|Wealth and Want|
|... because democracy alone is not enough to produce widely shared prosperity.|
|Home||Essential Documents||Themes||All Documents||Authors||Glossary||Links||Contact Us|
Boom Bust Cycles
Weld Carter: A Clarion Call to Sanity, to Honesty, to Justice
Our problem today, as yesterday, and the days before, back to the earliest recorded times, is POVERTY.
There are times when this problem is lesser. We call these "booms." There are also times when the problem is greatly exacerbated. These are called "busts." But, as the Bible says, "the poor have ye always with ye."
The purpose of this paper is to explore the core of the problem. It is not the position that there is only one single error afoot in our social organizations. There may be several, there may be only a few things to remedy. The position is, as stated earlier, that there is one basic cause of the problem. Therefore, the removal of this one basic error is the first, the primary step, for the simple reason that, until this basic social evil is eradicated, no other reform will avail. We will simply continue the boom and bust cycles until the economies of the whole world are wrecked by inflation or by a nuclear war triggered by the ongoing economic disaster.
Let us begin this study of the likely causes of our troubles by asking two questions:
In our economy, land is a ready object of speculation, and its value is constantly reflecting this evil. What happens in a rising market, the up side of a business cycle, is that investors see rising prices in land as indicative of a boom. Thereupon, they try to increase their holdings in such land, only to discover that their present returns will not pay for the present costs of land; the current price of land is not based on what the yield of that land is today, but on what it is projected to be two or three years from now. The difference tends to increase until a point is reached where the imarginal buyer of land suddenly finds himself unable to meet the rising costs to which he has subjected himself. With bankruptcy threatening him or having already been forced upon him, the land passes from his hands, and the market temporarily becomes overpriced. The bankruptcies increase, and ultimately land values are brought back to levels which represent current productivity, at which point the new boom will have started.
In 1933, the University of Chicago published a book by Homer Hoyt entitled One Hundred Years of Land Values in Chicago. This monumental study consists in 7 chapters, of which each of the first five describes one of the five major business cycles of the period in great detail.
What was so outstanding about Hoyt's book was its compelling confirmation of George's analysis, some thirty-five years after George's death in 1897! What is even more significant is Hoyt's handling of his data in chapters six and seven, the balance of the study. In these two chapters, he selects some sixteen events which not only are present in each cycle, but which occur in the same order in each cycle.
Mr. Hoyt concluded with the usual caveat: that the mere fact that this sequence is observed this many times does not guarantee that it will ever happen again; which is to say that we can never prove truth, we can only fail to disprove it.
The graphic rendition of one such cycle appearing on the following page was devised by John Monroe, the Director of the Commerce and Industry Division of the Chicago Henry George School of Social Science. For classroom use, Mr. Monroe had set up a large magnetized blackboard with a large inverted "U"; the sixteen items of the figure were described on sixteen magnetized chips, which were shuffled and distributed along the participants. The author once had a class of five company presidents; after defining the task, he never spoke during the exercise. The individual members had sole control as to the place on the curve where each chip belonged. It was thrilling to see and hear the discussion and the ultimate positioning of the individual chips. At completion, they matched precisely the historically-based results of Hoyt. Five converts, one of whom had been the President both of Chicago's Real Estate Board and of its Building Managers Association, as well as a trustee of the University of Chicago, walked out of that session.
There are banks which have gone under supporting rising land prices, loaning money on land at speculative price levels. The answer is not to rescue those banks; it is to rid ourselves of the fundamental process of speculation in land values.
The wringing out of land speculation from the dynamics of economics will remove that unacknowledged offence which has so labored the economic profession and the public at large. As Henry George discovered and as Homer Hoyt so brilliantly depicted speculative land prices as the cause of this bitter cycle, so will its removal rid society of this hitherto hidden defect. It will put the land market on a current value basis and eliminate the terrible risks to which that market has always been subject in the past.
The reason for such speculation under the present practices is obvious. All products of labor are subject to increases or decreases depending on supply and demand. When an oversupply of any commodity begins to rear its ugly head, prices tend downward and production is thereby lessened until there is a contrary swing upward. Land, on the other hand, is of fixed supply. Nothing man does can increase or decrease the amount of land, and therefore that brake that operates in the field of production does not apply to land values and prices.
Just think of the social benefits that would accrue to a society that could, at a stroke, rid itself of the potential hazards to which all prior societies have been so subject. Production will then occur on a steadily rising level, demand increases as the well-being of society improves, new techniques develop, new inventions are made, and all these will be benefits to the community as a whole, and not just to the land-owners as in the past. ... read the whole essayHenry George: The Land Question (1881)
I wish clearly to bring to view this point. The Irish famine was not a true famine arising from scarcity of food. It was what an English writer styled the Indian famine – a "financial famine," arising not from scarcity of food but from the poverty of the people. The effect of the short crops in producing distress was not so much in raising the price of food as in cutting off the accustomed incomes of the people. The masses of the Irish people get so little in ordinary times that they are barely able to live, and when anything occurs to interrupt their accustomed incomes they have nothing to fall back on.
