Crash recovery manual

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.

Georgist History

Thanks to Bob Jene of the Better Cities Committee of Illinois for discovering the Henry George Historical Society of San Francisco. And thanks to Mary Lois Timbes for blogging at Finding Fairhope, and particularly for notice of a new book about one of Fairhope’s most distinguished. Browsing around her blog, it turns out that Timbes has written her own book about Fairhope, too.

Speculation in an empty city

At Ordos, China, local officials reportedly have built an entire new city for a million people.  But no one can move there, because all the apartments have been bought by speculators so housing is too expensive.  Al Jazeera seems to be the only real source for this story, tho brief mentions (omitting speculation) are in the Telegraph and National Post , and of course numerous blogs link to the video.

Dangers of debt

“Black Swan” author Nassim Taleb at the Royal Society:

Debt is a product of overconfidence. The more confident you are, the less it makes sense to use equity. The problem is that we– humans– cannot be trusted with knowledge because we tend to be overconfident …Religions…don’t like debt. It’s not without a reason. You had debt jubilees, cancellation of debt from Babylonian times… Debt was not necessarily a good thing….Debt is something that’s very toxic and can hit you very quickly, which is why I don’t like leveraged buyouts…so you need to protect people from themselves.

You can express overconfidence with equity, without harming yourself too much…The debt bubble we have now is still here.

He gives some annoyingly persuasive arguments for a conservative approach to public policy. I don’t find any transcript, but there is an mp3 from Radio National, and the Royal Society offers both video and audio.  It’s worth listening just to hear him say “Silly Con Valley.”

Speculating in cab medallions

Prices below are medians (2009), and “average” for earlier years.

Month                Price               Source

October ’09        $185,000       City of Chicago
May ‘09             $170,000       Chicago Dispatcher
April ‘09            $164,500        Chicago Dispatcher
March ‘09           $165,000        Chicago Dispatcher
February ‘09      $158,000        Chicago Dispatcher
Feb ‘07               $  77,000        Chicago Tribune
2004                   >$40,000       Chicago Tribune
1991                     $28,000         Chicago Sun Times

The October list includes two sales at $190,000.

As medallion prices rise despite a sagging economy, this seems to me to indicate that fares are already too high and should be reduced, which would allow medallion prices to fall and, in theory, drivers would be unaffected while passengers benefit.

But Chicago Dispatcher publisher George Lutfallah sees it differently.  Due to difficult conditions in the taxi industry, individual medallion owners are selling their medallions to big owners– the taxi equivalent of land speculators. Lutfallah sees this as a bad thing, “a taxi driver who owns his or her own cab is more likely to take better care of both the vehicle and the customer.”  He therefore recommends a fare increase.  (source: print edition of Chicago Dispatcher October ’09)

Ripping off PBGC, too

I guess no one should be surprised at this; I’m just noting for my own information that

GAO found that 40 executives for 10 companies received approximately $350 million in pay and other compensation in the years leading up to the termination of their companies’ underfunded pension plans.

However, it’s all perfectly legal.

GAO did not find any illegal activity with respect to  executive compensation on the part of either the 10 companies or the 40 executives under review.

pdf summary here, complete report here.

Big Enough to Break Up

This is so sensible that I can’t imagine it will pass.

We urge the immediate enactment of the Too Big to Fail, Too Big to Exist Act, which directs the treasury secretary to compile a list of those financial institutions that are too big to fail in the next 90 days, and to break up these banks and insurance companies a year after the legislation is signed into law

You can sign Sen. Bernie Sanders’ petition for it.

Via Barry Ritholz.

Easier TIF qualification

Now you don’t need to even pretend that your TIF area is dilapidated. Just propose a STAR Line station within a half mile, get the Board to approve, and you can divert tax dollars pretty much for whatever you want. Thanks to ILAPA’s Sharon Caddigan for the alert.  Of course, an openly-administered TIF process might be appropriate for development near any transit station, provided that the funds raised are used to actually provide service at the station.

Government land ownership vs. community collection of land rent

Bloomberg’s report on land taken for the new Shanghai Disneyland tells us something about how people may fare under government ownership of land. One retailer, whose land was taken last year for an unspecified project, still hasn’t gotten compensation:

“All I care now is how much compensation we will end up getting after layers and layers of government officials get their share,”

I don’t see why Disney should get government help in assembling land for their project– it’s not infrastructure–, tho such assistance is routinely provided in the US too. Under a geoist system, where the community collects the land rent and uses it to fund governmental services, landowners would have strong incentive to sell and little incentive to hold out.  Disney could buy land cheaply but would pay substantial rent (in the form of land tax) to retain it. Those relocating could buy land cheaply elsewhere, and if in a less desirable location would find their land tax reduced.  Folks would also, of course, have no other taxes to pay and would receive a share of the rent collected in excess of governmental needs.

Inflation or Deflation?

That was the title of a talk this evening by UCGSB Booth School prof John Cochrane.  “I don’t make forecasts,” he said, “but I can offer scenarios.”  He actually offered only one scenario, which is basically one of inflation.  We are all aware of the huge and growing federal debt, but it’s much smaller relative to GDP than it was in 1945.  So how have the feds paid off big debts?  Thru growth.

But we’re not growing, and future growth will be difficult if taxes are increased.  And it seems the bailout pattern is continuing, so who knows how high the debt might go? So inflation seems more likely than the opposite.  Cochrane pointed out that inflation is based on what people anticipate rather than actual events, and noted that Japan continues to experience little inflation despite a large debt.

Of course, he apparently didn’t consider the possibility that taxes might be raised on things not produced by people.

Also:

(1) He acknowledged that the Phillips Curve, the alleged inflation-unemployment tradeoff, isn’t supported by actual data over the past several decades, and showed a couple of charts illustrating this.

(2) Why he isn’t making a forecast: “I’m an economist; I don’t know anything about political will.”

(3) “Every economist I know [apparently including himself] is buying TIPS [Treasury Inflation-Protected Securities].” If that turns out to have been a smart strategy, I guess we should assume that economists are able to advise themselves better than they can the rest of us.

(4) Reportedly, the talk will be posted somewhere, probably around here, in a few days.