If Not Liberalism, And If Not Socialism ...
Chapter 6 (Part 1 of 4) of the book
The Discovery of First Principles, Volume 3
Edward J. Dodson
For all the contradictions of
the present-day world, for all the diversity of social and
political systems in it, and for all the different choices made
by the nations in different times, this world is nevertheless
one whole. We are all passengers aboard one ship, the Earth, and
we must not allow it to be wrecked. There will be no second
Noah's Ark.[1] [Mikhail Gorbachev]
|
The decade of the 1980s unleashed in many societies conflicts between
those who believe the State is necessary as defender of community (or
of the status quo), and those who see the State as an oppressive
overseer designed to thwart individual liberty. On the side of
the anti-statists was the fact that by the late 1970s, there were few
examples to which one could point of government as an effective and
consistent servant of citizens. Whatever the form of government, the
tendency was for those in power to view themselves as an elite, to
whom privilege and license accrued as an integral component of power.
Citizen reaction around the globe followed paths of extraordinary
diversity -- ranging from apathetic acceptance to armed insurrection.
Unfortunately, few of the lessons offered by history had been learned
by those pressing for what they believed to be constructive change.
Only here and there did the community of transnationals exert
influence on the actions of governments or citizen activists. This
was, however, about to change and change dramatically because of the
revolution in communications over which governments soon learned they
would have little control.
A sense of what was on the horizon was revealed by discussion at the
first Global Conference on the Future, held in Toronto, Canada from
July 20-24, 1980. Among the presenters was author Alvin Toffler, whose
paper was extracted from his best-selling book, The Third Wave.
Toffler suggested that we were "facing a quantum leap forward"
and were on the verge of building of "a remarkable new
civilization from the ground up."[2] The process of change
would require decades and be accompanied by "upheavals,
turbulence, perhaps even widespread violence."[3]
Nonetheless, he expressed confidence in this vision of the future.
For reasons that have as much to do with the deepening of entrenched
privilege as with the pace of change, the years since have continued
to be plagued by the continuation of mass poverty and widespread
misery in the midst of remarkable advances in science and technology,
as well as our ability to produce more and more goods for consumption.
On the positive side, more and more people have accepted the need to
thoroughly understand the nature of our socio-political problems. At
the start of the 1980s, what concerned many people was how to balance
protection of our ecosystems with the quest for a rising global
standard of living. Out of this dialogue arose a debate over the
nature of property rights and - among some -- an awakening to the
destructive power of global land monopoly.
Among those speaking at the 1980 conference, Hazel Henderson came
closer than most to the central problem when she highlighted the
emerging struggle for control of nature's finite electromagnetic
spectrum:
It is now clear that a blatantly unfair monopoly by
industrialized nations of this vital resource exists over the medium
of communications from radio, TV, telephone to air and marine
navigation, microwave relay, radar, satellites and other strategic
systems. Here the division between nations of this planetary
resource is such that, for example, 90% of the radio spectrum is
monopolized by 10% of the world's population.[4]
The same could be said for control over valuable urban locations or
the world's richest natural resource-laden lands. Henderson offered no
mechanism for guaranteeing equality of access for a fair distribution
of the market values arising out of the economic licenses granted to
controlling interests. Only recently, in fact, has there emerged a
degree of recognition that, in principle, the airwaves ought to be
treated as societal property and leased to private users under an
auction system. Failure to charge full market rents for control of
the Commons (of which the airwaves are an integral part)
results in both inefficient use and speculation in the purchase and
sale of licenses. When nature is exploited without payment of the full
rental value to society and without appropriate regulation, those who
exploit the environment tend to do so with profit maximizing in mind.
They seldom behave with concern over whether their extractive
processes poison the air and water, destroy forests and the diversity
of life nurtured by forests or wetlands. To return to Henry George for
a moment, his fundamental observation about our behavior continues to
be valid: we seek to satisfy our desires with the least exertion. And,
sadly, the drive for profits too often overrides other considerations.
That is both the simplicity and the complexity of how crucial an
understanding of the laws of production and distribution is to the
enactment and enforcement of effective public policy. Uncollected rent
left in private hands provides a very adequate fund to cover any legal
expenses required to forestall enforcement of environmental
regulations (or contribute to the campaign funds of candidates for
public office who must decide what to do about such intransigence).
Companies guilty of the worst pollution of the land and water passed
on profits to owners and managers and then simply abandoned their
polluted and worn out production sites. The public received very
little of the rent that should have been collected and has been forced
to levy taxes on others to remove toxic wastes from land and water
before new uses are made possible.
In Toronto that year, conference attendees actually debated the
wisdom of privatizing the Commons. Scientist Joseph P. Martino
made a reasonably good case that private ownership results in far
better resource management and stewardship than when government is
asked to manage the earth. Unfortunately, Martino ignored the
monopolistic nature of private control over natural resource-laden
lands as well as locations in our cities and towns. Arvid Pardo[5] and
Elisabeth Mann Borgese stated their own case for an "equitable
distribution of benefits from exploitation"[6] of what a
growing number of transnationals recognized as "The Common
Heritage of Mankind" -- the seas and the seabeds. Leasing access
to the mineral-laden locations under the seas seemed a natural
application of just principle with respect to a sharing of the earth.
Private individuals or groups would bid (i.e., establish the market
rental value) for locations based on their estimation of what might be
extracted and taking into consideration the cost of whatever
regulation would be imposed. Those who continued to promote the basis
reform ideas offered by Henry George were highly supportive. These
Georgists and other transnationals were well aware that a major
obstacle to a fair sharing of the earth's bounty existed in the from
of claims to sovereignty over portions of the earth. Many people still
thought of themselves as citizens of a particular nation and that
control over resources within their borders was a prize that came by
defending one's sovereignty from external enemies. Very little had
occurred to alter that view for people living in what was still a very
dangerous world.
A month before the Toronto conference, some three hundred experts and
activists were brought together at Harvard Law School by the Lincoln
Institute of Land Policy for the First World Congress on Land Policy.
The Lincoln Institute received most of its funding from the foundation
established by industrialist John C. Lincoln, a dedicated promoter of
Henry George's ideas during the first half of the twentieth century.
Research conducted by economist James Brown revealed that nearly a
quarter of all land surrounding U.S. cities with populations over
100,000 sat idle, held by public entities, private individuals or
companies. Many were absentee owners who lived far from the
communities in which their land holdings rested. Outside the handful
of Georgists in attendance at the conference, few of the experts saw
any hope for solving this problem except by aggressive government
intervention in the form of strict planning and outright public
control of locations. The idea of taxing locations into use somehow
eluded their problem-solving insights.
