Dissipation of Rent
Mason Gaffney: A Cannan Gets the Range
Edwin Cannan (1861-1935) is best known for his 1904 edition of The Wealth of Nations. His other best-known work is a History of Theories of Production and Distribution, 1893. His book most relevant here is History of Local Rates in England, 1896. He was Professor at the London School of Economics, 1907-26, although a large inherited fortune let him reside at Oxford and dabble at London part-time. He criticized both Marshall and Keynes, although without much effect. His later work drew little enthusiasm.
In 1907 Cannan fired off a round at local rating of site values. It hit home. First he recited the logic of what today we call the "tragedy of the commons" (it was common coin long before Garrett Hardin). Then he pointed out that a city taxing only site values to provide free public services would attract too many people and too much capital. A city is an "open economy," free to immigration of everything but land, something like an open range or fishery. Even if all cities tax only site values, cities with more rents per head may support public services at higher levels, and so attract immigrants. This distorts locational decisions, attracting people to jobs of lesser productivity where they may gain from better public services. This is "Cannan's Law."
There are three bad results from Cannan's Law.
- One is an uneconomical distribution of population, as cities with more rentable lands attract more of mobile labor and capital than they should. That is not to deny that people are attracted to New York for good economic reasons. Rather, it is that distributing economic rent freely to all comers attracts people above and beyond the good economic reasons. Thus, people move to New York to earn high wages, well and good; but in addition they may receive a high quality college education from CCNY, the "poor man's Harvard," paid from local property taxes. In the glory days of the Mesabi iron range, children of immigrant Finnish miners there in Hibbing, Minnesota, enjoyed some of the best schooling in the country, paid from local property taxes on iron ore. In Alaska and Alberta, workers receive high wages to overcome the harsh climate, remote locations, and other disamenities. That is economically sound, but in addition they get a cash dividend each year from the overflowing oil revenues. All that tends to draw more people, like flies swarming to fresh pie, than the wages warrant.
- A second bad result is what economists call "dissipation of economic rent." To make it simple, consider a rich but crowded fishery where another fishing boat added to the crowd will not raise the total catch at all, but simply take fish from other crews who were already there. Interlopers will keep entering until the average boat and crew just make costs, leaving no net rent for anyone. This has long been standard economic lore. As Cannan writes, if a locality uses its rents to benefit all its "inhabitants," people will flock to the richest places until there is no further gain to immigrants because they have wiped out all the rent.
- A third bad result of Cannan's Law is to lower the incentive of local governments to provide public services that are open to all comers. It fosters local institutions and attitudes that are harshly hostile to newcomers and outsiders, especially to the poor, young, homeless, hungry, and vagrant. As Woody Guthrie, the Okie bard, sang of California, "Believe it or not, you won't find it so hot, if you ain't got that do-re-mi." That was in 1935; it is truer today.
Cannan goes on to say that if we are to tax site values, the tax should be national. It is not clear how sincere he is -- his style is carping, condescending, elitist and unsympathetic. Still, his logic implies it, and he does say it, however grudgingly. On this point the great Alfred Marshall agreed, in a positive spirit (positive, that is, for Marshall, a famously "two-handed" economist). ... read the whole article
Mason Gaffney: Rent, Taxation, Dissipation and Federalism
A. Dissipation means waste and destruction or suppression.
It means incurring needless costs, or aborting surplus-yielding activities. Redistribution is not, per se, dissipation. No incentive is required to produce land, or able to make more be created, so who collects rent is a distributive choice. However the manner of collection may twist incentives and interfere with efficient use; so may the method of tenure, or tenure-creation.
B. How rent is dissipated.
Open access, tragedy of commons. Arthur Young, Scott Gordon, Garrett Hardin, et al. Simple cases like open range, fisheries, public parks and beaches, freeways: a principle easily perceived (although not usually by undergraduates).
C. Open access followed by tenure: rent-seeking institutions.
Rent is dissipated through prematurity of investments. Squatters' Rights (Preemption Act of 1841), and residence requirement of Homestead Act (1862), traditional examples. Prior appropriation doctrine of water rights, simple example. Air routes; broadcast licenses; extending utility franchises; zoning; offset rights to pollute; other modern examples.
Offset rights to pollute are doubly effective in dissipating rent. By generating a nuisance and lowering the value of surrounding land, a polluter is rewarded by receiving a valuable vested right to continue the nuisance in perpetuity, or sell it.
Internationally, rent-seeking via warfare, or big-stick policies threatening warfare, may be seen to dissipate rent when we deduct the public cost from the private gain.
- Open access to exploration, followed by claims, as in minerals act of 1872.
- Noncompetitive leasing (free entry, first-come-first-served) as in Alaska until fairly recent times.
- Open access for preliminary forms of exploration, followed by leases for exploratory drilling.
