Georgist Policies and Population Growth in New York City, San Francisco, Chicago, Cleveland, Toledo, Detroit, Milwaukee, Pittsburgh, and Other Cities, 1890-1930

Abstract: In the period 1890 to 1930, the Georgist movement inspired a large number of civic leaders-mayors, assessors, governors, congressmen and others-to implement Georgist policies in a number of US and Canadian cities. That is, in order to encourage development, they reduced or eliminated assessments on buildings and increased assessments on land. They used land revenues to provide low-cost, high-quality public services. Where implemented, these policies resulted in rapid population growth.

INTRODUCTION

"History ... is the biography of great men" - Carlyle

Some cities have grown in notable spurts. Some of these cities were new; others have revived after decaying. Cities' cells, like ours, metabolize and can refresh themselves constantly. Cities need not die like us. They can continue this cycle of renewal forever, when people remodel buildings and clear and renew sites. This can happen even after periods of sickness and senility. Given the will, it also takes some skill with public policy. We can learn the skill from the history of growing and reviving cities.

The dynamics are bent by free will, not just iron laws of geography and history. True, they deal with economics and numbers and tax policy, with self-seeking employees and home-buyers and merchants and manufacturers, with simple motives and narrow outlooks. Yet the evidence keeps bringing us back to the impact of idealistic leaders, and the power of their ideals to move others, prevailing over and working with "destiny" and greed and myopia and technical details.

There was a telling episode in New York City, 1920-32. Its leaders exempted new residential buildings from the property tax, while maintaining the tax on land values. As current land prices rose, which they swiftly did, the land taxes rose in step. There ensued a notable surge in building and population, unmistakably linked to the tax policy. National population data disclose, however, that New York was not the only city to have boomed or revived suddenly. What was remarkable about New York, that we should be mindful of it?

READ ON...

After the quake and fire of 1906, San Francisco bounced back so fast its population grew by 22%, 1900-10, in the very wake of its destruction; it grew another 22%, 1910-20; and another 25%, 1920-30, becoming the 10th largest American city. It did this without state or federal help; without expanding its land base, as rival Los Angeles did; while providing wide parks and public spaces. How did San Francisco do it?

Mayor Nagin of New Orleans tells the world that Katrina wiped out most of his tax base, so he is impotent. By contrast, in 1907 San Francisco Mayor Taylor's Committee on Assessment, Revenue, and Taxation reported sanguinely that revenues were still adequate. How could that be?

San Francisco continued to collect property taxes, which post-fire amounted to pure land taxes, and used them to rebuild. If now New Orleans fails to collect property taxes, it will allow absentee speculators to gum up the land market, impeding coordination between residents who seek to rebuild.

History offers numerous examples of cities that pulled themselves up by their own bootstraps after a disaster. New Orleans can too.

Our latest Nobelist in economics, Thomas Schelling, offers the following advice in the wake of Hurricane Katrina: "There is no market solution to New Orleans. It is essentially a problem of coordinating expectations... ." By that he meant simply that each person's incentive to move home and rebuild depends on his or her confidence that others will do likewise. "But achieving this coordination in the circumstances of New Orleans seems impossible."

Actually, there is a time-tested way to solve the problem that defeats Schelling. American urban settlers and investors have a long history of building and rebuilding cities by "coordinating expectations." In 1891 the traveling Lord James Bryce wrote of Americans, "Men seem to live in the future rather than in the present: ... they see the country not merely as it is, but as it will be..." They achieved critical urban mass by faith in each other, a mutual faith more economic than theological.

"The chief tax is in every State," Bryce noted in 1891, "a property tax...". The property tax at that time fell in many places mainly on land values, because that is most of what there was to tax. This tax was the mechanism for "coordinating expectations." Each landowner felt the pressure to use his land, knowing his neighbors felt the same pressure at the same time. (There were also pioneering religious and ethnic groups that fostered mutual faith, as the Greek Orthodox community is doing now in its small part of New Orleans. In game theory we are all greedy monads, so such things do not happen in the models-and who cares about the extra-modular [i.e., real] world outside the laptop?)

