is a matter of people drawing down their holdings in order to live on them. 

From the FRB's Survey of Consumer Finances, here's the distribution of stock ownership in 2007 (Total value: $4.598 trillion): 

• Top 1%:      51.9%
• Next 4%:    30.5%
• Next 5%:      8.0%
• Next 40%:     9.0%
• Bottom 50%: 0.6%

And here's the distribution of mutual fund ownership (outside of retirement assets).  This includes stock and bond and REIT funds, but does not include money-market funds.  (Total value: $4.093 trillion.)

• Top 1%:      46.7%
• Next 4%:    30.9%
• Next 5%:    10.3%
• Next 40%:   11.6%
• Bottom 50%: 0.4%

Retirement assets -- IRAs, 401(k) accounts, etc -- (total value $8.905 trillion)

• Top 1%:       14.5%
• Next 4%:      28.0%
• Next 5%:      16.9%
• Next 40%:     36.7%
• Bottom 50%:   3.8%

Aggregating these three categories (total value $17.595 trillion)

• Top 1%:      31.8%
• Next 4%:     29.3%
• Next 5%:     13.1%
• Next 40%:    23.6%
• Bottom 50%:  2.2%

Here are the dollars, so that the relative amounts each quantile holds in each category can be compared.  Recall that the article's title speaks of "small investors."

Holdings of Selected Assets by Net Worth Quantile, 2007 billions of dollars
		Total	Bottom 50%	Next 40%	Next 5%	Next 4%	Top 1%
08	STOCK	4,597.5	29.8	412.3	368.7	1,402.1	2,384.6
09	NMMF	4,093.0	15.2	475.3	423.3	1,266.6	1,912.5
10	RETQLIQ	8,904.6	338.0	3,272.1	1,508.9	2,490.8	1,294.8
32	combined	17,595.1	383.0	4,159.7	2,300.9	5,159.5	5,591.9
	distribution	100.0%	2.2%	23.6%	13.1%	29.3%	31.8%
07	BOND	1,070.5	0.2	16.4	51.7	333.9	668.2
Source: Federal Reserve Board's Survey of Consumer Finances, 2007, behind tables at http://lvtfan.typepad.com/lvtfans_blog/ americas-wealth-distribution-2007-wealth-concentration-part-1- of-3.html Note: this understates the holdings of the top 1%, since the Fortune 400 families are excluded from the SCF. See Ponds & Streams.

Here are some excerpts from the NYT article. I wonder how "small investor" is defined.  Does it mean all individuals, as opposed to foundations, pension funds, university endowments and the like?  Does it mean those in the bottom 95% of the Net Worth distribution, who own just 40% of the value held by households?

Investors withdrew a staggering $33.12 billion from domestic stock market mutual funds in the first seven months of this year, according to the Investment Company Institute, the mutual fund industry trade group. Now many are choosing investments they deem safer, like bonds.

If that pace continues, more money will be pulled out of these mutual funds in 2010 than in any year since the 1980s, with the exception of 2008, when the global financial crisis peaked.

Small investors are “losing their appetite for risk,” a Credit Suisse analyst, Doug Cliggott, said in a report to investors on Friday.

One of the phenomena of the last several decades has been the rise of the individual investor. As Americans have become more responsible for their own retirement, they have poured money into stocks with such faith that half of the country’s households now own shares directly or through mutual funds, which are by far the most popular way Americans invest in stocks. So the turnabout is striking. ... 

To be sure, a lot of money is still flowing into the stock market from small investors, pension funds and other big institutional investors. But ordinary investors are reallocating their 401(k) retirement plans, according to Hewitt Associates, a consulting firm that tracks pension plans.

Until two years ago, 70 percent of the money in 401(k) accounts it tracks was invested in stock funds; that proportion fell to 49 percent by the start of 2009 as people rebalanced their portfolios toward bond investments following the financial crisis in the fall of 2008. It is now back at 57 percent, but almost all of that can be attributed to the rising price of stocks in recent years. People are still staying with bonds.

Another force at work is the aging of the baby-boomer generation. As they approach retirement, Americans are shifting some of their investments away from stocks to provide regular guaranteed income for the years when they are no longer working.

And the flight from stocks may also be driven by households that are no longer able to tap into home equity for cash and may simply need the money to pay for ordinary expenses. ...

Fidelity reported that hardship withdrawals and loans from 401(k) accounts in their custody are up.  But as one commenter pointed out,

Hardship withdrawals are truly an indication of economic distress.

Loans? I don't think so. When buying a new car to replace my 10+ year old car, I took out a 401(k) loan instead of going to the bank. I'd rather pay interest to myself and guarantee myself a 4.5% (or so) return on the 401(k) funds I took out.

I'll bet you that lots of people are resorting to 401(k) loans for similar reasons, and that the growth in loans has something to do with the difficulty in getting any kind of credit today.

His strategy makes sense to me.  4.5% is a whole lot more than money markets are paying, and less than one pays for a car loan.

Fidelity also reported that the average 401(k) in their custody was worth $61,800.   It would be interesting to know the median value.  I'm guessing it might be about 75% of the average.

Why were resources expunged from neo-classical economics? | Martin Wolf's Exchange

Why were resources expunged from neo-classical economics? | Martin Wolf's Exchange

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.  

Here is his response, posted 7/23:

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 people?

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 challenges.

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.

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!

Risks and Rewards, and our Best and our Brightest

Doctor and Patient - How Good Are Foreign-Trained Doctors? - NYTimes.com (titled "When the Doctor Doesn't Look Like You" online)

This article provides an interesting look at the medical profession in the US.   It reports a study which concludes that foreign-born, foreign-trained doctors are at least as effective as American-born, American-trained doctors. Foreign-trained doctors represent 25% of all practicing physicians.  The article  suggests that American-born, foreign-trained doctors may not be quite as effective.

The article says that international graduates "now account for nearly 30% of primary care doctors, a specialty that has had increasing difficulties attracting American medical students."

The study, of 240,000 patients hospitalized with either congestive heart failure or heart attack, found that board certification and, interestingly, fewer years since med-school graduation led to better results:

Dr. Norcini and his co-investigators also found that patient mortality rates were related to the doctor’s board certification and time since medical school graduation, regardless of his or her background. Those physicians in the study who were board-certified had substantially lower death rates among their patients. And the greater the number of years since medical school graduation, the more likely that doctor was to have a patient with heart attack or congestive heart failure die in the hospital.

“If you put these two pieces of data together,” Dr. Norcini said, “they make a strong argument for board certification and the maintenance of certification programs currently being put in place to improve the periodic reassessment of board-certified doctors.”

Here's what I posted to the related NYT blog:

What a shame it is that America’s best and brightest no longer flock into medicine and basic research, and instead head for the highly-rewarded and risk-socialized FIRE sector — Finance, Insurance and Real Estate.

We no longer reward doctors as heavily, and we expect them to bear more of the risk when treatments don’t unfold ideally.

And then we draw from foreign countries the people who could make a tremendous difference in their homelands, both in their role as doctors and as human beings and educated citizens.

Joe Stiglitz made a comment in Queensland a couple of weeks ago about the FIRE sector: “The financial sector (the banks and regulators) are the culprits behind the global financial crisis which has crippled the global economy. Apparently, moneylenders have been skimming 40 percent of the profits from companies that actually make and produce things. His big point was that this is not really the role of the financial sector. The financial sector’s job is to support economic growth, not cripple it.

“Finance is a means to an end,” he said. “The lack of balance between the financial sector and the economic sector was actually the real problem in this economic crisis (NOT the real estate bubble).”

When the FIRE sector gets to skim 40% of whatever producers make, why should our best and brightest go into medicine?

For all sorts of reasons, we need to reign in this reaping-what-others-sow structure.

When we stop socializing the risks taken by the financial sector while permitting them to privatize the rewards (think about hedge fund managers who pay only 20% federal income tax on their multi-multi-million wages, about all the entities we bailed out which paid high bonuses to their employees) and change the structures which require doctors to practice defensive medicine and carry expensive malpractice insurance, we'll have a healthier population and a healthier economy.  In the meantime, we're all sharecroppers.

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.

David Stockman - Four Deformations of the Apocalypse

Op-Ed Contributor - Four Deformations of the Apocalypse - NYTimes.com.

It is not surprising, then, that during the last bubble (from 2002 to 2006) the top 1 percent of Americans — paid mainly from the Wall Street casino — received two-thirds of the gain in national income, while the bottom 90 percent — mainly dependent on Main Street’s shrinking economy — got only 12 percent. This growing wealth gap is not the market’s fault. It’s the decaying fruit of bad economic policy.

I am sometimes amazed by the extent to which people who I wouldn't expect to speak to the issues that matter to ordinary people actually publish something relevant.  David Stockman said something I didn't expect to hear from something in his party.

The four deformations:

IF there were such a thing as Chapter 11 for politicians, the Republican push to extend the unaffordable Bush tax cuts would amount to a bankruptcy filing. The nation’s public debt — if honestly reckoned to include municipal bonds and the $7 trillion of new deficits baked into the cake through 2015 — will soon reach $18 trillion. That’s a Greece-scale 120 percent of gross domestic product, and fairly screams out for austerity and sacrifice. It is therefore unseemly for the Senate minority leader, Mitch McConnell, to insist that the nation’s wealthiest taxpayers be spared even a three-percentage-point rate increase.

More fundamentally, Mr. McConnell’s stand puts the lie to the Republican pretense that its new monetarist and supply-side doctrines are rooted in its traditional financial philosophy. Republicans used to believe that prosperity depended upon the regular balancing of accounts — in government, in international trade, on the ledgers of central banks and in the financial affairs of private households and businesses, too. But the new catechism, as practiced by Republican policymakers for decades now, has amounted to little more than money printing and deficit finance — vulgar Keynesianism robed in the ideological vestments of the prosperous classes.

This approach has not simply made a mockery of traditional party ideals. It has also led to the serial financial bubbles and Wall Street depredations that have crippled our economy. More specifically, the new policy doctrines have caused four great deformations of the national economy, and modern Republicans have turned a blind eye to each one.

• The first of these started when the Nixon administration defaulted on American obligations under the 1944 Bretton Woods agreement to balance our accounts with the world. ...

• The second unhappy change in the American economy has been the extraordinary growth of our public debt. ... 

• The third ominous change in the American economy has been the vast, unproductive expansion of our financial sector.   ... But the trillion-dollar conglomerates that inhabit this new financial world are not free enterprises. They are rather wards of the state, extracting billions from the economy with a lot of pointless speculation in stocks, bonds, commodities and derivatives.  ...

• The fourth destructive change has been the hollowing out of the larger American economy.

Reminds me a bit of something Joe Stiglitz said in Australia last week.

Stockman concludes:

The day of national reckoning has arrived. We will not have a conventional business recovery now, but rather a long hangover of debt liquidation and downsizing — as suggested by last week’s news that the national economy grew at an anemic annual rate of 2.4 percent in the second quarter. Under these circumstances, it’s a pity that the modern Republican Party offers the American people an irrelevant platform of recycled Keynesianism when the old approach — balanced budgets, sound money and financial discipline — is needed more than ever.

When are we going to turn our attention to creating a stable economy in which all of us can prosper -- those who do the basic work which needs to be done but doesn't required extended specialized training or long experience, as well as those whose education or training equips them for more specialized jobs?  We will continue to need farm workers, and janitors, and fast food workers, and dozens of other occupations, and it seems to me that we ought to favor a structure which makes a decent life possible for them as well as the more trained and educated.  When 1%, 5%, of us get such a large portion of the products of the total labor in this land, something is wrong.  The amount that is left to be divided among the other 99% or 95% is insufficient to properly compensate everyone for their labor.  A few are reaping what they didn't sow, and we maintain the impolite fiction that they somehow earned it.

And there ARE answers.  There ARE solutions.  I happen to think that the best solutions -- probably the only solutions, but I'll leave it to you to propose something better -- are likely to come from the thought associated with Henry George.  He was not original; he's part of a long continuum of people over many centuries who saw things similarly.  But he was perhaps the most eloquent, and, in his first book, Progress and Poverty, very methodical and thorough in laying out his analysis.  We, as 21st century people of good will, would do well to understand his analysis and argument, and see for ourselves whether we have a better answer to offer.

How to help the country recover from a financial earthquake » Ethical Economics » Shepheard-Walwyn Book Publishers

I'm going to take the liberty of quoting someone else's blog post in full.  (I don't know the author, though I suspect we might know some of the same people.)   This makes some points which overlap with something I posted a few days ago (see the post on Joe Stiglitz's talk in Queensland) about the financial economy.

Dear George Osborne: how to help the country recover from a financial earthquake by Adrian Hoare

George Osborne has invited the public’s views on what might be done to help the country out of its current financial crisis. It is to be hoped that he will seriously consider all that is suggested; he needs to be looking out for ideas that are different from those that have hampered genuinely sustainable economic development for decades. He would do well to bend his eye in the direction of the taxation system; not to see if a little tweak here and there might increase revenue without too much pain but to look at the fundamentals.

We do not design road vehicles with unround wheels but we have an economy with comparably unsuitable features. The only circular motion is in those ideas that set off in promising directions, only to return to their starting point.

In 2007 we suffered a financial earthquake. It would be foolish in the extreme to rebuild our economy upon the same foundations whose weakness led to the catastrophe. The banks were blamed and they were certainly very irresponsible. So too were the government(s) who failed to impose sufficiently robust regulations on them, to prevent them from their own stupidity. It is said that the banks could not be allowed to fail because they are vital to the economy. The logical argument following from that is that the banks should be nationalised or at least kept under close regulation, however much they howl about it.

It is openly admitted that there is a financial economy and a real economy. Something is wrong there. Without a real economy there would be no need for banks.

The banks’ blunders, serious though they were, could hardly have happened were it not for the existence of a market in land values, popularly and grossly inaccurately referred to as the property market. In the same way that land itself is fundamental to our very being, so the operation of the land values market is the basis of our economy. Every economic activity involves land (that is, all natural resources) directly or indirectly.

If conventional thinking on economics continues to determine policy, we shall be in the doldrums for years. There is an alternative: Land Value Taxation (LVT). This has the twin merits of requiring all occupiers of land to pay an annual fee (tax, if you like) for their security of tenure, and at the same time, raising revenue for government.

Shifting taxes off enterprise and effort onto LVT would improve Gross Domestic Product (GDP) by a very substantial margin. If we were to opt for LVT now, we could pass through the doldrums rather more quickly. That ought to appeal to our coalition government, which must need all the help it can find to keep the cynical, prowling media off its back. The government needs to show that its coalition works and LVT is the tool to prove it.

 

Many people in the UK will already be suffering varying degrees of financial ‘discomfort’ through no fault of their own as a result of 2007. Quite clearly some new thinking is called for in the unprecedented situation that has been foisted upon us. Faith in and respect for government has diminished to a frightening extent over the past two or three decades. The standard of political leadership must to be raised, to restore confidence in the institutions that have so much control over our lives. A constructive dialogue between government and people, by whatever channels, could be a good starting point.

We in the US "would do well to bend [our] eye in the direction of the taxation system; not to see if a little tweak here and there might increase revenue without too much pain but to look at the fundamentals."

The Buyout of America: How Private Equity Will Cause the Next Great Credit Crisis, by Josh Kosman

The Buyout of America: How Private Equity Will Cause the Next Great Credit Crisis, by Josh Kosman « Econamici.

Polly Cleveland posted a fine piece by Josh Kosman, which I commend to your attention.  It provides a concrete example of something Joe Stiglitz described in his talk at the University of Queensland last week:
 

The financial sector (the banks and regulators) are the culprits behind the global financial crisis which has crippled the global economy. Apparently, moneylenders have been skimming 40 percent of the profits from companies that actually make and produce things. His big point was that this is not really the role of the financial sector. The financial sector's job is to support economic growth, not cripple it.

"Finance is a means to an end," he said. "The lack of balance between the financial sector and the economic sector was actually the real problem in this economic crisis (NOT the real estate bubble)."

Kosman's article won't take long to read.  But it gives a good sense of one of the reasons why wealth is concentrating in America, and the extent to which the legitimate interests of ordinary working people are being subordinated to the privileges of our wealthiest.

Joe Stiglitz: the people are being cheated and the economy is getting poorer

Joe Stiglitz made some important observations in a talk on July 26 at the University of Queensland.  Here are the first few paragraphs from an article on the University's website:

Inadequate taxes on mining means the people of Australia are being cheated and the economy is getting poorer, a Nobel Prize-winning economist told a crowd of 1400 people at The University of Queensland last night.

Professor Joseph Stiglitz shared his thoughts on the proposed mining tax in response to a question from an audience member during the seventh UQ Centenary oration.

“Natural resources lead to an appreciation of the currency and that leads to an imbalanced economy because it's hard for any other sector to do well, competing with imports or exporting,” Professor Stiglitz said.

“You're selling off your assets and in many cases you're selling them off at a very low price.

“If you are taking resources out of the country and you are not reinvesting those resources in one way or another – a stablisation fund, human capital, infrastructure – then your economy is getting poorer, not richer, and a good accounting framework can show that,” he says.

“When you're taking out natural resources from an economy you ought to have a subtraction from GDP - a firm that held a resource and was selling it off would take off depreciation and that would show up in its books as depreciation.”

A bit of searching returned another account of that same evening:

Professor Stiglitz told a packed UQ Centre that Australia's economic stimulus package was the best designed in the world.

AND he said natural resources - coal, iron ore - should be properly valued at market just like the electromagnetic spectrum.

The government auctions the spectrum to the highest bidders who want to operate mobile phone networks, cable companies, television and radio stations. 

Basically, a country - like Australia - will end up poor if doesn't get the best price for its assets - and natural assets are not renewable, once they are gone they are gone. If the proceeds from the sale of these assets are not invested in infrastructure to support and grow other sectors the economy (manufacturing and value-adding, goods creation) then a country and it's people will not prosper - HELLO! HELLO! Drowning not waving.

"It should be subtracted from Gross Domestic Product (GDP)," he said. "You are selling off assets at a very low price if you don't have adequate taxes on mining - you are being cheated," he said to audience applause.