- Leasing on demand ("nomination"), i.e. at the convenience of the first potential lessee, rather than the lessor. In conjunction with the bonus bid system, leasing on demand puts a premium on financial or front-money power as the triggering force. It also puts a premium on sequestering information and treating it as proprietary, and forcing as much duplication of effort as there are competitors.
- Subsidizing exploration. A subsidy, almost by definition, causes waste in the amount of the subsidy, by causing people to spend more to produce things than they are worth. With minerals, subsidies cause submarginal lands to be developed. Submarginal in this case generally means "premature," since rising scarcity probably means the submarginal will eventually become superior.
- Direct subsidies
- Tax preferences (a long list). I premise the tax-subsidy concept, i.e. that those who pay less taxes on the supposed principle of taxation are being subsidized by others who pay more.
- Unlimited license to acquire leaseholds. Gale Johnson, Stephen Cheung and others have shown the rational landlord may make a system of share tenancy work only if he limits the land each tenant may have. State and Federal lessors generally impose royalties and other charges on a unit-of-production basis, so their lessees are share-croppers; but they put no upper limit on leasehold acquisition.
There are time limits on holding without producing, but these may be met by token compliance.
- Leverage of private investment over public investment and public services.
- Tolerating environmental damage without compensation. Minerals exploration, transportation, refining and consumption all receive heavy subsidies of this kind. (However, cf. #14, Goldplating.)
- Subsidizing consumption.
- Providing highways below cost.
- Underpricing gas and power at the margins, by melding and cross-subsidy.
- Subsidizing energy-intensive water projects. Etc., not quite ad infinitum.
Slowing down use and extraction of minerals once discovered. In tandem with incentives to premature exploration, this generates an unduly capital-freezing industry. It attracts capital too soon, and releases it too slowly. In the Austrian sense, it becomes too capital-intensive.
Freezing up capital is not free. To justify each year capital is frozen, interest must be paid. This wasted interest comes out of rent, in the form of lower bids for leaseholds.
- Severance taxation
- MER-based regulation of production
a. Other regulations that mandate low-grading of subeconomic residuals.
b. Cartel behavior
1. Impact of extreme pro-development psychology
1. One man's cost is another man's income, and they cancel out, so there are no social costs.
2. Gross product rather than net gain is the objective function a State should maximize.
3. Export industries are more basic, and have multipliers.
4. Small firms depend on large ones, rather than all activities are mutually supportive.
5. Discovery is the same as creating land.
6. Discovery creates value by itself; other activities are dependent.
7. Economies of scale are all that matter, and all activities are like newspaper publishing in this regard. This does tend to affect the attitude of editors who sway opinion.
2. Mandatory goldplating to appease organized groups.
Environmental protection, like other good things, may be carried to excess in specific cases like the Wilmington Basin. That is no basis for generalizing, however, and it is obviously underfinanced in other cases like tanker spillage.
3. Overextension of subeconomic feeder lines, cross-subsidized.
4. Selling at the wrong time. A good deal of early Alaska oil was sold, not that long ago, for $1/bbl netback to the wellhead.
5. Looting. Looting per se is only redistributive in the short run, but its destructive incentive effects are obvious.
Looting is sporadic, but the total ongoing cost of guarding against crime is an enormous drain.
6. Rent control in cities; price control at the wellhead. Both these are redistributive in intent and effect, but highly destructive of good incentives.
Wellhead price control of gas has been turned into a subsidy for exploring for new gas, via melding costs in gas rate regulation.
7. Taxes and lease provisions that twist incentives.
IV. Dissipating rent via public spending
A. Taxes and lease provisions need not twist incentives.
1. At worst taxes destroy incentives only at the margins: the "wedge effect."
2. Taxes may be structured to zero in on taxable surplus while sparing the margins. An obvious and well-discussed case is a tax based on land value, or putative rent, imposed as a flat charge unaffected by landowner production.
3. Taxes in excess of benefits received have positive incentive effects on landowners.
a. The wealth effect
b. The liquidity or cash-drain effect.
c. The effect of offsetting credit discrimination and rationing (land is cheaper to buy, hence less credit is needed, and taxes are or may be non-discriminatory among potential owners.)
So it is not taxation per se that dissipates rent, even though ill-structured taxes do destroy some rent.
B. Public spending of tax proceeds may dissipate rent.
Jurisdictions with higher rents/capita may support public services at a higher level, and so attract immigrants. This distorts locational decisions, attracting people to low-productivity, low-paying jobs where they may benefit from higher public services.
C. History of recognition of this spending effect
We are not the first to have noticed!
1. James Madison. U.S. Constitution blocked direct taxes on land at Federal level, allowed it at state and local. Also guaranteed free migration among and within states.
