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The Fallacy of “Buy Land — They’re Not Making Any More” – Article by Peter St. Onge

The Fallacy of “Buy Land — They’re Not Making Any More” – Article by Peter St. Onge

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The New Renaissance Hat
Peter St. Onge
September 21, 2015
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“Buy land — they’re not making any more!” is an old investing chestnut, and a common sense one to boot. Economically, it’s also completely false.

As counterintuitive as it may seem, we make land all the time. It just doesn’t look like land.

Why? Because land’s value doesn’t come from its ability to cover up the naked earth. Land’s value comes from its economic usefulness. From the value of things that can be done using that land (Rothbard’s “marginal revenue product” of the land). And that value is, indeed, changing all the time. Economically, from a price perspective, then, we make land all the time.

Step back a moment and ask why land has value anyway. Why do people want land? Well, obviously, because you can put stuff there — including yourself — plus buildings, swimming pools, and factories.

Now, anybody who’s visited West Texas knows there is plenty of building space in the world. You could drive for hours and meet nobody. There’s lots of space for that factory of yours. But it’s not really space itself that makes land valuable. It’s location. As in, there’s only so much room in Manhattan. Or Central London.

Once again, though, it’s not the actual space that matters. It’s the access. Put a strip mall on Manhattan surrounded by crocodile-filled moats and snipers and it will have low value. The value is in access. So Manhattan is valuable because it’s easy to get to other parts of Manhattan. And it’s easy for other people to get to you. Customers, partners, and friends can all easily visit you if your apartment or office is in Manhattan, moatless and sniperless.

So if it’s the access that matters, are they making new access? Of course. They’re doing it all the time.

New highways, new exits, new streets, mass transit, pedestrian malls are being regularly constructed. These all effectively “make new land” because they offer access to existing space. They turn relatively “dead zones” into “useful zones,” or new land.

What are some of the meta-trends on land as investment, then?

First: roads. This was a bigger value-driver a generation ago in the US, as new roads made the suburbs more accessible, helping to drain many cities even as US population grew. Outside the US (Mexico, Thailand, Russia), new roads are still a big deal, and even in the US, new highways can reshape values — draining old neighborhoods and building value in new ones. The decline of cities like Baltimore or Detroit are partly thanks to those beautiful roads that redistribute access to the suburbs.

Second: population. In the US “rust belt” of declining manufacturing, many regions have dropped in price simply because people are leaving. Detroit homes for $100 is emblematic, although of course there are also political reasons some cities are so cheap — in particular, taxes and crime.

And that brings us to politics. Real estate can be cheapened shockingly quickly by taxes and crime, and those traditional drivers have been joined in recent decades by environmental politics.

Environmentalists, by taking land off the market, effectively squeeze the remaining accessible locations, driving up the price. Regions like Seattle or San Francisco are poster children of this environmental squeeze, with modest homes even in remote suburbs costing upward of a million dollars. On the other extreme, cities like Dallas or Houston have kept prices down despite exploding populations by allowing farmland to be converted to residential, commercial, or industrial use.

Beyond the access and political angles, land is also vulnerable to “network effects.” In other words, the neighbors matter. Gentrification or urban decay can be hard to predict. Even in a compact city with rising population like Washington, DC, it can be hard to predict where the middle class or rich want to colonize, and where they want to flee.

There are clues, of course — in large US cities, gays moving into a neighborhood, new coffee shops or art galleries are some leading indicators that property prices might swing up. But gentrification has it’s own mind; even in a booming city it might go into some other neighborhood. New York’s Harlem or Silicon Valley’s East Palo Alto are two very accessible locations with low prices because of perceptions of the neighbors.

So, while they’re not “making” land, they are constantly making things that affect land price: access, regulations, changing neighbors. These are the kinds of factors that make land valuable, not it’s ability to cover the earth.

And so land comes back to earth, joining boring old commodities like wheat or copper. Just as vulnerable to changing supply and demand factors.

And if you are looking for something they’re not “making more of?” Well, gold does come close – hence its appeal. They do mine new gold all the time, but the costs are high enough that gold is a very “inelastic” commodity. It comes close to “they’re not making more.”

Beyond that? Develop your ultimate resource: yourself.

