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.

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.

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.

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. 

To keep land common while shifting to a market economy, you simply use the tax system. Taxation is the form that common property takes in a monetary, market-oriented economy. To tax is to socialize. It's then just a simple question of what you will socialize through taxation, and how; but in the answers lie success or failure.

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."
Since their time we have learned to measure land values, and we have broadened the meaning of "land" to comprise all natural resources. Agrarians will be relieved, and may be surprised, that farmland ranks well down the list in terms of total market value. Thus, a land tax is not primarily a tax on farms; only the very best soils in the best locations yield much taxable surplus.
The most valuable land by far is city land. Ted Gwartney, a professional land valuer, is speaking to us about that. I have data showing that well over half the value of city real estate is the pure land value. In big, key cities, prices per unit of land go astonishingly high, dwarfing most other values by comparison. For example, at the height of the Japanese boom, in 1990, land prices in that great city rose so high that the appraised value of the land under the Imperial Palace in Tokyo was as great as all the land in California! At the same time, within California, most of the land value was in our cities, even though California is the premier farm state in the U.S.A. Urban land of such immense value makes a rich, rich tax base for you, or any nation.
Another natural resource (hence part of "land"), whose nature and value the mass of people are only slowly realizing, is the radio spectrum. In this age of communication its value is vaulting skywards even faster than the rockets launching the satellites that direct and relay signals through the spectrum. Each satellite requires a spectrum assignment, or it is nothing but space junk. One minor American entrepreneur, Craig McCaw, collected a bundle of spectrum rights for cell phones, and a few years ago sold them to AT&T for $12 billions. Then Mr. McCaw went partners with Bill Gates, perhaps the richest American, in a firm called Teledesic, to launch hundreds of satellites and amass radio spectrum rights around the entire world, including your part of the world, in the hope of dominating worldwide communications. Radio spectrum is a natural resource, and it belongs to the government, even in the capitalistic U.S.A. When Teledesic comes calling, under the auspices of our Vice President Al Gore, don't sell anything cheap! In fact, don't sell anything at all, but lease it for a limited time, so you may gain from future rises in value. And don't stint on the professional help you should hire to protect your interests: these lease contracts are complex, and are worth billions if you play your cards right.
Hydrocarbons are a third set of valuable resources. The values involved are gigantic. The recent merger of the Exxon and Mobil oil firms was valued at $260 billions, several times greater than the Russian annual budget. Why should private parties make off with all this natural value? Several nations, including some of your neighbors, support themselves entirely from these revenues. Norway pays for a lush welfare state from its oil revenues. Its reserves are so valuable that the mere change in their appraised value in several recent years has exceeded the entire GDP of Norway. And your oil reserves? If they match your production, they may be the largest in the world.
World oil prices are down this year, as you know, but there is another side to this. The devaluation of the ruble has raised the value of your oil in Russian terms, because the oil earns "hard" currency abroad. Your government has recognized this by imposing a special tax on the resulting "windfall," but we will see below (Sections 2,C and 2,D) that there is a much more effective way to tax resource rents.
The American state of Alaska holds down its other taxes by socializing part of its oil revenues, which otherwise would inure to a handful of the major stockholders of two corporations (ARCO and BP). Alaska not only holds down other taxes, it pays each resident - man, woman, and child - a social dividend of over $1,000 per year. Go thou and do likewise. Your expert, Dmitri Lvov from the Russian Academy of Sciences, a speaker at this meeting, has written that you could cover most of your national budget from your enormous production of oil and gas.  
Many third-world nations like Venezuela or Nigeria have fabulous mineral oil that they fail to exploit for their own people, letting sophisticated or ruthless foreign corporations, in tandem with weak or corrupt insiders, reap the gains. The question for Russia is whether to follow their bad example and become a poor resource-colony of the west, or whether to assert your own sovereignty over your own resources for the benefit of your own people. You need look no further than Norway for a model.
Other subsoil resources have great value, too. Many nations, even backward ones, gain large parts of their national revenue from "hardrock" minerals. Bolivia, Gabon, Jamaica, Liberia, New Caledonia, Papua-New Guinea, Zaire, and Zambia have raised over 25% of their budgets this way in recent years; Chile, Thailand and Malaysia have taken lesser, but substantial amounts. Saskatchewan, a Canadian Province, raises large revenues from potash and uranium; Minnesota, an American state, from iron ore; and so on. Some other nations fail to raise much revenue from fabulous minerals from which others profit, like S. Africa with its gold and diamonds, West Virginia with its coal, or Missouri with its lead mines and reserves. Russia is a treasure-house of untapped mineral wealth that you can and should tax to alleviate the condition of the Russian people.
In arid lands, water is life, and the most valuable natural resource is water. For example, in southern California we need water so much we import it from the Feather River 600 miles north of us, pump it uphill through the long San Joaquin Valley, then over the high Tehachapi Mountain range, and tunnel it through the San Bernardino Mountain Range, all at great cost. When it gets here, it supplements and competes with local water that nature provides freely in the Santa Ana, San Jacinto, and other rivers. That local water then has a value equal to the high cost of importing the remote northern water. That value in the local waters is a taxable surplus. However, we have not learned to take that surplus value into the local treasuries; we give the water away, and worse, we actually subsidize people to withdraw water by helping them pay for dams, canals, and pipelines so they can waste water without paying for it. Thus we turn a public asset into a public liability - an extreme form of folly that is called "dissipating rent." In this age of growing water scarcities it is past time we learned to husband and nurture rent, in order to socialize it by taxing the surplus. So should you, in comparable circumstances.  
Another value from water is to generate power. Again, California witlessly fails to socialize this value, but Canada, our northern neighbor, has shown the way. British Columbia, Newfoundland (the Labrador part), Quebec, and other provinces raise large revenues from charges on the use of falling water. Russia, with some of the world's largest hydro-electric projects, can do the same, or better.
Fisheries are another source of value. In the past most nations have let this rent be "dissipated" by overfishing. In recent years the U.S. and Canada have in effect "privatized" fishing in their offshore waters by limiting the number of licenses and boats. This limitation was needed and desirable, overall. It created large rents, where previously there were little or none, by preventing overfishing and the great waste of duplicate, triplicate, and even quintuplicate fishing effort. That is a good example of husbanding and guarding rent, which is necessary before you can collect it. It was not necessary or desirable, however, to give away this net benefit to private parties.
The government did not sell these licenses, but simply gave them away to owners of existing boats, and others with political influence. Each license now sells for something like a million dollars, creating a new class of instant millionaires and "parlor fishermen." This giveaway to the few, and takeaway from the many, created an instant class society where before there were equal access and equal opportunities.
These privileges are worth so much that there are now documented cases off Alaska where the parlor fisherman takes 70% of the total catch. The captain, the crew, and the owner of the boat, who do the work and bear the dangers and discomforts and financial risks of fishing, must get by with the other 30%. Parlor fishermen are simply leeches; these rents should be socialized, relieving the workers from taxes.

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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.