land value – Page 6 – The Menace of Privilege

Another entrepreneur brought down by bad public finance

Cocoa Pods, by sarahemcc via Flickr (cc)

This one was “Bernard Callebaut, Alberta’s most famous chocolatier,” who purchased land to build a new chocolate factory. Those who understand land rent and the business cycle won’t be too surprised at what AlbertaVenture.com tells us happened next:

[Callebaut] insists that it was an ill-timed decision to buy a large plot of land near the Petro-Canada station on the TransCanada Highway just west of Highway 22 for $5 million, and his bank’s unwillingness to exercise patience, that really did him in. “The idea was we would sell 30 acres for development, and we would keep the back part, which is actually the less-expensive part,” Callebaut says. He planned to build a manufacturing and warehousing facility there, and he even held out hope that the project would serve as a tourist attraction. “People love to see chocolate factories,” he says.That never happened. Instead, the value of the land plummeted, and his bank decided to pull the plug.

Of course, under the current system of public finance he really had no choice. He needed land for his factory. If he rents instead of buying he is hostage to the landowners. Only if he really understood how the land cycle works, possibly he could have prospered. But no, Bernard Callebaut is not a political economist, he is a chocolatier. But perhaps he might have benefited from a learning some of what we teach at the Henry George School.

Like most good stories, there’s more to it than that. He not only lost his land and his company, he lost his name. To his lawyer. Read it here.

Drug prohibition coordinates politicians and “gangs”

Pilsen — image credit: Rosalyn Davis via Flickr (cc)

David Bernstein and Noah Isackson have a pretty good article in Chicago Magazine, Gangs and Politicians in Chicago: An Unholy Alliance. Focusing mainly on Alderman but also including State and Federal legislators, they assert that “gangs” provide the money, votes, and workers that enable officials to attain and retain their office. In exchange, the governments these legislators control provide funds and favors.

Isackson and Bernstein stop short of suggesting how to repair this problem, but reading thru the article it’s clear that the main way these “gangs” prosper is thru unauthorized distribution of drugs. And one of the main favors aldermen provide is assistance in avoiding “law enforcement” efforts to arrest them. End the drug prohibition, most of the “gangs'” income will end, and candidates will no longer get “gang” money. They’ll have to rely on crooked lawyers, lobbyists, etc.

Some of the drug money, of course, has gone into real estate, with “gang” members able to get favors such as rezoning and inspection waivers. A land value tax, by constraining real estate speculation, would be of assistance here.

Another successful politician endorses land value tax

Nick Boles

MP for Grantham and Stamford. New-intake MP and a key moderniser. Former Policy Exchange director and one of the Notting Hill set. Deemed close to the leadership. Tipped for bigger things

I assume this means he’s successful, British political terminology being rather unfamiliar to me. What’s really important is that

Nick Boles, The MP for Grantham and Stamford says a Land Value Tax should be introduced and use the proceeds to cut National Insurance – permanently.

He doesn’t want to do it exactly how I would want to do it, because he seems to want to exclude owner-occupied residential land and farmland, without limitation. But the important thing is, he’s a successful politician, he gets elected, and he appears to want to move toward a sound economy. I’m just some guy with a blog.

I also don’t know how all this relates to the British custom of building homes on rented land far more commonly than Americans do. But it seems to be his top priority.

Source: FT via GN

North America’s only full service railroad collects land rent

It’s not just in Japan (and Vancouver, sort of) that land rent is used to fund railroads.

Photo Credit: Gator Chris via Flickr (cc)

Originally built by the Federal government and now owned by the State, the Alaska Railroad is “North America’s last full service railroad” because it operates, on its own tracks, with its own rolling stock, freight and passenger service. Revenue is just a bit more than enough to cover operating costs, but how to pay for the capital expenditures– equipment, track, facilities– which must be constantly renewed and improved to run the railroad smoothly? Part of the answer is collecting the land rent. The Railroad owns some 18,000 acres of real estate (see source below), for which it last year received just under $13 million in land rent (see page 34 of this pdf). This compares to total capital expenditures last year of $73.1 million, with the balance covered from various kinds of grants, as well as operating profit.

