SCOTT BAKER
- Have Conditions in the Laboring Class improved from Henry George’s Time to our Own?
- The Land Cycle and the Stock Market
- Discussing the views of Piketty on inequality, with an eye towards Henry George
- The Real Lessons in Greek for Leftists
- A Rebuttal to Doom-and-Gloom forecasts such as Debt Collapse: The Decline and Fall of the USA
- China shifts taxes to Land
- Land Worth = GDP and enough to replace all taxes with Land Rent
- America Is Not Broke, Revisited
- The Simple Healthcare Plan for all that Ought to Please Everyone
July 29, 2014
By Scott Baker
Labor conditions were indeed often appalling in the nineteenth century, but are they any better now? Let’s start with a specific example and broaden our findings from there. A comparison of Labor’s life from a hundred years ago to today. Have things improved…or been offshored?
Henry George defined Labor as simply all mental and physical effort used in production. And, in George’s political economy, production is defined as all the processes involved in making wealth and bringing it from its place of origin to the consumer. It should go without saying that the only production that counts is that which satisfies consumer. As a counter-example, I may expend hours of labor whittling away a wooden toy car, but if there is no consumer willing to pay me for it, my labor is said to have no economic value.
So, let us confine ourselves to labor that has clear economic value when comparing conditions of Labor in Henry George’s time to our own.
Labor conditions were indeed often appalling in the nineteenth century, but are they any better now? Let’s start with a specific example and broaden our findings from there.
In “Social Problems,” George talks about tailors in New York City who are able to find employment only part of the year and have to “beg, steal or starve” the rest[1], or rely on a “charitable society.” Certainly, the tailors of today, unless they out and out fail in business, and probably not even then, do not alternate between being profitably employed and begging, stealing or starving, so this is progress, right? But, wait a minute. In addition to mending my clothes, my neighborhood tailor also dry cleans them in fact, dry cleaning is now such a large part of their business that they are known chiefly by that title: Dry Cleaner, and tailoring is only a secondary line of work for them. In our modern society, we outsource our clothes-cleaning (now both more frequent and more complicated than in George’s day of simpler garments), and occasional mending. This at least provides consistent employment for tailors, and a wider range of skill development (I don’t know how to use Dry Cleaning chemicals to clean my clothes, do you?). So, onward and upward! As his customers benefit, so does the tailor”or does he?
There is something the tailor is definitely not doing much of these days, unless he is very skilled and his customer very rich, and choosy, and that is making clothes out of whole cloth. Here is a list of Tailor-related jobs from the 1891 London Census:[2]
Tailor
Someone who made or repaired clothes
Tailor & Clothier
Someone who made or repaired clothes.
Tailor Coat Hand
A tailor’s assistant.
Tailor Hand
A tailor’s assistant
Tailoress
A female tailor
Tailor’s Apprentice
Someone learning the tailor’s trade
Tailor’s Assistant
A tailor’s assistant
Tailor’s Cutter
A tailor’s assistant – cuts cloth
Tailor’s Labourer
A tailor’s assistant
Tailor’s Machiner
A tailor’s assistant – machines cloth
Tailor’s Machinist
A tailor’s assistant – machines cloth
Tailor’s Presser
A tailor’s assistant – presses cloth
There were fully a dozen jobs just in the lowly Tailor’s shop in the nineteenth century. Today’s tailors exist mostly with one or two assistants and delivery people, or work for a large clothing store where there is enough volume.
So, one must be careful to compare apples to apples and tailors of old to persons sometimes split across multiple professions – who perform the same function today, whatever their titles. One thing that is clear is that we still need the products of those who labor to make clothing indeed, our closets bulge with a quantity of garments that most people in George’s day would not own in a lifetime. Whether we need so many items is for discussion outside this paper, though George did warn us that human desire is basically insatiable.
Perhaps our labor has become so efficient that machines do all the drudgery for us?
Three decades ago, I tagged along with a group of fashion students on a tour of the Jantzen Sportswear Company in Portland, Oregon (as a young man, I was curious about everything). There were machines to do all kinds of things, from spinning the cloth in so many vibrant colors! to cutting the cloth so efficiently! to producing the final garments in seemingly unlimited quantities, cheaply and powerfully. This indeed seemed to be the future of modern clothes-making. Yet, we are told in the late 1990s that:[3]
Today, Jantzen is the leading brand of swimwear in over 100 countries, although a tough business climate forced the company to lay off workers, move some production operations to Latin America and the Caribbean, and discontinue its sportswear lines (emphasis added).
The business decisions of a particular manufacturer are beyond the scope of this paper, but anyone who is even slightly aware of what’s been going on since George’s time, will understand that manufacturing as a whole has moved to the lowest margin of production that is, to the place where it is cheapest to produce the goods that will satisfy human desire. So, it is not accurate to say today’s American tailor is better off than yesterday’s he simply has a different job description. But what about that jettisoned function making clothes? What was life really like for people who actually made clothes, in large amounts, in George’s day? I’ll use an example from the turn of the twentieth century, slightly after George’s time, for reasons that will become clear later the Triangle Shirtwaist Factory.
The Triangle Shirtwaist Factory took up the eighth, ninth, and tenth floors of the Asch Building. Under the ownership of Max Blanck and Isaac Harris, the factory produced women’s blouses (known at the time as “shirtwaists”). The factory normally employed about 500 workers, mostly young immigrant women, who normally worked nine hours a day on weekdays plus seven hours a day on Saturdays. [4]
Says Pauline Newman, who actually worked at the factory:[5]
In the first place, it was probably the largest shirtwaist factory in the city of New York.
My own wages when I got to the Triangle Shirtwaist Company was a dollar and a half a week. And by the time I left during the shirtwaist workers strike in 1909 I had worked myself up to six dollars.
But you see hours didn’t change. The hours remained, no matter how much you got. The operators, their average wage, as I recall”averaged around six, seven dollars a week. If you were very fast – because they worked piece work” and nothing happened to your machine, no breakage or anything, you could make around ten dollars a week.
They were the kind of employers who didn’t recognize anyone working for them as a human being. You were not allowed to sing. Operators would like to have sung, because they, too, had the same thing to do, and weren’t allowed to sing. You were not allowed to talk to each other. Oh, no! They would sneak up behind you, and if you were found talking to your next colleague you were admonished. If you’d keep on, you’d be fired. If you went to the toilet, and you were there more than the forelady or foreman thought you should be, you were threatened to be laid off for a half a day, and sent home, and that meant, of course, no pay, you know?
Unfortunately, as most New Yorkers with a smattering of history know, the worst was yet to come.[6]
The Triangle Shirtwaist Factory Fire in New York City on March 25, 1911, was one of the largest industrial disasters in the history of the city of New York, causing the death of 146 garment workers, almost all of them women, who either died from the fire or jumped from the fatal height. It was the worst workplace disaster in New York City until September 11, 2001. Most women could not escape the burning building because the managers would lock the doors to the stairwells and exits to keep the workers from taking cigarette breaks outdoors during their shifts. Women jumped from the ninth and tenth stories as the ladders on the fire trucks could not reach these. The fire led to legislation requiring improved factory safety standards and helped spur the growth of the International Ladies’ Garment Workers’ Union, which fought for better and safer working conditions for sweatshop workers in that industry.
So, this tragedy national in significance led to improved worker conditions and unions to ensure workers’ rights. If that was the end of the story of where clothing comes from, and if it was merely a dramatic example of a general trend towards better labor conditions overall in all industries over time, than the “iron law of wages” which determines wages to the minimum on which laborers will consent to live and reproduce”[7] would seem to be wrong. But, of course, as George points out, the true cause of the global minimum wage is “an inevitable result of making the land from which all must live the exclusive property of some.”[8] Since this arrangement has not changed since George’s time, neither has the result. Here is how things work in today’s globalized market:
In a recent examination of “Patriotic clothing,” WCCO-TV went to Minnesota’s Mall of America (and found) every item with an American flag on it was made in China. At other stores with patriotic apparel, labels read made in China, El Salvador, Guatemala, Honduras and Russia.
At Target, WCCO-TV found more than 80 pieces of patriotic clothing. Of all the items, only one T-shirt was made in the United States. At Old Navy, WCCO-TV could not find any American-made patriotic apparel. At Wal-Mart, more than 40 patriotic items were checked. Most were made in America, which is no accident. Wal-Mart has a policy where any item with an American flag on it must be made in the USA.
Ninety-seven percent of all clothing sold in the United States is no longer made in the U.S. Yet, Minnesota is home to two long-standing textile manufacturers.[9]
We’ll look to the direct source of that claim that 97% of clothing no longer made in the United States in a moment, but first let’s look at a modern-day shirt factory right here in Manhattan. In the year 2000, reporter Henry Blodget found:
behind grimy windows, Chinese women slaved for 11 hours a day, stitching garments for a subcontractor hired by Donna Karan International. The women received no bathroom breaks, no overtime pay, no sick days, no paid vacation, and no maternity leave. They were screamed at to “work faster” and paid “per piece”–earning wages
that could only be called “living” if “living” means boiled water and rice” the miserable workers weren’t migrant Chinese peasants but immigrant Chinese and Latina women.[10]
Blodget tells us that this factory, so reminiscent of the Triangle Shirtwaist Factory a hundred years before it, has now been supplanted by travel bureaus and financial companies, but surely this cannot be the last one, either in New York City, or in the more invisible nether regions of America.
In fact, our own U.S. Department of Labor tells us that:
50% of garment factories in the U.S. violate two or more basic labor laws, establishing them as sweatshops. Sweatshops exist wherever there is an opportunity to exploit workers who lack the knowledge and resources to stand up for themselves. Typical sweatshop employees, ninety percent of whom are women, are young and uneducated. Many of them are recent or undocumented immigrants who are unaware of their legal rights. Young women throughout the world are subject to horrible working conditions and innumerable injustices because corporations, many of which are U.S.-owned, can get away with it.”[11]
One thing is clear, as George told us long ago:
And so, whatever be the character of the improvement (of machinery), its benefit, land being monopolized, must ultimately go to the owners of land.[12]
New Yorkers, of course, long ago mostly stopped working on actual land, so the owners are those who own the land where their factories reside, and pay so little for the privilege, that they can exploit garment workers at subsistence wages, or less, even here, in one of the most expensive cities in the world.
When even these owners finally cannot make a profit having factories in New York, they, or their competitors, find new land abroad, displace the peasants from that, and send them to work in new factories in distant lands where the sight of suffering workers, or workers leaping to their deaths from fires, will not upset squeamish Americans.
Women, in particular, are subject to grueling labor conditions, often enticed with false promises to leave their home countries, only to have their passports and money confiscated when they arrive in Southeast Asian or Middle Eastern countries. They are subject to sexual and physical abuse, being bought and sold like slaves, and incarceration. Often, their wages are under a dollar a day.[13]
It gets still worse.
In Myanmar – formerly known as Burma – villagers can be rounded up at anytime, forced to work on roads, pipelines, or whatever else the military Junta deems necessary to satisfy its customers including China, where it is not presenting a humanistic face for the West. People who refuse are beaten, often to death, imprisoned, and tortured.[14]
In this country, we do not call this Labor, we call it Slavery, for that is what it is. George, who saw American chattel slavery ended in his lifetime, would have recognized this form of slavery instantly. It is also beyond the scope of this paper to prove this, but it is my feeling that conditions of enforced labor have reached a level of depravity and abuse even worse than in George’s time. The ferocious hunger for the world’s diminishing resources, combined with the ready supply of people considered disposable by dictatorships in favour of resources throughout history has made vicious brutality a business practice in parts of the world Americans would prefer not to imagine, even if they could.
One cannot consider the condition of labor without considering the value of the Land they labor upon, as George stressed relentlessly from Progress and Poverty forwards. In fact, he makes the point that a laborer cut off from the fruits of Land is actually worse off than a slave:
So long as a plump, well-kept, hearty negro was worth $1000, no slave-owner, selfish or cold-blooded as he might be, would keep his negroes as great classes of “free-born Englishmen” must live. But these white slaves have no money value. It is not the labor, it is the land that commands value” (emphasis added).[15]
Elsewhere, a contemporary of Henry George, and former slave-owner, laughingly told him it was cheaper just to pay low wages for menial work to be done than to have to house and feed his former slaves. He went on to say that, had he known how much he would have saved by not having to house and feed his former slaves, in exchange for paying them a mere pittance to labor for him, he would have been in favor of abolition a long time before it finally came. How true is this labor equation in many parts of the world, still.