It's not that Schelling never heard of the stimulative effect of taxing land values. In 1969 I had the privilege of presenting it to a seminar at the Brookings Institution. I suggested raising the land tax, and lowering sales taxes and taxes on buildings. Most attendees listened with at least moderate sympathy, notably excepting Schelling, who objected that any change in tax policy would break the social contract, destabilize expectations, shatter investor confidence, and risk bringing the world down in ruins.

In 1966 I had spoken on the same point to a New Orleans civic group, sponsors of a Brookings urbanism program. They were charming hosts, eager for ideas to clear "undesirable" neighborhoods but obsessed with preserving Le Vieux Carré, which they saw as unique, wholesome, a money machine, and too fragile to survive competition that would replace it with the commonplace. Like Schelling, they chose stasis, with the results that we see today. Actually, there can be no stasis, as Bill Clinton has said: buildings depreciate every year, and need constant upkeep, operation, adaptation to markets, and often replacement.

A going city or region, leveled by catastrophe, has an easier time returning to critical mass than does a new city or region flying blind. London renewed itself after the Great Fire of 1666; Schenectady after Frontenac razed it in 1690; Lisbon after the 1755 quake; Dutch cities after flooding themselves out to balk successive Spanish, French, and German invaders; Moscow after 1812; and Washington, D.C., after 1813. In 1848 John Stuart Mill highlighted "the great rapidity with which countries recover from a state of devastation; the disappearance, in a short time, of all traces of the mischiefs done by earthquakes, floods, hurricanes, and the ravages of war." Since Mill there have been a series of such rebirths: Atlanta after Sherman; Chicago after 1871; swaths of Wisconsin after the epic 1871 fire named for little Peshtigo; Johnstown, Pa., after the killer 1889 flood; San Francisco after the quake and fire of 1906; Flanders after World War I; Tokyo after 1926; the Mississippi Valley after the great flood of 1927; Nanking after Japan's devastating occupation. After World War II came Germany's Wirtschaftswunder, and the rebuilding of Coventry, Rotterdam, Tokyo again, Hiroshima, Nagasaki, and Russia after Hitler. There was Anchorage after its quake; Kobe after its; and on and on.

Permanent hazards may remain, as in New Orleans. Yet, Chicago was rebuilt on the foundation of its "stinking swamp," where Chicago architects and engineers pioneered the modern skyscraper on deep caissons. Tokyo was rebuilt at the confluence of four tectonic plates, and after 1945 with no navy or army of its own. San Francisco was rebuilt on the San Andreas Fault, and went high-rise on its crazy hills while Los Angeles was still capping building heights and opting for sprawl. Much of the Netherlands thrives below sea level.

After disaster, location remains, and location makes cities. Greater New Orleans was recently the largest port in the world in tonnage shipped. People, enterprise, and investment also make cities. Herein lies the greater hazard, for many Americans cities wither away not with a bang but with a whimper, like Buffalo, Cincinnati, Detroit, Camden, or St. Louis. New Orleans today has a kind of dynamism that those cities lack. Demand for its real estate is holding up well, and rising in the unflooded areas like Gentilly Ridge.

Even in the flooded and abandoned areas there is strong demand from absentee bottom-fishers looking for a free ride up the price elevator as the efforts of others bring back the neighborhoods. Yet, this kind of dynamism is worse than stasis. These absentees choke out other buyers aiming to commit themselves, to rebuild and reside and make neighborhoods. As "Each man kills the thing he loves," do-nothing investors collectively drive away the very people who could make their dreams come true. Many of them have no plans, but are waiting for other people's plans. Coordinating expectations like those adds up to nothing. Tragically, the tax system in New Orleans-as nearly everywhere else-penalizes builders and doers, and spares free riders.