Yet is this not true of large classes in all countries? And are not all countries subject to just such famines as this Irish famine? Good seasons and bad seasons are in the order of nature, just as the day of sunshine and the day of rain, the summer's warmth and the winter's snow. But agriculture is, on the whole, as certain as any other pursuit, for even those industries which may be carried en regardless of weather are subject to alternations as marked as those to which agriculture is liable. There are good seasons and bad seasons even in fishing and hunting, while the alternations are very marked in mining and in manufacturing. In fact, the more highly differentiated branches of industry which advancing civilization tends to develop, though less directly dependent upon rain and sunshine, heat and cold, seem increasingly subject to alternations more frequent and intense. Though in a country of more diversified industry the failure of a crop or two could not have such wide-spread effects as in Ireland, yet the countries of more complex industries are liable to a greater variety of disasters. A war on another continent produces famine in Lancashire; Parisian milliners decree a change of fashion, and Coventry operatives are saved from starvation only by public alms; a railroad combination decides to raise the price of coal, and Pennsylvania miners find their earnings diminished by half or totally cut off; a bank breaks in New York, and in all the large American cities soup-houses must be opened!
In this Irish famine which provoked the land agitation, there is nothing that is peculiar. Such famines on a smaller or a larger scale are constantly occurring. Nay, more! the fact is, that famine, just such famine as this Irish famine, constantly exists in the richest and most highly civilized lands. It persists even in "good times" 'when trade is "booming;" it spreads and rages whenever from any cause industrial depression comes. It is kept under, or at least kept from showing its worst phases, by poor-rates and almshouses, by private benevolence and by vast organized charities, but it still exists, gnawing in secret when it does not openly rage. In the very centers of civilization, where the machinery of production and exchange is at the highest point of efficiency, where bankvaults hold millions, and show-windows flash with more than a prince's ransom, where elevators and warehouses are gorged with grain, and markets are piled with all things succulent and toothsome, where the dinners of Lucullus are eaten every day, and, if it be but cool, the very greyhounds wear dainty blankets–in these centers in wealth and power and refinement, there are always hungry men and women and little children. Never the sun goes down but on human beings prowling like wolves far food, or huddling together like vermin for shelter and warmth. "Always with You" is the significant heading under which a New York paper, in these most prosperous times, publishes daily the tales of chronic famine; and in the greatest and richest city in the world–in that very London where the plenty of meat in the butchers' shops seemed to some savages the most wondrous of all its wonderful sights–in that very London, the mortuary reports have a standing column for deaths by starvation.
But no more in its chronic than in its spasmodic forms is famine to be measured by the deaths from starvation. Perfect, indeed, in all its parts must be the human machine if it can run till the last bit of available tissue be drawn to feed its fires. It is under the guise of disease to which physicians can give less shocking names, that famine–especially the chronic famine of civilization–kills. And the statistics of mortality, especially of infant mortality, show that in the richest communities famine is constantly at its work. Insufficient nourishment, inadequate warmth and clothing, and unwholesome surroundings, constantly, in the very centers of plenty, swell the death-rates. What is this but famine – just such famine as the Irish famine? It is not that the needed things are really scarce; but that those whose need is direst have not the means to get them, and, when not relieved by charity, want kills them in its various ways. When, in the hot midsummer, little children die like flies in the New York tenement wards, what is that but famine? And those barges crowded with such children that a noble and tender charity sends down New York Harbor to catch the fresh salt breath of the Antlantic – are they not fighting famine as truly as were our food-laden war-ship and the Royal Prince's gunboats? Alas! to find famine one has not to cross the sea.
There was bitter satire in the cartoon that one of our illustrated papers published when subscriptions to the Irish famine fund were being made – a cartoon that represented James Gordon Bennett sailing away for Ireland in a boat loaded down with provisions, while a sad-eyed, hungry-looking, tattered group gazed wistfully on them from the pier. The bite and the bitterness of it, the humiliating sting and satire of it, were in its truth.
This is "the home of freedom," and "the asylum of the oppressed;" our population is yet sparse, our public domain yet wide; we are the greatest of food producers, yet even here there are beggars, tramps, paupers, men torn by anxiety for the support of their families, women who know not which way to turn, little children growing up in such poverty and squalor that only a miracle can keep them pure. "Always with you," even here. What is the week or the day of the week that our papers do not tell of man or woman who, to escape the tortures of want, has stepped out of life unbidden? What is this but famine?... read the whole article
John Dewey: Steps to Economic Recovery
A second claim among advocates of spreading tax burdens over the "big three" bases (and sometimes more if possible) is that it insures greater reliability and stability of the revenue streams supportive of government services. To be sure not all government services require stable budgets -- motor vehicle licensure varies with the state of the economy as do the needs of social welfare programs and some offices related to capital investment. But most programs do need to rely on predictable and stable financial support, particularly education, health, and public safety. With revenue streams based on formulas that vacillate from year to year, it becomes difficult to provide for public needs, and the continual political struggle over fiscal designs is frequently costly.
