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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."

Why Do People Become Terrorists?

I heard an NPR story about this woman's work and have not yet tracked it down; in my search, I found this recent NYT article, which pretty well covers what I heard on the radio.  
Private Trauma Gives Jessica Stern Insights on Terrorism

Here are a few paragraphs -- please read the whole thing online, because I've omitted some important material!:

“I’ve really been studying perpetrators and violence all my life.”

How she came to this realization is the subject of her new book, “Denial: A Memoir of Terror,” which Ecco published last week. The book recounts how, in 1973, when Ms. Stern was 15, she and her younger sister were raped at gunpoint in their home in Concord, Mass. The police disbelieved the girls’ account and bungled the investigation; their father, in Europe at the time, didn’t think it necessary to cut his trip short and return. The whole community, she writes, seemed to be in denial.

The experience created in Ms. Stern a kind of emotional numbness — a calmness, even a fearlessness, that has proved oddly useful in her current work.

“I am fascinated by the secret motivations of violent men,” she writes in “Denial,” “and I’m good at ferreting them out.” She found that terrorists would talk openly to her, she said, because she could “go into a state where I almost tried to become that person, and where I felt that if I allowed myself even the tiniest judgmental thought, they could probably sense it.” ...

Not the least of her contributions, he went on to say, was that she was one of the very first terrorism scholars to realize that the way to discover what terrorists were thinking was to go and talk to them.

“She was asking the right questions of the right people,” he added, “and if some of that comes from her own experience of being terrorized, then the lessons were very fruitful.”   ...

She began to come to terms with what was a traumatic family history even before the rape: her mother died when she was 3; her father, a German émigré who had been persecuted by the Nazis, remarried but six years later divorced his second wife, leaving his daughters with her for almost two years while he lived on his own.

And with the help of an investigator, Ms. Stern even tracked down the story of her rapist, who served 18 years in prison and then hanged himself. He turns out to have been responsible for at least 44 rapes or attempted rapes between 1971 and 1973, all with a trademark methodology that the police somehow failed to pick up on. Among other things, he found most of his prey at girls’ boarding schools or at Radcliffe College, and many of his attacks involved two or more young women. ...

Ms. Stern interviewed friends or relatives of the rapist and uncovered a long and depressing history of parental abandonment (he was adopted, though he didn’t know it for years, and a woman he thought was his aunt was really his mother); confused sexual identity; drug use (he even dropped acid once with Timothy Leary); and possible childhood molestation (his parish church harbored a series of predatory priests). He had probably been traumatized himself, and then in the classic fashion went on to traumatize others.   ...

Writing the book, she added, taught her a lot about the effects of post-traumatic stress syndrome, of which she now considers herself a victim, and also helped refine her thinking about terrorism. Her researches have taught her that there is no common denominator in determining why people become terrorists, but she has identified a checklist of risk factors. These include alienation, coming from a society with a youthful population bulge or a high male-to-female ratio and, for the people who wind up being used as cannon fodder by the terrorists, poverty.

To the list she would now add sexual humiliation, and in January she published an article in Foreign Affairs in which she pointed out that sexual abuse of boys in the Islamic religious schools known as madrasas is not uncommon, and neither is the rape of boys in Afghanistan, especially on Thursday, known as “man-loving day,” because Friday prayers are thought to absolve a sinner of all his guilt.

“I’ve known about this for years,” Ms. Stern said, “but until I wrote this book, I didn’t make the connection. I’m not sure how you study it, but I do think it’s there. Humiliation is definitely a risk factor, and this may be a particular kind of it.”

She paused and added: “But why humiliation in some places and some people but not others? Harvard is a humiliation factory, and yet we don’t produce a lot of terrorists.”

Most of those at Harvard come from a lot of money, and/or can expect to earn a lot of money in this society, which probably cushions them greatly from the effects of any humiliation they might suffer at the hands of their classmates or teachers.  Who cushions the poor from what they suffer as ordinary humans in a society which is structured to concentrate income and wealth in relatively narrow slices of the spectrum?

Or is this an inconvenient thing we ought to continue to ignore?

Relatedly, one might think about how someone who is in the 20% of America which receives, say, 4% of America's income might feel about those who are in the 1% who receive about 20% of America's household income, and what their opportunities are to move up even a quintile or two.

See also the next post, about a neurologist looking at his own family history, and the difference that a secure and serene childhood can make in one's chances in life.  I heard these two stories within a couple days of each other -- what a juxtaposition!

Tackling America's Drug Addiction

Tackling America's Drug Addiction : NPR.

I heard parts of this when it was initially broadcast, and hunted around for the text version.   It contains some statistics that surprised me.   Here's the first part of the interview:

MICHELE NORRIS, host:  Earlier this week, Mexican President Felipe Calderon defended Mexico's war against the drug cartels, and cast some blame on his neighbor to the north: the U.S. The origin of our violence problem begins with the fact that Mexico is located next to the country that has the highest level of drug consumption in the world, Calderon wrote in a newspaper editorial. It is as if our neighbor were the biggest drug addict in the world.

Harsh words, to be sure. It got us wondering about the appetite for drugs in the U.S., and whats being done to curb it.

For answers, we turn to Joseph Califano, the former secretary of Health, Education and Welfare, and now director of the National Center on Addiction and Substance Abuse at Columbia University.

Mr. Califano, welcome to the program.

Mr. JOSEPH CALIFANO (Director, National Center on Addiction and Substance Abuse, Columbia University): Nice to be here.

NORRIS: Now first, any truth in President Calderon's statement? Is it fair to characterize the U.S. as the biggest drug addict in the world?

Mr. CALIFANO: The U.S. is 5 percent of the world's population. We consume two-thirds of the world's illegal drugs. So there is a lot of truth...

NORRIS: Hmm.

Mr. CALIFANO: ...in what President Calderon said.

NORRIS: Let me ask you about the war on drugs right now. The current administration is trying to focus on a balance between interdiction and treatment: drug courts, for instance, followed by mandatory treatment, things like that.

Will that shrink the domestic market for drugs - since when you're talking about treatment, there are so many issues surrounding access to treatment?

Mr. CALIFANO: You're absolutely right. The rhetoric of the administration is good, but the dollars haven't changed. We're still putting roughly two-thirds into interdiction and enforcement, and one-third into treatment and prevention. Interestingly, when President Nixon started the war on drugs, his first budget was two-thirds for prevention and treatment, and one-third for interdiction.

NORRIS: Oh, so it's flipped.

Mr. CALIFANO: It's flipped totally. Now, we have to look at a lot of systems to really do something about this. The drug courts are great. We've analyzed them at our center. They work. And the prison population is important because 65 percent of the people in prison meet the medical criteria for drug or alcohol abuse and addiction. That's a wonderful - in a sense, captive audience. But we don't provide much treatment for them.

NORRIS: So it's just a wasted opportunity. They're not getting treatment.

Mr. CALIFANO: About one in 10 that need treatment gets some kind of treatment. But most of it is not good.

There's a Medicaid population: 30 percent of the beneficiaries of Medicare have drug and alcohol problems. We have to go after those populations. That's the short-run - in a sense - solution to this problem.

There's a longer-run solution. We know from our research that if you get a child through age 21 without getting into this stuff, that child is virtually certain to be home free for the rest of his or her life. And when you say a drug-free society - and there will always be drugs being used - what you're really talking about is that population of children - and that's parents, that's schools, that's people that are dealing with that. And they've got to get focused on it.

NORRIS: Is the U.S. serious enough about the war on drugs?

Mr. CALIFANO: No, we're not. I'll tell you - and we're not serious. The government is not serious enough. You can barely hear any of the leaders in the government talk about it. The medical profession is not serious enough. The public-health profession is not serious enough.

Think about it.  The richest nation in the world.  And our wealth is quite concentrated in a relatively small portion of our population: 1% of us have over one third of the net worth.  10% of us have over 71% of the net worth.

And 10% of us get nearly half of the pre-tax income, and 20% of us get 61%, and 40% of us get 80%, leaving not much for the rest.

The rest of us keep talking about our nation's ideals, as if we'd already achieved them and we should all be content.  But clearly our concentration of wealth and concentration of income are producing effects which burden a large number of us and then get transmitted to other parts of the world.  (Am I a master of understatement?)

Paying for Transportation Infrastructure is simple

A friend passed along this excellent piece, from the City Club of New York just over 100 years ago.  It is long, but highly instructive, and quite relevant in the 21st century.  

Do you want to know the mechanisms by which we concentrate wealth into the portfolios of a narrow slice of our population?  Read this.  Read Fred Harrison's Wheels of Fortune. Watch Fred's brief video, Ricardo's Law: The Great Tax Clawback Scam:

And consider a town or city you know.  Is your experience any different?

Why on earth would we finance infrastructure any other way?  Well, California's Proposition 13 is designed to make sure California can't.  No wonder the state is in such trouble.

Remember what Leona Helmsley told us: "WE don't pay taxes.  The little people pay taxes."  She wasn't talking about tax evasion; she was describing tax structure. THIS is how wealth concentrates.

The reference to Spuyten Duyvil is to the point where today the Henry Hudson Bridge, on the parkway of the same name, crosses from upper Manhattan into Riverdale, in The Bronx. (It refers to devilish currents in the rivers, which menace unsuspecting rowers.)

Building of Rapid Transit Lines In New York City By Assessment Upon Property Benefited

A Memorandum Addressed to the Board of Estimate and Apportionment
And The Public Service Commission of New York City.

The City Club of New York
55 West 44th Street
October 2, 1908

The Board of Estimate and Apportionment and the Public Service Commission:

Dear Sirs:

The City Club respectfully submits for your consideration the results of inquiries made through its Transit Bureau with relation to the feasibility of meeting the cost of future subway extensions by means of assessments on the property benefited.
 
The city urgently needs more rapid transit roads. Private capital seems disinclined, at present at least, to finance the work of building. The city's borrowing power is utterly inadequate to cover the need, and will be until relief may be secured through the slow process of constitutional amendment. If the necessary lines are to be built, it seems self-evident that other methods must be considered.

The Club's investigations show that in the outlying districts reached by the present subway, and to some degree the nearer sections, the value of the property served has increased to an extraordinary degree. This added value would have paid for the cost of the work several times over. While the city as a whole has benefited greatly, the scale of local benefit is naturally much greater. In our judgment, it would not only be helpful as a solution of the problem, but far more equitable to charge a proportion of the cost of constructing a rapid transit line to the property most benefited by such construction.

The argument is elaborated, and the exact results of the Club's investigation given, in the accompanying memorandum. We trust that this may have your examination, and that if the plan commends itself to your judgment, the future policy of the city may be shaped accordingly.

Very respectfully yours,
Homer Folks, Chairman, Transit Committee.

Henry C. Wright, Bureau Director.

BUILDING OF RAPID TRANSIT LINES IN NEW YORK CITY
BY ASSESSMENT UPON PROPERTY BENEFITED

For many years the city has deemed it just to assess upon abutting property the cost of opening streets and building sewers. The theory of such a tax upon property is that it receives almost the exclusive benefit from the construction of a street or sewer adjacent to it. The question naturally arises, does not a transit line, by the benefit that it confers, fall in the same class as new streets and sewers? If a street railroad or rapid transit line be extended into an undeveloped territory, is it not built primarily for the purpose of furnishing  transit facilities to future residents in that section? People will buy this property primarily because it has good transit facilities and the value placed upon it is largely based upon its accessibility. This being true and universally admitted, why should not the property thus enhanced in value by the extension to it of a transit line pay for the construction of such line, to the extent that the increased value warrants it, instead of receiving such increased value as a present from the city. This principle, in a modified and unofficial form, is operated in Berlin. The assessment is not collected by the city, but the street car company when extending a line to outlying territory requires the owners of the property benefited to guarantee to the company a certain return upon the cost of such extension.

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. 

The Labour Problem ... population? or something else?

Here's another interesting article from the January 1, 1887 edition of The Democrat.  It speaks to some very 21st-century issues: wealth concentration, population growth, access and ownership of land and natural resources, and equality of opportunity -- to name a few.  I've Americanized the spellings to make it an easier read for US readers.   "Labor" refers to us, ordinary folks who need to work for a living -- not to organized labor specifically.

THE LABOR PROBLEM.

By An American.

The signs of dissatisfaction on the part of the laboring classes are clearly apparent everywhere. Labor organizations, strikes, boycotts, labor journals -- all these mean something, and what that something is we cannot find out too soon.

Is the dissatisfaction of labor simply the result of human perverseness, the envy and jealousy of idleness and carelessness at the better success of industry and thrift, or are there unjust forces operating on society producing vicious inequalities?

Has every man the same chance? Can all men attain to the same fortune if all are equally industrious and thrifty? Is there a fair field and no favor?

Certainly there is, cries a host of respondents. Is not each man the architect of his own fortune? And they quote case after case of men who began at the foot of the ladder, but who with indomitable pluck gained step after step until they conquered fortune, while others who began at the same point, neglected their opportunities and are still toiling in poverty, where they are destined to stay to the end of the chapter.

Is society so constructed that to all there is the same chance? Can all by exercising the same industry and thrift become equally wealthy? This question goes directly to the core of the labor problem. If there is the same chance to all, then what reason has the laborer to complain? A little consideration answers this question.

In how many years could society with its utmost exertions and greatest economy accumulate enough so that toil would be no longer necessary, and forever after all succeeding generations could live in idleness. No more plowing in spring, no reaping in harvest, no toiling in the mine, no sailing on the ocean — a huge, everlasting pic-nic!

Never! Toil, to restore the faded or to replace the worn out, must be as lasting as the race. Toil, toil, toil, is the inevitable.

"Men may come and men may go,
But toil goes on for ever."

Note that as fact number one and put fact number two alongside it.

And fact number two is this: Certain families now have the power of living for ever without toil. They organize no industry, invent no machine, do nothing to furnish supplies for themselves or their fellows — drones in the human hive, and yet their cruse of oil never fails.

Now, put these two facts together:

1st. Toil must be lasting as the race;

2nd. Some are now eternally exempt from toil;

Therefore, as certain as any therefore can be, some are endowed with privileges from which the rest of the race must be by an inexorable physical law for ever excluded.

Education and Democracy

I came across this longish piece in the November, 1886, edition of a British monthly called The Democrat, and I think it is a keeper:

EDUCATION AND DEMOCRACY.

Within the last ten years Britain has awakened to an important fact. She has seen that her workmanship is being outdone by Continental workmen. She has still unbounded ambition, energy, and talent, but she has only a limited training. The schools of the Continent endeavour to prepare their scholars for the world's work, to train them in eye and hand to a cunning mastery over materials, and to teach them the deep scientific principles that underlie the rightful doing of the simplest task.

Compulsory education implies free education. It is most unreasonable and unfair to compel a father to send his children to school and then to compel him to pay for their education. The child is educated not for his own benefit or his father's benefit, but for the benefit of the State. It is found more and more year by year that we must have education. Had those obstructionists who opposed education because they saw in the word only another way of spelling revolution been able to carry out their policy of making ignorance national, Britain would speedily have fallen to the intellectual and commercial unimportance of Spain. But they failed. The country was great, and to make it greater national education was resolved. It should have been free, thorough, and unsectarian. We should not have to go to a needy washerwoman, who toils day and night to give her children a morsel of bread and a rag of clothing, and say to her, "My good woman, it is needful for the greatness, the glory, and the prosperity of this happy country in order that her princes may inhabit palaces and her landholders continue to receive their countless millions, that your children shall be educated. Therefore each of them must come to school, and see, at your peril, that they bring coppers with them to pay for their teaching." And so she has to toil and pay for the greatness of her country, which, after all, never did anything for her, but allowed her no more pleasure of living in it than if she had marked upon her brow some brand of infamy.

And after school, what? Whither go these children who, year by year, leave our national schools, what becomes of them, how much good have they got from their education? They have got much good, and yet much less good than they might have got. The simple power of being able to read is a blessing past all eloquence to describe. There is a greater difference between the man who can read and the man who cannot than there is between a king and a peasant. In this age how narrow, how contracted, how futile, and how feeble must be the ideas of those who do not possess the magic power of letters! On the other hand, the commonest workman who can tell the meaning of printed characters may possess a greater and a happier soul than any within the circle of the peerage. But ordinary minds, that is to say, the immense majority, are in need of more. They have the rudiments of education, they want training in the methods of application. It is said by those who have large means of knowing that many children leave the Board Schools who at once proceed to forget their education, and that within a vеrу few years they can hardly write their names or read a simple sentence. Be this true or false it at least is certain that many use their education only to read that gutter literature of which we have so constant and appalling a growth. The difference between the ordinary circulation of a newspaper and its circulation when it records one of those high-class infamies that give so constant an employment to our courts of law is a curious comment upon national education. And while thus we leave all who will to sink as they may, we refuse our help to those who with talent, energy, and success are struggling to the higher knowledge. Technical education is dear and scarce, and that upon which the future of our country so largely depends is regarded with indifference. Had it not been for the private energy and generosity that in the northern and midland towns of England has founded great schools of the arts and manufactures, we would at this day have been, from a trading point of view, very little better for Mr. Forster's scheme of national education.

A true Democracy looks upon such a state of things with discontent and disapproval. Democracy springs from an educated public feeling, education is the weapon with which it cuts its way to power, and its end and aim is to educate all men to their rights and duties. Were every man in this country really educated, that is to say, really aware of the few and simple facts that make up social life, and really able to think upon these facts, we should have at once a bloodless revolution. To wealth would be set its limits, upon rank would be imposed its duties, idleness and poverty would disappear together, the landlord and the publican would pass away to one common obscurity. It is because of the dense and wide-spread ignorance, and because of those who impose upon that ignorance, that our advance is so tardy and so difficult. Therefore, all teaching is really with us, even although it may seem against us. The political leader who, from some platform, hurls against us his powerful and burning words, calls us fanatics and knaves, seeks to confound us with his marshalled facts and ordered figures, and raises in his audience a whirlwind of hatred against us, even he from a higher point of view, and a larger knowledge, is our friend, and does us service. Through him men become acquainted with our teachings, and when the fervour of denunciation is over, and the fever of debate has ceased, the calm reasonableness begins to speak to his mind, and he finds that we are only saying what often his own heart has whispered to himself. In a true Democratic state the schoolmaster, who at present is treated by the upper and middle classes half with intolerance, half with contempt, would be held in the utmost importance, and would receive the utmost honour.

Those who oppose free education often ask us in their pleasant, sarcastic way why, if we teach children for nothing, we should not also feed and clothe them? To this we answer, "Why not?" As a State, it is not only our duty, but our interest to bring up for the future service of the country a generation of men and women as able for every duty as our efforts can make them. You cannot properly educate a child who has an empty stomach, and whose clothes will not exclude the winter's cold. The poor infant is numbed and stupified; knowledge can make no way through his starved and frozen intellect. First feed and clothe, then teach the children. To do this would be neither difficult nor expensive. All public school children should be provided with a warm and comfortable uniform. This would be in no danger of being taken away and pawned by depraved relations, for no one would buy that which was stamped with the Government mark. I would also lengthen the school hours. At present a child only comes to school to repeat lessons that he has learned at home. These lessons should not only be repeated, but should be learned within the school buildings, where he would have the aid of books and maps, with the kind assistance of teachers. Even if these school hours extended from nine to six, they would not be too long, for they would not be wholly passed in book-work. They should include musical drill, gymnastics, training in some simple handicraft, and at least two hours of such play as pleased the children best. And above all things they should begin with a good meal, a good meal should pleasantly divide their hours into two, and a third good meal should conclude their working day. In our scheme of education we put almost as much importance upon the dining table, the gymnasium the swimming bath, the playground, and the drill-ground, as we do upon the spelling-book and the copy-book.

We want to make men; and to this end the Democracy will spare neither toil nor money. A school must of itself be a palace of health and beauty; its teacher must be the best and the ablest of men; the teaching must have as its object the development and improvement of the race.

Nor will the duty of the State be done when it turns out into the working world a well developed lad of thirteen or fourteen years. Every boy will be told that he must learn a trade or profession, and that he must apprentice himself to it. But the lad will not be allowed to work all the working hours of the week. At certain fixed times he will have to attend classes, and there to study what higher learning may be directly useful to his profession. This will be distinctly apart from the culture of the evening schools. These, too, will be helped and developed, so that every student eager to improve his mind and to extend his knowledge will have every opportunity freely opened. But culture must be allowed to depend upon a man's own wishes, for we cannot force it, and we would not if we could. Technical education is different; every lad, every child, born rich or born poor, has a right to demand of his country that he shall be taught to do what share of the world's work has been allotted to him in the best and most scientific manner, with most credit to himself and most satisfaction to his employers; and on the other hand, the State has a right to see that every lad is trained so as to be most useful to his country. Thus we would have technical schools in every town, and agricultural schools in every county. Among the throngs that yearly passed through the various schools there would always be found a small proportion marked out from the crowd by superior zeal and ability. For these should be provided the Free University, and not only should the teaching be free, but free board should be given also. Their purpose should be to develop the talent of the nation, and they would make no distinction between the son of the poorest man and the son of the richest man in all the land, for the light of learning should shine as impartially as the light of heaven. Nor would we limit national education to schools and colleges. It is to view learning narrowly to think that it must be confined to academic walls. Scattered through all our land in surprising numbers are men of humble rank who never passed the infant school, and perhaps have not even had the advantage of that, who yet possess a culture large and deep. Nay, there are some upon whose minds literature has produced happier results than upon many whose trade is learning and whose profession is culture. These are what they are from the powerful influence of the Free Library and the Mechanics' Institute. Their minds have grown to strength and beauty amidst the pure airs and the copious sunshine of our English literature. Shakespeare has taught to them — man; Shelley has trained their senses to every fine and lovely influence; Milton and Burns have made them pure and strong. The daily papers, which are half read and half ignored by the listless loungers of the aristocratic club, are fully read, considered, and debated by thousands of intellectual working men. Thus in every town is a band of humble workers who know more, think more, and understand more than any equal body of their self-titled superiors. These should be multiplied. In every quarter of every town should be halls, baths, libraries, reading-rooms, gymnasiums, all that would make higher living attractive, and aid those who struggled to the higher life.