He thinks resources should be auctioned off to the highest bidder - the free market at work. Of course, the mining industry will make all kinds of threats.

To everyone's amusement he joked about how mining companies bamboozled, threatened and bribed governments of developing, fragile nations. 

"I assume that's not the case in Australia," he mused.

To prosper, a country needs to set up a stabilization fund (from a mining tax, if not a resources auction) for nation building.

This is what he calls an investment fund for building infrastructure and to grow value-adding industries, maintain education, job creation.

Not only that but the sell-off of natural resources should appear on a country's accounts as a kind of depreciation of assets - otherwise the accounts are not accurate. ...

He made these comments at the end of the oration after he explained the difference between the financial sector and the economy - the economy is not the financial sector.

The financial sector (the banks and regulators) are the culprits behind the global financial crisis which has crippled the global economy. Apparently, moneylenders have been skimming 40 percent of the profits from companies that actually make and produce things. His big point was that this is not really the role of the financial sector. The financial sector's job is to support economic growth, not cripple it. 

"Finance is a means to an end," he said. "The lack of balance between the financial sector and the economic sector was actually the real problem in this economic crisis (NOT the real estate bubble)."

The second account concludes with:

And as for Climate Change and the price of carbon and waiting for the rest of the world before we do anything?

Economies are not restructuring because there is no carbon price. The western world worries about the growing and changing consumption patterns of China and India.

Professor Stiglitz doesn't believe the West should begrudge them at all.

It's not consumption that's evil - it's profligacy. WASTE! Now, I wonder who wastes more the West or countries raising people out of poverty?

India and China will follow the wasteful ways of the West if the world fails to set a carbon price and force everyone to consume less to save the planet - the planet will force us to change in the end (*he says).

"If we had agreed to have a price on carbon at Copenhagen that would have been the answer," he said. "It would have provided an increase in global aggregate demand (global economic spending) as firms all over the world needed to retrofit (their business to meet pollution standards)."

So why is the US not hearing this advice?   There is a lot here that speaks to issues which Americans would be wise to attend to.   Alaska pays for a large portion of its costs by taxing its natural resources, and also provides an annual income to every permanent resident, of any age, from the proceeds of investing oil revenue into a broadly diversified portfolio, through the Alaska Permanent Fund.   We have sacrificed many American lives in Iraq, but not produced a situation in which Iraq's oil revenue gets used either to finance infrastructure and government-provided services OR to provide an income to every citizen.

Re-read these excerpts with Iraq in mind, and then thinking of Afghanistan, and then of America.

Postscript:  see also Karl Fitzgerald's account of Stiglitz's 7/30 talk.

William Allan's Landlord's Prayer

I've found a longer version of a Landlord's Prayer which Henry George published in The Standard (late 1880s, or early 1890s).  This one was reprinted in December, 1920 in an IBEW publication, and is sourced there to the Dundee People's Journal.

LANDLORD'S PRAYER.
(By William Allan.)
Lord, keep us rich and free from toil
For we
Are honored holders of thy soil,
Which democrats would fain despoil
With glee.
O Lord, our fathers got the land
For serving men whom Thy right hand
Had chosen to be great and grand,
As kings.
Tho' taken by stealth, we're not to blame;
Thou knowest, O Lord! it is a shame
To say to us of titled name
Such things.

Lord, let us live in wealth's content
And peace;
Lord, we are by Thy mercy meant
To rule mankind and make our rent
Increase.
The birds that hunt the moors and hills,
The fish that swim in streams and rills,
The beasts that roam as nature wills,
We own.
E'en Lord, the minerals that lie
Beneath the earth's periphery
Belong to us -- Thou knowest why
Alone.

Lord, on the rugged rabble frown,
For they
Are foes to us, Thy church and crown;
Lord, bare Thine arm and grind them
down
To clay.
O Lord, our God! we make their laws,
Which they reject with wild applause;
Be Thou a buckler to our cause
And caste.
They scorn our love, Thy name and word,
They reverence neither squire nor lord;
Lord, them consume with fire and sword
At last.

Lord, they are poor and ignorant,
And worse.
Compared with us, how different
In manner, garb, and lineament,
And purse!
Lord, never let them get or see
The power which lies in unity.
Keep us apart from them -- for we
Are men.
Protect us from their greedy hands,
Protect us from their vile demands,
Protect us in our wealth and lands,
Amen, amen!

--Dundee People's Journal.

New plan to make millions in profits without any investment - PakTribune

New plan to make millions in profits without any investment

A standing google alert on the "Roosevelt Hotel" in NYC brought me this article on another way for the foreign owner of this excellent acre in Manhattan to make money without selling the site.  It suggests that this method might be quite profitable for a number of individuals in that country's government. 

The back story, as I've gleaned it, is contained in some earlier posts to this blog.

The article slightly mis-states the situation.  It is not the Roosevelt Hotel which is worth $300 to $400 million; rather, it is the ground under the hotel, which is a well-located full-block, roughly an acre, in midtown Manhattan.  Estimates of its value a few years ago, as a tear-down, ranged from $400 million to $1.2 billion.  When the real estate market went soft, it was clear that waiting a few years for it to revive would be quite profitable.

This article, though, suggests that a lot of individual politicians stand to make individual profits through a different strategy.

Remember what Leona Helmsley told us:  "WE don't pay taxes.  The little people pay taxes."    The little people's taxes provide the services which make this acre worth $400 million.

What an Estate Looks Like to the Taxman

What an Estate Looks Like to the Taxman - NYTimes.com.

But where does that dynastic plutocracy begin? There is an astronomical gap between Mr. Buffett’s fortune, which Forbes estimated at $47 billion, and two retirees in Marin County, California, whose life’s work might have allowed them to leave their heirs $3.5 million in assets, mostly in the value of a house.

Oh, I was so pleased to read someone expressing it so clearly.  Tell me about that house in Marin County.  Let's see.  Let's say our retirees bought it in, say, 1980, for, say $200,000.  They probably put down 10% or 20% in those days (borrowing standards were a little different then).   Let's say that they had a mortgage for, say $160,000, at 8%.  They finished paying it off last year.  The monthly mortgage payment was $1,174. Over the course of 30 years, they paid off $160,000 of principle, and paid the lender about $266,000 in interest.  To rise from the $200,000 purchase price to today's value of $2 million, the average annual appreciation was about 8.3%.  Obviously, some years it was more, some less.  But 8.3% is an average.

What the paragraph quoted doesn't explain is how our hard-working retirees caused their property to appreciate by 8.3% per year over 30 years. 

The reality is that houses depreciate.  What rises in value is the land, and it rises for reasons which have nothing to do with the individual landholders, or even all the landholders in aggregate.  Land appreciates as a result of the presence and growth of population and a healthy economy; as a result of the public provision of goods and services which people value and which make a community or state a better place to live.  Advances in technology can also contribute to increases in land value -- consider elevators in cities, air conditioning in the American south, fiberglass boats in waterfront communities.

Our retirees experienced an 8.0% average annual growth in the value of their residence.  Paying off their mortgage raised their equity by the $160,000 they originally borrowed. Appreciation, provided by their community and their nation, provided $1,800,000 -- over 10 times as much!   Their hard work paid the mortgage, but their community contributed FAR more.

But, you might argue, they did pay property taxes all those years.  Yes.  Under Proposition 13, their property tax is based on 1% of the assessed value of the property, and the assessed value of the property can only rise by 2% per year, no matter how much the market value has risen.  Voters can approve additional payments in the form of parcel taxes, which might bring taxes up to perhaps 1.25% of the assessed value of the property. 

At 1.25%, over those 30 years, our hardworking Marin retirees have paid in $109,514 in property taxes.   The rest of their "hard-earned"  appreciation comes from

• the scarcity of housing close to California's cities, compared to the number of people who would like to live close in;
• spending supported by taxes on sales and wages -- which come not only from their own pockets but from the pockets of the 50% of California residents who are renters because they can't afford to buy;
• federal dollars spent on California infrastructure
• effects created by changes in mortgage interest rates and mortgage lending policies, including loan-to-value ratios, underwriting standards related to income ratios, etc.

Does it seem churlish to collect back a portion of the value we-the-people have created once per generation?  We'd be much wiser to collect it year-in and year-out, in the form of a tax on the value of the land itself, and let our workers keep their wages and not pay taxes on their purchases or homes.

Does it seem churlish that the Marin retirees' children should not be entitled to keep all that value we-the-people created just as if the retirees had created it themselves?  After all, other people's children, including those of tenants, don't get to keep that value, but they've contributed to creating it.

A 15% capital gains tax on the $1,800,000 somehow seems an insufficient share for the commons.  Even a 50% estate tax seems a bit insufficient, too.

This is trickle-up economics at work, and saying that some of it trickles to people we might consider middle class doesn't change the fact that some grow wealthy in their sleep, while others simply grow poor despite working hard for decades.   The two situations are not unrelated.   (And a $3.5 million estate doesn't fall into most definitions of middle class in America.)

Is Our Tax System Helping Us Create Wealth?

tax.com: Featured Articles: Is Our Tax System Helping Us Create Wealth?.

This article, by David Cay Johnston, is at least a few months old, and I didn't see it when it first came out.  I did see a blog post which referred to it, and quoted some passages of it.  Here are the ones which caught my eye then: 

Without a doubt, the much lower tax rates at the top encouraged people to realize more income in the tax system. And if the only measure is that some people made more, then this would be a good.

But let’s ask the question that the classical economists would have asked back when they were known as moral philosophers and their leaders spoke of policies that benefited the majority. Let’s go back to a time before Vilfredo Pareto’s observations began what is the overwhelmingly dominant orthodoxy today, neoclassical economics with its focus on gain.

What is the social utility of creating a society whose rules generate a doubling of output per person but provide those at the top with 37 times the gain of the vast majority? ...

Is a ratio of gain of 37 to 1 from the top to the vast majority beneficial? Is it optimal? Does it provide the development, support, and initiative to maximize the nation’s gain? Are we to think that the gains of the top 398 or 400 taxpayers are proportionate to their economic contributions? Does anyone really think that heavily leveraged, offshore hedge fund investments are creating wealth, rather than just exploiting rules to concentrate wealth, while shifting risks to everyone else?

Under the overwhelmingly dominant economic theory of today, this is all good. Pareto argued that if no one was harmed, then all gain was good.

Carried to an extreme, neoclassical economics would say that if the bottom 99.9999997 percent had the same income in 1961 and 2006, and all of the gain went to the one other person in America, that would be a good. ...

Is our tax system helping us create wealth and build a stable society? Or is it breeding deep problems by redistributing benefits to the top while maintaining burdens for the rest of Americans?

Think about that in terms of this stunning fact teased from the latest Federal Reserve data by Barry Bosworth and Rosanna Smart for the Brookings Institution: The average net worth of middle-income families with children whose head is age 50 or younger, is smaller today than it was in 1983.

But the original has some other important things to say.  It begins,

Imagine that all you had to live on was the amount of tax you saved in your best year because of the many tax rate cuts Congress has put in place since 1964, when President Johnson signed into law the Kennedy tax cuts.

For most Americans, living off income tax savings would mean starvation. Their income tax savings have been minor, and when looked at over a long period, say since 1961, increases in payroll taxes have more than offset their slight income tax reductions.

But for the very few who have gained the most from living in the United States, the story is quite different. Their tax savings alone from a single year, invested to earn just 5 percent annually, would be enough to provide a lifetime income at nearly twice the income threshold for being in the top tenth of 1 percent.

That's a remarkable decrease for some very privileged folks!  Johnston goes on to compare what has happened with incomes at the very top of the scale between 1961 and 2006 with what has transpired for the bottom 90% of us.  The bottom 90% saw real income rise from $22,366 to $31,642 (both in 2006 dollars).  At the 90th percentile, wages rose from $60,404 to $104,440.  DCJ goes on to make some points which Elizabeth Warren and Amelia Tyagi made in "The Two Income Trap:"

That tiny increase in pay does not represent a real increase in wages, only total income. That is because in the middle of that 45-year era, a profound transformation took place in America.

In 1961 most families lived on one income, maybe supplemented by some part-time work by the wife for what was quaintly known back then as "pin money." Now two-income households are the norm.

The overall wealth of America grew and grew during this era. GDP, adjusted for inflation and increased population, was up 227 percent. But wages and fringe benefits did not grow with the economy. For most workers, they fell. Wages peaked way back in 1972-1973, were on a mostly flat trajectory for more than two decades, rose briefly in the late 1990s, and then fell sharply in the new century. Airline pilots have seen their 1990s income cut by more than half; some union factory workers have seen their pay slashed by two-thirds. Millions are out of work, and the jobs they once held are gone and are not coming back. And even if the Great Recession is coming to an end, we face years of jobs growing more slowly than the working-age population, which could radically transform America's culture, work ethic, and sense of progress.

In 2006 families worked on average about 900 more hours than families did in the 1960s and early 1970s. That is a roughly 45 percent increase in hours worked accompanied by a 41 percent increase in total income.

For many, the reality is that two jobs produce the same or a smaller after-tax income than just one job did three and four decades ago.

Compare that to the top 400 taxpayers:

The average income for the top 400 taxpayers rose over the 45 years from $13.7 million to $263.3 million. That is 19.3 times more.

The income tax bill went up too, but only 7.8 times as much because tax rates plunged. Income tax rates at the top fell 60 percent, three times the percentage rate drop for the vast majority. And at the top, the savings were not offset by higher payroll taxes, which are insignificant to top taxpayers.

The average income tax rate for those at the top in 1961 was 42.4 percent. By 2006 it was down to 17.17 percent. Add on payroll taxes, and the 2006 rate is 17.2 percent, the same as rounding the income tax figure alone.

Readers of this site will know that I have no use for income taxes.  But until we shift to smart and just taxes, a sharply progressive income tax seems to me to be a better-than-nothing way to fund our common spending.

Johnson ends with this:

Is our tax system helping us create wealth and build a stable society? Or is it breeding deep problems by redistributing benefits to the top while maintaining burdens for the rest of Americans?

Think about that in terms of this stunning fact teased from the latest Federal Reserve data by Barry Bosworth and Rosanna Smart for the Brookings Institution: The average net worth of middle-income families, with children, whose head is age 50 or younger, is smaller today than it was in 1983.

In my humble opinion, DCJ isn't looking quite deep enough.  Our tax system -- federal, state and local combined -- is permitting those who own our most valuable common assets (land value and nonrenewable natural resources) to privatize their value, year after year, generation after generation -- and grow hugely wealthy and powerful -- and then merely taxing some of the income from them. 

The alternative?  Tax the annual value of those resources -- which are rightly COMMON property, provided by the Creator and by the presence of all of us and the spending/investment of the entire Community, not by individuals or corporations -- heavily (say, 90% or 95% of the annual value)  and reduce or even eliminate -- starting at the bottom -- the wage and interest and sales taxes and taxes on manmade improvements to land.   Think about the ramifications of that reform.  They're profound, and point in the direction of a healthier, more stable and more just economy.   Will the revenue generated be sufficient to fund all of today's public spending?  Probably not.  But

1. that's no reason not to shift our taxes off bad taxes onto good ones; and

2. we may find that with good taxes, things change enough that we no longer need to spend large amounts on the social safety net, because a vibrant economy with opportunities for all and a somewhat more equal distribution of income and of wealth and power permits the vast majority of us to be self-sufficient and prosperous.

The bottom 70% or so of us CAN'T save.  Large shares of our incomes are devoted to housing and transportation, and to all sorts of FIXED costs.   We can't increase our spending on other goods, and we can't save.   We have to fix that.  We have to do things which distribute the value of that which SHOULD be common, and end the privatization of value which ought to be common. 

Wealth Concentration, Income Concentration and the Economy

I came across an interesting paragraph in the January, 1887, issue of The Democrat, a British publication, which speaks to our 21st century economy:

The Rothschilds all over Europe are calculated to possess a yearly income of at least six millions. Suppose they spend only one million, laying aside five, what does this really mean? It means that they demand from the producers a tribute of six millions a year, not in goods, but in money; to raise this tribute-money, the producers have to sell six million pounds' worth of their productions in a market in which the Rothschilds purchase only one million's worth, having no requirements for more goods, their spending capacity, viz., their demand: for necessities and luxuries, not having increased so fast as their income. The producers — the people at large — cannot fill the gap by purchasing these remaining five million pounds' worth of goods, much as they need them, because they have to pay the proceeds of their labour as a tribute to the Rothschilds to the tune of £6,000,000 a year. Here, then, is the solution of the great problem, why goods are not saleable, why labour can find no employment, though the greatest need for goods exists.

It is attributed to Michael Flurscheim, a manufacturer in the Grand Duchy of Baden.

America's FIRE sector -- Finance, Insurance, Real Estate -- continues to harvest huge amounts of the production of American workers who are fussy enough to want a place to live.  They don't have sufficient cash to buy the land and structure outright, and 15-year mortgages have given way to 30-year mortgages, fixed rates to adjustable rates, 20% downpayments to 10% and 5% and less -- with private mortgage insurance -- and $8,000 tax credits often are the equity in a newly purchased home.    And the top few hundred employees of each behemoth pay themselves and each other awesomely high bonuses, on top of salaries which would alone place them in the top 1% of our income spectrum.  Our best and brightest students are drawn, not to medicine, or scientific research, or engineering, or production management, or any of a number of fields in which they could make a positive impact on the lives of their fellow human beings (and be comfortably compensated with opportunities for leaving their children well-situated as well), but into Finance and Consulting, where the goal is to suck the vitality out of productive companies and out of wage-earning individuals. 

The alternative?  It is remarkably simple.  So simple that "smart" people scoff at it.  It is also wise, and just, and efficient, and conducive to solving many of our most pressing -- and supposedly intractable -- social, economic, environmental and justice problems.

When 2+3=6, who is entitled to the "extra" 1?

When there is a benefit to be gained by people congregating in one area rather than spreading themselves out evenly over the entire area of a country such as America, who is entitled to that benefit?