Economists attending the First Global Conference on the Future showed
even less understanding or concern over the concentrated control of
nature. For example, Swedish economist Gunnar Adler-Karlsson offered
the following solutions to the problem of widespread poverty:
Either at least the head of the poorest families is
provided with a job, by which he earns an income by which he can pay
for the goods and services included in a basic needs standard. Or
redistributive policies must one way or another be created by which
the state takes part of the income of those who work and transfers
it to the unemployed poor.[7]
Clearly, Professor Adler-Karlsson could not contemplate circumstances
under which there might be more jobs looking for people than people
looking for jobs. He rather easily rationalizes use of the coercive
powers of the State to confiscate natural property, meaning
property yielded by a person's labor. Nowhere in his presentation did
he attempt to distinguish between earned and unearned income, natural
and unnatural property.
When William E. Halal expressed concern over the reliance on profit
motive as the primary basis for economic relationships, he pointed to
"holders of capital" as governing the social order,
as the inheritors of power originally held by "those who
owned land"[8] in agrarian societies. I find it difficult to
understand that he and others failed to recognize the lingering
existence -- and even growing power -- of agrarian landlords and of
industrial landlords controlling millions of acres of natural
resource-laden lands as well as commercial locations worth billions of
dollars, pounds, yen, marks or francs. Even when transnationals
included land monopoly among the global problems to be solved, they
tended not to see this as something in need of attention in the
developed and so-called rich societies. Lester Brown, head of
Worldwatch Institute, for example, observed quite correctly in 1978
that "land, living space, fresh water, and clean air become
costly in a crowded, increasingly affluent world"[9] and that
housing prices were fast rising out of reach of millions of
households, even in the United States. Yet, he called for reform only
in societies he viewed as agrarian, and did so despite an
extraordinary insight into the true power of the landed interests
everywhere:
The key to who gets what and how much, landownership
patterns also help determine how efficiently national land and labor
resources are used and whether a country has food shortages or food
surpluses. In countries for which data are available, land
productivity is invariably higher on small holdings than on large
ones though small farms are often carved out of lands of lower
quality. One reason is that more labor is lavished on crops and
livestock on family farms than on large farms dependent on hired
labor, since the latter must pay the going wage.[10]
What Brown ought to have also given some attention to is the fact
that almost everywhere farm workers are paid little more than
subsistence wages. And, where alternative employment and higher wages
are available to citizens, the owners of large farms import foreign
workers willing to work for almost any wage and unable to leave even
when working conditions turn out to be equivalent to slavery. Within
the developed and rich countries those without inheritances, special
talents or abilities and education exist at the bottom of the
socio-economic pile. Many are exploited by those in control of
agricultural or resource-extraction land and, therefore, the supply of
jobs for unskilled labor. Moreover, in many societies a landless
population marginalized by monopolistic control over locations is
forced onto marginally-productive -- and ecologically sensitive --
land, where for a few short years they survive until forced to move on
when the land turns lifeless and unyielding. All around the globe,
millions of people are forced to share land with garbage, toxic waste
or the dead. In countries where agriculture is highly mechanized and
land extensive, monocultural practices have invited plant diseases and
pests to proliferate. Only now are farmers beginning to understand the
delicate balance upset by clearing the land of life's enormous
diversity. Owner-occupant farmers are far more likely to treat the
land with greater care for long-term sustainability and to think of
themselves as members of an inter-dependent local community. The
managers of globally-managed corporate agribusinesses tend (with
notable exceptions) to think and behave based on short-term profit
maximization considerations, avoiding to the extent possible the
diversion of revenue to support local communities or foster
sustainable exploitation of the natural environment. Too often,
government functions as a coercive force in alliance with those who
have little or no compunction over the unbridled destruction of
nature.
The need for reform of land tenure systems is recognized by
transnationals. The connection between widespread agrarian poverty and
land monopoly is readily apparent. Yet, the implementation of
effective reforms has been elusive. To accomplish land redistribution
in the less developed countries (the LDCs), Lester Brown proposed
confiscation with compensation to the agrarian landlords, the funds to
do so coming from an undefined restructuring of the international
economic system. Similarly, economist K.K.S. Dadzie expressed in
general terms the challenge facing transnationals:
All concerned must listen to the voices of the poor, who
have paid the highest price for the passing order and can no longer
be kept in convenient silence. The issues call for an international
politics of human survival, based on broad public understanding and
statesmanship suffused with vision and courage.[11]
There were some signs that a human rights ethic was emerging to
compete with the exploitative nature of existing socio-political
arrangements and institutions. In the United States, as well as in
Britain and Norway, intense debate occurred over how much of the
market rents associated with off-shore oil drilling licenses the
public ought to retain. Oil companies, required to compete with one
another, were bidding enormous sums for these licenses. However, their
revenue projections were based on the fact that OPEC had so far
successfully increased the price of crude oil far above what an open
market would have generated. The major players guessed that prices
would remain at these high levels even with an expansion of supply. As
a result, the licenses issued to the oil companies brought these
fortunate governments a windfall in revenue. Unfortunately, none of
them chose to use this revenue to reduce the level of confiscation of
earned income and assets that occurred under existing taxation
schemes. Nor did these governments make a serious attempt to use the
oil rent revenue to retire government debt. Conservative governments
that came to power in the social democracies began to reduce taxes
imposed on the sale of business assets without distinction. Thus, by
rewarding profits from land sales and speculations in shares of
corporate stock, these measures triggered large-scale speculative
investments that took away from rather than add to the capacity for
increases goods production and improved services.
Several examples did exist for public officials of sufficient
intellectual and ethical capacity to suggest the appropriate direction
in public policy. On the other side of the globe, the government of
Hong Kong had long operated under the principle that the market value
of land belonged to the nation (or, rather, the "crown")
and not to individuals. Land in Hong Kong was under lease, and the
rents collected (although not high enough to prevent leaseholds from
having a selling price) had long been effectively used to build Hong
Kong's infrastructure. On the island of Formosa, the Chinese regime of
Chiang Kai-shek had finally made land redistribution and a reduction
in private land rents a high priority. "With the landlords
brought to bay and with assured possession," wrote economist
A.M. Woodruff, "the farmers began to plant second crops of
rice and intervening crops of vegetables, thus doubling their income a
second time. The four-to-one increase had a multiplier effect
throughout the ... economy."[12] Not only did the standard of
well-being for Taiwanese farmers improve, these moves did a great deal
to quiet discontent and generated popular support for what was still
an autocratic and historically-corrupt regime. Even so, the Taiwanese
experience involved only a half-way measure -- a cap on the rental
charges private owners of land could collect. The government made no
attempt to establish a system under which society would benefit by the
public collection of the full rental value of locations.
For the proponents of Henry George's solutions to social problems and
other champions of cooperative individualism, the enigma of Taiwan as
a society where democracy was thwarted but where Georgist principles
of land tenure were partially tested was far from the most clouded
experiment in public policy. At the southern tip of the African
continent, the city of Johannesburg stood as a unique example of
principle operating within an environment of extreme moral relativism.
