We're in for a wild ride. Exponentially accelerating technological, cultural, and socioeconomic evolution means that every year will see more developments than the previous one. More change will happen between now and 2050 than during all of humanity's past. Let's explore the 21st century and ride this historic wave of planetary transition with a confident open mind.

Saturday, May 9, 2009

Land Value Tax for Major Cities

How New York City can leap ahead in upcoming urban competition (Or Story of Joe the Land Baron)

Recent elections in Iceland have punished conservatives who brought the beautiful country to the brink of economic ruin. The new Social-Democratic/Green-Left coalition's leader is determined to integrate Iceland into European Union. The process might take time but the small country will be better protected from international economic shocks with continental currency. Reykjavik would then be the closest European Capital to the New York/Boston axis, even closer than Dublin. A brand new investment opportunity awaits American Northeast as well as a closer point of contact with Europe's economy.

We've seen that the so called Celtic Tiger of Ireland was a paper tiger just like Iceland and Merrill Lynch. Lax regulation, borrowing, and land speculation have lifted the Irish only to knock them down again all the much harder. They've learned along with the rest of the world that living space for citizens is not a stock market to gamble with. They've learned, like many Americans, that you can't buy a house, renovate it a little bit, and resell it for 30% more. That extra addition inside a land improvement is just not that valuable. Reykjavik will not make the same mistake and New York City is too economically important and rent dependent to have housing bubbles seen elsewhere. So how does all of this play into helping New York and our Bostonian brethren to attract the most talent and win the economic hub wars?

The key obstacle to overcome and sharpen New York economy is the land baron.

You say, "Land barons!? Are you mad!? Those haven't been around since Alexandre Dumas' time! Talk about the 21st century now!"

Unfortunately this feudalistic remnant still exists and this faction is stronger than ever. We forget that private land ownership is not only a pre-capitalistic concept but also a non-capitalistic concept. The capitalist does not mix his creative mind, energy, and money to create a field or a chunk of rock in lower Manhattan. No, that rock was already there and taken with the help of a state government using violence, money, or trickery to take it from others. Then the government used men with guns to protect the chunk of land from armed men loyal to other governments. The capitalist is just allowed to play around on the land and build things like factories. However, many people who sit on parts of the land have convinced everybody that they have inalienable right to it since they either got there first, built something useful on it for others, or are renting the use of land to the efficient capitalist so it becomes useful. They passionately make a point that they are not like those other land owners in the world who used their tribe to violently seize it from others or used lies (that's true since then they'd be governments themselves or the Vatican).

At first glance, the argument seems right and fair especially since many "land barons" are rugged good old descendants of frontier men who settled America. Surely the great-great-grandson of a man (who was allowed by Union forces to settle on land after it was ethnically cleansed), is not a land baron if he runs a humble ice cream shop? He is, but not significant to the discussion of helping to increase trade between New York and Europe if he's outside those areas. Let this man run and sell his ice cream to his heart's content in the Midwest for now.

If one looks more carefully at the fine print of land baron arguments, one sees that sometimes a legal squatter on the land just rents the space to the more efficient capitalists. Lets look at a hypothetical example. The land baron (lets call him Joe), might have descended from another back in the day or he could be one from Japan or United Arab Emirates who decides to buy a few square acres in Manhattan. He buys the acres from another baron when local economy is damaged and land is a bit cheaper or when he sees economy growing in the future. He hires a wonderful construction company to build a shiny skyscraper office building. Then he waits for the capitalist to come in and give him rent money to run a business out of the building. Those barons who have land near say, Wall Street, can jack up their rent pretty far and just worry about other barons building taller buildings and offering cheaper rent.

Sounds great for development you say? Well, a shovel also sounds like a great way to dig a ditch in the absence of a bulldozer. However the bulldozer equivalent of directing development does exist and has shown remarkable results in such little gems like Hong Kong and Singapore. But more on that in a minute. Lets return to Joe now. Joe has found that he can create a de facto monopoly sometimes. Maybe Joe buys a couple of pieces of land with airports on them next to a city. Then he charges capitalists (who own airlines), rent to have their facilities and airplanes there.

Joe, trembling with excitement, cried out, "Lets jack up the rent a bit shall we what are they going to do!? Lose out to their competitors by not flying their planes here? Are they going to buy land next to my airports and build their own airports which will take years and lots of money and pressure on local governments? Hah! Let them and then I'll lower the rent again!"