Two people working together produce more than the sum of what they produce separately.  How should that surplus be divided? 

Should it be divided equally among the workers?  Should it be divided in proportion to the contributions of the labor of each worker?  Should it all go to the more able of the two workers?  Should it go to the fellow who owns the land on which they work?  Should it go to those who lent someone money to buy the land?  Should it be spent on things which make life more pleasant or work easier where they work?

Looters in Loafers - Krugman

More about what our best and brightest have been doing.  Are you old enough to remember the days when our b&b went into research, medicine, or engineering, or other roles in which they could put their talents to use for the benefit of their fellow human beings?  Krugman writes,

Sure enough, last week the Securities and Exchange Commission accused the Gucci-loafer guys at Goldman of engaging in what amounts to white-collar looting.

I’m using the term looting in the sense defined by the economists George Akerlof and Paul Romer in a 1993 paper titled “Looting: The Economic Underworld of Bankruptcy for Profit.” That paper, written in the aftermath of the savings-and-loan crisis of the Reagan years, argued that many of the losses in that crisis were the result of deliberate fraud.

Was the same true of the current financial crisis?

Most discussion of the role of fraud in the crisis has focused on two forms of deception: predatory lending and misrepresentation of risks. Clearly, some borrowers were lured into taking out complex, expensive loans they didn’t understand — a process facilitated by Bush-era federal regulators, who both failed to curb abusive lending and prevented states from taking action on their own. And for the most part, subprime lenders didn’t hold on to the loans they made. Instead, they sold off the loans to investors, in some cases surely knowing that the potential for future losses was greater than the people buying those loans (or securities backed by the loans) realized.

What we’re now seeing are accusations of a third form of fraud.

We’ve known for some time that Goldman Sachs and other firms marketed mortgage-backed securities even as they sought to make profits by betting that such securities would plunge in value. This practice, however, while arguably reprehensible, wasn’t illegal. But now the S.E.C. is charging that Goldman created and marketed securities that were deliberately designed to fail, so that an important client could make money off that failure. That’s what I would call looting.

Krugman concludes with,

The main moral you should draw from the charges against Goldman, though, doesn’t involve the fine print of reform; it involves the urgent need to change Wall Street. Listening to financial-industry lobbyists and the Republican politicians who have been huddling with them, you’d think that everything will be fine as long as the federal government promises not to do any more bailouts. But that’s totally wrong — and not just because no such promise would be credible.

For the fact is that much of the financial industry has become a racket — a game in which a handful of people are lavishly paid to mislead and exploit consumers and investors. And if we don’t lower the boom on these practices, the racket will just go on.

Perhaps if we make financial engineering less lucrative, some of the next generation of smart kids will find other ways to apply their talents.  They might even be able to grow the pie, instead of merely gobbling larger shares for themselves.

Hope rises for real financial reform - WaPo

How does wealth concentrate?  Let us count the ways ... Tell us again about the wonders of trickle-down economics, folks.  The trickle flows the other way: to the shareholders of our natural resources companies and the FIRE sector -- Finance, Insurance and Real Estate.  This article from the Washington Post gives some useful data.   $1 per gallon, going into the pockets of the oil companies and the too-big-to-fail speculating banks, and particularly their top "hired help,"  who are highly compensated whether or not their shareholders also make out well. 

(And if you've forgotten the statistics about stock ownership, read http://lvtfan.typepad.com/lvtfans_blog/2010/04/americas-wealth-distribution-2007-wealth-concentration-part-1-of-3.html and the data at the bottom of http://lvtfan.typepad.com/lvtfans_blog/2010/03/mason-gaffney-corporations-democracy-scotus.html and at http://lvtfan.typepad.com/lvtfans_blog/2010/01/farewell-to-c-lowell-harriss-professor-of-economics---dec-29-2009.html)

Harold Meyerson - Hope rises for real financial reform.

The Goldman Sachs scandal has done the unthinkable: It's made it possible that legislation reining in Wall Street's casino may actually be enacted.

The odds against real reform are still steep. Wall Street remains the most deep-pocketed lobby in the land. And the problem isn't just Republican opposition. "A lot of our members up here just want a bill passed," says one Democratic legislator. "They don't think that people are watching that closely. But this matters immensely to people. This is a which-side-are-you-on moment."

The clearest way for senators to demonstrate that they're not on Wall Street's side would be to support the bill that Arkansas Democrat Blanche Lincoln plans to bring before the Senate Agriculture Committee on Thursday. Going well beyond the bill that the House passed and the legislation that came out of Connecticut Democrat Chris Dodd's Senate Banking Committee, Lincoln's bill aims squarely at the big banks' most highly leveraged, profitable and risky-to-the-rest-of-us business: their trade in derivatives. (The Ag committee has jurisdiction because derivatives historically were used to trade commodities.)

Lincoln's legislation would require the firms that buy and sell derivatives -- 95 percent of such deals in the United States, according to the Comptroller of the Currency, are done by Goldman, Morgan Stanley, J.P. Morgan Chase, Bank of America and Citibank -- to do their trading openly on exchanges and to post some actual money behind their trades. Today, the market is unregulated. But if Lincoln's legislation passes, no longer would deals with the potential to threaten the nation's economic stability be invisible to regulatory agencies; no longer would businesses seeking to buy derivatives have to accept banks' terms with no ability to shop around or even ascertain the going price for such contracts. No longer would trades with foreign entities be exempt from regulation. And no longer would banks that our government backs up with deposit insurance and access to the Federal Reserve's discounted interest rates be able to put taxpayers on the hook for their speculative bets: They could either continue as derivative-trading casinos or as governmentally insured banks, but not both. In fact, Lincoln's bill goes a good deal of the way toward meeting Paul Volcker's proposal to remove banks' proprietary trading from the umbrella of federal protection.

On Tuesday, leaders of industries that actually need to lock in prices on real commodities -- in particular, oil -- went to the Senate to endorse Lincoln's bill.  "In 2008," said James May, president of the Air Transport Association of America, "we burned the same amount of fuel we burned in 2003, but we paid $42 billion more." The difference, he said, was the result of the vast increase in oil speculation carried on through derivatives. Over the past half-decade, for instance, the largest holder of home heating oil often has not been an energy company but, rather, Morgan Stanley. Such speculation, estimated Sean Cota of the Petroleum Marketers Association of America, has increased the cost of gas at the pump by about a dollar a gallon.

 "We need predictability in prices," Cota said Tuesday. "The banks want volatility. . . . Old-fashioned bonds built Hoover Dam, but they were paid off over many years. The banks are only interested in trades that pay off in the next 30 seconds. . . . They have no concern for the future of the larger economy."

Just another wealth-concentrating machine.  A $1 per gallon "tax" going to line the pockets of our smart and privileged, out of the pockets of ordinary working people.   And, by the way, any of those smart folks who die this year will be able to leave their estates to their heirs untouched by even "death taxes." 

There is no such thing as a free lunch.  Their windfall comes out of the pockets of the rest of us, not out of thin air.

Aren't markets wonderful?  I am reminded of the statement about neoclassical economists being rich peoples' useful idiots.

Crosby: God's Gift (a poem)

I came across a poem I thought worth sharing.  It comes from a book of poetry entitled "Broadcast", by Ernest Howard Crosby.

God's Gift

WHERE is my gift," said God, "that I gave to men—
The sun-wed, fruitful earth, with her freight of good
For all their wants? What mean these prayers for food?
Are there poor in a world which bursts with its golden stores?
Who are the few that dare to withhold from all My gift to all of the fruitful, sun-wed earth?"

And the few replied: "O, Lord, we give Thee thanks.
Thou gavest the earth to all, it is true, but lo!
Thy angels, Law and Order, who rule the world
When Thou art far away, have learned our worth,
And rightly bestowed on us Thine inheritance."

"I know them not," said God; "they are fiends from hell
That juggle thus with the gift that I gave to man.
I am never far away from the world I gave.
And now once more and forevermore I give
This fruitful earth anew to the sons of men.
Woe to the fiends who shall dare usurp my place!
Woe to the few who say that my gift is theirs!
Woe to the man who grasps his neighbour's land!"

It brings to mind several things I've read.  First, this passage from "Progress and Poverty" by Henry George:

We sail through space as if on a well-provisioned ship. If food above deck seems to grow scarce, we simply open a hatch -- and there is a new supply. And a very great command over others comes to those who, as the hatches are opened, are permitted to say: "This is mine!"

Second, two different versions of "The Landlord's Prayer" which I posted on this blog earlier:

from the Anglican Book of Common Prayer

A Prayer For Landlords

"The earth is thine, O Lord, and all that is contained therein; notwithstanding thou hast given the possession thereof to the children of men, to pass over the time of their short pilgrimage in this vale of misery.  We heartily pray thee to send thy holy spirit into the hearts of those that possess the grounds, pastures and dwelling places of the earth, that they, remembering themselves to be thy tenants, may not rack or stretch out the rents of their houses or lands; not yet take unreasonable fines and incomes, after the manner of covetous worldlings; but, so let them out to others that the inhabitants thereof may be able both to pay  their rents, and also honestly to live, to nourish their family and to relieve the poor.  Give them grace also to consider that they are but strangers and pilgrims in this world, having here no dwelling-place, but seeking one to come; that they, remembering the short continuance of their lives, may be content with what is sufficient, and not join house to house, nor couple land to land, to the impoverishment of others; but so behave themselves in letting out their tenements, lands and pastures, that after this life they may be received into everlasting dwelling-places, through Jesus Christ our Lord."

and from Henry George's newspaper, The Standard:

Lord, keep us rich and free from toil,
For we
Are honored holders of Thy soil,
Which democrats would now despoil
With glee.
O! Lord, our fathers got the land
For serving those whom Thy right hand
Had chosen to be great and grand
As kings.
Tho' ta'en by force, we're not to blame,
Thou know'st, O! Lord, it is a shame
To say to us - of titled name,
Such things.

Lord, let us live in wealth's content,
And peace!
Lord, we are by Thy mercy meant
To rule mankind, and make our rent
Increase.
The birds that haunt the moors and hills,
The fish that swim in streams and rills,
The beasts that roam as Nature wills,
We own;
E'en Lord, the minerals that lie
Beneath the earth's periphery
Belong to us! Thou knowest why

Alone.

And third, of a book entitled "Thy Neighbor's Landmark" which is online at http://www.whatwouldjesustax.com.

Crosby's poem is wonderful.   Perhaps we can explain a significant portion of the concentrations of wealth and income in the hands of a few:

And the few replied: "O, Lord, we give Thee thanks.
Thou gavest the earth to all, it is true, but lo!
Thy angels, Law and Order, who rule the world
When Thou art far away, have learned our worth,
And rightly bestowed on us Thine inheritance."

"I know them not," said God; "they are fiends from hell
That juggle thus with the gift that I gave to man.

It is time for a paradigm shift on housing

Well-paid economists are trying to figure out how we can back out of the situation our current set of incentives have created with respect to purchasing housing.  It used to be that a 20% down payment on a home purchase was standard, and one rented until one was able to save that amount and still have something left in the "rainy day fund."  Today, the concept of a rainy day fund is considered a quaint oddity, something it would be nice to have but which few seem to be able to attain, for the vast majority of Americans.  And 20% down payments are apparently fairly rare, not just for first-time buyers but for those purchasing "move-up" homes, unless one is moving from a part of the country where housing is expensive to a less expensive area.

20% down payments gave way to 10% down payments, which in turn gave way to 5% and 3% and no down payment, and then to 107% financing.  Homebuyer tax credits have been supplying the down payment for many people in recent months.  But how do we wean ourselves from this?

It is time to start thinking outside the box.  I don't yet see the full mechanics of the transition, but here's the thought process.

Houses do not rise in value.  Like cars and other mechanical things, they depreciate, year in and year out.   It is never worth more than what it would cost to construct today, less depreciation.  At some gut level, every homeowner knows it.  (And most renovation projects do not increase the value of a house by as much as they cost; the exceptions appear to be adding a 2nd bathroom to a house with only one, and adding a deck to the house.  Other renovations customize the house to the preferences of the current owners, which may be something quite different from what others would be willing to pay that amount for; there's nothing wrong with that, as long as owners do it with their own money.  A, say, $50,000 renovation might only increase the market value of the property by $25,000 or less.)

Let's think about what one buys when one buys a house.  First of all, with very few exceptions, one is buying the piece of land on which it is built.  (In a leased land situation, one does not buy the lot, but one may be buying the right to occupy it for the payment of some amount of ground rent to another party; the formula for the ground rent will affect the selling price.  In a condo or co-op situation, one is buying a part of a larger entity which usually involves owning the land.)  While this may be a surprise to those who have only owned land in the heartland of America, in many places the value of the land under the home represents more than half, sometimes far more than 75%, of the price of the home.  These are what used to be known as "high rent districts."  (You know the song, "New York, New York" -- "if you can make it here, you'll make it anywhere?"  Some of that is a reference to coping in a high-rent area.)

One is buying the house that sits on that lot, which might be quite new and technologically up to date, or quite old and, despite being well maintained, somewhat out of date.  One is also buying the right to replace that older building, subject to local zoning and other requirements, with something which better suits current market wants.  The existing structure may be quite usable, but if it is a cottage in the middle of a city block, the building itself may actually have a negative value: it will cost you something to tear it down and remove the debris.

Here's the part we need to think about.  The buyer pays the seller for the value of the land and for the value of the structure on it.   The seller, or someone in the chain of previous owners of that site, created the building on it.  But he didn't create the land value.  The community did.  The current owner, if he has owned it for more than a few years (a few months, in some places, even in 2010) has ridden the value up.  He might have put down a 10% down payment, and experienced a, say, 10% increase in the value of the total property, doubling his money.  In places where land is scarce or conditions are structured to discourage selling, he may have experienced a 50%, 100%, 150% increase in the value of the total property.  But remember that the house itself has been depreciating while he owned it, even if he has taken good care of it.   The seller is reaping something he didn't sow.  The buyer must borrow from a lender to pay him for it, and will be paying it off for the next 30 years of his life.

Suppose that we started recognizing the distinction between the land and the building on it, and set things up so that our buyers were buying the building and the right to the land under it, but instead of paying the seller for something the seller didn't create, would pay the community, year in and year out over the course of his ownership, the annual value of the lot.  In a place where land was quite valuable, that would be a lot of money each year -- more than local government needs, and enough to send some up to the state and federal governments, which have paid for the infrastructure in the highest-value cities.  In a place with little infrastructure and few services and no natural amenities, it would be quite little. Banks would lend some percentage of the value of the house itself, while recognizing that they're financing a depreciating asset.

Here's a quick and dirty table.  It hasn't caught the extremes at the top or bottom end, but perhaps it will help illustrate:

	House Value	Land Value	Land Share Real Estate Value	Land Rent at 5%	20% Down Payment	80%  Mortgage	(Annual) Mortgage Payment at 5%, 30Y	Property Taxes	Annual Carrying Costs	Annual Income Needed at 28%
Major coastal city	150,000	850,000	85%	$42,500	30,000	$120,000	$7,730	0	$50,230	$179,393
Major coastal suburb	150,000	600,000	80%	$30,000	30,000	$120,000	$7,730	0	$37,730	$134,750
Exurbs*	100,000	100,000	50%	$5,000	20,000	$80,000	$5,153	0	$10,153	$36,261
Beach	150,000	400,000	73%	$20,000	30,000	$120,000	$7,730	0	$27,730	$99,036
Ski Area	100,000	600,000	86%	$30,000	20,000	$80,000	$5,153	0	$35,153	$125,546
Midwestern city	100,000	200,000	66%	$10,000	20,000	$80,000	$5,153	0	$15,153	$54,118
Midwestern suburb	100,000	50,000	33%	$2,500	20,000	$80,000	$5,153	0	$7,653	$27,332
Rural	80,000	20,000	20%	$1,000	16,000	$64,000	$4,123	0	$5,123	$18,296
*beyond commuting distance, but perhaps weekend-accessible

Incidentally, you might be surprised to learn that construction costs don't vary all that much from one part of the country to another.  Based on costs in southern California, as 1.00, the range is from .73 in El Paso, .74 in Charlotte and Raleigh, .76 in Savannah, .77 in Montgomery, Jackson, St. Petersburg, .87 in Dallas, .91 in Boston, .95 in Seattle, 1.02 in Newark, 1.03 in New York City,  1.08 in San Francisco, to 1.29 in Anchorage and 1.44 in Honolulu.  And, according to the same source, economy construction for a 2000 square foot, 1-story home can be as little as $86psf, or $172,200 -- in southern California -- which would equate to $126,000 in El Paso.  "Luxury" construction on a 3,000 sf home would run $210 psf, or $630,000 in SoCal.   The cost of the building varies much less than the cost of the land does.

This is consistent with Mason Gaffney's findings.  (Search this page for the word "wine," and then go up 6 or 8 paragraphs.) 

This is also consistent with Morris Davis and Michael Palumbo's May, 2006 paper, The Price of Residential Land in Large U.S. Cities, at http://www.federalreserve.gov/pubs/feds/2006/200625/index.html: average structure values vary far less than average land value does across metro markets.  See, for example, Table D and Tables 6a through 6g.

See also http://www.masongaffney.org/essays/How_to_Thaw_Credit.pdf

Today a significant number of homeowners with mortgages owe more than their homes are worth.  While what I am proposing would create a certain major disruption for many people who expect to live off their home equity, I think it is something we need to look at very carefully, and find a way to make an orderly transition to.   A gradual shift of taxes off productive activity and onto land values is in order.

NYT LTE's: It Happened on Wall St. and Main St.

Letters - It Happened on Wall St. and Main St. - NYTimes.com.

I don't know when I've seen a collection of letters to the editor that covered the waterfront so well. 

Published: April 6, 2010

To the Editor:

Re “I Saw the Crisis Coming. Why Didn’t the Fed?,” by Michael J. Burry (Op-Ed, April 4):

Indeed, there were many people besides Mr. Burry who saw the economic crisis coming. I recall reading several economists’ warnings in articles and blog posts.