Economic cycles are accepted as a given in both government and business circles. But there is compelling evidence that such cycles have their roots in the tendency for elements of the financial community to speculate in real estate, fostering bubbles in their market prices that ultimately must be reconciled with the real demand.5 Because the market price of Land is in good part a function of the settling of rent, the recapture of that rent in the form of taxation can both stabilize those markets and remove the cause of those periodic cycles. By collecting only a miniscule element of Land rent, and instead collecting revenue from Labor and Capital, economic cycles are amplified and exacerbated, to say nothing of their effect on productivity. Evidence of the stabilizing effect of taxes on Land in the form of economic rent collection is shown best by the fact that those nations and states that rely most heavily on Land taxation are least subject to cyclical tendencies and intermittent recessions. Japan, which imposes no tax on urban land, has yet to recover from the crash in its real estate market almost fifteen years ago. ... Read the whole article
Kris Feder: Progress and Poverty Today
As this book was written, the Industrial Revolution was transforming America and Europe at a breathless pace. In just a century, an economy that worked on wind, water, and muscular effort had become supercharged by steam, coal, and electricity. Canals, railroads, steamships and the telegraph were linking regional economies into a national and global network of exchange. The United States had stretched from coast to coast; the western frontier was evaporating.
American journalist and editor Henry George marveled at the stunning advance of technology, yet was alarmed by ominous trends. Why had not this unprecedented increase in productivity banished want and starvation from civilized countries, and lifted the working classes from poverty to prosperity? Instead, George saw that the division of labor, the widening of markets, and rapid urbanization had increased the dependence of the working poor upon forces beyond their control. The working poor were always, of course, the most vulnerable in depressions, and last to recover from them. Unemployment and pauperism had appeared in America, and indeed, were more prevalent in the developed East than in the aspiring West. It was "as though a great 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." This, the "great enigma of our times," was the problem George set out to solve in Progress and Poverty....
... Yet a half century before Keynes, George outlined a theory of boom and bust which explained the underlying instability of the market economy under present fiscal institutions. ... Read the whole articleFred Foldvary: Geo-Rent: A Plea to Public Economists
OTHER ADVANTAGES OF TAPPING GEO-RENT While this article will not necessarily serve as a manifesto for the idea of tapping geo-rent to fund community goods, there are a number of further advantages that merit passing mention.
The Georgist economic proposal insists on the primary importance of land as a factor in the economy. Many people dismiss that as a quaint, agrarian notion. "Perhaps," they scoff, "land was that significant back when most people had to work the soil for a living, but modern agriculture has moved far past that! Nowadays we deal with modern issues of technology, global markets, information -- land is no longer a big deal."
10. There's no place to dump your trash for free. ...
9. Scratch a financial crisis, find a real estate bubble. ...
8. Information (like railroads) needs routes. ...
7. Cities can no longer afford to be inefficient. ...
6. Global climate change is too likely to ignore. ...
5. The loss of biological diversity cannot be reversed. ...
4. Two out of every five people lack a safe and dependable source of drinking water. ...
3. The myth of overpopulation causes cultural sickness. ...
2. We have forgotten what nations are. ...
1. "The land shall not be sold forever, for ye are strangers and sojourners with Me." ...
Albert Jay Nock — Henry George: Unorthodox American
The wealth gap is increasing in the US. According to the latest Federal Reserve data, the top 1% of the population has $2 trillion more wealth than the bottom 90 percent.
Perceptions of the causal factors of these statistics and the suffering of so many who lack basic necessities in this wealthy country are most often simplistic explanations - these people lack money and they lack money because they lack jobs or their wages are too low, or housing costs are too high. For those concerned about the growing wealth gap in America and worldwide, and the resultant poverty, homelessness, hunger and food insecurity, the dilemma usually bogs down into supply or demand side efforts to find solutions. But the root cause is a deeper injustice.
The primary cause of the enormous and growing wealth gap is that the land and natural resources of the earth are treated as if they are mere market commodities from which a few are allowed to reap massive private profits or hold land and resources out of use in anticipation of future profits. Henry George, the great 19th century American political economist and social philosopher, proposed a solution to a problem that too few understood at the time and too few understand today. Early Christian teachings drew upon deep wisdom teachings of the Jubilee justice tradition when they addressed this problem. The problem is the Land Problem.
The Land Problem takes two primary forms: land price escalation and concentrated land ownership.
In order to show that there was NO NEED for land reform in Central America because our land in the US is even more concentrated in ownership than Central America, Senator Jesse Helms read these facts into the Congressional Record in 1981:
A United Nations study of 83 countries showed that less than 5% of rural landowners control three-quarters of the land. Other studies on land ownership report these facts:
The basic human need for food and shelter requires access of labor to land. With access to land people can produce the basic requirements of life. Access to land provides an enabling environment for life itself and thus meets the minimum requirement of love, meaning fairness in human relations based on the fundamental equal right to exist. The Land Problem in its two forms - the inequitable ownership and control of land and natural resources and the treatment of land as a market commodity - is the root cause of the great amount of human deprivation and suffering from lack of the basic necessities of life. And yet the human right to the earth is missing from the Bill of Rights, the Universal Declaration of Human Rights, and the Covenant on Economic, Social and Cultural Human Rights.