All this, the critic will say, if the critic thinks it worth his while, is a dream and a delusion. A dream it may be, but delusion it is not. And to say that it is a dream is to saу that civilisation is governed by selfishness and is hastening to corruption. For we have done no more than to make a declaration of simple human rights. If we are to have a civilisation at all we must recognise our duty towards every child that is born into the land. We do this partly, feebly, and irresolutely. But not thus can we satisfy justice. If we owe a man a pound we have not fulfilled the law of honesty by throwing him a shilling. We owe to every child a complete education, a training that will make him a useful and a worthy citizen; we do not fulfil that obligation by starving his body and cramming his mind with odds and ends of knowledge. Learning is useless, nay, infinitely worse than useless, to make a man abler and better unless it stimulate the individual and improve the race.

And the cost of it? This is the very first burden that we would place upon ground-rental. For all that is spent upon national education goes to make the land more valuable. Your schoolmaster is the greatest builder up of land values. The more intelligent, industrious, and honest the teacher makes the people, the higher is rent. Did the schoolmaster give to our landholders an annual present of golden millions, he could not more infallibly increase their incomes than he does by raising the standard of the people who labour upon the land. Thus, in asking that the land shall pay for the teaching of the new generation, we only ask that it shall pay for value about to be received, for vast and material benefits about to be conferred. We make an inflexible stand for free education and complete education, and we demand that payment for it shall be made, not from the paltry earnings of the poor, but from the inexhaustible fund created in the land by the labour of all who have ever lived, and being daily augmented by the labour of all who pass from the school to the workshop.

A Scottish Pressman.

Contrast this to California's Proposition 13, which for over 30 years has limited the tax on land value to a small -- and diminishing -- and uneven! -- fraction of the annual rental value of California's land.

Which Georgist first called LVT the "least bad" tax?

Most Georgists reading this will respond that it was Milton Friedman who called LVT the "least bad" tax -- at least twice, first in 1978 and then again in a newspaper interview in 2006, a few weeks before he died.  And they'll add, "but he wasn't a Georgist" -- he never pursued the importance or implications of that observation.

But the answer to the question, I submit, is Lowell Harriss!  I had occasion to read a report dated November 9, 1966 by Weld Carter (my grandfather) reporting to a foundation he worked for [the Robert Schalkenbach Foundation] about a symposium of the Tax Institute of America which had occurred the previous week.   He does not report where it took place, but mentions that the program chairman was Dr. Alfred Buehler, who pointed out that (the quotes here refer to Carter's report):  "this was the first time since 1939 that the Tax Institute had selected the property tax for its annual symposium.  Of the present panelists, he, [Lowell] Harriss and [Harold] Groves had all been on the 1939 program.  He praised Dick Netzer's book as being the most important since the work of Jensen in the early '30's, calling attention to Netzer's suggested alternatives to the general property tax."

"Ken Back presided over the opening session.  He cited the way in which scholars had sought in the past to bury the property tax.  For his part, he showed its present importance and vitality, pleading that it should be brought up to date.  He called attention to three 'myths':  (1) that the property tax has limits; (2) that its administration is so poor as to condemn it; and (3) that it is unsound in principle.

The report goes on to say,

"Harold Groves could not appear, but he sent his paper on "Property Tax -- Effects and Limitations."  This was read by a former student, Leonard Kust, vice president and tax counsel for Westinghouse Electric.  The paper wound up with a plea for better administration and the prevention of the continuing erosion of the property tax base, followed by an endorsement of the taxation of economic rent, with the recommendation that it be collected at the state level and returned to the local communities.  He appended the observation that this tax conserves the base.

"Lowell Harriss, had problems, which Miss [Dr. Mabel Walker]Walker explained later.  When Dr. Groves had his heart attack, he (Groves) had already been scheduled to do a paper on "Growing Property Tax Burden: Effects and Upper Limits."  After the attack, Lowell Harriss had kindly consented to substitute for Groves.  But at the last minute, Groves sent in a paper, so Miss Walker had to change the title of Groves' paper and, I gues, get Harriss to modify his presentation somewhat accordingly.  The Harriss paper was good.  He spoke of the expanding potential of the property tax, saying that generally it should be able to meet advancing needs without increasing rates.  He objected to the notion of "limits," point out that as services were expanded, land values would grow continuously higher.  He called attention to the fixed quantity of land.  He called attention to the effects of differential rates on land: higher rates forcing more intensive rates and lower rates tending to take the pressure off owners.  He then spoke of some of the unfavorable effects of taxation on improvements, with their tendency to increase slums.  He pointed out that there was no hitherto undiscovered alternative to the property tax, saying that the question is the comparison of more intensive use of other tax modes.  Speaking negatively, he said, "The least bad tax I can imagine is a tax on land values.  It will score better than any other tax."  On the favorable side, he spoke of land value taxation as enhancing local autonomy, as providing equity, as aiding optimum resource allocation, as providing good competition between communities.  At one point he also alluded to the fact that a lowering of the tax rate on land value would be of no benefit to prospective newcomers because any remission of such tax would only be capitalized into higher prices for land."

Congressman Curtis opened his luncheon address on "The Property Tax in the Perspective of our National Tax System" with the statement that the property tax is the cinderella of taxes, who, in shabby clothes, must  stay home while her far less attractive sisters go to the ball.  ..."

A Google search on "least bad tax" and "Lowell Harriss" yielded a newspaper article, appearing originally in the Adrian Daily Telegraph, and picked up by the Nevada Daily Mail of April 5, 1976 -- two years before Milton Friedman's statement:

Looking Forward to Paying Taxes

Most college students will pay taxes equal to more than 40 per cent of what they earn throughout their lives.

Those who are especially successful or live in localities with above average government spending may pay more than half of their lifetime incomes in direct and indirect taxes.

"All of us have a vital interest in making the tax system as 'least bad' as possible."  This food for thought was served by Prof. C. Lowell Harriss at Hillsdale College, to students in the Constructive Alternatives Program.

"And taxes affect our lives in many kinds of ways other than extracting dollars," he added.

Prof. Harriss pointed out that government spending per capita in 1975 was $9,409 for a family of four, up, in today's dollars, from $1,130 just over 20 years ago.  That's an increase during the lifetime of today's college student averaging $244 a year.  Students should ask whether they are getting their money's worth, he suggested.

People create their own conditions and the framework within which they are free to use their capacities.  If this freedom is "collectivised" by big governemnt to get all the "services" people want, do they really get them?

Certainly there has been some improvement accompanying the growth of big government, in some cases a lot of it.  But would private deployment of, say, half of the increased tax burden have produced more of what the people want?  "This question," said Prof. Harriss, "I leave with you as a challenge."

Lowell Harriss is a professor of economics, Columbia University.

This talk was given at Hillsdale College, which is libertarian in orientation.  In July, 2006, in Hillsdale's publication Imprimis, Friedman had this to say.  (The interview took place in May, 2006, at an event honoring the 25th anniversary of "Free to Choose: A Personal Statement.")   He failed to see that there can be a difference between common property and government property.  (Too few pixels in the picture, one might say.)  But despite his language -- praising as "privatization" that which Georgists would consider the socialization -- he recognizes

LA: Let me ask you about demographic trends. Columnist Mark Steyn writes that in ten years, 40 percent of young men in the world are going to be living in oppressed Muslim countries. What do you think the effect of that is going to be?

MF: What happens will depend on whether we succeed in bringing some element of greater economic freedom to those Muslim countries. Just as India in 1955 had great but unrealized potential, I think the Middle East is in a similar situation today. In part this is because of the curse of oil. Oil has been a blessing from one point of view, but a curse from another. Almost every country in the Middle East that is rich in oil is a despotism.

LA: Why do you think that is so?

MF: One reason, and one reason only — the oil is owned by the governments in question. If that oil were privately owned and thus someone's private property, the political outcome would be freedom rather than tyranny. This is why I believe the first step following the 2003 invasion of Iraq should have been the privatization of the oil fields. If the government had given every individual over 21 years of age equal shares in a corporation that had the right and responsibility to make appropriate arrangements with foreign oil companies for the purpose of discovering and developing Iraq's oil reserves, the oil income would have flowed in the form of dividends to the people — the shareholders — rather than into government coffers. This would have provided an income to the whole people of Iraq and thereby prevented the current disputes over oil between the Sunnis, Shiites and Kurds, because oil income would have been distributed on an individual rather than a group basis.

LA: Many Middle Eastern societies have a kind of tribal or theocratic basis and long-held habits of despotic rule that make it difficult to establish a system of contract between strangers. Is it your view that the introduction of free markets in such places could overcome those obstacles?

MF: Eventually, yes. I think that nothing is so important for freedom as recognizing in the law each individual's natural right to property, and giving individuals a sense that they own something that they're responsible for, that they have control over, and that they can dispose of.

Those "shares" would be better implemented as a guaranteed share of the income, not shares which could be sold to others (say, as an alternative to a payday loan).   And "natural right to property" obfuscates the distinction between (a) that which nature provides or the community creates (to which all of us have an equal right), and (b) that which individuals or corporations create (to which individuals and corporations should have an unfettered right, subject to (a)!

The Alaska Permanent Fund does something similar: some of the royalty revenue Alaska collects on oil extracted within the state is used to fund Alaska's services, and some goes to the Alaska Permanent Fund, which invests the proceeds in a broadly diversified portfolio and pays an annual income to every adult and child who is a permanent resident of Alaska.  See http://lvtfan.typepad.com/lvtfans_blog/2008/09/pbss-now----8108-alaska-governor-palin-and-oil-resources----who-do-they-belong-to.html

Anyway, even if Lowell Harriss was not the first to apply the term "least bad tax" to land value taxation, he said it well before Milton Friedman said it.

If you're not a regular reader here, you might want to know that there are a few other posts about Lowell, who died in December, 2009, at the age of 97. 

• http://lvtfan.typepad.com/lvtfans_blog/2010/01/farewell-to-c-lowell-harriss-professor-of-economics---dec-29-2009.html
• http://lvtfan.typepad.com/lvtfans_blog/2010/01/reading-lowell-harriss.html which explores some of Lowell's writings on the property tax, and how we might best reform it.

To circle back to Milton Friedman, it is worth noting that he and his wife Rose were both at the University of Chicago in the early 1930s for economics PhDs.  I don't know how large that program was, but I can only assume that students in it were aware of the research of others in the program. In 1933, Homer Hoyt's dissertation was entitled "100 Years of Land Values in Chicago."  It was an analysis of 5 boom-bust cycles.  I encourage you to read a couple of things which reference this book:

• Mason Gaffney's The Great Crash of 2008, at http://www.masongaffney.org/essays/Great_Crash_of_2008.pdf
• Weld Carter's "A Clarion Call to Sanity, to Honesty, to Justice,"  at http://www.wealthandwant.com/docs/Carter_Clarion.html

One might reasonably wonder why Milton Friedman didn't apply his knowledge to reducing poverty.  Perhaps other concerns topped that one.  I wonder what they were.

47 percent

That figure has been in the news and opinion columns a great deal in the past couple of weeks.  It is the percentage of Americans who pay nothing in federal income taxes (as distinct from federal withholding for social insurance).

Some of the articles and related comments have focused on the concept that everyone should be paying something, so that they "have some skin in the game" so that there is an incentive not to vote for spending that others will have to pay for.  Some have approached the 47% as "freeloaders."

It is funny that in our largest state, where, for 30+ years, Proposition 13 has put a ceiling on property taxes, so that landholders, who are the primary beneficiary of the effects of state and local spending (and federal funding of state and local projects) can expect their tenants to contribute mightily to the projects they vote for -- and no one has made an impression by pointing this out. 

And none of the articles I've seen about the 47% figure -- which went viral after an article by Bob Williams in the WaPo -- have spent much time exploring the policy decisions behind this.

I am reminded that according to our official Federal Poverty Guideline, about 13% of us live "in poverty."  And that even the Census Bureau, which collects and reports the data on who lives below the Federal Poverty Threshold (a retrospective figure which relates closely to the FPG) willingly recognizes that the Federal Poverty threshold and guideline are merely a statistical yardstick, with no particular logical relationship to the cost of living anywhere in America.

I am reminded that for the states for which a Self-Sufficiency Standard Study has been published (about 35 in all), the bare-bones cost of living for a young working family typically runs from 180% of the Federal Poverty Guideline -- in the least expensive counties (where very few people live) to perhaps 210% in the major cities of our smaller states to 300% or 400% in the major cities in our larger states.

Should the incomes -- mostly wages -- of our working people whose incomes are insufficient or barely sufficient to meet their own and their families' most modestly defined needs, be taxed?

I am reminded of the Overlooked and Undercounted studies, which typically follow a Self-Sufficiency Standard Study, and seek to quantify the number and percentage of working-age families whose incomes are insufficient to cover their bare-bones cost of living.  Significant percentages of these families are at these income levels.  30% to 35% sticks in my mind -- and a larger percentage of America's children.

I am reminded that a large percentage of today's seniors are hugely reliant on their income from Social Security, and that the level of Social Security income is established upon retirement and thereafter only rises to keep up with the CPI-U; our oldest retirees are receiving Social Security incomes which are a function of their wages 30 years ago -- roughly as logical as California property taxes for long-time owners being based on the selling price of California housing 30 years ago!

I am reminded that many people get to deduct their mortgage interest and real estate taxes from their taxable income (they're typically in the coastal states; in the heartland states, the standard deduction often turns out to be higher, since taxes and interest payments tend to be lower ... which may correlate to the percentage of children who attend 4 year colleges).

And I am reminded that state and local taxes fall more heavily on low-income people than they do on high income people. (See "Who Pays?  A Distributional Analysis of the Tax Systems in All 50 States", particularly the "Averages for All States" table on page 124 of 130), which shows that, on average, the bottom quintile of us pay 10.9% of our income in state and taxes, while the fourth quintile pays 8.5% and the top 1% pays just 5.2%, on average.

I am reminded of our concentration of income:

• 10% of us receive 47.19% of the before-tax income
• 20% of us receive 60.96% of the before-tax income
• 40% of us receive 79.14% of the before-tax income
• 60% of us receive 90.37% of the before-tax income [see middle-class agenda, on the next page of this blog]

So the bottom 40% of us receive less than 10% of the before-tax income.  And those who think they don't pay enough in taxes would like them to pay more into the system than they already do?   The problem is one of low wages, unemployment and underemployment.  The best solution to these problems I've come across lies in the ideas of Henry George.  The law of wages is something like the law of gravity: we operate in ignorance at our own risk.

Crosby: Democracy

This is the first poem in "Broadcast" by Ernest H. Crosby, and it is entitled "Democracy."  It is quite long, and I'll include it all (on the jump), but on this front page, will share a few stanzas I particularly like.

IX

The common people,—why common people?
Does it not mean common life, common aspirations, community of interests, communion of man with man?
Does it not imply the spirit of communism, of fellowship, of brotherhood?
Does it not suggest that human life down at the bottom is more fluid and intermingled and social than up at the top?
Is not all this hidden away in the words "common people?"

X

Would you make brothers of the poor by giving to them?

Try it, and learn that in a world of injustice it is the most unbrotherly of acts.
There is no gulf between men so wide as the alms-gift.
There is no wall so impassable as money given and taken.
There is nothing so unfraternal as the dollar,—it is the very symbol of division and discord.
Make brothers of the poor if you will, but do it by ceasing to steal from them;
For charity separates and only justice unites.

XI

Peace between capital and labour, is that all that you ask?
Is peace then the only thing needful?
There was peace enough in southern slavery.
There is a peace of life and another peace of death.
It is well to rise above violence.
It is well to rise superior to anger.
But if peace means final acquiescence in wrong,—if your aim is less than justice and peace, forever one —then your peace is a crime.

XII

I am homesick,—
Homesick for the home that I never have seen,—

For the land where I shall look horizontally into the eyes of my fellows,—
The land where men rise only to lift,—
The land where equality leaves men free to differ as they will,—
The land where freedom is breathed in the air and courses in the blood,—
Where there is nothing over a man between him and the sky,—
Where the obligations of love are sought for as prizes and where they vary with the moon.

That land is my true country. I am here by some sad cosmic mistake,—and I am homesick.

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.

Bits and Pieces from a 1914 Bi-Monthly

The bi-monthly to which I refer is The Single Tax Review, whose 1914 volume Google Books has digitized.   Here are some of the goodies I appreciate on this reading:

In fact, if a nation spends great sums in improving roads and canals and bettering the public services, these heavy expenditures increase the value of the nation's land, and this increase is taken by the landlords. If artisans, tradesmen, producers of all kinds concentrate in a locality, the money they spend on building, on the costs of living, their activity and even their presence is sure to increase the well-being of the inhabitants of this locality, a result translated into an increase of land values which the landowners pocket. If a manufacturer builds a factory in an uninhabited spot and constructs dwellings for his workmen it may result in ruin for him if he has not carefully calculated his chances, but in the meantime he will have increased the value of the surrounding land and enriched the landlords.

And this: 

Now here are a few propositions, and a question:

(1) The area of the world's surface is fixed beyond the possibility of adding thereto.

(2) The population of the world is increasing.

(3) The two preceding facts make it inevitable that particular tracts and sites of land will be increasingly more desirable than others.

(4) All of the land is for all of the people; therefore those who wish to occupy the more valuable tracts and sites, should pay the value thereof into a common fund for the use of all the people.

(5) Every man has a natural right to the products of his labor.

(6) Confiscation by the State of any man's labor is a clear violation of a natural right; therefore our present system of taxation is fundamentally wrong. (And the fact that taxes under the present system cannot possibly be, nor have ever been, equitably assessed, is only a logical sequence of violation of verified truth.)

(7) Taxes on any commodity made by individual labor is a tax on individual labor.

(8) Taxes on that which no man has made, which no man can make and -which, therefore, no man has earned, is not a tax on labor.

(9) When the wealth which is created by population is used for public purposes and not for up-building of private fortunes, and when public revenues no longer represent confiscation of the rewards of labor, we shall have taken the road which leads towards pure democracy, and not before.

The foregoing are Single Tax propositions. The Question is: In whose pages, other than those of Henry George, can our friends, the professional economists, find a body of principles of greater "scientific value" than the above propositions? If not in the pages of Henry George, where will they find ideas of greater "scientific value" than those which are directly deducible from self-evident truths?

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.

Moses

A piece today on Huffington Post about Passover and Moses caught my attention.  I learned a few things.  It gives "talking points" about Moses; I've omitted the supporting material from all but one:

1. A quote from Moses appears on the Liberty Bell.  ...

2. The Founding Fathers proposed that Moses appear on the U.S. seal. ...

3. Moses was the national hero for slaves.  ...

4. The Statue of Liberty was modeled on Moses. ...

5. Superman was a modern-day Moses. ... 

6. Cecil B. DeMille turned Moses into a Cold War icon. The 1956 epic The Ten Commandments, which is the fifth highest grossing movie of all time, opened with DeMille appearing onscreen. "The theme of this picture is whether men ought to be ruled by God's law or whether they are to be ruled by the whims of a dictator," he said. "The same battle continues throughout the world today." To drive home his point, DeMille cast mostly Americans as Israelites and Europeans as Egyptians. And in the film's final shot, Charlton Heston adopts the pose of the Statue of Liberty and quotes the line from the third book of Moses -- Leviticus -- inscribed on the Liberty Bell: "Proclaim liberty throughout all the land unto all the inhabitants thereof."

7. Moses is the Patron Saint of Washington. ... 

Cecil B. DeMille's Moses was, at least in part, inspired by his connection via his brother's marriage, to Henry George, the author of Progress and Poverty (1879), and a speech George gave the year before about Moses, and probably made repeatedly over the following years, on lecture tours around the world.  (Cecil B. DeMille was born in 1881, and died in 1959.  His older brother, William, married Henry George's daughter Anna George, a few years after George's death; their daughter was the choreographer Agnes de Mille (1905-1993.)

George's ideas provide a modern way to achieve a stable and just middle class society and economy in which all can prosper -- a modern version of the OT land laws. 

Here's a short excerpt from "Moses":

Trace to its roots the cause that is producing want in the midst of plenty, ignorance in the midst of intelligence, aristocracy in democracy, weakness in strength –- that is giving to our civilisation a one-sided and unstable development –- and you will find it something which this Hebrew statesman three thousand years ago perceived and guarded against. ...

Everywhere in the Mosaic institutions is the land treated as the gift of the Creator to His common creatures, which no one has the right to monopolise. Everywhere it is, not your estate, or your property, not the land which you bought, or the land which you conquered, but "the land which the Lord thy God giveth thee" –- "the land which the Lord lendeth thee".

Read "Moses" and see what you think.

Struggling Governments Get Creative to Raise Income

Struggling Governments Get Creative to Raise Income - NYTimes.com.

This article describes some of the tax approaches that governments, mostly overseas, are turning to in order to plug holes in their budgets.

It is amazing that none seem to have thought about going back to basics, and drawing a larger share of the needed revenue from the one tax base that can be tapped without distorting the economy, without driving productive activity elsewhere, without taking from producers that which they produce.

It seems to me that a municipality, or state, or federal government should tap the annual value of the land within its borders before it starts to tax the wages or purchases of its people.  If the municipality fails to collect that rental value, then the state ought to be able to do it; if the state fails to collect it, then the federal government ought to collect it. 