It is worth noting in this regard that it is the resource-rich regions, not the resource-poor ones, where labor conditions are the most appalling. In fact, we can narrow George’s strong implication into an axiom: Wherever the relationship between Land and the human labor to develop that Land is the least, the degree of human suffering will be the greatest.
Myanmar, for example, has the following resource wealth:
Copper, gypsum, barite, and cement. Steel and iron make up 6% of the country’s exports. Myanmar is second in opium production only to another bastion of horrid labor conditions, Afghanistan. Despite an import ban, one can regularly find Burmese Teak in the United States. Myanmar also has rubies, jade, pearls and fish which it exports to the Middle East and Asia, while a third of its own children are malnourished. Natural Gas accounts for 40% of Myanmar’s exports, flowing to China – and to Chevron.[16]
Myanmar is resource-wealthy, but its people are impoverished. In fact, when one reads of the atrocious working conditions in Myanmar, one longs for the relative comfort of resource-poor nations that only have sweatshops! At least there, the middlemen sweatshop managers, and factory-owners, act as buffers between the rapacious landowners and laborers.
What has happened to the dream of ever-increasing prosperity for all since George’s time? Didn’t the neoclassical Chicago School economists and the Free Market economists tell us that as bad as things may seem, that wealth would trickle-down eventually from the top income earners to the bottom, as they developed new businesses? Wasn’t it supposed to be that, as Julian Simon famously said in 1997:
The material conditions of life will continue to get better for most people, in most countries, most of the time, indefinitely. Within a century or two, all nations and most of humanity will be at or above today’s Western living standards.[17]
Indeed, Business Week warned us in a 2006 article on Chinese Factory Workers, that:
companies across the board are feeling the squeeze. Last year turnover at multinationals in China averaged 14%, up from 11.3% in 2004 and 8.3% in 2001. Salaries jumped by 8.4%, according to human resources consultant Hewitt Associates LLC.[18]
So, maybe it is onward and upward for everyone after all…eventually. All we have to do is run out of dark corners where people can be creatively exploited and then, finally, conditions will improve for those who labor so that, so we are told, we can live in relative splendor, here in the developed countries.
China may indeed, be coming around to recognizing Workers’ Rights, although Venture Outsource which bills itself as “an Authoritative Source for Decision-Makers” (Read: CEOs of multinational companies) – tells us Chinese labor rates for manufacturing are still below a dollar an hour[19] – this in a country that ranks fifth in the number of millionaires, as of 2007.[20] China’s Labor Bureau, optimistically, recommends setting the “minimum wage at about 40 to 60 percent of average monthly wages”[21] but this recommendation is regularly flouted, and perhaps most rigorously enforced only where high-profile factories producing goods for American manufacturers are concerned. In the more remote provinces, just as in the more remote regions of the U.S., people, often children, regularly work at or well below the minimum wage. In the countries that China itself outsources to the fourth world conditions are even worse, as previously described. Instead of free markets providing better lives for “most people, in most countries, most of the time,” an increasing number of regions, and even countries, has instead provided more ways to exploit the people within them.
Even where our better-known American brands are concerned, like Apple, conditions in China can easily fall behind the standards of the client company:
In its (own) report, Apple revealed the sweatshop conditions inside the factories it uses. Apple admitted that at least 55 of the 102 factories that produce its goods were ignoring Apple’s rule that staff cannot work more than 60 hours a week”these guidelines are already in breach of China’s widely-ignored labour law, which sets out a maximum 49-hour week for workers.
Apple also said that one of its factories had repeatedly falsified its records in order to conceal the fact that it was using child labour and working its staff endlessly.[22]
Before we leave this depressing litany of abuse and human degradation, let us be clear, it is not a given that resource-rich countries must always exploit the people within them. Near war-torn Congo’s southern border, Botswana has used its mines, which are partially owned by the state, to fund infrastructure, education, and health care, as well as set aside a rainy-day fund of nearly $7 billion. But, Botswana has something essential Congo does not: a government known for being both functional and honest.[23]
One might add that Botswana has another thing that Congo and almost every other country doesn’t have: a recognition that the value of the Land belongs to all of its people equally.
There is still something else doesn’t seem quite right about Simon’s promise, aside from the fact it has become awfully stale in the hundred years or so since value-free economics pushed aside Georgism and the other classical economists.
Consider that the average American CEO’s pay rose nearly 300% from 1990-2005, while the average American production worker’s pay rose only 4.3%, both figures adjusted for inflation[24] [25] (though inflation has been considerably higher for the lower and middle classes than for the tax and land-advantaged upper classes). It seems those in the highest balloon rise the fastest. Yet, people are generally more in debt, the middle class feels more vulnerable, and, so we are repeatedly told, we cannot afford our profligate ways any longer! Finally, household debt has risen from under 25% of GDP in 1954 to 99% in 2008.[26] Does this seem “onward and upward’ to you?
We come full circle to George again. Without justice in the distribution of Land, unskilled labor will be forced to a subsistence level, or, in the case of the middle class, be forced to borrow ever more to support a debt-ridden lifestyle for themselves, while enhancing an ever-more opulent one for the rich and grasping. If the middle class ever gets to the point where they finally cannot afford the shirts on their backs, where their ability to purchase becomes more closely aligned with third world labor’s ability to earn, it will be the middle class that sees its lifestyle go down, not the Land-owning elite. Improvements, or “mechanization” will not change that. Efficiency measures won’t even dent it American workers are already among the most efficient workers in the world. Without redistribution of the value of Land to all, who are both equally entitled and equally responsible for its rise in value, those without Land will always be forced to compete near the bottom just to survive, while “improvements” will only guarantee an even more obscene level of living for those who own the resources and charge others rent upon it.
Man without Land cannot survive, no matter how vigorously he labors. This was true in George’s day. It is true today.
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[1] Social Problems, Henry George, 1883, Pg. 68
[2] http://www.census1891.com/occupations-t.htm
[3] http://www.answers.com/topic/-268
[4] http://en.wikipedia.org/wiki/Triangle_Shirtwaist_Factory_fire#cite_note-drehle-1
[5] http://historymatters.gmu.edu/d/178/
[6] http://en.wikipedia.org/wiki/Triangle_Shirtwaist_Factory_fire#cite_note-drehle-1
[7] “Social Problems,” Henry George, 1883, pg. 146
[8] “Social Problems,” Henry George, 1883, pg. 146
[9] http://wcco.com/seenon/Made.in.America.2.347947.html
[10] http://www.slate.com/id/2113689/
[11] http://www.mtholyoke.edu/%7Enshah/fashioncrimes/Sweatshops.html
[12] “Social Problems,” Henry George, 1883, Pg. 145
[13] http://www.mtholyoke.edu/%7Enshah/fashioncrimes/Sweatshops.html
[14] Mother Jones, For Us, Surrender is Out of The Question, Mac McClelland, March/April 2010
[15] “Social Problems”, pg. 102, Henry George, 1883
[16] Mother Jones, For Us, Surrender is Out of The Question, Mac McClelland, March/April 2010
[17] http://en.wikipedia.org/wiki/Julian_Lincoln_Simon
[18] http://www.bloomberg.com/magazine/content/06_13/b3977049.html
[19] https://www.ventureoutsource.com/contract-manufacturing/trends-observations/2008/hourly-manufacturing-labor-rates-in-china
[20] http://www.bloomberg.com/bw/stories/2007-10-17/the-global-millionaire-boombusinessweek-business-news-stock-market-and-financial-advice
[21] http://www.china-labour.org.hk/en/node/100206
[22] http://www.telegraph.co.uk/technology/apple/7330986/Apple-admits-using-child-labour.html
[23] Mother Jones, Blood and Treasure, Adam Hochschild, pg. 60, March/April 2010
[24] http://money.cnn.com/2007/08/28/news/economy/ceo_pay_workers/index.htm
[25] http://www.faireconomy.org/news/ceo_pay_charts
[26] http://lacoctelera.com/gracias.html
July 28, 2013
By Scott Baker
A description of the 18.6 year land cycle and how it relates to the current stock market, and whether history will win over modern intervention.
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Worried Dollar by N.A.
This article from well-known stock market prognosticator Zerohedge caught my eye recently.
The charts show the scale of deep and prolonged Fed-led market manipulation and are consistent with other data I’ve been seeing since the Fed started its trillion dollar/year QE purchases. The thing is, the phoniness of the asset market bubble is well-known on the street, so there’s a question of how much difference a taper or some other gradual change will make, though the scare of about a month ago seems to indicate at least short-term corrections are likely, plus we are technically over-bought here and in the weak part of the year, historically. Zerohedge seems to acknowledge all this at the end too.
We’re in uncharted waters as far as the asset markets go, starting with the fact there has never before in history been two 50% crashes in the market – 2000-2003 & 2008-2009 – in the same decade (or 50% rises either). This kind of volatility is not only unhealthy in itself, but speaks of massive intervention of the unhealthy kind.
From the economic reformer perspective, both Georgist Fred Harrison and Georgist-Stock Market Guru Phil Anderson say we are at the beginning of the next 18-year land-based stock bubble, and like the beginning of all bubbles, it will be slow at first, followed by a mid-cycle correction (Harrison, in his new book, “The Traumatised (English spelling) Society” says this will come 2019, with a China-led global crash coming in 2028; Anderson recommends Harrison for his prescience in his newsletters). Harrison was correct in 1997, in predicting a 2010 housing market bottom (perhaps the bottom came a bit earlier than that, but few would have imagined the unprecedented Fed and Gov’t intervention in 2008-2009 too). Harrison was making his prediction back in the Dark (or light?) Ages before even the repeal of Glass-Steagall!
But, take a look at this chart of inflation-adjusted home prices according to the Case-Shiller index going back to 1890 (Henry George’s time!):
In 2006, just as the Housing market was peaking, the NYT ran this graphic of the 100-year Case Shiller chart. It showed how radically overvalued Housing had become.
Two years later, TBP reader Steve Barry updated that graphic, including the projected Home Price mean reversion. (See versions for 2008, 2009 and 2010).
Its time to update this for 2011. Note the 2009 tax credit wiggle:
Case-Shiller Index since 1890 by The New York Times
If the red line is followed – this chart stops in 2011 – we still have a long way to go to get to normal re-evaluation of house (read: land) prices…going down .
The Fed is trying to defy the natural law of supply/demand with lots of money from nothing (well, technically toxic assets, but these MBS are worth nothing like what is being paid for them – that’s what makes them “toxic”), but these are being turned into new speculations on land (Dr. Cay Hehner talked about this in the last Left Forum panel with Dr. Michael Hudson too; it was hedge funds and other speculators who started the post-crash land “boom” which still is invisible in this big picture chart, although that may be because it is not current enough). Still, is all this goosing enough to keep things above the Mean of 100? Is it even healthy for us to be above the Mean when the productive sector is money-starved?
Zerohedge, Phil Anderson, and other market followers would of course like things to go up, even while recognizing the phoniness of the Ponzi scheme, but this might be coloring their objective analysis. Clearly, a reversion to the mean would mean another 20-30% correction in housing, and most likely stocks, since they are so dominated by the FIRE sector now. At some point, the Fed – though most likely Bernanke’s successor (especially if it is hard-nosed, opinion-immune, Larry Summers) – will have to step off the gas, interest rates will rise, loans will be even further reduced, and the way financial institutions make most of their money – through Derivatives, Mergers and Acquisitions, and Wealth Management, won’t work anymore (JP Morgan invests 69% of its assets this way, leaving just 31% for traditional loans, typical of the TBTF banks – yet another argument for Public Banks).
Then comes the crash, but maybe bail-ins instead of a bailouts, now that that is prevented by Dodd-Frank (at least in theory, practice TBD). The joint FDIC-BOE plan, announced in a paper in December, to do a Cyprus-style involuntary bank deposit for bank equity swap, will trigger the Mother of All Bank Runs. Then the FEMA camps, draconian anti-liberty laws and practices without laws, as feared in the comments to this Zerohedge article, will really come out in force. As former president Jimmy Carter said in what must be the most mainstream media under-reported significant comment made by a living president of all time, “America no longer has a functioning democracy.”
I wonder if even the hundreds-years old 18.6 year land cycle can withstand that.
May 4, 2015
By Scott Baker
(Video included) I was asked to be a co-host for a Webinar discussion by president of the Henry George School of Social Sciences in New York City, Andrew Mazzone on April 22, 2015. We discussed the views of Thomas Piketty, Yanis Varoufakis and Henry George on the economic issues of today.