From 1919 on, property improvements were fully exempted from taxation;
all revenue derived from what the British, Australians and South
Africans refer to as "rates" came from the taxation
of the rental value of locations. On the island continent of
Australia, the city of Sydney had also been taxing land but not
buildings over an even longer period of time. Outside the Georgist
community and a small circle of academics and planners hardly anyone
else noticed or cared. The ongoing challenge for activists was to
somehow bring these long-standing but little understood perspectives
into the mainstream, to build both a theoretical literature and real
world record that could not be ignored - by either defenders of the
status quo or by advocates for reforms inconsistent with the
principles of cooperative individualism.
KEEPING THE TABLETS:
THE RIGHT STRIKES BACK
During the post-Second World War decades, the human rights movement
made some progress around the globe but had become intimately
associated with democratic socialism. Only by capturing control over
the State, many felt, could the entrenched power of oligarchies and
other monopolistic elites be reduced or subdued. Even in the most
benevolent of welfare states - Sweden pointed to as the model to be
emulated -- business owners blamed declining profits and inability to
compete on the international markets on government regulations, heavy
taxation and the costs imposed on the market by bloated bureaucracies.
Unions were increasingly seen as opponents of progress and industrial
efficiency rather than as defenders of worker rights. Moreover, the
Hansen-Keynesian revolution had not delivered on the promises made by
its champions. No country long experienced either full employment or
stable prices. Recessions were becoming more and more frequent and
prolonged. New answers -- or rehashed forms of old answers -- began to
be heard around the globe.
The last few years of the 1970s was accompanied by a resurgence of
laissez-faire interventionist doctrine. In Britain the return
to a privilege-based economic system was being led by Margaret
Thatcher. The editors and contributors to the Georgist periodical Land
& Liberty recorded and analyzed each move made by the Thatcher
government favoring landed (and other rent-seeking) interests and
against those who actually labor to produce wealth. A British
government desperate for revenue brought publicly-held lands to market
at a rapid pace; yet, the new owners -- their tax burden kept low and
deferred to encourage purchases -- were more inclined to hold their
new acquisitions for unearned gains on resale than in job-creating
development. By the Spring of 1981, even one of Prime Minister
Thatcher's own early advisers at the Centre for Policy Studies (which
she established) told a journalist that Thatcher had "fallen
into the very trap she promised she never would. She has come under
the influence of the layabouts and the landowners of the party."[13]
Landowners were even the primary beneficiaries of the creation of
enterprise zones. What businesses saved by exemption from taxation on
plant and equipment was simply capitalized by landowners into higher
rents and selling prices. Fred Harrison's Land & Liberty
analysis (March/April 1982) of the Thatcher strategy forecasted dismal
failure:
In Britain, Margaret Thatcher's main policy objective
was to cut the rate of inflation; and she now insists, as the
unemployment rate topped 3 million in January, that she must not be
side-tracked from this objective. But there are no signs of success
for the main plank of the Conservative strategy. ...
When she came to power in 1979, Mrs. Thatcher decided to change the
basis on which inflation would be measured. For there was evidence
that, if taxation policy was taken into account, this index of
inflation was slowing down markedly over the period 1977/1978
compared with the usual retail prices index.
Well, although Chancellor of the Exchequer Sir Geoffrey Howe did
cut taxes at the first opportunity, the government's strategy
rebounded on itself. And after two years of Thatcher-style
monetarism, the tax and price index is rising faster than the
conventional retail prices index![14]
By ignoring the connection between land markets and tax policy,
Thatcher and the Conservatives could not -- even had they been willing
-- make public policy an instrument for achieving full employment
without inflation. At least one leading Tory understood this. Hugh
Fraser (who had unsuccessfully challenged Margaret Thatcher for
leadership of the Tory Party in 1975) introduced a bill into the House
of Commons on February 26, 1982 to levy "a Crown rent on all
land, whether privately or publicly owned" in order to break
up the large landed estates interested in "neither
development nor movement, but only accumulation."[15]
Fraser's bill received virtually no support. In fact, Britain's landed
interests were moving in deliberate fashion to eliminate the tax on
real estate entirely in favor of a local income tax. What few British
political leaders other than Fraser dared talk about were the dramatic
increases in land prices claiming such a large proportion of what most
people earned as wages. Businesses that rented their locations and
individuals who lived in rented quarters were the most seriously
affected. Even mainstream economists ought to have been able to
measure the vast amount of financial reserves dedicated to speculation
and dealing in land; for the most part, however, they were not
interested. Land was no longer unique or important to them in their
forecasts despite the frequent analyses of real estate markets
appearing in the popular press. Between 1975 and 1981 -- and despite
an intensifying national recession -- the price of building sites for
housing increased throughout Britain by an average of nearly 250
percent. The impact on the British people was felt deeply by all but
the landed (i.e., those who had no reason to actually work for a
living). Yet, even many well-to-do individuals found their income from
investments falling and their purchasing power being eroded by rising
prices. As I have endeavored to explain in the more theoretical
portions of this book, the dynamics involved are not that difficult to
appreciate; all one need do is follow the chain of economic events
associated with rising land prices and remember that price does not
clear land markets as it does for labor, capital goods or credit.
Rather, rising land prices stimulates hoarding and speculation based
on an expectation of even higher prices in the future.
Everyone engaged in production as well as those engaged in service
activities attempts to pass on rising costs to the next person or
group in line. Workers negotiate for wage increases tied to an index
of prices for basic goods and services. Commercial and office building
owners attempt to raise leasing fees, and their tenants do the same
for the goods and services they offer to other companies and
consumers. After not too long a period, however, prices are rising
faster than the wages most people are receiving. Consumers curtail
purchases (or resort to heavy borrowing because they have lost the
capacity to save). Businesses begin to lose revenue or suffer
declining profit margins. Their owners or managers release employees
and many reduce investment in capital goods. More and more people find
themselves unemployed and unable to make mortgage payments on their
homes, or keep up with other debt obligations. Real estate developers
become unable to secure buyers or tenants for new buildings. Many
default on construction loans, forcing banks and other lending
institutions to foreclose and take ownership of buildings no one will
pay a price for equal to the debt owed. Some banks, forced to record
massive loan losses, fail and close their doors, adding to regional
unemployment problems, an increase in public debt and heavier
taxation. By this time a regional or national economy is in the grip
of recession. Government's traditional method of dealing with this
problem is to combine massive deficit spending with a monetary
expansion that erodes the purchasing power of the central bank's
currency, thereby making easier the repayment of private and public
debt obligations at the expense of those who are creditors, savers and
producers. The dynamics are universal, and the British had plenty of
company in their misery.
Across the Atlantic in the United States, a large number of Americans
had been victimized by or lost faith in the policies of liberalism.
A window of opportunity opened for the laissez-faire
interventionist wing of the Republican Party. Their rhetoric was that
of individualism and the return of meaningful political sovereignty to
the states; their program of selective deregulation and reduced
taxation on business profits, on gains from the sale of assets
(including land) and on the highest incomes, all combined to reinforce
the long-established structure of private monopoly privilege. What
they needed was a new leader who could command a national following.
