Category: Georgist/geoist

Theories are easy; facts are hard

Georgists say that we understand the cause of the global financial crisis, and we saw it coming.  So if we’re so smart, why ain’t we rich? Well, some of us are, but for most of us it’s a matter of data and calibration. If we had detailed data on land prices and land rents, and a few other robust variables, properly and consistently defined, for a couple hundred years, we might make some real and pretty quick money from the theory that we do understand quite well.Or maybe not.

The above is suggested by a somewhat related post at Falkenblog.

Most people think facts are easy, and theory is hard, but actually I think it is the reverse. Theory, once you understand it, is trivial, yet important facts are very elusive, often at the bottom of most major disagreements.

And, from one of the comments:

Economics is not Physics. Economists do not collect data then develop theories like physicists. Economics is closer to Ethics in form and methodology…

Steve Keen on the financial crisis

Aussie economist Steve Keen, whom I have mentioned before in an investing context, has interesting recommendations for dealing with our economic meltdown.  His analysis distinguishes between capitalists and financiers, recognizing the former as labor’s allies in the production of wealth, and the latter as parasites who crashed the economy. His immediate solution for rebooting the economy now is that about 2/3 of the debt needs to be written off, tho he recognizes that legitimate savers must be protected in this process.

But long term, how to prevent something like this from happening again?  It seems that his key proposal is to restrict stock trading. Corporations could still issue stock, with voting and dividends as today.  And the stock could be traded.  However, as soon as a share of stock is traded, its “perpetual” life would be shortened to 30 years.  He says that would prevent people from leveraging the purchase of stock, which represents a big part of the debt that got us in this mess. Certainly it would require investors to look more closely at what their money is actually being used for, and would tend to make corporate ownership more focused on the long-term future.

His second proposal seems to be a restriction on the amount of debt that can be secured by real estate, limiting it to 10 times the rental value. (However, the video is truncated before he can discuss this point.)

How Georgist is this?

In a geoist world, privilege would be eliminated or taxed, including public collection of essentially all economic rent.  As a result, the value of stock could only represent real capital, which generally lasts less than 30 years.  And of course, with rent publicly collected, investors would (we expect) realize that real estate leverage cannot be profitable.  So I think Keen is proposing an alternative, more complicated way of achieving something similar to a Georgist reform.

There’s much more in the video, about his modeling work and the details of the mess we’re in.  Probably the most interesting part is near the end, where he makes his 30-year-limit-on-stock proposal.  The (New York) audience, probably people in the securities business, cannot accept this.  “Who would trade stock if doing so reduced its value?” “If people didn’t trade stock, how would traders know what it was worth?” “If I didn’t buy Microsoft stock when it was first issued, how could I buy it?”

Just as with land, everybody assumes that they will get rich off the stock market.  And that they should.

note: This link (repeated from above) takes you to Keen’s blog article, which includes  links to an MP4 video of the presentation as well as a pptx file (pretty much readable by Impress) of his slides.  There is also a paper (which I did not read).

Are tariffs even more regressive than I thought?

Tariffs– fees charged by the U S Government for the import of goods– are designed to protect politically-powerful interests who would otherwise be unable to compete as profitably with foreign producers.  So they are regressive in the sense that politically-powerful interests are likely to be relatively wealthy.

But according to this article, tariffs are also regressive in the sense that their direct impact on the poor exceeds that on the wealthy. “Luxury goods have very low tariffs, while cheap clothes, underwear, shoes and household products have much higher rates.”  Several examples are cited; I have no idea whether they’re typical.  Both the Cato Institute and the Democratic Leadership Council are quoted in support, an official of the former calling tariffs “our most regressive tax that the federal government imposes.”

A percentage of a lot is quite a bit

Here are a couple more examples of troubles we wouldn’t have under a just economic system.