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The Webinar lasted 2 hours and can be seen here:
Mazzone had asked me to join him as a follow-up both to my appearance with him on the first of his increasingly popular Smart Talks with economists, in which we both interviewed Yanis Varoufakis when he was just a well-known economist in the Fall of 2013, and to his own later follow-up with Varoufakis on Piketty. You can see the first interview with all three of us here: From the Henry George School: Debating Economics And a sub-portion of the hour plus long video was highlighted when I wrote a follow-up after Varoufakis became Greek Finance Minister, wherein I had discussed with him the possibility of Greece issuing endogenous debt-free Sovereign Money, and then written a brief Mazzone/Baker plan for fixing Greece’s economy.
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The Mazzone/Baker Plan:
1. Issue drachmas for local consumption and spending. The amount should be enough to meet the 30% Output Gap, but not enough to cause too much inflation; the problem now, of course, is rampant deflation caused by too little money in circulation.
2. Agree to pay off the debt over 100 years, 1/100th per year. In reality, this will be the basis for negotiation, but it is a concrete one, something that has not been offered so far.
3. Use the devalued currency to encourage cheap tourism to Greece and exports. Tourism growth estimates vary considerably but 16.7% is a good mid-range calculation in 2014, and tourism remains Greece’s main economic engine, supporting 53 job categories.
4. Tax the large landowners with a Land Value Tax. It turns out that the Greek Orthodox Church is the country’s second largest land owner, after the government, but actually, this is imprecise, because in Greece, the church is part of the government, and its priests also collect a salary from government and the church owns stock in publicly traded companies like the Bank of Greece.
This article was put online at the school’s website a few weeks before the Webinar and future students were encouraged to read it and watch the embedded video snippet to understand some of the issues that might come up in the Webinar better. It was pre-Webinar homework. That article was originally published here: Will Greece or the EU Blink first?
As preparation for the Webinar I re-watched the follow-up interview Mazzone had with Varoufakis in which he discussed the recent economics best-seller from Dr. Thomas Piketty: “Capital in the 21 Century,” just before Varoufakis was appointed Greece’s Finance Minister. Though Varoufakis is probably, and understandably, too busy to have joined us for this Webinar on Thomas Piketty, Mazzone and I met to discuss his views, our own interpretation of Piketty’s important work, and also to put it in contrast to the solutions offered by Henry George, especially in his 1879 best-selling opus, Progress and Poverty (see video above), while interacting with the students. Mazzone’s second interview with Varoufakis, discussing Piketty, can be found on the school’s website, here: Smart Talk with Andrew Mazzone and Dr. Yanis Varoufakis.
Varoufakis also wrote a review in 2014 of Thomas Piketty’s book, in which he said:
The commercial and discursive triumph of Thomas Piketty’s Capital in the 21st Century symbolizes this turning point in the public’s mood both in the United States and in Europe. Capitalism is, suddenly, portrayed as the purveyor of intolerable inequality which destabilizes liberal democracy and, in the limit, begets chaos. Dissident economists, who spent long years arguing in isolation against the trickle-down fantasy, are naturally tempted to welcome Professor Piketty’s publishing phenomenon.
The sudden resurgence of the fundamental truth that the best predictor of socio-economic success is the success of one’s parents, in contrast to the inanities of human capital models, is undoubtedly uplifting. Similarly with the air of disillusionment with mainstream economics’ toleration of increasing inequality evident throughout Professor Piketty’s book. And yet, despite the soothing effect of Professor Piketty’s anti-inequality narrative, this paper will be arguing that Capital in the 21st Century constitutes a disservice to the cause of pragmatic egalitarianism.
Underpinning this controversial, and seemingly harsh, verdict, is the judgment that the book’s:
• Chief theoretical thesis requires several indefensible axioms to animate and mobilize three economic ‘laws’ of which the first is a tautology (SB – Piketty himself admits this in his early pages), the second is based on an heroic assumption, and the third is a triviality
• Economic method employs the logically incoherent tricks that have allowed mainstream economic theory to disguise grand theoretical failure as relevant, scientific modeling
• Vast data confuses rather than enlightens the reader, as a direct result of the poor theory underpinning its interpretation
• Policy recommendations soothe our ears but, in the end, empower those who are eager to impose policies that will further boost inequality
• Political philosophy invites a future retort from the neoliberal camp that will prove devastating to those who will allow themselves to be lured by this book’s arguments, philosophy and method.
Varoufakis’ complete 18-page paper, which has some moderately involved math regarding Piketty’s 3 main formulas, may be found here: http://www.paecon.net/PAEReview/issue69/Varoufakis69.pdf
Varoufakis details one of the most damaging charges against Piketty in both his writing and in interviews: that Piketty conflates too many things into Capital that shouldn’t be there. There is more about this in the Piketty — Varoufakis — George Notes below, and in the later category (George, as in Henry George), many Georgists, whether formal economists or not (like me) almost immediately noted that Piketty’s failure to disaggregate returns on non-capital Land is a major failing in his analysis, actually fatal to his opening ‘Law’ (Separately, Georgist professor Mason Gaffney writes in his own critique that this ‘Law’ does not even rise to the level of hypothesis, let alone theory, or ‘Law’). But even beyond that, there is another area involving labor which both Piketty and Varoufakis overlook as a major contributor to wealth, albeit for a limited historical period, Varoufakis by omission, and Piketty by commission because it is Piketty that “folds in” slave labor from America during 1770-1860. He uses U.S. Census data to include the value of slaves during this critical period in our then-young country’s history, concluding that in 1860, according to the last census before the Civil War that would end slavery, that slaves constituted 40% of the wealth in the South.
This is a big asterisk then, and while it shows Piketty’s consistency, it also shows how willing he is to include virtually anything that is considered, however hideously, as Capital, in his calculations. This genuflection to a legal definition of capital over an economic one should give us serious pause when considering what other factors might be mislabeled “Capital.”
What else has Piketty included as capital that shouldn’t be? Land.
In a thorough critique of Piketty, “A note on Piketty and diminishing returns to capital” by Matthew Rognlie, the 26-year old MIT student argues that Piketty’s return to capital is entirely due to Land appreciation, not capital, which in any case, loses its value faster than ever in today’s rapidly changing technological environment (he cites the Apple iPod as one simple but instructive example). This is in sharp contrast to Piketty, who argues technological achievement is one of the things that gives modern “capitalists” greater returns on their investments than Laborers can get through wages.
Supporting this view further is former OMB Director under Obama, Peter Orzag’s Bloomberg column “To Fight Inequality, Tax Land” in which he argues:
In the lasting debate over Thomas Piketty’s book on outsized returns on capital, a significant fact has been obscured: If you exclude land and housing, capital has not risen as a share of the U.S. economy.
If you’re surprised, you’re not the only one. Intuition suggests this capital-output ratio should be higher today than it was in the early 1900s. Yet, in the U.S., capital excluding land and housing has been roughly constant as a share of the economy since the mid-1950s, and is lower today than at the turn of the 20th century.
What has skyrocketed over the past several decades is the value of land and housing.
Orzag has some pretty good backup too, citing former World Bank president and noble prize winner, Joseph Stiglitz”
Stiglitz also argues for imposing a land value tax, to directly address this source of increasing wealth inequality. Economists have long favored such a tax, because it does little or nothing to distort incentives: Since land is roughly fixed in supply, there’s little one can do to escape a land tax. Indeed, from the perspective of economic efficiency, a land value tax scores higher than even a value-added tax, which is typically seen as the most efficient form of taxation.
Also cited is the political economist/journalist who started a serious theory of Land as the basis for just and sound economic policy: Henry George
Sometimes old ideas are good ideas. Henry George advocated forcefully for a land tax in his 1879 book, “Progress and Poverty.” More than 135 years later, perhaps its time is ripe.
Orzag concludes:
So here is a bold idea for a national candidate: Propose a national land value tax. It would highlight the fact that, except for land and housing, capital ratios have not risen here, despite Piketty’s rhetoric. It would also be economically efficient and reduce wealth inequality. The revenue could be used to reduce other taxes, or to help close the actuarial deficits in our entitlement programs, or some combination thereof.
As I re-watched the November 24, 2014 Smart Talk interview between Andy Mazzone and Yanis Varoufakis, I took the following notes and added more thoughts parenthetically:
Piketty — Varoufakis — George Notes
Mazzone points:
1. We have a broken neoclassical model
2. Capitalism has inexorable outcomes but no empirical explanation for them is provided by Piketty
3. There are accidental good times (e.g. WWI — apx. 1980) but these are treated as exogenously caused and without explanation
4. Piketty conflates wealth and capital — Varoufakis agrees
Varoufakis and Mazzone points:
1. Piketty is helpfully bringing inequality into established mainstream of economics profession. In neoclassical economics there is no place for inequality due to Utility Theory. This solves the disconnect between what most Americans thought and how economics has been practiced.
2. Inequality was banned from neo-classical economics because it uses a Utilitarian model where utility justifies all levels of inequality based on intelligent consumer preference and that one’s output cannot be compared to anyone else’s outside of this ranking.
3. Piketty finally made it so that the economics can say something about inequality after all.
4. (Andy/Yanis) Piketty offers no theoretical basis for inequality (In Piketty’s defense, it should be noted that he says his book is as much a work of history as economics. It would be interesting to see an historical critique of Piketty then, not just economic critiques), but Varoufakis says the theoretical construct is consistent with neo-classical textbook, but it can be disregarded eventually because it has no substance: 3 laws.
a. Law 1 is a tautology r>g (capital grows faster than national product)
b. Law 2 based on assumption that can’t hold in reality
c. Law 3 is trivial
5. Conclusion is weak, just a wealth tax with no distinction between capital, labor and land wealth.
6. Very few read all the way through Piketty’s book (Amazon reviews confirm this “early pages” bias).
7. Paul Krugman praised the book, though he should know better (Andy). Krugman is an academic economist who sees the world as a single sector economy model (Yanis) and is coached in terms of the IS-LM model (Investment Saving-Liquidity Preference Money Supply) — a macroeconomic tool that demonstrates the relationship between interest rates and real output, in the goods and services market and the money market. IS-LM acts as if there is only one “capital good” (Yanis) and it just interplay between availability of money vs. other capital goods. Returns to capital are not difficult to envisage in one-capital good model. This model does not need money, only trade.
8. Neoclassical models not capable of “handling money.” It is too complicated a concept. The models predict anything is possible and so are “useless” and not predictive.
9. (Yanis) Krugman uses his simply IS-LM model to do good things. Piketty much less interested in changing the world than Krugman, more a describer. Both Krugman and Piketty share an over-simplified view of capitalism.
10.What policy prescriptions can you take from Piketty? (Andy). There’s no bargaining power in Piketty’s formulation because we’re all “cogs in the machine” (e.g. The Matrix). This is not capitalism (Yanis). Piketty assumes prices are given and the “market” has determined them to everyone’s satisfaction.
11.(Andy) Piketty says tax all wealth, including money (which is most wealth these days, at least on paper), and he doesn’t disaggregate it (e.g. Land, true Capital),
12.”Rooseveltian reforms are off-the-table”
13. Piketty is writing “propaganda” not solutions (Yanis). Problem is we “can’t measure capital” as long as we live in a multi-commodity world. Doomed to mis-appreciation like love or beauty. Piketty chooses to measure wealth instead, not measuring capital at all. Everything is the same — Grandmother’s silverware to robotic assembly line, to stocks and bonds. Would force grandmother to sell silverware to pay the wealth tax.
14. No distinction for productive vs. non-productive assets. Would tax machinery as well as Land, stocks and bonds.
15.(Yanis) Piketty not interested in solving inequality, but in becoming the guru of inequality and connecting to the social sentiment that there is something wrong with inequality. This makes Piketty a great enemy in the end of pragmatic egalitarianism (perhaps this is why his book was so heavily promoted? — SB)
16. Piketty has formed economic committee to address how to change inequality.
17.(Yanis) Piketty has formed another group in France to do something about collapsing Eurozone. Have published a manifesto. However, (Andy) his book does not support direct gov’t intervention. But (Yanis) he is allowing this because he knows democracy is imperiled.
18.Reminds Yanis of debate between John Rawls and Libertarian Robert Nozick. “Piketty is a second rate version of John Rawls (book “Theory of Justice”, pub. 1971). Rawls mechanism for passing judgment on the justice of society was to imagine random scattering of rich and poor etc. Rawls was a re-distributionist as well, like Piketty (SB — Robert Reich too). Nozick destroyed Rawls in his 1974 “Anarchy, State, And Utopia” by saying: “Well, OK, we have distributed wealth as Rawls says, but what happens if someone develops wonderful skills at Basketball? And everyone wants to pay large amts of money to this star player. But allowing people to pay excessive amounts to player would allow skewing of wealth. So, allow it and destroy distribution or disallow it and prevent talent?” But market is not fair (Yanis — and me). Piketty too will be destroyed by Libertarian argument, even more so. Piketty has nothing to say about the process, only the outcome, and it is too late then.