The former Fed chairman Alan Greenspan’s arrogant denial of these voices reveals how much economic theory has become an article of faith rather than an analytical instrument. The nation remains at peril as long as free-market ideologues trim the facts to fit their preconceptions.
 
Kevin R. McNamara, Houston, April 4, 2010
•

To the Editor:

Michael J. Burry asks how Alan Greenspan missed the rampant abuses and ludicrous underwriting practices in the mortgage market. This is an echo of the “failure of intelligence” in the Iraq war, and countless other examples of government officials abandoning critical thought and backing indefensible policies.

Our legislators and regulators are not stupid or incompetent. Rather, the problem is that they respond to the demands of well-financed special interests, regularly putting aside the common good to facilitate private gain. When things inevitably go awry, the public is treated to a “special investigation” that ends by letting the responsible parties off the hook with the conclusion that no one could have predicted the sadly all too predictable outcome.

Bart Coughlin, Dedham, Mass., April 5, 2010 The writer manages family-owned commercial real estate.

•

To the Editor:

There are many who blame the citizenry for getting subprime mortgages, but people trusted what they were told, and there was an adage, “you’ll never have money if you don’t own a home.”

There are those who blame people who got in over their heads for racking up credit card debt when there was no option if they wanted to buy food or to pay the gas and electric bill.

Yes, some game the system, but some, like a woman I met, cried because she had two kids to support and three jobs and no health insurance.

Aside from this, the cost of living has outstripped Main Street’s ability to maintain a solid standard of living, and that’s been going on since the Reagan years without being addressed. Now we’ve added outsourcing and vast unemployment to the picture.

Washington should talk to the people on their own turf. Alan Greenspan wasn’t the only one who wasn’t listening. Having some heart as well as serious thought: addressing issues is the only game in town if we’re going to fix our ills.

Nancy Gerson, Bergenfield, N.J., April 4, 2010
•

To the Editor:

Re “Hedge Fund Pay Roars Back” (Business Day, April 1):

It is immoral and un-American for the top 25 hedge fund managers to pull in a collective $25.3 billion in one year. That these billions are presumably not even treated as income for tax purposes but are counted as capital gains and taxed at lower rates is unconscionable.

Can we have true democracy and promise for the future when there is such outrageous wealth and desperate poverty side by side in a country that purports to be egalitarian?

Everyone knows that a billionaire has instant access to and influence on any elected official from the president on down to city council members. The poor have little power, especially now as they struggle with lost jobs and fewer public resources.

The United States needs tight regulation of the entire financial industry and a progressive income tax that hits hard at the rich.

Ann Singer, Berkeley, Calif., April 4, 2010
•

To the Editor:

The top 25 hedge fund managers took home an average of $1 billion each last year (Business Day, April 1). The same day I read that the global community has pledged $9.9 billion over the next three years for disaster relief in Haiti (“Billions of Dollars Are Pledged for Haiti, but Skepticism Remains” news article, April 1).

Something is terribly wrong here.

Anthony Rogers, Cambridge, Mass., April 1, 2010

Well said, all!

Mine! All Mine!

When I started reading this piece, from The Single Tax Review of 1914, I thought it was going to be a retelling of The Savannah, one of many memorable passages in Henry George's book, Progress and Poverty.  But it turned out to be something a little different, and struck me as very topical nearly 100 years later, as we see joblessness and tremendous concentration of wealth in America, this "smartest" of countries, with supposedly expert economists trying to steer us back into something resembling prosperity.  Wages tending to a minimum, and jobs disappearing.  Individuals and large shareholders in companies who claim ownership of our best land and our natural resources growing rich, while the rest of us struggle to sip from the trickle-down we are told will be ours if we consent to this structure.   Those who have read P&P know why the flow is in the other direction.

IT'S MINE—ALL MINE.

(For the Review.)

By BENJAMIN F. LINDAS.

The sun had just slipped behind a few wisps of clouds that hung above the western horizon, as a 'prairie schooner' came to a stop in the fertile bottom lands on the banks of a mighty river of the mid-west. A few trees growing in scattered clusters were all that broke the monotony of the plains that stretched in every direction as far as eye could see. The only vegetation was a high, thick, tangled grass that grew in luxuriant abundance from the rich black soil.

"Guess we had better stop here," said the driver, a harsh-voiced squatty man of middle age, whose shifty gray eyes peered out from under his heavy brows. "Soil looks good—no pestering neighbors," and he tugged at the heavy mustache that hid his tightly pressed lips.

"All right," was the tired response from his wife, who was slightly younger than her husband, with traces of beauty still visible in the clear-cut profile and large, dark, but now lusterless eyes. "But it's dreadfully lonesome, Jim."

The man was busy unhitching the horses and made no response. He was a man of few words; morose, hot-tempered and selfish. He had, by the strictest kind of economy and frugality hoarded together a few hundred dollars, and, ignorant though he was, he had left the little village in which he had been reared in answer to an inner voice that kept prompting him to "Get some land! Get some land!"

America's Wealth Distribution -- 2007 -- Wealth Concentration, Part 1 of 3

The Survey of Consumer Finances is published every three years by the Federal Reserve Board.  The most recent published is the 2007, the report on which was titled Ponds and Streams: Wealth and Income in the United States, 1989 to 2007.  It contains voluminous tables, with very useful detail.  This page reports data from Table A3A.  Definitions of the various kinds of assets are on page 70 of that report.

You can read trend data in Part 2 and Part 3 of this series, for aggregate NETWORTH (Line 01 in this table) and more data is available in the SCF Chartbook. 

This data may understate the concentration of wealth, since the Fortune 400 families are specifically excluded from the SCF.  Their holdings represent roughly 1% of the value.

Comments follow this table.

This provides 29 lines directly from the SCF, and an additional 33 lines which combine various related kinds of assets, or assets and their related debts.

Distribution of Net Worth in Total and by Component, 2007 Dollars in billions of 2007 dollars
					Percentile of the distribution of family net worth
					Original Reported Data from Ponds and Streams						Top 1%, Next 9%, Bottom 90%				Top 5%, everyone else
	Item	All Total	Column pct		<50 Share	50-90 Share	90-95 Share	95-99 Share	99-100 Share		<90 Share	90-99 Share	99-100 Share		<95 Share	95-100 Share
		(1)	(2)		(3)	(4)	(5)	(6)	(7)		(8)	(9)	(10)		(11)	(12)
01	NETWORTH	64,597.9	100.0%		2.5%	26.0%	11.1%	26.6%	33.8%		28.5%	37.7%	33.8%		39.6%	60.4%
02	ASSET	75,866.7	117.4%		6.1%	29.1%	10.6%	24.7%	29.6%		35.2%	35.2%	29.6%		45.7%	54.3%
03	FIN	25,703.5	39.8%		2.7%	25.1%	12.4%	28.2%	31.5%		27.8%	40.7%	31.5%		40.3%	59.7%
04	LIQ	2,822.5	4.4%		6.5%	33.0%	11.4%	26.2%	22.9%		39.4%	37.6%	22.9%		50.8%	49.2%
05	CDS	1,041.2	1.6%		3.1%	46.6%	11.5%	23.7%	15.1%		49.7%	35.2%	15.1%		61.2%	38.8%
06	SAVBND	113.7	0.2%		6.1%	55.4%	11.3%	19.7%	7.6%		61.5%	31.0%	7.6%		72.7%	27.3%
07	BOND	1,070.5	1.7%		0.0%	1.5%	4.8%	31.2%	62.4%		1.6%	36.0%	62.4%		6.4%	93.6%
08	STOCKS	4,597.5	7.1%		0.6%	9.0%	8.0%	30.5%	51.9%		9.6%	38.5%	51.9%		17.6%	82.4%
09	NMMF	4,093.0	6.3%		0.4%	11.6%	10.3%	30.9%	46.7%		12.0%	41.3%	46.7%		22.3%	77.7%
10	RETQLIQ	8,904.6	13.8%		3.8%	36.7%	16.9%	28.0%	14.5%		40.5%	44.9%	14.5%		57.5%	42.5%
11	CASHLI	834.6	1.3%		6.5%	38.5%	13.3%	19.4%	22.3%		44.9%	32.7%	22.3%		58.2%	41.8%
12	OTHMA	1,682.2	2.6%		0.9%	19.4%	13.5%	26.8%	39.4%		20.3%	40.3%	39.4%		33.9%	66.1%
13	OTHFIN	543.7	0.8%		5.8%	27.4%	10.0%	25.8%	31.0%		33.2%	35.8%	31.0%		43.2%	56.8%
14	NFIN	50,163.2	77.7%		7.8%	31.1%	9.6%	22.8%	28.7%		38.9%	32.5%	28.7%		48.5%	51.5%
15	VEHIC	2,224.7	3.4%		28.6%	45.9%	8.0%	10.9%	6.6%		74.5%	18.9%	6.6%		82.5%	17.5%
16	HOUSES	24,104.2	37.3%		12.6%	48.9%	11.0%	18.1%	9.4%		61.5%	29.1%	9.4%		72.5%	27.5%
17	ORESRE	5,358.5	8.3%		2.2%	23.4%	14.6%	35.2%	24.6%		25.7%	49.7%	24.6%		40.2%	59.8%
18	NNRESRE	2,911.3	4.5%		1.2%	17.0%	10.8%	35.2%	35.8%		18.2%	46.0%	35.8%		29.0%	71.0%
19	BUS	14,893.7	23.1%		0.4%	6.0%	5.5%	25.5%	62.7%		6.3%	31.0%	62.7%		11.9%	88.1%
20	OTHNFIN	670.8	1.0%		4.0%	21.3%	11.1%	23.6%	40.0%		25.3%	34.7%	40.0%		36.4%	63.6%
21	DEBT	11,268.8	17.4%		26.7%	46.6%	7.7%	13.7%	5.3%		73.3%	21.4%	5.3%		81.0%	19.0%
22	MRTHEL	8,418.6	13.0%		25.3%	50.1%	7.6%	12.9%	4.1%		75.5%	20.4%	4.1%		83.0%	17.0%
23	RESDBT	1,140.8	1.8%		5.8%	34.8%	12.9%	32.9%	13.6%		40.6%	45.8%	13.6%		53.5%	46.5%
24	INSTALL	1,144.8	1.8%		52.8%	35.5%	4.3%	3.2%	4.2%		88.3%	7.5%	4.2%		92.6%	7.4%
25	OTHLOC	49.8	0.1%		10.8%	36.7%	3.0%	16.7%	32.7%		47.6%	19.7%	32.7%		50.6%	49.4%
26	CCBAL	392.3	0.6%		43.1%	45.8%	5.6%	4.3%	1.2%		88.9%	9.9%	1.2%		94.4%	5.6%
27	ODEBT	122.5	0.2%		28.9%	22.4%	6.6%	17.6%	24.5%		51.3%	24.2%	24.5%		58.0%	42.0%
28	EQUITY	13,694.3	21.2%		1.5%	19.6%	12.4%	30.5%	36.0%		21.1%	42.9%	36.0%		33.5%	66.5%
29	INCOME	9,784.9	15.1%		22.4%	36.3%	8.3%	16.6%	16.4%		58.7%	24.9%	16.4%		67.0%	33.0%
	LVTfan's Calculated Aggregations
					Share of Assets Held by Each Quantile						Share of Assets Held by Each Quantile				Share of Assets Held by Each Quantile
		All Total	Column pct		<50 Share	<50 Share	90-95 Share	95-99 Share	99-100 Share		<90 Share	90-99 Share	99-100 Share		<95 Share	95-100 Share
31	STOCKS+NMMF	8,690.5	13.5%		0.5%	10.2%	9.1%	30.7%	49.4%		10.7%	39.8%	49.4%		19.8%	80.2%
32	STOCKS+NMMF+RETQLIQ	17,595.1	27.2%		2.2%	23.6%	13.1%	29.3%	31.8%		25.8%	42.4%	31.8%		38.9%	61.1%
33	STOCKS+BUS	19,491.2	30.2%		0.4%	6.7%	6.1%	26.7%	60.1%		7.1%	32.8%	60.1%		13.2%	86.8%
34	STOCKS+BUS+NMMF	23,584.2	36.5%		0.4%	7.5%	6.8%	27.4%	57.8%		8.0%	34.2%	57.8%		14.8%	85.2%
35	STOCKS+NMMF+RETQLIQ+BUS	32,488.8	50.3%		1.3%	15.5%	9.6%	27.6%	45.9%		16.9%	37.2%	45.9%		26.5%	73.5%
36	STOCKS+BUS+NNRESRE+NMMF	26,495.5	41.0%		0.5%	8.6%	7.3%	28.3%	55.4%		9.1%	35.5%	55.4%		16.4%	83.6%
37	STOCKS+BUS+NNRESRE+NMMF+ ORES	31,854.0	49.3%		0.8%	11.1%	8.5%	29.4%	50.2%		11.9%	37.9%	50.2%		20.4%	79.6%
38	STOCKS+BUS+NNRESRE+NMMF+ ORES+OTHMA	33,536.2	51.9%		0.8%	11.5%	8.8%	29.3%	49.7%		12.3%	38.0%	49.7%		21.1%	78.9%
39	STOCKS+BUS+NNRESRE+NMMF+ ORES+OTHMA+BONDS	34,606.7	53.6%		0.8%	11.2%	8.6%	29.3%	50.1%		12.0%	38.0%	50.1%		20.6%	79.4%
40	STOCKS+BUS+NNRESRE+NMMF+ ORES+OTHMA+BONDS+RETQLIQ	43,511.3	67.4%		1.4%	16.4%	10.3%	29.1%	42.8%		17.8%	39.4%	42.8%		28.2%	71.8%
41	BUS+NNRESRE	17,805.0	27.6%		0.5%	7.8%	6.4%	27.1%	58.3%		8.3%	33.5%	58.3%		14.7%	85.3%
42	BUS+NNRESRE+ORES	23,163.5	35.9%		0.9%	11.4%	8.3%	28.9%	50.5%		12.3%	37.2%	50.5%		20.6%	79.4%
43	BUS+NNRESRE+ORES+HOUSES	47,267.7	73.2%		6.9%	30.5%	9.7%	23.4%	29.5%		37.4%	33.1%	29.5%		47.1%	52.9%
44	BUS+NNRESRE+ORES+HOUSES minus MRTHEL-RESDBT	37,708.3	58.4%		2.8%	26.0%	10.0%	25.4%	35.7%		28.8%	35.5%	35.7%		38.9%	61.1%
45	VEHIC+HOUSES	26,328.9	40.8%		14.0%	48.6%	10.7%	17.5%	9.2%		62.6%	28.2%	9.2%		73.4%	26.6%
46	VEHIC+HOUSES-MRTHEL-INSTALL	16,765.5	26.0%		5.6%	48.8%	12.8%	20.7%	12.0%		54.4%	33.5%	12.0%		67.2%	32.8%
47	VEHIC+HOUSES+RETQLIQ	35,233.5	54.5%		11.4%	45.6%	12.3%	20.1%	10.5%		57.1%	32.4%	10.5%		69.4%	30.6%
48	VEHIC+HOUSES-MRTHEL-INSTALL+RETQLIQ	25,670.1	39.7%		5.0%	44.6%	14.2%	23.2%	12.9%		49.6%	37.5%	12.9%		63.9%	36.1%
49	HOUSES minus MRTHEL	15,685.6	24.3%		5.8%	48.3%	12.8%	20.8%	12.2%		54.1%	33.7%	12.2%		66.9%	33.1%
50	NFIN other than HOUSES & VEHIC	23,834.3	36.9%		1.0%	11.7%	8.4%	28.8%	50.2%		12.7%	37.1%	50.2%		21.0%	79.0%
51	FIN other than RETQLIQ	16,798.9	26.0%		2.2%	18.9%	10.1%	28.4%	40.5%		21.1%	38.4%	40.5%		31.2%	68.8%
52	NETWORTH other than VEHIC & HOUSES minus MRTHEL minus INSTALL	47,832.4	74.0%		1.4%	18.0%	10.5%	28.6%	41.5%		19.4%	39.1%	41.5%		29.9%	70.1%
53	NETWORTH other than RETQLIQ, VEHIC & HOUSES minus MRTHEL minus INSTALL	38,927.8	60.3%		0.8%	13.7%	9.0%	28.8%	47.7%		14.6%	37.8%	47.7%		23.6%	76.4%
54	LIQ+CDS+SAVBNDS	3,977.4	6.2%		5.6%	37.2%	11.4%	25.4%	20.4%		42.8%	36.8%	20.4%		54.2%	45.8%
55	BOND+STOCKS+OTHMA+NMMF	11,443.2	17.7%		0.5%	10.8%	9.4%	30.2%	49.2%		11.3%	39.5%	49.2%		20.6%	79.4%
56	CASHLI+OTHFIN	1,378.3	2.1%		6.2%	34.1%	12.0%	21.9%	25.8%		40.3%	33.9%	25.8%		52.3%	47.7%
57	HOUSES+ORESRE	29,462.7	45.6%		10.8%	44.3%	11.6%	21.2%	12.2%		55.0%	32.8%	12.2%		66.7%	33.3%
58	NNRESRE+BUS	17,805.0	27.6%		0.5%	7.8%	6.4%	27.1%	58.3%		8.3%	33.5%	58.3%		14.7%	85.3%
59	MRTHEL+RESDEBT	9,559.4	14.8%		23.0%	48.3%	8.2%	15.3%	5.2%		71.3%	23.5%	5.2%		79.5%	20.5%
60	INSTALL+OTHLOC+ODEBT	1,317.1	2.0%		48.9%	34.4%	4.5%	5.0%	7.2%		83.3%	9.5%	7.2%		87.8%	12.2%
61	"all other assets" (exc VEHIC, HOUSES & RETQLIQ)	40,633.2	62.9%		1.5%	14.7%	9.1%	28.6%	46.2%		16.2%	37.7%	46.2%		25.2%	74.8%
62	"all other debts" (except MRTHEL & INSTALL	1,705.4	2.6%		16.2%	36.5%	10.5%	24.8%	12.1%		52.7%	35.2%	12.1%		63.2%	36.8%
Source: Ponds and Streams: Wealth and Income in the United States, 1989 to 2007 (http://www.federalreserve.gov/pubs/feds/2009/200913/200913pap.pdf), Table A3A and LVTfan calculations.  Definitions of asset and debt detail at page 70.