Barry Goldwater had frightened mainstream Americans with his bellicose
statements, and Richard Nixon demonstrated he was neither of
or for the people. Fortunately for conservative Republicans,
they had a viable candidate in the person of Ronald Reagan. Reagan had
unsuccessfully challenged Gerald Ford for the Republican Party
nomination in 1976, urging a poorly thought out program of tax
reduction, a balanced budget and the curtailment of federal power
(except in the arena of military preparation, where Reagan was anxious
to commit the United States to a spending war with the Soviet Union).
From 1977 on, Reagan provided an almost continuous commentary on the
Carter administration's foreign and domestic policies. He talked about
weakened U.S. military capabilities, argued against arms limitation
agreements and in support of a return to the policy of containment
against Soviet expansionism.
With each passing month, Reagan was attracting to his side a
broadening base of support. And, by 1980, Americans were more than
ready for a change in leadership. Economist Lester Thurow sought to
explain, in his book The Zero-Sum Society, what seemed to be
happening:
Throughout our society there are painful, persistent
problems that are not being solved by our system of political
economy. Energy, inflation, unemployment, environmental decay,
ever-spreading waves of regulations, sharp income gaps between
minorities and majorities -- the list is almost endless. Because of
our inability to solve these problems, the lament is often heard
that the U.S. economy and political system have lost their ability
to get things done. Meaningful compromises cannot be made, and the
politics of confrontation are upon us like the plague. Programs that
would improve the general welfare cannot be started because strong
minorities veto them. No one has the ability to impose solutions,
and no solutions command universal assent.[16]
Thurow went on to write that the maldistribution of wealth ownership
was a fundamental outcome of what I have described as the American
System, and that the U.S. political structure had served to
prevent the implementation of permanent solutions. On the eve of a
conservative return to power, Thurow warned that the changes in tax
law and government spending advocated would not lead to expanded
wealth production but to a deepening of wealth and income
concentration.
Although Thurow ventured deeply into the territory of the political
economist, he revealed no greater understanding of the price mechanism
and how markets operate than most of the other economists I have
written about in this book. The closest he comes to discussing laws of
production and distribution is to conclude that "there are
three factors that control the growth of productivity."[17] A
society succeeds, in Thurow's world, when labor and capital (capital
defined to also include land in the economist's two-factor model) are
shifted rapidly to areas where the output per unit of input is
greatest and future-oriented. He recognized that under the
American System, inefficiency is protected and sanctioned by laws,
rules and regulations of all types. In response, Thurow advocated the
elimination of the corporate income tax in favor of a personal income
tax that required shareholders to pay taxes on their pro rata portion
of retained earnings as well as distributed dividends. The proposal to
end the taxation of business profits has merit on the basis of
efficiency, inasmuch as businesses would no longer need an army of tax
accountants and attorneys to figure out how to manufacture expenses
and hide revenue from the taxing authorities. Full benefit, however,
would come only if state and municipal governments acted similarly.
The merits of taxing shareholders based on a company's retained
earnings are less clear to me. Companies clearly need to set aside
some portion of current profits to ensure funds are available to
replace equipment or acquire facilities for expansion into new
markets. There are other options, of course: the issuance of bonds or
the sale of additional shares of stock. For closely-held companies,
all profits could be distributed and thereby made subject to taxation
as individual income, but the companies could require that some
portion be reinvested by shareholders to maintain an agree-upon level
of ownership interest. A deeper analysis of this proposal is warranted
than I am prepared to offer here.
To his credit, Thurow does seem to realize that privilege forms the
basis of the American System where the taxation of personal
assets is concerned. "Since many of the returns from wealth
are not counted as income (unrealized capital gains being the most
notable)," he writes, "inequalities are reduced and
the rich are perceived as less rich than they actually are."[18]
He sees that the current system of taxation is unfair but does not
specifically make the distinction between natural and unnatural
property, or between earned and unearned income. Rather, he chooses to
bring attention to the fact that nearly half of the large fortunes
held are inherited rather than earned by their owners. For those who
amass large fortunes themselves, the tax system again works its magic.
"Realized capital gains are taxed at less than half of normal
rates, and unrealized capital gains are not taxed at all,"[19]
observes Thurow.
Terminology aside, Thurow was doing his best to convey to his readers
that a serious injustice was being perpetrated against the
overwhelming majority of citizens. Yet, he could not seem to bring
himself to advocate the public policy solution of preventing the
private appropriation of unrealized gains on the sale of land holdings
or other forms of economic licenses -- as opposed to net gains on the
sale of material assets. Businesses are permitted to deduct as
expenses from revenue not only the actual costs of maintaining or
repairing assets but a portion of the asset's acquisition cost. Thus,
when an asset is sold for more than book value, the business is said
to be recapturing part of the revenue previously untaxed. Ownership of
a share of stock in a business has a much more volatile market value,
which is why taxes are levied at the time of sale rather than on a
periodic recognition of gains in market value. Another perspective on
whether gains on the sale of share of stock ought to be subjected to
taxation is offered by Harry Gunnison Brown:
Either the corporation is a desirable form of business
organization or it is not. If it is not, then, indeed, there might
be justification for prohibitive corporation taxes in order than
corporations should be eliminated. But if corporations are
desirable, then there is no argument for subjecting them, and,
through them, the owners of their securities, to special
discrimination. Even if a corporation is in receipt of an excessive
monopoly income, and the market value of its stock is, therefore, in
part, a capitalization of this income, prevention of monopoly or
public regulation of its charges is to be preferred either to
special taxes on it or to taxes on all securities.[20]
What intrigues me about Lester Thurow is what I see as his
transitional role in returning economics to the realm of the political
economist. His emergence as a media economist during this period -- as
an expert frequently called upon to convey to the interested public in
normal language insights into public policy and economic trends --
opened the door to other economists as well. Also of some interest is
Thurow's collaboration with Robert Heilbroner on recent editions of
Heilbroner's fundamental text on economics, The Economic Problem.
The authors advise students that "if there is one overriding
aim of our book it is to demystify economics."[21] In this,
they do a credible job; and, they at least recognize land as a
distinct factor of production, even though they choose to use a
mainstream definition of rent that ignores its true origins (as
detailed below). Heilbroner's book, The Worldly Philosophers,
the first edition of which appeared in 1953, included a passage on
Henry George. Heilbroner seemed to admire George for his humanity but
not much agree with his treatment of political economy:
It is an elusive thesis when we seek to evaluate it. Of
course it is naive, and the equation of rent with sin could only
have occurred to someone as messianic as George himself. Similarly,
to put the blame for industrial depressions on land speculation is
to blow up one small aspect of an expanding economy quite out of
proportion to reality: land speculations can be troublesome, but
severe depressions have taken place in countries where land values
were anything but inflated.[22]
What George actually equated with sin is the private appropriation of
rent. As a source of revenue for societies to provide for public goods
and services, the increase in rent is something to be nurtured.