Democratic governance has not yet concerned itself with a "first principle" question. This question concerns property rights in land - property rights in the earth itself. The question is, "Who Should Own the Earth?" The question of "Who Should Own the Earth?" is a fundamental question. In venues when this question is asked, the answer is always the same. The answer is, "everyone should own the earth and on an equal basis as a birthright." Read the whole article
Mason Gaffney: Privatizing Land Without Giveaway
Mason Gaffney: Land as a Distinctive Factor of Production
High land price guides investors to prefer kinds of capital that substitute for land. Although capital cannot be converted into land, it can substitute for land, and does so when rents and land prices are high. John Stuart Mill long ago pointed out that the structure and character of capital is determined by the level of rents and wages.19 Such substitution is an integral part of the equilibrating function of markets; the human race could never have attained its present numbers and density without it. High wages evoke labor-saving capital; high rents evoke land-saving capital. It is useful to carry this farther, and recognize five kinds of substitutive capital evoked by high rents and land prices:
e. Rent-leading capital.
To understand the forces shaping capital investment, one must recognize the difference of land and capital. High land prices evoke substitution of capital for land, shaping the capital stock in particular ways. Viewed positively, this is a central part of economic equilibration, tempering land scarcity. Viewed negatively, it has led historically to boom and bust cycles.Mason Gaffney: The Taxable Capacity of Land
C. Land-driven Booms and Busts
In a speculative land boom, land prices go prematurely high. Premature high land values profoundly distort the character of capital investment. High land prices stimulate land-saving, land-enhancing and land-linking investments. This is a rational economic response when and if the market is sending the right signals. Ideally, an optimally high level of land rents and values serves as a community synchronizer, causing everyone to build as though others were going to build complementarily in synchronized fashion.
However, in the frenzy of a speculative boom the market sends the wrong signals. Land is peculiarly subject to irrational speculative pricing in booms because of its subjective pricing - see B-16.
Overpricing of land reserves land for two contrasting kinds of buyers and holders.
Type A buyers would "force the future" with "rent-leading" buildings. They plan to and do develop land for a future demand higher than present demand. In Chicago, 1835, this was exemplified by building four-story buildings outside The Loop (the city center). Overpricing and consequent over-improvement gets greater, the further out you go.
When that demand fails to materialize, Type A buyers cannot recover their money. They cannot rent out all their floor space, if that is what they built. Or they cannot use the full capacity of their tannery, harbor, shipyard, sawmill, packing plant, soap factory, brickyard, or whatever they overbuilt.
When Type A buyers develop land beyond the reach of existing infrastructure, they force extensions of same which are often losers, cross-subsidized by the whole system.
Type B landowners just hold land unused or underused. Rather than force the future, they would free-ride on the future. They are usually looking or expecting to sell for a rise. Type B-1 is the aggressive outside buyer, the stereotypical "land speculator" who does this calculatingly, cold-heartedly, as a purely pecuniary investment. Type B-2 is the ancient owner whose land just happens to lie in the way of growth. Type B-2 owners are sympathetic figures in popular drama and sentiment. They are passive victims of change, clinging to old values against mechanistic, impersonal, exogenous, amoral, modernizing forces. However, their market behavior has much the same economic consequences as that of Type B-1. Many turn out to be ambivalent, resisting change for a few years while quietly expecting to sell out for the top dollar for their retirement.
The land of Type B landowners absorbs no capital directly, but much capital indirectly, by forcing the stretching-out of all land-linking investments in space, and generating no traffic or use to justify those that are built to and past them. Empty land also generates no synergistic spillover gains to raise the cash flow of surrounding, complementary lands. Thus it helps freeze capital sunk in improving them. Read the whole article
The question I am assigned is whether the taxable capacity of land without buildings is up to the job of financing cities, counties, and schools. Will the revenue be enough? The answer is "yes."
The universal state and local revenue problem today is whether we must cap tax rates to avoid driving business away. It is exemplified by Governor Pete Wilson of the suffering State of California. He keeps repeating we must make a hard choice: cut taxes and public services, or drive out business and jobs. (When a public figure gives you two choices you know they're both bad, and he wants one of them.)
The unique, remarkable quality of a property tax based on land ex buildings is that you may raise the rate with no fear of driving away business, construction, people, jobs, or capital! You certainly will not drive away the land. However high the tax rate, not one square foot of it will put on a track shoe and hop out of town. The only bad thing to say about this tax's incentive effects is that it stimulates revitalization, and makes jobs. If some people think that is bad, maybe this attitude is the problem.
There is the answer to Governor Wilson' dilemma. I hope here in The Empire State you will supply a practical demonstration of the answer, one we may then use to inspire The Golden State. California now, following Proposition 13, has become a morality play, a gruesome object lesson in what happens when the property tax is pushed down toward zero. It forces higher taxes on production and exchange. Non-property taxes, you know, mostly have the character that they "shoot anything that moves," penalizing and discouraging economic activity. New buildings gain by having a lower property tax burden, it is true; but they bear the brunt of these new taxes and impost fees up front, at the time they are built. These offset the benefits of their lower property tax rate. ...