My thoughts after watching the video:
Piketty may be sincere, despite what Varoufakis says, but his analysis is shallow and data-dependent on the easiest data to obtain. That is, he relies on data to drive his theoretical construct, which is at times incoherent anyway, rather than building a construct supported by data. This produces a result that shows what happened from a historical-economic perspective, but not why. He conflates anything that is remotely wealth as “capital” as both a way to explain inequality and also to enhance his book’s impact (it would be far less powerful if his book was entitled “Capital in the 21 Century” but had an asterisk saying “*Includes: Land, Slaves, and makes no distinction between earned wealth and rent wealth due to monopoly.” Such an asterisk would give away the game right there.)
Piketty’s data-driven model is so weak it invites anti-progressive libertarian attack, even by nominally progressive people, since it doesn’t allow for wealth based on production, or even for disallowing taxing Grandmother’s silverware set. The more recent ad-hoc Piketty economic committees are fine as a concept, but may not support Piketty’s limited viewpoint, so in the end are not going to be effective due to lack of clear theory.
But, the Georgist model was not given enough thought by Varoufakis either, and he too glibly conflates wealth and land value (which is never mentioned at all in the interview). Disaggregating land value and then suggesting taxing that would open the door to a new form of equality — based on process, not result — that in the end would produce something more fair than we have now. There would still be relatively poor, but not nearly the extremes as we have now. These extremes cannot exist without some form of unearned income from monopoly. The innovative market simply will not allow for it if it is allowed to function as it should. Piketty ignores this, or, at best, just assumes it is an unavoidable part of capitalism, except for great wars when everything is disrupted. Gaffney makes the point in his critique that Piketty is ignoring “non-shooting wars” in his period of relative equality — 1914-1980. Policy plays no part in Piketty’s world, or at best is a very weak and temporary brake on the rampant accumulation of capital at the top (again, conflated in his analysis) over national growth.
Notes on Piketty’s book: Capital in the Twenty-First Century
Reviews can be like a second article or book. The Reviewer, consciously or unconsciously reveals his bias in selecting what to highlight or critique. There is no substitute for reading the original, especially in the case of a tome like Thomas Piketty’s 685-page “Capital in the Twenty-First Century, even if “only” 577 pages are text and the rest mostly endnotes; some of those endnotes can be important too!).
In preparation for the Webinar I reviewed the notes I had taken when reading the book, though doubtless I note-took with my own biases, unquestionably in the Georgist direction to disaggregate Land from Capital, and in the Greenbacker direction to question the monopoly on money-creation by private parties. Still, I believe the notes have value, especially if one isn’t going to read the “original source,” Piketty himself.
Here they are, in slightly cleaned up form with page numbers referring to the hard cover edition and my reactions to Piketty’s thoughts in italics. Especially important points are in bold. I provided some links for the uninitiated.
1. Difference between property in 1900-1910 and now shown — page vii
2. Return on capital exceeds return on output and income — page 1
3. Inequality used to be even larger than today. Piketty refers to Jane Austin and de Balzac as good and accurate literary sources for early 19th century.
4. Land rent increases during Thomas Malthus’ time due to population growth — page 4
5. Malthus wrote during time of European revolutions — France, England (potential) — page 5
6. David Ricardo failed to appreciate the rise of technology and industry when he was writing his thesis. Too much emphasis on agricultural land — page 6
7. Urban land disequilibrium discussed — page 6
8. Inequality was extreme up until WWI — page 8
9. Says law — “Production creates its own demand” — page 9
10. Marx failed to use all sources available to him at the time or to account for continued technological progress.
11. Kuznet’s curve — the early to mid-20th Century tendency for all incomes to equalize due to technological progress. But this optimistic outcome was disproven by the 1980s — page 13. This lack of progress may be due to the cold war — page 14 or world wars — page 15 says Piketty, but I believe has more to do with profound policy changes favoring rentiers over producers.
12. Piketty relied on tax records for income calculations — page 17. But these can be incomplete and subject to evasion, particularly by those with the most to tax. Gaffney notes this in his critique too.
13. World Top Incomes Database (WTID) is Piketty’s primary source of data — page 17
14. Income is defined by Piketty as deriving from both wages and capital income (rent is included in his calculations, though much of this is based on land and not the result of labor) — page 18
15. Piketty also uses estate taxes in calculations — page 18
16. 2 optimistic assumptions have been proven wrong:
a. Class warfare will be replaced by generational warfare.
b. Education will equalize opportunity — page 22
17. Slow growth correlates with high income and wealth inequality, but Piketty does not emphasize that connection enough or its socially destructive potential — pages 25, 42
18. r>g: formula meaning rate of capital growth exceeds rate of national growth. — page 25
19. Piketty discusses mostly U.S., Japan, Germany, Italy, France and the U.K. because that’s where the long-term data is best. But does this mean the results might be different in other countries with different systems? Also, Gaffney points out that data for Germany, France and Italy is non-existent before ca. 1850 when they became countries, and sketchy at best for the U.S. before then too.
20. Inheritance played a smaller role in U.S. inequality historically due to early explosive population growth. — pages 28-29 Also, unmentioned, the presence of a large amount of free land in the frontier with which to build wealth.
21. Piketty says his book is as much a work of history as economics — page 33
22. Piketty’s example of conflict between labor and capital in Johannesburg is really between Labor and Land (mine) owners — page 39. 34 miners were killed for striking. What if rent on gold was distributed to the community whose land it was found on instead?
23. Piketty fails to distinguish between land and capital again — page 42. Does Piketty understand locational value?
24. What is capital to Piketty? — page 46. He says it is not human capital (except when he includes slaves 1770-1860), but he includes Real Estate, which includes land (page 42). He doesn’t separate land and other capital because he says it is too hard to separate them, but this is a fatal methodological flaw!
25. No distinction between wealth and capital because it is simpler that way — p. 48
26. Fixed capital includes buildings, infrastructure and land (to Piketty). Equals – total capital in developed countries — page 48.
27. Claims (falsely) that private wealth is almost all national wealth because debts balance out assets — page 48.
28. Foreign assets balance out between countries — page 50
29. Output growth broken into 2 parts population growth, and per person output growth — page 72. The latter is historically under 2%
30. Piketty believes growth will slow to historic norm of .1%/year due to population slowdown– page 74. But there is no evidence that rapid population growth necessarily leads to high output growth (e.g. See Malthus), so why should reverse be true?
31. Inheritance is less important when there is strong demographic growth — page 84. Lower demographic growth means more inequality due to relative higher importance of inherited wealth.
32. No country’s growth is >1.5%/year over long periods — page 93. Does China or India disprove this now that they have exceeded this level for over two decades?
33. Oil must be replaced to maintain growth — page 95
34. There was strong growth post-WWII because of strong State intervention in the economy until about 1980. But then why doesn’t Piketty call for more intervention now, instead of assuming a slowdown in growth is inevitable? — pages 98-99
35. There was no change in money conversion rates in 19th century. — page 105
36. Great levels of debt began after WWI — page 106
37. High inflation began in 1913 (Federal Reserve Act came slightly before inflation due to WWI) and until 1950 — page 107
38. 19th century wealth was in land or bonds — page 113
39. Piketty admits land is a special form of wealth — page 114 But still does not treat it separately when discussing capital accumulation.
40. First identification of rent-seeking — page 116
41. Housing chart on page 116-117 disguises land wealth. Also, agricultural land has been replaced by buildings, business capital, financial capital — page 118
42. Government debt nets to zero because it is an asset to private sector (this mirrors the philosophy of Modern Monetary Theory). — page 118. But not all debt is actually sovereign and Piketty misses that.
43. Piketty finally acknowledges that “housing” can be broken down into land + actual houses — page 119
44. National Capital = farmland + housing + other domestic capital + net foreign capital — page 119
45. French and British rents transferred abroad — pages 120-121
46. Capital is defined as difference between what one owns vs. what one owes, but Piketty does not project out to future ownings and future debt where the ratio might change — page 123
47. Sovereign wealth funds have arisen to manage sovereign wealth. This disproves Piketty’s earlier contention that governments are essentially without assets because debts balance out assets and net to zero – page 124
48. France paid debt by inflating it away or defaulting on 2/3 of it during revolution in 1790 — page 130. Is this a lesson for Greece and others today? Countries aren’t allowed to “reset” so easily anymore.
49. Public and private debts grew to unprecedented levels in early 19th century. Bonds replaced land as income — page 130
50. 19th century France paid more in interest on bonds than on education — page 132. Taxes went in large part to bond holders.
51. Landlord wealth is only 3 times national wealth in the U.S. vs. 7 times in the U.K.
52. Slavery was added to wealth and increased 10 times from 1770-1860 according to census — page 158. This amounted to 40% of the South’s wealth in 1860.
53. Is Piketty’s capital/income the best measure of national inequality? It doesn’t account for large individual discrepancies in capital/income ratios. — page 166
54. Capital accrues faster to wealthy people in a slower growing economy. Faster growing economies will have less savings but more opportunities — page 167.
55. Second fundamental Law of Capitalism: -‘= s/g Formula: capital/income = -‘ Savings rate = s; growth rate = g. “If s = 12% and g = 2%, then -‘ = s/g = 600%…meaning in the long run a country will have accumulated 6 years of national income as capital. Piketty says this formula does not work if natural resources are included — page 169. Georgists say natural resources SHOULD be included!
56. -‘ = s/g also does not work if asset prices grown faster than consumer prices — page 169.
57. The formula also does not account for shocks like world wars.
58. Piketty acknowledges speculation drives asset market prices — page 172. But he does not provide an alternative to dampen speculation such as Land Value Taxation.
59. Retained earnings are put back into stocks as a greater rate than economic growth, long term — page 176 – 177
60. Durable household goods not counted as savings, but corporate durable goods are so counted and their depreciation is written off taxes — page 179
61. Distinction between public and private wealth may be arbitrary, e.g. charities like foundations — page 182
62. In most rich countries, borrowing exceeded public savings/investments
63. All countries are privatizing assets — page 186
64. Rise in value of pure urban land does not account for rise in capital/income — page 198
65. Returns on capital higher than from labor — pages 205-206 and were 4-5% in the 19th century.
66. Rental value of housing is 3-4% but housing is – total national wealth — page 209
67. Real estate and financial wealth account for “bulk of private wealth.”
68. Too much capital kills return on capital — page 215
69. 30% return to capital was the norm after WWII — page 218 (But this is too simplistic)
70. Capital tends to replace labor over time page 221 Gaffney makes the point that tractors (capital) actually replaced the land that was used to feed draft horses on farms — about 1/3 of the typical farm — and not labor. There are other such examples that contradict Piketty’s big pronouncement.
71. Income from Capital defined as any income not from labor, including rent — page 242 (but see important “slavery” exception 1770-1860)
72. Inequality resulting from difference in capital returns always greater than inequality resulting from difference in labor returns — page 244
73. Top 10% of labor receives 25-30% of labor income. Top 10% of capital receives 50% of capital income, up to 98% in some societies. See charts of labor and capital inequality — pages 246-249
74. In U.S., top 10% of laborers make greater return than bottom 50%
75. Half of population own virtually nothing — page 257
76. No society has ever existed in which capital inequality is only mild — page 258
77. Wealth is so concentrated that the bottom 50% is almost unaware of its existence. — page 259
78. The truly wealthy become that way through stock and business partnerships — page 260 Prof. William Lazonick and others have documented that as much as 90% of corporate profits are plowed back into buybacks and dividends, leaving just 10% to grow the business, so this makes Piketty’s observation much less benign
79. 1900-1910 Europe — The richest 1% owned 75% of all wealth — page 261 This puts into question the commonly assumed “revolution tipping point” at lower GINI ratios or when the wealthy 1% own about 40% of the wealth. Why the difference? Might historical royalty allow for greater wealth inequality?
80. Today’s middle class lays claim to – to 1/3 of national wealth. Middle class in Europe gained at expense of wealthy — page 262
81. Piketty says revolution probable when wealth gets too concentrated — e.g. 90% of wealth in top decile — page 263. But 50% makes it more likely too.