Heilbroner felt under no pressure to support his criticism with
evidence. As a young economist emerging into the Hansen-Keynesian era
of economic analysis, Heilbroner joined with his more senior
professional colleagues by largely ignoring the contributions made by
Henry George to classical political economy. Even when a completely
revised edition of The Worldly Philosophers was published in
1972, Heilbroner repeated his original assessment, writing that George
"went straight into the underworld of economics and there he
exists today; almost-Messiah, semicrackpot, and disturbing questioner
of the morality of our world."[23]
One should not be surprised, given Heilbroner's apparent
unfamiliarity with the intellectual rigor of George's theoretical work
and that of his predecessors, that even teamed with Thurow, their text
on economics is neo-classical in its notions. To their credit (as
noted above), the two economists do identify land as a factor of
production and rent as the return to land; unfortunately, when they
attempt to define rent more specifically, they ignore the imputed
returns to those who control and hoard land, describing rent as "the
payment we make to [the land] owner for its services to the market."[24]
Just what services the landowner performs in the capacity of landowner
is not stated. Their analysis of land markets also explores mainstream
theory by distinguishing between what rent would be absent
hoarding and monopoly rents (which they call "quasi
or economic rent") generated by shortages. An important point
to remember with regard to land is that shortages in supply exist not
because locations do not exist; rather, shortages occur primarily
because locations are hoarded in anticipation of future increases in
their exchange value or are grossly underutilized in comparison to
their highest and best use in the market place. The lower the annual
carrying cost imposed (i.e., the lower the portion of imputed rent
left untaxed by society) the easier it is for the owner to hold land
out of use for prolonged periods of time.
In his own writing, Thurow added his name to the list of economists
ignoring the true operation of rent when he attempted to offer
a solution to the issue of who ought to pay for cleaning up the
environment. He proposed that goods and services be taxed based on a
calculation of how much pollution is generated by their creation.
Although this would have a rationing effect and provide a source of
revenue for after-the-fact clean-up efforts, the primary beneficiaries
-- those holding title to locations taxed at only a fraction of full
rental value -- continue to be protected from the kind of market
pressures exerted on labor and owners of capital goods. Taxation must
take the profit out of allowing land to be used for
pollution-generating activities, and the most efficient means of doing
so is to utilize outcome-based (as opposed to process-based)
regulation and allow the market to respond. The rental value of
locations subject to regulation will be lower precisely in line with
the opportunity cost imposed when compared to circumstances where
there are no such regulations. With location rent collected, a tax on
business income generated by the sales of goods and/or services
becomes wholly unproductive and penalizes success. However, if revenue
shortfalls continue to press on governments (and businesses are to be
penalized by taxation), then I submit that a tax on gross revenue --
set at a rate low enough that businesses would not have an incentive
to hide revenue or move their operations elsewhere -- at least has the
added virtue of rewarding with lower taxation those businesses whose
managements strive to keep down expenses (i.e., achieve a high level
of productivity).
One last note on the Thurow-Heilbroner partnership before moving on.
In 1981 they collaborated on another book, titled Five Economic
Challenges. Their treatment of taxation as public policy is
largely superficial, as when they discuss the tax on real estate as
progressive in some instances and regressive in others without
offering any comment at all on the practice of some cities to place a
higher rate of taxation on assessed land values than on the value of
improvements. They also make a passing inference to the unique quality
of land as an asset that "typically rises during inflations."[25]
They end with a warning to investors that they should be wary of the
land market, which has a tendency to crash from time to time. To the
new Reagan administration they simply warned of the very great
difficulties ahead for a team committed to cutting government spending
in the face of entrenched constituencies.
And Along Came Reagonomics
Ronald Reagan was pursued during his run for the Presidency by a
number of people who saw in him a potential champion for a scheme of
economic policies that eventually came to be called
supply-side economics. Business journalist Jude Wanniski,
after teaming up with economists Arthur Laffer and Robert Mundell,
reached Reagan in 1978 through one of his former campaign aides,
Jeffrey Bell, and U.S. Congressman Jack Kemp. Wanniski had already
converted Jack Kemp into a supply-sider and was instrumental in
getting Kemp to introduce a deep indiscriminate tax cut measure in the
U.S. House of Representatives.
Reagan convinced Kemp that their basic philosophies of government
were very much alike. And, through Kemp, Art Laffer was invited to
join Reagan's circle of economic advisers. Supply-side economics
seemed to have arrived. At least that was how things looked until
Reagan was elected and began to staff his departments. Under pressure
from Republican stalwarts, he put economic policy in the hands of
advisers deeply committed to the laissez-faire interventionist
policy agenda of liberalism. If there was attached to this
group an outspoken critic of Hansen-Keynesian interventionism, that
person was Milton Friedman. Reagan was in office only a few days when
Friedman went on the attack against the manner in which Paul Volcker,
Chairman of the Federal Reserve System, had attempted and failed to
stabilize the economy:
Chairman Paul Volcker, in testimony to Congress, blamed
last year's "abnormal" fluctuations in money supply and
interest rates on a sharp second quarter recession followed by a
stronger-than-anticipated recovery, the temporary imposition of
credit controls last spring, market uncertainty over the Fed's
decision to let interest rates fluctuate more widely and
irresponsible inflationary expectations.
This explanation reminds me of the man on trial for murdering his
parents who asked for mercy on the ground that he was an orphan.
The sharp second-quarter recession very likely was produced, and
certainly was intensified, by the Fed's own actions. ...[26]
Friedman argued that Volcker had allowed the Fed to become an
instrument of political expediency, monetizing government deficits so
that neither spending cuts nor a tax increase threatened the status
quo. Once again during his long career, Friedman argued for a
sustained monetary expansion and market-determined interest rates.
Although Art Laffer was now pushed even more to the periphery of
power than previously, the campaign had turned him into a media
economist (if by a very different route than that traveled by Thurow).
For his part, Laffer supported Milton Friedman's approach to monetary
policy as far more rational than trying to outsmart the market. Laffer
observed, however, that an important change was occurring in the
global economy. Mexico and several other heavily indebted nations were
cutting prices of oil and other commodities in response to slackened
demand. To further stabilize the exchange value of the U.S. dollar,
Laffer urged Reagan to announce the government's intention to soak up
excess dollars by the sale of gold reserves. Introduced carefully so
as not to drive down the price of gold in terms of dollars, Laffer's
plan offered an opportunity for short-run balancing of the growing
federal budget. However, his proposal fell on deaf ears among Reagan's
economic advisers convinced the Fed would come around to a monetarist
program.
For the supply-siders, some early Reagan appointments and policy
choices did seem to promise a real test of their assertions. Political
considerations then intervened. Reagan retreated from any serious
effort to curtail federal spending; and, in fact, dramatically
increased spending for defense. Supply-side theory had established an
ostensible stimulus/response relationship between lower tax rates on
business and individual incomes and a growing tax base. Yet, when
Reagan's budget director, David Stockman, worked out the numbers he
came up with staggering deficits. The only certain result of the
Reagan tax cut, an outcome accurately forecasted by Stockman, was to
permanently add to the national debt, which not long into 1982
surpassed $1 trillion. A growing number of critics were outraged and
deeply concerned over the debt, giving rise to a movement for a
constitutional amendment to balance the budget. When Reagan left
office, the federal government's debt had climbed to over $2.6
trillion. Only the rate of growth has changed since then. At the time
of this writing, the U.S. government's debt is well above $7 trillion.