Madison's rationale was the self-interest of local voters would then keep them from redistributing rents.
2. Edwin Cannan. Around 1900 the ideas of Henry George were powerful in the U.K., and adopted by the Liberal Party. George, of course, spoke and wrote in favor of rent-sharing via tax and spending policy. Cannan wrote in the EJ that heavy local taxes on land rents, used to provide superior public services, would distort locational incentives and cause overpopulation in London.
This is a tragedy-of-commons once-removed. Land remains tenured, but schools, parks, welfare, streets, libraries, public restrooms, public ambiance, etc. are open to all.
Alfred Marshall seconded Cannan, shifting the argument however to the suburbs which he thought would become overpopulated. Marshall, by the way, came around to favoring a national land tax, in spite of Stigler's resurrection of his acrimony with travelling agitator Henry George at Oxford.
Neither George, Cannan nor Marshall got into exclusionary local zoning, a later and highly relevant development.
3. Half-brothers Austen and Neville Chamberlain, arch-foes of land taxation, adopted the Madison principle of stifling it by relegating it to local jurisdictions only, letting forces of local particularism limit its use.
4. Upton Sinclair learned the force of this principle in 1933. In his How I ran for Governor of California and How I got Licked he reports his EPIC campaign nearly won until the enemy found the formula of anti-Okie-ism.
5. B.C. offsets the magnet of Vancouver's location and public facilities by costly Provincial efforts to subsidize less attractive cities at Vancouver's expense. Nationally, Canada does the same with Alberta oil revenues.
Ironically, Canada's effort is still too little to placate Quebec, giving a notion of the limits of purely fiscal measures to overpower cultural factors. While this may discourage the purely allocative economist, it contains a seed of hope for those interested in ethics and justice, indicating narrow pecuniary self-interest is not everything. There is some pleasure in contemplating a people who will not sell out so cheaply (and perhaps not at all).
6. Alaska, of course, lost out to the ghost of Madison when it gave a social dividend to all residents with five years in the State, and was successfully sued (Zobel v. Williams, 102 USSC 2309, 1982).
7. Etc. A universal principle has universal illustrations. ... Read the whole article
Mason Gaffney: The Taxable Surplus of Land: Measuring, Guarding and Gathering It
Common Property in Land is Compatible with the Market Economy.You can enjoy the benefits of a market economy without sacrificing your common rights to the land of Russia. There is no need to make a hard choice between the two. One of the great fallacies that western economists and bankers are foisting on you is that you have to give up one to enjoy the other. These counselors work through lending and granting agencies that seduce you with loans and grants to learn and accept their ideology, which they variously call Neo-Classical Economics, or "monetarism," or "liberalization." It is glitter to distract you and pave the way for aliens to acquire and control your resources.
Not only can you have both common land and free markets, you can't have one without the other. They go together, like love and marriage. You need market prices to help identify land's taxable surplus, which is the net product of land after deducting the human costs of using it. At the same time, you must support government from land revenues to have a truly free market, because otherwise you will raise taxes from production, trade, and capital formation, interfering with free markets. If you learn this second point, and act on it, you will have a much freer market than any of the OECD nations that now presume to instruct you, and that are campaigning vigorously to make all nations in the world "harmonize" their taxes to conform with their own abysmal systems.The very people who gave us the term laissez-faire -- the slogan at the core of a free market economy -- made communizing land rents a central part of their program. These were the French economistes of the 18th Century, sometimes called "Physiocrats," who were the tutors of Adam Smith, and who inspired land reforms throughout Europe. The best-known of them were François Quesnay and A.R. Jacques Turgot, who championed land taxation. They accurately called it the "co-proprietorship of land by the state."
Nic Tideman: The Constitutional Conflict Between Protecting Expectations and Moral Evolution
The Russian Mafia today can be understood, in many cases, as promoting efficient resource allocation by preventing the dissipation of rent through competition. For example, Old Arbat Street in Moscow was for many years a place where artists would sell their wares to tourists. But to operate there, artists were required to pay the Mafia gang that controlled the street. The fees collected by the Mafia served to ration the space to an efficient number of artists. Without that rationing device, there would have been an excess of artists crowding the street and interfering with each other inefficiently. And people would have been getting up at 2:00 in the morning to get space before anyone else claimed it. In these circumstances, the Mafia action served to prevent the dissipation of the rent and did not reduce the net incomes of artists. If there were no public-good aspects of the provision of art, it could be argued that complete efficiency was achieved by this "spontaneous" private appropriation of rent.
The person who wishes to abolish such exploitative institutions as slavery, autocratic governments and Mafia protection schemes, without compensation for those who derive income from them, can be asked to explain why it is right to terminate these incomes without compensation, when the development of the institutions served to improve allocative efficiency.
The answer comes in two parts.