Review of the Book:
After the Crash: Designing a Depression-Free Economy
by Mason Gaffney

Nadine Stoner

[A collection of the Selected works of Mason Gaffney, edited with an Introduction by Clifford W. Cobb. Reprinted from GroundSwell, September-October 2009]

After the Crash: Designing a Depression-Free Economy is the latest book in the series Studies in Economic Reform and Social Justice from The American Journal of Economics and Sociology. The book analyzes in a unique way the causes of the current crash by showing how such events derive from real estate bubbles and their interactions with banks and other lenders.

Mason Gaffney, explains the current economic crisis, by developing a general theory of capital. His theory draws on the previous findings of Knut Wicksell, and demonstrates for readers how excessive investing in durable capital of slow payback can destabilize and then freeze our modern economy, which requires constant circulation and renewal of capital to function properly. Combining that analysis with observed cycles of land speculation, Gaffney shows how a "perfect storm" formed and now has overwhelmed the economy.

After the Crash offers a distinctive framework for analyzing macroeconomic issues, which can offer a useful counterpoint to Keynesian, monetarism, rational expectations theory, and general equilibrium analysis. It reviews sympathetically the function of banks and deposit creation and warns against banks' monetizing speculative and volatile land values by using them as collateral. Finally, this book criticizes orthodox economists for conflating land and capital in their thinking and their theories, and trivializing the value of land in their data sources.

The contents of the book are as follows:

Chapter 1: The Role of Land Markets in Economic Crises

Summary: It is widely recognized that the economic crisis of 2009 was caused by unsound lending for real estate. Largely ignored, however, is that this contraction was easily predicted on the basis of a well-established pattern of land speculation, premature subdivision, and excessive building on marginal land that recurs approximately once every eighteen years.

Capital locked up in projects that are started during a land bubble is effectively lost during the downturn, leaving the nation without sufficient capital to finance ordinary business operations during the recovery period. The best instrument for avoiding this boom-bust cycle is the property tax, and more specifically, the portion that falls on land. We explore here the ways in which the property tax influences the intensity, timing, and location of development. We also examine why the frequency and accurate assessment are essential to make the property tax an effective method of preventing speculative real estate bubbles.

Part I: Boom and Bust in Real Estate

A. Hoyt's Land Cycle Research

B. Elements of the Land Cycle

• Element 1: From prosperity to overpricing of land
• Element 2: Overpriced land induces sprawl
• Element 3: Inflated land prices reduce profitability of productive investment
• Element 4: Land Price appreciation induces destruction of capital
• Element 5: Overpriced land misguides investing
• Element 6: Lending for overprices land weakens banks
• Element 7: Shifting investments to land reduces real saving, which leads to collapse
• Element 8: Land remains overprices, even after economy Collapses

Part 2: Factors Affecting Land Use (Intensity, Timing, Location)

A. Intensity of Use

• Taxes on buildings
• Taxation of land value

B. Timing of Demolition and Renewal

• Short-run effects
• Long-run effects

C. Choice of Location

D. Ripening of Land for Higher Use

Part 3: Avoiding The Real Estate Cycle

A. Property Tax Slows Speculation

1. Land taxes
2. Building taxes

B. The Importance of Assessment

1. Accuracy of assessment
2. Frequency of assessment

Part 4: Conclusion

Chapter 2 A New Framework for Macroeconomics: Achieving Full Employment by Increasing Capital Turnover

Summary: All forms of macroeconomics today, whether Keynesian or monetarist, presuppose that problems of economic instability can be treated as errors in financial management. Neither fiscal nor monetary policy recognizes the existence of systemic faults in the real economy that result in overinvestment in durable capital that turns over slowly, in contrast to forms of capital that interact more frequently with land and labor. Only by removing serious distortions in microeconomic relations can macroeconomic problems be resolved. The current global economic crisis exemplifies the limitations of policies that ignore distortions in the rate of turnover of investment capital.