Given the size of the U.S. economy (as measured by GDP), economists
were not then and are not today uniformly concerned with either the
size or the rapidity with which the national debt increases. During
the early 1980s, their attention was focused elsewhere.
The Debt Bomb Explodes
Millions Died, But Who Noticed
More than ever before, the stability of the international monetary
system and many of the world's largest banking concerns were seriously
in question. Falling oil and commodity prices combined with runaway
government spending (and wholesale corruption) to build a mountain of
debt -- owed mostly to large money-center banks and much of it
guaranteed in some fashion by one or more governments. By 1981, some
twenty-five countries had fallen behind on debt payments. Early in
1982, Polish officials met with their international creditors in Paris
in a desperate attempt to restructure Poland's government debt. Just
four countries -- Poland, Mexico, Argentina and Brazil -- were behind
in interest payments totaling more than $230 billion. U.S. and Western
European bankers were facing the ramifications of having to declare
these loans in default and write them off. Nearly $740 billion -- owed
by all the LDCs -- was at risk.
Attempting to hide the problem beneath a declaration of paper
profits, the banks rescheduled the debt at ever higher rates of
interest and recorded as revenue large fees deducted from the proceeds
of new loans. For the debtor nations, the new loans had additional
costs; the bankers and negotiators for the International Monetary Fund
imposed severe austerity measures on debtor governments. They were
instructed to slash domestic spending on social welfare programs and
raise taxes. The side-effect was that LDCs were rapidly converted into
export economies where the primary reason for being was to convert
commodities sales into foreign currency reserves with which to make
payments on outstanding loans. One should not be surprised that well
in advance of the imposition of these measures, the wealthy elites
converted domestic currencies into U.S. dollars or gold or foreign
real estate investments. Vast sums left these troubled countries for
safe harbors. Swiss bankers received an estimated $4 billion in
deposits from Latin America in 1978, and another $25 billion was added
in 1984. Wealthy Mexicans alone held an estimated $50 billion in
assets outside the country, while the state-owned petro-chemical
industry (Pemex) was run for the private benefit of the privileged
bureaucracy. Those who remained behind, with no alternative but to
continue to offer their labor for hire, experienced rapidly
deteriorating living standards and long-term unemployment. In Brazil,
the annual rate of inflation hit 100% and kept climbing.
In the U.S., banks were also forced to acknowledge that loans made to
energy companies and farmers were also under water. The loss of
deposits by savings banks to money market funds started the first
round of bank failures -- eleven in 1980, twenty-eight in 1981 and
seventy-two in 1982. Belatedly, the Reagan administration lifted
restrictions on the savings banks, and in 1981 the first adjustable
rate mortgage loans began to appear. Desperate to generate fee income
and higher yielding loan assets, the savings banks (and, to a lesser
extent, the commercial banks) entered into competition for business
borrowers and made equity investments in speculative commercial real
estate ventures. Deposits were lured back after the industry
successfully lobbied to have the insurance coverage on accounts
increased to $100,000 (adopted without debate in the U.S. Congress
despite the fact that only a small minority of households held more
than $10,000 in savings). The availability of such a vast pool of
financial reserves triggered an eight-year long speculative climb in
land prices and in the construction of real estate for which market
demand was highly suspect. Nonetheless, Reagan's team was committed to
banking deregulation; and, with every new opportunity handed to them
the bankers took ever greater risks. Developers had little difficulty
obtaining financing for almost any construction scheme. The landed
once again found themselves at the receiving end of a bidding war for
access to land, and prices skyrocketed. During the 1980s, domestic and
foreign banks and other financial institutions would pour over $350
billion into the U.S. real estate sector. Available commercial office
space alone increased by over 30 percent. The stage was being set in
parts of country for a crash in the land market and a serious
recessionary downturn.
The Laffer Curve
Still A Two-Factor Model
Neither Wanniski, Laffer nor any of Reagan's more conventional
economic advisers expressed concern that a sizeable portion of the
funds made available because of the reduction in taxes on high
marginal incomes were finding their way not to producers of goods but
to landowners, although in mid-1980, Laffer explored in a paper
published by his consulting firm, A.B. Laffer Associates, the
theoretical arguments supporting his call for a 30 percent
across-the-board reduction in personal income tax rates. In this
paper, Laffer traced the rise and fall of Hansen-Keynesian demand
management supremacy and the renewed interest among some economists in
classical economic theory. Failed demand management was, Laffer
argued, responsible for much of the economic chaos that plagued the
U.S. from 1964 on:
The record is not yet complete. But the economy in the
second quarter [of 1980] underwent a contraction as severe as that
experienced in 1975, unemployment rates are rising and inflation has
hit new highs. As interesting as any single observation can be is
the fact that the Federal deficit continues to hemorrhage red ink:
Tax rates have been raised by Carter explicitly and deliberately to
balance his 1981 budget. The fiscal 1980 deficit now is projected at
something on the order of $60 billion, an increase of $24 billion
from the Administration's March projections. The budget for fiscal
year 1981, which had been projected to be in surplus by $16 billion,
now is expected to be $30 billion in the red. ...[27]
Laffer continued with his explanation of the incentive/disincentive
effects of taxation on two of the three factors of production -- capital
and labor:
[A] cut in the tax rate on either factor of production
will, if the other factor's tax rate is left unaltered, raise
output. In order to hold output constant, if one tax rate is
reduced, the other tax rate must be increased. ...[28]
The incidence of a tax structure is very different from the burden
of that tax structure. The person upon whom a tax is levied may well
experience no loss in net income if he passes the tax forward onto
consumers or backward on suppliers. Likewise, a person upon whom no
tax has been levied may well suffer large net income losses as a
consequence of taxes levied (incidence) on others.[29]
Since 1948, the positive relationship between real after-tax
profits and average weekly real spendable earnings is unmistakable.
Higher profits, more often than not, are associated with higher
wages. Higher wages also are consistent with higher profits. ...
If capital is overtaxed, there will be less capital formation.
...Lowering tax rates on capital will increase the capital stock,
and, more important, will raise the wages of ... workers. High wages
and high profits are far from opposing objectives. Returns to
capital and returns to labor are, in fact, complements. Policies
that reduce either are inimical to both.
One such policy is the tax on capital earnings. A reduction in the
rate of taxation on the earnings from capital would result in more
investment -- which would raise wages. Lower tax rates on wages
would increase employment and thereby cause profits to rise.
Capitalists and workers alike are thus helped by lower rates of
taxation on either capital or income.[30]
But what of those in control of the first factor of production, land?
