|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|
Henry George: Justice the Object -- Taxation the Means (1890)
Why, look at it here today, in this new country, where there are as yet only 65 millions of us scattered over a territory that in the present stage of the arts is sufficient to support in comfort a thousand millions; yet we are actually thinking and talking as if there were too many people in the country. We want more wealth. Why don't we get it? Is any factor of production short? What are the factors of production? Labour, capital, and land; but to put them in the order of their importance: land, labour, capital. We want more wealth; what is the difficulty? Is it in labour; is there not enough labour? No. From all parts of the United States we hear of what seems like a surplus of labour. We have actually got to thinking that the man who gives another employment is giving him a boon. Is there any scarcity of capital? Why, so abundant is capital today that United States bonds, bought at the current rate, will only yield a fraction over 2% per annum. So abundant is capital that there can be no doubt that a government loan could be floated today at 2% and little doubt but that it would soon command a premium. So abundant is capital that all over the country it is pressing for remunerative employment.
If the limitation is not in labour and not in capital, it must be in land. But there is no scarcity of land from the Atlantic to the Pacific, for there you will find unused or only half-used land. Aye, even where population is densest. Have you not land enough in San Francisco? Go to that great city of New York, where people are crowded together so closely, the great majority of them, that physical health and moral health are in many cases alike impossible. Where, in spite of the fact that the rich men of the whole country gravitate there, only four per cent of the families live in separate houses of their own, and sixty-five per cent of the families are crowded two or more to the single floor — crowded together layer on layer, in many places, like sardines in a box. Yet, why are there not more houses there? Not because there is not enough capital to build more houses, and yet not because there is not land enough on which to build more houses.
Today one half of the area of New York City is unbuilt upon — is absolutely unused. When there is such a pressure, why don't people go to these vacant lots and build there? Because though unused, the land is owned; because, speculating upon the future growth of the city, the owners of those vacant lots demand thousands of dollars before they will permit anyone to put a house upon them. What you see in New York, you may see everywhere. Come into the coalfields of Pennsylvania; there you will frequently find thousands and thousands of miners unable to work, either locked out by their employers, or striking as a last resource against their pitiful wages being cut down a little more. Read the entire article
Rev. A. C. Auchmuty: Gems from George, a themed collection of excerpts from the writings of Henry George (with links to sources)
Louis Post: Outlines of Louis F. Post's Lectures, with Illustrative Notes and Charts (1894) — Appendix: FAQ
Nic Tideman: Basic Tenets of the Incentive Taxation Philosophy
The Proper Disposition of Returns to Different Factors of Production
The idea that the rent of land is properly collected by governments is an example of the more general idea that it is important to distinguish the different "factors of production" identified by classical political economy. The return to each factor has a proper destination.
Replacing Existing Taxes
When we say that the appropriate recipient of rent is the public treasury, it should be understood that this is not in addition to existing sources of public revenue, but rather instead of existing sources of public revenue.
While one might call such fees "taxes," we consider that designation inappropriate, because the word "tax" connotes an exaction from someone of something to which he or she has a just claim, and we deny that there are such just claims with respect to land. We expect that the collection of fees for the full value of opportunities assigned by governments would provide adequate revenue for all necessary government expenditures. ... Read the whole article
Karl Williams: Social Justice In Australia: INTERMEDIATE KIT
We've just seen how returns from land are, by nature, monopolistic and, by rights, should be returned to the community. But how do we calculate this amount?Michael Hudson: The Lies of the Land: How and why land gets undervalued
WHO GETS THE COCONUTS?
It's perhaps best illustrated by the Robinson Crusoe scenario, where he finds himself alone on a desert island. Rob naturally settles on the best available land which, for argument's sake, can produce 20 coconuts per acre per month. Along comes Man Friday, who gets the second-best land producing 18 coconuts per acre. This best, freely-available land of Friday is called the marginal land and, as we'll see, determines both the level of wages and that of rent.