Peter St. Onge is an assistant professor at Taiwan’s Fengjia University College of Business. He blogs at Profits of Chaos.
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Where Is the Inflation? – Article by Mark Thornton

Where Is the Inflation? – Article by Mark Thornton

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The New Renaissance Hat
Mark Thornton
January 30, 2013
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Critics of the Austrian School of economics have been throwing barbs at Austrians like Robert Murphy because there is very little inflation in the economy. Of course, these critics are speaking about the mainstream concept of the price level as measured by the Consumer Price Index (i.e., CPI).

Let us ignore the problems with the concept of the price level and all the technical problems with CPI. Let us further ignore the fact that this has little to do with the Austrian business cycle theory (ABCT), as the critics would like to suggest. The basic notion that more money, i.e., inflation, causes higher prices, i.e., price inflation, is not a uniquely Austrian view. It is a very old and commonly held view by professional economists and is presented in nearly every textbook that I have examined.

This common view is often labeled the quantity theory of money. Only economists with a Mercantilist or Keynesian ideology even challenge this view. However, only Austrians can explain the current dilemma: why hasn’t the massive money printing by the central banks of the world resulted in higher prices.

Austrian economists like Ludwig von Mises, Benjamin Anderson, and F.A. Hayek saw that commodity prices were stable in the 1920s, but that other prices in the structure of production indicated problems related to the monetary policy of the Federal Reserve. Mises, in particular, warned that Fisher’s “stable dollar” policy, employed at the Fed, was going to result in severe ramifications. Absent the Fed’s easy money policies of the Roaring Twenties, prices would have fallen throughout that decade.

So let’s look at the prices that most economists ignore and see what we find. There are some obvious prices to look at like oil. Mainstream economists really do not like looking at oil prices, they want them taken out of CPI along with food prices, Ben Bernanke says that oil prices have nothing to do with monetary policy and that oil prices are governed by other factors.

As an Austrian economist, I would speculate that in a free market economy, with no central bank, that the price of oil would be stable. I would further speculate, that in the actual economy with a central bank, that the price of oil would be unstable, and that oil prices would reflect monetary policy in a manner informed by ABCT.

That is, artificially low interest rates generated by the Fed would encourage entrepreneurs to start new investment projects. This in turn would stimulate the demand for oil (where supply is relatively inelastic) leading to higher oil prices. As these entrepreneurs would have to pay higher prices for oil, gasoline, and energy (and many other inputs) and as their customers cut back on demand for the entrepreneurs’ goods (in order to pay higher gasoline prices), some of their new investment projects turn from profitable to unprofitable. Therefore, you should see oil prices rise in a boom and fall during the bust. That is pretty much how things work as shown below.

As you can see, the price of oil was very stable when we were on the pseudo Gold Standard. The data also shows dramatic instability during the fiat paper dollar standard (post-1971). Furthermore, in general, the price of oil moves roughly as Austrians would suggest, although monetary policy is not the sole determinant of oil prices, and obviously there is no stable numerical relationship between the two variables.

Another commodity that is noteworthy for its high price is gold. The price of gold also rises in the boom, and falls during the bust. However, since the last recession officially ended in 2009, the price of gold has actually doubled. The Fed’s zero interest rate policy has made the opportunity cost of gold extraordinarily low. The Fed’s massive monetary pumping has created an enormous upside in the price of gold. No surprise here.

Actually, commodity prices increased across the board. The Producer Price Index for commodities shows a similar pattern to oil and gold. The PPI-Commodities was more stable during the pseudo Gold Standard with more volatility during the post-1971 fiat paper standard. The index tends to spike before a recession and then recede during and after the recession. However, the PPI-Commodity Index has returned to all-time record levels.

High prices seem to be the norm. The US stock and bond markets are at, or near, all-time highs. Agricultural land in the US is at all time highs. The Contemporary Art market in New York is booming with record sales and high prices. The real estate markets in Manhattan and Washington, DC, are both at all-time highs as the Austrians would predict. That is, after all, where the money is being created, and the place where much of it is injected into the economy.

This doesn’t even consider what prices would be like if the Fed and world central banks had not acted as they did. Housing prices would be lower, commodity prices would be lower, CPI and PPI would be running negative. Low-income families would have seen a surge in their standard of living. Savers would get a decent return on their savings.

