book review – The Menace of Privilege

Georgist looks at “Escaping the Housing Trap.”

This new book by Strong Towns head Chuck Marohn (and Daniel Herriges) is worthwhile for anyone who wants to understand where America’s “housing crisis” came from. The history is important: How did we get here? He goes thru how housing was financed a hundred years ago, federal programs enacted in response to the 1929++ economic depression and subsequent disruptions, subsequent federal programs, and the dilemma we have today.

About 2/3 of American households are homeowners, they have (or hope to obtain) “equity” in their property, and they really don’t want to see the economic value of their holdings decline. Many of them are already stressed by the cost of paying their mortgages, taxes, maintenance expenses, and other costs of living. Not to mention the cost of owning and operating automobiles, as in most communities life without one is quite inconvenient.

The remaining third are renters (plus the unhoused). Many of them are also under economic pressure, as rents in recent decades have outpaced incomes. They might like to see housing prices decline, or more precisely to see the housing they want become easier for them to afford.

So there are big interests who want housing costs to decline, and who don’t want the price of housing to decline.

Part of the problem, as Marohn sees it, is that nowadays housing is built, financed, and often managed at a national scale. These folks are professionals who can deal with complex zoning and building code requirements. So part of the remedy is for local governments to make it easier for small-scale, local builders to make housing. This would include allowing an increase in density by right, such as backyard cottages, accessory apartments, or a two or three unit building in areas which have been restricted to single family.

This isn’t wrong, and I have enough personal experience dealing with building and zoning officials in a “progressive” community to know that improvements would be helpful. Even Brandon Johnson claims to be aware of the problem.

Working thru the book, I kept wondering what happened to the land value tax, which I know Marohn has supported. When I got to the example on “Financing Backyard Cottages” where he notes that one advantage would be additional property tax revenue, it sure looked like LVT has been tossed aside. Finally, toward the end of the penultimate chapter, he says “the land value tax… is perhaps the best mechanism to overcome neighborhood stagnation and decline.” Well it was nice he was able to fit this in.

I do recommend this book to anyone interested in realistic ways to get more housing built, or just in finding out how we got where we are. However, if you want to know how the whole problem could have been avoided by getting public revenue primarily from the value of land and other privileges, you’ll want to look elsewhere.

Not the first daylight robbery, but a good one

I’ve long considered Dominic Frisby, perhaps the only working comic who’s also a financial writer, to be a Georgist. Several years ago he posted a nice video explaining the land value tax. Now he’s gone deep into a history of taxation and its effects, in Daylight Robbery: How Tax Shaped Our Past and Will Change Our Future Readable and succinct, but somehow by the end Frisby has forgot about his video.

The title is appropriate, so good that over a dozen older books already carry it, but the subtitle may be unique. Frisby asserts quite a few facts new to me, and for the most part provides references (altho some are a bit summary, showing only the domain name such as cbs.com, or time.com, where one might need to search around a bit).

The book starts with the story of Hong Kong, a British colony which prospered thru free markets and lower taxes (The point stands, even tho in recent years external demand pushed housing costs to obscene levels, and in recent months political and governmental interference made conditions even more difficult.) Going thru tax history, Frisby of course discusses the effects of the window tax (“daylight robbery”), and explains why it was considered to be fairer and easier to administer than its predecessor. He tells us about tax revolts and England’s first income tax, all records of which were apparently destroyed (source citation is a two-volume history that I can find only in Latin). He explains the cause of the U S War between the States (which Lincoln waged more for revenue purposes than in any opposition to slavery.) He notes that Hitler was tax-exempt, and the Guardian used a Cayman Islands entity to (apparently legally) avoid taxes.

After lots more stories about taxation and its role in history, moving to modern times, Frisby explains (as if any of us need to know) the burden that taxation of productive activity places on people trying to, well, be productive. He talks about the digital nomads and crypto currencies which make collection of production tax more difficult, and about digital transactions which make the collection easier.

Finally he proposes a Utopian tax system. Is it collection of all economic rent as the sole source of public revenue? Not really. He wants VAT (not to exceed 15%, and including narcotics) and income tax (also not to exceed 15%). So the record-keeping burdens and complexities of those will remain, tho perhaps a bit reduced because the impact of error is less. To these he wants to add L U T (Location Usage Tax), which is basically LVT but with perhaps a clearer name, and which would be set at some percentage of the land rental value. He wants voters to choose the percentage, apparently a single rate nationwide. And since he aims to keep governmental expenditures below 15% of GDP, it’s unclear that there would be any L U T at all.