Consider born-again San Francisco, 1907 to 1930, as a case study in success. What can it teach New Orleans? It had no state or federal aid to speak of. The state of California had oil, but didn't even tax it, as Louisiana (rightly) does. It did have private insurance, but so does New Orleans today. It had no power to tax sales or incomes. It had no lock on Sierra water to sell dearly to its neighbors, as now; no finished Panama Canal, as now; no regional monopoly comparable to New Orleans' hold on the vast Mississippi Valley. Unlike rival Los Angeles (whose smog lay in the future) it had cold fog, cold-water beaches, no local fuel nor easy mountain passes to the east. Its rail and shipping connections were inferior to the major rail, port, and shipbuilding complex in rival Oakland, and even to inland Stockton's. It was hilly; much of its flatter space was landfill, in jeopardy both to liquefaction of soil in another quake and to precarious land titles. Its great bridges were unbuilt, so it was more island than peninsula. It was known for eccentricity, drunken sailors, tong wars, labor strife, racism, vice, vigilantism, and civic scandals. In its hinterland, mining was fading and irrigation barely beginning. Lumbering was far north around Eureka; wine around Napa; deciduous fruit around San Jose. Berkeley had the state university, Sacramento the capital, Palo Alto Stanford, Oakland and Alameda the major U.S. Navy supply center.

How did a city with so few assets raise funds to repair its broken infrastructure and rise from its ashes? It had only the local property tax, and much of this tax base was burned to the ground. The answer is that it taxed the ground itself, raising money while also kindling a new kind of fire under landowners to get on with it or get out of the way.

Historians have obsessed over the quake and fire but blanked out the recovery. We do know, though, that in 1907 San Francisco elected a reform mayor, Edward Robson Taylor, with a uniquely relevant background: he had helped Henry George, more than anyone else, write Progress and Poverty in 1879. George, of course, is the one who wrote and campaigned for the cause of raising most revenues from a tax on the value of land, exempting labor and sales and buildings. (See sidebar.) In 1907, single-tax was in the air, and it was natural to go along with Cleveland (Mayors Tom Johnson and Newton Baker), Detroit (Mayor and later Governor Hazen Pingree), Toledo (Mayors Samuel "Golden Rule" Jones and Brand Whitlock), Milwaukee (the "sewer socialists" and Mayor Dan Hoan), Chicago (Mayor Edward F. Dunne, ex-Governor J.P. Altgeld, muckrakers Ida Tarbell and Henry D. Lloyd, Editor Louis F. Post, Nobelist-to-be Jane Addams, Councilman Clarence Darrow, et al.), Vancouver (6-time Mayor Louis Denison "Single-tax" Taylor), Houston (Assessor J.J. Pastoriza), many smaller cities, and doubtless other big cities yet to be researched, that chose to tax buildings less and land more. It was the golden age of American cities when they grew like fury, and also with the grace of the popular "City Beautiful" motif.

San Francisco bounced back so fast its population grew by 22% from 1900 to 1910, in the very wake of its destruction; it grew another 22% from 1910 to 1920 and another 25% from 1920 to 1930, becoming the tenth largest American city. It did this without expanding its land base, as rival Los Angeles did, and without stinting its parks. On its steep gradients it housed, and linked with publicly-owned mass transit, a denser population than any city except the Manhattan borough of New York. It is these people and their good works that made San Francisco so famously livable, the cynosure of so many eyes, and gave it the massed economic power later to bridge the Bay and the Golden Gate, grab water from the High Sierra, finance the fabulous growth of intensive irrigated farming in the Central Valley, and become the financial, cultural, and tourism center of the Pacific coast.

Mayor Nagin of New Orleans tells the world that Katrina wiped out most of his tax base, so he is impotent. By contrast, in 1907 Mayor Taylor's Committee on Assessment, Revenue, and Taxation reported sanguinely that revenues were still adequate. How could that be? Because before the quake and fire razed the city, land value already comprised 75% of its real estate tax base. San Francisco also taxed "personal" (movable) property, but it was much less than real estate, and secured by a lien on land. The coterminous county and school district used the same tax base. They also made extensive use of special assessments on lands benefited by specific public works. In other words, San Francisco had adopted most of Henry George's single tax program de facto, whether or not they said so publicly.

It was a jolt to replace the lost part of the tax base by taxing land value more, but small enough to be doable. This firm tax base also sustained the city's credit, allowing it to finance the great burst of civic works that was to follow. Taylor supported the next mayor but one, James Rolph (1911-1930), who oversaw a long period of civic unity and public works. "Sunny Jim" Rolph expanded city enterprise into water supply, planning, municipally owned mass transit, the Panama-Pacific International Exposition, and the matchless Civic Center. Good fiscal policy did not turn all the knaves into saints: Rolph eventually fell into bad company with venal bankers and imperialist engineers. But San Francisco rose and throve.