For how much could Rob rent out his land - 2 coconuts or 20 coconuts per acre? Friday would only be prepared to pay 2, because he can already get 18 from his. So here's our first definition, that of the Law of Rent: The application of labour and capital equipment being equal, the rent of land is determined by the difference between the value of its produce and that of the least productive land in use. So if Man Saturday comes along (the next day?!) and finds that the best available land can only produce 15 coconuts per acre, Rob could rent his land out to Saturday for 5 coconuts per acre, and Friday for 2.
What then determines the level of wages? When Friday came along and could work land yielding 18 coconuts per acre in a month, then he wouldn't accept wages offered by Rob for less than 18 coconuts. But when Saturday arrived, suddenly Friday could only command 15 per month, because Rob knows that the going rate (that applicable to Saturday at the margin) is only 15. So here we have the Law of Wages, which is the corollary of the law of rent: Wages are the reward that labour can obtain on marginal land, i.e. the most productive land available to it without paying rent.
Of course it all gets more complicated by technology, trade unions, immigration, the existence of a pool of unemployed, personal preferences, levels of education etc., but these strong underlying laws always hold. But let's now tie up the factors of production. Rent is the return to land, wages are the return to labour, and interest is the return to capital. The law of interest can be stated thus: Interest is the return that the use of capital equipment can obtain on marginal land, i.e. the most productive land available to it without paying rent. ... Read the entire article
Turning land-value gains into capital gains
Hiding the free lunch
Two appraisal methods
How land gets a negative value!
Where did all the land value go?
A curious asymmetry
Site values as the economy's "credit sink"
Immortally aging buildings
Real estate industry's priorities
THE FREE LUNCH Its cost to citizens Its cost to the economy
Turning land-value gains into capital gains
YOU MAY THINK the largest category of assets in this countrly is industrial plant and machinery. In fact the US Federal Reserve Board's annual balance sheet shows real estate to be the economy's largest asset, two-thirds of America's wealth and more than 60 percent of that in land, depending on the assessment method.
Most capital gains are land-value gains. The big players do not want their profits in rent, which is taxed as ordinary income, but in capital gains, taxed at a lower rate. To benefit as much as possible from today's real estate bubble of fast rising land values they pledge a property's rent income to pay interest on the debt for as much property as they can buy with as little of their own money as possible. After paying off the mortgage lender they sell the property and get to keep the "capital gain".
This price appreciation is actually a "land gain", that is, it's not from providing start-up capital for new enterprises, but from sitting on a rising asset already in place, the land. Its value rises because neighbourhoods are upgraded, mortgage money is ample, and rezoning is favorable from farmland on the outskirts of cities to gentrification of the core to create high-income residential developments. The potential capital gain can be huge. That's why developers are willing to pay their mortgage lenders so much of their rent income, often all of it.
Of course, investing most surplus income and wealth in land has been going on ever since antiquity, and also pledging one's land for debt ("mortgaging the homestead") that often led to its forfeiture to creditors or to forced sale under distress conditions. Today borrowing against land is a path to getting rich -- before the land bubble bursts. As economies have grown richer, most of their surplus is still being spent acquiring real property, both for prestige and because its flow of rental income grows as society's prosperity grows. That's why lenders find real estate to be the collateral of choice.
Most new entries into the Forbes or Fortune lists of the richest men consist of real estate billionaires, or individuals coming from the fuels and minerals industries or natural monopolies. Those who have not inherited family fortunes have gained their wealth by borrowing money to buy assets that have soared in value. Land may not be a factor of production, but it enables its owners to assert claims of ownership and obligation, i.e., rentier income in the forms of rent and interest. ...
Hiding the free lunch
BAUDELAIRE OBSERVED that the devil wins at the point where he convinces humanity that he does not exist. The Financial, Insurance and Real Estate (FIRE) sectors seem to have adopted a kindred philosophy that what is not quantified and reported will be invisible to the tax collector, leaving more to be pledged for mortgage credit and paid out as interest. It appears to have worked. To academic theorists as well., breathlessly focused on their own particular hypothetical world, the magnitude of land rent and land-price gains has become invisible. But not to investors. They are out to pick a property whose location value increases faster rate than the interest charges, and they want to stay away from earnings on man-made capital -- like improvements. That's earned income, not the "free lunch" they get from land value increases.