82. Inequality is more achievable through rentier societies, “patrimonial societies” that pass wealth through inheritance — page 264
83. One can be both a “super manager” and a rentier — page 265
84. How inequality is measured is not a neutral phenomena — page 270. You don’t say”
85. Rentier income fell by 2/3 in France in the 20th century — page 274
86. Today, unlike in the past, only the very top derive income from capital — page 277
87. Rentiers fell behind super-managers — page 278 Is this really true? What about rent from intellectual property via patents, or from stock options, or from mineral resources or pollution a company produces that it is not paying a fair price for (externalities)?
88. The next 9% under the top 1% enjoy an 80/20 income/capital splits, but capital income is under-reported for the top 1% – page 281
89. Income taxes are becoming an unreliable source of income statistics. Gaffney argues they have been that for some time.
90. The 9% under the 1% fared better during the depression — page 285
91. Capital gains taxes are at unsustainable low levels — page 285
92. Increase in inequality contributed to instability — page 297
93. From 1977-2007 the top 10% got 3/4 of the income growth and the top 1% got 60% of that — page 297
94. The rise in inequality is not explained by changes in education and technology — page 304
95. Power of special groups may determine wages, not their productivity — page 305
96. Education can’t explain gap between the top 1% and next 9% – page 314
97. Japan and Europe are not as unequal despite being as technologically advanced as the U.S., so technology and education premium does not make sense as a cause of inequality — page 330
98. Compensation changes since 1980 largely responsible for CEO wealth gains — page 333
99. Superior corporate performance does not correlate with high CEO pay — page 334 Also, my article here: http://www.opednews.com/articles/High-CEO-Pay–Low-Company-by-Scott-Baker-091231-794.html
100. Top 1% owned 60% of the wealth in 1900-1910 — page 339
101. Top decile in France owned 80-90% of total wealth — page 342
102. Piketty conflates rent with capital — pages 353, 359
103. Inequality dropped from 1914-1945 and has not yet returned to previous levels — page 372 But the trend is in that direction!
104. Rentiers no longer make up top 1%, but super-managers do — page 373
105. Inheritance tax rates went from 1-5% to 20-30% during WWI, leading to more equality — page 374
106. In Germany, estate tax is half that of France — 15-20% – page 374
107. Piketty claims capital was once land but is now industrial, financial and real estate, but isn’t Real Estate mostly land? — page 377
108. In the 21 century, one can be a small or medium rentier and a super-manager — page 378
109. Lower mortality in second half of 20th century partly explains lower inheritance rate — page 387
110. “The logic of r>g implies that an entrepreneur always tends to turn into a rentier.” — pages 395, 411, 420. This contradicts his earlier statement that rent-seeking has given way to running businesses and being a super-manager.
111. Tax competition among nations and regions can lead to inequality and slower growth — page 422
112. Rent has been redefined by the 20th century as “income on any capital” — rent, interest, dividends, profits, royalties — page 422
113. Rent is now simply return based on ownership, independent of any labor. Rentier has now become an insult — page 423
114. Piketty makes no distinction between rent on land and rent on true manmade capital — page 424
115. Inherited wealth likely 50-60% of private capital — page 428
116. Slowing of population growth means inherited wealth will become more important — page 428
117. Forbes showed billionaires increased from 5 per million (1987) to 30 per million (2013), from .4% to 5% – page 433
118. Top 1% owns 50% of global wealth — page 438
119. Merit alone cannot account for wealth inequality and money grows on its own, independent of owner merit — page 443
120. Entrepreneurs turn into rentiers — page 443
121. Inflation is not detrimental to assets if it is low and assets are invested wisely — page 453
122. Rents to sovereign funds are climbing but currently at 1.5%
123. Annual rent on natural resources is currently just 5% – page 459
124. Wealthy residents of rich countries are hiding assets and making trade balance appear negative when it isn’t — page 467
125. Piketty calls for a global progressive tax on capitalism, but then dismisses it as utopian himself — page 471
126. Share of taxes as part of national income rose 3-4X post WWI — page 476
127. Welfare spending is small — page 478
128. Growth of social state accounts for growth of state spending — page 479
129. Tax rates are regressive for top 5% – page 496
130. Absence of progressive tax implies support for globalized economy. Countries with tax cuts at top have most income inequality — page 508
131. Executives fought for huge raises only after 1980, when tax rates were lowered from 80-90%, but reductions in top rates have not stimulated national growth, just the opposite has occurred — page 510
132. Growth rates the same in U.S. and Europe over past 3 decades — page 510
133. U.S. growth rate higher 1950-1970 then from 1990-2010 — page 511
134. Incomes of over .5 — 1 million should be taxed at 80%, says Piketty – page 513
135. In favor of Real Estate taxes — page 517, but Piketty vastly understates revenue from this at only 1-2% of national wealth
136. Global wealth tax would force reporting of assets — page 520 and this should be automated — page 521
137. Force all banks globally to report holdings.
138. FACTA requires non U.S. banks to report holdings — page 522
139. Countries less powerful than global patrimonial capitalism — page 523
140. Impose 30% tariffs on countries that don’t release bank data — page 523
141. Income for the wealthy is hidden in trusts etc. — page 525
142. Piketty wants to replace property tax with wealth tax — page 529 Bad idea. Wealth in non-land forms is easy to hide, compared to land, which also cannot be moved offshore.
143. Calls for progressivity in taxation — page 530
144. Land rent seen as stable, good, income in the 19th century
145. Property taxes suffer from bad assessments and lack of progressivity — page 530. Actually progressivity is built-in since wealthy people tend to live on more valuable land. Assessments can be made more honest and better.
146. China has capital control and capital regulation — page 536
147. Piketty claims public wealth is close to zero due to debt — page 541. Apparently, he’s never read a CAFR – click here
148. Inflation would take decades to work down debt — pages 544-545
149. Taxes far better or reducing debt than inflation — page 547. Sovereign, debt-free money is better still – http://www.opednews.com/articles/Debt-No-More-How-Obama-ca-by-Scott-Baker-Banks_Constitution-In-Crisis_Constitution-The_Constitutional-Amendments-131018-391.html
150. Milton Freidman’s “Monetary History of the U.S.” in 1963 led to the Chicago School rejection of big government and the conservative revolution of the 1980s — page 549
151. Central banks do not create wealth, they redistribute it — page 550
152. ECB, BOE, FRB has doubled to 20% of GDP — page 552
153. Piketty suggests a corporate tax be deducted from shareholders based on global database of wealth — page 560. This can be progressive too.
154. Apportion taxes based on sales and wages paid in each country — page 561
155. Too much capital accumulation retards growth — page 563
156. There should be no prior constraints on Euro debt — page 566
157. Net private wealth in Europe has never been so high — page 567
158. Piketty calls for annual tax on capital to be global — page 572
July 31, 2015
The Real Lessons in Greek for Leftists
By Scott Baker
The Greeks are in line for another bailout, or are they? Who is really getting bailed out here? What can Greece do to prevent capital flight? The answers here…
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The problem of capital flight Steven Jonas identifies as happening in Greece and as a cautionary tale for Leftists, is not as hard to deal with as it sounds. There were two part-contemporaries of Karl Marx, cited by Jonas who effectively did it, without that being even their main objective: Henry George (1839-1897) and President Abraham Lincoln.
How?
George came up with a formal and thorough description of a tax that has actually been around to some degree since the Old Testament (economists, like humans, have to re-learn the lessons of the past, over and over). It was called the Land Value Tax. The Land Value Tax is a tax on the site value of the Land, primarily though it is also a tax on resource-wealth and even, in modern form, on pollution. None of these forms of taxation, unlike taxes on income or sales, can be driven offshore — income taxes drive income offshore, while taxes on sales drive sales offshore. But taxes on Land (the classical economic term meaning ALL of nature’s resources and most importantly, location) cannot be avoided. This satisfies one of the cannons of taxation, first laid out by Adam Smith, who also advocated taxing landowners on their unearned income. Here they are (see slide 13):
1. Light on production
2. Easy and cheap to collect
3. Certain
4. Fair
The Land Value Tax satisfies all of these, including #1 because it is merely collecting for the public good what the landowner currently collects for his private gain. It is also Fair (#4) because it is the community demand that created the value of the location in the first place. It is Easy and cheap to collect because locational value, apart from improvements like buildings which are untaxed, is something brokers and assessors have been determining for centuries, and it is easier than ever with modern computerized tools. The Land Value Tax, at least in this country, could raise trillions in America, as I document in my new book, “America is Not Broke!” and even in Greece, where the value of housing (read: Land) has declined 50%, there are vast under-taxed estates.
Rather than selling off public lands at fire-sale prices to the outside Troika or other vulture capitalists, Greece should retain these, and then collect full rental value on its private properties, which by definition cannot be moved offshore.
The other solution, which is not unique to Lincoln either, and indeed goes back as far as the Land Value Tax to the mists of time when money first became part of human society, is Sovereign Money, issued by the government not a semi-private central bank, or the network of private banks (either here or in Greece). Money, as both Lincoln and George realized, is too important to be left solely in the control of the money monopolist banks. The banks only care about having their debts repaid, not about the people or countries paying them, and not about the health of the economy. In fact, as former Finance Minister Yanis Varoufakis is finding out now, they will turn viciously on anyone who challenges their money monopoly.
The long knives are out for Varoufakis now: Supreme Court prosecutor takes action over Varoufakis affair.
And consultant and world-renowned economist, James Galbraith Jr. is named in a suit as well: Varoufakis facing treason charge for hacking accounts.
What’s next? Will they go after journalists for covering the story (including bloggers like me who advocate for alternate currencies too)? Opednews? This is really getting to be insane, but that’s what happens when money is monopolized by a completely unaccountable body dominated by the banks. This monopoly must be busted, and the way to do that goes beyond letting a few megabanks (aka Systemically Important Financial Institutions in the Fed’s nomenclature”which raises the question: important to whom???) fail. The monopoly on money creation itself must be defeated. And with proper respect to the dangers of inflation, this is the track record of the private Federal Reserve to the value of the Federal Reserve Dollar since inception in 1913:
Has the Federal Reserve managed the value of the Federal Reserve dollar well? Before answering that, consider that another form of dollar, a United States Note, can be bought for more than twice face value on eBay, and it’s that expensive precisely because it is so rare. So much for the government over-issuing money when it had the chance. The reality is precisely the opposite.
So, knowing of these two solutions, when president of the Henry George School, Andy Mazzone and I interviewed Yanis Varoufakis a year before he became Finance Minister for Greece, I asked him about issuing Sovereign Money.
I wrote in an earlier article: Will Greece or the EU Blink First, about that exchange:
From the interview in Fall of 2013:
Minute 6:20 Scott: This is why I advocate along with Henry George and other monetary reformers that we break up the monopoly of money creation itself and that that way the politicians are not going to be bribed by money because they have their own supply. Because it seems that politicians are very cheap in the world of finance that these bankers operate in (and) to buy off for congress is a modest investment from their point of view…
Yanis: I agree, Scott…
…and that they’ll continue to do it and the there’s no reason not to, as Andy says why they wouldn’t. But the only way to break that – I believe – is to break the monopoly on money as well as the monopoly on land and the land in the expansive sense as meeting all resources.
Yanis: I agree”
Scott: So if we don’t take this monopoly power away from the financiers in around two years then what hope is there for the actual productive class to have any sort of parity in the society?
Yanis: Spot on. I agree. I agree entirely. But there’s one danger in this narrative, not that I disagree with you, but we have to be very careful how we hone it because today there is, as you well know, there is a tea party/libertarian argument against the monopoly of money, against the Federal Reserve, against fiat currencies and in favor of a Hegekian (?) blueprint of privatizing money and effectively allowing private…banks to issue their own currencies.
Now this libertarian pipe-dream, which of course is never going to come to fruition, is a political bulwark against the agenda that you just outlined. So it’s…we must be very clear about this. It is not…the problem is not that we have state fiat money. The problem is that we have a Fed…a Federal Reserve System, in the United States, a European Central Bank in Europe, which is in the pockets of the private financiers.
And the task is not to undo the state’s control of money. The point is to strengthen it but to make the state operate…operate…utilize its control of money on behalf of manufacturers, on behalf of creative people, on behalf of all those whose lives are wrecked as we speak by the rent-seeking behavior of the financiers that control through the revolving-door strategy the regulators.
Minute 9:05
It’s clear Varoufakis agrees with the majority of economists in that economic demand must be increased.
Later, Mazzone and I discussed the possibilities for Greece a bit more and came up with this broad outline for a plan:
1. Issue drachmas for local consumption and spending. The amount should be enough to meet the 30% Output Gap, but not enough to cause too much inflation; the problem now, of course, is rampant deflation caused by too little money in circulation.