An American counterpart of Vancouver's "University Endowment Lands" is Beverly Hills, California, where land value composes some 80% of residential values, and the mean parcel is worth something like a million dollars. Beverly Hills, with its great wealth and mansions, is known as "Tear-down City." Every year many a grand old palace that once sheltered some renowned matinee idol, and rang to scandalous parties, is torn down to salvage its site for the next, grander one. In a land boom, such as crested in 1989, half the city goes to the brink of demolition and replacement. ...
The adequacy of a tax base must be judged over the cycle of boom and bust, a cycle we are now learning is still much alive. How stable is the base? Capital comes and goes; land is fixed. When they finally close that plant and move the work to Mexico, at present we reward them by lowering their taxable valuation -- reward them and punish ourselves, as city revenues fall. On the other hand, if we taxed just their land, the valuation would remain about the same. They will squeal, cajole, and threaten, but no way can they move their land to Mexico. They will just have to find a new use for it. Meantime, you will have made it more likely there are profitable new uses by removing the tax threat against whatever new capital they might invest in your town to employ your people.
Land prices boom and bust too, jeopardizing revenue stability. That can be a problem, but land taxation contains a built-in contra-cyclical factor. When a land boom reaches its manic phase, as it did in California before 1989, growth expectations rise so high that they offset interest costs: people think they are holding land with no net carrying cost. Your home is expected not just to shelter you, but pay off its own mortgage, upkeep, and maintenance by appreciating. Call it irrational, but it happens. In this phase, the fast-moving tax assessor is an equilibrating force. The quicker he follows such a market, the quicker he showers it with cold water, by imposing a sobering cash drain on the participants. This is an excellent time for local governments, if they have the wit, to pay their debts, fix their potholes, and fill the fiscal reservoir against the next drought.
Those getting the cold shower, meantime, may resist it. In California, the land of extremes, we got Howard Jarvis and Prop. 13. This Constitutional Amendment capped the property tax rate at 1%, and virtually froze assessed values until land sold. Then the boom really went wild. I myself, after campaigning hard against Jarvis, unexpectedly made $200,000 in a few months after it passed. Buyers were chasing me around the block, just to buy a scrap of land I happened to have in the right place at the right time. It was blind luck, but the money was as good as though I had earned it honestly: better, in fact, because 60% of the gain was not even reportable as taxable income. It was a once-in-a-lifetime experience, but buyers and sellers came to regard it as normal, and only fair. They saw regular annual increments as a divine right of property. For a few mad years, they were.
It was the lack of a tax stabilizer that took the cap off land prices. When my lot rose to $240,000, it was still assessed at $10,000, and capped there by constitutional law! Taxes were 1% of $10,000 - that's right, $100/year, 1/24 of 1% of the market value. Was I in a strong bargaining position? You bet, and I loved it, just as you might. Now we are paying the price, or beginning to, as our public services collapse and our criminals outgun our police. This year they are cutting faculty salaries (that's me) 5%, and raising college tuition (that's my three children) 100%. I'll pay all right. All tax rates other than property are headed north; land prices south. Our once-vibrant economy is dying; our unemployment rate leads the nation. Our largest city was torched last year by the frustrated unemployed. Our once-leading schools trail the nation; our murder rate leads it. Those are the economic consequences of Howard Jarvis. Like Tokyo and London and Faust, we signed with Mephistopheles. He showed us a grand time, but now his bill is due. To paraphrase Kipling, "Be warned of our lot, which I dread you may not, and learn about Jarvis from me." Read the whole articleMason Gaffney: Geoism, Recession and Control of Monopolies
Recessions (and depressions) may occur when there are massive shocks to the system (e.g., the OPEC producers withholding supplies and doubling and tripling prices of a commodity that could not be readily substituted for). Recessions may also be prolonged and accelerated by unwise public policy choices made by people who have no idea of the consequences of their actions or inactions. Now, in the activist area where I am working, there is still a strong cry for a Constitutional amendment to balance the U.S. Federal budget. Some of the economists in and out of government are saying this would be a disaster, using the same sort of "if GDP is growing, don't worry be happy" pronouncement you refer to above. When GDP is adjusted for the dollars spent on the criminal justice system and clean-up costs for preventable environmental disasters, then I might have some faith in this as a bellwether of wellbeing.
As for the coming "boom," I simply repeat my observation that there is no U.S. economy; there are only regional economies competing with one another as well as with other nations. We have the beginnings of speculative booms in some places, stability in others, and continuing recessions in others. People who cannot sell their houses because they owe more on them than they are worth cannot take their services elsewhere to seek employment. So much for the mobility of the labour force. This is one of the unfortunate sides of the American dream of home ownership; when a lease expires, one simply does not renew.
Only around 25-30% of households own their own homes. By good fortune, I just read something that helps resolve the difficulty. It seems that a great deal of anti-trust legislation from the Progressive Era had been aimed at monopoly in the flicks, which had started with Thomas A. Edison, who was as much a patent-litigation bully as he was a pure inventor. Much of this legislation became unravelled under President - guess who? - Ronald Reagan, spawn of the "entertainment" industry, and political voice for same. Vertical integration and media mergers and monopolization then ran wild. Disney under Eisner, of course, has played a role in this. Disney as real estate developer throws its heavy weight around brutally. ... Read the whole article
Karl Williams: Social Justice In Australia: ADVANCED KIT - Part 2
BOOM & BUST CYCLES
"Give me a one-handed economist! All my economists say, "on the one hand...on the other". - Harry S. Truman, (1884-1972), U.S. president.