New Orleans, sited below the Mississippi River and its levees, has its own special problem. Milton Friedman and his like-thinkers proclaim that markets have solutions for everything that governments botch. Building levees, however, demands cooperation guided by some overall authority, which is what governments are for. A levee protects the land behind it only by shunting water onto other lands, which then require their own levees to shunt the water back, and downstream, and even, as it turned out, upstream. Competition among levee-builders becomes a vicious spiral. Over a century it has led step-by-step to levees four stories high.

Analytically, the problem is analogous to that of rivals pumping water or oil from a common pool, or fishermen competing by taking fish from each other. In those other contexts, private-property fanatics (i.e. most modern economists) see a "tragedy of the commons" and prescribe privatization. Levees, however, are there to protect lands already private, and call for different thinking.

Since the Mississippi Valley covers half the country, the central authority has to be Federal. In the great flood of 1927, Calvin Coolidge let Herbert Hoover make himself czar of the river system. Hoover, who fostered cartels in industry, declared that prosperity can be organized by "cooperative group effort and planning"-i.e., by coordinating expectations consciously, from the top down. It was too late, however, to keep the power elite of New Orleans, who ran Louisiana, from dynamiting the levee protecting St. Bernard and Plaquemines Parishes, saving the city by flooding the rednecks. These responded by electing Huey Long governor in 1928, breaking New Orleans' hegemony for good.

Meantime, Hoover and a few rich power-brokers organized the Tri-State Flood Control Commission to coordinate efforts among at least Louisiana, Mississippi, and Arkansas. Hoover's approach achieved coordination by making local governments pathetic supplicants (like Mayor Nagin and Governor Blanco) at the public trough, brokered by the highly politicized U.S. Army Corps of Engineers. Over time this arrangement has come to entail less coordination and more pork.

Hoover's czardom came too late to allocate lands for a bypass or overspill, such as the broad one west of Sacramento that protects the lower Sacramento Valley. Too many oxen would be gored. And last year the overbuilt levee system, legacy of 150 years of the slow vicious spiral of misdirected competition to beggar-thy-neighbor, finally betrayed the city.

What to do now? A strong dose of Georgist tax policy will revive the private sector of any city, and the surrounding rural areas too. As to flood control, we need an integrated system that will sacrifice some lands to benefit others, and a tax system that will compensate the losers from the gains of the winners. Given such integration, engineers since James B. Eads in 1870 have worked out plans for the whole river system. It would take a catastrophe to shock Americans into such a new mode of thinking-but the catastrophe just happened, so now let us think.

Henry George warned that landowners might take a growing wedge of the national "pie", or product. Labor's wedge might grow absolutely, as the whole pie grows, but still fall as a fraction.

In our times, George's grimmer scenario is coming true. Since about 1975, labor's wedge of the pie is shrinking as an absolute. "Real" wage rates have been falling since about 1975. "Family wage" used to mean a breadwinner's wage high enough to support a family; now it means the combined wages of two adults. Many of these are "DINKS" (Double Income, No Kids) because that is all they can afford without cutting their customary material and educational standards.

What is this "real" wage rate? It is a ratio: the nominal money wage rate on top, divided by an index to the Cost of Living (COL) on the bottom. The higher the COL, the lower the real wage. Landowners cut into labor's share from both the top and the bottom, because the COL includes many products of land (like building materials and energy) and land itself (like homesites). Shelter costs are by far the largest part of household budgets.

The standard index to the COL is the Consumer Price Index (CPI), calculated and published regularly by the Bureau of Labor Statistics (BLS). This index is, we will see, a political football.

Henry George said little about inflation because it was not a threat in his day. That was a time of "hard money" and the gold standard. Prices were stable or falling; DEflation was the great bugbear. Today, though, to check on George's forecast, we have to distinguish between nominal money wages, and real wages.

An old Kingston Trio classic offered the following folk wisdom about survival in The Everglades: "If the 'skeeters don't get'em then the 'gators will." If the skeeters of life are nicks taken from money wages, the big gator now is the price of buying and owning a home.