2. Agree to pay off the debt over 100 years, 1/100th per year. In reality, this will be the basis for negotiation, but it is a concrete one, something that has not been offered so far.
3. Use the devalued currency to encourage cheap tourism to Greece and exports. Tourism growth estimates vary considerably but 16.7% is a good mid-range calculation in 2014, and tourism remains Greece’s main economic engine, supporting 53 job categories.
4. Tax the large landowners with a Land Value Tax.
Now, it’s later, and it’s now clear that Varoufakis was working on an alternate currency option all along, understandably in secret since the monopolist banks would never allow it if they had known. The banks would have withdrawn liquidity from the Greek banks, as indeed they did, when there was even a hint of rebellion against their illegitimate demands (illegitimate because banks should be subservient to the government, not the other way around).
These options still exist, and it’s hard to see how Greece digs itself out of the debt hole — soon to be 200% of GDP — without them. The banks, aka the “Institutions” have no intention of writing down the debt, even though they know it cannot be paid. Why continue with such an illogical demand?
Because it is the banks, not Greece, which are being repeatedly bailed out.
Varoufakis identified this trend too, but now even the NY Times has written about it, Bailout Money goes to Greece, only to flow out again:
The latest financial aid package is following a similar pattern to the previous ones. Only a fraction of the money, should Greece get it, will go toward healing the economy. Nearly 90 percent would go toward debts, interest and supporting Greece’s ailing banks.
See the Times’ article for an excellent chart showing how the so-called Greek bailouts are really being divided up, mostly for debt servicing of already existing debts, some for so-called financial programs (read: bailouts for holders of Greek bonds, private Greek banks etc.) and virtually nothing for the Greek people themselves. All of these bailouts to others come at a price, of course, and that price is not borne by those who receive the money, but by the Greek people in the form of new debt added to an already impossibly high burden on their economy.
Moral hazard is a term typically applied to people who took out loans they shouldn’t have because they think they will be bailed out, or in this case to Greece, but what about the financial institutions that are getting bailed out repeatedly, without even the appearance of accruing new debt themselves? Where is the moral hazard for them? Why should they write off debt when they keep getting re-funded? And here’s another thing: the financiers — who, remember, get rich from unearned income — keep buying Greek bonds. But the curious thing is those Greek bonds are not yielding 15%, 20% or more, because of the high risk of default. No, they are yielding 5.3%, barely a couple of points above Germany, supposedly Europe’s most credit-worthy economy. And there is no slowdown in the “market” for these bonds, no reevaluation, certainly no government authority stepping in and saying “Wait a minute. Bondholders ought not to expect further bailouts of their bond purchases!” Where is the moral hazard?
This is a sweet deal for the bondholders, a sweet deal for the banks, who get money with debt to someone else (Greece). This is the ultimate form of Exploitative Capitalism, the slow rape of a country without end.
Well, actually there will be an end, because a people an impoverished people will rise up eventually, as they already are. Greek riots are now commonplace, though they are called “protests” in the polite company Western media. This cannot stand. The center cannot hold.
August 25, 2015
A Rebuttal to Doom-and-Gloom forecasts such as Debt Collapse: The Decline and Fall of the USA
By Scott Baker
We do not have to submit to debt default or to austerity. We have all the resources we will ever need, if we learn where to look.
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There are several problems with this doom-and-gloom article “Debt Collapse: The Decline and Fall of the United States of America” by William Edstrom (full disclosure: I’m the OEN Editor who released it from the Queue).
Without refuting each of the numbers one by one, a few need special attention.
1. The Pension returns are supported by a single link to the site State Budget Solutions. While the site looks very official and unbiased, it actually seems to make a very biased assumption. Buried way down in the methodology section is this note “Plan liabilities were discounted according to the 15-year Treasury bond yield averaged over calendar year 2013. That rate was 2.734%.” I wasn’t sure at first if they meant that just the Treasury returns were calculated using these returns or the ENTIRE pension fund returns, so I checked the underlying spreadsheet, and sure enough there is a similar footnote for that indicating the 2.734% return is used to project returns for entire pension funds. Also, they say elsewhere “State Budget Solutions uses fair market valuation to determine the unfunded liabilities of public pension plans. Outside of the small world of public pensions, there is near-universal agreement that discount rates based on the assumed rate of investment return are far too risky. The approach SBS uses is to discount liabilities based on the approximate equivalent of a 15-year U.S. Treasury bond yield. This year’s number is derived from the 2013 calendar year average of the 10 and 20 year bond yields.”
Well, promises of 8%/year certainly have proven to be overly-optimistic, but using historically low Treasury yields is overly pessimistic too, though perhaps not in Edstrom’s view, since in his article he says he expects the stock market “will lose 86% of its value” based on some obscure calculation called the Tobin’s q value. Now, Wall Street uses many things to generate stock market returns, many of them fraudulent (a good list may be found here), but relying on a single formula is not one of them.
And, ironically, if the nation’s pension funds are dependent on upon stock market returns, it’s likely the regulators like the Fed and the SEC will turn the other way when these frauds are perpetuated, or even engage in them themselves. For the most part, this is a very unhealthy state of affairs, but it does open up one big possibility…
- The government could simply rip up money it owes itself. Ron Paul, and later Alan Grayson, supported a bill a few years ago that would have wiped $2t in national debt that the government owed the Federal Reserve through Treasuries it owed to the FRB itself. This was seen as a way of getting back “under” the so-called debt ceiling, but it is revenue-neutral because the Fed already returns whatever money it collects on Treasuries minus its own expenses. But this may be the tip of the iceberg in terms of what the Fed actually owns now, because, as this article and this one by Paul Craig Roberts and this one by me points out, the Fed may be behind secret Treasury purchases in other countries masquerading as foreign purchases. If so, this is another possible source of revenue-neutral write-downs.
I won’t venture to say how much “paper debt” can be ripped up this way, but it is certainly in the trillions, possibly in the 10s of trillions if you also include government bonds owed to the U.S. that could be cancelled out in a direct swap, but this really misses the bigger picture because…
- Edstrom’s article suffers throughout from the Loanable Funds Fallacy (LFF). LFF states that there is a finite amount of money and that if this is depleted, in the case of the government, no more money can be produced except by raising taxes or borrowing. While this may be true in the case of the states — even leaving aside for the moment major state options l will discuss in a moment — it is certainly not true for the Federal Government, which is monetarily sovereign under historical precedent, or the Constitution’s Coinage Clause (Art. 1, Sec 8, Clause 5), which allows Congress to “coin Money.” Edstrom throws out the possibility of the government “printing money” (I will discuss why this flippant characterization is inaccurate in a moment too) as potentially hyper-inflationary, even while he unquestioningly allows the deflationary result of debt default and Great Depression levels of economic contraction. But the opposite of deflation is inflation, so why not deploy inflation to counter deflation if that is what’s required? Economists agree that deflation is the bigger of the two problems. Economists also agree that it was the tight monetary policies of the 1930s that led to the Great Depression. Milton Freidman even suggested dropping billions of dollars from helicopters if necessary to counter deflation, and former Fed Chair Ben Bernanke made a speech in the early 2000s suggesting the same thing, which got him dubbed “Helicopter Ben.” And a funny thing happened on the way to Hyperinflation: it didn’t happen. In fact, according to the CPI (itself rigged to under-count inflation, but certainly not to the levels that Edstrom worries about, nor from wage inflation but rather from asset inflation), we have suboptimal inflation right now, under 2%. This is especially evident in the oil and gas markets, where prices are hitting lows they haven’t seen since the crisis in 2009, under $40/barrel for oil.
- Edstrom also undercounts or discounts entirely, the positive benefits of some government spending. While military spending doesn’t add to the national wealth pie overall (and its contribution to our national security can and should be seriously questioned when we are spending almost as much as the next 10 countries combined and the Pentagon cannot account for $8.5t since 1996), there are government programs that produce more wealth than they cost. They are investments. One of these is one that holds a good portion of the national debt that Edstrom is so worried about — and that we owe ourselves — Social Security. Because of the Money Multiplier, we have a net gain from $0.80 to $1.00 every time $1.00 is spent. See my article here, citing two studies to back this calculation up. If we eliminated Social Security we would actually lose more money than we would gain.
Many economists realize that debt is not the problem it seems to be to people who are not monetarily sovereign themselves (you and me, and the states). Paul Krugman recently called for more debt, pointing out that “One answer is that issuing debt is a way to pay for useful things, and we should do more of that when the price is right.” By the “price is right” Krugman really means the current Zero Interest Rate Policy (ZIRP). But we don’t even need ZIRP if we issue the money ourselves, and bypass the Central Bank, as Lincoln famously did during the Civil War when the New York banks (there was no Central Bank at that time) wanted 24-36% interest. Lincoln asked Congress to issue $450m in United States Notes, a currency form that was issued 14 times overall until Treasury phased them out in 1996, our longest-lasting currency! These first forms of Legal Tender were not inflationary — putting the lie to the private bank-favored argument that government will be unbounded by newly rediscovered ability to “coin Money.” In fact, U.S. Notes can be purchased for over twice face value in Federal Reserve Notes on eBay because they are so scarce and in such high demand.
There are other problems with Edstrom’s analysis. He discounts the revenue and asset side of the ledger too.
For example, California, which supposedly has one of the largest pension debt obligations, has about a quarter of a trillion dollars in its pension fund. It has to shell out about 4%/year to pay pensioners, meaning 96% of the fund remains to “make money on.” Well, first of all, when did government become a profit making enterprise? It could, in theory, cash in that pension fund, with iron-clad promise to pay pensioners out of future taxes raised by a relatively small amount, and then, with the far better credit rating it would get from becoming newly flush with cash, open a Public Bank and charge ultra-low interest rates for in-state projects that would support the state economy, instead of “investing” that money in Wall Street gambling, which, as Edstrom points out, is actually more risky than casino gambling because the bets are insufficiently backed and the banks making them have to be regularly bailed out. In contrast, the Bank of North Dakota — the country’s only Public Bank (est. 1919) — has never needed a bailout and in fact creates credit for the state and a dividend as well – $300m in one recent 10-year period.
So, there exist investment options for the states that would make their debt far less onerous than they are now and could even be a net gain.
And this is even leaving aside the very dubious assumptions about continued low returns cited by Edstrom’s sole supporting link.
Newly created jobs, in a well-run public works program also generate wealth, of course, as is proven by the national wealth from the public works projects initiated under FDR that we are still enjoying today. Again, these are investments, not just liabilities, as Edstrom strongly implies.
Medicare is another example of this, and is a cheaper option than Obamacare, which is basically a subsidy for the private healthcare insurance companies. If Edstrom wants to rein in the cost of healthcare — the largest in the world — he should support Medicare for All, as Bernie Sanders does, and which, as Robert Reich and others have pointed out, is the solution, not the problem to high healthcare costs. Additionally, Medicare should be strengthened by being allowed to negotiate for lower drug prices. But even now, public payment of healthcare is a net benefit, not a net cost. You can’t just look at the spending side of the ledger without accounting for what’s gained.
And there’s more. We have, according to Georgist economist Mason Gaffney, some $5.3t in economic rent, which mainly goes into undeserving private hands now. This is money Land/location holders make simply for holding those assets, not from any productive activity. This money, if properly collected, could eliminate the need for any other form of taxes, and the removal of this deadweight loss to the productive classes — mostly in the middle class — would greatly stimulate economic production, growth, and work towards eliminating the national debt in the best way possible.
I talk about these ideas, and much more, in my book “America is Not Broke!” Perhaps Edstrom and others will have a read, and stop regurgitating the scare stories of conservative outlets like those of the Pete Peterson Institute and other institutions and ultra-wealthy individuals like the Koch Brothers, who only want to increase the divide between them and the 99% to enrich themselves still further.
September 27, 2014
China shifts taxes to Land
By Scott Baker
China has made a major shift to taxation on Land, especially in those areas with the most speculative fever, their largest cities. This will not only enhance revenue, it will provide the final link in the well-managed Chinese economy, and may spell the end of Western economic dominance, even sooner than currently forecast.
Goldman Sachs just revised its growth target for China downward to “just” 7.1%/year for 2015. See here: click here
However, Goldman uses the classic Western rationale:
In economics, there are three factors that contribute to economic growth: labor growth, capital growth and technological advance. Labor growth in China is set to slow. The Chinese society is aging rapidly and the younger generation chooses not to pop out more babies even though Beijing has relaxed its one-child policy. Capital accumulation can only go so far as well and “the current pace of debt accumulation is unlikely to be sustainable in the long term.” As for technological advance, China has already played much of the “‘catch-up’ given the shrinking gap with the highest-productivity nations.