For all their dismal policy failures, economists always seem to present themselves as having learnt from the past mistakes of others and to have caught on to the right policy mix. And yet they, too, are invariably criticised by the succeeding generation of economists who themselves trumpet the reasons why they have now got it right. And nothing exemplifies this ongoing farce more than the debates surrounding the economic boom and bust cycles - or, more particularly, the reasons for economic recessions. We can confidently predict that conventional neoclassical economists will never find the solution in their own gloomy cupboards.
We know already how the failure to distinguish land from capital fatally flaws neoclassical economics at its very core. This confusion has been taken a step further by the real estate business in a way that, when you see it for what it is, verges on the absurd.
WORDS THAT OBSCURE
Real estate terminology obscures the whole land issue by hardly ever separating land from buildings, but lumping the two together as "property." So when land prices start rising, the real estate sector terms this a property boom or housing boom, concealing the fact that houses (or capital) cannot but depreciate over time while land always appreciates. They speak of the "housing market" as if houses levitated all over the place. In point of fact, housing construction costs - both labour and material combined - have declined in real terms in Australia over the thirty five years to 1985 by 1%, while over the same period, land price has skyrocketed by a very healthy average of around 6% per annum!
So, the media have convinced the public that a "healthy property market" is a good thing and - hey! - if you're a speculator, then you begin rubbing your hands with glee as you estimate your latest windfall. If you are a home-owner however, your "new" net worth is of little benefit if you intend selling up and moving, since the price of the home which you intend to buy will in most cases have risen by a similar margin, so where is the gain?. Well, we've got news for you. It is rising land prices that precede and are the primary cause nearly all economic recessions. First, these recurrent booms starve the economy as funds are poured into land instead of productive capital, and second, they choke any immediate chance of recovery as businesses have to pay more and more for land.
Now we get back to the peculiar nature of land. In a growing economy, land prices must rise because competition for land sites cannot be satisfied by producing more sites. While the real estate industry is merrily singing about the vigor of the property market, the cost of space begins to outpace profit margins, and the economy is headed for a recession.
"RUSH FOR THE EXIT!"
But we never spot the looming recession before it's too late, because once people observe a rise in land values, they too want to get in on the act, thus pushing up land prices even further. And away we go on this boom that isn't a boom at all, only a speculative bubble!
We do get a few warnings, but our learned friends in the real estate sector dress them up as indicators of rosy investment opportunities. As the real estate market continues to "strengthen", the cost of occupancy forces companies either to pay up even more or move elsewhere. And the suffering soon spreads, because unrealistic land prices must take a cut from the returns to labour and capital. As a result there is less purchasing power to buy the goods and services of others, general production is checked, and the whole downward spiral towards recession has begun.
At a certain point in the land boom, buyers realise that the yields on their investments are not keeping pace with exorbitant land values, and demand for land drops, in turn causing prices to level off. This is the moment of collective déjà vu. Suddenly the speculators realise, "Uh, oh! I think I've been here before!", and begin panic selling as they realise that their investments could earn more elsewhere. The turning tide becomes a flash flood, as speculators recognise that the only way out is to sell quickly before prospective buyers realise that the bottom has dropped out of the market. At the same time some start to default on loans which they had taken out to make their now-overvalued speculative purchases, and at this point the banking sector is involved in the domino effect. The banks have over-extended themselves on the speculative land bubble, and when they must start to recall their loans, the knock-on consequences can be even more severe.
YOU KNOW THE REST…
The rest is history, literally. Speculation in land (or in the shares of companies owning natural resources) can be isolated as the prime factor for practically every periodic panic that has caused economic crises. Of course, there are all sorts of contributing factors or even effects that governments, real estate professionals and neoclassical economists will claim to be the major cause of recessions. In the 19th century, governments often used the printing presses to increase the money supply in desperate attempts to stave off the inevitable crises. The restrictive trade policies of the Great Depression were not really a cause but rather an outcome, which in turn exacerbated things. But the great initiatory cause is invariably the speculative advance in land price, but it's difficult to spot because it does its dirty work while everyone is crying, "Boom, boom! Robust land market!"
Broadly speaking, the recession will continue until one or more of three things occur:
A boom can never be genuine under land monopoly capitalism, for speculators inevitably bid up the price of scarce land. And when money is diverted to speculative purposes, it is effectively sterilised, for buying land does not create wealth (machines or jobs). ... Read the entire articleJeff Smith: Sharing Natural Rents to Sustain Human Society
To get rich, or more likely to stay rich, some of us can develop land, especially sprawling shopping centers, and extract resources, especially oil. While sprawl and oil depletion are not necessary, they are more profitable than a car-free functionally integrated city. Under the current rules of doing business, waste returns more than efficiency. We let a few privatize rent -- ground rent and resource rent -- although rent is a social surplus. As if rent were not profit enough, winners of rent have also won further state favors -- tax breaks, liability limits, subsidies, and a host of others designed to impel growth (20 major ones follow herein).