And should the municipalities wise up and collect the lion's share of the land rent within their borders, the state and federal governments have other like tax bases they ought to be tapping: the value of water rights, of the airwaves, of geosynchronous orbits, of airport landing rights at busy airports, pollution, non-renewable natural resources such as oil, natural gas, lithium, etc.  [The classical economists called all these things "land," as opposed to capital or labor, the other two inputs to production.]

They don't need to get creative.  They need to go back to basics: tax that which nature provides; tax that which the community creates -- not what individuals and corporations create.

Who is prospering from Prop 13?

Almanac : Who is prospering from Prop 13?.

This is a well-researched piece about a Menlo Park, California, parent, concerned about program cuts in her child's school, who looked into consequences of Proposition 13, with emphasis on the proportion of funding coming from commercial property owners versus the owner-occupied residences.

Ms. Bestor's research of Menlo Park properties -- particularly of parcels on one commercial strip and one residential street -- sheds light on how the provisions of propositions 13 and 58 created the lopsided tax-burden equation.

Looking at Menlo Park's main downtown street, she found that of the 56 commercial parcels on Santa Cruz Avenue, 23 are at the 1978 assessment (plus 2 percent per year) level. Of those 23 parcels, only four are owned by the same people who owned them in 1978. Eleven have passed to a son or daughter, and in a number of cases are held in family trusts.

By contrast, of the 53 residential parcels in Ms. Bestor's neighborhood, 13 are owned by the same people who held them in 1978, and two are held by children of the 1978 owners, so are taxed at the 1978 level. The assessments of two other parcels were affected by other factors.

The other 36 parcels (including Ms. Bestor's) have been reassessed after changing hands, she says.

"My street is paying its way," Ms. Bestor says. "I think that Prop. 13 did what people hoped it would do (for homeowners). It allowed people to stay in their homes and families to plan their financial futures."

What she doesn't say, of course, is that while her street might be "paying its way" -- I'm not quite sure what she means by it -- some of its residents are paying quite a bit more than their long-time-owning neighbors.  15 out of 53 are being highly subsidized by newer arrivals, and those who have bought most recently are doing the subsidizing.  They are paying 1% of their purchase price annually, but due to some neighbors in similar homes getting 90% subsidies, they are not receiving in services as much as they would if their neighbors weren't receiving a 90% discount on their tax bills.  Ms. Bestor is too polite to say it.   It is not clear whether she is a subsidizer or a subsidizee within her neighborhood.

Her research, however, on the commercial sector, which she chooses to focus on, appears to me to be based on the right questions.

The article continues,

On the other hand, commercial property owners who are assessed at 1978 levels are not paying their way, she says. "Does it really make sense to subsidize family trusts, major real estate corporations and developers, who make smaller and smaller contributions (proportionally) to public services each year?"

In her letter to Mr. Buffet, Ms. Bestor cites a downtown Menlo Park example to underscore the inequity: "The Trader Joe's property -- the 'new' market in town contributes just $7,471 of general tax towards our local services (for two-thirds of an acre of prime commercial property) compared with Draeger's up the street at $66,585. It isn't Trader Joe's, of course, that's paying the tax -- if they'd bought the property when they moved in, that parcel would be contributing 500 percent-plus more.

"Trader Joe's leases it from a family trust, descendents of the 1978 owner ... with an address on a leafy street in Cape Cod. Since landlords charge what the market will bear, it's fair to guess that the property tax savings are accruing to those folks in Massachusetts while the costs are borne by school kids and residents of Menlo Park."

Assuming that Draeger's and Trader Joe's are both on sites of comparable value, and that both are tenants, the annual costs to the tenants are probably comparable.  The difference is that Draeger's pays more of it to Menlo Park, and Trader Joe's pays more of it to the landlord, bypassing the city.

Now here is the question: who has created the land value?  The landlord?  The tenant?  Or the community?   If the landowner and the landuser are the same entity, is the answer any different?

Let's think about what Prop 13 does to and for residential owner-occupants.  Local conditions -- jobs, good schools, attractive views, recreational opportunities, high-quality health care -- attract newcomers to the community.  If new housing is not being constructed -- houses where there was previously vacant or farmland, or multi-family homes where previously single-family homes stood, or smaller lots -- the price of existing homes is driven up.  (Houses don't appreciate, but the land value rises.) 

But Prop 13 reduces the supply of houses available by reducing the normal turnover.  Where in most parts of the country, elderly people might decide that the house in which they raised their children no longer fits their needs, or is too large to heat/cool/clean/maintain/navigate in, particularly for a single adult, in California, they have several strong incentives to stay there nonetheless:

1. Their property taxes, if they've lived there for 30 years, are tiny, particularly for what some of the choicest (highest-appreciation) towns are offering in terms of amenities.  This is known as a "free lunch."  But it is only "free" to them.  It does not come out of thin air; it comes at the expense of their neighbors.
2. Their children can inherit their highly-subsidized status, and receive all that the town offers for a tiny fraction of what ordinary folks would pay there, or what they would pay in a comparable neighborhood or town nearby.   They will be able to put the grandchildren into some of the finest school districts and pay only the 1976-based property tax rate, a tiny fraction of what the new folks next door must pay.
3. Like everyone else, they hate to think of moving. Prop 13 provides them a good excuse to "think about it later" or not think about it ever.

At the same time, young families living in apartments or condos, which typically have two or perhaps three bedrooms, want more space.  To get it, they must either compete with others who want to buy from the constrained supply of family-sized housing available, or locate further out -- putting a load on highways, using fuel, creating pollution, paying for 2 cars where one might have sufficed, reducing the time they can spend with their children, and possibly requiring the building of more houses on the fringe, requiring the extension of taxpayer-provided infrastructure (roads, water, sewer, drainage, roads, parks, etc.) and services (police, fire, ambulance, hospitals, libraries, public health, etc.) more schools (while the ones in the neighborhood they'd have preferred are not filled, because a lower percentage of the homes have school-aged children).

California has among the lowest homeownership rates in the US; the figure that sticks in my mind is 55% when the total US was 69%, which means that the homeownership rate for the rest of US must have been perhaps 72%.) That's pretty well known.  But you might be interested to know that California's seniors actually have a higher homeownership rate than their counterparts in the remainder of the US.  Prop 13 is clearly a major factor in that.

While I understand the pressures on Ms. Bestor not to speak of the Emperor's nudity, and applaud her research, as far as it goes, I think the entire Prop 13 system needs to be examined and dismantled.

She proposes capping the Prop 13 benefits to commercial property owners at 20 years.   This would produce some interesting effects on revenue flows if all commercial properties get re-evaluated at the same time, and continue some awesome inequities if some get re-valued now and some 19 years from now.

The article provides a link to a letter Ms. Bestor sent to Warren Buffett, who a few years ago expressed the opinion to the Wall Street Journal that Prop 13 was unjust and unwise (story here):

Prop 13 – and then Prop 58 that made Prop 13 bases inheritable – has created economic inequities that are evident from simple on-line searches of the county assessor's database – and destroy any idea of a level business playing field. A quick trip around my town illustrates this.

The nondescript little gas station on El Camino near my house pays $30,148 a year in property tax for the privilege of selling me less expensive gasoline than the two Shell stations ($14,214; $17,214), the Union 76 ($15,920), and the Chevron ($20,388) down the street. Those big-name stations have service bays to increase revenue and are on major intersections. But the "new guy" in town (well, actually, there's been a station there since 1978 -- but the new competitor in the market) is the one who's paying $10,000 a year more for police, fire, road repair, education, parks and courts.

Flipping the equation around, the Trader Joe's property -- the "new" market in town -- contributes just $7,471 of general tax towards our local services (for two-thirds of an acre of prime commercial property) compared with Draeger's up the street at $66,585. It isn't Trader Joe's, of course, that's paying the tax -- if they'd bought the property when they moved in, that parcel would be contributing 500%+ more. Trader Joe's leases it from a family trust, descendants of the 1978 owner ... with an address on a leafy street in Cape Cod. Since landlords charge what the market will bear, it's fair to guess that the property tax savings are accruing to those folks in Massachusetts -- while the costs are borne by school kids and residents of Menlo Park.

Of course, if the Cape Codders visited, they would probably look across Curtis Street to the Walgreens (Unamas and Starbucks) building and point out that that whole complex is only paying $8,709 in general property tax ... without providing customer parking. In fact, the Walgreens building pays 51% more for sewer service ($13,181) than it does towards police, firefighters, courts, roads, and maintaining its free city parking ....

Do you wonder whether any commercial properties ARE contributing meaningfully towards our local services? Well, the Chase takeover of Washington Mutual appears to have triggered a reassessment of that property (WaMu's earlier absorption of Home Savings had not). So that's an additional $25,000 into the pot (up to $45,190). And a dry cleaner we use, Menlo Art, is in a building that pays $30,346. The dry cleaner only occupies 25% of the building, so their share is a mere $7,587 -- but compare that with the $944 paid by the much busier cleaner across Santa Cruz Avenue. (Hoot'n'Toot sits on yet another property whose sewer bill dwarfs their property tax contribution -- with an out-of-state owner on the possibly-less-leafy Leisure World Drive in Mesa, AZ.) I wish I could afford Tom Wing's jewelry ($21,687), but I do have pizza at Amici's ($32,809) whenever possible. And Kepler's, our doggedly independent bookstore, occupies about a sixth of a building that pays $220,395.

Well, Mr. Buffett, I think you get the idea. People say that increasing taxes will make prices go up but, frankly, that requires the generous assumption that, in this totally unbalanced model, landlords aren't charging what the market will bear. 


To make sure, I tested this. I took identical loads of my husband's laundry into each of the dry cleaners mentioned above (after a particularly depressing talk by our school superintendent -- spending per pupil is down this year over last, with only one new teacher hired for over 120 new kids, and 14 teachers due to be laid off in May) -- and found that cleaning three shirts, two khaki slacks and a cashmere sweater cost me $37.00 at the popular ($944) cleaner, while I paid $35.60 across the street ($7,587). Wherever the savings are going, it's not to customers.

And then there's the threat that Business Will Leave if commercial property taxes go up. Having spent twenty years in the corporate world before becoming a mom, forgive my skepticism. I sat in on many meetings at Apple Computer Inc. in the early 80's and 3Com Corp. in the early 90's discussing siting new sales and manufacturing operations. Property tax was never, to my best recollection, mentioned. Consolidated tax levels, yes, but in the broad context of the overall cost and relative ease of doing business. What attracted us? Locations with a level playing field (not one that discriminated against the new entrant); a highly skilled (educated) workforce; good road-, rail- and air-transportation; fair and efficient courts and public services; reliable infrastructure; and a community environment that made employees want to live there.

OK, out of fear of throwing the baby out with the bathwater, we are now drowning him in it.

The original article, near the end, includes this:

So what is to be done? Ms. Bestor suggests capping Proposition 13 benefits for commercial property owners at 20 years. "Every 20 years, non-residential property is reassessed at market value, then gets to enjoy another 20 years of tax relief," she writes.

She also suggests a system whereby properties can be reassessed gradually so as not to overburden assessors' offices, and a process for appealing reassessments.

Ms. Bestor also is attempting to launch local fundraising efforts that would focus on commercial property owners who benefit from lower tax levels. "I have the feeling these people are ready to be asked," she says.

"They need strong schools and a vibrant residential community just as much as anyone else does."

Assessing land properly is not all that difficult, and if California would simply stop taxing the buildings, doing high-quality annual assessments of land value would not unduly burden the assessors' offices.

But I think that final point is correct: even absentee landlords benefit from strong schools and a vibrant residential community. 

A thought about Glenn Beck, churches and social justice

Glenn Beck, a cable TV personality, urged Christians to leave their churches if the words "social justice" were used.  He is quoted as saying,

I'm begging you, your right to religion and freedom to exercise religion and read all of the passages of the Bible as you want to read them and as your church wants to preach them . . . are going to come under the ropes in the next year. If it lasts that long it will be the next year. I beg you, look for the words 'social justice' or 'economic justice' on your church Web site. If you find it, run as fast as you can. Social justice and economic justice, they are code words. Now, am I advising people to leave their church? Yes.

This makes me think about some of what went on in Alabama a few years ago -- the notion that churches should be dispensers of charity, and that they should not be campaigning for social justice because if there were social justice, there would be no need for charity! 

As I read some of the comments on a NYT blog, 

"Lord, when was it that we saw you hungry and gave you food, or thirsty and gave you something to drink? And when was it that we saw you a stranger and welcomed you, or naked and gave you clothing? And when was it that we saw you sick or in prison and visited you?' And the king will answer them, 'Truly I tell you, just as you did it to one of the least of these who are members of my family, you did it to me." (Matthew 25)

I am led to wonder whether people understand the difference between charity and justice.  To me, Matthew 25 merely describes charity.  Helping an individual in difficult circumstances, without seeking to correct the structures which put him into those circumstances and will put the next person in those circumstances.  If he is hungry because he has no job and no skills, feeding him will keep him alive another day, and training him will aid him if a job is available -- but if there is no available land for him to labor on, you've not moved a step toward justice. Welcome, and clothing, and visits are all wonderful -- but they don't change the structure which makes it impossible for some people to provide for their own needs and the needs of their families.

Susan Pace Hamill, the University of Alabama law professor who has made extensive studies of Alabama's tax system and the federal tax system and is now running for the state legislature in Alabama, said of the churches a few years ago -- I'm paraphrasing -- that even if they deserve an "A" for charity, if they earn an "F" in justice, that does not come out to a "C"; it is failure.   If I recall correctly, the Alabama chapter of the Christian Coalition was opposed to tax reform (reducing sales taxes on groceries, raising the state income tax threshold to approximately the poverty line -- no one was even talking about reforming the perversely low property tax) on the basis that churches would no longer have as many objects for their charity if Alabama moved in the direction of economic justice.   They'd be depriving the churches of poor people to serve!

I wonder whether Mr. Beck considers our current society to already be perfectly socially just and economically just, and, if not, what entity(s) he considers should seek to move us in that direction if he specifically excludes the Christian churches from having a concern for these issues.

To me, social justice and economic justice start with treating that which nature -- God, if you prefer -- provides, and that which the community creates -- as our common treasure, and treating that which individuals and organizations create as their private treasure.  Glenn Beck, Dick Armey and Grover Norquist may be very focused on that second portion, but if they fail to get the first half right -- first! -- they will not create a stable -- or just -- economy or society.

Union College Admits That It’s in Schenectady, NY

Union College Admits That It’s in Schenectady, N.Y. - NYTimes.com.

My brother (an alum) called this one to my attention.  My husband and I are alumni, too, and some years ago, when it came time to look at colleges, our son refused to seriously consider Union because he had seen Schenectady on various visits to campus over the years, and simply couldn't imagine living there for four years.  He made a great choice for a college, but I've often mulled over what the article is discussing: that the problems of Schenectady, like much of upstate New York, make it an unhappy place, one where many people would not choose to live, given other options.  Its economy is hurting -- and for reasons that can be easily corrected.

Union always had a well-regarded economics department, and being as close to the state capital at Albany, some students did internships in various legislature offices.

So why on earth haven't Union's Economics and Political Science departments applied their sciences -- and talents -- to the problems of Schenectady, and proposed solutions? 

Part of the answer might be that for several generations, neither of these sciences have put much thought into the problem that underlies Schenectady's troubles.  It hasn't been fashionable to talk about, and many haven't even had the vocabulary.  Most of today's economics professors learned their economics at the feet of neoclassical economists.  They have a lot to fit into a trimester, and they're not likely to teach that which their own instructors chose to omit.  But they're missing something important and relevant.  The classical economists had a lot to tell us which points to the root of some of today's most serious problems.

Or perhaps those seeking a better future for Schenectady might turn to the History department, or to American Studies.  Students of the last half of the 19th century might be able to tell them about an American philosopher and economist named Henry George (b. 1839, Philadelphia; d. 1897, NYC), who was the best known (due in part to his bestselling book on political economy, Progress and Poverty, which was familiar to anyone who read at all during the last 20 years of that century; it sold about 6 million copies and was widely serialized and translated) of a long continuum of people who called attention to the importance of land and natural resources in our economy, and to the distortions that result when we permit the privatization of their economic value -- or about the movement which followed in the early years of the 20th century.  George proposed a simple and just remedy, and I'll bet that not 10 of this year's Union graduates have even heard of it.  (That doesn't set Union apart from many other highly regarded colleges, but it is clearly a shame: that these students have spent 3 or 4 years in Schenectady, and not gotten close to some answers about why there is such poverty and underdevelopment in the state of New York, from which many of Union's students come.  They come from much richer parts, in general.)

The small cities of upstate New York, like many other places in America, are suffering from the use of the wrong taxes.  Schenectady is perhaps an extreme example.  When we tax both land value and buildings at the same millage rate, we discourage the sort of development which we claim to want.  The answer, of course, is to reduce or even eliminate the tax which falls on buildings, and increase the millage rate on land value. 

Union's economics and political science departments owe it to their hometown to take on this topic.  First, the faculty must educate themselves.  And then they must involve their students, particularly those who come from New York State.  They can become a force for good, a force for reform of some miserable policies, and for a shift to superior ones.

They may find themselves coming up against the "real estate interests" -- including alumni, perhaps -- who think that this might not be in their own best interests (and therefore discourage the exploration).  (Governor Spitzer, the son of a real estate magnate, would not have been enthusiastic about this, for instance.  He convened a panel to try to offer "Property Tax Relief" as an answer to some question -- but it was probably not primarily for homeowners.  Remember Leona's wisdom about taxes.)  Will Union's best and brightest be able to push through the interested parties' incentives, or will they be derailed by pressure not to study this matter? They have tenure, many of them, and most live in or close to Schenectady.  

The political scientists might start with a couple of Google books, such as "Natural Taxation" (by one of the founding partners of Shearman & Sterling) or "The ABC of Taxation."  They're available via Google books, and will soon be online in other forms.  (Stay tuned here for updates.)

The economists might start with "The Principles of Natural Taxation" (also on Google books) or Progress & Poverty (unabridged, or in a modern abridgment), or an essay called "That We All Might Be Rich".

The History department might start with some of Henry George's speeches, such as "The Crime of Poverty" or "Thou Shalt Not Steal," or with Winston Churchill's 1909 Speeches called The People's Land.

The American studies department might start with a book of essays entitled "Social Problems" or with Mark Twain's essay, Archimedes, or with Bengough's Primer.

The English department might appreciate some poetry by Luke North, inspired by this same movement.

And all might appreciate the writings of Bill Batt, an Albany-based thinker on a lot of important issues which could be of great help to Schenectady.

And if any of them think this might simply be a quaint agrarian idea, I encourage them to read this page, and consider which of these issues don't affect Schenectady or their own futures.

People as diverse as Henry Ford, Theodore Roosevelt, Aldous Huxley, Clarence Darrow, Bernard Shaw, and Leo Tolstoy have embraced these ideas, as have a wide range of wise people from earlier centuries, and contemporaries as diverse as Bill Buckley and Michael Kinsley.  They are a fine example of thinking globally and acting locally, and represent a "third way."

Will Union College act -- and in the process, teach its students some important truths -- or simply nibble at the leaves of Schenectady's problems?  Go to the root!

Post Script: Union's faculty, and others who care about Schenectady, have an opportunity to get to know these ideas this summer.  There will be a conference in Albany, July 12-16, of the umbrella group for North American Georgists.   Some of the sessions will be of great interest to those who care about Schenectady, but I mention it here primarily because it will be an opportunity to interact with people who know George's ideas well and are persuaded that they can make an important difference in the world.  (This post didn't start out to be a promotion for the conference, but I was glad to find that the conference schedule is now available online.  It ends: "The Law of Rent never changes, but our schedule may - without notice.")

Is "chasing the bad guys" the highest good?

I heard part of a radio interview with Harry Markopolos today.  He's the fellow who saw through Bernard Madoff's "investment" scheme, and made every effort to get the SEC to pursue it.   I have tremendous respect for Markopolos, and hope he will continue to use his talents for public good.

He was talking about "chasing the bad guys," and it got me thinking that while "chasing the bad guys" -- the ones who abuse the rules, who flout them completely, who betray trust others put in them -- is important, there is something else that also needs to occupy our attention.

We have a structure, which few of us are conscious of, which funnels our nation's wealth into the pockets of a particular class of us, and until we -- a large proportion of ordinary people -- become conscious of the particulars of that structure, we are simply putting our attention in the wrong place. 

The theft by Bernard Madoff from some of our wealthiest folks -- I'm guessing that few of his victims were below the top 5% of the net worth distribution, counting just the dollars they sent to Madoff and their other holdings, not the assumed increase in the Madoff "investments" -- may simply serve to divert our attention from noticing that major structural matter to chasing a bad guy.

I discovered an interesting book online this weekend.  Hardcopy sits in my library -- from my late grandparents' collection -- but I'd been put off by the title, and never bothered opening it.   The title is "The Story of My Dictatorship." It turns out to be funny and interesting -- a telling of a dream, a bit along the line of "A Connecticut Yankee in King Arthur's Courts." 

We need people who will play whistleblower on our system, our structure.  And we need to listen to them.

That $1 billion acre in Manhattan

Current rupee-dollar exchange rate.

About the possibility of selling PIA-owned Roosevelt Hotel in New York to pay for past losses, he said it is not the appropriate time to sell a billion-dollar property when real estate market is still recovering in US.

“Besides, what is the point in selling a business which earns PIA $7-8 million annually?”

So the Roosevelt Hotel, which occupies an acre near Grand Central Terminal in NYC, has a net income of $7 million or $8 million per year.

This suggests some questions one might ponder:

1. Should an acre in NYC worth a billion dollars be earning a mere $8 million?  Seems to me that this is a rather low return -- at $1 billion valuation, that's 0.8% per year.

