Wealth and Want
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Is Homeownership the Answer?

There is a saying that four moves is equal to a fire in terms of the effects on one's possessions.  It is also hard on one's life, one's children, one's peace of mind, one's leisure.  When a move comes as the result of a job opportunity, it can be a pleasurable experience, particularly if an employer pays for deluxe services surrounding the move.  But for most of us, moving is something to be dreaded.

Is homeownership "the answer?" Much depends on which question we seek to answer.  The data suggests that homeownership has many benefits for families in terms of stability, and certainly those who have title to their own homes on average have far more other assets than those who do not have title. Those fortunate enough to own property in places where land is appreciating rapidly may find that their house earns more each year than their own work does.  But that is a separate matter from the question of whether increasing homeownership is key to making people more equal. 

The homes which those who currently don't own them can afford are often located so far from their jobs, or from the centers of economic activity, that it may not be in their best interests to push to increase homeownership from, say, 69% to 70%, particularly if to do it they must take out adjustable rate mortgages, 40 year mortgages, interest-only mortgages, 100% or 103% financing, or commit a larger share of their gross income to paying for housing than they can reasonably afford -- particularly in an economic environment in which wages in the bottom 90% of the income spectrum are not rising as they were a generation ago.   A large share of the mothers of young children are already employed and their families are spending signficant income on childcare. (See Elizabeth Warren and Amelia Warren Tyagi's book, The Two Income Trap.)

But almost certainly the homeownership rate will continue to rise for a few years -- strictly as a result of age-related demographics and the size of the Baby Boom generation. Administrations and housing departments will claim credit for this, crowing about the success of their programs promoting homeownership.

But if the question about homeownership is whether making virtually everyone a homeowner is going to promote genuine social or economic equality, or shared prosperity, or general well-being, in American society, the answer is No! In the language of the fences and small bandages page, this is a fence which may help keep a few people from poverty.* It is not a solution to the problem of the privatization of land rent, because residential land rent is trivial compared to the land rent on choice commercial sites, particularly those in the central business district or served by our major highways.

*Those who think our poverty measure provides an over-estimate of the number of needy people sometimes point to the statistic, drawn from census data, that 43% of the poor "own" their own homes. Ignored, of course, is that "ownership" may be 10% for the "homeowner" and 90% for the mortgage lender, or that the fully owned home is an older cottage with few modern amenities, and insufficient income available to maintain it.

If we want to achieve justice and prosperity and equal opportunity, we need to move toward making land common property, by collecting as our common treasure a significant portion of the economic value of the land. When we do that, many more people will find themselves able to afford to own their own home, closer to their work, without hocking their futures. And their home equity will no longer be their largest asset, because they'll be able to invest in other goods, which will promote capital formation and employment, creating opportunity. (What's not to like? If you think that appreciation in land is your private treasure, you might not think this in your best interests, especially if you own a very choice piece of urban land you think your grandchildren should inherit.)

Henry George: What the Railroad Will Bring Us [Californians, and particularly San Franciscans]  (1868)
The truth is, that the completion of the railroad and the consequent great increase of business and population, will not be a benefit to all of us, but only to a portion. As a general rule (liable of course to exceptions) those who have it will make wealthier; for those who have not, it will make it more difficult to get.
  • Those who have lands, mines, established businesses, special abilities of certain kinds, will become richer for it and find increased opportunities;
  • those who have only their own labor will be come poorer, and find it harder to get ahead --
    • first, because it will take more capital to buy land or to get into business; and
    • second, because as competition reduces the wages of labor, this capital will be harder for them to obtain.
What, for instance, does the rise in land mean? Several things, but certainly and prominently this: that it will be harder in future for a poor man to get a farm or a homestead lot. In some sections of the State, land which twelve months ago could have been had for a dollar an acre, cannot now be had for less than fifteen dollars. In other words, the settler who last year might have had at once a farm of his own, must now either go to work on wages for some one else, pay rent or buy on time; in either case being compelled to give to the capitalist a large proportion of the earnings which, had he arrived a year ago, he might have had all for of himself. And as proprietorship is thus rendered more difficult and less profitable to the poor, more are forced into the labor market to compete with each other, and cut down the rate of wages -- that is, to make the division of their joint production between labor and capital more in favor of capital and less in favor of labor.