He goes hogwild buying up land with oil fields, mountains full of copper and gold in them, and parts of coastal areas on poor islands to build entire tourist resort chains with casinos on them. Sometimes, in the heady days, organized crime wanted a bit of the cut or offered help but Joe grows too powerful and stops being seen as a person. After a while the local government stops being dazzled by Joe's success, wealth, power, and shiny structures in their communities. They approach Joe and say that perhaps owning all the airports drains too much money from the people by making the capitalists jack up prices. They cautiously warn that perhaps owning the only rail hub through town is detrimental a bit. Making capitalist railroad owners pay more for transit hurts development and progress and raises price of goods for the residents.

Joe replied, "What are you going to do!?! Tax me!? I'll just sell my land to another Baron who will in turn pass on the taxes to others by jacking up the prices even more. Maybe then I'll move out of this state or country and just do this again somewhere else. I hear Cuba's Batista wouldn't do this to me. Why don't I go there build more Casinos? Are you going to forcefully take away my land?? See how that works out for you, get some political capital for that, and then call the guy I sell the land to."

At that, the government officials shook their heads and smiled nervously. They soothingly spoke to Joe, "No, no, no we don't mean it like that. All we want is to form a partnership with you to get a cut of your profits. This way you can be a member of our community and benefit from it as well as be protected by our influence. Let's just iron out an agreement on jacking up prices and we'll even help you out with tax breaks here and there and some lax regulation. We want votes from the people and you are important to us to achieve that goal. Join us in a partnership. You can still sell the land and we'll continue the partnership with somebody else if you want."

Joe thought for a bit and then smiled widely. "What a good reasonable idea! I always felt connected to this city anyway!" he exclaimed as he shook the government's hand.

Sometimes however, the government just acquired key transportation and large assets by buying them and running it themselves. Not being profit driven they, of course, could not compete as effectively and often passed the costs to the tax payer. Sure, a government monopoly (like Port Authority of New York and New Jersey) on airports and subways could artificially keep the prices low so capitalists and their airlines are not too pressured. That however required either higher taxes and fees from ordinary people or required cutting corners here and there.

And thus the infrastructure rotted and got dingier (although the shiny new planes sure were kinda modern). And the price for the capitalists using this government owned land didn't really come down that much at all.

What to do, what to do?

The first step is elimination of taxation on land improvements while jacking up tax on land through equal Land Value Tax for all land owners in New York City. LVT is the only tax with no deadweight loss since amount of land is fixed. Singapore and Taiwan have utilized it effectively and beautiful cities like Sydney achieved wonderful efficiencies in infrastructural improvement. Land Value Tax has been proposed in America and New York City many times (for an example, see this NYT article from 1899 explaining that those barons living next to new subway lines will help pay for the economic benefits that the new line brings).

The land barons or as they're now called landlords (what other profession has a lord in the title?) have killed the idea in the United States. However, now that educated are migrating to the cities it's time to milk those who own the new apartment buildings. No, buying an apartment inside somebody else's building is not wealth. Reselling it to somebody else (and fueling the bubble) just makes the apartment owner the baron's stooge who bought a seat on somebody else's car. The artificial overvaluing like this and the bubble that it creates is a massive transfer of wealth to a parasitic non-capitalist feudal class of middlemen. All land owners should pay a tax (rent) to the government that protects their property with tax payer paid thermonuclear weaponry. Lets not contribute further to failed sub-urban economic structure by making it cheaper for people to live in suburbs through low (compared to tax on improvements) land taxes currently. Lets free the capitalists having to deal with land barons from dealing with middlemen and lets make those capitalists who are also land barons more efficient.

The second step is to sell off land on which subway, bus, and railroad infrastructure sits to private companies.

The third step is using 21st century trust-busting to make sure all the private owners are competing and not joining forces. Teddy Roosevelt knew what was right for America and really contributed to making capitalism better, more efficient, and less in cahoots with feudal parasites. Let's do one better than a republican 100 years ago. Lets save capitalism by letting capitalists using the land breathe freer and by allowing them to really use their creative energies in competition. Let the real landlord, the New York City government, get the fat checks and make the city more attractive to trade. Ice cream owners in Midwest and other competing urban hubs like Los Angeles can follow or do their own thing. Lets make New York City an ever better connector to the economy of Europe and a source/receiver of talent and investment. Lets make Joe the Baron into Joe the Capitalist

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