“The location usage tax does not apply just to land, but to any asset granted by nature — the airspace the mineral wealth, and even the broadcast spectrums.” He doesn’t seem to have any problem with private collection of rent for “intellectual property,” even tho I P is a privilege granted and protected by the government, thus straightforward to track and assess– if there’s any justification for I P at all.

It seems that much of the land in Britain is “unregistered,” in that the owner isn’t known, and in Utopia this will be remedied by identifying every owner. I’m not sure why that’s necessary. A tax bill could be posted for each parcel, and a copy mailed to the owner should s/he request it. After due and repeated notice, If the bill isn’t paid, the land could be taken over by the Crown (or whatever they call it over there), and auctioned to somebody willing to pay the tax. (If nobody’s willing to pay the tax, it needs to be reduced.)

Would I like to live in Frisby’s Utopia? Well, of course here in the U S we have no VAT, and the retail sales tax is generally less than 15%. But income tax can be higher, and we have various other taxes which Frisby proposes to eliminate. And LVT has other benefits in addition to the revenue it generates. So on the whole, it’s a better deal, a step in the right direction. But Utopia? Go back and watch the video.

(Note: This review is of the 2019 edition of the book. The Publisher’s web site indicates that a new edition will be released later in 2020.)

Costs of medical services still out of control– and some ideas for improvement

book cover It’s pretty well-known that medical care is absorbing an increasing proportion of GDP, and putting many Americans into financial (and, in many cases, medical) distress. One source of the problem is poverty– people whose incomes are too low to afford decent housing, food etc. are unlikely to have much left over to pay for medical treatments. And another cause might be an aging population who demand advanced treatments to further extend their lives. Both important issues, but this post focuses on another, probably more important one: The medical system is full of rentiers and other thieves, who, pretending to improve health or efficiency, impose tolls or promote unnecessary treatment, resulting in higher and rising costs. That’s the book Marty Makary (MD) has written.

Using a conversational style, well-organized, packed with personal anecdotes, Makary, a cancer surgeon at Johns Hopkins, works his way thru some of the reasons medical care costs so much. Sources are meticulously cited in endnotes. I think his findings can be pretty well summarized:

Some medical professionals offer screenings and other promotions to entice folks to get treatment they really don’t need.
Hospital charges are, not quite random, but pretty much void of any relationship to actual costs or what other customers pay for the same service.
Some hospitals take advantage of their quasi-monopoly status to charge excessive prices, and aggressively sue customers who don’t pay promptly. On the other hand, at least a few hospitals in similar circumstances find they can prosper while charging more reasonable prices.
Air ambulance (and, to some extent, surface ambulances) have been largely taken over by private equity firms, and impose excessive (mostly unregulated) charges on people who are in no position to bargain.
Some doctors are outliers in terms of types of birth delivery and various surgeries, meaning that they perform invasive and/or expensive procedures at a much higher rate than the norm. This may be because they’re selfish and inconsiderate, or maybe they just haven’t thought about it and, when shown the data, mend their ways.
The opioid problem, as reported elsewhere, is partly due to some doctors prescribing more pills than really necessary.
Overtreatment is a problem; often a more conservative approach is more effective (as well as less expensive).
A few organizations have managed to rethink how medical care is provided, giving more autonomy to practitioners as well as more support to patients. Also, a few payers (meaning, typically, employers who pay for insurance) are managing to learn the charges imposed by various providers, and incentivizing their insureds to choose less costly providers.
“Health insurance,” which is really a care financing arrangement and not insurance in the conventional sense, is an even sleazier business than I thought, and insurance brokers are incentivized to maximize costs.
Pharmacy benefit managers may have seemed like a good idea at one time, but basically are toll collectors between the payer and the drug provider. Similarly, “group purchasing organizations” charge a toll on hospital purchases of equipment and supplies. In both cases it’s rarely possible to get accurate data on who is paying who how much for what.
Then there’s the “wellness” industry. Of course sensible diets and some exercise are good things, but “wellness” seems to have evolved to divert attention from the main causes of escalating costs.

The book concludes with a few recommendations, mostly for providers and legislators, but also for consumers, who are encouraged shop around, and ask for prices before agreeing to treatment.

A few important concepts are missed.

The scandal of “Certificate of Need” laws, which protect hospital monopolies and still exist in several backward states, isn’t mentioned.
While the cost of drugs receives attention, no mention is made of the patent games by which the U S Government enables drug manufacturers to extend protection, and collect rents, far beyond the statutory period.
Little attention is given to the history of medical care in America, including lodge practice and the role of wealthy foundations in choosing how medicine developed.

Finally, I hope the next edition will avoid doubling the populations of Missouri and Wisconsin (page 79).

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 17^th 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.

“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.