If we are to sustain our selves, our civilization, and our eco-system, we must make some hard choices about property. What we decide to do with rent, whether we let it reward our exploiting or our attaining eco-librium, matters. Imagine society waking up to the public nature of rent. Then it would collect and share its surplus that manifests as the market value of sites, resources, the spectrum, and government-granted privileges. Then we could forego taxing labor and capital. On such a level playing field, this freed market would favor efficiency -- the compact city -- not waste -- the mall and automobile. ...
Drawing their cue from the public, governments tolerate "rentention", the private retention of publicly-generated land values. Lacking this Rent, states turn to taxes. But to grow the economy, all governments -- left, right, or undecided -- hustle to stimulate development; they cut taxes and slop subsidies. Going beyond the call of duty, the state excuses producers' their routine pollution and limit liability, thereby cutting the cost of insurance. Companies that don't impose on nature, worker, or customer are not benefited at all but lose a competitive advantage. On this tilted playing field, one with the lumps of subsidies and the tilts of taxes, technologies lean and clean have a hard time competing as suppliers of materials, homes, food, rides, and energy. ...
Noticing rent, realizing its social nature, accepting that it's to be shared, and understanding that wages and interest should not be expropriated, for most people that's a new way of thinking. Thinking such thoughts leads to a new way of conceiving economics, too. Ecological economics becomes not just a branch of economics but a whole new discipline, needing a new name. In geonomics we maintain the distinction between items bearing exchange value that come into being by human effort - wealth - and those that don't - land. Keeping this distinction in the forefront makes it obvious and non-controversial that speculating in land drives sprawl, that hoarding land retards Third World development, that borrowing to buy land plus buildings engorges banks, that so-called "interest" is quasi-rent, that the cost of land inflates faster than the price of produced goods and services, that over half of corporate profit, says the Urban Land Institute, is from real estate.
Summing up these analyses, geonomists offer a Grand Unifying Theory, that the flow of rent pulls all other indicators in its wake. Geonomics differs from economics as chemistry from alchemy, as astronomy from astrology. The acid test of any science is prediction, a test that economics fails and geonomics passes. Plugging in the land price cycle of 17+ years lets geonomists crank out predictions more accurate than those generated by "the experts" who missed, for example, the collapse of mighty Japan. When the land of the Rising Sun was on the market for four times the assessed value of all America, that's when a few geonomists, like voices in the wilderness, countered conventional wisdom by proclaiming that the Japanese boom would bust. According to these geonomic prognosticators, don't expect America's next downturn for at least another five years, despite the tech wreck or any other stock market fluctuations. ...
Geonomics draws its power to predict and fix what ails economies by being grounded in reality. It holds to the notion that economies are not apart from but part of the embracing eco-system. As part of whole, economies self-regulate by the same natural feedback loops. The prey/predator cycle is mimicked by the pricing cycle, also known as the Law of Supply and Demand. This familiar pattern is found, too, in the Share Rent Cycle.
(1) Getting more rent, people work less, so output drops.
Thus, production is put into balance with consumption and work with play. Geonomics yields a policy that's not at war with but aligned with nature as model. Perhaps the most central feature of economics is price. Price is to production what DNA is to reproduction, the guides to growth. Rather than distort price with taxes and subsidies, with license (so-called "externalities") and rent-retention, geonomics respects the integrity of price, allowing it to accurately reflect our costs and values, by sharing rent. Then economies ("geonomies") can operate without the deadweight losses of taxation and rent seeking.
To sustain that which we love, we must transform our relationships to nature, to government, and to each other. We need to become geonomists in worldview, theory, discipline, and policy. Geonomics creates an economy that's not at war with but aligned with the natural world.... Read the whole article
Frank Stilwell and Kirrily Jordan: The Political Economy of Land: Putting Henry George in His Place
Bill Batt: How Our Towns Got That Way (1996 speech)
Stability refers to the ability of a tax to produce revenue in the face of changing economic circumstances. Income and sales taxes, for example, vary greatly according to phases in the economic cycle; the property tax, in contrast, is highly stable regardless of the state of the economy. Followers of economist John Maynard Keynes believe that revenues should be inverse to the cycles of the economy; i.e., that the government should be used to stabilize or boost the economy as occasions require. I should add as an aside that there are some theorists who believe that, were revenue sources completely based on land value, economic cycles would disappear.