In correspondence with me, Laffer described his paper as "pure
Georgian economics."[31] Yet, my conclusion is that his
attachment to the two-factor model of economic production and
distribution condemned his own analysis to, at best, fallacious
performance expectations. The application of two-factor theoretical
economics to policy analysis could yield only a partial or nominal
collection of rent, the uncollected portion of which continued
to be capitalized into higher selling prices for land. This aspect of
taxation theory, demonstrated clearly by measurable economic activity,
was ignored by Laffer (despite the inclusion in his paper of two
quotations on tax theory from Henry George).
From the standpoint of the Georgist, however, Art Laffer and his
supply-side supporters, opened the gate for even more critical
challenges to the status quo. They proved the Hansen-Keynesian veneer
had indeed cracked wide open. Both theory and experience linked tax
policy and economic performance. What awaited Georgists was a concrete
opportunity to move from the confines of municipal finance and reform
of the real estate tax into the arena of national public policy and
macroeconomic analysis.
Reagan's Populist Pursuit of Inequality
Walter Williams, one of a handful of professional economists who
happen to be both African-American and conservative, writes that "
[i]n the Reagan years there was a radical shift from policy
analysis to political ideology."[32] Reagan's style of
leadership, Williams argues (I think correctly), discounted the need
for and value of rigorous analysis and reliance on actual evidence
that policies were working. Despite their best efforts, the
supply-siders ended up playing only a peripheral role in establishing
the Reagan agenda. The real power came, Williams relates, from the
ranks of the American Enterprise Institute, Heritage Foundation and
Institute for Contemporary Studies. Reagan relied heavily on Ed Meese
to force the Administration's policy objectives and tactics. With
Reagan's concurrence, Meese immediately withdrew funding and staff
from research on domestic policy issues. They were firmly committed to
a mainstream conservative agenda that combined dramatic increases in
defense spending with tax cuts on capital gains and on high marginal
incomes. The rhetoric was supply-side, but the result was to encourage
investment by the already wealthy into the real estate (i.e., land)
and stock markets. These measures also contributed to the Reagan era's
first $100 billion plus budget deficit. Reviewing the first year of
the Reagan presidency, Brookings Institution economist Robert Solomon
concluded in Foreign Affairs that the "combination of
tighter fiscal and monetary policies ... helped to create the
recession that began in the latter half of 1981."[33] David
Stockman later admitted that the published budget numbers were
politicized; that is, they were deliberately understated and revenues
deliberately overstated to deceive the public into a false sense of
confidence. Even Reagan supporter Alan Greenspan was vocal in his
distrust of what he knew were extraordinarily optimistic projections.
Ironically, supply-side economics took most of the blame in the
popular press.
The forces of recession had been building for some time. Rapidly
rising energy costs and high interest rates (brought about by a
combination of aggressive central bank intervention and competition
for deposits between credit-hungry governments, money market funds and
the recently deregulated depository institutions) dampened the
profitable employment of labor and capital goods. The banks, and the
savings banks in particular, were plagued by government delays in
allowing them to compete on even terms for deposits. The savings banks
faced the enormous problem of finding investments or borrowers that
(at least on paper) yielded enough in fees and nominal rates of return
to offset negative spreads on billions of dollars of low yielding,
fixed rate loan assets. At the same time, the squeeze on profits moved
United States-based corporations to close their domestic operations in
record numbers. By 1980, the value of goods manufactured in the U.S.
had fallen to under 17 percent of the global total. Only strong
agricultural exports protected the U.S. from experiencing what public
officials continued to describe as an even more severe balance of
payments problem than had plagued previous Administrations. Hardly
anyone outside of the libertarian wilderness accepted the perspective
(offered prominently by economist Milton Friedman) that a people who
received more value in goods and services than they were required to
give up in exchange was inherently advantaged. To export more than was
imported continued to be perceived as in the national interest and key
to the pursuit of full employment. One ostensibly had only to look at
the low unemployment existing among Japanese, Korean, Taiwanese or
German workers to see that this was true. Thus, by taxing imports and
subsidizing exports, a high wage nation encouraged production and
contributed to a more level playing field. The concentration of
profits in the hands of the few - or the repatriation of those profits
to shareholders and senior executives of multinational corporations -
meant that currency not required for basic consumption needs was
increasingly invested in government securities, in real estate
speculation and in the stock market. In such a world, the negotiation
of appropriate trade and tax policies was becoming increasingly
difficult. The old ways just did not seem to work any longer.
Among academics and planners, debate raged over which set of economic
policies and strategies produced the better standard of well-being for
the most citizens. Policy analysts and other experts seemed on an
endless search at the periphery for combination of golden variables
that would allow for reasonably stable economic growth. The experiment
with social democracy - with the balance between big government, big
business and big labor - was beginning to unravel. The question was,
what would emerge in its place. In 1980, the World Future Society
published an extensive volume of essays on the subject by many of the
world's most respected transnationals. Daniel Yankelovich and Bernard
Lefkowitz offered this:
As a practical matter, we do not believe that America is
about to enter into a grand debate on the significance of
materialism, the application of the new values, or the desirable
rate of growth in the last decades of the twentieth century. What is
more likely is a continuing discussion of many different proposals,
programs and strategies presented at all levels of government and
business, from town hall to Congress, from the executive boardroom
to the company cafeteria. Whether these hundreds or perhaps
thousands of proposals will collectively express the kind of dynamic
consensus America enjoyed in the post-war period will depend on how
consonant they are with the public's emerging value priorities and
with the public's ability to confront painful choices - and make
them.[34]
While social democracy and state socialism were each under pressure
for failing to deliver in critical areas, mainstream critics exercised
considerable caution against probing too deeply into fundamental
socio-political arrangements and institutions. In the same volume,
Swedish economist Gunnar Adler-Karlsson succinctly expressed the
conventional wisdom to which many of his colleagues had also arrived:
The elimination of absolute poverty can logically be
realized in only two ways. Either at least the head of the poorest
families is provided with a job, by which he earns an income by
which he can pay for the goods and services included in a basic
needs standard. Or redistributive policies must one way or another
be created by which the state takes part of the income of those who
work and transfers it to the unemployed poor.[35]
How, when the extent to which land interests had so clearly benefited
by long-standing forms of privilege could intelligent and educated
analysts propose tax those who earned their incomes in order to help
the poor? Neither the democratic left nor the libertarian right seemed
ready or able to make the moral or public policy distinction between
incomes that were earned versus those obtained as a result of
privilege. Two distinct criticisms of Henry George's analysis and
proposals help to make this point. In 1973, Henry Hazlitt dismissed "The
Henry George Scheme of a 100 percent 'single tax' on ground rent"
with the assertion that this would "discourage the most
productive utilization of land and sites, and adversely affect general
economic development."[36] John Kenneth Galbraith asked: "Why
single out the owners of land as uniquely culpable?" After
all, he observed: "Many others besides landowners, not
excluding passive investors in all manner of industrial,
transportation, communications and banking enterprises, were similarly
enriched and had similarly a free ride."[37] Galbraith raised
other objections, moral and practical. Georgists had answers, of
course, but long-held views were and are difficult to dislodge. The
Georgist analysis remained on the margin, its proponents working hard
to put behind them the reputation of unquestioning devotion to
everything ever uttered by Henry George as absolute truth.