Mortgage servicers incentivized to prevent mortgage modification. Many commentators have pointed out that, if the value of a property declines below the market value, and the homeowner is unable to pay, the lender is better off agreeing to reduce the principal to an amount consistent with current values.  (This is true even in the absence of any government-funded incentives.) So why does it rarely happen? It’s because lenders, apparently to conform to bizarre federal tax rules, have given up the right to modify loans.  Only the mortgage servicer, an independent company (tho sometimes a subsidiary of a big bank),  has the right to do that.  But the mortgage servicer is paid based on a percentage of the outstanding principal, thus has no incentive to help reduce it.  (Cash incentives offered under a recent federal program apparently aren’t large enough to matter.)

The geoist perspective: If land values were fully taxed,  real estate prices never would have bubbled, and mortgages would cover only the cost of the house, not the cost of the land it occupies.  Therefore mortgages would be smaller, perhaps rarer, and the whole problem of numerous underwater homeowners could never have occurred.

A little extra sleaze for municipal bonds. When a municipality (or, for that matter, any organization) issues bonds, they choose an underwriter who, for a fee, agrees to get all the bonds sold.  The issuer may choose the underwriter by open bid or by negotiation.  Academic research shows that, in the latter case, interest rates tend to be 17 to 48 basis points (hundredths of a percent) higher.  So how were 85% of the $378 billion in municipal bounds issued last year underwritten? By negotiation, which seems in theory to be costing taxpayers several billion dollars over the life of these bonds.   And that 85% includes 100% of bonds issues by the City of Chicago.  No one familiar with local government will be surprised at the reason: “[T]he city and its aldermen want to reward those who support public officials and politically connected charities.”

The geoist perspective: Most public debts are issued to benefit the underwriters and bond purchasers. At best, the funds are used for improvements that increase land values. Therefore, capital investments should be paid thru a tax on land values. If the landowner who benefits hasn’t enough cash to pay her share, she may need to borrow privately to cover it, but the general public should not be liable. If the improvement does not increase land rents enough to justify its cost, then it is not worth doing.

Much more information about both of these outrages is provided in the source articles, which you should read unless it would make your head explode.

Investing risk vs. return: Henry George was right

Back in the ’70s when I learned about investing, we sophisticated folks understood that financial markets are “efficient” and the Capital Asset Pricing Model (CAPM) would guide us.  You could reduce your risk somewhat by having a diversified portfolio, but to get a higher return you’d have to accept more risk of loss.  Of course there was no Internet, no easy way to check this for ourselves, but I did get access for a time to a remote terminal connected to a computer which supposedly allowed me to test this theory.  I did so, and the results were consistent, tho today I certainly can’t remember the details.

So when I first read Progress & Poverty in the ’80s, I was a bit troubled by this from Book III Chapter 4: Continue reading Investing risk vs. return: Henry George was right

Taxing billboards– a win-win?

Since billboard value is a function of location in the community, it’s only fair that the community should collect most of the rental value.  Accordingly, the City of Toronto expects to collect C$10.4 million/year with a tax of $850/$24,000 per billboard, “depending on size and type.” Naturally, the billboarders object, saying that they’ll pass the tax on to landowners and advertisers (which somehow makes it illegal– but I do not understand U. S. law, let alone Canadian).  But of course, all taxes are ultimately paid by landowners. Perhaps the tax will reduce the number of billboards, but most citizens are likely to survive this loss.

Mayor Daley, being in a taxing mood, might want to consider this, if his obligations to the billboarders aren’t excessive. Chicago Reporter has found many illegal billboards in the city, and that politicians receive, not only free space, but cash contributions, from the billboarders.

ht Frank Dejong

Inequality vs. economic growth

Henry George notes that existence of privileged classes tends to reduce economic growth, because the rich must spend nonproductive effort stealing from the poor and protecting their gains, while the poor spend nonproductive effort trying to defend themselves.  And he noted that a large part of the labor force will comprise “idlers and those who minister to them.”

Something approximating the former category has recently been termed “guard labor” and some work has been done toward measuring it.  A comparison of U S states indicates that the proportion is higher where inequality is greater.  Cross-national comparison shows some correlation to polarization and political conflict.  A proposal is even made for something like a “citizens dividend,” tho the funding source isn’t identified.  Also, NYT column about costs of inequality here.

HT to Max Keiser (video).