Author Archive

If it were a dog it would bite them!



Book Review: Mariana Mazzucato: The Value of Everything: Making & Taking in a Global Economy [2018]

image credit: green kozi CC BY-NC-ND 2.0 https://flic.kr/p/aaEYAY

Taken from Henry George, the title of this post refers to economists who make good points but don’t get to their logical conclusion. Mariana Mazzucato may be another. We may start by looking at some of the main themes of her book.

  • Value extractors are obtaining a large and increasing share of wealth produced, resulting in a smaller share for those who actually produce valuable goods and services. This problem has several interlocking causes.
  • Measures of national product (GDP) conceive value as equal to price, meaning that any profitable activity adds to national product even if it’s essentially an extraction of value rather than production of good or service of value. In recent decades, opportunities for private value extraction have multiplied.
  • One effect of this increase in private value extraction is that the extractors now have effective control of much of the government. Lobbying by value extractors changed national income concepts to include their extractions in GDP.
  • Further, the conventions of national income calculation tend to understate the value of government work. This is because the value of a private company’s production necessarily exceeds, on average, the cost of labor and capital inputs (otherwise the company would have no profit). A government’s production, by contrast, is treated as equal to the cost of the inputs, even if the value of the product is much greater.
  • Partly as a result of this undervaluation, some services previously provided by government have been “privatized,” which means, in most cases, are still funded by taxes but are performed by employees of private firms under contract.

Some examples of the problem:

  • As retirement income becomes based on earnings of assets, pools of assets grow and opportunities for value extraction multiply. This includes fees for managing investments, and various side-hustles.
  • As governmental functions are “privatized,” the quality of service drops along with the earnings of people who provide the service. But costs typically don’t decline because of contractors’ profits and lobbying expenses.
  • Patent privileges have been vastly expanded in recent decades. This provides more opportunities for value extraction, but actual useful innovation seems to be retarded by patents. Also, as patent offices have become understaffed relative to the workload, patents become easier to obtain.
  • Governments (or their banker overlords) seek to reduce the deficit/GDP ratio by reducing spending, failing to recognize that some kinds of government spending actually facilitate an increase in GDP far in excess of their cost.
  • The dominant neoclassical economic ideas assume that rent can be competed away, and that unemployment is voluntary. They further fail to recognize “the collective and cumulative processes behind innovation.”

The remedy? According to the author:

  • “We” need to “define and measure” the “collective contribution to wealth creation,” to overcome the “price=value thinking…” and recognize that most of the “…creation of value is collective.”
  • “We” should also recognize that the current structure of corporations, controlled by shareowners thru boards, with no formal role for employees, customers, and other “stakeholders,” is not the only possible or practical way to arrange things.
  • The role of governments, as well as nonprofits and cooperative organizations, in value creation needs to be recognized.
  • Tax laws need to be modified to advantage actual value creators rather than value extractors. In addition to changes in income tax laws, a small tax on financial transactions would be helpful.
  • Patent laws need to be modified to discourage abuse. To encourage particular kinds of innovation, bounties might be substituted for patents.
  • Portraying government as “investing, not spending, can eventually modify how it is regarded.” [of course this little trick has been used by U S politicians for many years.]
  • “We” need to develop a vision of what society needs, and set government priorities regarding infrastructure, services, and regulations to achieve it.

So what is the value of this book?

  • It does give some history of concepts of national income, going back to the 17th century and summarizing views of William Petty and Gregory King as well as Adam Smith, the Physiocrats, Ricardo, and (with special admiration) Marx and Keynes. It does discuss rent, mostly in an accurate way. There’s no mention of Henry George, perhaps because this part of the book is euro-centric, or perhaps for other reasons. She does mention some important Americans, including Elinor Ostrom.
  • It identifies the problem of accumulated privilege, resulting in value extraction, which impedes real progress.
  • It clearly describes some principal means by which value is extracted.
  • It taught me a few things about the way GDP is calculated, and the history of patents.
  • It clarifies that there’s nothing “natural” or “inevitable” about the way our economy is set up; many different arrangements for such components as corporations and patents could work, and some would be a lot better than what we have.
  • In a description of VW and the “dieselgate” affair, she acknowledges some of the limitations of her proposals.