In the United States, data collected by government agencies and
others was generating great concern. The purchasing power of worker
earnings was being severely eroded by an ever-rising cost of living.
For the overwhelming majority of Americans, there had been no gain in
real income during the entire decade of the 1970s. Giant industrial
corporations had diverted from their primary activities in a frenzy of
debt-financed acquisitions. In 1982, economists Barry Bluestone
(Boston College) and Bennett Harrison (M.I.T.) estimated that "somewhere
between 32 and 38 million jobs were lost during the 1970s as the
direct result of private disinvestment in American business."[38]
This occurred, they noted, despite the fact that states and local
communities increasingly gave in to business demands for minimal
regulatory interference and exemptions from tax laws that others were
required to adhere to. The gamble was that a supply-side result would
develop, that the taxes paid by employees would compensate the state
and local community for the foregone revenue. Neither Bluestone nor
Harrison made the connection between the under taxation of rent
and the underutilization of locations owned by departing corporations.
They might have productively discussed the conclusions and
recommendations of a Congressional subcommittee report on the cities
prepared in 1980, which included the following:
A strong case has been made that the property tax, as it
currently operates, is one of the major reasons that land
speculation is rampant in cities. Good evidence suggests that proper
adjustments in this tax can help suppress speculation, loosening its
grip on tightly-held idle lands that now push development outward.
Real estate taxes in most U.S. jurisdictions favor speculative land
holders over builders or land users.[39]
How could so many economists and policy analysts not see that by
increasing the carrying costs of holding land idle, owners would be
more inclined to think seriously about development in order to
generate cash flow or making the land available to someone else? The
real world actually offered a glimpse or two into the possibilities of
moving in the direction of full employment without inflation. There
was, for instance, the case of the City of Pittsburgh, Pennsylvania,
where proponents of land value taxation were successful in
establishing separate rates of taxation for locations and property
improvements. Although only the city adopted this two-rate approach,
leaving the school district and country property tax structure to
operate in the traditional manner, the impact on investment decisions
by Pittsburgh property owners was significant. In the aftermath of the
city's decline as an industrial center during the 1970s, Pittsburgh
was emerging with a more diverse economy and improving living
environment:
Pittsburgh's uptaxing of land and downtaxing of
buildings has been politically popular and economically effective.
The late Mayor David Lawrence credited lower tax rates on buildings
as a prime incentive to the city's privately-financed Golden
Triangle renewal after World War II. ...
A big leap forward came in 1978 when Pittsburgh's budget was short.
While some urged a higher wage tax, Councilman William Coyne led a
successful drive for a land tax four times higher than on buildings.
...[40]
The net result of this increase was an impressive increase in the
value of building permits and a comparable increase in the sale of
vacant lots to developers. A positive sign to Georgists was that the
measure was supported by, among others, economist Herbert Simon, on
the faculty of Carnegie-Mellon University in Pittsburgh. As the city
considered various options for balancing its budget, Simon wrote: "Assuming
that a tax increase is necessary, it is clearly preferable to impose
the additional cost on land by increasing the land tax, rather than to
increase the wage tax -- the two alternatives open to the City (of
Pittsburgh). It is the use and occupancy of property that creates the
need for the municipal services that appear as the largest item in the
budget- fire and police protection, waste removal, and public works.
The average increase in tax bills of city residents will be about
twice as great with wage tax increase than with a land tax increase."[41]
The previous year (1977), Harvard University economics professor (and
president of the National Bureau of Economic Research) Martin
Feldstein had also written specifically in favor of taxing rent:
One of the reasons that economists have long been
interested in the tax on pure rental income is that it is a tax
without an excess burden. Because the owners of land cannot alter
the supply of land, the tax introduces no distortions and therefore
no welfare loss.[42]
As far as I have been able to determine, Feldstein did not advance
this idea as part of the Reagan agenda. Reaganomics held no
bias in favor of those who earned their income by producing goods or
providing services. Political considerations had, in fact, overwhelmed
even the drive for supply-side reforms. Although Reagan adopted Jack
Kemp's call for three annual 10 percent tax cuts, his advisers
obtained a six-month delay in implementation. Outside of the Treasury
Department, where economists Paul Craig Roberts and Norman Ture became
chief advisers to Secretary Donald Regan, supply-side proponents were
absent in the Administration's key positions. Kemp's one apparent
victory with Reagan had been the appointment of David Stockman as the
new director of the Office of Management and Budget (OMB). Mainstream
Republicans orchestrated the appointment of economist Murray
Weidenbaum, a professor at Washington University (Missouri) as
chairman of the Council of Economic Advisers. When the time came,
Weidenbaum added his voice to that of Stockman, Greenspan and Charls
Walker in support of postponing the supply-side tax cuts until
mid-1981 -- to reduce the loss of revenue. These Administration
officials and advisers clearly did not believe tax cuts would lead to
an economic expansion sufficient to fill the gap in tax revenue caused
by lowering tax rates. Perhaps (but I doubt it) they intuitively
understood that a large portion of the untexed personal income would
be channeled into the real estate sector and land speculation, in
particular, which is exactly what transpired.
The tax bill drafted by the Reagan team early in 1981 called for an
immediate lowering of the maximum rate on interest and dividend income
from 70 percent down to 50 percent. Investors were also to be allowed
to depreciate the cost of acquiring new capital goods over much faster
periods of time -- as few as ten years for buildings (a measure that
materially encouraged the sale and resale of buildings every few years
as a means of obtaining the tax benefits of accelerated depreciation).
A meeting held in February that included economists Arthur Burns,
Herbert Stein, George Shultz and Charls Walker, as well as Kemp and
Laffer, resulted in the decision to push instead for an
across-the-board cut in the tax rate on all income regardless of
source.
To make matters worse for the supply-siders, Reagan's first economic
report to the U.S. Congress contained no mention of supply-side
economic arguments, the virtues of returning to a gold standard or
criticism of the Federal Reserve System; Murray Weidenbaum and his
mainstream colleagues were seemingly in firm control.
Where Reagan exerted his personal political doctrine most deeply was
in the arena of government regulation. His appointees were, in many
cases, beneficiaries of laissez-faire interventionist
practices and eager to free themselves and their friends from
conservationist and environmentalist constraints. The new Secretary of
the Interior, James Watt, symbolized the return to monopoly privilege
as orthodoxy. Watt was more than willing to allow private exploitation
of the public domain at nominal cost and with little regard for the
long-term environmental consequences. Whether deliberate or
inadvertent, the effect of the Reagan Revolution was, in
important respects, to protect and advance the interests of the landed
and exploiters of public lands at the expense of wealth producers.
Central to the problem, of course, was the essential confusion on the
part of public servants over who, in fact, were producers and who were
the beneficiaries of monopoly privilege. On this basis, the
American System surged on through the 1980s toward yet another
period of crashes in the regional real estate markets and a major
correction in an overheated stock market.
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