But, China just made a major move to change the way it taxes its people, and this will have a major impact on both its growth and its sustainability. Says Canada’s The Globe and Mail: “China moving quickly to roll out property taxes nationwide” – http://www.theglobeandmail.com/report-on-business/international-business/china-moving-quickly-to-roll-out-property-taxes-nationwide/article20294761/
For years, Chinese property owners have enjoyed a free ride to wealth driven by scorching growth in home prices and a lack of property taxes to whittle away the gains. A condo in Beijing has been like a piece of gold: an asset that can sit and gain value, with little cost of ownership.
But three years ago, Chinese authorities began taxing a small fraction of the country’s real estate, with pilot projects in two major urban areas, Shanghai and Chongqing.
Now Chinese authorities say they are moving to rapidly roll out property taxes nationwide, in a bid to reshape the country’s financial structure and curb some of the incentives for local governments to trammel the rights of farmers and others left behind by China’s extraordinary wealth gains.
My group, Common Ground-NYC, has been advocating a land-heavy property tax for years, in a series of comments on both Western and Chinese media, as have more influential Georgist, or Georgist-sympathetic, economists like Michael Hudson and Former Assessor of Greenwich, CT, Ted Gwartney, who have both had high level meetings with officials in China and other Chinese groups going back to the 1990s.
Hudson has written in July, 2013: China — Avoid the West’s Debt Overhead: A Land Tax is needed to hold down Housing Prices
How can China avoid the “Western financial disease” — a real estate bubble followed by defaults and foreclosures? The U.S. and European economies originally sought to avoid this fate by taxing the location’s site value. A rent tax was the focus of Progressive Era reforms.
Enacting a rent tax remains China’s main challenge to accompany its privatization of real estate and natural resources. If land rent were fully taxed, it would not be paid to banks as interest for rising mortgage loans — and governments would not have to tax income and sales. Holding down housing debt will reduce labor’s cost of living, but not its living standards.
While Western economies shrink in response to debt deflation and fiscal austerity, China continues its unprecedented 30-year growth. Many Western forecasters warn that it must suffer a Western-style financial crash, as if this is a universal path. But China has been industrializing and raising living standards by public credit and infrastructure investment similar to the mixed private/public balance that raised America, Germany and France to world powers as their Industrial Revolutions gained momentum in the late 19th century. Its keys are active public investment in infrastructure, subsidized education and urbanization, rising wage levels and progressive taxation.
Gwartney’s justification for China to tax primarily land can be seen in much greater detail here: se.xmu.edu.cn/jzyc/UploadFiles/2014371830317055475115776.pdf. A small portion of this report is shown below:
China is looking for new methods of raising revenue to support its government and services for its people. This paper will introduce the concept of collecting land rent which will provide the needed public revenue for China’s economy. It will show how to implement the concept of collecting land rent and methods for valuing land rent. An example of a proposal to fund all of California state and local governments from land rent is presented.
Real estate consists of land and buildings. The nature and characteristics of land and buildings are totally different and the revenue raised from each has totally divergent effects on people, communities, commerce, growth and economic well-being. Buildings are created by man’s labor and incur a cost to produce. They deteriorate over time, lose value and need to be replaced. They should be built in suitable locations in order to preserve farm land and natural resources. Land is defined as everything that is freely supplied by nature, which includes all natural resources, such as air, soil, minerals, airwaves, forests and water. Everything not made by man, is categorized as land. Land has no cost to produce and is nature’s gift to mankind. Land’s uniqueness stems from its distinctive location, fixed supply and immobility. Land is required in the production of all goods and services. Land is our most basic resource and the source of all wealth.
Land rent is the value created from ecological and social endowments, not the personal activities of individuals. Land rent is an amount that should be paid annually for the exclusive right to use a land site location or other natural resource. Land rent varies by location and available amenities. It changes by people’s competitive desire to use the same land site. Since land is fixed in supply and cannot be expanded, demand is the sole determinant of land rent. As land demand increases, the rent will increase proportionally. Buildings are not a part of land rent. Land rent is the only source of public revenue that could be taken for public purposes without having any negative effect on the productive potential of the economy. When a community collects land rent for public purposes, both efficiency and equity are realized.
….
China has raised revenue from taxes and land use development fees. It has invested in infrastructure, schools, police, fire protection, utilities, and recreation and public services. This investment has increased the rental value of land. China owns its land and each land user should pay land rent to enable China to provide high quality public services to everyone. Land rent exists whether the community collects it or allows people to retain the values that were produced by the community. Collecting land rent will enable China to attain a sustainable and growing revenue base for funding the local and provincial governments. As the demand for land increases the land rent increases.
The burden of paying land rent reduces land speculation, premature land use and the detrimental use of farm land and the rural environment. The requirement to pay land rent fosters the most efficient, highest and best use of land.
The rental value of land should be sufficient to finance all public services and to obviate the need for raising revenue from taxes. Public revenue should not be supplied by taxes on people and enterprise unless all of the available revenue has first been collected from the natural resources and the community- generated land rent. Only if land rent were insufficient would it be necessary to collect any taxes.
The fact that this pilot tax is being rolled out in the most seriously land-inflated areas like Shanghai and Chongqing means they are finally serious about curbing unproductive and socially destructive land speculation. Not only will this raise needed revenues for the government, it will allow them to untax actually productive activities, like wages, sales and fixed capital (including buildings if China continues to emphasize a higher tax in dense urban areas). The Land Value Tax – described by Milton Friedman as “the least bad” tax, and Henry George as the “Single Tax” to replace all others, could have the power to permanently and sustainably keep growth in the 3%-5% range all by itself. Coupled with China’s demonstrated control over its currency production – producing more Yuan in downturns, when Western models allow private banks to pull back and starve the economy of credit-money – might add another 2%-4%.
Smart industrial policy and highly competent Central Authority (the reverse of America) will do the rest. China will succeed on its own terms, not the West’s. Those who look for Westernization of China will be as disappointed as those who sell China short (the same group, actually). China’s construction of “Ghost cities” is well known. But if the Land Value Tax was applied to these cities as well, the holders (read: speculators) of these lands would be forced to sell to a lower bidder, and China’s huge migrant population would finally be able to afford to live in them.
China has learned from the West, but not just from the positive things like rewarding innovative technological growth, but from the negative experiences too. If they continue to be smart, they will avoid our boom/bust cycles, which, together with an austerity model governed by the banks instead of by Governments, threaten to permanently destabilize and retard the economies of Europe – which is entering its third recession in 6 years – and America, which has had a trillion dollar/year Output Gap since 2008, according to the Congressional Budget Office. America too, has choices. It can tax the Land, not the People, as China has slowly started doing, and as it has done in some small cities in Pennsylvania, most recently Altoona. It can also produce Government issued debt-free money to fill the Output Gap with public works projects, including the sort of infrastructure buildup China is doing – almost inconceivable under the Hodge-podge Western Growth model – using the Constitution’s Coinage Clause (Article 1, Section 8, Clause 5), first practiced by President Lincoln in 1862-1863.
It can do both of these things and more, but not if it remains institutionally bound and theoeconomically moribund, to the banks’ austerity models.
It kind of makes you wonder: Which is the Land of the Free, America or China?
The idea of using Land Value to pay for society’s needs goes back to biblical times in the old testament, what author John Kelly called “The Other Law of Moses” in his book by
the same name. But a more formalized attempt at applying such a land value tax, or, more accurately, site value collection, only came in more modern times. Our original Articles of Confederation’s Article 8 (http://www.articlesofconfederation.com/p/articles-text.html) states:
VIII. All charges of war, and all other expenses that shall be incurred for the
common defense or general welfare, and allowed by the United States in Congress assembled, shall be defrayed out of a common treasury, which shall be supplied by the several States in proportion to the value of all land within each State, granted or surveyed for any person, as such land and the buildings and improvements thereon shall be estimated according to such mode as the United States in Congress assembled, shall from time to time direct and appoint. The taxes for paying that proportion shall be laid and levied by the authority and
direction of the legislatures of the several States within the time agreed upon by the United States in Congress assembled.
We lost the provision for collecting land and building values to support the U.S. with the new Constitution. For reasons explained in detail in Progress and Poverty (1879) by Henry George, we would get far better use of the land if taxes were only collected on that (mostly location), and not on the buildings built on the land. We would get more buildings, with just a Land Value Tax, and more efficient use of the land too. And, as Henry George wrote, “There is enough, and to Spare.” Today, there are starting to be some verifiable calculations as to the value of U.S. land, including this new article: The Real Role of Land Values in the United States (http://bit.ly/1Rf5bUS)
Just 6 percent of U.S. land is developed. That matters when we talk about affordability. It’s all about location. It’s interesting that if you work it out, the value of all land in the U.S. is just about equal to its GDP. I wonder if that is some sort of natural law or at least an equilibrium point that markets return to when they overshoot or undershoot.
And still more estimates of the total value of Land in the U.S., with a hat tip to Michael Hudson: How Much Is (Nonfinancial Corporate) Land in the U.S.A. Worth? (http://bit.ly/22yJxlO)
The short answer, if one extrapolates the graph above for a couple of (good) years, and sums both corporate ($8t) and non-corporate land, more volatile and smaller ($3t) is a total of $11t. This is somewhat less than the amount calculated in the first article, but there are reasons to suspect this figure is too low. However, whatever the inaccuracies of the FRED model, as author Matt Leicester points out, they vastly pale in comparison to the Fed’s stated land value of NEGATIVE $4b of non-corporate land, which is due, he says, to over-assessing building values and using a land residual method of valuation. This, as both Leichter and Hudson point out, drastically under-values land and is responsible for the Fed’s trivializing it as a source of potential economic rent (let alone THE source to replace all other taxes). The Fed fails to account for repeated depreciation allowances, which is how landowners get so rich, after all.
That wealth – which is currently powering the supposed populist revolt campaign of Donald Trump – is now mostly, and increasingly, collected by private landowners like Trump, or, more likely, by banks. Interest on mortgage loans is the new Land Rent, and banks are, with the exception of rentiers like Donald Trump, the new landowners. The vast majority of us then, are merely renters, even those so-called homeowners, who in reality have only small amounts of equity, while the bank has the rest.
A much fairer system of taxation would be to collect the value of the land for the public good, since it was the public whose demand created the value in the first place. And there is, after all, as Henry George said, “Enough, and to Spare.” Will Donald Trump repudiate the method behind his multi-billion dollar wealth and return the value of the commons back to the people? Would you bet your land on it?
NOTED BY CARL HERMAN:
Walter responded to my article, ‘Developed’ nations now $50 TRILLION in debt; literally, figuratively bankrupt for infrastructure, public services with the following brilliant 400 words:
REPLY FROM WJB:
“Please, please, please understand the following:
If you were married to a Super Model who was gorgeous, and everyone kept telling you she was fat and ugly, after a while would you doubt yourself to think that she is fat and ugly?
Per that debt, the following three points apply:
Enron promoted their profit and hid their debt. Government does the exact opposite: they promote debt and hide profit.
With the changes in government accounting over the last 15 years, now they project out “liabilities” 35 years cross-matched with 1 year of income. If Bill Gates, you, or I did the same, we all would look like we are on death’s financial door.
Government back during the 70’s, 80’s, and 90’s had so much cash coming in the door they did not know what to do with it all. So, the scheme went into effect of promoting debt, and then funding that debt with their own cash: turning cash into debt as an investment for them, and as a “parking zone” for that cash. Well, today if you start cross-matching that local and federal government debt with the investor of that debt, after connecting the dots, you will find that 65% + of that debt is “self-funded” or cross-matched with other local or federal investment funds. You may have the county funding the city debt, and the same city funding the county debt. The enterprise operation owned by the city may be funding the city debt, a local government may have 500 million invested with a bank, brokerage, or insurance company, and that institution is now funding 500 million of that same local government’s debt. A state may have massive investment capital in China, and now the same state will have the investment manager in China fund the state’s new bond issue which makes the funding “look” like it is coming from China, and so on, and so on, and so on.
The public was played as useful idiots per this scheme with the one side of the coin promoted of the debt. The public is now convinced that their gorgeous model wife is fat and ugly, when in fact she is just as gorgeous as ever and even more so. If government debt was cross-matched with government investments, and then offset against each other, you may just have 80% of that “government debt” evaporate with the stroke of a pen. Please don’t get caught into promoting the useful idiot line of government debt…
Please share my comments with anyone you know who is currently “promoting” the one- sided view of the coin per government debt, and share with whomever else you think needs to know the points brought forward above.