Why deny inflation? Those in power have several reasons to understate rises in the cost of living (COL), measured by the CPI.

1. To mask the fall of real wage rates. This is supposed to placate working voters. It is supposed to support orators declaiming that our standard of living is ever rising, and we should all feel good. Actually, real wage rates have fallen steadily since peaking in about 1975. That is using the official Consumer Price Index (CPI) to measure rises in the COL. If the CPI understates rises in the COL, real wage rates have fallen even faster than the data show.

As a by-product, this denial of inflation supports those who like to dismiss George as a false prophet of doom.

2. To mask the fall of real interest rates, making savers and lenders feel better, and more willing to lend to governments. In this age of massive and growing federal debts, the U.S. Treasury depends on willing lenders more and more, to stay solvent.

3. To slow the rise of income tax brackets, which are indexed to the CPI. That is, when the CPI rises by, say, 5%, the income level at which you pass into a higher tax bracket also rises by 5%. Congress, for once in a reasonable mood, enacted this sensible provision when enough people became aware that they were victims of "bracket creep". Bracket creep is when inflation boosts your money income into a higher tax bracket, although your real income has not risen.

However, if the true COL rises by 10%, while the CPI rises by only 5%, this provision no longer protects us against bracket creep. It just gives a talking point to those who claim to protect us. Sneaky! That is why you, dear reader, may have had a hard time following the bean under one of the three shells. Politicians, of course, are good at withdrawing promises. The sneakier the method, the easier it is for them to cover their tracks.

4. To cut the real value of social security payments. This point is straightforward. These payments are also indexed to the CPI. If the CPI understates the COL, real social security benefits fall every year. Congress gets to spend the savings on wastes like Alaska's "bridge to nowhere", redundant imperialistic ventures, tax cuts for major campaign contributors, and no-bid contracts for the well-connected.

5. To cut rises in labor union and other wage contracts that are indexed to the CPI.

6. To give the Federal Reserve Bank credit for having "tamed inflation", when in fact inflation of land prices is running wild.

That is the "Why" of veiling inflation, or enough of it to show the motivation of those in power. Now let us look at the "How". There have been two major steps in recent decades.

First was removing the costs of buying and owning homes from the CPI. The Bureau of Labor Statistics (BLS), the agency that calculates the CPI, did this from 1983 onwards. They didn't remove it altogether, that would have been too transparent. Instead they substituted the "rental equivalent" of housing. This is supposed to be what your house would rent for, or what you would pay to rent a similar house. It is a hypothetical and casual figure - sloppy and unverifiable, that is - based simply on questionnaires to a sample of homeowners. It takes no account of the fact that some people will, and therefore everyone must pay a premium to own, because of expected higher future rents and resale values.

Thus the land boom of 1983-89 was mostly blanked out of the official published CPI of those years. The CPI rose gently as though the land boom never happened. Again, in 2004 housing prices rose by 13%, while these "rental equivalents" rose only by 2%.

The CPI also takes no account of the price of extra land around some houses. It takes no account of recreational lands, which now have displaced farming and forestry over whole counties and regions.

The second major step was the Boskin Commission Report of 1995 (Newt Gingrich was dominating Congress), and its acceptance and implementation. Michael Boskin of the Hoover Institution was called upon to legitimize allegations that the CPI overstated inflation. He and his Commission obliged, and supplied the rationale for several rounds of trimming down the CPI even more.

The Boskin Commission's advanced methodology included a lot of old-fashioned cherry-picking. They accumulated evidence supporting the foregone conclusion, and omitted contrary evidence. Most tellingly, they were silent about the biggest factor by which the CPI understates inflation: that is the use of "rental equivalence" in place of home prices. Now, shelter costs are about 40% of consumer budgets, and hence of the true COL. To accept an extreme understatement of shelter costs, while distracting us with lesser factors and arcane methodology, shows bias.