Part 1. Introduction

A. Paradox: Idle Labor, Shortages of Capital and Land

B. Recent History of the Failure of Macroeconomics

Part 2: Why We Need a New Form of Macroeconomics

A. The Origins of Macroeconomics

B. The Half Truths of Macroeconomics

1. Half-truth #1: Adding capital to increase labor productivity raises wages.
2. Half-truth #2: Capital always complements labor
3. Half-truth #3: A fixed amount of capital is required for each job to be created

C. Basic Principle of a New Macroeconomics: Increasing the "Valence" of Capital

D. Environmental Benefits of a New Macroeconomics

E. Austrian-Georgist Roots of New Macroeconomics

Part 3: Combining Land, Labor, and Capital for Macroeconomic Health

A. Factor Mix and Factor Prices

1. Historical observations about land "engrossment"
2. Tax biases affecting land and capital combinations
3. Counterproductive expansionism
4. Varying intensities of land use: tax biases and employment effects
5. Concentrated land ownership and diminishing labor intensity
6. Expansionism: civilian and military
7. Longevity of capital and the displacement of labor
8. Growing and flowing capital, including a Field Guide to Capital Intensity
9. Activating capital by encouraging faster turnover

B. How Taxes Induce Land and Capital to Displace Labor

1. Property tax treatment of
2. Property tax treatment of
3. Income tax treatment of
4. Inflation as a tax
5. Corporate income tax

C. Capital Investment and Capital Turnover

D. The Microeconomic Basis for a Correct Macroeconomics

1. Historic recognition of capital turnover: Smith, Mill, Wicksell
2. A homely example of business turnover
3. The Great Revolving Fund
4. Capital replacement as the true source of national income

Part 5: Conclusion

A. Directing Capital to Enhance Employment

B. Faster Recovery of Capital

C. Monuments and Frontiers as Capital Sinks

D. The Role of Taxes

Chapter 3: Money, Credit and Crisis

Summary: The financial crisis of 2008-2009 has antecedents in earlier crises, including the Great Depression. In order to understand how the current crisis arose, we must review the most fundamental principles of banking. Doing that, we find that the main service performed by banks is the creation of liquidity, a collective good that can be destroyed by the behavior of individual financial institutions. The key element in creating liquidity is the monetization of various types of collateral. When collateral takes the form of land or capital that turns over slowly, banks lose liquidity. That is why major banking crises have frequently been associated with real estate lending. The best way to restore health to the financial system is by restoring the principles of the "real bills" doctrine that requires loans to be self-liquidating.

Part 1: Introduction

A. The Trap of Conventional Wisdom

B. Misleading Keynesian Orthodoxy

Part 2: Liquidity and the Real Economy

A. The Amount of Money

B. How Liquidity Is Created

C. The Rationale for Interest

D. Cost Of Creating Liquidity

E. Technical Limits on Destabilizing Effects

Part 3: Sources of Equilibrium and Liquidity

A. Limit #1. Loss of public confidence

B. Limit #2. Federal Reserve Board controls

1. Reserve requirements
2. Federal Reserve Bank lending to member banks
3. Qualitative controls on bank lending
   
   

   a. "Real Bills" rejects the dogma of market perfection.
   
   b. The Chicago School rejects qualitative regulation.
   
   c. The unconventional idea that real estate matters.

C. Limit #3: The market

1. "Creditworthiness" of borrowers
2. Major kinds of loan collateral; basis of valuation
3. Bank capital or net worth

D. Limit #4: The limited liquidity of M2

Part 4: How Banks Are Seduced Into Illiquidity

A. Short-term gains

B. Periodic Land Booms

1. The Difference Between Land and Capital
2. Interest Rates and Asset Values
3. The Role of Banks in Fueling Booms
4. How Capital is Destroyed During a Speculative Boom

Part 5: Lessons from the 1920s and 1930s

A. Nation-wide Perspectives

B. Florida and New York City in the 1920s

C. Real Estate Speculation and Detroit Bank Failure of 1933

Part 6: Conclusion