2. If this property is worth $1 billion, the land rent, at 5% -- "20 years' purchase" -- is $50 million per year.   How much does the Roosevelt Hotel pay the City of New York in property taxes each year?

3. How much do the guests at the Roosevelt Hotel pay NYC and NYS in hotel occupancy taxes per year?

4. How much do the employees at the Roosevelt Hotel pay NYC in wage taxes per year?  Wouldn't it be better to collect this amount via taxes on land value?

5. How much do the employees at the Roosevelt Hotel pay NYC in sales taxes and property taxes per year?  Wouldn't it be better to collect this amount via taxes on land value?

6. When Pakistan International Airlines decides to sell this "taxpayer," for $1 billion, and that $1 billion, created not by PIA or the people of Pakistan, or the hotel management or the hotel employees, leaves this country, will that be a good thing, or something which should have been avoided?

7. Shouldn't the beneficiaries of NYC's land value be NYC, NYS and the American people, instead of a private entity of any kind -- be it PIA, an American REIT, an NYC-based corporation, a family-owned real estate dynasty, one or more American pension funds (corporate or public), a British church, a middle eastern sovereign fund, a mutual fund, or any other private entity?

That site is valuable not because of anything its current owner is doing or is not doing.  It is valuable because of the presence of millions of residents in the surrounding area, and of millions more who visit NYC on business and as tourists in the course of a year.  It is valuable because we-the-people have invested and will continue to invest in infrastructure and services which protect and serve these sites.  Why on earth does a private entity get to pocket what we create? 

It doesn't come out of thin air.  

For more background on this story, see some previous posts here:

• That block in Manhattan ...
• Hotel Roosevelt For Sale at $1 Billion
• Cashing in on urban land value ... who is entitled to it?

Paring the Deficit, by Selling Part of the Radio Spectrum

Economic View - Paring the Deficit, by Selling Part of the Radio Spectrum - NYTimes.com.

I'd missed the article when it was published a week ago, but an LTE brought it to my attention.  The author is Richard Thaler, a professor of economics and behavioral science at the newly re-named business school at the University of Chicago (forever to be recalled as GSB by some, despite stern orders in the alumni rag).

He proposes auctioning off "The Buried Treasure in Your TV Dial."  But he isn't suggesting leasing it for some finite period of time, with a new auction at the end of, say, 5 or 10 or 15 years, but selling it forever.   As one of the LTE's says,

Re “The Buried Treasure in Your TV Dial” (Economic View, Feb. 28), in which Richard H. Thaler cites an estimate that the government could reap $100 billion by auctioning the portion of the radio spectrum used for over-the-air television:

How long would such a sum last, however, in an era of military adventures and over 700 foreign military bases? What would be permanent is the loss of both choice and the free reception of radio and television programming. Ownership of electronic media, and access to the privatized airwaves, would be as concentrated as cable and satellite systems are today.

The column says that such an auction would have many national benefits. But virtually all them, like faster broadband connections for schools, could be obtained by federal policy, not a fire sale.

Those airwaves belong to the American people, and the American people ought to be collecting full rent on them -- year in, year out -- not giving away licenses and then permitting corporations to make a business in re-selling or leasing out what they choose not to use.

Here's Thaler's article.  I look forward to his next suggestions; he has the germ of a good idea, but gets a very important aspect of it wrong.  Don't sell our common asset to anyone.  AUCTION OFF LEASES.  Wait 5 years.  Repeat.

HERE’S a list of national domestic priorities, in no particular order: Stimulate the economy, improve health care, offer fast Internet connections to all of our schools, foster development of advanced technology. Oh, and let’s not forget, we’d better do something about the budget deficit.

Now, suppose that there were a way to deal effectively with all of those things at once, without hurting anyone. And suppose that it would make everyone’s smartphone work better, too. (I’ll explain that benefit shortly.)

I know that this sounds like the second coming of voodoo economics, but bear with me. This proposal involves no magical thinking, just good common sense: By simply reallocating the way we use the radio spectrum now devoted to over-the-air television broadcasting, we can create a bonanza for the government, stimulate the economy and advance all of the other goals listed above. Really.

The reason for this golden opportunity may be in your purse or pocket: that smartphone to which you could well be addicted. The iPhone, the BlackBerry and competing devices are already amazing technologies. But precisely because of the nifty features they offer, like the ability to text photos, stream video and provide GPS directions, the radio spectrum is looking as crowded as Times Square on New Year’s Eve. Demand for spectrum is growing rapidly — a trend that will surely continue.

The problem is that the usable radio spectrum is limited and used inefficiently. Think of it as a 100-lane highway with various lanes set aside for particular uses, including AM and FM radio, TV and wireless computer technology. The government — specifically, the Federal Communications Commission — is in charge of deciding which devices use which lanes.

Because we can’t create additional spectrum, we must make better use of the existing space. And the target that looks most promising in this regard is the spectrum used for over-the-air television broadcasts.

These frequencies are very attractive on technological grounds. People in the industry refer to them as “beachfront property” because these low-frequency radio waves have desirable properties: they travel long distances and permeate walls. We have already allocated parts of this spectrum for mobile wireless, and the F.C.C. recently auctioned other parts for $19 billion. That has left 49 channels for over-the-air television.

Why is the current use of this spectrum so inefficient? First, because of the need to prevent interference among stations, only 17 percent of it is actually allocated by the F.C.C. for full-power television stations. (The so-called white space among stations is used for some limited short-range applications like wireless microphones.)

Second, over-the-air broadcasts are becoming a nearly obsolete technology. Already, 91 percent of American households get their television via cable or satellite. So we are using all of this beachfront property to serve a small and shrinking segment of the population.

Suppose we put this spectrum up for sale. (The local stations do not “own” this spectrum. They have licenses granted by the Federal Communications Commission.) Although the details of how to conduct this auction are important, they don’t make compelling reading on a Sunday morning. Interested readers should examine a detailed proposal made to the F.C.C. by Thomas W. Hazlett, a professor at the George Mason University School of Law who was formerly the F.C.C.’s chief economist.

Professor Hazlett estimates that selling off this spectrum could raise at least $100 billion for the government and, more important, create roughly $1 trillion worth of value to users of the resulting services. Those services would include ultrahigh-speed wireless Internet access (including access for schools, of course) much improved cellphone coverage and fewer ugly cell towers. And they would include other new things we can’t imagine any more than we could have imagined an iPhone just 10 years ago.

But some compelling technology that could use these frequencies already exists, like wireless health monitoring — to check diabetics’ blood sugar regularly, for example — and remote robotic surgery that can give a patient in Idaho a treatment like that available in New York or Chicago.

Who would oppose this plan? Local broadcasters are likely to contend that they are providing a vital community service in return for free use of the spectrum that was put in their hands decades ago. Whether the local news or other programs are vital services is up for debate, but their value isn’t the issue, because they can be made available via cable, satellite and other technologies, including improved broadband.

Say there are 10 million households that still get their television over the air, including those that can’t afford cable or satellite and some that generally just don’t care for what’s on TV. (Yes, there are people who don’t like “American Idol.”) But about 99 percent of these households have cable running near their homes, and virtually all the others, in rural areas, could be reached by satellite services. The F.C.C. could require cable and satellite providers to offer a low-cost service that carries only local channels, and to give vouchers for connecting to that service to any households that haven’t subscribed to cable or satellite for, say, two years.

Professor Hazlett estimates that $300 per household should do it: that amounts to $3 billion at most. Compared with the gains from selling off the spectrum, it’s a drop in the bucket. Or, as an interim step, we could reduce the number of channels available in a community from 49 to, say, 5.

I KNOW that this proposal sounds too good to be true, but I think the opportunity is real. And unlike some gimmicks from state and local governments, like selling off proceeds from the state lottery to a private company, this doesn’t solve current problems simply by borrowing from future generations. Instead, by allowing scarce resources to be devoted to more productive uses, we can create real value for the economy.

Economists are fond of saying that there is no such thing as a free lunch. Here we have an idea that is even better than a free lunch: being paid to eat lunch. More paid-lunch ideas will be coming in future columns.

The classical economists might never have heard a radio or seen a television, but they'd immediately recognize broadcast spectrum as "land" -- a gift of nature, finite and scarce -- and would have regarded it as our common treasure.  Unfortunately, Professor Thaler is not a classical economist.  He is a neoclassical economist, and his training in economics probably glossed over the truths the classical economists saw.  And quite likely, that's how he teaches the subject, too.

We can concentrate more wealth in the hands of a few corporations, or we can collect the economic rent on this scarce and valuable resource.  (See also Alaska Permanent Fund, in the topic cloud at left.)

I hope we'll do the latter.

U.S. Plans New Measure for Poverty

U.S. Plans New Measure for Poverty - NYTimes.com.

About time!  The new measure (the old one will remain; this is supplemental) will take into account the local cost of living:

Federal officials describe the supplemental measure as experimental and a work in progress. It establishes a poverty threshold that depends on the cost of food, shelter, clothing and utilities “plus a little more” for “a population that is not poor but is somewhat below the median.”

The original measure figured costs for two adults and two children. The new one covers one adult and two children, a family structure more prevalent these days among lower-income households, and would be adjusted to reflect living costs in different metropolitan areas.

The threshold would be adjusted to calculate the value of in-kind benefits, like food stamps, and whether homeowners have a mortgage. Tax credits would be added to the total income and benefits; taxes, work expenses (including commuting and child care), and out-of-pocket medical costs would be deducted.

It sounds to me as if someone has been reading the Self-Sufficiency Standard Studies, which take into account local costs for rent, commuting, health care, child care, and a (usually) national figure for 100% home-cooked meals.

The new figures will not be published until Fall, 2011 (August is the time of year the annual poverty data currently is published).  I look forward to seeing the methodology, and how it differs from or matches the Self-Sufficiency Standard study assumptions, which are based on the Fair Market Rent for a suitably sized apartment in each county.  That's generally the 40th percentile of the local market (occasionally the 50th).  Will this new poverty "threshold" use the 40th, or something lower?   How will it be calculated?  Does HUD make available the, say, 20th percentile? 25th?  

There is a parallel study to the Self-Sufficiency Standard studies, which are generally oriented to working-age individuals and families, which relate to the cost of living for seniors.  I've read the one for Pennsylvania.  It works with both rented and owned housing, county by county, in that state, for a single senior and a married couple.

Under the new poverty measure, poverty rates will likely rise significantly in America's cities, particularly on the coasts.  (Look for the legislators from the heartland states to question the new measure: a lower share of poverty will be in their districts and states.)

My calculations, from the Overlooked and Undercounted studies, suggest that 35% to 45% of our children are in families with insufficient income to meet the family's most modestly defined needs.  (Click on the link for Self-Sufficiency Standard studies in the cloud at left, for more details.)

I expect that, when we see how many people simply have little discretionary income, it will become clearer to us what it will take to make our economy work better: insure that more people have spendable income.

Those who have spent some time exploring this blog will know that the ways I'd propose to achieve that are different from what is usually proposed.

Airport Landing Rights as our COMMON treasure

According to CNN, JFK's airport's busiest runway will close today for four months for reconstruction. "Officials are reducing the number of arrivals and departures at the airport from about 1,300 a day to 1,050."  Given the softness in the economy, this is a fine time to do the necessary work. (I wonder whether this is being paid for in part by stimulus dollars.)

1300 takeoffs and landings a day.  48 million passengers per year. One of two international gateways to -- and from -- NYC metro area.

Finite.  There is no suggestion in the article that this project is going to increase capacity.  The goal is to widen the runway by 1/3, and add taxiways, to ease air traffic congestion.  The results should, I hope, include reducing fuel use by delayed flights, both on the ground and waiting to land; reduce time-wasting backups produced at other airports around the US caused by JFK delays.  This will be good for the airlines, for air quality, for efficiency, productivity and stress levels of passengers.  Its effects should reverberate through many other airports, here and abroad.

The project will cost $376 million.  Quick and dirty, if there are 48 million passengers per year, a $1 surcharge on every ticket for the next 8 years would pay for the work.

So how should this be financed?

We ought to be treating landing rights at JFK (etc.) as our common treasure, not the property of the airlines. Auction them off, 5 years at a time. Lease them to the highest bidder at the price bid by the second highest bidder. Use the revenue to finance airport improvements. This is one the Bush administration's FAA director got right, but she was shot down by what I assume were corporate interests or their very good friends.

Time to review that one, and get it right.

What the airlines are paying now is far below the amount they'd be willing to pay if we required them to bid for their slots.  As I understand it, airlines own their slots, treat them as assets, and can sell them to the highest bidder, with no revenue going to we-the-people or to those who maintain the airports!  

Airport landing rights might not have been known at the time of the classical economists, but they would immediately recognize them as "land" and thus rightly part of the commons, to be treated as our common asset rather than anyone's private property.  Permitting the privatization of that economic value is a mistake.

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.

Nation Building -- abroad and at home

Nation Building creates RENT -- economic rent.  To whom should it belong?

• Should the rent in, say, Iraq, belong to America since we're investing American dollars and American lives in building infrastructure and creating order in Iraq?
• Should the rent in Iraq belong to those who currently own the land made valuable by the infrastructure and order we're helping to create there?  (Some would say that that is the "American way;" at least it is what we do.)
• Should the rent in Iraq be collected and used to fund government services and more infrastructure for the people of Iraq?

And in America, as we consider investing in maintaining existing infrastructure -- roads, bridges, railroads, water mains, sewage systems, airports, etc. -- and building new (e.g., high speed rail), who should reap the benefit in terms of the land value such maintenance and building maintains and creates?  Should it be privatized, or recycled for public purposes?

There is a passage in Henry George's book Progress & Poverty which has been excerpted under the title "The Savannah" which I think is relevant here.  I'll share it in a moment. 

America's millionaires

The term "millionaire" used to always be a reference to net worth.  Recently, we've started to see it used to refer to people with annual incomes of $1 million or more -- usually in articles suggesting that a significant and growing percentage of us fall into that category and isn't America wonderful?

Here is a bit of information which uses the traditional definition: people with net worth of more than $1 million.  It comes from a study entitled "Migration of Wealth in New Jersey and the Impact on Wealth and Philanthropy."  The data cited comes from the Federal Reserve Board's triennial Survey of Consumer Finances.

In 2007, according to the Federal Reserve Data, only 9% of U.S. households had at least $1 million in net worth. That 9% made the majority of charitable contributions, owned the majority of equity in unincorporated and closely held businesses, and had a disproportionately large share of investable assets as compared with the remaining 91% of the population. These “wealthy households” made 53% of all household charitable contributions ($117 billion). They also owned 93% ($13.7 trillion) of business equity owned by all households in unincorporated and closely held businesses, and they had 41% ($10.3 trillion) of investable assets owned by all households, i.e. liquid assets, stocks, bonds, and mutual funds. Typically, wealthy households do not have million dollar incomes. In 2006, the average wealthy household income before tax amounted to $354 thousand, while the median amounted to $159 thousand. Only 6% of millionaire households made as much as $1 million in 2007. The pattern is similar for unearned income. The average household unearned income of millionaire households was $145 thousand in 2006 and the median was $18 thousand. Only 6% of wealthy households had unearned income of as much as $500 thousand. Nevertheless, wealthy households received 86% of total unearned income received by all households in 2006.

Among wealthy households, both household income and household assets are importantly related to charitable giving, but assets, especially investable assets, are much more important than income. Statistically, the relationship between the value of assets and the amount of charitable giving is roughly 7 times stronger than the relationship between the level of income and the amount of charitable contributions. Put simply, millionaire households make charitable contributions more because they are wealthy than because they earn a high income.

Most (more than 90%) millionaires acquired their wealth in their own lifetimes through business, investment, or service as corporate executives rather than through inheritance. The majority became wealthy through growing their own business or investing in businesses of others. They tend to be entrepreneurial and agents of economic expansion. In earlier paragraphs we saw that as a group they own 93% of the equity in unincorporated and closely held businesses owned by all households in the U.S. Even in retirement millionaires participate in business opportunities. They contribute to local economic development as a source of funds, as a potential investor, and as an agent for creating new businesses and expanding established ones.

This seems to be a paean to trickle-down economics, and even those of us who don't believe in trickle-down economics can be tempted to accept that, since our wealthiest fellow citizens have such a large fraction of the total net worth, trickle-down must be the only relevant model for understanding wealth.  

I question the realities behind the statement that "Most (more than 90%) millionaires acquired their wealth in their own lifetimes through business, investment, or service as corporate executives rather than through inheritance."  

• Many of them, I suspect, were given college educations by their parents or grandparents; a private college education today costs about $200,000.  Not an insubstantial figure.  Graduate school runs about the same amount, particularly in the private universities or for out-of-state students at public universities.  
• Many of them, I suspect, were given the 20% down payment on a home either by the government or by their parents or other relatives.  It might have been 20% of $80,000 or $125,000, which might sound trivial in relation to their 2007 $1,000,000 corpus -- but it made a big difference which the paragraph above fails to acknowledge. (Paying off the other 80% made a relatively small contribution to their "home equity.") The appreciation of the land under that home may be a major contributor to their net worth. 

We may call that "investment" but it is really the legalized privatization of that which one's community and one's local, state and federal governments' spending has created.  Self made men?   Hmph!  And the startup funds for their businesses may have come from borrowing on that land equity.  -- and of course that interest is deductible on one's federal and, likely, state income taxes.  A nice subsidy, huh?  And the most profitable businesses tend to be those who own the building and land on which the business is conducted -- and the sites of others' businesses too!   Those folks may work hard -- almost as hard as their employees -- but they also get the benefit of the local economic activity as it drives the selling and rental value of their landholdings upward.  Bu we permit them to call themselves self-made.  Aren't we generous?   Or would it be more accurate to say that we're wearing blinders?

We should set the playing field level between landlord businesses and tenant businesses. (Land value taxation would do this.)  Landlords do not create land!  To permit structures which compensate them as if they do is dumb.

A bit later, the study continues,

According to the Survey of Consumer Finances, sponsored by the Board of Governors of the Federal Reserve, on a national basis households with net worth of at least $1 million, headed by a person age 60 or older, comprise 4% of all households but donated approximately 25% of all household charitable contributions in 2007 (the most recent year for which data is available).

The first paragraph of their 3-paragraph conclusion reads:

During the December 13, 2009 edition of “Meet the Press” former Chairman of the Federal Reserve, Alan Greenspan, touted the importance of rising stock prices to economic recovery. In a broader context Greenspan’s words highlight the importance of wealth to economic growth. During decades of research at the Center on Wealth and Philanthropy we have consistently found that wealthy households contribute disproportionately more to charitable causes both from their household assets and from their foundations, trusts, and donor advised funds.

Perhaps we would have less need for charity if we had a less concentrated distribution of wealth in America.  Perhaps, if we funded our local, state and federal spending via taxes on the value of the commons that individuals and corporations and other domestic and foreign entities claim as their own --  instead of taxing sales and wages and buildings -- we'd create more opportunity for more people to earn adequate incomes.

Until we do that, though, shouldn't we be collecting back this land appreciation once per generation, through taxes on the largest estates?

How should we-the-people pay for ... snow removal?

As I watch the mid-Atlantic states dig out from heavier snows than they are accustomed to dealing with (or budgeting for), the question of how we ought to finance such costs comes to mind. 

Let's review the choices.

• We could tax wages. 
• We could tax capital income (dividends, interest, appreciation of capital - a/k/a capital gains). 
• We could tax sales of goods.
• We could tax services.
• We could tax corporate profits. 
• We could tax specific kinds of transactions: e.g., stock sales, property transfers, tobacco sales, luxury goods, imported goods. 
• We could tax pollution. 
• We could tax buildings. 
• We could tax land value. 
• We could impose user fees.

It is very tempting, of course, to recommend that We tax whatever I have the least of.  That's the "don't tax you, don't tax me; tax the guy behind the tree" approach, and many people never move beyond it in their thinking about taxation.  It is one of the factors that causes us to rely on taxes which fall on people who have relatively little.  (Remember Leona Helmsley's statement -- "WE don't pay taxes; the little people pay taxes." -- I don't think she was talking about tax evasion; she was describing how we've structured things.)

When we tax wages, we take from people that which they create.  We discourage them from working, from producing, from contributing.

When we tax dividends or interest, we discourage savings and investment.  Our corporations need capital.  (Notice, however, that when one buys an existing share of stock from another investor, the corporation is not getting a new infusion of capital; what is changing hands is the entitlement to an actual or potential stream of dividends, and to a payment of some size if management decides to sell the corporation to another corporation or some private entity.)  

When we tax capital gains, what we are taxing is a mixed bag. Capital does not appreciate.  As anyone who has left a home unoccupied for a few months knows, as anyone who has owned a car knows, buildings and machines and the like do not appreciate.   They depreciate, even with the best of maintenance.  Most "capital" gains are actually either appreciation of land, or relate to the extraction of scarce -- nonrenewable -- natural resources.   (Much of what is taxed by the estate tax, too, relates to one of these kinds of gains, which have NOT already been taxed elsewhere in our system.  Taxing them once per generation, particularly when there are huge concentrations, is better than not taxing it at all.) 

When we tax sales of goods, or sales of services, we impose both on the purchaser and on the buyer; by raising the price of goods or services, we lower the demand for them.   

When we tax corporate profits, we encourage corporations to move those dollars to another country.   And they are happy to oblige.

When we tax transactions of various kinds, we discourage those transactions.  That can be a good thing or a bad thing.  If we are discouraging hedge funds from skimming profit away from the market, many would argue this is desirable.  If we are discouraging the flipping of houses by making it less profitable, many would argue this is desirable.  Some would argue that discouraging liquor, or tobacco, or recreational drug transactions is desirable.  Some would argue that discouraging trade with other countries is desirable.  (Others would take the position that Henry George took: that it is doing to ourselves in peacetime what other countries might seek to do to us in war!)