Most professional economists, sad to say, treat Boskin's report as holy writ. They come on like preachers, salesmen, or just cheer-leaders, not like scientists exercising independent judgment. I have recently surveyed 20 current texts in Macroeconomics. They all list the same four "biases", in the same order, that they allege make the CPI overstate inflation. These are:

a. Substitution bias. When the price of something rises, you use less of it, so it should be weighted less in the index.

b. Quality improvement bias. Products of the same name keep getting better, so they say.

c. New product bias. The CPI lags in showing how new gadgets raise our welfare. Microchip products, of course, are the example of choice.

d. "Discount bias". The CPI scriveners assume that products sold in discount stores are of lower quality, when they really are just as good.

Let's just take point "b", above, quality improvement bias. The texts give some examples, but not a single counter-example. Here are a few of the latter.

One could go on, but the point is that Boskin et al. seem not to have considered counterexamples to their foregone conclusions. If they did this where we can observe them, what else did they do under cover of black box models? The BLS, succumbing to the political pressure, keeps modifying the CPI to show less inflation, even while our daily experiences and shrinking savings tell us there is more.

George warned that landowners might take most of the fruits of progress, leaving labor barely enough to survive. Critics then and now have urged us, instead, to don rose-colored glasses. The rosiest of these is the CPI as manipulated to screen out bad news, especially news about soaring land prices. Let us be aware of who is manipulating the news, why, and how.

(Originally in Groundswell, December 2005)
 

There is a strong movement afoot to tax just consumption rather than all income. The "good reason" for this is to promote saving and investment, and thus enhance domestic capital formation, said to be the main force for economic growth, poorly defined but assumed to be a good thing. A battery of well-financed pols, along with many economists and divers publicists, are pushing it.

Leading proposals take mainly two forms. One is to create a national sales tax, obliterating the present income tax. The second is to exempt all saving and investing from the present income tax. This is more sly, is easier to achieve politically, is already partly in place, and is the more likely to occur, so my examples will come from it.

There are several faults in the proposals. A chief one is to distract us from the major cause of overconsumption, viz. turning land value gains into cash. Some call it "living high on the old homestead," which is imprecise but gives you the idea. "Equity withdrawal" is a more generic term. The land under and around homes is indeed a major element of land gains, but mineral, commercial, recreational, industrial, transportation, radio-wave, sylvan, and all kinds of lands and waters and other natural resources are involved, including those held by corporations, governments, and eleemosynaries.

An owner may "withdraw equity" by selling land for a gain; or borrowing (tax-free) on the swollen value; or neglecting maintenance and replacement of buildings, counting on the land gains to maintain his or her assets while milking the old capital as a "cash cow." In all cases, the NIPA (National Income and Product Account) does not count the land gains as income. NIPA does not count them as anything, they are outside its purportedly "aggregate" social accounts, just as they are outside the consciousness of most modern economists (except when they invest privately). However, the gainers spend them on consumption - with no output corresponding to it. This shows up in NIPA as dissaving.

Some economists dig a little into causes of dissaving. They mostly omit equity withdrawal from land value gains as a major cause, distracting us instead with other explanations. Some favored ones are social security (with no mention that our FICA taxes ARE a form of saving, squandered not by us but by Congress for the benefit of richer taxpayers); improved insurance (pooling risks, a net social gain); easy credit for housing (but with no mention of equity withdrawal); student-loans (with no mention that they are invested in human capital); and consumer credit (not mentioning it is dwarfed by mortgage credit). One may sense some class bias in the choice of examples.

The same economists are puzzled why the following causes have not increased saving the way they are "supposed to": the fall of income tax rates in top brackets; the rise of the percentage of our population in the high-saving ages, 45-65, after 1995; and the rise of average incomes.

Economist Robert Barro got promoted from Rochester to Harvard and became a Business Week guru for theorizing that Federal deficits would stimulate private individuals to save more. Milton Friedman cheered. This notion is, to put it charitably, not proving out. As for "business saving" (as of undistributed corporate profits) it gets lost in the shuffle.

Stiglitz & Walsh, whose current Macro-economics text is a cut above most, do mention the "wealth effect" of high stock values, making people "feel richer" and thus spend more on consuming. The authors would seem to be getting warm, but then they dismiss the rise of home prices: it has just "meant that more individuals were saving in the form of home equity" (p.225). Thus, their only direct reference to the rise of land values, while vague, has it backwards. Scanning other current texts on macro, the quality is downhill from there.