As a Georgist, I see two big shortcomings with this book:

(1) Even tho nowadays the value extractors have effective control of governments and other powerful institutions, the author seems to assume that somehow these forces will be overcome once the people come to understand that government really is useful, and that the benefits it provides are far greater than is reflected in GDP. Furthermore and related, there is the assumption that the bulk of government expenditure is good, that government is for the most part honest and reliable. There is also almost no mention of the huge waste on military, punishment, and other expenditures which an honest and efficient government would need to eliminate. So, once proper understanding is achieved, the government will wisely set priorities and provide appropriate infrastructure and services. No method is proposed for accomplishing this, and the alternative of decentralization really gets no attention.

(2) While rent is mentioned, and for the most part correctly characterized, there’s no discussion of how rent can be used to properly fund services and eliminate other taxes. It’s true, of course, that some privileges are best eliminated, but for use of real estate parcels, electromagnetic spectrum, and other natural resources the wise policy in most cases is to allow private ownership but collect virtually all the rent for public use.

And then there are a few little nits to pick.

  • She does not like corporations to distribute profits to shareholders. Partly this seems to be because share buybacks are one of the several ways that corporate management contrives to reward themselves excessively, but also she displays a fundamental belief that corporations should reinvest in their business, apparently without regard for whether management believes worthwhile opportunities are available.
  • “A recent study by researchers at the University of Pennsylvania…” is referenced on page 219, but without footnote or citation.
  • On page 44 she describes rent as including “what you pay a landlord to live in a flat.” This is inconsistent with the way she uses the term elsewhere in the book, since only part of what you pay to live in a flat is to cover the proportionate share of the land it occupies; much is for use of the structure (capital) and services (labor).

In conclusion, this is a pretty good book for understanding how some means of wealth extraction work and why it poses a danger to the rest of us. It encourages us to consider alternative ways for organizing our communities. But it’s weak on practical solutions.

additional note: Mariana Mazzucato has recently been interviewed regarding this book on Econtalk and Alphachat.

another additional note: Font sizes may appear a bit screwy herein because I haven’t figured out how to enlarge the teeny font that seems to be the default in WordPress lists under the new Gutenberg editor. Someday maybe I will.

City of Chicago exacerbates impact of lousy transit as a cause of poverty

image credit: Josh Koonce https://flic.kr/p/7HrANR

Good reporting from Wirepoints, based on articles from Reason and Pro Publica, about the City of Chicago pushing low-income motorists into bankruptcy. These sources focus on the twin injustices of punitive ticketing and fines, and aggressive impoundment of innocent motorists’ cars. Of course parking restrictions, liability insurance requirements, and traffic rules need to be enforced, but it’s pretty clear that Chicago Police and other municipal actors see this as a source of revenue to pay their salaries and pensions, more than as an enforcement mechanism. The statistics imply a racist motive as well.

But that’s not the point.  The point is, why do people with low incomes need to own cars? Why can’t they get where they need to go by transit? The answer, of course, is that in most affordable neighborhoods transit is sparse:  Buses run slowly and infrequently, and quit early. Rail is only a bit faster, and most lines also lack 24-hour service.  Relatively few jobs are reliably accessible within an hour, or even two hours travel time. And with the demise of neighborhood retail, cars are almost essential for shopping.  Schools, libraries, other government facilities have large free parking lots even it they’re poorly-located for transit and pedestrian access. So of course people who can’t afford to own and operate automobiles find they’re compelled to have them.

This doesn’t justify the municipality stealing money and property from residents already living on the economic edge.  It just makes it worse.

LVT and rising sea levels

https://commons.wikimedia.org/wiki/File:Boneyard_Beach_on_Bulls_Island_(4880451924).jpg

Christopher Flavelle’s recent Business Week article looks at how rising sea levels can affect ownership of newly-submerged land. Part of the problem, of course, is that owners of these parcels want the government (Corps of Engineers, local authorities, somebody!) to use expensive artificial means to preserve or recover their properties, but of course don’t particularly want to pay for the service.  Complicating the situation is the public trust doctrine, as applied in the various coastal states, which prohibits private ownership of submerged land. So if the land is recovered, who owns it?