Yours Truly,
Walter Burien – CAFR1.com
Burien includes 3 links from Carl Herman, below. I suggest anyone who is unfamiliar with the CAFRs watch at least the shorter first and third videos. If you are not absolutely shocked by how much money is actually available to us through the various off-the-books government accounts, well, then you must be familiar with the CAFRs after all, or with 3 of the other major economic reforms I’ll talk about in a moment. Two other of these reforms – Credit Reform in the form of Public Banking, and Monetary Reform in the form of debt-free sovereign money, are discussed as well by my colleague Carl Herman in his interview on the Infowars News (the third link):
Links below added by Carl Herman from his article:
Thrive’s (documentary with 32 million views) founder Foster Gamble’s 7-minute explanation on Walter’s work with CAFRs:
Walter’s 2011 72-minute full documentary on CAFR:
Carl Herman’s 2012 23-minute interview on Alex Jones’ Infowars news on CAFRs:
I’ve had parallel paths with Carl many times over the past half dozen years or so, and quoted him in my book, America is Not Broke! americaisnotbroke.net, along with Walter Burien, and Public Banking movement founder Ellen Brown, and leading Monetary Reformer Stephen Zarlenga (cited by Carl in his video too). We are both, along with Ellen, members of the Public Banking Google group. Zarlenga has his own discussion group and his seminal book, “The Lost Science of Money” put out by the organization he founded, The American Monetary Institute.
There is a fourth major reform not covered by the people mentioned so far, which I cover in chapter 2 of my book, Land Value Taxation, aka the Georgist Single Tax. This reform could produce at least as much non-inflationary wealth as Public Banking and Monetary Reform, and, if certain recent aggregate totals
of Land wealth are to be believed – including a 3-year old Time Magazine report which showed $128 trillion just in oil and gas reserves alone – maybe even as much as the 10s of trillions invested in the government funds documented by the approximately 200,000 CAFRs.
I discussed this reform with long-time financial and land reporter and Georgist Fred Harrison in 2013. The video of that discussion and specific numbers for New York City may be seen here, along with a video of Fred interviewing probably the best-known Georgist, professor Mason Gaffney, at the end of that article.
Land Value Taxation tends to be a local matter. I talked about the billions left uncollected in New York City alone at the Henry George School, a year and a half ago.
And just a few weeks ago, a Georgist colleague, Josh Vincent, who’s been working on Land Tax reform with cities and municipalities, mostly in Pennsylvania, but also elsewhere through the organization he currently heads, led a two-day seminar at the Henry George School too. The first of nine short videos of that presentation can be found here: https://www.youtube.com/watch?v=3R54KpvQL-w
Mason Gaffney calculates there is $5.3 trillion in rent in the U.S., available this year, and every year (of course, it may go up or down somewhat depending on current economic conditions). I quote Gaffney and other Georgist experts in my book as well.
So, America is Not Broke, which is not only the apt title of my book, but of a flyer I and members of my former Georgist group, Common Ground-NYC, handed out by the hundreds in 2011 in Zuccotti Park, when it was occupied.
Yet, here we are, in the middle of one of the most contentious election seasons ever, led, or nearly led, by two supposedly anti-establishment candidates: Donald Trump and Bernie Sanders. While Trump is a rentier who perhaps understandably will not reveal the secret of his wealth in Land Rent collection, he has railed against the banks regularly. Yet, we’ve heard nothing from him about the alternative of Public Banking, not even when the best example of that is the Bank of North Dakota, in red-state North Dakota since 1919. We’ve heard nothing from him about the trillions locked up in government accounts by a supposedly broke set of federal, state and local governments. Does he just not know? I sent him my book a couple of months ago and have the signature confirmation to prove it was received. Perhaps he’s been too busy to read it.
Bernie Sanders is aware and supportive of Public Banking, though he’s only talked, very briefly, of the smaller subset banking reform of postal banking (also
in my book) during the campaign. He’s recently appointed S&L super-regulator William Black as an economic advisor, which should help support his efforts to break up the big banks and reform the others. But why is there no mention of the Public Banking alternative? Why is there no mention of the CAFRs or of monetary reform, including the bills H.R. 2990 introduced by his Congress colleague, Dennis Kucinich in 2011, or another colleague when Sanders was still a Congressman, Ray LaHood, and his highway-financing bill with interest-free money, H.R. 1452? And why does Sanders push for lower property taxes, when the real answer is two-tiered property taxes and taxes on the land portion only, to encourage efficient use of land and the increased production of buildings (untaxed)?
None of the economic reforms either candidate is talking about – let alone the milquetoast reforms of Democratic front-runner Hillary Clinton – come close to the impact of these 4 super-reforms. At best, they are regulatory changes, overdue and probably welcome (the Devil is always in the details), but not systemic. The people I mentioned above, and many others, growing all the time, have put forward monetary and land reform proposals in concrete terms, even reaching the level of Congressional and local bills. Yet the public is largely uninformed by the mainstream media, except for some occasional sideways endorsements like the Time magazine article of 3 years ago (and no follow-up that I’m aware of).
Is the reason that it is just too big, too radical for us to wrap our heads around? That may be part of it, but I’ve given lectures all over the northeast for years, on TV and radio (17 shows last fall to promote my book), to all kinds of people, and I can tell you, they generally get it when it’s presented clearly and succinctly. One thing does come up in Q&A which may offer a clue: I get regularly asked, or more accurately, told, that the powers that be will never change, that the system is hopelessly corrupt. Is this resignation realistic or self-fulfilling? The system is thoroughly corrupt. Of that there can be little doubt anymore. And by that I don’t mean just that there are politicians with their campaign hands out, demanding cash to support Wall Street or the big banks. There is that, and all the leading candidates are scrambling to say they are opposed to that, whether or not they will actually do anything about that if elected remaining to be seen (I have the most faith in Sanders in that regard, who has been denouncing pay-for-play and Citizen’s United for as long as he’s been in office, and refuses to take corporate and big donor cash in the current campaign).
But there are huge, systemic changes possible, still consistent, even more so, with our stated beliefs in fairness, meritocracy, and honest accounting.
A lot has been made of the public’s pessimistic attitude, of the belief that America’s best days are behind us. Perhaps we cannot accept good news even
when it’s fairly and persuasively presented? If so, no politician can fix that. We have met the enemy and he is us.
On the eve of the great Obamacare repeal, or not, if conservative Republicans get their way, ironically, I thought I would offer my plan to replace Obamacare with something much better than Trumpcare (and it deserves to be called Trumpcare, because without President Trump, this repeal would have gone the way of the several dozen other repeal plans offered by Republicans during the last 8 years, and been vetoed by the president).
Liberals generally want some form of national health insurance that covers most, or all, medical expenses for all Americans. Conservatives want the government to tax and spend less and let Americans choose their own coverage, or even do without if they “choose” to (I put “choose” in quotes because it is never sufficiently explained, to me at least, what the conservative option is for someone who is inadequately covered who gets sick and can’t afford health care. Do we let them “die on the street” as president Trump famously said he would not do?). The Koch Brothers promise to fund an opposition candidate to Trump who opposes the current Ryan-Trump endorsed bill to be voted on today (which is changing dramatically even as I write this). They think it doesn’t go far enough, and indeed, the Ryan-Trump plan has been called Obamacare 0.5 for its reduction in support but not complete elimination.
However there is another option that reduces, or even eliminates the regressive payroll tax, provides medical coverage for all Americans, allows people to chose their own doctors, and even allows for some form of “premium care” to co-exist as a private supplement to an expanded Medicare-for-all. I’m not talking about Representative John Conyers’ Medicarefor-all plan HR676, which, while well-intentioned, will never pass since it imposes more taxes than even the current Obamacare taxes on the rich, plus new taxes on Wall Street trading (a good idea, but not for funding Medicare, but for stopping useless and destructive high-frequency trading and raising revenue for other good things).
Michael Chernew writes in the Health Affairs Blog, “The Economics of Medicaid Expansion” (UPDATE: The original link seems to have stopped working. See this archive link instead: http://cc.bingj.com/cache.aspx?q=money+multiplier+for+medicre&d=4999081626 241058&mkt=en-US&setlang=en-US&w=zI15CyfdAQXhUdt447lfPl1GcUIc9h0P):
The Multiplier Effect
Yet the analysis presented above is incomplete. Even in steady state beginning in 2020, the states that do opt to expand receive 90 percent of the funding for Medicaid expansion from the Federal government. Those dollars do not sit idle. They largely support provision of care, and the largest share of that expense is labor. The workers in organizations supported by Medicaid spend the funds on everyday expenses. They eat at restaurants, buy groceries, and go to movies. The businesses who supply those services, many of whom will be in-state entrepreneurs, in turn spend the money on wages and supplies, and the cycle continues. In economics this process is known as the “multiplier effect.” A dollar put into an economy creates more than a dollar of economic activity. The magnitude of that multiplier is again subject to debate, but a reasonable estimate could be between 1.5 and 2.0. Thus after 2020, the 90 cents received from the federal government for each dollar in Medicaid spending translates to between $1.35 and $1.80 in state economic activity (crucially assuming enough slack in the economy to absorb the spending).
Note Chernew was writing about Medicaid, not Medi care. However, the patient populations are similar: neither can afford medical care without a government subsidy (Medicaid) or very few can (Medicare). They tend to be older and/or sicker than the general population. Both are not insured (Medicaid) or under-insured (Medicare) by private insurance.
Note also that the link in this 1-year old article doesn’t work, but I was able to find the original PDF report that the article is based upon from the Wayback Machine (the internet never forgets!) here: http://web.archive.org/web/*/http://www.mffh.org/mm/files/MUMedicaidExpansionRe port.pdf
The study is only for Missouri, and considers many factors in its analysis.
But let’s assume, just for the sake of argument, that the essential finding is correct: that for every dollar spent, we get back something more than that from Medicare (or Medicaid).
If the multiplier is greater than $1 for every $1 spent, than why not just pay for Medicare entirely out of debt-free money? The government can, has, and can again, issue money direct from the Treasury Department, bypassing the central bank, as it did during President Lincoln’s Administration to pay for the Civil War. $450m back then is worth $10b today, but this understates things because the size of the economy – measured by a backwards GDP calculator, was just $6b in today’s dollars, so Lincoln effectively increased the GDP of the then-young nation by 40%.
We would need far less than that to fund Medicare for all, of course, and we could still reduce the cost by allowing Medicare to bargain for lower drug prices, for example, and doctors would save on staff by not having a myriad of confusing healthcare companies to contend with (some doctors spend more on dealing with insurance carriers than on the rest of their practice). But if we could do away with the regressive payroll tax (Social Security produces between $1.80 and $2.00 per $1.00 spent, according to a study from the Southern Rural Development Center and another one from the AARP respectively, and is eligible for the same process therefore).
A commenter on the blog above wrote that we are taking private productive capacity that has its own multiplier out of the economy with taxes, but if we do away with the tax, what then? Then it’s just a net add.
And it’s not inflationary if production uses up the stimulus money. And certainly a sicker population, which is what an under-insured population is likely to be, is less likely to pay taxes and boost the economy. Being healthy means being productive, which means adding to the economy. The multiplier, in economist terms, does not even include that; they are just counting what that money is spent on and how it circulates in the economy.
There could still be supplemental insurance for those who can afford it, or want to cover other things Medicare doesn’t cover (like Dental, some mental health coverage, cosmetic surgery, and maybe even the emerging field of longevity enhancement). The private provider sector would shrink, of course, and it should. This sector costs people money, is less efficient than Medicare and spends money on advertising that does nothing to enhance people’s lives.
Sounds like a win-win to me.
Of course, if you are a conservative who merely wants to widen the gap between rich and poor/middle class (the middle class is also poor by any measure that compares them to multi-millionaires and billionaires), then this plan is not for you. If you think sick people are just lazy or have no one but themselves to blame for getting sick and/or being un/underinsured, this plan is not for you.
But I’m hoping most Americans want what all the industrialized world already has, medical coverage for all at a price that is affordable; there are still deductibles in Medicare, and even supplemental insurance, though this too, should go away in a properly designed plan.
Since it uses Uncle SAM‘s Sovereign MoneY to provide Health CARE that does not have to be taxed into existence or borrowed, let’s call it SAMMYCARE.
I kind of like the ring of that.