Comments:

Line 01, NETWORTH, is quite concentrated.  5% of us hold 60% of it.  10% of us hold over 70% of it.  Depending on how you define "Middle Class," the "Middle Class" might have as much as 30% of it.  Half of our population owns a total of 2.5% of NETWORTH.

NETWORTH is the sum of ASSET (Line 02) and DEBT (Line 21).  ASSET is the sum of FIN (Line 03 -- Financial Assets) and FIN (Line 14 -- Nonfinancial Assets).  Within FIN, the largest category is RETQLIQ (Line 10 -- Retirement Qualified Liquid Assets, such as IRAs and 401(k) accounts; this does not include the value of pensions in defined benefit plans).  Within NFIN, there are two large items: Line 16 HOUSES and Line 19 BUS, the value of privately held businesses.

Within DEBT, which represents 17.4% of NETWORTH or 14.8% of ASSETS, the largest category is Line 22, MRTHEL -- Mortgages and Home Equity Lines of Credit.

Two additional lines appear in the original report:

• LINE 28 reports EQUITY, which is the value of publicly held stocks, whether they are in STOCKS, NMMF or RETQLIQ.  They represent 21% of the aggregate NETWORTH, about 10% less than privately held BUS.  (See below.)
  
• Line 29 reports INCOME.  33% of INCOME goes to the top 5% of NETWORTH holders (Column 12).  22% goes to the bottom 50% of NETWORTH holders (Column 3).   Aggregate INCOME is equivalent to 15.1% of aggregate NETWORTH.
  

Some Notes about the Additional Aggregations

1. Stocks and Businesses  We frequently hear advertising campaigns which suggest that the majority of Americans own stock.  True enough -- I think the figure is 51%.  But the more important reality is that ownership of stock is quite concentrated.   Line 08 STOCKS shows individually held stocks; you'll note that 82% of the value belongs to the top 5% of us, and 52% to the top 1%.  The bottom half of the wealth distribution holds less than 1% of the value.

Stocks may also be held in Mutual Funds.  Line 09 is "Non-Money Market Mutual Funds," and represents stocks, bonds, real estate investment trusts.  You'll note that 78% of the value of NMMF's belongs to the top 5% of us.  (These are mutual funds held outside of retirement accounts.)   The bottom 50% of us have less than 1/2 of 1% of these assets.

Stocks might also be part of IRA's.   IRA's and 401(k) accounts are reported in Line 10, RETQLIQ.   RETQLIQ represents nearly 14% of aggregate NETWORTH (Column 2), slightly more than stocks and mutual funds combined.     Ownership is less concentrated: a mere 42.5% is held by our top 5%, and our bottom 50% hold nearly 4% of the value.  The next 40% of us have nearly 37% of retirement assets.

The big category, though, is Line 19, BUS.  This is the value of privately owned companies and private equity.  It represents 23% of aggregate NETWORTH.  The top 1% of Americans hold nearly 63% of this value, and the top 5% hold 88% of it.   These include the value in the so-called "small business" sector.  (There are also many businesses, particularly ones which are tenants rather than landlords, which have little or no value to count.)

Lines 31 to 44 show various combinations of investment-related and business assets.   Line 35 collects these four classes of assets.  Together, they represent 50.3% of aggregate NETWORTH (column 2).   The top 5% of us hold 73.5% of that value, and the top 10% hold all but about 17% of that value.

Line 41 shows BUS and NNRESRE (non-residential real estate), which together represent over a quarter of aggregate NETWORTH.  The top 5% of us hold over 85% of these assets.  Line 42: Add to that "ORES" -- Other Residential Real Estate -- and the top 5% have 79% of the value.   Line 43 adds in HOUSES, which are a widely held asset.   Line 44 nets out the debt against these assets, and we find that when debt is accounted for,  the top 5% of the NETWORTH holders have 61% of the value -- in categories which together represent 58% of aggregate NET WORTH.

2. Assets Commonly Held by Ordinary People.    Line 45 combines vehicles and houses.  These two classes of assets represent almost 41% of aggregate NETWORTH.   The top 5% hold a third of the value; the bottom 50% of us hold 14% of the value.

Line 46 nets out the debt against these assets; the top 5% of us hold 32.8% of the value.

Line 47 adds in another asset which is relatively widely held, RETQLIQ (IRA and 401(k) accounts) and omits the debt.  The combined assets represent 54.5% of aggregate NETWORTH, and our top 5% hold 30.6% of them.  The bottom 50% of us hold 11.4%, and the next 40% of us -- which some will call our "Middle Class" --  hold 45.6% of the value.

Line 48 nets out the mortgage and installment debt.  The combined categories represent almost 40% of aggregate NETWORTH, and are the assets most widely held.   The bottom 50% of us have 5% of the value; the next 40% of us have almost 45%; the next 5% have 14%, the second 4% have 23%, and the top 1% have 13%.

Line 53 is everything which is not in Line 48.  Almost 48% of that value is owned by the top 1%ers, and over 76% by the top 5%. 

Two related pages will follow: Part 2 looks at the distribution of Income to the various quantiles of NETWORTH holders, and how it has changed from 1989 to 2007.  Part 3 looks at the changes in the distribution of NETWORTH from 1989 to 2007.

In Progress and Poverty, Henry George wrote of "an immense wedge . . . being forced, not underneath society, but through society. Those who are above the point of separation are elevated, but those who are below are crushed down."  If you'd like to understand why wealth concentrates, I commend Progress and Poverty to your attention.  And that book provides a simple, logical, just, efficient and economy-invigorating remedy, which can put us well on the road to solving some of our supposedly-intractable social, economic, climate and energy problems.

America's Wealth Distribution -- 2007 -- Wealth Concentration, Part 2 of 3

America's Wealth Distribution, Part 2: Middle Class: Trends in Net Worth Distribution by Income Quantile.

This is the first of a pair of pages which show trends in how America's household Net Worth is distributed.  The data source is the Survey of Consumer Finances Chartbook 2007.

They follow Part 1, which shows detail on Net Worth distribution in 2007.   Part 3, by Net Worth Quantile, is here.

While the distribution of wealth and the distribution of income are both rather concentrated, they are different distributions.  That is, a young high-earning couple with two jobs on Wall Street may not yet have accumulated much in the way of Net Worth, but their income could place them in the top 5% or 1% of the income distribution.  People with a lot of assets may not need or want to earn a great deal of income in order to live comfortably; even if their assets produce few dividends, they can sell off some each year to meet their needs. Also, assets which appreciate year to year, such as urban land and natural resources produce so-called "capital" gains which the owners do not "recognize" until they sell.  Many of the highest income families in any particular year are people who have cashed in on an asset which has been quietly appreciating for a number of years, not incurring any taxes or notice from the IRS; such gains are taxed at 15%.  (If you are interested in the relationship between income and wealth distributions, you might appreciate some of the graphics contained in Ponds and Streams: Wealth and Income in the United States, 1989 to 2007.) 

This page shows, by quantile of income, how NETWORTH is distributed, and what has happened to this distribution between 1989 and 2007.  Part 3 shows the distribution of NETWORTH according to quantiles of NETWORTH.   As with Parts 1 and 3, the concentration of NETWORTH is likely understated, because the SCF omits the Fortune 400 families from the study.  Their aggregate wealth and income is equal to the aggregate holdings of a large segment of America.

This page was inspired, in part, by my puzzlement about why Tea Party enthusiasts are so incensed about redistribution of income to those below them on the income spectrum.   A comment I read online recently made some sense to me:

"If you are “middle class” and you already feel taxed to the hilt. And someone comes along saying they want “rich” people to pay more taxes, well, it isn’t rocket science for the “rich” people to come along and tell the “middle class” hey! they’re robbing “us” blind!!!!"

The Chartbook, page 43, provides the mean value of net worth, by income quantile, for each of the 7 triennial studies. From that, I've computed the aggregate holdings for each quantile in order to calculate the share of aggregate holdings for each quantile.  My calculations overstate the holdings of the bottom quintile somewhat, because they are based on the mean holdings for those with holdings, and not all households actually have holdings.  But we'll put that aside.  (All are in 2007 dollars.)

Table 1: Mean value of net worth for families with holdings, by income quantile [000's of 2007 dollars)
	Quantile of Income
SCF Year	Bottom Quintile [20%]	Second Quintile [20%]	Middle Quintile [20%]	Fourth Quintile [20%]	Second Decile [10%]	Top Decile [10%]
1989	$ 39.7	$ 105.8	$ 163.1	$ 219.0	$ 358.0	$ 1,579.6
1992	47.6	92.9	146.4	203.8	327.6	1,390.5
1995	60.1	106.9	138.3	218.1	348.1	1,471.6
1998	60.8	122.4	161.0	262.7	415.0	1,971.9
2001	61.8	134.8	190.3	344.3	534.8	2,650.7
2004	79.8	133.5	213.8	375.1	538.0	2,792.0
2007	105.2	135.0	210.4	375.8	609.1	3,315.6
source: SCF Chartbook, page 43 Note: these are the mean holdings for families with holdings

The average NETWORTH among families in the middle income quintile in 2007 was $210,400. That is not the same as the median, which was $88,100.  (That is, half of families in the middle income quintile had NETWORTH higher than $88,100, half had less.  The average is always higher than the median, which means that most of us are below average.  In fact, according to the Chartbook, the median NW in the fourth income quintile was $205,800.)  

Multiplying the average holdings in each quantile by the percentage of households in that quantile, I get this.  Notice that this does not account for the increase in population from one period to another -- but every quantile grew by the same amount.   Keeping in mind that the first four quantiles are all of equal sizes -- and the last two together the same size as the others, the differences are striking:

Table 2: Aggregate Net Worth Dollars by Income Quantile
	Quantile of Income						Total
SCF Year	Bottom Quintile	Second Quintile	Middle Quintile	Fourth Quintile	Second Decile	Top Decile
1989	794	2,116	3,262	4,380	3,580	15,796	29,928
1992	952	1,858	2,928	4,076	3,276	13,905	26,995
1995	1,202	2,138	2,766	4,362	3,481	14,716	28,665
1998	1,216	2,448	3,220	5,254	4,150	19,719	36,007
2001	1,236	2,696	3,806	6,886	5,348	26,507	46,479
2004	1,596	2,670	4,276	7,502	5,380	27,920	49,344
2007	2,104	2,700	4,208	7,516	6,091	33,156	55,775
source: SCF Chartbook, 2007, page 43, and my calculations.  Note that these are calculated from Table 1, multiplying by the percentage of households in that quantile. This does not account for population growth, but does reflect the shares each holds.  It overstates holdings in the bottom income quintile, since not all households have positive net worth, and, as noted elsewhere, understates holdings for the top quantile due to the omission of the Forbes 400 families from the SCF sample.

Next, we calculate the shares of Net Worth held by each income quantile:

Table 3: Shares of Net Worth by Income Quantile
	Quantile of Income						Total
SCF Year	Bottom Quintile	Second Quintile	Middle Quintile	Fourth Quintile	Second Decile	Top Decile
1989	2.7%	7.1%	10.9%	14.6%	12.0%	52.8%	100.0%
1992	3.5%	6.9%	10.8%	15.1%	12.1%	51.5%	100.0%
1995	4.2%	7.5%	9.6%	15.2%	12.1%	51.3%	100.0%
1998	3.4%	6.8%	8.9%	14.6%	11.5%	54.8%	100.0%
2001	2.7%	5.8%	8.2%	14.8%	11.5%	57.0%	100.0%
2004	3.2%	5.4%	8.7%	15.2%	10.9%	56.6%	100.0%
2007	3.8%	4.8%	7.5%	13.5%	10.9%	59.4%	100.0%
point change, 1989 to 2007	+ 1.1 pts	- 3.3 pts	- 3.4 pts	- 1.1 pts	- 1.1 pts	+ 6.6 pts
Source: SCF Chartbook 2007 and my calculations.  See Notes for Table 2.

If you explore Table 3, it becomes evident that since 1989, the top 10% of Income recipients have increased their share of America's Net Worth from 52.8% in 1989 to 59.4% in 2007.  Depending on how you define "Middle Class," here's what you get:

1. If the Middle Class is the middle 60% of the income distribution, the Middle Class has seen its share of the Net Worth drop from 32.6% to 25.9%.  But of the 6.7 percentage points they've lost, 1.1 was picked up by the bottom 20% of the income distribution, and 5.7 points went to the top 20%.  So it seems a bit puzzling that the Tea Party enthusiasts are complaining about "wealth redistribution to the poorest."   It seems misdirected.   (What was it the bank robber said about why he robbed banks?)

Table 4: Shares of Net Worth, by Income Quantile
SCF Year	Income Quantile
	Bottom 20%	Middle 60%	Top 20%
1989	2.7%	32.6%	64.7%
1992	3.5%	32.8%	63.6%
1995	4.2%	32.3%	63.5%
1998	3.4%	30.3%	66.3%
2001	2.7%	28.8%	68.5%
2004	3.2%	29.3%	67.5%
2007	3.8%	25.9%	70.4%
pt chg 1989-2007	+ 1.1 pts	- 6.6 pts	+ 5.7 pts

The Tea Party folks seem to have little curiosity about how wealth that was in the middle class in 1989 has slid into the top 20%.

2. If one defines the Middle Class as the 50% of us between the 40th percentile and the 90th, here's how the same data looks:

Table 5: Shares of Net Worth by Income Quantile
SCF Year	Income Quantile
	Bottom 40%	Next 50%	Top 10%
1989	9.7%	37.5%	52.8%
1992	10.4%	38.1%	51.5%
1995	11.7%	37.0%	51.3%
1998	10.2%	35.1%	54.8%
2001	8.5%	34.5%	57.0%
2004	8.6%	34.8%	56.6%
2007	8.6%	31.9%	59.4%
pt chg 1989-2007	- 1.1 pts	- 5.6 pts	+ 6.6 pts

3. Finally, if one defines the Middle Class as the 30% of us between the 60th and 90th percentiles, here's how the Net Worth distribution looks:

Table 6: Shares of Net Worth by Income Quantile
SCF Year	Income Quantile
	Bottom 60%	Next 30%	Top 10%
1989	20.6%	26.6%	52.8%
1992	21.3%	27.2%	51.5%
1995	21.3%	27.4%	51.3%
1998	19.1%	26.1%	54.8%
2001	16.6%	26.3%	57.0%
2004	17.3%	26.1%	56.6%
2007	16.2%	24.4%	59.4%
pt chg 1989-2007	- 4.2 pts	- 2.2 pts	+ 6.6 pts

Is this progress?  As time goes on, and technological progress continues, and public investment in effective infrastructure continues, and we invest in education and public health, and all sorts of public goods which should elevate us all, the NETWORTH share of the highest income portion of our society grows by leaps and bounds, and the share going to the remainder of us falls. 

By this time, I suspect someone is going to point out that over the course of 18 years, some people who were in the bottom income group, by whatever quantile definition you choose, are likely to have advanced into a higher income group, so what's the problem?   Our low-income 18 year old becomes a 36 year old; our 36 year old a 54 year old -- and our 54 year old a 72 year old. (You can find the age-related income and net worth data in the Chartbook.) But relatively few of us ever make it into the top 10%, where the bulk of the goodies go.

The kinds of assets held by our highest-income people seem to be appreciating faster than those of the rest of us.  (They're also more likely to have spare cash and borrowing power for down payment and mortgages on same, at favorable terms.)  This is consistent with the notion that part of what we're seeing is the appreciation of well-located land -- the kind that sits under Manhattan condos and office buildings and suburban single-family homes.  And it is consistent with the notion that ownership of corporate stock and privately held businesses often includes the ownership of such assets and of nonrenewable natural resources -- oil, water rights, airport landing slots, geosynchronous orbits, electromagnetic spectrum, and a host of other such assets.  All these things collect economic rent from the rest of us.  Few of us understand much about it; even college and graduate-level economics majors don't learn much about it at most colleges and universities.

In Progress and Poverty, Henry George wrote of "an immense wedge . . . being forced, not underneath society, but through society. Those who are above the point of separation are elevated, but those who are below are crushed down."  If you'd like to understand why wealth concentrates, I commend Progress and Poverty to your attention.  And that book provides a simple, logical, just, efficient and economy-invigorating remedy, which can put us well on the road to solving some of our supposedly-intractable social, economic, climate and energy problems.

America's Wealth Distribution 2007 -- Wealth Concentration -- part 3 of 3

Middle Class:  Net Worth Distribution by Net Worth Quantile

The Survey of Consumer Finances Chartbook 2007 provides these quantiles* for Net Worth:

• Bottom Quartile (25%),
• Second Quartile,
• Third Quartile,
• Next 15% and
• Top Decile (10%).

(*Quantile is the generic which includes percentiles, deciles, quartiles, quintiles, and any other aggregation within a distribution, including small fractions of a percentile.  If you're curious about quantiles smaller than the top decile, you can find 2007 data on the top 1%, next 4% and following 5% in Part 1.  That's where the action is.)

The Chartbook collects the results of the past 7 SCF's.  It provides means and medians for various quantiles and demographics.  Each table appears on its own page, and the Chartbook runs to about 1200 pages.  I've selected a very small number of the pages; the data here comes from two pages.

The data is on Net Worth; that is, the total assets of a family minus its debts.

Table 1 shows the Mean Value of Net Worth for families with holdings.  Notice that the average in the bottom 25% is negative, and that in the second quarter of families the average is under $60,000 in 2007.  (The mean of any income distribution is higher than the median: the median represents the middle person or family -- half have more, half have less.  The mean today seems to be about equal to the 80th percentile, which means that, unlike Lake Wobegon, most of us are below average.  Ironic when you consider that 19% of us consider ourselves to be top 1%ers!)