A land value tax won’t prevent land from being submerged, and won’t clarify ownership, but it will importantly change the incentives.  The article cites one case where the landowner continues to pay real estate tax [presumably a modest amount, but the article does not say] on the submerged parcel.  ‘“It’s Gulf-front property,” says Levenson, who now lives in Tennessee. “Someday it will be valuable.”’
Suppose, instead, that the rental value of land was the sole source of public revenue.  The land might someday be very useful, and might have a large rental value, but could never be sold for a high price.  End of controversy. The water rises, the owner avoids the taxes by relinquishing the land. Unless the rest of us are obligated to pay to enrich a few coastal owners, this is the just and efficient way to proceed.

Some Cook County assessments are maybe about as bad as we thought

We have a new report(pdf) today from the Civic Consulting Alliance, pointing out that residential assessments  (excluding condominiums and large apartment buildings) done by Joe Berrios and his crew are of poor technical quality, don’t make effective use of modern techniques, and tend to treat expensive properties more leniently than less expensive ones.  The Tribune article gives pretty good context and describes the contents of the report, so I won’t try to duplicate it. Rather, I’ll focus on just a few things that caught my eye.

The study uses data that apparently has never been made public.  That is, it belongs to the public as represented by Joe Berrios, but the public hasn’t been permitted to see it.  And we’re still not permitted to see it.  In fact, the consultants and the Assessor seem to have spent more than two months negotiating a five-page nondisclosure agreement (reproduced at the end of the report) to make sure we wouldn’t see it. But we are able to see some detailed analysis, in the study appendix, that’s more useful than the raw data for understanding how assessments actually work.

We get some useful detail on the bias in favor of expensive properties.

The above figure, which is Appendix Table 5 in the report, shows the inaccuracy (left half, shorter bar means less inaccurate) and bias in favor of expensive properties (right half, shorter bar means less bias).    We can see that the bias in favor of expensive properties exists for all four categories, but is  most serious for multi-family and mixed-use (residential with a storefront, for example).  But for such properties, there’s no reason to expect that the expensive property contains the wealthier taxpayer.

Also as previously observed, the report notes that more appeals are filed by owners of more expensive properties:

This implies that wealthier homeowners are getting a bigger tax break, proportionally, than less wealthy homeowners. I suspect it’s true, but I really don’t see any way around it within the current assessment system.  The wealthier homeowner has more to gain from a successful appeal (or, what is the same thing, more to lose by failing to appeal.)  She may also be more comfortable dealing with government officials and forms (and perhaps with the tax lawyers who send mailings to homeowners).

But isn’t the same true of the income tax? The wealthier taxpayer is more likely to know, or learn, tax-avoidance tricks, and/or to use a skilled tax preparer.   The difference is that parcel-level assessment data is, to some extent, public information, but income tax returns in the U S no longer are.

Of course the main remedy for problems of inequitable assessments comprises:

(1) Assess only land value, ignoring the value of any improvements on the parcel.

(2) Post the assessments, including all information used to calculate them.

 

 

Fictitious people and their imaginary taxes

Credit: Mike Licht (CC BY 2.0)

Matt Levine has an illuminating post about why the recent reduction in corporate tax rates results in a reduction in some corporations’ reported profits.  It seems that past losses can be saved as a “deferred tax asset,” permitting a reduction in taxes to be paid in future years.  But the ratio of losses to tax reduction declines when the tax rate declines, so the deferred tax asset is reduced.   Levine notes that such tax rate reduction can cause a corporation to appear less well capitalized, since it reduces assets, even tho it increases expected after-tax income.

Just another illustration of the absurdity of a corporate income tax (or perhaps of corporations in general).  Of course corporations should pay taxes – based on the land (including spectrum and other natural resources) that they claim.  And they should pay additional taxes reflecting the limited liability granted by the state.  But the accounting concept of corporate income has little to do with this.

Robust management and planning needed for transit

Westbound on Cermak at Wabash (Menace of Privilege photo)

BACK ON THE BUS: SPEEDING UP CHICAGO’S BUSES showed up this morning from Active Trans. Of course it says transit needs more money, and doesn’t connect the dots on cost-effective investments.   From the executive summary:

Chicago needs a healthy and growing bus system. Fewer Chicagoans riding the bus means more people driving and more cars on our already congested streets, especially in and around downtown during peak periods. Our hub-and-spoke rail system continues to be a good option for people who live and work along the CTA train lines and in the Loop, but many neighborhoods lack access to it. Without more investment in bus service, Chicago risks more people abandoning transit for transportation options that are more expensive and less efficient, healthy, and green.

