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.


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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