And so in San Francisco the rise in building lots means, that it will be harder for a poor man to get a house and lot for himself, and if he has none that he will have to use more of his earnings for rent; means a crowding of the poorer classes together; signifies courts, slums, tenement-houses, squalor and vice.

San Francisco has one great advantage -- there is probably a larger proportion of her population owning homesteads and homestead lots than in any other city of the United States. The product of the rise of real estate will thus be more evenly distributed, and the great social and political advantages of this diffused proprietorship cannot be over-estimated. Nor can it be too much regretted that the princely domain which San Francisco inherited as the successor of the pueblo was not appropriated to furnishing free, or almost free, homesteads to actual settlers, instead of being allowed to pass into the hands of a few, to make more millionaires. Had the matter been taken up in time and in a proper spirit, this disposition might easily have been secured, and the great city of the future would have had a population bound to her by the strongest ties-a population better, freer, more virtuous, independent and public spirited than any great city the world has ever had. ... read the whole article

Charles B. Fillebrown: A Catechism of Natural Taxation, from Principles of Natural Taxation (1917)

Q56. How would it affect the man who owns the house he lives in?
A. In nearly every case it would reduce his taxes. Roughly speaking, his taxes will be less or greater in proportion as his house is worth more or less than his land. ... read the whole article

Edward Dodson: Owning Land: Key to Wealth Building?

Mason Gaffney: Geoism, Recession and Control of Monopolies

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

William F. Buckley, Jr.: Home Dear Home

... So why is the cost of housing so high?

We learn that the average new house nationwide now sells for nearly $300,000. The writer tells us, "I asked (a builder) what our children — my kids are both under 8, I told him — would be paying when they're ready to buy.

"'They're going to live with us until they're 40,' (the builder) said matter-of-factly. 'And when they have their second kid, then we'll finally kick them out and make them pay for the house that we paid for. And that house will cost them 45 to 50 percent of their income.'"

Such data are dismaying, but perspective helps. "In Britain," the builder explains, "you pay seven times your annual income for a home; in the U.S. you pay three and a half." The Brits get 330 square feet per person in their homes; Americans, 750 square feet. But choice parts of the United States face "build-out." Consider New Jersey. It currently averages 1,165 people per square mile — denser than India (914) and Japan (835).

And we confront, finally and inevitably, the question: What is to be done about it?

Almost without exception, housing specialists concur, high home prices are owing to zoning. Twenty years ago, in many quarters of the country, one year would go by before the political authority would permit a developer to begin housing construction. In New Jersey, that interval now approaches eight years. Delays of that kind have the effect of shrinking the amount of land on which houses can be constructed. We get the inflated costs so familiar. "(Some authorities) used sample prices from 25 areas to show that the cost of housing in a metropolitan area appears to be in direct correlation to its degree of zoning ordinances," Gertner writes.

This is a politically remote source of trouble. People who have to wait for a zoning agency to change its conventions, regulations, traditions and idiosyncrasies will be very old before they acquire a new home.

Henry George, the eminent social philosopher of a century ago, turned the attention of planners and economists, however briefly, to the indefeasible factor of land scarcity. Capital and labor can increase; land cannot. ... read the whole column

Jeff Smith and Kris Nelson: Giving Life to the Property Tax Shift (PTS)

John Muir is right. "Tug on any one thing and find it connected to everything else in the universe." Tug on the property tax and find it connected to urban slums, farmland loss, political favoritism, and unearned equity with disrupted neighborhood tenure. Echoing Thoreau, the more familiar reforms have failed to address this many-headed hydra at its root. To think that the root could be chopped by a mere shift in the property tax base -- from buildings to land -- must seem like the epitome of unfounded faith. Yet the evidence shows that state and local tax activists do have a powerful, if subtle, tool at their disposal. The "stick" spurring efficient use of land is a higher tax rate upon land, up to even the site's full annual value. The "carrot" rewarding efficient use of land is a lower or zero tax rate upon improvements. ...

First-time home buyers make out like bandits. They'd pay a higher land dues to their community but lower total taxes to government, a lower price to the seller, and a lower mortgage to the lender. Is it fair that one group should benefit so prodigiously? Yes. In many US cities, renters now outnumber owners. High rates of tenancy, as shown in Goldschmidt's 1940s study of the Central California towns Arvin and Dinuba, engender apathy and indifference, which are bad for democracy, community involvement, street safety, and environmental protection. The sooner young families can become homeowners, the better off all members of society will be. ...

