All I hear about these days is the housing crisis and the resulting recession. I can only listen to this for so long before I have to speak up. The fact is that we were warned about this long ago. Not by Alan Greenspan or any number of top economists today. No, I’m talking 130 years ago, when an economist named Henry George wrote his magnum opus, Progress and Poverty. In it, he explained the crucial and underappreciated role that land plays in the economy. In a time when we have such a serious housing crisis, it would serve us to take heed.
So what is this land connection? To understand that, we must first understand what in economics is known as rent. This may prove somewhat difficult, as the economic definition is different from the way we commonly use the term. The difficulty is further compounded by the fact that neoclassical economists have expanded the meaning of the term from what it originally meant(largely in an attempt to obscure Henry George's ideas). As it was originally understood, rent meant the economic return of land to the landowner, just as wages were the return of labor, and interest the return of capital. What is unique about rent is that it requires no effort on the part of the landowner to increase in value, but rather is determined by activity of society as a whole. We all understand this, which is why homeownership is considered such a good investment. If a new park is built nearby, the land value goes up. If a new grocery store opens nearby, the land value goes up. Of course, if there is an increase in crime or pollution, the land value goes down. In fact, land value is a great economic indicator of just how prosperous and well-functioning a particular area is. Any money the government spends on public works mysteriously ends up in land values.
Knowing this, several people like to speculate in land. This is how Donald Trump got most of his fortune. This can often create patches of underdeveloped or underused land in the middle of urban areas, leading to sprawl, and causing the land values to rise due to expectation of future returns. For reasons too complex to explain in this article, this speculative advance of land values lowers the return of labor and capital, reducing productivity. I will suffice to say that the return of land is inversely proportional to the return of labor and capital. Eventually, the advance of rent presses on wages and interest beyond the point where production can continue to grow. Eventually, the bubble bursts, and land values come crashing down.
During housing crises like our current one, we tend to hear a lot about banks and predatory lending. I do not mean to discount the relevance of these practices, but the truth is that the problem is much more fundamental than mere banking practices. We have all bought into the idea of homeownership as the perfect investment, and yet that promise proves empty in times like this. Make no mistake about it: housing crises are inevitable so long as land speculation exists.
So what is the solution? For this, we once again turn to Henry George. The solution he proposed was to render the land rent as common property through land value taxation. Essentially, this would mean a modified property tax in which the burden of taxation is shifted entirely onto the land value and away from the value of improvements on the land. A nearly 100% land value tax, shocking though that may sound, would ultimately cost us less than our current tax system, especially when used to replace other taxes such as income and sales tax. Such a tax would not make land more expensive, but would simply shift the cost of land from private hands to the public coffers. As I mentioned earlier, government expenditures end up capitalized in land values, so by collecting the revenues from those land values, the government could recycle the money they spend, rather than shifting the cost onto the lower and middle class through sales taxes. The economy would become self-sustaining, and we would not have to worry about housing crises or recessions. Then we can get to other pressing issues.