The report acknowledges that part of the problem has been CTA’s substantial service reductions, but seems mainly to look at  “how do we move buses around faster” rather than “how do we provide service that lets people travel where they want, when they want, under civilized conditions and at a reasonable cost.” But, hey, moving buses faster is probably a good start.

Three transit recommendations

The report provides three main recommendations: Dedicated bus lanes, traffic signal improvements, and faster boarding. (more…)

About those corporate tax rates…

credit: Mike Licht (CC BY 2.0)

We hear that corporate tax rates, at 35% (federal), are too high and need to be reduced so U S companies can be competitive.  I remain confident that the best way to fund public services is thru a tax on land value and other measures of privilege, but if any kind of corporate tax is to be retained, here are a few things to consider:

  • The statutory rate is 35%, but there are all kinds of credits and deductions a corporation can take, so typically the effective rate is much less. Here’s a U S Treasury report (pdf)  claiming that effective corporate tax rates were 20% in 2011, the most recent year calculated. Major corporations have the ability to obtain special tax favors. (Just scan thru the tax code (big pdf) to find some of these special favors, available only to individual projects or corporations which reached specific milestones on specific combinations of dates.)
  • Enterprises in most countries, but not in the United States, have to pay a national value-added or sales tax.  The rate and details of course varies by country, but is typically about 19% as indicated by this OECD spreadsheet.  Scroll down to the second half of this article to get some more perspective from John Hussman.
  • Most U S states impose an additional corporate income tax, with varying rates and rules. Illinois takes 9.5%.    I have no knowledge about other states nor subnational jurisdications outside the US.  However, this table from Deloitte (pdf) provides some detail, including an assertion that the total national+local corporate tax rate in Germany is about 30-33%.
  • Some commentators complain about “double taxation” of corporate earnings, because corporate dividends are paid out of after-tax earnings.  However, incorporation, with its perpetual life and limitation of liability, is a privilege, for which it’s reasonable to expect corporations to pay.  I don’t suppose that taxable income is the best measure of the value of this privilege, perhaps a small percentage of total expenditures would be better, but certainly the appropriate fee is greater than zero. Furthermore, a considerable percentage of corporate stock is owned by various kinds of entities which do not pay tax, such as universities and other nonprofits, and Roth IRA’s.

“The hero turns out to be Henry George”

Ray Kroc’s first McDonalds in Des Plaines, IL, is now a historic site. Image credit: Matt Thorpe CC BY-NC-ND 2.0

I’ve complained before about Russ Roberts’ Econ Talk failing to note the importance of economic rent and land costs.  So I was pretty pleased to hear his guest Philip Auerswald say

I think the hero in all this, and I talk about this in The Code Economy, turns out to be Henry George. I mean, I think he really, you know, the 19th century U.S. economist–and he really anticipated these phenomena more clearly than anybody.

Pleased enough to read Auerswald’s new book. And he does get a lot of what George wrote about.

Auerswald’s main point seems to be that an economy doesn’t just have inputs and outputs, but what’s more important is the methods by which the inputs are used to produce the outputs. That’s “code,” and folks have been using it for 40,000 years.  In recent centuries, standardization and automation of various kinds have increased productivity — the amount of stuff which a given amount of inputs could produce.

And, as we see computers and machine-driven processes increasingly capable of replacing human labor, what will humans do?  He endorses Henry George’s analysis that, as productivity increases, rents will increase.  And he supports the citizens’ dividend (tho he does not use the term), to be funded by a land value tax.

But his concluding pages seem to assume that, of course everyone will have a guaranteed income from land rent, no problem there, but what will people do with their time? To George, the problem was to get a fair distribution (not redistribution, because by right the rent belongs to everybody) of wealth, which he expected would result, over time, in social progress and a more constructive community. When I look at Wikipedia, Flickr, some blogs and a bunch of other internet resources, I tend to agree with George. Auerswald assumes the wealth distribution, but doesn’t assume that people and the community will improve.  If I looked at Facebook or some other sites I might agree with him.