Mortgage lending rates are a subtle way of disguising rent as interest, of turning buyers into temporary yet serial tenants (since people move so often and the first five years of mortgage payment is nearly pure interest). Land dues are a way to keep locally generated social values circulating in the local community. ...

A big problem needs a big solution which in turn needs a matching shift of our prevailing paradigm. Geonomics -- advocating that we share the social value of sites and natural resources and untax earnings -- does just that. Read the whole article

Jeff Smith: What the Left Must Do: Share the Surplus
As Goldschmidt showed in his classic 1940s study of two towns in California’s Central Valley – Arven and Dinuba (one town of owner occupants, the other a one-company town) – where people have a stake, they vote, attend hearings, and use parks and libraries. Government responds, filling potholes, funding schools, etc. Improving people’s lot in life increases their participation in civic affairs.

The reform of collecting ground rent in lieu of taxing buildings lowers the cost of housing, which raises the rate of owner occupancy. When Pittsburgh PA taxed land six times their rate on buildings, their affordable housing, stable neighbourhoods, and low crime rate won the once strong union town the title of “America’s Most Liveable City” twice in the mid 1980s. Succumbing to pressure applied by speculators, in 2000 the Steel City returned to the conventional property tax. Construction starts in 2001 in the rest of Pennsylvania fell 1.5%; in Pittsburgh, 38.1%. For 2001 and 2002, compared to 1999 and 2000, building permits declined 21.3% while nationwide they rose 6.7% (Incentive Taxation, 2003 June, Henry George Fdn). Read the whole article

Frank Stilwell and Kirrily Jordan: The Political Economy of Land: Putting Henry George in His Place

However, it is also pertinent to note that land ownership today is significantly less concentrated than in George’s time, with around 70% of Australians being home-owners (including those in the process of purchasing their homes with mortgage finance). According to the recent Household, Income and Labour Dynamics in Australia (HILDA) Survey, home-ownership is unevenly distributed between income groups, with 56% of households in the lowest income quintile owning their own homes, compared to 85% of those in the highest quintile (Kohler et al, 2004: 10). But this distributional inequality is significantly less marked than the ownership of other assets, such as shares for example. Of course, most land ownership for residential purposes involves very small tracts, typically only about one-sixth of an acre in the suburban areas of the major cities. Flat-owners, growing annually as a proportion of the population, usually own less land and do so more indirectly through strata property titles. So the form of land tax (that is, whether flat rate or on a progressive scale, whether applying to all land or only that above a ‘threshold’ value, or exempting owner-occupied property) becomes crucial to its effectiveness as a mechanism for tackling distributional inequality. It is also crucial to the political acceptability of land tax reform. ... read the whole article

Peter Barnes: Capitalism 3.0 — Chapter 7: Universal Birthrights (pages 101-116)

Fast-forward to the twenty-first century. Land is no longer the basis for most wealth; stock ownership is. But Jefferson’s vision of an ownership society is still achievable. The means for achieving it lies not, as George W. Bush has misleadingly argued, in the privatization of Social Security and health insurance, but in guaranteeing an inheritance to every child. In a country as super-affluent as ours, there’s absolutely no reason why we can’t do that. (In fact, Great Britain has already done it. Every British child born after 2002 gets a trust fund seeded by $440 from the government — $880 for children in the poorest 40 percent of families. All interest earned by the trust funds is tax-free.)

Let me get personal for a minute. My parents weren’t wealthy; both were children of penniless immigrants. They worked hard, saved, and invested — and paid my full tuition at Harvard. Later, they helped me buy a home and start a business. Without their financial assistance, I wouldn’t have achieved the success that I have. I, in turn, have set up trust funds for my two sons. As I did, they’ll have money for college educations, buying their own homes, and if they choose, starting their own businesses — in other words, what they need to get ahead in a capitalist system.

As I hope my sons will be, I’m extremely grateful for my economic good fortune. At the same time, I’m painfully aware that my family’s good fortune is far from universal. Many second-, third-, and even seventh-generation Americans have little or no savings to pass on to their heirs. Their children may receive their parents’ love and tutelage, but they don’t get the cash needed nowadays for a first-rate education, a down payment on a house, or a business venture. A few may rise because of extraordinary talent and luck, but the majority will spend their lives on a treadmill, paying bills and perhaps tucking a little away for old age. Their sons and daughters, in turn, will face a similar future.