When we tax pollution, we should get less pollution.

When we tax buildings, we should expect to have slower redevelopment, poorer maintenance, less investment in energy-conserving technologies and renovations, fewer highrises and less vibrant cities.  We will certainly have fewer people employed in these activities or in spaces created by them.

When we tax land value, what happens?  To quote the eminent economist Lowell Harriss,

Land as area is fixed in quantity. Tax it heavily, and it will not move to some other place, or decide to take a vacation, or leave the inventory of productive resources by going out of existence. Tax land lightly, and the favorable tax situation will not create more space in the community.

But we don't have to figure this out over and over.  Adam Smith, in The Wealth of Nations, provided us with the canons of taxation -- the criteria by which to judge the various options.  You might take a look at these two pages on the subject: 

• Taxes: What Are They Good For? at http://www.henrygeorge.org/canons.htm
• Canons of Taxation at http://www.wealthandwant.com/themes/Canons.html

All those goods and services whose effect is to maintain or increase property values -- land values, since buildings depreciate -- should be financed via taxes on land value.  We should avoid taxing any of the other possible tax bases at all until we have fully taxed land value.  (At this point, you might be wondering what it means to "fully tax land value."  Generally, it means to collect something approaching 100% of the annual rental value of the land itself.  Quick and dirty, that's about 5% of what the selling price of the land would be in the complete absence of a tax on it.  So if a lot would currently sell for $100,000, while bearing no annual tax on land value, the annual land rent would be about $5,000.  Land value taxes up to that amount do not place a burden on the landholder.  Collecting 100% of that amount would reduce the selling price of the land to a token level, but would not reduce its annual rental value by a penny.)

If you tend to think that "balance in taxation" is a good idea, you might take a look at The Fallacy of the 'Three-Legged Stool' Metaphor, by Bill Batt.  You might see it differently.

Land, labor and capital: cleaning up after the snow storm

Last Saturday, 2/6, the mid-Atlantic region received an amount of snow that exceeded what it normally gets in an entire winter.  By Sunday afternoon, major highways had a single lane well-plowed and a second one barely passable.  We had delayed our planned trip from Connecticut (where we're used to snow and our towns budget for snow removal) to southern Delaware (where snow is much less common) from Friday.  We arrived to find our destination had about 15" of snow and plowdrifts blocking the driveway.   We were grateful to have a very short driveway.  Having read a few local blogs, we'd packed 2 snow shovels, an ice hacker (MUTT = multi-use tough tool), some salt and a long pole for getting snow off trees, as well as boots and parkas.   Some young men cruising the neighborhood looking for work had one snow shovel, and they borrowed one of ours and moved enough snow to get our cars off the street.  We knew from the local blogs that shovels had sold out well before the snow started.  Had we thought more deeply, we'd have bought 5 or 10 at our CT grocery store to offer to neighbors.  I also wished we'd brought a Wovel with us; it would have had a great workout.

The next day, I went to see if anyone was in need of some shoveling help.  One neighbor's car was sitting on top of compacted snow, and the MUTT turned out to be just what we needed to break up that hardened snow.  The MUTT was also very helpful when I needed to hack through the plowdrifts, which had hardened.  Without it, I would have been much less productive; my shoulders would hurt more, and I would have gotten less done.

While there are many pickup trucks and tradesmen's SUV's in the area, almost none have snow plows here; snow of a quantity that would require it is so infrequent as to make it uneconomical.  Within a couple of days, though, some "bobcats" started to appear; I don't know how far away they came from. 

A second storm arrived Wednesday, bringing more snow.  We'd mostly cleared our driveway after the first storm, and getting the second cleaned out was easier.  State and local snow plow drivers were very kind and avoided socking us with a plow drift, once we'd opened our driveway the first time.

I titled this post "land, labor and capital."  Why?  Well, here are some of the thoughts that occupied me while I shoveled and hacked. 

• the young men who came looking for work on Sunday could not earn a living unless they had some land to work on -- in this case, ours.
• their single snow shovel -- capital -- made them far more productive than they would have been with no tools at all.  But their lack of a second shovel made them far less productive than they could otherwise be.  Even if they'd had funds to buy a second shovel, shovels were simply not available.
• having the right (specialized) tools for the job -- the MUTT, or a truck-mounted plow -- plus the skills to use them well makes a big difference in how much one can do with 10 minutes or 2 hours of labor.

I listened to a radio program coming out of nearby Washington, DC, which was largely shut down by the nearly unprecedented snows (there was no mail delivery from Saturday to Thursday; the federal government was pretty much shut down), and there was some discussion about whether towns and cities ought to spend taxpayer funds keeping inventory of plows to handle snows much heavier than what typically occurred, or whether perhaps there should be incentives for private individuals to own and maintain truck-mountable snow plows.  Did it make sense to tax everyone, say, $50 more per year to pay for better snow-management equipment if it would save $100 worth of productivity per person?

I no longer remember what I heard on the radio, and what parts of this were my own musings.  But it did pass through my mind that such things as snow removal ought to be financed not through taxes on people's wages or interest income, or on their purchases, but rather should be paid for by taxes on land value.   People are willing to pay more to live where better services are provided, where more consistent utilities are provided.

Taxing the poor people of Washington, D.C., many of whom are tenants, $50 each, and taxing the wealthy homeowners in Georgetown $50 each is not nearly as fair as taxing people in proportion to the value of the land they own.  Georgetown homeowners ought to be paying a lot more each than the owners of subdivided brownstones in less expensive neighborhoods.  And the tenants of those subdivided brownstones are paying significant rents to their landlords; their share of the costs of providing local services should come out of the payments their landlords receive, which are a function largely of their location in Washington, D.C., not luxurious landlord-provided amenities within those homes.

The tenants are already paying 30% or more of their income for housing, which seems to me to be a form of sharecropping; their landlords share in their labor.  For that matter, those of us who are paying mortgages are sharing our wages with a mortgage lender, who in turn paid off the seller of the property we're bought.  It is highly unlikely that more than half of the purchase price was for the improvements to the land (unless it is a brand new house in a fringy area); most of the purchase price -- and the mortgage payment -- are payments for land value.  And the seller didn't create that value, so it seems perverse and odd to me that he is the one who reaps what the community has sown. Our structure permits him to privatize this public investment.

The remedy, of course, is rather simple: shift our taxes OFF labor, OFF sales, OFF buildings ... and ONTO land value.  Many supposedly intractable problems will start to evaporate when we do that.  And we can do it very gradually if we choose, or expeditiously if we see fit.

The House of Tranquillity: A "Middle Class Agenda"

Op-Ed Columnist - The House of Tranquillity - NYTimes.com. Finally, Biden was asked to come up with a middle-class agenda. This is a surprisingly difficult job because many of these programs — credits for college affordability and child care — fairly reek of Clintonism. This is an administration that is staffed by Clintonites but does not want to appear Clintonian in any way.

Let's talk about America's middle class.  How should we define the middle class?  If we define it in terms of income, we find that the middle quintile of households in 2007 had median net worth of $88,100.  That is, of the middle 20% of us, half had household net worth of less than $88,100, and half had more.  That's not a whole lot of money to fall back on, particularly when one considers that much of that is home equity.

The same middle-income quintile had a median before-tax family income of $47,300.  That is, half had more, half had less.

That middle income quintile accounted for 10.9%  -- no!  that was the the 1989 figure.  By 2007, it was 7.54% -- of America's net worth in 2007. 

Here's how the net worth was distributed across the income quantiles in 2007:

• 	Top income decile:	59.45% of the net worth
  	Second income decile:	10.92% of the net worth
  Top income quintile:		70.37% of the net worth
  Second highest income quintile:		13.48% of the net worth
  Middle income quintile:		7.54% of the net worth
  Fourth highest income quintile:		4.84% of the net worth
  Bottom income quintile:		3.77% of the net worth

    [source: SCF chartbook, p. 43, and my calculations]

If we define the middle class more broadly -- as the middle 60% of the income distribution -- our "middle class" has 25.86% of the net worth.

And here's how the before-tax income was distributed across the same income quantiles:

	Top income decile:	47.19% of the before-tax income
	Second income decile:	13.77% of the before-tax income
Top income quintile:		60.96% of the before-tax income
Second highest income quintile:		18.18% of the before-tax income
Middle income quintile:		11.23% of the before-tax income
Fourth highest income quintile:		6.72% of the before-tax income
Bottom income quintile:		2.92% of the before-tax income
[Source: SCF Chartbook, page 7 and my calculations]

Using the broader definition of middle class -- again, the middle 60% of the income distribution -- our "middle class" has 36.13% of the before-tax income.

(Think of this quantile data as you read Bob Herbert's recent column "The Worst of the Pain.")

Alternatively, if we define the middle class in terms of net worth -- erase the above income-based definitions from your mind for the moment! -- here's the corresponding data:

The median household arranged according to net worth had net worth of $120,600 [source: SCF Chartbook, p. 39]  That doesn't sound so bad, does it?

Let's look at the net worth quantiles:

	Top net worth decile:	71.46% of aggregate net worth
	Second 15% of net worth holders:	15.83% of aggregate net worth
Top net worth quartile:		87.29% of aggregate net worth
Second highest net worth quartile:		10.21% of aggregate net worth
Third highest net worth quartile:		2.60% of aggregate net worth
Bottom net worth quartile:		-0.10% of aggregate net worth
[Source: SCF Chartbook, 2007, page 73]

The middle 50% of us, arranged according to net worth have 12.81% of the net worth.

If you define our middle class as those between the 50th and 85th percentiles of the net worth distribution, our middle class owns 26.04% of the net worth.

How is the income distributed across those same net worth quantiles?

	Top net worth decile:	41.25% of before-tax income
	Second 15% of net worth holders:	16.56% of before-tax income
Top net worth quartile:		57.81% of before-tax income
Second highest net worth quartile:		19.76% of before-tax income
Third highest net worth quartile:		13.80% of before-tax income
Bottom net worth quartile:		8.63% of before-tax income

The middle 50% of us, arranged according to net worth, have 33.56% of before-tax income

If you want to define our middle class as those between the 50th and 85th percentiles of the net worth distribution, our middle class is getting 36.32% of the before-tax income.  35% of us getting 36% of the income.  That's middle, I guess.

If you've gotten this far, I'll bet that you will think that we might want to tax income more heavily at the upper end of the income spectrum, or tax large estates more heavily.

I'm going to propose something different.  Something which digs deeper, and seeks the source, the cause of the problem, rather than trying to redistribute the income or net worth after the fact.

Henry David Thoreau, in Walden, wrote this:

There are a thousand hacking at the branches of evil to one who is striking at the root, and it may be that he who bestows the largest amount of time and money on the needy is doing the most by his mode of life to produce that misery which he strives in vain to relieve. It is the pious slave-breeder devoting the proceeds of every tenth slave to buy a Sunday's liberty for the rest. Some show their kindness to the poor by employing them in their kitchens. Would they not be kinder if they employed themselves there? You boast of spending a tenth part of your income in charity; maybe you should spend the nine tenths so, and done with it. Society recovers only a tenth part of the property then. Is this owing to the generosity of him in whose possession it is found, or to the remissness of the officers of justice?

Henry George wrote this, in the opening chapter ("The Problem") of Progress & Poverty (1879), describing the first 100 years of America's existence as a nation:

It is true that wealth has been greatly increased, and that the average of comfort, leisure, and refinement has been raised; but these gains are not general. In them the lowest class do not share. I do not mean that the condition of the lowest class has nowhere nor in anything been improved; but that there is nowhere any improvement which can be credited to increased productive power. I mean that the tendency of what we call material progress is in no wise to improve the condition of the lowest class in the essentials of healthy, happy human life. Nay, more, that it is to still further depress the condition of the lowest class. The new forces, elevating in their nature though they be, do not act upon the social fabric from underneath, as was for a long time hoped and believed, but strike it at a point intermediate between top and bottom. It is as though an immense wedge were 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.

Now go back and look at the distributions of income and of net worth in America in 2007.  I've not provided the trend data here, but the 2007 snapshot tells the story well enough.

Do We Really Have to Create Man-made Misery to Supplement What Nature Provides?

As I read and listen to and watch the news -- earthquake, ice storms -- and think about the past year -- floods, fires, mudslides, hurricanes, nor'easters, more earthquakes -- it seems to me that nature provides us plenty of opportunities to exercise our compassion and charity, individually and as a nation, and plenty of spending opportunities for maintaining necessary infrastructure.

We don't need to maintain economic structures which create additional human misery.  There is enough without them.

We can't control nature. But we CAN correct man-made structures which victimize our fellow human beings.

We don't need poverty in the world.  We could manage just fine without it.

It is time to delve into those structures, and get to the root of them.

When we get to the root, we'll recognize it and know what to do about it. 

When we've done that, our safety nets will be there for those who have health problems, or accidents, or are victims of nature's whims.  We'll be able to devote our energies and funds to things which can't be avoided -- acts of nature -- instead of trying to patch up the victims of our economic system.

Here and abroad.

Go to the root of the problem.

Where do you start?  Read Henry George.  Start with the speeches linked from the front page of http://www.wealthandwant.com/, and then, if something in his thought resonates, move on to Social Problems (ditto) and then "Progress & Poverty, at http://www.progressandpoverty.org

The good news is that economics need not be a dismal science.  When viewed through the lenses of the classical economists, a lot more things look a lot more fixable.

Poverty is a structural problem.  Nothing we try to do for or with individuals is going to make the least bit of difference in the structures which are producing poverty.   While I applaud the hearts and efforts of those who seek to improve the lives of individuals afflicted with poverty through charity, through education, through aid, even through job creation, none of these things is going to end poverty until we correct the structures which take for some that which others create.  You might move one person from being a sower to being a reaper, but you aren't going to reduce the problem of some being permitted to reap what others sow until you attack the structures which permit it!

And isn't it government's job to create and promote structures which protect all of us from exploitation by others?

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 with this:

    Greater fairness in sharing the costs of local government constitutes a prime -- but not the only -- reason for shifting much of the tax from improvements to land. This country will be around for a long time. So also, I hope, will meaningful local government. Effective freedom requires financial independence, including ability and responsibility for raising revenue.

    One of the biggest legacies we leave our children will be the tax system. We want to make it as good as possible. Equity is one (again, not the only) element of "goodness" of a tax system.

He proposes a shift to a structure where the millage rate on land is about 4 times that on buildings.  He talks about transition issues, and issues of equity during and after the transition:

    Two markedly different sets of equity issues command attention. The one of dominant concern ought to be the situation in which we (and our children) would carry on our affairs after generally full adjustment as contrasted with conditions then if present practices were to continue. The long run in which "we" are not all dead! The other concern involves the transition. The shift itself would produce results distinguishable from those to prevail after the economy had settled down to the new system.

Writing of long-term equity issues -- remember that this was 1970 when you consider the dollar figures --

    Community Use of Values Created by Social Development and Local Government Spending

    Over the longer run, landowners would get less of the increment in the values of location. The general public would get more in the form of a larger flow of the rising yields of the worth of location (land) to finance local services. On this score, the equity results commend themselves very strongly indeed. Socially created values would go for governmental, rather than for private uses -- and locally. The absorption of the increments for local, rather for state or national, governmental use would channel these funds on a benefit basis geographically.

    The localities doing most to make themselves attractive would have most of this revenue source. In major cities $10,000 to $15,000 (now often considerably more) of governmental outlay is frequently needed for each new dwelling unit -- schools, streets, fire and police, sanitation and health, park and prison, facilities. Under present arrangements much benefit from such outlays in developing areas accrues to the owner of locations being "ripened" for more lucrative use; his payment in taxes (and special assessments) toward the cost will generally be only a modest portion of the total.

He describes this as a "burdensomeless" tax:

    As for the future, the tax on values of location above their present levels would be almost burdensomeless, except as owners of land and their heirs get less of the "unearned increment" of rising values over the decades. Much of the element of true economic surplus would be used for public purposes. For those parcels of land whose values drop, the annual tax would also decline. Then, because tax rates on land would be higher than today, local government would share more fully in the loss of worth. For landowners the proposal would not be a one-way affair which assumes that land always rises in price.

    No other revenue source seems to me to compare so favorably on this score of fairness. Future users of land would be no worse off for the much heavier tax they would pay on the value of location. The purchase price of land would be correspondingly less. Of the total flow of yield of location value, interest (explicit or implicit) would be smaller, taxes higher. Who would be less well off? The landowners and their heirs who would have gotten the (unearned) increments!

    More of the rise in land value which results from (1) governmental investment in community facilities and (2) the general rise in demand due to the growth of population and income would go to pay for the costs of local government. Such a tax on a pure economic surplus seems to me about as fair as any imaginable source of funds for financing community services. The National (Douglas) Commission on Urban Problems estimated that in the 10 years to 1966, and despite rising interest and tax rates, land prices rose by over $5,000 per American family -- $250,000 million.  Even a modest fraction of this amount if used for local government would have permitted quite a reduction of burden on buildings. The estimated rise in land prices was over four times the total growth of state-local debt and was greater than all of the property tax paid in the 10-year period.

And

    Land as area is fixed in quantity. Tax it heavily, and it will not move to some other place, or decide to take a vacation, or leave the inventory of productive resources by going out of existence. Tax land lightly, and the favorable tax situation will not create more space in the community.

    Our ethos apparently ties economic justice -- equity -- to rewards based on "accomplishment." This principle does not lead to justification of large rewards because of the ownership of land. Differences, big ones, in payments for human services or for the use of capital can rest on what the recipients have done. But for the owners of urban locations such justification can rarely be found; when there have been private inputs for community development, to the extent feasible administratively, they belong on the tax rolls as improvements rather than as land.

And just before he concludes, he writes,

    What an owner can get in the form of land price increases in and around cities has made rich men out of owners of farmland, vegetable plots, and waste areas. More than one owner of a few acres of potato land on Long Island or farms on the outskirts of many a city in the United States, of a small plot of rice land near Tokyo or Bangkok or Taipei, has reaped handsome gains because of the pressure of population. In America, North and South, in Europe and Australia and Africa, private enrichment has come to the passive owner of land who has done little or nothing to enlarge its worth as part of the city whose growth has brought his good fortune. In fact he may have paid no more than an infinitesimal fraction of the taxes which have financed the streets and other governmental facilities that have helped to elevate the value of his land.

Next, I moved on to a longer piece, from the same time, and containing some of the same material.  I ended up feeling that it is perhaps the best piece I've read in a long time on Land Value Taxation.  It is titled "Property Tax Reform: More Progress, Less Poverty" and it is a lecture he delivered at DePauw University in 1970.   I commend it to your attention.

Finally, I note a book from the TRED -- Committee on Taxation, Resources and Economic Development -- series (#6) entitled Government Spending & Land Values: Public Money & Private Gain edited by C. Lowell Harriss (1973).  Each book in this series came out of a 2- or 3-day conference, held at the University of Wisconsin-Milwaukee.  Lowell organized this conference, and wrote the book's introduction.  Here's the dust jacket material:

Billions of tax dollars are spent annually on government subsidy programs which are designed to help certain groups, areas, and industries, and contribute to the general welfare. Despite the good intentions of legislators, however, analysts point to evidence that the programs are not only burdensome for the taxpayer but often fail to do their intended jobs. Critics find that major benefits go not to those whom the programs are designed to help, but to others who can "capitalize" on them.

One major feature of the subsidy benefit pattern -- unintended but predictable -- is the capitalization of land values. The value of land will increase when the benefits, chiefly money income, are enhanced by government subsidization. When the land is sold, the benefit of a subsidy which seems likely to continue will be captured by the seller. Thereafter, tax funds that continue to subsidize a program will not fully benefit those for whom they were presumably intended, but the seller will have made a capital gain.

A classic example can be drawn from the experience of federal farm programs. Taxpayers and consumers have been spending billions annual to aid some farmers. In practice, of course, these programs have often -- and intentionally -- reduced farm output and raised consumer prices. The consumer-taxpayer is thus dealt a double blow, in effect subsidizing an increase in his own food prices. Yet the operating farmer, burdened with a higher land price, fails to get the full benefits of the programs established for his welfare.

In farm programs, as in some other subsidy programs, the expected annual benefits are capitalized into higher land prices. Then, after land prices have gone up to reflect these benefits, the annual payments to farm operators in effect support the higher land prices. In effect, the seller of land realizes the benefits of government subsidy into perpetuity. A somewhat similar pattern is to be expected in other public spending programs, including those concerned with urban renewal, where benefits are localized. The pattern shows that farm programs do not raise wages of low-paid farm labor, that urban projects do not rid cities of slums, and that the taxpayer-consumer bears the burden of both.

This volume explores, and at least attempts to define, the extent to which land values tend to capture the benefits of subsidies and other government spending through capitalization. It includes papers by proponents as well as critics. The contributors, who include some of the nation's leading economists, discuss the nature and effects of farm and housing programs, commodity price supports, transportation outlays, land preservation projects, water resource development, and urban renewal programs. Their work will be of more than routine interest to economists, political scientists, lawyers, political officeholders and government officials, planners, and all others who seek to unravel the complex fabric of multi-billion-dollar government spending programs.

Lowell made contributions in many parts of economics; I am probably familiar with only a small portion of his work, but I am grateful for it.

"The End of Poverty? Think Again"

The new film, "The End of Poverty? Think Again" had its NYC premier back in November, and is now back for a second round.

I commend it to your attention.  It is beautifully filmed, and, while it doesn't provide clear answers, it raises a lot of important questions -- different questions from the ones commonly being discussed -- and considers them in light not only of economic justice, but also the sustainability of our planet.

You can watch a number of clips on YouTube ... start at http://www.youtube.com/user/CinemaLibre2 and you'll see links to many excerpts and some outtakes, interviews with the director, and a review.