In assessing the value of a tax it is also important, of course, to understand its potential to bring in revenue for the purposes of government. This is usually deemed revenue sufficiency. Income, sales and property taxes, along with corporation taxes to a lesser extent, have come to be regarded as the workhorses of the American revenue structure. But, as anti-tax politicians are quick to note, the higher these taxes are, the more they impose a drag on the economy. This is why one should ponder whether to consider raising taxes which have demonstrable distorting effects. In contrast, if you take the time to look at a tax on land value alone, it measures up so well that it looks like the perfect tax!... read the whole articleBill Batt: The Compatibility of Georgist Economics and Ecological Economics
Any failure to pay back that increment to society, or of government to recapture it in the form of taxes, constituted not only an injustice to the poor but a distortion of economic equilibrium. He witnessed first hand the perverted configurations of land use that today we know as sprawl development— even in his time it was apparent that urban, high value land parcels were being held off the market for speculative gain by meretricious interests. He witnessed also the boom and bust cycles of the land markets on account of such speculation, effects which spread far wider than just land prices. These inevitable cycles would dislocate labor and capital supply, giving impetus to the impoverishment and suffering which he himself had experienced. He understood that holding the most strategically valuable landsites out of circulation constituted a burden on the economy. He understood that financial resources spent to pay exorbitant land prices had a depressing effect on capital and labor. And because government was taxing labor and capital instead of recovering land rent, it was further restricting the job market and the growth of capital. He realized that people who captured monopoly control of strategically valuable landsites could do so because they were privy to information prior to its public release. It was not by any means his insight alone; it was captured also by George Washington Plunkett writing at the same time:
There’s an honest graft, and I’m an example of how it works. I might sum up the whole thing by sayin’: “I seen my opportunities and I took ‘em.”
Just let me explain by examples. My party’s in power in the city, and it’s goin’ to undertake a lot of public improvements. Well, I’m tipped off, say, that they’re going to lay out a new park in a certain place.
I see my opportunity and I take it. I go to that place and I buy up all the land I can in the neighborhood. Then the board of this or that makes its plan public, and there is a rush to get my land, which nobody cared particularly for before.
Ain’t it perfectly honest to charge a good price and make a profit on my investment and foresight? Of course, it is. Well, that’s honest graft. 32
32William L. Riordan, Plunkett of Tammany Hall. New York: Dutton, 1963, p. 3.
All society needed to do was to collect the economic rent from landholders as its rightful due, a solution that became part of the subtitle of his book, “the remedy.” Taxing the land (or, alternatively, collecting the economic rent) was something common citizens could understand.... read the whole article
Weld Carter: An Introduction to Henry George
In addition, George differentiated sharply between land itself and the products -- or wealth, as he termed them -- which labor made from the land. "In producing wealth, labor, with the aid of natural forces, but works up, into the forms desired, pre-existing matter, and, to produce wealth, must, therefore, have access to this matter and to these forces -- that is to say, to land. The land is the source of all wealth. It is the mine from which must be drawn the ore that labor fashions. It is the substance to which labor gives the form."
George saw, as between land and products, certain elementary differences. "In every essential, land differs from those things which... [are] the product of human labor. ...It is the creation of God; they are produced by man. It is fixed in quantity; they may be increased illimitably. It exists, though generations come and go; they in a little while decay and pass again into the elements."
Having noted these differences, George proceeded to use them as the basis for his examination of related areas of economics, such as speculation. When asked how speculation worked, George responded that a distinction must be made between speculation in land and speculation in products.
Writing of industrial depressions, he said, "When, with the desire to consume more, there coexist the ability and willingness to produce more, industrial and commercial paralysis cannot be charged either to overproduction or to overconsumption. Manifestly, the trouble is that production and consumption cannot meet and satisfy each other .
"How does this inability arise? It is evidently and by common consent the result of speculation. But of speculation in what?
"Certainly not of speculation in things which are the products of labor ...for the effect of speculation in such things, as is well shown in current treatises that spare me the necessity of illustration, is simply to equalize supply and demand, and to steady the interplay of production and consumption by an action analogous to that of a fly-wheel in a machine." In other words, the tendency of speculation in products is to increase the demand for products and therefore to increase the price of products. This increased price will induce more production, which, increasing the supply, will tend to lower the price. Throughout this cycle, there has been a stimulating effect on production in general.
He continued, "Therefore, if speculation be the cause of these industrial depressions, it must be speculation in things not the production of labor, but yet necessary to the exertion of labor in the production of wealth -- of things of fixed quantity; that is to say, it must be speculation in land."
How can this be? How can speculation in land cause industrial depression? George explains, "...that there is a connection between the rapid construction of railroads and industrial depression, anyone who understands what increased land values mean, and who has noticed the effect which the construction of railroads has upon land speculation, can easily see. Wherever a railroad was built or projected, lands sprang up in value under the influence of speculation, and thousands of millions of dollars were added to the nominal values which capital and labor were asked to pay outright, or to pay in installments, as the price of being allowed to go to work and produce wealth. The inevitable result was to check production. .."
The tendency of speculation in land is similar to that of speculation in products; it increases the demand for land and thereby increases the price of land. However, here the similarity ends. The supply of land is fixed; as successive units of land become priced beyond the level at which labor and capital can profitably engage in production, an increasing (though artificial) scarcity of land develops. "The inevitable result was to check production."
So, according to George, another difference between land and products is that speculation in products tends to stimulate production, whereas speculation in land tends to check production. ... read the whole article
Judge Samuel Seabury: An Address delivered upon the 100th anniversary of the birth of Henry George
to email this page to a friend: right click, choose "send"
Wealth and Want
... because democracy alone hasn't yet led to a society in which all can prosper