Table 1: Mean Value of Net Worth for families with holdings (000's of 2007 dollars) by Net Worth Quantile
	Quantile of Net Worth
SCF year	Bottom 25%	Second 25%	Third 25%	Second 15%	Top 10%
1989	(1.0)	37.0	143.3	363.8	1,999.3
1992	(0.8)	36.8	131.1	316.3	1,807.9
1995	(0.2)	41.4	134.7	322.6	1,943.2
1998	(2.4)	45.7	163.7	410.1	2,468.4
2001	0.1	51.9	195.6	528.3	3,235.7
2004	(1.6)	51.7	204.0	580.7	3,427.6
2007	(2.2)	58.1	227.7	588.6	3,985.9
2007 SCF Chartbook, page 73

Multiplying the average holdings per family within each quantile by the size of the Net Worth quantile, Table 2 shows the relative size of the holdings of each quantile group:

Table 2: Total Value of Net Worth for families with holdings (2007 dollars) by Net Worth Quantile
	Quantile of Net Worth
	Bottom 25%	Second 25%	Third 25%	Second 15%	Top 10%		Total
1989	(25)	925	3,583	5,457	19,993		29,933
1992	(20)	920	3,278	4,745	18,079		27,001
1995	(5)	1,035	3,368	4,839	19,432		28,669
1998	(60)	1,143	4,093	6,152	24,684		36,011
2001	3	1,298	4,890	7,925	32,357		46,472
2004	(40)	1,293	5,100	8,711	34,276		49,339
2007	(55)	1,453	5,693	8,829	39,859		55,778
Source: 2007 SCF Chartbook, page 73, and author's calculations.   Each quantile group's mean holdings (see Table 1) is multiplied by the percentage in that quantile.  Thus, the totals from year to year do not reflect increases in population. Note also that since not all families have holdings, the value of the bottom quantile's holdings may be overstated!

Table 3 is calculated from Table 2, and shows the shares of aggregate net worth held by the various quantile groups.  The top 10% of Net Worth holders had 66.8% of the total Net Worth in 1989; by 2007, their share had risen to 71.5%.

Table 3: Shares of Aggregate Net Worth for families with holdings (2007 dollars) by Net Worth Quantile
	Quantile of Net Worth
	Bottom Quartile	Second Quartile	Third Quartile	Second 15%	Top Decile		Total
1989	-0.1%	3.1%	12.0%	18.2%	66.8%		100.0%
1992	-0.1%	3.4%	12.1%	17.6%	67.0%		100.0%
1995	-0.0%	3.6%	11.7%	16.9%	67.8%		100.0%
1998	-0.2%	3.2%	11.4%	17.1%	68.5%		100.0%
2001	0.0%	2.8%	10.5%	17.1%	69.6%		100.0%
2004	-0.1%	2.6%	10.3%	17.7%	69.5%		100.0%
2007	-0.1%	2.6%	10.2%	15.8%	71.5%		100.0%
point change, 1989-2007	n/c	- 0.5 pts	- 1.8 pts	- 2.4 pts	+ 4.7 pts
source: SCF chartbook, my calculations

So how is our middle class* doing?  And how are those whose economic situation can't be stretched to describe them as middle class doing?

*See the last paragraphs for why I'm focusing on Middle Class here.

Let's look at some possible definitions of "middle class," based on Net Worth holdings (and the SCF data structure):

1. The Middle Class is the middle 50% of the Net Worth distribution -- those between the 25th and 75th percentiles.
2. The Middle Class is the 65% of us between the 25th and 90th percentiles.
3. The Middle Class is the 40% of us between the 50th and 90th percentiles.

1. Defining the Middle Class as the middle 50% of the Net Worth Distribution,  we find that the Middle Class's share of America's Net Worth has fallen from 15% to under 13%, a decrease of 2.3 percentage points (over 15%).  The situation of the bottom 25% has not improved.   The Net Worth has flowed upward over these 18 years.

Table 4:  Shares of Net Worth by Net Worth Quantile, 1989 to 2007
	Net Worth Quantile
	Bottom 25%	Middle 50%	Top 25%
1989	-0.1%	15.1%	85.0%
1992	-0.1%	15.6%	84.5%
1995	-0.0%	15.4%	84.7%
1998	-0.2%	14.5%	85.6%
2001	0.0%	13.3%	86.7%
2004	-0.1%	13.0%	87.1%
2007	-0.1%	12.8%	87.3%
point change, 1989 to 2007	n/c	- 2.3 pts	+ 2.3 pts
source: SCF Chartbook, my calculations

2. Defining the Middle Class as the 65% of us between the 25th and 90th percentiles, we find that the Middle Class's share of Net Worth has fallen from 33.3% to 28.6% between 1989 and 2007.  This is about 14%.  All has flowed upwards.

Table 5:  Shares of Net Worth by Net Worth Quantile, 1989 to 2007
	Net Worth Quantile
	Bottom 25%	Middle 65%	Top 10%
1989	-0.1%	33.3%	66.8%
1992	-0.1%	33.1%	67.0%
1995	-0.0%	32.2%	67.8%
1998	-0.2%	31.6%	68.6%
2001	0.0%	30.4%	69.6%
2004	-0.1%	30.6%	69.5%
2007	-0.1%	28.6%	71.5%
point change, 1989 to 2007	n/c	- 4.7 pts	+ 4.7 pts
source: SCF Chartbook, my calculations

3 Defining the Middle Class as the 40% of us between the 50th and 90th percentiles of Net Worth, we find that the Middle Class's share of America's Net Worth fell from 30.2% to 26.0%, while the share of the bottom 50% fell from 3.0% to 2.5%.

Table 6:  Shares of Net Worth by Net Worth Quantile, 1989 to 2007
	Net Worth Quantile
	Bottom 50%	Middle 40%	Top 10%
1989	3.0%	30.2%	66.8%
1992	3.3%	29.7%	67.0%
1995	3.6%	28.6%	67.8%
1998	3.0%	28.4%	68.5%
2001	2.8%	27.6%	69.6%
2004	2.5%	28.0%	69.5%
2007	2.5%	26.0%	71.5%
point change, 1989 to 2007	- 0.5 pts	- 4.2 pts	+ 4.7 pts
SCF Chartbook, my calculations

The SCF Chartbook provides another set of data points: the median Net Worth within each quantile -- that is, the situation of the middle family within each group:

Table 7: Median value of net worth for families with holdings
	Percentile of net worth
Year	Less than 25	25-49.9	50-74.9	75-89.9	90-100
Level (thousands of 2007 dollars)
1989	0.3	33.9	139.4	338.4	1,108.5
1992	0.7	34.1	126.8	295.3	962.0
1995	1.3	38.1	128.6	299.0	923.7
1998	0.6	41.6	153.4	394.8	1,141.2
2001	1.4	47.8	184.7	503.9	1,529.6
2004	1.9	47.9	187.8	560.0	1,570.6
2007	1.2	54.3	220.3	573.8	1,892.5

Among the bottom 25% of us, in 2007, half had total Net Worth of less than $1,200, and half had more than that.  Among the next quarter of our families, half had total Net Worth of less than $54,300, and half had more.  Among the third quarter of our families, half had total Net Worth of less than $220,300, and half had more.  Among the next 15% of our families, half had more than $573,800, and half had less.  Among the top 10% of families, half had nearly $1.9 million in Net Worth, and half had less.  As Ed Wolff's work a few years ago pointed out, a shockingly small portion of American families had sufficient assets, outside of home equity, to live for even 3 months at the poverty level.

Incidentally -- no, not incidentally -- the fact that I've focused here on "middle class" does not mean that I am not concerned with those whose net worth and/or income falls below anyone's definition of middle class.  My focus on various definitions of "Middle Class" is intended to show that our much-talked-about MC, by any definition, has a smaller portion of the return on labor than most people seem to realize.  And our underclass has almost nothing, despite many working long and hard at jobs without which our society could not function. But it isn't our underclass (sorry -- I don't like that word, but I haven't found another I like better) that is squeezing our middle class.  Wealth is not flowing down or trickling down; it is concentrating.  

As Henry George told us in Progress and Poverty, there is an immense wedge being driven through society.  Those above it are buoyed up, those below it are pressed down.  Look at the data here, and see what you think.

Elizabeth Warren: Behind Consumer Agency Idea, a Fiery Advocate

Behind Consumer Agency Idea, a Fiery Advocate - NYTimes.com.

Don't miss this wonderful article about Elizabeth Warren, law professor at Harvard Law who first came to my attention when she and her daughter wrote a book called "The Two-Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke" (2003).  I read some of her material at TPMCafe, and watched her appearance on Bill Moyers program, which gave me a sense of the human being behind some important writing and research.   Later, she co-authored the study which connected a large share of personal bankruptcies with lack of effective health insurance.

And I share the enthusiasm of the readers' comments there.

She advocates for the middle class, which is a fine idea, and for the consumer, which is also a fine idea.  I am led to wonder, however, whether she is familiar with the statistics about middle class income and middle class wealth.  

If we define the "middle class" as the middle 60% of the income distribution, our "middle class" has

• less than 26% of the aggregate net worth, and
• about 36% of the pretax income. 

If we define the "middle class" as the middle 50% of the net worth distribution, our middle class has

• less than 14% of the aggregate net worth, and
• less than 34% of the pretax income. [data source: 2007 Survey of Consumer Finances Chartbook]

Another recent article about Warren, includes this quote:

"She truly believes that markets can work, but she knows that participants in the market have strong incentives to rig things in their favor," says Adam Levitin, a former student of Warren's who specializes in bankruptcy law at Georgetown University. "If participants have a sweet deal, they'll be upset at anyone who wants to level the playing field."

While Warren sees some of that level playing field clearly -- and definitely has a gift for communicating what she sees -- IMHO, she doesn't yet see most of the land-related aspect of it.   She senses it, in the chapters of Two-Income Trap which deal with middle-income couples bidding up the price of housing in good school districts, but she doesn't see the half of it yet.

I hope that she might buy (or download -- see the next link) a copy of the modern abridgment of Henry George's landmark book on political economy, "Progress and Poverty" for some airplane reading.  (Political economy is the science which deals with the natural laws governing the production and distribution of wealth and services.)  One can also read the book online or download MP3s.

Most people don't see the "sweet deal" which has produced the income and wealth distributions described above.  But George explains it very clearly.

Land in Manhattan

One Broadway deal - NYPOST.com.

I don't know quite when it occurred, but I am intrigued to see that the sale of a piece of land is no longer described in dollars per acre, or dollars per square foot of land, but rather in dollars per square foot of permitted development.  This item is about a lot at the corner of 56th and Lex in midtown Manhattan.  The lot size isn't even mentioned.

The article mentions that it includes seven vacant small buildings!  Imagine!  Vacant buildings in midtown Manhattan!  Not even so-called "taxpayers."

The Turkey-based Kiska Development has bought the development site at the northwest corner of 56th Street and Lexington Avenue for $33.9 million, or $386 a square foot.

The lot can accommodate 88,000 square feet of development, and while the expectations are that the space will hold a hotel, its flexible zoning means it could host offices, retail or residential. Kiska, which is led by Kagan Gursel, created the Marmara-Manhattan extended stay hotel on East 94th Street, which was converted from a condominium. Gursel runs Marmara out of Istanbul. The site encompasses seven vacant small buildings and runs from 678, 680, 682 and 684 Lexington Avenue around the corner to 131, 122 and 135 East 56th Street.

What sort of incentives do we have in place if this many buildings can sit vacant?   The assessor must be valuing them at some token value, rather than at their genuine land value.  The existing buildings may be worth nothing -- but the land clearly has value.    Setting things up so that owners can afford to let that land sit unused is dumb!   A property worth $33.9 million, as a teardown, should be paying something approaching 5% of that amount in land taxes per year.  That would be $1.7 million in taxes.  If we only collect 4%, and leave the other 1% as a bonus for the landholder, that would still be $1.36 million -- far better than collecting that same amount in sales taxes or wage taxes.

NYC may have its reasons for not collecting the rental value of its land.  Maybe it has plenty of revenue already to meet all its needs.  But the federal government and even NYS could use that revenue, and ought to be collecting it if NYC chooses not to.

I wonder what the sellers would tell us they did to earn their $33.9 million.  When did they buy these sites, and how much did they pay?  How much have they earned in rents on them since then?  And what did they do to produce the increase in value in the intervening time?  (How many people have they housed?  How many jobs have been made within those walls within their ownership?) 

Some people work very hard to earn a living (at $50,000 a year, $33.9 million represents 678 years of work).  Others leverage a small down payment and a few years of mortgage payments, and walk away with a significant gain, taxed as a "capital" gain, at a lower rate than the wages of those who work for a living.

How Is The Distribution Of Wealth Determined In The United States?

One of my standing google alerts brought me to a page where this question was posed.  I jumped in to answer it, and thought I'd share my answer here:

Answer #1: It is determined by what we tax and what we don't; what we permit to be privatized, and what we socialize.  When we permit the privatization of natural resources and the economic value of land, by collecting only small royalties and low taxes on land value, we permit individuals and corporate shareholders to privatize value which all of us create.  Corporate stock ownership is quite concentrated, even though lots of people own a little each.

When we place taxes on buildings, and the sales of goods and sometimes services, we tax that which individuals and corporations create.  Many would argue that this is unfair, and most economists would agree that we discourage production, innovation and job creation.

When we place taxes on wages, we socialize a part of that which individuals create.  At the very highest income levels, where a significant portion of "wages" might actually be natural resource values, or urban land rent, or other kinds of privilege, we are -- somewhat clumsily -- collecting via an income tax that which ought to have been collected via taxes on land values and natural resource values.  But it is a clumsy tool.

When we tax the very largest estates (we currently tax the estates of fewer than 1% of the people who die each year), we are collecting, once per generation, a percentage of the appreciation of land and natural resources (which hasn't been taxed yet)  -- which is better than never collecting it at all but far inferior to collecting it annually --  but we are also collecting some things which are genuinely the fruits of someone's labor or brilliance.

Huge fortunes may be built on good ideas, but frequently they are built on urban land values, on natural resources (Jed Clampett) -- or on privilege or monopoly of some kind.  "Capital" doesn't appreciate.  As every homeowner knows, buildings depreciate, even with good maintenance.  As every car owner knows, cars and other machinery depreciate, even with good maintenance.  What appreciates is what is scarce or in finite supply: choice urban lots and nonrenewable natural resources that meet a consumer need.  When we permit some of us to say "THIS IS MINE!"  we determine wealth distribution.  The rest of us pay the privileged folks for that upon which we rely to live.   What a deal!  Every young person must either pay rent or buy a piece of land on which to live, and much of our housing payment is for the location, not the structure; and on top of that we must pay interest.  (Guess who benefits? Shareholders of lenders.)

You might be interested in the fact that the board game Monopoly is based on a game which was developed in the early 1900s to teach these ideas.  It was called The Landlord's Game, and it came with two sets of rules.  One set was called the Prosperity rules, and it made for a rather dull game: no big winners, no abject losers.  Not an exciting game, but a model for sustainable living, in which all could prosper.  Needless to say, the board game Monopoly is based on the other set of rules.

Should life be based on Monopoly rules, or Prosperity rules?

Answer #2: If your question was "how do we measure the distribution of wealth" then perhaps the best answer is via the Federal Reserve Board's triennial Survey of Consumer Finances, last conducted in 2007.  They survey households in great detail, and then report how wealth in total and of various kinds, and debt, are distributed.  However, since their sample omits the Fortune 400, they under-report the concentration of wealth.   See http://lvtfan.typepad.com/lvtfans_blog/2010/02/the-house-of-tranquillity-a-middle-class-agenda.html for a bit about wealth concentration, and look on that same page for more about the Survey of Consumer Finances (SCF). 

Debt in America

A new study on the Federal Reserve Board site provides some interesting data from several years' worth of Survey of Consumer Finances data.  The data is not new, but it is stark, and worth paying attention to.  The study is a working paper entitled The Finances of American Households in the Past Three Recessions: Evidence from the Survey of Consumer Finances.

While the working paper is focused on modeling what has happened to various parts of our population since the 2007 SCF (this is not an analysis of the return to the 2007 panelists in 2009, which will be out later in the year), what I'm presenting here is actual SCF data.  It comes from Tables 5 and 7.

		1989	2001	2007
All households
	1. Percent of households holding debt:	72%	75%	77%
	2. Percent of households holding mortgage debt:	40%	45%	49%
	3. Median ratio of debt to income:	0.5	0.8	1.1
	4. Percent of HH with debt payments >40% of income	10%	12%	15%
Households by Income Percentile:
	1. Percent of households holding debt:
	Bottom 40%	53%	60%	61%
	Next 40%	82	84	87
	Top 20%	91	88	89
2. Percent of households holding mortgage debt:
	Bottom 40%	16%	20%	22%
	Next 40%	47	53	60
	Top 20%	72	76	79
3. Median ratio of debt to income:
	Bottom 40%	0.3	0.5	0.7
	Next 40%	0.6	0.9	1.4
	Top 20%	0.6	0.9	1.2
4. Debt payments >40% of income
	Bottom 40%	19%	22%	23%
	Next 40%	8	9	14
	Top 20%	3	3	6
Age of Head:
1. Percent of households holding debt:
	<45 years	84%	86%	85%
	45 to 64 years	78	81	85
	>64 years	38	43	48
2. Percent of households holding mortgage debt:
	<45 years	45%	48%	48%
	45 to 64 years	48	56	61
	>64 years	15	21	28
3. Median ratio of debt to income:
	<45 years	0.6	0.9	1.3
	45 to 64 years	0.5	0.8	1.1
	>64 years	0.2	0.4	0.7
4. Debt payments >40% of income
	<45 years	10%	11%	14%
	45 to 64 years	10	12	15
	>64 years	9	15	15

Do you notice the trend?  An increasing proportion of us are helping to make the FIRE sector --  the shareholders in the finance, insurance and real estate businesses -- wealthy. 

Nearly half of retirees have debt, up 1/3 from 1989, and median debt has n tripled.  Nearly 3 in 10 retirees have mortgages, and 15% of retirees (or is that of the retirees with debt?) have over 40% of their income devoted to debt payments.