The title is a direct challenge to Jeffrey Sachs' 2005 book "The End of Poverty." The film looks for the roots of global poverty, and who benefits from the current structure.  It provides a lot to think about.

Here are three websites I encourage you to explore

• the film company's website, http://theendofpoverty.com  This will tell you where you can find the film and provides some additional clips.

• A Georgist Perspective on the film "The End of Poverty?", http://povertythinkagain.com/
• A companion book for the film, "Why Global Poverty?" http://whyglobalpoverty.com/  available at the online bookstore at http://www.schalkenbach.org/

The solutions to poverty that most people are talking about -- microcredit, vaccines, drinking water improvements, etc. -- are not going to put a major dent in the problem.  None of them, and no combination of them, goes to the ROOT of the problem, the underlying cause.

I'm actually not altogether sure that the filmmaker himself fully understands the root of the problem -- but it seems to me that he is at least on the right track.   And I think his film has the potential to get the conversation going, which is a lot better than where we've been.

When I think about the other proposals that are being made to end poverty, I think of a passage from Henry George, the beginning of a chapter called "The Robber That Takes All That is Left:"

Labor may be likened to a man who as he carries home his earnings is waylaid by a series of robbers. One demands this much, and another that much, but last of all stands one who demands all that is left, save just enough to enable the victim to maintain life and come forth next day to work. So long as this last robber remains, what will it benefit such a man to drive off any or all of the other robbers?

I'm not saying that disabling or disposing of some of these other robbers isn't noble work.  But we ought not to fool ourselves that it is sufficient.  And we're operating in the dark if most people don't even realize the existence of that other robber, who also robs them, day in and day out.   

Remember that in America, which has, most of us think, solved most of the problems these people set out to solve, has tremendous concentration of wealth:

10% of us hold 71.5% of the aggregate net worth.  The next 10% have 13.5%.

That doesn't leave a whole lot for the bottom 80% of us.  And recent developments, including the Supreme Court decision in Citizens United, lead some of us to expect that wealth will concentrate further in America.

The other Davos website

I came across an interesting website the other day ... http://www.we-forum.org/en/events/AnnualMeeting2010/index.shtml.

Unfortunately, the link to the Stiglitz interview doesn't work ... but here is a short one from the same interview.  It is an excerpt from the Philippe Diaz film, The End of Poverty?  Think Again.   Once you see that one, you'll also see links to other excerpts from the film and to trailers and other information.

The Davos website is not what it appears to be, but I encourage you to explore it anyway.   Some of the videos are priceless.

The link under "initiatives" for "Sane Tax Initiative" strikes me as directionally correct:

Sane Tax Initiative

The cancellation of taxes on labor and basic consumption, the creation of a 2% worldwide tax on property ownership (except basic habitation for the poor), and the implementation of a global 0.5% flat tax on all financial transactions with a total prohibition of speculation on food products.

Until the beginning of the 19th century, taxes were largely used as a means of reducing inequalities, and fell mainly on property ownership.

Neoliberal policies of the 20th century slowly shifted the tax burden away from the rich to the poor by taxing labor and consumption—making the poor responsible for financing our economic system while giving the rich most of the benefit. And we all know what became of trickle-down theory.

Taxes must be shifted away from basic necessities and consumption, and back to profit-making operations, and the ownership of natural resources and other industrial properties. A tax must also be levied on financial transactions.

I would differentiate between property in land, which I strongly believe ought to be taxed, with the revenue applied to public purposes, and property in buildings and other owner-created structures and improvements to land, which I do not believe ought to be taxed.

Further, I do not think that "operations" ought to be taxed because they are profitable or buildings because they are "industrial."  But I do agree that the ownership of natural resources ought not to enrich private individuals, or corporations, or any entity other than the public at large.  (Alaska has taken important steps in this direction, with good results, over the past 30 or so years.)

I'm not sure what I think of taxing financial transactions, but I'm certainly in favor of measures which would end the speculation which we've been seeing and which has contributed to awesomely large fortunes created by hedge funds and other traders.  Those fortunes don't come out of thin air, and the traders aren't growing the wealth pie or adding to the stability of our economy; when some reap what they didn't sow, others who sowed are not getting to reap.  And that's wrong. 

I'll post separately about the film, "The End of Poverty?  Think Again," which is currently showing in NYC.

The Great 18-year Real Estate Cycle

http://forums.wallstreetexaminer.com/index.php?act=Attach&type=post&id=1308

This short article by Steve Hanke, of Johns Hopkins and Cato, begins,

On January 3rd, US Federal Reserve Chairman Ben S. Bernanke delivered a major speech at the annual meeting of the American Economic Association. In his formal paper, “Monetary Policy and the Housing Bubble,” Chairman Bernanke argues that the Fed’s monetary policy was not responsible for the U.S. housing bubble. He claims that faulty regulation was the primary culprit.

Chairman Bernanke’s claim is a great canard. The Fed is a serial bubble blower. Let’s first consider the Fed-generated demand bubbles. The easiest way to do this is to measure the trend rate of growth in nominal final sales to U.S. purchasers and then examine the deviations from that trend. As the accompanying chart shows, nominal final sales grew at a 5.4% annual rate from the first quarter of 1987 through the third quarter of 2009. This reflects a combination of real sales growth of 3% and inflation of 2.4%.

It ends,  

These data talk, and the most interesting thing they say is that every 18 years we can expect the culmination of a credit-fueled real estate and ensuing business cycle. This, of course, doesn’t imply that all recessions are preceded by a real estate cycle. It only says that all real estate cycles have spawned economic downturns.

This knowledge has allowed for some prescient forecasts. The prize in that department goes to Prof. Fred Foldvary who wrote in 1997: “the next major bust, 18 years after the 1990 downturn, will be around 2008, if there is no major interruption such as a global war.”

For a full treatment of the 18-year real estate cycle, I recommend the following items:

• Fred E. Foldvary. “The Business Cycle: A Georgist-Austrian Synthesis.” American Journal of Economics and Sociology Vol. 56, No. 4, 1997: 521-41.
• Mason Gaffney. After the Crash: Designing a Depression-Free Economy. Ed. Clifford W. Cobb. Chichester, U.K.: Wiley-Blackwell, 2009.
• Phillip J. Anderson. The Secret Life of Real Estate and Banking. London: Shepheard-Walwyn, 2009.

You can read a book-related interview with Mason Gaffney at http://www.masongaffney.org/essays/GAffney_interview_in_Canada_Sun_Life_Financial.pdf.  The book is available here.  Fred's paper is here.  Mason's review of Phil's book is here.

2024.

Why I Bother

The reader might wonder why there are several hundred posts on this blog, and rather few comments.  Why do I keep on writing?

This blog comes out of an experience which Georgists -- people who are persuaded that Henry George (b. 1839, Philadelphia; d. 1897, NYC) largely got it right -- call "seeing the cat."  The phrase refers to an AHA!!! moment once described as follows:

I was one day walking along Kearney Street in San Francisco when I noticed a crowd in front of the show window of a store. They were looking at something inside. I took a glance myself, but saw only a poor picture of an uninteresting landscape. As I was turning away my eye caught these words underneath the picture: "Do you see the cat?" I looked again and more closely, but I saw no cat. Then I spoke to the crowd. "Gentlemen," I said, "I do not see a cat in that picture; is there a cat there?" Some one in the crowd replied: "Naw, there ain't no cat there. Here's a crank who says he sees a cat in it, but none of the rest of us can." Then the crank spoke up. "I tell you," he said, "there is a cat there. The picture is all cat. What you fellows take for a landscape is nothing more than a cat's outlines. And you needn't call a man a crank either because he can see more with his eyes than you can with yours."

Well, I looked again very closely at the picture, and then I said to the man they were calling a crank, "Really, sir, I cannot make out a cat in that picture. I can see nothing but a poor drawing of a commonplace landscape." "Why, Judge," the crank exclaimed, "just you look at that bird in the air. That's the cat's ear." I looked but was obliged to say: "I am sorry to be so stupid but I really cannot make a cat's ear of that bird. It's a poor bird, but not a cat's ear." "Well, then," the crank persisted, "look at that twig twirled around in a circle; that's the cat's eye." But I couldn't make out an eye. "Oh, well," returned the crank a bit impatiently, "look at those sprouts at the foot of the tree, and the grass; they make the cat's claws." After a rather deliberate examination, I reported that they did look a little like claws, but I couldn't connect them with a cat. Once more the crank came back at me as cranks will. "Don't you see that limb off there? and that other limb just under it? and that white space between?" he asked. "Well, that white space is the cat's tail." I looked again and was just on the point of replying that there was no cat's tail there that I could see, when suddenly the whole cat stood out before me.

There it was, sure enough, just as the crank had said; and the only reason the rest of us couldn't see it was that we hadn't got the right angle of view. but now that I saw the cat, I could see nothing else in the picture. The poor landscape had disappeared and a fine looking cat had taken its place. And do you know, I was never afterwards able, upon looking at that picture, to see anything in it *but* the cat.

To which Nic Tideman added, "In my view, 'the cat' is the possibility of a world without privilege."

The goal of this website is to help others see what Georgists see.  We look around and see dozens -- hundreds -- thousands -- of social problems which ultimately, if you go to the root, are offshoots of our -- America's, the world's -- failure to recognize that the value of land, non-renewable natural resources and other like things (that which the classical economists would recognize as "land" even if they never saw an airplane [prime landing rights at LaGuardia] or heard a radio or TV [electromagnetic spectrum] or imagined a satellite in geosynchronous orbit, or lived in a place where water wasn't in seemingly infinite supply, or a time when clean air wasn't a given) ought to be socialized -- treated as our common treasure through taxation -- while things which individuals and corporations create ought to be privatized (not taxed).

There!  I've written a sentence of a length that only a few can parse.  But perhaps it will give you a sense of the Georgist vision and reform.

I write this blog in the hope that a curious journalist, or legislative aide, or reformer, or foundation board member, or simply another person who thinks that there has to be another, better way than what we are currently doing, will find this body of posts, and explore it long enough to start to see the cat, too, and then share it with others who are willing to work for a better country and better world. 

I'll close with a quote from Henry George's book, Social Problems, in an essay called "What We Must Do."

"I do not say that in the recognition of the equal and unalienable right of each human being to the natural elements from which life must be supported and wants satisfied, lies the solution of all social problems. I fully recognize that even after we do this, much will remain to do. We might recognize the equal right to land, and yet tyranny and spoilation be continued.

But whatever else we do, as along as we fail to recognize the equal right to the elements of nature, nothing will avail to remedy that unnatural inequality in the distribution of wealth which is fraught with so much evil and danger. Reform as we may, until we make this fundamental reform, our material progress can but tend to differentiate our people into the monstrously rich and frightfully poor. Whatever be the increase of wealth, the masses will still be ground toward the point of bare subsistence — we must still have our great criminal classes, our paupers and our tramps, men and women driven to degradation and desperation from inability to make an honest living."

The Feoffees, the Ipswich School Committee and the TENANTS of Little Neck

I've been following this story for nearly as long as I've had this blog:

• The Feoffees, their tenants, and the Ipswich public schools  (February, 2008)
• Update on the Feoffees' tenants in Ipswich, Massachusetts  (July, 2008)
• The Feoffees may sell Little Neck to the tenants ... for ever and ever   (December, 2008)
• The Feoffees of Ipswich are still thinking about selling that fine piece of land at Little Neck  (February, 2009)
• Update on the Little Neck (Ipswich, MA) sale by the Feoffees of Ipswich's Public Schools   (May, 2009)

I've not posted here in a while, though I've commented on individual articles on the Ipswich area newspapers' websites. It seems that, despite the terms of the trust which forbid the sale of the land, an agreement has been reached to sell the land to the tenants for the quite pitiful sum of $29,150,000.

A bit of background: about 350 years ago, a forward-thinking landholder in Ipswich (a town on the shore north of Boston, famous for its clams) donated for the benefit of the Ipswich public schools a magnificent almost-island called Little Neck.  The trust required the Feoffees (trustees) to collect market rent on the land, and donate the proceeds to the town's public schools.  Little Neck totals perhaps 27 acres, of which about 24 acres show up on the Ipswich assessor's database; the rest, I assume is the roads which wind around it. 

For centuries, the land was used for farming, but early in the 20th century, the Feoffees recognized that farming was no longer the highest and best use of this scenic and well-located acreage, and they subdivided it into lots and permitted people to rent them and erect cottages on them.  There are 167 cottages. 

Today, less than half of the land is rented out to individual tenants: my spreadsheet, which is probably pretty close, suggests 10.32 acres rented to tenants and 13.88 acres held unrented by the Feoffees, but available to the tenants as Commons, for a total of 24.19 acres.  There are beaches and a community center, a pier, a playground, playing fields.  Presumably the Feoffees maintain these commons.  A few years ago, a sewage plant was installed.

Houses on Little Neck are mostly small cottages, many under 1000 square feet and built between 1910 and 1935.  Few have more than one bathroom.  Most are seasonal; that is, they can under the terms of the land lease be occupied only from about April to January.  24 are year-round.  I've not been able to figure out which ones, and I don't recall ever seeing one for sale in the times I've looked.

These cottages are old, weather-beaten and modest.  Some have very appealing interiors, but tiny rooms and modest outfitting.  Most are seasonal, and have no heat.They sit on lots which range from 0.041 acres (1,786 square feet) to 0.112 acres (4,879 sq ft), with most at 0.069 acres (3,005 sq ft).

Were they not on Little Neck, with its fabulous views and huge common spaces, its beaches and community amenities, these cottages would be worth no more than $50,000 to $100,000.  (An 800 square foot cottage at $60 per square foot is $48,000.  A 1200 square foot cottage at $80 psf is $96,000.  $60 psf and $80 psf are excessive valuations for cottages built between 1865 and 1950.  Houses depreciate, even with the best of care.)

Yet asking prices for these cottages when I looked 10 days ago were $175,000 (924 sq ft, built 1930) to $620,000 (1,779 sq ft, built 1910, waterfront).   

What does this mean?  It means that the current land rent being collected is nowhere near the market value land rent. 

Currently, the Feoffees are collecting about $10,000 per year each for the 143 seasonal cottages, and a bit more for the 24 year-round ones.   But the difference between the $50,000 to $100,000 value of the cottage itself and the asking prices of $175,000 to $620,000 represent capitalization of uncollected land rent -- Land Rent which the Feoffees are REQUIRED by the terms of the trust to collect!

Perhaps a year ago, or maybe it was two, I spent some time looking at the Ipswich assessor's database, and assembled a spreadsheet.  I think I probably have 95% of the lots accounted for.  I found some interesting things.  In no particular order,

• Occupied lots total 10.32 acres.  The land represented by those lots was valued by the assessor at  $30,990,200, or $3,004,382 per acre.  
• The per-acre assessed value of the occupied lots ranged from $2.6 million to $5.2 million
• Untenanted lots are of two sorts:

1. one large one, listed at 39 Bay Road, of 11 acres, valued at $842,500, or $76,591 per acre
   

2. perhaps 42 small ones, totaling 2.88 acres, valued at $918,800 total, or $320,000 per acre  

• The untenanted lots, totaling 13.88 acres, were valued by the assessor at $1,761,300, or $126,941 per acre.   Had they been valued at $3,004,382 per acre, their value would be $41,700,822. 
• Add together the $30,990,200 at which the assessor valued the occupied lots and the $41,700,822 for the untenanted lots -- the commons -- and the value of Little Neck's land would be $72,691,022.
• The assessor valued the cottages on Little Neck at $14,857,592, an average of $88,968 per cottage, ranging from $38,700 to $223,600.  
• The assessor valued the tenant-occupied lots on Little Neck at from $161,600 to $343,500, with most falling at $185,500, or $228,700, or $290,000 to $300,000.  (Perhaps differentiating a bit for views or for year-round occupancy rights)?

As a letter to the editor pointed out, the Feoffees don't own the land, and therefore can't sell it.  They are merely trustees for the land.   So the discussion about selling ought not to be happening at all.

But if somehow the powers-that-be determine that black is actually white, and up is actually down, then the Feoffees ought to be getting the full current value for the land.  And they ought not to act as mortgage lenders.  That is not within the terms of the Trust, and is nothing but trouble.

$72,691,022 divided by 167 cottagers works out to $435,275 per cottage -- quite a bit more than the $174,000 they're offering, to break the Trust which has been in place for 350 years.

Twenty years' purchase, or 5% of the $72.7 million, works out to land rent of $3.6 million per year.  Divide that by 167, and the average annual land rent would be $21,800.  Some would be worth more -- the larger lots, the ones on the waterfront, the ones with prime views, the ones with year-round occupancy rights -- and some would be worth less -- the smaller lots, the ones with less desirable views, the seasonal ones.  

Would charging the market rent make Little Neck unaffordable to some of the current tenants?  Yes, quite possibly.  Did the Grantor of the trust make an exception for that?  Or did he simply charge the trustees with collecting the market rent and being good stewards of the property, forever?   The trust was not created in an attempt to be kind or generous to tenants; the beneficiary was explicitly named as the schools of Ipswich.  If the interests of the tenants now somehow outweigh the interests of the schools of Ipswich, please tell me where to buy a new compass, because North is no longer North.

How will we know when the Feoffees are collecting the full market rent on the Little Neck property?  When the selling price of a $50,000 cottage is $50,000.  Until we see that, we'll know they're not collecting the full rent, but leaving a significant portion in the pockets of the cottage tenants.   The difference between the $50,000 value of a cottage and the $250,000 PRICE of a cottage when the land rent is not being collected is enough to put a cottager's child or grandchild through college. 

But the Trust was set up to benefit not the TENANTS' children but the children of the schools of Ipswich.  Got it?

The Trustmaker gave Ipswich's public schools and Ipswich's community a very fine gift: a goose that he knew would lay golden eggs.   The recent and current Feoffees may have failed to collect those eggs.  That's past history.  We can't change it.  And it doesn't change the nature or terms of Mr. Paine's foresighted gift.  Just collect the eggs.  Keep feeding the goose.  If the current group of Feoffees isn't so inclined, replace them with Ipswich residents who are.  If necessary, hire professional staff; at $3.6 million in annual rent flow, volunteers can't do it all.

And, by the way, when you announce the schedule under which rents will be raised from current levels to market levels, a lot of cottages are going to go on the market.   It will take a while for them to sell, and you'll see the prices drop.  The cottagers will claim theft on the part of the Feoffees.   They're wrong.   Many of the cottages will be teardowns.   The new owners will ponder for a while, and then begin to build interesting and attractive new homes there, within the constraints of those postage stamp lots.  Preservationists will bemoan the loss of "historic cottages."  Unhappy tenants will say sad goodbyes to summer homes whose full carrying cost they can't absorb.   The grocery shopping and restaurant visits these 167 families -- and their tenants -- represent may fall off for a summer or two, while new owners build new cottages.

The construction trades in Ipswich will prosper (the Feoffees might be wise to prohibit construction work during the high season) and so will the town itself, for all sorts of reasons, including the rent flowing to its public schools.

Unless, of course, the stakeholders -- or the courts -- think that the interests of the tenants ought to be primary.   In which case, please order me the new compass.

This blog has more observations and history on this story.  See them collected at  http://lvtfan.typepad.com/lvtfans_blog/feoffees-land/.

MLK: An edifice which produces beggars needs restructuring

Beyond Vietnam--A Time to Break Silence

Reverend King gave this speech at the Riverside Church in New York on 4 April 1967, a year before his death.   I was intrigued to note how frequently he mentions land reform as important.

Perhaps the most stirring paragraph is this one:

A true revolution of values will soon cause us to question the fairness and justice of many of our past and present policies. On the one hand, we are called to play the Good Samaritan on life's roadside, but that will be only an initial act. One day we must come to see that the whole Jericho Road must be transformed so that men and women will not be constantly beaten and robbed as they make their journey on life's highway. True compassion is more than flinging a coin to a beggar. It comes to see that an edifice which produces beggars needs restructuring.

I think of the wealth distribution within America (2007) or throughout the world.  I think of some paragraphs from Henry George's book "Protection or Free Trade" (Chapter 25) which speak of "the robber that takes all that is left."  I'll share them at the bottom of this post. I think of some writings on the subject of piracy.

Middle Class Wealth

One of my google alerts, for the words "wealth distribution," took me to a blog post about the tragedy which has occurred in Haiti, which referred to America being different because it had a large middle class.  Since I'd recently posted on this blog some new data about the distribution of wealth, I took a look at that data with the "middle class" in mind.

Here's the data on the distribution of Net Worth, copied from the post below:

	Top 1%:		34.6%
	Next 4%:		26.4%		Top 5%:		61.0%
	Next 5%:		10.8%		Top 10%:		71.8%
	Next 10%:		13.3%		Top 20%:		85.1%
	Next 30%:		12.4%		Top 50%:		97.5%
	Bottom 50%:		2.5%

Do we define as "middle class" the people who hold the middle third of our wealth?  That's the 9% of us who hold 37.2% of our wealth.   Those below that cutoff must be "lower middle class" or "poor."

Do we define as "middle class" the people between the 50th and 80th percentiles of the wealth distribution?  That 30% has a mere 12.4% of our wealth.  The 50% below them only have 2.5% of the net worth.

Do we define as "middle class" the people between the 50th and 90th percentiles? They hold 25.7% of the wealth.