Auerswald also makes interesting use of the concept of comparative advantage, applying it to humans exchanging work with machines. Machines can do certain kinds of work millions of times faster than humans, so logically machines should do such work.  In other tasks the difference might be much less, so those tasks would remain with humans (tho I would guess at much lower wages than currently.) And then there are some “low-volume, high-price” tasks which might remain human monopolies.

*****If you’re not the editor of Auerswald’s book, stop reading here*****

This book is full of irritating errors.  On page 2 is a list of ingredients for chocolate chip cookies, comprising butter, sugar, water, salt, and chocolate chips — but no flour. Page 92 says “slavery was abolished in the British Empire in 1807,” while Wikipedia provides various dates, depending on your definition, in the 1830s or 1840s. Page 120 places Ray Kroc’s first McDonalds in “Desplaines, California.”  Page 175 calls Zipcar a “ridesharing” platform, corrected on page 213 to “car-sharing.”   “As Henry George understood nearly a century ago” on page 232 doesn’t seem likely regarding a man who died in 1897 mentioned in a 2017 book. There are probably more, that historians or various kinds of geeks would notice.

 

Land Cost Note from Singapore

Singapore Skyline by Bernard Spragg .NZ (public domain)

According to Bloomberg, “Malaysian Tycoon” Quek Leng Chan’s company spent S$1.62 billion (reportedly equivalent to US$1.2 billion) for a development site. Bloomberg doesn’t tell us the size of the site, but the local source Today says  it includes permission for a building of up to 950,592 sq ft., thus requiring a site cost of S$1704, or about US$1262, per square foot of building.  My guess is that you could produce a very nice office building for construction cost less than $1200/sq ft, in which case site cost will actually be greater than the entire construction cost of the new building.  Today notes a couple other costs for the developer:

  • He has to replace the police station currently on the site
  • This isn’t a fee-simple purchase, but a 99-year lease

Which I guess indicates that land is still a nontrivial part of the cost of doing business.  No surprise.

Another outrage that a land value tax would eliminate

One of many sophisticated dogs named “Wrigley” Image credit: Liz CC BY-NC 2.0

Expanding on a subject covered here nearly six years ago, Tim Novak of the Sun Times writes about  assessment deals in Wrigleyville.  Actually, not just 32 properties in Wrigleyville, but apparently on 13,984 parcels countywide, each of which reportedly contains commercial use along with at least one, but no more than six, apartments.

Because Cook County taxes residential (and vacant) property at 40% of the rate applicable to commercial property, and because, 17 years ago, the Cook County Board decided to pretend that commercial property containing one to six apartments is residential, taxes on these 32 Wrigley-area properties (and, presumably, on all 13,984 parcels) are only 40% of the amount they would otherwise be.  Furthermore, Novak visited some of the properties and found evidence that they don’t contain any apartments at all. Which Assessor Berrios thanked him for reporting.

Novak also visited an auto repair shop across the street from Wrigley, whose owner owes $78,000 in back taxes and claims to fear losing his property.  Of course I don’t know the owner’s personal financial situation, but given high land prices in the neighborhood, it seems he could sell his site for a couple million dollars, take the money and buy (or buy land and build) a better facility a mile or two away.  Across from Wrigley may have been a good location for car repair in the 1970s, but not so today.

Three conclusions:

(1) Sun Times needs to sell papers (and attract web traffic) and putting “Wrigley” in the title probably doubles or quadruples the number of people who’d read an article about “tax break.” But the issue is taxes, not commercial baseball.

(2) Once again, let’s be thankful that real estate tax and assessment data is (mostly) accessible to the public.  Who knows what kinds of scandals there are on the income tax and sales tax returns filed by the politically-connected property owners, their accountants or attorneys? Unless Wikileaks takes an interest, we’ll never see them.

(3) All this would be solved with a land value tax.  Everybody pays the same rate — a big rate — based on the value of their land, exclusive of improvements, and perhaps no other taxes are needed.  If there were inequities, the Sun Times — or the Civic Federation — could publish maps making them readily visible.