It doesn’t have to be this way. One can imagine all sorts of government programs that can help people advance in life — free college and graduate school, GI bills, housing subsidies, and so on. Such programs, as we know, come and go, and I prefer more rather than less of them. But the simplest way to help people advance is to give them what my parents gave me, and what I’m giving my sons: a cash inheritance. And the surest way to do that is to build such inheritances into our economic operating system, much the way Social Security is.

When Jefferson substituted pursuit of happiness for Locke’s property, he wasn’t denigrating the importance of property. Without presuming to read his mind, I assume he altered Locke’s wording to make the point that property isn’t an end in itself, but merely a means to the higher end of happiness. In fact, the importance he and other Founders placed on property can be seen throughout the Constitution and its early amendments. Happiness, they evidently thought, may be the ultimate goal, but property is darn useful in the pursuit of it.

If this was true in the eighteenth century, it’s even truer in the twenty-first. The unalienable right to pursue happiness is fairly meaningless under capitalism without a chunk of capital to get started.

And while Social Security provides a cushion for the back end of life, it does nothing for the front end. That’s where we need something new.

A kitty for the front end of life has to be financed differently than Social Security because children can’t contribute in advance to their own inheritances. But the same principle of intergenerational solidarity can apply. Consider an intergenerational transfer fund through which departing souls leave money not just for their own children, but for all children. This could replace the current inheritance tax, which is under assault in any case. (As this is written, Congress has temporarily phased out the inheritance tax as of 2010; a move is afoot to make the phaseout permanent.) Mind you, I think ending the inheritance tax is a terrible idea; it’s the least distorting (in the sense of discouraging economic activity) and most progressive tax possible. It also seems sadly ironic that a nation that began by abolishing primogeniture is now on the verge of creating a permanent aristocracy of wealth. That said, if the inheritance tax is eliminated, an intergenerational transfer fund would be a fitting substitute.

The basic idea is similar to the revenue recycling system of professional sports. Winners — that is, millionaires and billionaires — would put money into a kitty (call it the Children’s Opportunity Trust), to be divided among all children equally, so the next round of economic play can be more competitive. In this case, the winners will have had a lifetime to enjoy their wealth, rather than just a single season. When they depart, half their estates, say, could be passed to their own children, while the other half would be distributed among all children. Their own offspring would still start on third base, but others would at least be in the game.

Under this plan, no money would go to the government. Instead, every penny would go back into the market, through the bank or brokerage accounts (managed by parents) of newborn children. I’d call these new accounts Individual Inheritance Accounts; they’d be front-of-life counterparts of Individual Retirement Accounts. After children turn eighteen, they could withdraw from their accounts for further education, a first home purchase, or to start a business.

Yes, contributions to the Children’s Opportunity Trust would be mandatory, at least for estates over a certain size (say $1 or $2 million). But such end-of-life gifts to society are entirely appropriate, given that so much of a millionaire’s wealth is, in reality, a gift from society. No one has expressed this better than Bill Gates Sr., father of the world’s richest person. “We live in a place which is orderly. It’s a place where markets work because there’s legal structure to support them. It’s a place where people can own property and protect it. People who have the good fortune, the skill, the luck to become wealthy in our country, simply have a debt to the source of their opportunity.”

I like the link between end-of-life recycling and start-of-life inheritances because it so nicely connects the passing of one generation with the coming of another. It also connects those who have received much from society with those who have received little; there’s justice as well as symmetry in that.

To top things off, I like to think that the contributors — millionaires and billionaires all — will feel less resentful about repaying their debts to society if their repayments go directly to children, rather than to the Internal Revenue Service. They might think of the Children’s Opportunity Trust as a kind of venture capital fund that makes startup investments in American children. A venture capital fund assumes nine out of ten investments won’t pay back, but the tenth will pay back in spades, more than compensating for the losers. So with the Children’s Opportunity Trust. If one out of ten children eventually departs this world with an estate large enough to “pay back” in spades the initial investment, then the trust will have earned its keep. And who knows? Some of those paying back might even feel good about it. ... read the whole chapter


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Wealth and Want
... because democracy alone hasn't yet led to a society in which all can prosper