If America's strength is its broad middle class, they certainly aren't reaping much of a reward.  The Chartbook for the Survey of Consumer Finances, page 42, shows this:

Median Value of Net Worth for Families with Holdings, 1989, 1998 and 2007, by Income Quantile in thousands of 2007 dollars: Income Quantile: 1989 1998 2007 1989 to 2007 Bottom Quintile (20%) 2.9 7.4 8.1 +5.2 Second Quintile (20%) 38.8 42.2 38.1 -0.7 Middle Quintile (20%) 67.1 68.0 88.1 +21.0 Fourth Quintile (20%) 107.0 143.0 205.8 +98.8    Second Decile (10%) 211.2 240.0 356.2 +155.0    Top Decile (10%) 625.4 575.9 1,119.0 +493.6

From the following chart in the Chartbook, Mean Value of Net Worth for Families With Holdings, I calculate the following shares of Net Worth:

Share of Holdings, 1989, 1998 and 2007 -- by Income Quantile
Income Quantile:			1989		1998		2007		1989 to 2007
Bottom Quintile	(20%)		2.65%		3.38%		3.77%		+ 1.12 percentage points
Second Quintile	(20%)		7.07%		6.80%		4.84%		- 2.23 percentage points
Middle Quintile	(20%)		10.90%		8.94%		7.54%		- 3.36 percentage points
Fourth Quintile	(20%)		14.64%		14.59%		13.48%		- 1.16 percentage points
Second Decile	(10%)		11.96%		11.53%		10.92%		- 1.04 percentage points
Top Decile	(10%)		52.78%		54.76%		59.45%		+ 6.67 percentage points

   

By this standard, who is our middle class? 

• The 20% of us between the 40th and 60th percentiles, who have  7.54% of the net worth? 
• The 60% of us between the 20th and 80th percentiles, who have 25.86% of the net worth?   
• The 70% of us between the 20th and 90th percentiles, who have 36.78% of the net worth?
• The 50% of us between the 40th and 90th percentiles, who have 31.94% of the net worth?

The top 10% of us, sorted by income, have 59.45% of the net worth -- $6 out of every $10 of net worth in America!!

What does this suggest to you about how we might tax ourselves?

What does this suggest to you about who we might ask to support the aid to Haiti after its tragedy?  

What does this suggest to you about the notion that the strength of America is its large healthy middle class?

What does this suggest to you about the notion that our taxes ought to be based on income?

Does it put Leona Helmsley's comment -- "WE don't pay taxes.  The little people pay taxes." -- in a different light?

A caution about the data: This post shows two different distributions of net worth: according to net worth in the first part, and according to income in the second part.  Don't confuse them -- it is easy to do.  But all the data is based ultimately on the Federal Reserve Board's Survey of Consumer Finances, and I've never heard anyone claim that the SCF overstates the concentration of wealth.    If you need help differentiating, post a question, and I'll try to help.

I hate to disagree with Chip Case, but I must

1732_952_LLA100103.pdf (application/pdf Object).  "Housing, Land and the Economic Crisis" and it appears in "Land Lines." 

The Lincoln Institute of Land Policy, an organization founded back in the 1940s by an industrialist enthusiastic about the ideas of Henry George, who intended that his wealth be used to promote those ideas, publishes a newsletter, the link to which arrived in my inbox last week.  One of the articles was by Chip Case, recently retired from Wellesley, and half of Case-Shiller.  The article is titled, "Housing, Land and the Economic Crisis" and it appears in "Land Lines." 

What I take issue with is this statement:

The expansionary monetary policy pursued during this short period reduced the cost of buying a home by almost a third.

It might be correct to say that monetary policy reduced the cost of borrowing a particular amount of money by almost a third, and I suspect that is what Chip meant to say.    But the reality is that instead of a potential buyer being able to purchase a particular house for 1/3 less monthly outlay for mortgage costs, he was able to borrow 50% more for the same monthly outlay -- and indeed, if he wanted to buy that particular house, he was competing for it with other people who WOULD be willing to borrow 50% more, so he would have to.   And he needed to accept an adjustable rate mortgage, with all the downside that leads to.

This drove up the transaction prices, and produced the appearance of home equity against which a larger percentage of non-sellers were able to borrow.  The spending -- on credit -- has led to profits for retailers and manufacturers, and most certainly for bankers (and thus to greater concentration of our wealth and income) and, as it had to, to a bust of large magnitude and widespread pain.

Have we learned, or are we going to do this again?

The article is titled, "Housing, Land and the Economic Crisis" and it appears in "Land Lines."    But the word "land" appears only twice in the article:

1. second paragraph:  "Between 2000 and 2005, the value of residential land and buildings increased from about $14 trillion to $24 trillion. About half of this increase reflected new construction, and half was due to rising land values, primarily on the coasts (Case 2007). But in late 2006 prices began to decline, and by mid-2009 they had fallen roughly 30 percent.
2. antepenultimate paragraph (I knew I'd have a use for that word someday!):  "California represents about 25 percent of all the land value in the United States, and events there have major implications for the rest of the country. The good news is that for the last three months, the indexes for San Francisco, San Diego, and Los Angeles have led the nation in price appreciation. The California Association of Realtors reports substantial increases in home sales volumes except in the Central Valley.

I'm disappointed that neither Case nor Lincoln saw fit to connect the dots.

(And I'll note parenthetically that California and Florida's steeply rising land prices were in part due to their limitations on the property tax under Proposition 13 and "Save Our Homes" respectively.   Many of California's problems would get better if they would simply fund their public spending from a tax on their land value, rather than suppressing that tax and relying on taxes on sales and wages, both of which depress any economy.)

To connect the dots, I'll ask that you read Mason Gaffney: The Great Crash of 2008, at http://www.masongaffney.org/ and his new book, After the Crash: Designing a Depression-free Economy, available at http://www.schalkenbach.org/store.php?crn=78&rn=610&action=show_detail

Lenders ought not to be lending on speculative land values. Localities ought to be collecting more of the economic rent on the land within their borders, lowering the selling price of land without reducing its value in use -- and arguably increasing it!  Localities and states ought to be lowering their taxes on buildings, on wages, on sales, and substitute the revenue from collecting economic rent.  See also Mason Gaffney: How to Thaw Credit, Now and Forever, online at his website (above).

 

Wealth Concentration data

I stumbled across a bit of data on wealth concentration which I thought worth sharing.  Previously I've reported data from the 2007 Survey of Consumer Finances, which was published just about a year ago.  The data on Net Worth as reported shows top 1%, next 4%, next 5%, next 40% and bottom 50%:

Top 1%:		33.8%
Next 4%:		26.6%		Top 5%:		60.4%
Next 5%:		11.1%		Top 10%:		71.5%
Next 40%:		26.0%		Top 50%:		97.5%
Bottom 50%:		2.5%

Ed Wolff, of NYU, is quoted here as reporting this distribution of Net Worth for 2007:

• Top 1%:        34.6%
• Next 19%:     50.5%
• Bottom 80%:  15.0%

Since the source is a working paper not yet published online, I don't know the underlying data source, but I'm guessing that Wolff might be working with the SCF 2007 data and following up on the statement in Arthur Kennickell's Ponds & Streams, the Federal Reserve Board paper which published the 2007 SCF, that the wealth holdings of the Forbes 400 are omitted from the SCF data, and that Wolff is adding that data both to the top 1% and the aggregate to come up with these data. (If I'm wrong, I'd welcome correction!) If I'm correct, his 50.5% for the "next 19%" indicates that the distribution of Net Worth is roughly as follows:

• Top 1%:     34.6%
• Next 4%:    26.4%   Top 5%:    61.0%
• Next 5%:    10.8%    Top 10%:  71.8%
• Next 10%:   13.3%   Top 20%:  85.1%
• Next 30%:   12.4%   Top 50%:  97.5%
• Bottom 50%: 2.5%

Those figures include housing wealth.

The same table which reported that Net Worth data also reports Wolff's findings for Financial Wealth, which he defines as Net Worth minus the [gross] value of one's home:

• Top 1%:  42.7%
• Next 19%: 50.3%
• Bottom 80%: 7.0%

The same article reports some useful measurements of stock ownership -- that is, ownership of shares in publicly held companies, whether directly, through retirement accounts or mutual funds.

• Top       1% own 38.3% of the stocks
• Next    19% own 52.8% of the stocks
• Bottom 80% own  8.9% of the stocks

and

• 48.1% of us owned no stocks in 2007
• 51.9% of us owned some amount of stocks in 2007
• 17.5% of us owned stocks worth less than $10,000 in total
• 31.6% of us owned stocks worth more than $10,000

What do you conclude from this data? 

Do you conclude that the bottom 80% of us are simply shiftless folks who must not be working very hard, or stupid folks who don't work very well, or invest what little we save very well, or do you think there might be something else going on?  What is it that the bottom 80% of us lack?

Does it seem to you that if only we shift some more of our wealth to the top 1%, benefits will somehow begin to trickle down to the rest of us, perhaps in the form of job creation by wealthy benefactors?

Does it seem to you that increasing homeownership is (or was ever) the solution to these problems, or do you think we might need to dig deeper to find the root of the problem?

We have permitted a wealth-concentrating machine to be created, sustained and, within the adulthood of the boomer generation, strengthened.

Few understand this machine, but I submit that the first step to understanding it is to read a 130 year old bestseller.

Progress & Poverty begins with the questions "why, despite awesome technological progress which has the potential to wipe out poverty, do we still have poverty?" and "why is wealth so concentrated?"   It examines the standard answers to those questions (you'll recognize them all) and finds them wanting.  It then sets out to find a more satisfactory answer, and to examine its implications.  It proposes a remedy -- the remedy -- and explores what that remedy means for the individual and a society with America's ideals.

If you've never read Progress & Poverty or your acquaintance with it goes back a decade or two, take a look at it in light of these issues.  You can read a modern abridgment at http://progressandpoverty.org/, listen to it at http://hgchicago.org/audio/, or get more information at http://www.wealthandwant.com/George_P&P.html

Neoclassical economists are rich people's useful idiots.

I found a quote I particularly like in a blog comment at http://neweconomicperspectives.blogspot.com/2009/12/michael-hudson-responds-to-paul-krugman.html

"neoclassical economists are rich people's useful idiots."

Another commenter there added this:

Dr Mason Gaffney's The Corruption of Economics is useful reading in this general vein of the co-opting of modern economics.

The University of Chicago was founded with Rockefeller support. He who pays the piper calls the tune.

I think the root of a lot of our current economic problems can be found here.  Our prominent economists learned their economics from neoclassical textbooks and instructors and full professors who learned their economics from neoclassicals.  I suspect, too, that it is very difficult to teach what one doesn't know.   It is difficult to get tenure from neoclassical departments if you aren't hewing the line.   

I commend to your attention Mason Gaffney's newest book: After the Crash: Designing a Depression-Free Economy.  Unless, of course, you like booms and busts.  You can order it at http://www.schalkenbach.org/ or from Wiley.com.

Children in Poverty, Children in low-income families

As I listen to the discussions about the health care legislation, and the effort to write abortion coverage out of the plans, I am reminded of some data I came across recently.  It comes from a series of studies called "Overlooked and Undercounted" which are siblings to the Self-Sufficiency Standard studies I've posted about from time to time. 

Most people acknowledge that what the Census Bureau says about the Federal Poverty Guideline is true: it is merely a statistical measure, with no particular relevance to the cost of living anywhere in America, much less in the places where most people live.  Places with relatively low cost of living have higher official poverty rates, and places with relatively high cost of living often have lower, even negligible, official poverty rates.

The Self-Sufficiency Standard studies work with a highly reproducible and logical methodology to develop a bare-bones, no-frills, just-getting-by cost of living, in a lifestyle in which all of a family's most basic needs -- including the age-appropriate child-care which permits all the adults to be employed full time -- would be met, but with no room for savings, for debt repayment, for anything but a home-cooked meal, for gifts, or entertainment; with no provision for replacing the necessary clunker every few years.  The SSS studies provide this analysis for individual states, by county, for various configurations of families.   They are called SSS because they represent the cost of living without depending on anyone for free childcare, or meals, or other necessities. They take into account local tax structures, including tax credits, and are based on all meals prepared at home under the USDA low-cost food plan, which requires careful shopping and a fair amount of food preparation time and allows (October, 2009) about $2.06 per person per meal for a family with two school-age children.

In the least expensive counties in America, the SSS is about 170% of the Federal Poverty Guideline.  Relatively few people live in those counties; they're rural, with few jobs and few of the amenities that larger communities offer. 

Many more of us live in places where the SSS is 200%, or 300% or even 400% of the FPL.  And in the places where the SSS is high, there is still a need in the workplace for people to perform the tasks which aren't very well paid: janitor, child-care, retail, etc.  

The Overlooked and Undercounted studies quantify the number of households in a particular state whose income falls below the SSS in their particular county for their particular household configuration, and break out various demographics.

But I think the most important figure of all is one they have failed to provide: the percentage of America's children who are growing up in families with insufficient income to meet everyone's most simply defined needs.

I've calculated this figure for all the studies I could find.  Doing so required making a single assumption: the average number of children in a family with 4 or more children (3 or more in Connecticut).  I assumed 4.5 (3.5 in CT).

Here's what I found.  The percentage of children living in families with less income than the FPL and the local SSS for their configuration of family:

State	Census data year	Below FPG	Above FPG but Below SSS	Total Below SSS	Above FPG as pct of Below FPG
	(1)	(2)	(3)	(4)	(5)
Colorado	2000	9.8%	24.9%	34.5%	254%
Mississippi	2007	26.3%	17.5%	43.8%	67%
California	2007	15.0%	34.0%	49.4%	227%
Washington	2000	11.3%	22.6%	34.0%	200%
Connecticut	2000	9.0%	22.9%	32.0%	254%
Pennsylvania	2007	13.5%	21.7%	35.3%	161%
New Jersey	2005	9.7%	22.5%	31.5%	232%
Source: Overlooked and Undercounted Studies

The next question is, what percentage of the children below the SSS are in families with more children?

• Colorado: 13.4% of all children are in 4+ child families; but they represent 26.0% of children who live below the poverty line and 25.6% of children who live below the SSS.  36.9% of all children live in families with 3 or more children; they represent 54.8% of children who live below the SSS. Two thirds of Colorado children in 4+ child families live below the local SSS.  Even in married couple households, over half of children in 4+ child families live below their SSS level.
• Mississippi: 14.6% of all children are in 4+ child families; they represent 27.3% of those who live below poverty line and 24.1% of children who live below the SSS.  38.1% of all children are in 3+ child families; they represent 54.9% of children who live below the SSS and 52.7% of those who live below the SSS.   Even in married couple households, over half of children in 4+ child families live below their SSS level. 
• California: 16.9% of all children are in 4+child families; they represent 33.1% of children in poverty and 26.9% of children below the SSS. Children in 3+ child families represent 42.1% of all children, but 63.3% of children below the FPG and 57.2% of children below the SSS.  Even among married couple households with 4+ children, 74.6% of children live below the SSS.
• Washington: 14.7% of children are in 4+ child families; they represent 30.2% of children below FPG and 27.1% of children below the SSS.
• Connecticut: 37.1% of children are in 3+ child families; they represent 53.4% of children below FPG.  Even in married couple households, 35% live below the SSS level.
• Pennsylvania: 14.7% of children are in 4+ child families; they represent 30.4% of children below FPG, 29.1% of children between FPG and SSS, and 29.6% of children under the SSS level.  25.2% of children in married-couple families live below the FPG; in the 4+ child category, they are 33.8%.
• New Jersey: only 10.9% of children are in 4+ child families; they represent 22.7% of those below FPG, 20.9% of those between FPG and SSS, and 21.9% of those below SSS.

So we are going to take away the possibility of employer-provided health insurance which provides abortion coverage to women who want it?  

Do we really mean to promote policies which make it difficult for American couples to control how many children they bring into the world?   Birth control isn't 100% reliable, and despite all best efforts, even married couples often can simply not afford another child.

Here are the statistics, straight from the O&O studies: The percentage of families (not of children) with incomes below their local SSS:

The Percentage of Families with Various Numbers of Children Whose Incomes Fall Below Their Local Self-Sufficiency Standard Level
	1-child families	2-child families	3-child families	4+ child families	all families w/children	childless families
1. Colorado	22%	26%	43%	66%	29%	14%
2. Mississippi	32%	34%	53%	72%	39%	25%
3. California	34%	38%	60%	79%	43%	20%
4. Washington	22%	26%	41%	63%	29%	15%
5. Connecticut	21%	25%	46% (3+ children)		27%	12%
6. Pennsylvania	21%	26%	43%	71%	29%	15%
7. New Jersey	22%	24%	39%	63%	27%	14%
range:	21% -  34%	24% -  38%	39% - 60%	63% -  79%	27% -  43%	12% -  25%
Source: Overlooked and Undercounted studies

These seven states are widely dispersed geographically, and together represent a significant share of US population.  I'm guessing their data is fairly representative of the US as a whole.

Children in larger families are significantly more likely to live in situations without sufficient income to meet their most modestly defined needs. Should we promote policies which lead to more children?

Shouldn't we be looking for the underlying cause of insufficient wages?  They aren't inevitable.

And those who have explored this blog will probably know that the underlying cause is a structural one, not an individual one.  Or has your town figured out how to get along without school bus drivers, janitors, retail or child care workers, to name just a few categories of low-paid workers we rely on.  Are they entitled to have children, to have a life, or are you willing to support policies which ensure that their children will be brought up under straightened circumstances?  (I'd always thought that was spelled "straitened" -- as in "dire straits," but just discovered I was wrong.)

First-time homebuyers as sharecroppers

I came across an interesting table in a November, 2007, Federal Reserve Board Study entitled "First-Time Home Buyers and Residential Investment Volatility" by Jonas Fisher and Martin Gervais, and another version from "Why Has Homeownership Fallen Among the Young?" (FRB, March, 2009), by the same authors.

While median income (in real dollars) has fallen, the ratio of median house price to median income has nearly doubled, down payments at the median are down by over 1/3, and, perhaps most important, the proportion of after-tax income going to mortgage payments has nearly doubled, to 40%.  Consider also that in 1976, most mortgages were fixed rate instruments, while by 2005, a very high percentage were adjustable rate mortgages, whose interest rate could rise by 2% at the end of the first year, raising that proportion higher in the second year.

And then, of course, in addition to paying 40% of after-tax income to the mortgage lender, our young people must also pay taxes: payroll taxes, wage taxes, sales taxes, taxes on their house and the land on which it sits.  Those who have read this blog for a while will know that placing the largest share of our tax burden onto land value would have many desirable effects, including reducing the selling price of land to a nominal amount.  Instead of borrowing from a mortgage lender a large sum to pay the seller for land value the seller didn't create, we'd pay land rent to our community, which would keep some of it for local purposes, and pass some up to the state and the federal government -- revenue which would replace some or all of the state sales and income taxes, and the federal income taxes. 

And that 40% is mostly interest, not principle payment.  Depending on the interest rate, in the first year of a mortgage, one pays 70% (at 4%), 78% (at 5%), 83% (at 6%), 88% (at 7%) 91% (at 8%) of one's mortgage payment as interest, and only 30% to 9% to pay down principle.  The fact that, for some, mortgage interest isn't taxed, should be little consolation.  (Why "for some"?  Because for many families, the standard deduction is a better deal than itemizing deductions.  Most homebuyers don't realize that, and assume they'll benefit as homeowners.)

Yet another FRB study, from May, 2006, showed that in the top 46 metro areas, on average, land value represented 51% of the value of single-family residential property.  In San Francisco metro, the figure was about 88%; in NYC and Boston metros, it was well over 70%.   Oklahoma City was the lowest, in the 20's range.

Homesellers reap gains they didn't sow.  Mortgage lenders get to pocket large shares of young people's wages.  There has to be a better way.  Longtime readers will know what it is: shift our taxes onto land value, and off productive activity. 

Table 2: Characteristics of First Time House Buyers Statistic 1976 1986 1996 2005 Median Real Income $35,972 $35,481 $33,151 $30,281 Median Price/Median Income 1.5 1.9 2.5 2.8 Mean Down-payment/Price .18 .13 .12 .11 Mean Monthly Payment/After-Tax Income .23 .30 .35 .40 Notes: The table entries are from various issues of The Guarantor, 1978-1998, the 2005 National Association of Realtors Profile of Home Buyers and Sellers, and 2005 American Housing Survey. The Real median income is based on the CPI. Mean Monthly Payment/After-Tax Income before 2005 is from The The Guarantor. In 2005 we made an assumption about the average tax rate, .25, to calculate this variable. From "Why Has Homeownership Fallen Among the Young?" Table 3: Characteristics of First-Time House Buyers Statistic 1976-80 1981-90 1991-99 Median Price/Median Income 2.0 2.1 2.4 Mean Down-payment/Price .18 .16 .14 Mean Monthly Payment/After-Tax Income .29 .34 .35 Source: Various issues of The Guarantor, 1978-1999.

Income and Poverty Among Older Americans in 2008

The Congressional Research Service has recently published "Income and Poverty Among Older Americans in 2008"  which I found at http://benefitslink.com/articles/guests/RL32697_Oct_2009.pdf.

It contains some sobering statistics, ones which ought to get most of us thinking about whether the way we've structured our economy and our society is serving the common good, or is designed to meet some other objective.

Many studies find that older people have far more in assets than younger people, and to some extent, that makes a lot of sense; they've worked for a long time to accumulate what they've got, and we might accept that as a sign that hard work is rewarded, and that savings are rewarded.  If the older people have a huge amount of assets, and our younger people must mortgage themselves to purchase from their elders a place to live, perhaps this is not so good.

Here are some of the highlights of the CRS study:

1. In 2008, Social Security paid benefits to 86% of individuals aged 65 and older and to 89% of households in which the householder or the householder’s spouse was 65 or older.

2. Social Security is the largest single source of income among the aged.

• Sixty-nine percent of Social Security beneficiaries aged 65 or older received more than half of their income from Social Security in 2008.
• For 41% of elderly recipients and 28% of elderly households, Social Security accounted for more than 90% of total income in 2008.