ARR provides more information about their leased and leasable land here.

Of course, this is collecting only a tiny part of the economic rent the railroad generates, but at least it’s a source that will grow as the railroad improves.

Thanks to Trains magazine for the original tip.

Cuba gets it half-wrong

What kind of financial crisis could America have had without private collection of land rent? If homebuyers were able to purchase a house, but the land came practically free with an obligation to pay a land value tax, how bad could the mortgage mess have been? Not very bad, evidently, since mortgages would have been much smaller and quite unlikely to go under water (because the price of houses can’t decline nearly as much as that of the land under them).

Veranda in Cuba Which is why I’m not pleased to learn that Cuba will allow the private purchase and sale of homes (including, apparently, both structure and land). There will be limits (only Cuban citizens and permanent residents, and only two homes per person) “to prevent speculative buying and the accumulation of large real estate holdings,” tho one wonders how long-lived and how effective they’ll be.

There’s no question that Cuba’s struggling economy needs freer trade, and moves to allow buying and selling of cars, and an increase in the permitted size of private businesses, tend in that direction. It’s unfortunate that the Cuban powers that be don’t seem to recognize that land is different, since by definition it will never be produced no matter how free or prosperous the economy.

“The new law requires that all real estate transactions be made through Cuban bank accounts so that they can be better regulated, and it sets a tax rate of 8 per cent of the assessed value.” The need for more government revenue is one possible explanation for this change. Another is that Cuban elites anticipate, after further easing of land ownership restrictions, the ability to accumulate at low prices sites which will become valuable in the future. The least likely is that Cuban authorities just haven’t thought about what land is and its role in political economy.

Did you hear the one about the two economists….

…who spoke for over an hour about cities, development, migration, and density, and asserted that America would be more productive if our cities were denser, and did not mention economic rent nor land value?

They did it here, on econ-talk, and you can download the podcast or just read a pretty good text summary (I do not recall them using the word “land” either, but it appears several times in the text summary so I must have missed it). The book itself seems to be available only on Amazon Kindle, which as I understand it means I cannot buy it, but only license a copy to read. But from the interview I gather that author Ryan Avent has determined that American cities (and some suburbs too) are not as densely developed as they “should” be, and that this is due to local governments’ reluctance to allow development at optimal densities.

Now certainly there’s no question that local governments, usually reacting to neighborhood concerns, often refuse to allow development at densities which are physically workable. I recall one suburb where a proposal would have had single-family houses on lots of 9000 square feet. Community reaction was that the kind of people who would live on such small lots would not be desirable neighbors, even tho in many other cities such a lot would be considered oversize. These concerns are often stated as “property value” arguments, and perhaps they really are. That’s an expected consequence of an economic system where ordinary people cannot expect to accumulate much money by working and saving, and must hope to profit from rising prices of the real estate they occupy.

And it’s not unknown for the politicians whose approval is needed for major developments to take advantage of the opportunity for personal gain, legal or otherwise but surely wrong.

So how is it to be decided what the optimal density is? In Science of Political Economy, Henry George observes that, for each kind of production, there is an optimal density at which to work. That density depends on what is being produced, the technology applied, the number of workers available, their skills, the quantity to be produced, etc., so it will change over time. Avent may be correct that we would be better off if higher densities were permitted in some already-dense desirable places, but he certainly didn’t offer much evidence in this podcast.

But let us assume that higher density would be a good thing (and I am certain that in some places it would be), how is it to be achieved? Avent seems to assume that a reduction in land use regulation would be the proper method, because the market is efficient and so density would rise to the appropriate level.

But communities are more complicated than that, and you can’t, or at least shouldn’t, ignore externalities. The first builder to put a high-rise in a desirable townhouse neighborhood may profit nicely. However, not only does the character of the community start to change, but different infrastructure is needed. Can the streets handle the traffic, or can acceptable public transport be provided? Will the sewer and water system handle the load? What are the other effects on the larger community, and how can they be dealt with? There are loads of reasons why it makes sense for the community, acting thru its local government, to have a major say in its development.