A bright spot is the ongoing work of Oxford's John Muellbauer, who may even be having a hearing in HM Treasury in Whitehall. It is hard to assess the impact, even from close up, and that much harder from this distance. We do know, however, that Britain has gone over to a VAT, and has not fully repaired Maggie Thatcher's vandalism of its local rating system, so Britain has a long climb ahead simply to get out of the pit it has dug itself into.

The result in the U.S., at least, is counterproductive policy advice from economists: raise sales taxes, and lower any tax, of whatever kind, that hits real property. This class includes property taxes, of course, but also estate taxes, inheritance taxes, taxes on the income from property (both land and capital), capital gains taxes, and severance taxes. The resulting higher land values lead to more equity withdrawal and less saving - the opposite of the alleged "good reason" for taxing only consumption.

This neglect of equity withdrawal from real estate is not a simple oversight. It is the result of years of perverting economists' training and vocabularies and techniques - their "groupthink," if you will - to cloud their understanding of it and intimidate them from mentioning the obvious. Poterba and Krugman, highly visible writers, also brought it up in the early 1990s, but without following through, and their "words like silent raindrops fell, and echoed in a well of silence". Mentioning equity withdrawal in any but a favorable light may have become a modern solecism, for it would discredit the measures actually proposed.

These measures include removing land rent, values, and gains from the base of the income tax. This is to be done by letting land buyers write off the expenditure in the year they buy. If the buyer is in, say, a 20% tax bracket, the Treasury thus puts up 20% of the purchase price. After that it gets back at most 20% of the net cash land rent, which is just a return on its own investment. If it's residential or recreational land, with no cash flow, the Treasury gets back nothing. In addition, mentioning how equity withdrawal pays for consumption would discredit the fellow-traveling proposal to exempt all "capital gains" (read land gains) from the income tax. It would weaken ongoing proposals to obliterate property taxes and severance taxes and taxes on estates and inheritances.

A second major fault in the proposals to tax only consumption is confused ambivalence toward saving. There is a strong residue of Keynesian demand-side economics among economists, journalists and pols, so that spending of all kinds is more often praised than censured, even as the gurus scold us, "the public," for our prodigality and indiscipline with money. Most economics texts are uselessly indecisive on this point. On one page they tell us that saving is desirable to create capital to abet growth, and on another that consumer spending is the key to growth and jobs, and saving is a menace. Pols and the Fed chief, Alan Greenspan, may thus pick whichever position suits their p.r. needs of the moment. As to the causes of saving, most toss it off as an automatically increasing function of income, and perhaps of interest yields.

A third major fault is misidentifying "consumption." Economists are careless with definitions, as Henry George brought out in his day, and the modern profession has not reformed. For example, many champions of taxing consumption cite the authority of J.S. Mill, who did indeed write that the income tax should exempt saving. None of them has noted, though, that Mill defined house purchase as a consumer expenditure, not saving, and scathed grandiose mansions on display in conspicuous locations as wasteful. Modern NIPA, in contrast, calls all housing a capital outlay.

We know that Mill, like Smith and the Physiocrats, viewed land rent as being peculiarly eligible for special taxation, so we may reasonably infer that if he had been present at the creation of NIPA he would have suggested several improvements. NIPA for example ignores wasting slots of land-time by underuse, which should be included as part of consumption. Investing in human capital is called consumption, as though weddings, pregnancies, birthings, commuting, nurture, housekeeping, chauffeuring kids, and grades K-12 are all frivolity on a par with jockeying ATV's over fragile lands, or bar-hopping. On the second matter, the childless Mill actually had no sympathy with the costs of parenting, a point on which his Malthusianism trumped his humanitarianism, but we needn't follow him on everything - just make sure we define our terms, and make others do the same.

NIPA does NOT call depleting hydrocarbons consumption, or even a business cost. This custom originated during W.W. II when the idea was desperately to maximize gross output, and damn the social costs. The custom is outrageously obsolete now, but the power of inertia is so strong that macro-economists do not even resist efforts to redefine terms: they simply ignore them. These are such big topics in their own rights, and so damning of NIPA and modern macroeconomics, that we defer fuller treatment for a sequel.
 
(Originally in Groundswell, May/June 2005)
 

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