Chicago School economists insist that no free lunch exists. But when one begins to look beneath the surface of national income statistics and the national balance sheet of assets and liabilities, one can see that modern economies are all about obtaining a free lunch. However, to make this free ride go all the faster, it helps if the rest of the world does not see that anyone is getting the proverbial something for nothing - what classical economists called unearned income, most characteristically in the form of land rent. You start by using a method of appraising that undervalues the real income producer, land. Here's how it's done. ...
Site values as the economy's "credit sink"
TO CLARIFY MATTERS it may help to think of "land" in the broad sense of comprising all elements of property value that cannot be explained in terms of capital investment and its profits. This category includes the site's locational value. Site value is the essence of long-term planning by real estate developers at the local level. But an examination of the economy-wide figures shows property prices to be determined by broad macroeconomic factors, headed by the availability of mortgage credit. Real estate is the major recipient of bank credit, and price waves or cycles are determined largely by the supply of mortgage loans and their interest rates.
Stated the other way around, the costs of reproducing buildings and structures are "sunk costs". Price trends are determined not by yesterday's supply prices but by today's market demand as supplemented by mortgage credit. If anything, buildings, plant and equipment wear out and depreciate, but their obsolescence is offset (and indeed, usually more than offset) by the rise in their site value. This rise reflects the desirability of real estate as an investment vehicle, the prime recipient of the economy's savings and source of new credit.
After 1990, for instance, when commercial banks found real estate to be largely "loaned up," they reduced the rates paid to depositors, as they did not have an alternative use for these deposits. The allocation of America's savings shifted away from banks and their real estate lending to other forms of investment as depositors began to shift their savings into money-market funds invested mainly in bonds, and then into mutual funds invested largely in stocks. This shift was largely responsible for the stock market's remarkable takeoff, substantially in advance of the real estate recovery.
One would think that land prices would play a central role in modern business cycle analysis, if only because a large share of stock market value consists of corporately owned real estate. Since the late 1940s "concealed value" in the form of properties carried at outdated book values reflecting low acquisition prices was a major factor behind corporate raiding, mergers and acquisitions. Aggressive firms employed accountants to pour over the Stock Exchange's 10K reports searching for such hidden values. But macroeconomists lacked the statistics needed to follow how the business cycle affected land prices, that is, the "non-building" aspect of real estate value. This made it difficult to provide meaningful analyses of corporate net worth and the causes of its rise and fall.
How, then, can business cycle statistics be collected without land values as a prime indicator? After all, it is the inflation of real estate asset prices that provides real estate owners with the collateral to justify further borrowing from banks to acquire yet more property. And by the same token, falling land prices extinguish the collateral that backs the banking system's savings, leading to financial insolvency.
The real estate cycle is essentially a credit cycle. Traditionally, land acquisition has been the object of recycling savings and extending new credit. Site values are the economy's "credit sink" as well as its ultimate "savings sink". This is why real estate values reflect the economy's rising and declining financial surplus. Profits fall as business upswings approach their crest and the economic surplus available for saving declines. A lower volume of loanable funds means that less credit is available to real estate developers, speculators and homebuyers, curtailing their ability to bid up prices with borrowed funds. Borrowing to buy buildings is discouraged by the fact that when interest rates rise, more of the rental income must be paid to lenders.
In sum, just as real estate lending fuels land speculation, so the withdrawal of such credit leaves property markets to decline, sometimes with a crash, as occurred in Japan after 1990 when its financial bubble burst. Should this rise and fall be attributed to buildings or to land? It seems to me that inasmuch as the price rise and fall is homogeneous, applying to parking lots as well as to skyscrapers, we should attribute it to land. This achieves the logical symmetry of applying to the downturns as well as upturns in the real estate cycle. ...
Immortally aging buildings
INCOME TAX LIABILITY may be minimized in two ways.
fiscal privilege has created a phantom real estate economy.
Buildings acquire death-defying lives, metamorphosing time and again
for the purpose of enabling their owners to avoid paying income
taxes. For commercial real estate investors as a whole, the
depreciation of buildings has made commercial real estate investment
largely exempt from the income tax. Homeowners are not permitted to
charge depreciation on their own residences, but only on buildings
that they rent out.
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