But to really irritate those who understand political economy, Avent says:

[I]f you had a sort of density charge–I hate to tax density in that way but in terms of being realistic about the distribution of cost–you could channel some of that into investing in local amenities: could be parks, could be transit, something to try to convince local stake-holders that density is going to be in their interest. So normally we think of taxes as discouraging an activity–which it would. It would make it more expensive for developers to make urban areas more dense.

Yes, some way for the community to share in the benefits of increased density. Can you say “land value tax?” It doesn’t tax development, it taxes development potential. It pressures landowners to build at appropriate densities, but doesn’t punish them for doing so. Supported by competent and realistic zoning, it guides density to the places where is works.

Somebody told me once that the Economist, for which Avent is a correspondent, is a pretty good source of economic news except that it refuses to acknowledge the possibility, let alone the benefits, of a land value tax. I still haven’t seen anything that contradicts this assertion.

Yes, LVT falls on the rich

In case anyone doubted it, Bloomberg reports that real estate prices in vacation areas favored by the wealthy, such as Mount Desert ME and the Hamptons on Long Island, continue to rise even as prices generally have dropped. And, yes, these are land prices, not house prices:

[B]illionaire Mitchell Rales bought a $5.5 million estate and tore it down to build a $25 million mansion

The only specific figure given for the wealthy enclaves is a rise of 14% in Southhampton, and the period to which this applies isn’t specified.

One hopes that local assessors are closely monitoring and responding to these trends.

Prices climb for ag land and infrastructure

I have blogged before about rising prices for agricultural land. The trend continues, with FRB/Chicago reporting(pdf) that, as of Q2 2011, farmland prices in its area (Iowa plus most of Illinois, Michigan, Wisconsin, Indiana) had risen 17% in a year, and 4% just since the prior quarter. This trend, of course, reflects an increasing amount of financial power invested in (and therefore inclined to defend) the goverment’s destructive ethanol incentives.

What’s new, to my knowledge, is investment by speculative interests in grain elevators. While elevators aren’t exactly a monopoly like farmland (farmers lacking reasonable elevator services have in some cases built their own), they’re certainly a tool that can be used to squeeze profit without producing or providing useful service. The source article implies that the investment is simply a function of increasing storage prices (without explaining what caused the prices to increase), with no intention of storing grain to manipulate prices. Americans wouldn’t do that, would they?

Land Economics and Ownership– cancelled

I am back to the blog, after a series of computer difficulties and travel distractions. I could have resumed earlier, but had (still have) too many things to write about, so I waited for something simple and outrageous. And here it is.

What two products, planned for the 2007 U S Census of Agriculture, have been cancelled? One is a report on acquaculture. The other? Land Economics and Ownership. One inclined to conspiracy theory might say TPTB are trying to prevent folks from learning the truth. I would tend more to think it’s a product of ignorance, no need for conspiracy. I wonder what the report would have said.

Hong Kong’s “citizens dividend”

I have previously discussed Hong Kong’s land tenure system, under which the land is publicly owned, but improvement owners have security of tenure in exchange for paying significant land rent. One result is that most working people don’t have to pay any sales or income taxes. Another is that land is efficiently used.

But there are a couple of concerns:

Since Hong Kong doesn’t collect all the economic rent, speculation can still drive up the cost of housing as well as any activity which uses land (and they all do).
Wealthy mainland residents are moving to Hong Kong to take advantage of the increased liberties which HK residents get, further driving up costs for local people.

Now we read that every HK has declared a sort of citizens’ dividend, every permanent resident will get HK$6,000 (US$773, currently). Bloomberg calls it a “handout,” but I think “share of economic rent” might be more appropriate. Opponents of the move say it will be inflationary, and certainly it could lead to higher economic rent, with speculation driving land costs even higher. Of course, if people expected the government to collect all the economic rent, speculation would not occur. While the cost of living might still increase, giving an equal dividend to every resident would tend to flatten the income distribution, helping the poor much more than the wealthy.