After the Crash: Designing a Depression-Free Economy. By Mason Gaffney, edited and with an intro by Cliff Cobb. Published by Robert Schalkenbach Foundation, 2009.
From time to time, a Georgist will suggest to me that one or another politician or academic, who seems sympathetic but ignorant about economics, should be given a copy of Progress & Poverty. I usually reply that such persons are too famous and wise to be influenced by new ideas or logical analysis. But now I might propose that, if one is serious about promoting wise economic policy, one might make the investment to give such a distinguished person After the Crash.
Georgists know that the crash could have been avoided by a simple policy of taxing privilege, not production. But here we are, in a real economy which is doing poorly. Mason Gaffney explains how we got here, and what needs to be done to get us out. Everyone who wants to understand the situation should read this book. It is as long as it needs to be– a bit over 200 pages– and doesn’t seem to be available on the free Internet, so unfortunately some of the most vocal advocates won’t read it. Wealthy institutions– Lincoln, Cato, New America, EPI, etc.– could do no better service than to buy whatever rights are necessary to make it widely available.
Although it is listed on Amazon, Schalkenbach seems to offer a much better price.
Here are what appear to be the main points.
1. Speculation in land titles, and other types of privilege, was the main cause of the crash. It was made more severe because banks and similar institutions financed it liberally.
2. For a job-rich recovery, we need to recognize that some types of capital investment create a lot more jobs than others. The best type of investment for this purpose turns over rapidly. Compare the number of jobs generated by a major infrastructure project— high speed rail, for instance— with the same amount of money invested by small scale businesses in working capital for inventory and payroll. Done properly, this analysis needs to cover the entire time period while the infrastructure project is amortized.
3. Current government policy at all levels focuses mainly on big projects that generate few jobs per million dollars invested. This involves not only direct government investment, but tax laws and other practices that favor these kinds of investments. One reason for this is that the beneficiaries– banks and monopolies– have the resources to lobby effectively.
4. Wise policy is to eliminate such programs, but not to create new ones subsidizing job-creating investments. Rather, if we just let the market function, without taxing labor to subsidize the privileged, the recovery will be faster, broader, and more stable.
5. The “property” (real estate) tax has much better economic effects than income taxes or consumption taxes. Even though it penalizes building construction, the effect is to channel more investment away from job-poor and into job-rich forms.
6. Banks have repeatedly got into trouble by lending on real estate, with the current crash only the most recent example. Wise policy would insist that banks make mainly “self-liquidating” loans, such as for inventory or accounts receivable, and require that real estate purchasers provide hefty equity.
There is much much more in this book, and I started to write a much longer review, but will not complete it because no one (including me) would have the stamina to read it. I will post some pieces of it later. Meanwhile, if you are concerned about our economic future, you should read this book.
This is a fantastic book, but I don’t think that giving copies to legislators and other politicians is “marketing centric” as they say. What would be fantastic, however, is if someone would prepare a 1-3 page summary of “After the Crash” that highlights the main ideas, gives sound bite quotes and lists other economists that have agreed with this position, including Friedman.
I think I provided such a summary in my post; however I doubt that it’s persuasive to persons not already familiar with the field. I hope you can do a better one, Rob; it’s not easy. We know that Progress & Poverty can be abstracted down to 5% of 10% of the total words, with all the key ideas intact. Not so AtC.
Maybe, when one gives the book to the Dignitary, one should say “Have your economic advisor take a look at this.”
In March I will be giving a talk at HGS on “Who Stole Prosperity?” Of course I haven’t yet written it, but expect to rely heavily on AtC. Perhaps the result will be something useful.
I received (by email) the following comment
RE: “6. Banks have repeatedly got into trouble by lending on real estate, with the current crash only the most recent example. Wise policy would insist that banks make mainly “self-liquidating” loans, such as for inventory or accounts receivable, and require that real estate purchasers provide hefty equity.”
This hefty equity, would that not make it more difficult to purchase a house?
my response:
You are correct, and this is one of the penalties of trying to very briefly summarize a book full of sound thinking.
So let’s make up some plausible numbers to look at the problem. Say that in 2006 the minimum cost for a decent house (and lot) in a particular area was $200,000. A person paying, say, 3% down would come up with $6,000, and have to pay, say, $1200/month for mortgage and taxes (we ignore maintenance and utility costs, which actual homeowners know can kill you.) Assume mortgage is fixed rate and there’s no HELOC.
In an alternate universe, everything is the same except the minimum down payment is 20%. How would this affect the cost of housing? Fewer people can come up with $40,000 than with $6,000, so, the demand for housing is somewhat less. Lower demand means lower price, let us say $190,000. Still, the guy who has $6,000 for a downpayment cannot buy the house, she must rent.
Now, suppose our $6,000-down-payment guy loses her job, which paid $3,000/month, and can only find another paying $2,000/month. Not only that, but real estate taxes went up, so the monthly payment goes up from $1200 to $1250. What can she do?
In our universe she is screwn, she has to sell her house, may or may not be able to afford to rent a cheaper place, or move in with friends, or, worst case, becomes homeless. (It doesn’t always take job loss, either; a busted furnace financed on a credit card could do the trick.)
In the alternate universe, her income is down, but she has a $6,000 cushion so she can pay the rent for at least a few months. She has options: Maybe move to a cheaper apartment when the lease expires, or to another city with better job prospects. If there is a widespread economic slowdown, her landlord might reduce the rent in order to keep a tenant.
Of course in the alternate universe she never had the chance to build “equity” in the increasing dollar value of a house and lot, but she also never was exposed to the risk. For most people who can barely afford to buy, the “equity building” in our universe is an illusion anyway. Something always happens.
If your highest priority is to get everyone into an owner-occupied house, then a higher down payment requirement is not helpful. But if your priority is a stable and prosperous economy, where everyone willing and able to work can afford a decent place to live, I think it is good policy.