Among our young people -- <45 years of age, 85% have debt, and at the median, their debt is 1.3 times their income, more than double the ratio 18 years earlier. 

A wealth concentrating machine.  The FIRE sector -- the banks, the insurance companies, the real estate interests -- are have been permitted to create a giant wealth machine, too big to fail.

But not too big to correct.  There ARE things that can be done.  I encourage you to take a look at Mason Gaffney's new book, After the Crash: Designing a Depression Free Economy.  (read the interview linked at http://www.masongaffney.org/, or find the book at schalkenbach.org's bookstore.

The Top 400, and the Rest of Us

The Top 400 and the Rest of Us

2/23: I added a postscript to this one ... scroll down!

David Cay Johnston, first known to many of us as the tax reporter for the NYT, and more recently the author of Perfectly Legal and Free Lunch, and as a columnist for tax.com, last week brought to popular attention a story which the IRS posted to its website without the normal fanfare which announces a new piece of information there.  Even more interesting is the fact that it represents a return to the IRS reporting data which was customarily furnished during the Clinton years and suppressed by the Bush administration, who brought us substantial tax cuts for the highest-income Americans -- and for the highest-value (top 1%) decedents.  As Andrew Leonard put it in Salon,
 

This is America, right? We've come to expect shocking statistics on income inequality. They're practically our birth right.

But then came the kicker:

The annual top 400 report was first made public by the Clinton administration, but the George W. Bush administration shut down access to the report. Its release was resumed a year ago when President Obama took office.

Because you know, if you are going to reward the richest Americans with tax cuts, it's best if you keep the rest of us in the dark as to just how much money they're making, and how little they are paying Uncle Sam.

The new information relates to the top 400 income taxpayers.  The data published brings forward the series data, previously published for 1992 to 2000 (See http://www.irs.gov/pub/irs-soi/00in400h.pdf, published in 2003) to 2007.

Here are some of the highlights of the 2007 data:

• The adjusted gross income threshold for being among the top 400 taxpayers rose from $24.4 million in 1992 to $138.8 million in 2007.   In constant dollars, that was approximately a quadrupling in 15 years.
• The average AGI among the 400 taxpayers rose from $46.8 million (192% of the cutoff) in 1992 to $344.8 million in 2007 (248% of the cutoff).
• In 1992, the total AGI of the 400 represented 0.52% of the total AGI for all taxpayers.  In 2007, the 400 represented 1.59% of the total AGI.   In those years, total taxpayers increased from113.6 million to 143.0 million.  The 400 represented .00035% of the households in 1992, and .00028% in 2007.
• Over the same period, the average AGI for the remaining taxpayers increased from $31,781 to $59,798.
• Salaries and Wages represented 26.22% of the Top 400's AGI in 1992; by 2007, that had decreased to 6.53% -- an average of $29.4 million per taxpayer, for the 306 who reported such income.  306 is the lowest figure since 1992.
• All 400 reported Taxable Interest income.   On average, they reported $27.1 million.  In total, their taxable interest exceeded their salaries and wages.   In total, their taxable interest was 4.04% of total US taxpayer interest.
  
• All 400 reported Dividend income, and their average was $24.5 million.  Their dividends were 4.14% of total US taxpayer dividends.
• The vast majority of their reported taxable income was in "Net capital Gains less Loss in AGI": an average of $228.6 million each.  Their capital gains equaled 66.29% of their AGI, and 10.07% of total US taxpayer capital gains.
• Virtually all of their capital gains -- $226.4 million on average --were subject to preferential rates; this means they were "long-term" holdings, and were taxed at 15%.  [And of course none was subject to FICA, on which the vast majority of those who labor pay 14% (more precisely, (7.65*2)/107.65, or 14.2%).] 
• 49 reported net business income, averaging $3.2 million.  More, 84, reported net business losses, averaging $2.6 million -- they represented 3.06% of the US aggregate.  
  
• 202 reported Partnership and S Corporation net income, averaging $83.0 million.  185 reported Partnership and S Corporation net losses, averaging $25.2 million -- 3.52% of the US aggregate.
• Their itemized deductions averaged $49.4 million, 1.46% of the US aggregate; the average itemized deductions limitation was $5.4 million -- they represented 5.4% of the US aggregate.
• On average, they claimed "taxes paid" deductions of $13.9 million, and "interest paid" deductions of $9.9 million.  Their "taxes paid" deductions represented 1.17% of aggregate deductions for taxes paid.
  
• Almost all claimed contributions deductions, averaging $28.5 million -- 5.73% of the US aggregate.  (Interesting that this is roughly equal to salaries and wages, or to dividend income, or to taxable interest income!)
• Their Taxable Income grew from an average of $42.2 million to $296.2 million.  In constant dollars, it increased 376%.  In 1992, their taxable income represented 0.70% of the aggregate; by 2007, theirs was 1.95% of the total.
• Their federal income taxes averaged $57.3 million; in total, the 400 represented 2.05% of the total paid, up from 1.04% in 2007.  [Compare the former percentage to their 1.59% share of AGI, and their 1.95% share of Taxable Income.] Their average federal tax rate was 16.62% in 2007, down from 26.38% in 1992. 
• If we add the amount they claimed as a deduction for taxes paid to their federal income tax, their taxes represented 20.57% of their AGI in 2007, down from 32.12% in 1992.   Their other taxes paid dropped from 5.74% of AGI in 1992 to 3.95% in 2007.
• These 400 taxpayers paid a total of $28.4 billion in taxes, federal and other, in 2007, on AGI of $137.9 billion and taxable income of $74.7 billion.
  
• In 2007, they paid $28.4 billion in taxes, federal and other.  Had their tax rate in 2007 equaled their tax rate in 1992, they would have paid $44.3 billion in taxes, federal and other, or about $110.7 million on average, instead of $70.9 million.
  

Johnston's Tax.com article also points out:

The top 400 reports understate actual top incomes because of deferral rules. For example, managers of offshore hedge funds who deferred their gains may not be counted in the top 400 reports, which are based on the figure on the last line of the front page of Form 1040.

At least three hedge fund managers made $3 billion in 2007. It is not known how much, if any, of their income they deferred.

and

Only 7 of the top 400 have shown up in the report every year, the IRS data showed. Of the 6,400 returns covered by the 16 years of the report, the IRS said that 2,515, or almost 40 percent, appeared one time.

The previous report (before the Bush administration suppressed publication), said that less than 25% of the then 3600 returns appeared more than once between 1992 and 2000.  

A very useful table in DCJ's column shows that the income of the bottom 90% of taxpayers has increased by a mere 13% (in constant dollars) over the 16 years.

The IRS data is in a pdf at http://www.irs.gov/pub/irs-soi/07intop400.pdf

The data prompts a number of questions:

• How much of this income do you think they spent on consumer goods? 
• What do you think they did that helped stimulate our economy?   
• How many people do you think they employed, and what sort of wages did they pay?
• What do you think this year's portion of each fortune will be worth upon the death of the recipient? 
• What do you think they invested their windfalls in?   I'm guessing that a lot of it went into land -- urban land -- and non-renewable natural resources of one kind or another -- that which Will Rogers and others have pointed out is not being made anymore. 
• What industries do you think these fortunes are coming from?  How have these people benefited from the boom-bust cycle which has victimized millions of Americans?  What privileges have we-the-people granted them to reap what we-the-people sow?  To what degree have they benefited from privatizing the commons -- things which rightly belong to all of us?  What sort of contribution do you think these companies have made to pollution, to personal bankruptcies, to concentrating America's wealth in the pockets of a relative few?  How many jobs have they moved offshore?  Are they being paid in shares or stock options that burden their employer's shareholders?   What sort of wages have they paid their employees at various levels on the pyramid?   What sort of influence will they have over our next elections -- Senators, Congressmen, Governors, President, etc., -- and over future decisions to go to war in various resource-rich parts of the world?  They can certainly afford to spend to influence public opinion in ways which benefit their interests, and to guarantee that they won't be taxed heavily, even if workers, who end up with little, are.   

Postscript: See also NYT opinionator blog post, The Great Goldman Sachs Fire Sale of 2008.

The article lists a number of people who will likely be in the 2008 second tier -- not the top 400, but clearly well into the top half percent, based on their selling Goldman Sachs stock; the article isn't clear about what their basis might have been in the stock -- but one sold shares worth $17.6 million plus $55.7 million (he may not be an American).  Another, who ran the merchant banking business, sold $29 million worth.  The article suggests that most of these sellers still have considerable amounts of Goldman Sachs stock; Lloyd Blankfein's 3.3 million shares are now worth more than $500 million.  Should he sell, he'd be well onto the Top 400; the 2007 threshold was $139 million.  

I'm guessing that many on the top 400 list in any particular year are people who have sold a privately held business to a large corporation.   They've paid 15% on the capital gains, and will likely rail against paying an estate tax on the other 85%.

Looking Forward

Looking for the phrase "I am for men" (see an earlier post, below) I came across a 1906 book by August Cirkel (circa 1870-1946), of Chicago, entitled "Looking Forward."  His prefatory note is as follows:

An apology is, peradventure, due the memory of Edward Bellamy for the semi-plagiarism in the title of this book.  It is true that "Looking Backward" suggested the name I have given it. The ideally happy condition of all the people, that Mr. Bellamy pictured as resulting from socialism, I look forward to as a result of a higher development of individualism.

The variety of topics considered may make the work seem presumptuous.  But though the subjects are various, the same strain runs through all.   Like the Irishman with his shillalah at the county fair, wherever I have seen a monopoly head, I have taken a whack at it.  If there are any sore pates or broken craniums on account of my impartial and promiscuous blows, I shall know that I have not labored in vain.

A.C.

A passage in the middle of "Looking Forward" caught my eye, and I added the preceding ones for setting the scene.  In this age of "too big to fail" and 10% of our households having over 70% of the aggregate net worth, a lot still rings true after 100 years:

We have one concern controlling far more than half the oil, another more than half the iron, another half the coal, another forming to control much more than half the copper, a few combinations working towards ownership of all the railroads and steamship lines; another, meat; in our large cities, the public service corporations are one by one being gobbled up by the same group of capitalists who control these other companies. It is probably safe to say that the so-called trust crowd now controls at least forty percent of the business and wealth of the country; moreover, the portion so controlled is organized on such a basis that the profits exacted each year reach the public with almost the directness of a tax. Without exception each one of these gigantic monopolies makes millions in the way of earnings disbursed to pay interest on bonds and dividends on stocks.

The profits of the Standard Oil Company have averaged forty percent per annum for many years; others of these companies are nearly as successful. In ordinary business only the very few after a period of twenty or thirty years can show a larger capital than they had at starting, and many fall by the wayside; but each, and every one, of these giant corporations makes tremendous gains. The public seems to have acquiesced in their right to fix the tribute that they will levy each year, and has grown so accustomed to their demands as not to analyze this right.

A few years ago Henry George tried to stir the people to a realization of the wrongs contained in the private ownership of land; but excepting the few Single-tax Leaguers who still try to keep alive the fires he kindled, few have given serious consideration to this matter, and many think him to be a vain dreamer of impossible conditions.

His theory as to the manner of applying a remedy has doubtless estranged many who accede to the correctness of his views as to existing wrongs. His argument as to the natural right of all mankind to the earth, the air, and the waters on the earth or underneath it, cannot well be refuted.

Let us suppose ten families occupy an island, and that this island constitutes all the land on the earth. Now, assume that they organize a regular government, the rights of each and all being fully considered and agreed to by every one, and, further, that every individual is perfectly satisfied that justice has been done him. Suppose that they agree to divide the island into ten equal parts, giving each family an equal portion, for which a patent is issued by the government, each soul on the island being satisfied that the division is fair and also satisfied with his allotment. There being no one on earth except the ten families, and as they are all content and happy, at first blush it might appear that they had a right to make this apportionment, and that there is no element of wrong concealed anywhere in the transaction. In doing this they certainly would be doing no more than has been done by nearly every people in history, and on a much more equitable basis. They overlooked, however, the changes to be wrought by time. After the apportionment, let us say that the islanders, being ordinary human men and women, went about their vocations in the usual manner, and led their lives as humankind generally does; let us say that there existed among them the same differences in capacity and temperament and habit of life that commonly prevail among people — some being thrifty and industrious, others improvident and idle, as men have been, are now, and perhaps always will be. What would probably happen? In a short space of time possibly fifty percent of the population would sell their share in the island to the provident class, and in the course of time twenty-five percent might come to hold absolute title to all the land. In consequence, the children born of the families that sold their holdings would have no land. The children born to the twenty-five percent would own it all.

If the laws of the island were based on the same principles as now obtain in the laws of the United States, it would be perfectly lawful for the twenty-five percent to say to the seventy-five percent that they might work the land on shares, giving the landlords half of the product of their labor. As there would be no possibility of procuring a livelihood otherwise, this offer would have to be accepted, if the laws were obeyed.

Normally, it is hard enough for a laborer to gain his living by the sweat of his brow, though he gets the full product of his labor. How much more difficult the situation when half of all he produces must be handed to another! In Ireland the situation was parallel to this; the poor Irish tenants tilled the soil of their native land, but instead of getting the full product of their labor, a large portion was pitilessly exacted by alien landlords. In lesser degree in nearly every country on earth the situation is comparable to this, the burden being disguised in various ways.

We, then, have seventy-five percent of the islanders giving up to the twenty-five percent one half of the product of their labor. Assuming that the original ten families that organized the government and apportioned the island have all died, by what God-given principle should the seventy-five percent of the population be required to give half of the fruits of their efforts to the twenty-five percent? Yet under our own laws would this not be possible, yea, natural? Without doing anything whatever, the twenty-five percent would be getting a revenue one and a half times as great as they could produce if working on an equal basis with the others. Because their fathers had got possession of the island, these few without toil get half again as much as they could produce if toiling, while the rest, though constantly laboring, get only half of the results of their labor. There are doubtless those who will say that the thrift of the original provident islanders should entitle them to transmit their gain to their children. Very good, but how about the thrift of the seventy-five percent now? The twenty-five percent may be compared with the original spendthrifts, as they squander without toiling, and by a just continuance of the rule, the children of the thrifty toilers should get back the island. On the face of the proposition this would manifestly be impossible. Let us go a step farther. Suppose the twenty-five percent, grown haughty with power, exercise it so arbitrarily that the others object, would it not be possible under laws like the laws of the United States, for the minority to refuse the majority employment except on the terms of the minority? What must be the consequence? Either submission to slavery by the seventy-five percent or starvation, if the laws are obeyed, or revolution and rebellion, if they are not. It cannot be an answer to the argument to hold that the ordinary principles of morality would restrain the minority in their exactions. History has not demonstrated that those who grow great with power never grow greedy. Then, if there is no justice in requiring the seventy-five percent to give up half their labor, is there justice in a situation or in laws which compel this result?

In the United States we have not even been as fair as the islanders, no equal division ever having been made, nor has every person been satisfied that his share is just; yet most of the land has been passed to the possession of private owners by patent from the government, and the average man has always thought, and the average man now thinks, that as a general proposition this was just, although knowing and admitting the possibility of minor wrongs. People have had the notion of private ownership of land so thoroughly grounded by long custom, that it seems the natural, rather than the artificial, manner of holding. Community of interest is repugnant to most minds. Socialism is believed to be a theory that might answer the requirements of angels, but finds small space for application among the wingless crowd on earth. Yet if the principle of private ownership is wrong as applied to the island, is it not equally wrong with us?

A few years back, owing to financial stress in the business world, vast numbers of men were idle from inability to find employment. Coxey gathered together a tatterdemalion army of the riffraff, tramps, and bums of the country, and marched them to Washington to emphasize to Congress the hardship of the situation, and to beg relief. He was derided and jeered at every hand. The public looked upon the idea as one of a crank, laughed at it, and dismissed it from their minds. Yet out of this army of thousands, how many possibly were sincerely desirous of a chance to earn an honest livelihood? The country at that time was infested with tramps, but since times improved the majority of them have gone to work again, and Coxey is forgotten. But way down deep, unperceived by the casual thinker and busy every-day man, some elemental principle had been violated, and in consequence the deplorable condition resulted. These men had a right to live. They had a right to labor. They had as good a right as any one of us to use God's soil, and to breathe God's air, and pity for them on our part by no means fulfilled our duty towards them. Somehow, little they knew how; somewhere, little they knew where; some time, little they knew when,— they had been cheated of the rights that are due to every human being that comes upon this earth.

The Declaration of Independence holds it to be a self-evident truth, that all men are entitled to life, liberty, and the pursuit of happiness. What a grim sardonic joke this would be, if read some Fourth of July to a ragged army of a hundred thousand starving men, women, and children, willing to labor, but with naught to lay their hands to! Hollow, indeed, would it sound, and the mockery would be so apparent to the multitude that I doubt not they would feel that somehow a terrible injustice had been done them.

When the ten families divided the island they allotted what belonged to God, and not to themselves, except as a blessing flowing from Him. They had no right to alienate the title from the whole community. The island belongs to every child who is born upon it, and each has as good a right to its benefits as every other. The ten families deeded away what they had no right to. Posterity was not considered, but the child then unborn owed no duty to the agreements made adverse to his interests by incompetent, reckless, luckless, or improvident ancestors, who bartered away his birthright. It was not theirs to give.

We must all, high and low, rich and poor, young and old, somehow or other, directly or indirectly, get our living from the earth. Necessity compels every one to eat to live. How fulfill this necessity except by application to Nature? What right has any government so to shape its laws that one single human being is debarred from his God-given right to labor in order to sustain his life? Organize society as you will, if provision is not fully made to protect the unborn souls to come, an injury is done, a seed is planted that will grow and bear suffering.