3. Of the 37.8 million Americans aged 65 and older who were living in households in 2008, 20.4 million (54%) received income from assets, such as interest, dividends, rent, and royalties. Most received small amounts of income from the assets they owned.

4. Among individuals aged 65 and older who received income from assets in 2008, half received less than $1,054.

5. Of households with a householder or spouse aged 65 or older, 59% received income from assets in 2008. Among these households, median income from assets in 2008 was $1,542.

6. Median income for individuals over 65 varied by age:

• 65 to 69 . . . $22,057
• 70 to 79 . . . $17,573
• 80+  . . . . . . $16,491

That means that half of each age group receives more, half less.  And that takes into account income from all sources.

7. Asset income for individuals over 65:

• 65 to 69:  55.2% have asset income; half of them have less than $1,015 
• 70 to 79:  54.2% have asset income; half of them have less than $1,069
• 80+:         52.3% have asset income; half of them have less than $1,150 in 2008.

8. At the household level among households whose head is over 65:

• 65 to 69: 60.4% have asset income; half have less than $1,500 (and the average is $10,020 per household)
• 70 to 79: 58.6% have asset income; half have less than $1,600 (and the average is $10,217 " ")
• 80+:        57.55 have asset income; half have less than $1,500 (and the average is  $8,236 " ") 

9.  Median and Mean Social Security income are not all that different from each other, for elderly individuals:

• 65 to 69: mean $13,010; median $12,480
• 70 to 79: mean $12,786; median $12,113
• 80+         mean $12,818; median $12,557

The proposed $250 one-time payment would be about the equivalent of an extra week's worth of Social Security.

10. At the household level, Median and Mean Social Security income are further apart

• 65 to 69: mean $17,314; median $15,804
• 70 to 79: mean $18,256; median $16,229
• 80+         mean $16,589; median $14,400

And clearly, more than half of these households are "below average" -- so when you hear about "the average household" recognize that only a minority are above average.  Lake Wobegon in reverse.

Are we structuring ourselves appropriately?  I don't think so.  I think Henry George pretty much got it right.  We have permitted the creation of a machine which concentrates wealth in a small percentage of our population, leaving the rest to scramble and try to cope -- and blame themselves for not being in the top few percent, above the wedge George called attention to.

Krugman: How Did Economists Get It So Wrong?

Paul Krugman's article, in this Sunday's NYT Magazine -- is How Did Economists Get It So Wrong?

Well, perhaps the answer to Professor Krugman's question is that very few of the current crop of economists -- saltwater or freshwater (read the article!) -- ever were guided into reading the work of one of the foremost writers on political economy.  

And perhaps the few who did read it were too embarrassed to challenge their brethren.

But even a look at the textbooks from which most of the college and university economics professors teach their students would demonstrate that Henry George got it right, and that his ideas, while eclipsed by economists who know where their own bread is buttered, and which ideas they ought not to embrace while seeking tenure (during which they forget the little they ever did learn about this wise man's thought and observations) still shine and still explain what we see around us better than the neoclassical economists who are embraced by most teaching and government economists and economics pundits.

I commend to their attention Henry George's books, all of which are available online and all of which can be purchased in hardcopy from http://www.schalkenbach.org/:

• Progress and Poverty -- the best sellling book on political economy* ever -- modern thought-by-thought updating, abridged, is at http://www.progressandpoverty.org/ and http://www.hgchicago.org/audio.  The unabridged is at http://www.schalkenbach.org/
• Social Problems, a book of essays, is at http://www.wealthandwant.com/
• so is  The Land Question
• Protection or Free Trade)
• The Science of Political Economy (published posthumously)

* Political economy is the science which deals with the natural laws governing the production and distribution of wealth and services. Seems like something most of us have a vital interest in understanding ourselves and promoting widespread understanding.

Some of George's speeches are also available at http://www.wealthandwant.com (the URL comes from the subtitle to Progress & Poverty).

Henry George, along with the other CLASSICAL economists (as opposed to the NEO-classical economists from whom most of today's students learn their economics) recognized that there were three factors of production: land, labor and capital.  The Neo-classicals seem to consider the distinction between land and capital too much nuance for their taste, and gloss lightly over it, as if land and natural resources were no longer worth talking about in 20th or 21st century America -- or the rest of the world.  While the classical economists weren't familiar with electromagnetic spectrum, or geosynchronous orbits, or rush-hour landing rights at LaGuardia Airport, or water rights, or pollution rights, or oil as a major energy source, or parking spaces for cars in congested cities, they would immediately recognize each of these things as "LAND," and they would likely agree with Henry George that we are all equally entitled to them, and that permitting some to privatize their value, and forcing others to pay them just as if they'd created them is a poor idea.

We fail to measure the value of these important assets, or we measure them only poorly, or we ignore the implications of valuing these rightly-common assets.  Or we ignore the work of those who do measure them.  Do you think that land value and natural resource value mattering is just a quaint agrarian idea, in the context of the 21st century?

• Remind me again what it is that we and others go to war over.
• Remind me how much of the typical family's budget is going to the FIRE sector (finance, insurance, real estate -- including the sellers from whom homeowners in coastal states bought their homes, who reaped what they did not sow). 
• Remind me how much the typical family is paying for energy and other non-renewable natural resources.
• Remind me which direction the average worker's wages are going, and how difficult it is to find work, despite there being so many unsatisfied needs and wants in the world
• Remind me how concentrated our nation's and the global income and wealth is -- and why.
• Remind me again of the havoc that our boom-bust cycles create in the lives of Americans and our neighbors around the world. 
• Remind me again of what sprawl costs us; of what too little exercise costs us; of what long commutes cost us; of what children growing up in families with insufficient income to meet their most modestly defined needs costs us.  (These are very closely related, and can be traced to a single underlying fallacy in how we structure our economy.  And they can be ameliorated by recognizing and correcting that fallacy.)

Then tell me again that LAND and natural resources don't matter in the 21st century.

How did economists get it so wrong?  To use my mother's phrase, their education was neglected.  Even Paul Krugman's as best I can tell.

Where to start?  Mason Gaffney's website -- http//www.masongaffney.org -- and Fred Foldvary's -- http://foldvary.net/

See also Quotable Nobels and Quotable Notables and you'll see some others who "got it" -- and got it RIGHT!

The Landed Gentry ... this time, in Pakistan

but Pakistan is just an example.  A standing google alert brought an article at http://www.defence.pk/forums/national-political-issues/31924-who-rules-pakistan.html which includes this paragraph:

The democracy in Pakistan is fledgling at best. There are powerful vested interests such as the landed aristocracy. A vast majority of the members of the Assemblies are landed gentry; they do not pass any legislation that hurts big landlords, nor do they allow any taxes on themselves. Then there is the military; the government survives at the mercy of the army chief.

What is so special about the landed gentry?  Here's what Henry George said:

It is a well-provisioned ship, this on which we sail through space. If the bread and beef above decks seem to grow scarce, we but open a hatch and there is a new supply, of which before we never dreamed. And very great command over the services of others comes to those who as the hatches are opened are permitted to say, "This is mine!"

and

What largely keeps men from realizing the robbery involved in private property in land is that in the most striking cases the robbery is not of individuals, but of the community. For, as I have before explained, it is impossible for rent in the economic sense — that value which attaches to land by reason of social growth and improvement — to go to the user. It can go only to the owner or to the community. Thus those who pay enormous rents for the use of land in such centers as London or New York are not individually injured. Individually they get a return for what they pay, and must feel that they have no better right to the use of such peculiarly advantageous localities without paying for it than have thousands of others. And so, not thinking or not caring for the interests of the community, they make no objection to the system.

It recently came to light in New York that a man having no title whatever had been for years collecting rents on a piece of land that the growth of the city had made very valuable. Those who paid these rents had never stopped to ask whether he had any right to them. They felt that they had no right to land that so many others would like to have, without paying for it, and did not think of, or did not care for, the rights of all. .

See also http://www.wealthandwant.com/themes/underpop/landed_gentry.htm and http://www.wealthandwant.com/themes/underpop/landlordism.htm

Nothing particularly special about Pakistan in this regard.  But perhaps it might lead us to think about America's most landed gentry, and the windfall we grant them, at the expense of the commons and the ordinary working person.

Follow the Money: A Close Look at Recent Southern California Foreclosures

31 page PDF at http://www.areuea.org/conferences/papers/download.phtml?id=2133

A May, 2009, paper by Michael LaCour-Little, Eric Rosenblatt and Vincent Yao entitled "Follow the Money: A Close Look at Recent Southern California Foreclosures" provides some interesting data about single-family residential real estate in one part of the US.

Briefly, the paper looks at loans in five southern California counties which went into foreclosure in November in 2006, 2007 and 2008.  It traces the collateral and loans from purchase to foreclosure, and provides some useful findings.  Here's their abstract:

Abstract

The conventional wisdom is that households unfortunate enough to have purchased at the top of the market during the recent housing bubble are those most at risk of default due to recent price declines, upward re-sets of adjustable rate mortgage instruments, the economic downturn, and other factors. Here we use public record data to study three cohorts of Southern California borrowers facing foreclosure in 2006, 2007, and 2008. We estimate property values as of the date of the scheduled foreclosure sale with the automated valuation model of a major financial institution and then track sales prices for those properties that actually sold, either at auction or later as REO. We find that borrowers did not, in general, buy at the top of the market and virtually all had taken large amounts of equity out of the property through refinancing and/or junior lien borrowing. Given sales prices of collateral thus far, aggregate losses to lenders will reach almost $1.0 billion dollars compared to almost $2.0 billion dollars of equity previously extracted by property owners.

They do for mortgage foreclosures what Elizabeth Warren (et al)'s, study did for understanding the role which uninsured medical expenses play in personal bankruptcy filings.  California may be a more extreme case, for reasons which relate to the perverse incentives involved in the 1978 Proposition 13 property tax limitations.  But my interest is not the same as what the authors were driving after.

I took their data and created a small spreadsheet to look at the data from a different point of view.

Their sample is composed of 4,258 properties which went into foreclosure in Novembers of 2006, 2007 and 2008.  On average, the properties in each of the three cohorts had been purchased in 2002, and for an average price of $356,200.  By November 2006, the properties which went into foreclosure that month had an average value of $519,000 (as calculated by a commercial proprietary Automatic Valuation Model).   I made the assumption that the properties which were foreclosed on in November 2007 and November 2008 had the same AVM valuations in November 2006.

My calculations proceed as follows: I compare the average 2002 purchase price of $356,200 (a weighted average of the three cohorts) with the 2006 AVM valuation of $519,000, which provides a 4-year appreciation of $162,800 per property.  Assuming that each homeowner's annual property taxes started at 1.25% of their 2002 purchase price, and rose by the Prop 13 maximum of 2% per year, they each paid, on average, $19,578 in property taxes over 4 years. 

Houses don't appreciate.  They depreciate at about 1.5% per year. They're never worth more than what it would take to reproduce them. Taking 65% as an estimate of the share of the value of single family homes in southern California which can be attributed to land (1998 was 64.9% and 2004 was 78.7% in Los Angeles, according to Davis & Palumbo, May, 2006), 65% of the 2002 purchase price of $356,200 is $231,535.  Let's assume that the house doesn't depreciate at all, to account for owner-made improvements.  Land value, then, rose from $231,535 on average in 2002 to $394,300 by 2006.

So what produced that rise in land prices? 

• Some of it has to be attributed to the increase in population during that period of time -- due to fertility, improved public health, immigration from other countries and other states.  New relationships and broken relationships both contribute to the demand for housing. Since the quantity of land is fixed, land prices tend to rise with population.
• Some of it has to be attributed to relaxed lending standards, which permitted more people to borrow more money
• Some of it has to be attributed to changes in interest rates, which permitted more borrowing for the same monthly payment.
• Some of it has to be attributed to Proposition 13, which limited property taxes to 1.0% (in practice, roughly 1.25%) of the original purchase price, with an annual increase capped at 2%.  The annual rental value of land is generally 5% of the purchase value, so the 3.75% to 4% difference gets capitalized into the selling price of the land.

But let's think, too, of why people were willing to pay more to live in these five counties.  It was due to the schools, to jobs, to the roads, the sewers, the water system, the police and other emergency services, buses and trains, airports, the courts, jails and prisons, the universities, the hospitals and libraries, and public health and a myriad of other publicly provided goods.  The homeowners as homeowners paid only about $20,000 in taxes, and received, if the AVM is correct and they sold in 2006, $162,800 in appreciation on their land. 

The study shows that those who were in the 2006 foreclosure cohort had total average housing-related debt by November, 2006, of $469,000, up from the original loans of about $334,400.  So they'd taken out an average of $134,600 by borrowing against their home equity.

Did the services which contributed to raising that land value by over $160,000 over 4 years really only cost $20,000 per property?  No.  Sales taxes, and wage taxes and other taxes also financed those services.  And they were paid not just by landholders -- the roughly half of southern California residents who own their own homes -- but also by the other half, who rent their homes from others.

So homeowners reaped a huge windfall, and those who were not homeowners ended up financing it.  And as we attempted to increase the homeownership rate by a few percent by relaxed lending standards, they got to pay another time.

Most people think there is no viable alternative.  They're so used to the current structure -- and in California, Proposition 13 is sometimes referred to as the "Third Rail" of California politics" (touch it, and you die!) that few stop to consider that our taxes are at the root of our most serious problems.

So what's the alternative?  Sanity would be for all those public goods whose effect is to support and increase property values to be financed by a tax on land value.  Justice -- ditto.  Efficiency -- ditto.

California is floundering because it can't fund its spending.  And yet these 4,258 households stood to collect from buyers, if they sold in 2006 after buying in 2002, an aggregate windfall of $693 million: I've aggregated the data for these November foreclosures and here's the story.

Total Households:	4,258
Aggregate purchase price, approx 2002:	$1,516,735,000
Aggregate down payment:	$263,551,350
Aggregate value in 2006:	$2,209,902,000
Aggregate appreciation 2002 to 2006:	$693,167,000
Aggregate 4-year appreciation as percent of down payment	263%
Aggregate real estate taxes paid (@1.25% of purchase price, rising by 2% annually)	$78,142,339
Aggregate appreciation as percent of property taxes paid	887%

Folks who think they and people like them stand to reap a gain of $700 million on an investment of $264 million in 4 years, while paying just $78 million in property taxes may not consider it to be in their best interests to shift taxes off wages, off buildings, off sales.

Had Proposition 13 not been in place, and property owners paid just 1.25% of their properties' market value each year, aggregate property tax would have been $97,500,000, or about 25% more (assuming straight-line increase from 2002 purchase to 2006 average value of $519,000).  Still a tiny fraction of the appreciation.

The study's sample was only the November foreclosures.  To approximate the figures for all the foreclosed properties in the five counties in those 3 years, one might multiply by 12.  And recall that foreclosures are still a tiny fraction of all single-family residential properties in these five counties, and that these are relatively newly purchased properties.  Think of how much could be collected in the form of a tax on land value if everyone, no matter what year they bought their property, paid at the same millage rate on their true market value, instead of some paying on values based in the 1970s.

We-the-people created that appreciation.  Should homeowners and other landholders get to keep it as if they created it?  Does the answer to that question hinge on whether the homeownership rate is 30%, or 50%, or 65%, or 75% in that particular place, or in our country as a whole?  Or is the homeownership statistic irrelevant to the justice or logic of this privatization?  (Remember that residential real estate is frequently NOT the biggest piece of this: the urban real estate owned by corporations, REITs, foreign investors including airlines and sovereign funds, pension funds, philanthropies, 150-year trusts, private equity funds and other private entities, appreciates far faster.  (Remember Leona Helmsley's description: we don't pay taxes; the little people pay taxes.)

On the other hand, when one takes into account the fact that the run-up in prices this situation has led to a situation in which all these people have been foreclosed on, a large and rising proportion of mortgages are "under water" and observers are saying that the "bust" portion of this boom-bust cycle is going to leave something like 50% of mortgage holders "under water" by 2011, perhaps one might reach the conclusion that even if one is not convinced of the justice of revising our system, one might choose it strictly on the basis of avoiding boom-bust cycles being wise.

William Jennings Bryan, on liberty and future generations

William Jennings Bryan gave a fine speech in London in 1903 at the American Society's Thanksgiving dinner.  I thought this except, reprinted in The Public, worth sharing:

We sometimes feel that we possess a sort of proprietary interest in the principle of government set forth in our Declaration of Independence, yet the principle therein set forth was not the invention of an American mind. Thomas Jefferson expressed it in felicitous language and put it into permanent form, but the principle had been felt and thought by men before. The doctrine that men are created equal and endowed with unalienable rights and that governments derive their just power from the consent of the governed was not invented in the United States of America. It did not come from an American mind, it did not come so much from any mind as it was an emanation of the human heart. It had been in the hearts of men for ages before Columbus turned the prow of his vessel westward; before the barons wrested Magna Charta from King John. Before Homer sang, that sentiment had nestled in the heart of man and nerved him to resist the oppressor.

That sentiment was not even of human origin. Our own great Lincoln declared it in the toast, "God Himself, who implanted in every human heart the love of liberty." When God created man, when He gave him life, He linked with life love of liberty. We have received great blessings from God and from all the world, and we cannot make adequate return to those from whom we have received those gifts. It is not in our power to repay the Father above the debt we owe Him, nor can we make return to those who have sacrificed so much in the past. We cannot make return to the generations past; we must endeavor to pay our debt to the generation living and that to come. We must discharge our debt not to the dead, but to the living.

How can we discharge this debt we owe? In but one way, and that is by giving the world something equal to what we have received from the world. What is the greatest gift man can bestow upon man? Food, clothing, wealth? No. It is an Ideal that shall be with him always, lifting him to a higher plane of life: giving him a better conception of his relations to his fellow-men.

I know of no greater service that my country can furnish the world than to give it the highest ideal the world has known. And that ideal must be so far above us that it will keep us looking up all our lives; and so far in advance of us that we shall never overtake it even to the hour of our death.

Our nation must make its contribution to the welfare of the world, and it is no reflection upon those who have gone before to say we might do better than they have done. We would not meet the responsibilities of today if we did not build still higher the social structure to which they devoted their lives. The world has made progress. No longer do ambition and avarice furnish sufficient excuse for war. Today you cannot justify bloodshed except in defense of right already ascertained, and then only when every possible means for peace has been exhausted. The world has made progress. We have reached a point where the greatest man today is the man who will die not in securing something he might desire, but in defense of his rights.

We recognize the moral courage of the man who is willing to die in defense of his rights, but there is a higher ground. Is he great who will die in defense of his rights? There is yet to come the greater man who will die rather than trespass upon the rights of another man. Hail to the nation, whatever its name may be, that leads the world toward a realization of this higher ideal!

Among my "take-aways" from this is the notion that we must recognize that 2009 is not the merely culmination of all that has come before and that therefore we need not take heed of the rights of future generations, but that 2010, and 2020, and 2030 and 2100 will come, and it is in our laps, and within our capability, to begin to move the world to a society which is sustainable, equitable, just, efficient.  And if not us, who? If not now, when?

And we can start by recognizing what the structures we accept as normal do to our fellow human beings, and to us.  They favor the few with privileges which most of us don't realize are at the root of our most serious social, economic and justice problems.

The Ethics of Sharecropping, Taxation ... and Theft

Another "find" in "The Public" from November 14, 1903:

A PROBLEM IN ETHICS.

Jones—Neighbor Smith. I am out of a job; how am I to make a living?

Smith—I have a proposition to make to you. Provide yourself with tackles and go to fishing, and I will give you half you catch.

Jones—I'll do that; thank you; you are very kind, indeed.

And the people laugh at Jones' foolishness and ask: "If he provides his own tackles, what claim has Smith on the fish he takes? Ought not all the fish belong to the man who catches them?"

We think so. But while about it, suppose you tell us the difference between this proposition and the one that Brown made to Wilson when he said: "Get your teams and plows and go to work raising potatoes, and I will give you half the potatoes you raise."

Now, don't answer this question until you have thought over it just a little.  — Living Issues.

Should we tax wages?  Should indivdual (or corporate) landholders be permitted to pocket the land rent?

It seems to me that we as a society have a right to tax wages only after we've collected virtually all the land rent, and then only if we agree that the resulting revenue is insufficient to fund the legitimate purposes of government.  (Reasonable people can differ about what ought to be done by the public sector; that's a separate conversation.)

Land rent here includes not only the rent on unimproved land values (that is, the value of each site before accounting for the improvements its owner has put on it himself or bought from someone else who did) but also on things like electromagnetic spectrum (the "airwaves"), primetime landing rights at congested airports, geosynchronous orbits, on-street parking in congested downtowns, the use of water where it is scarce, rights to pollute air and water, the withdrawal of scarce natural resources, etc.

Opportunities, Privilege, Rent -- and a better way to fund our common spending

THE PUZZLED FISHERMEN.
For The Public.

We had packed the 500 trout in a large box with ice and cool wet moss, and as we were eating our last supper under the big pine before breaking up camp, the painter started the trouble.

"I'll bet ten dollars that this lake will be owned in five years," said he.

"I'll take that bet," said the plumber. "Why, the public wouldn't stand it. Here's a lake of five square miles, chuck full of trout, only 20 miles out of Kamloops, and the government put in a road costing $1,500 just to accommodate the public; and d'ye think it would be fair to let any one man own it? No sir!"

"What did Lusk charge you for the horse's pasture?" asked the printer of Jimmey, the stable boy.

"Four dollars, sir; dollar each for two days' pasture."

"That's a blamed outrage," said the tailor. "When I was out here last year we just picketed our horses out at the foot of the lake, and they did flne."

"Yes, but you didn't have to look after them," said the carpenter. "I had to change the pickets twice a day, and I'd much rather pay my share of the four dollars for the pasture, and be free to fish. Besides, Lusk has built a lot of fencing to make that pasture."