Henry George's theory is correct. The land belongs to all, the air and the water belong to all. If we are on earth for a purpose, and the God of chance is not ruling our destiny, as no man who thinks deeply can believe, it behooves us to conform to Nature's laws. The rules of conduct prescribed by people hundreds of years ago should have no binding force upon us today against our reason. Because people have always divided the land, it is not proof positive that their methods have been correct. Humanity has not reached the acme of advancement by any means. Some things are done vastly better today than ever before in history. It seems as if progress is being made. The world seems to be growing better. Yet how would this be possible but by the correction of previous wrong conceptions? Progress can never be made contrary to Nature's law; the decay of the nations of history proves the inexorableness of her workings. Conformity to her decrees, through principles of justice, of liberty, of equality, has ever led to advancement at a tremendous pace; but selfish interests have always injected into the laws of the nations the virus of destruction; decay ensues, the people become enfeebled, corruption reigns, and dissolution follows through the onslaughts of vigorous, lusty races that have grown strong through meting out the justice which the older nations had forgotten.

No government is good that does not give the greatest consideration to its lowliest citizens.

Let's talk about "our lowliest citizens."  Recall that 10% of us have title to 71.5% of the aggregate net worth. The bottom 75% of us have an amazing 12.7% of the aggregate net worth.  A slightly different 10% of us receive 47.2% of the before-tax income, and 20% of us get 61.0% of the pre-tax income.  The bottom 60% of us share --  are you ready? -- 20.9% of the pretax income -- and most economists agree that we're paying 15% of that in social insurance taxes on our wages, plus federal and state income taxes, sales taxes, taxes on our buildings and on our land (if we own any).  (Remember Leona Helmsley's observation about who pays taxes.)

Looking forward ... to more of the same?  To a society which doesn't automatically enrich a small segment of us at the expense of the rest, who, most of us would agree, work equally hard, even if we're not in privileged categories of the real estate, finance, insurance or natural resources sectors, or otherwise endowed with a monopoly which feeds them so abundantly at the expense of others.

In many fast examinations of the Gilded Age, Edward Bellamy's book on socialism, "Looking Backward" is mentioned in the same sentence with Henry George's book best-selling "Progress & Poverty."  The former book seems to be more widely assigned reading, in courses which bring in original sources.  This is a shame.

The Monkeys Disgrace

A friend sent me this poem, which seems a complement to Uncivilized, by Edmund Vance Cooke (1866-1932).  I first heard Uncivilized at a CGO meeting in Alburquerque perhaps 5 or 7 years ago, when Everett Gross recited it from memory.  The third verse of this one seems to me to be a direct reference to Uncivilized.

The Monkeys Disgrace

Three monkeys sat in a coconut tree
Discussing things as they're said to be.
Said one to another, "Now listen, you two,
There's a certain rumor that cannot be true,
That man descends from our noble race -
The very idea is a disgrace.

No monkey ever deserted his wife,
Starved her babies and ruined her life;
And you've never known a mother monk
To leave her babies with others to bunk,
Or pass them on from one to another
Til they scarcely know who is their mother.

And another thing you'll never see -
A monk build a fence around a coconut tree
And let the coconuts go to waste,
Forbidding all other monks to taste.
Why, if I put a fence around this tree,
Starvation would force you to steal from me.

Here's another thing a monk won't do -
Go out at night and get on a stew,
Or use a gun or club or knife
To take some other monkey's life;

Yes, Man Descended - That ornery cuss -
But, brother, he didn't descend from us!"

     - anonymous

Uncivilized begins,

An ancient ape, once on a time,
Disliked exceedingly to climb,
And so he picked him out a tree
And said, "Now this belongs to me.
I have a hunch that monks are mutts
And I can make them gather nuts
And bring the bulk of them to me,
By claiming title to this tree." 

[read the entire poem here]

One source attributes The Monkeys Disgrace poem to Nettie Bates Thomas, another to Ogden Nash.   Yet another compares it to a 1950s Broadway show tune, which you can hear here.

But I've also found a lot of other attributions for it, some which date it back to within Cooke's lifetime: 

"I Am For Men"

That's the slogan on the two-story high advertising mural found recently on a building in Galesburg, Illinois.  (Photo here.)  It is an ad for Henry George 5 cent cigars.  (See also this page of cigar ads.)

The "I am for men" slogan was on a pin I found on ebay a few years ago.  The seller made some comment about it being anti-feminist.  Well, she or he didn't know much about George.

When I googled the phrase, I found some interesting things.  Here's one:

Henry George, a nineteenth-century American author and political economist, was nominated for the office of mayor of New York in 1886. He was called to a meeting at the Cooper Institute to speak to working men. The chairman of the meeting gave him a flowery introduction with the customary political rhetoric. The chairman concluded by saying, "Henry George is the friend of the working men." As soon as Mr. George rose to his feet, slowly and emphatically he said, "I would like to announce that I am not the friend of the working man." Stunned silence ensued -- a strange kind of bewilderment. He went on, "Nor am I the friend of capital. I am for men simply as men, regardless of any accidental or superfluous distinctions of race, creed, color, class, function, or employment."  [source.]

I found a front-page article in the Scranton (PA) Tribune and Kansas City Journal (among others) of October 30, 1897, the day after Henry George's death, which reported some of the campaign speeches George had given on his last day, a few days before the 1897 mayoral election.  Here is one of them:

At College Point there were 1,200 common laborers, a rough crowd, closely packed in the hall.  Mr. George was introduced as the friend of the working man.

He began: "I have never claimed to be a friend of the workingmen.  I do not now make any such claim (there was a pause of dead silence).  I have not and do not intend to advocate anything in the special interest of the laboring man (another dead pause; Mr. George walked the full length of the platform and let out his full voice in a shout:).  I am for men! (The crowd set up such a cheering and stamping that the room was filled with a choking dust).  I am for men! -- the equal rights of all men.  Let us be done with asking privileges for the laboring men."

I also found a 1906 book called "Looking Forward," by August Cirkel, which has a chapter by that title which starts with these paragraphs:

"I am for men." This famous expression, uttered by Henry George, sounds the keynote of the true spirit in which every public policy should be tested. Does it make men? Does it make them stronger, or wiser, or better? These are the all-important questions to be asked, when the effect of any system is to be noted. If the answer cannot be made affirmatively, sophistical must be the arguments that support it.

The kind of laws and institutions any people lives under is the kind of laws and institutions that that people deserves to live under. Every thing of life builds the body that it inhabits, and what kind of abode it constructs for itself, that is the kind of abode it must dwell in. Every people makes its own government. Where a race is ruled by tyrants, craven fear smites the hearts of the masses, and rather than endure the dangers of asserting their divine prerogative of freedom, they shuffle through life in cowardly submission to a few men no stronger than themselves.

I found a 1910 speech by Theodore Roosevelt, entitled "New Nationalism" which contains these paragraphs:

I believe in shaping the ends of government to protect property as well as human welfare. Normally, and in the long run, the ends are the same; but whenever the alternative must be faced, I am for men and not for property, as you were in the Civil War. I am far from underestimating the importance of dividends; but I rank dividends below human character. Again, I do not have any sympathy with the reformer who says he does not care for dividends. Of course, economic welfare is necessary, for a man must pull his own weight and be able to support his family. I know well that the reformers must not bring upon the people economic ruin, or the reforms themselves will go down in the ruin. But we must be ready to face temporary disaster, whether or not brought on by those who will war against us to the knife. Those who oppose reform will do well to remember that ruin in its worst form is inevitable if our national life brings us nothing better than swollen fortunes for the few and the triumph in both politics and business of a sordid and selfish materialism.

Near the end of the same speech, TR says this:

One of the fundamental necessities in a representative government such as ours is to make certain that the men to whom the people delegate their power shall serve the people by whom they are elected, and not the special interests. I believe that every national officer, elected or appointed, should be forbidden to perform any service or receive any compensation, directly or indirectly, from interstate corporations; and a similar provision could not fail to be useful within the States.

The object of government is the welfare of the people. The material progress and prosperity of a nation are desirable chiefly so long as they lead to the moral and material welfare of all good citizens. Just in proportion as the average man and woman are honest, capable of sound judgment and high ideals, active in public affairs; but, first of all, sound in their home, and the father and mother of healthy children whom they bring up well; just so far, and no farther, we may count our civilization a success.

(TR by that time had become quite comfortable with Henry George's ideas. See his party's 1912 platform "A Confession of Faith.")

In 1917, Luke North (James Hartness Griffes) published a book of poetry entitled "Songs of the Great Adventure" which included this:

"I AM FOR MEN"

He stood for Men —
Not for parties, sections, classes;
Not for dogmas, doctrines, isms —
Nor all the minutiae of over-elaborated plans for the future,
Nor for craven caution, dissimulation, equivocation —
Patience that now outrages virtue —
Program'd ways and means which if not followed
The world may stay in hell.

He stood for Men —
For in his soul he knew the line of cleavage
Was not between the robber and the robbed —
Was not marked by external difference,
By rank or class or occupation or wealth or poverty.
He knew that poor men could be very cruel and rich men kind.
He knew the line of cleavage was in the heart — those who care and those who don't —
This Henry George who wrote "Progress and Poverty."

He stood for Men —
And was he wrong to yield no tithe to classes?
What has now become of all the appeals
To class interest, class consciousness, class solidarity?
The human heart will not respond to them — in every class are tyrants.
The human mass forgets its every interest,
Flings to the wind all self and class advantage
And goes out to die for a word.

He stood for Men —
And showed the world how to unshackle the chains that bind men.
He showed how poverty begins,
Where modern slavery has its roots,
And how to tear them up.
The earth is for all men, he said —
And his word has gone around the world —
And now it's time to act!

He stood for Men —
Not creeds and doctrines, nor all the lesser details of future contingencies.
He bared the earth to man.
It is for us to take it.
He tried to gain it, and was beaten back to his death.
Now we will gain it —
At whatever cost!

Check out this fine book of poetry -- and if you know of a songwriter looking for inspiration, send them to this starting page.

It is ironic that Henry George's name became associated with cigars.  He smoked, and that likely contributed to his premature death at age 58.   He wrote about cigar-making and taxation as follows, in Chapter 8 of "Protection or Free Trade?"

It is no wonder that princes and ministers anxious to make their revenues as large as possible should prefer a method that enables them to "pluck the goose without making it cry," nor is it wonderful that this preference should be shared by those who get control of popular governments; but the reason which renders indirect taxes so agreeable to those who levy taxes is a sufficient reason why a people jealous of their liberties should insist that taxes levied for revenue only should be direct, not indirect.

It is not merely the ease with which indirect taxes can be collected that urges to their adoption. Indirect taxes always enlist active private interests in their favor. The first rude device for making the collection of taxes easier to the governing power is to let them out to farm. Under this system, which existed in France up to the Revolution, and still exists in such countries as Turkey, persons called farmers of the revenue buy the privilege of collecting certain taxes and make their profits, frequently very large, out of the greater amount which their vigilance and extortion enable them to collect. The system of indirect taxation is essentially of the same nature.

The tendency of the restrictions and regulations necessary for the collection of indirect taxes is to concentrate business and give large capital an advantage. For instance, with a board, a knife, a kettle of paste and a few dollars' worth of tobacco, a competent cigar maker could set up in business for himself, were it not for the revenue regulations. As it is, in the United States, the stock of tobacco which he must procure is not only increased in value some two or three times by a tax upon it; but before the cigar maker can go to work he must buy a manufacturer's license and find bonds in the sum of five hundred dollars. Before he can sell the cigars he has made, he must furthermore pay a tax on them, and even then if he would sell cigars in less quantities than by the box he must buy a second license. The effect of all this is to give capital a great advantage, and to concentrate in the hands of large manufacturers a business in which, if free, workmen could easily set up for themselves.

But even in the absence of such regulations indirect taxation tends to concentration. Indirect taxes add to the price of goods not only the tax itself but also the profit upon the tax. If on goods costing a dollar a manufacturer or merchant has paid fifty cents in taxation, he will now expect profit on a dollar and fifty cents instead of upon a dollar. As, in the course of trade, these taxed goods pass from hand to hand, the amount which each successive purchaser pays on account of the tax is constantly augmenting. It is not merely inevitable that consumers have to pay considerably more than a dollar for every dollar the government receives, but larger capital is required by dealers. The need of larger capital for dealing in goods that have been enhanced in cost by taxation, the restrictions imposed on trade to secure the collection of the tax, and the better opportunities which those who do business on a large scale have of managing the payment or evading the tax, tend to concentrate business, and, by checking competition, to permit large profits, which must ultimately be paid by consumers. Thus the first payers of indirect taxes are generally not merely indifferent to the tax, but regard it with favor.

The other passage about cigars which I recalled turned out to be not from Henry George, but from his friend Louis F. Post, who went on to be President Wilson's Secretary of Labor:

Though land value has no effect upon the price of good, it is easier to sell goods in some locations than in others. Therefore, though the price and the profit of each sale be the same, or even less, in good locations than in poorer ones, aggregate receipts and aggregate profits are much greater at the good location. And it is out of his aggregate, and not out of each profit, that rent is paid, For example: A cigar store on a thoroughfare supplies a certain quality of cigar for fifteen cents. On a side street the same quality of cigar can be bought no cheaper. Indeed, the cigars there are likely to be poorer, and therefore really dearer. Yet ground rent on the thoroughfare is very high compared with ground rent on the sidestreet. How, then, can the first dealer, he who pays the high ground rent, afford to sell as good or better cigars for fifteen cents than his competitor of the low priced location? Simply because he is able to make so many more sales with a given outlay of labor and capital in a given time that his aggregate profit is greater. This is due to the advantage of his location, and for that advantage he pays a premium in higher ground rent. But that premium is not charged to smokers; the competing dealer of the side street protects them. It represents the greater ease, the lower cost, of doing a given volume of business upon the site for which it is paid; and if the state should take any of it, even the whole of it, in taxation, the loss would be finally borne by the owner of the advantage which attaches to that site — by the landlord. Any attempt to shift it to tenant or buyer would be promptly checked by the competition of neighboring but cheaper land.

Location, location, location!  Or, as a friend in the advertising business put it when I told him about George's ideas, Location, Location, Taxation!

Reading Lowell Harriss

As I've noted in an earlier post, Lowell Harriss died a few weeks ago.  I've been reading some things he wrote during his long and productive career.

The first is a piece he wrote in 1978, a few months after Proposition 13, California's taxpayer initiative which lowered property taxes and "protected" property owners from paying for services through property taxes, was passed.  It is entitled "Property Taxation After the California Vote." 

He starts with this: What approach to property taxation would be most in our interest and that of our children?

He provides some history of the property tax, in general and then specifically in California.

Keep in mind that, in California more than in most of the country, assessments on homes rather promptly reflect market conditions -- in an environment in which house and land prices have been rising rapidly. Often, however, local officials did not use the increases in tax base to finance offsetting reductions in tax rates. Homeowners faced rising tax bills; cash income, especially for retired persons, did not always go up correspondingly.

California's colleges and universities were, however, among the best in the US, and surely some significant portion of the public spending was to provide the very services which caused California's property values to rise.

Lowell went on to say,

The full results of Proposition 13 will not appear at once. Only time will reveal whether new jobs develop now as property owners use the addition to their disposable income; whether extensive declines will occur in state-local employment; and how much more erosion of local authority will result from expansion of state payments to replace revenues lost by the sweeping changes in real estate taxes.

He continued,

Present owners of property have voted themselves capital gain "windfalls." The reduction in property taxes will tend to raise real estate prices. Today's owners, in voting essentially permanent reductions in annual property taxes, have enlarged the stream of net benefits (income) to be capitalized in valuing real estate. This one-time capital gain in effect absorbs much of the future benefit from the tax cut. In this respect, the specific results of Proposition 13 are difficult to judge because assessments (but not the tax rate) will rise after a sale. Future buyers will pay a higher price -- higher by enough, in general, to offset the tax benefit.  "No election will ever be lost by votes in the future," runs the conventional wisdom. And certainly California voters did not have future property owners (or voters) in mind when they rallied to the support of Proposition 13.

Lowering the tax reduces the cash required to hold on to underdeveloped land. "Speculative underutilization" becomes less expensive. Waiting for population growth and inflation to boost prices will cost less. The current offerings of land will decline -- and thereby prices will be raised -- because owners face lower cash pressure to sell or develop.  Income tax considerations, of course, complicate individual decisions and require some caution in generalization, but the net effect on land use will be some -- or much -- distortion away from the direction of free-market forces.

Will the California economy get a boost from Proposition 13? Of course it will. Other things being the same, tax something, and there will be less of it (land being an exception). The 50- to 60-percent cut in taxes on man-made capital will alter favorably the "arithmetic" of construction projects in California. How much so is difficult to say. This cost reduction will interact with many other factors, including the forces tending to raise land prices. The change in prospective net returns at the margin may be more modest than impressive. But one conclusion is clear: More capital will flow where tax reduction improves the prospects for investment.

He continues,

The once widely accepted criticism that property taxes are regressive does not survive modern economic analysis. In fact, a persuasive argument in favor of property taxation for local services can be made on grounds of equity. Especially important, it seems to me, is the fact that in effect this tax enables localities to capture some of the fruits of forces raising prices of land, including public outlays on streets, schools, sewers, and other facilities.

He concludes,

Finally, and probably of greatest potential, there is a real opportunity in the wake of Proposition 13 for restructuring fundamentally the way we tax property. We can reduce burdens on man-made capital and make up the revenue from higher taxes on site values, a procedure which seems to me eminently desirable on several grounds. This possibility should be part of the broader public discussion of the role of property taxation stimulated by the vote in California.

One change may be politically tempting -- to reduce burdens on residential property while maintaining or even raising burdens on business and public utility property. Such moves would not only add to concealment of costs of government in the form of hidden burdens on consumers and investors. In addition, the productive portions of the economy would suffer. Building better communities will not come from boosting taxes on business.

Americans should be "up in arms" -- or at least doing something -- about restricting and effectively controlling the growth of government. "Revolt" seems to me too strong a term; it also seems misleading, implying as it does that a single, dramatic action will do the job. Patient, informed, continuing efforts are required. Among them will be the reform of property taxation to develop its potential as a high-quality revenue producer.

Another, earlier paper entitled "Equity of Heavier Reliance on Land Taxation (Location Value) and Less on Improvements" (1970), starts