Of course, the stock market and the bond market would also see significantly lower prices. Bank stocks would collapse and the bad banks would close. Finance, hedge funds, and investment banks would have collapsed. Manhattan real estate would be in the tank. The market for fund managers, hedge fund operators, and bankers would evaporate.

In other words, what the Fed chose to do ended up making the rich, richer and the poor, poorer. If they had not embarked on the most extreme and unorthodox monetary policy in memory, the poor would have experienced a relative rise in their standard of living and the rich would have experienced a collective decrease in their standard of living.

There are other major reasons why consumer prices have not risen in tandem with the money supply in the dramatic fashion of oil, gold, stocks and bonds. It would seem that the inflationary and Keynesian policies followed by the US, Europe, China, and Japan have resulted in an economic and financial environment where bankers are afraid to lend, entrepreneurs are afraid to invest, and where everyone is afraid of the currencies with which they are forced to endure.

In other words, the reason why price inflation predictions failed to materialize is that Keynesian policy prescriptions like bailouts, stimulus packages, and massive monetary inflation have failed to work and have indeed helped wreck the economy.

Mark Thornton is a senior resident fellow at the Ludwig von Mises Institute in Auburn, Alabama, and is the book-review editor for the Quarterly Journal of Austrian Economics. He is the author of The Economics of Prohibition, coauthor of Tariffs, Blockades, and Inflation: The Economics of the Civil War, and the editor of The Quotable Mises, The Bastiat Collection, and An Essay on Economic Theory. Send him mail. See Mark Thornton’s article archives.

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Copyright © 2013 by the Ludwig von Mises Institute. Permission to reprint in whole or in part is hereby granted, provided full credit is given.

The Vital Importance of Property in Land: Part 2 – An Analysis of the Georgist Land-Value Tax – Article by G. Stolyarov II

The Vital Importance of Property in Land: Part 2 – An Analysis of the Georgist Land-Value Tax – Article by G. Stolyarov II

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The New Renaissance Hat
G. Stolyarov II
October 16, 2012
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In this second installment of my short series on land and property rights (see my first installment here), I begin to respond to “We Can Have It All: The Beauty of Value Capture” by Edward Miller. In particular, I focus on the idea of the single tax on the value of land, as originated by Henry George. Mr. Miller, a contemporary representative of the Georgist position, states that “We can eliminate taxes and debt, poverty and special privilege. Contrary to the dour pronouncements from the curators of the dismal science, we can have it all.” Mr. Miller advocates doing this by advocating the elimination of “no-strings-attached sovereignty” over land and replacing it with what he calls “Value Capture” and which many others would call a land-value tax. Mr. Miller states that this “is a tax only in the sense that Pigovian ‘Taxes’ are. It is not a tax on production, and thus there is nothing objectionable about it from the perspective of classical liberalism. Indeed, I’d argue that without it, classical liberalism is a cruel joke. Value capture is simply a reconceptualization of who owns the value of the access rights over the Earth.” In this installment, I will focus on the Pigovian/Georgist land-value tax idea in particular. In subsequent installments, I will address what I consider to be a more desirable approach to land in a free-market, classically liberal manner that seeks to facilitate economic growth and the continual improvement of living standards.

I am not a supporter of a land-value tax (however it may be termed) or of Pigovian taxation in general. The idea of a Pigovian tax (however called) seems to me rather contrived, in that it assumes a perfect knowledge on the part of the taxing authority of not just which activities create negative externalities, but also the precise extent to which a particular instance of such activities creates those externalities – and, correspondingly, the precise extent of taxation needed to take the “social cost” of these activities into account. The economic distortions of taxation, relative to a tax-free free-market situation, cannot be avoided in practice, no matter what form the tax takes – though, admittedly, it can be said that some types of taxes produce greater distortions or different kinds of distortions than others. Furthermore, the idea of a Pigovian tax is unworkable in practice, because political incentives and the influence of special-interest pressure groups would surely distort the incidence of the tax to benefit those with lobbying clout. In other words, even if the exact “social cost” of every activity could be calculated, the influence of lobbyists on elected officials would result in the incidence of the tax departing from a proper reflection of that “social cost.”

The elimination of all other possible taxes would be a definite advantage of the Georgist system, though – in practice – attempts to introduce a new type of tax have seldom supplanted existing taxes but have merely resulted in yet another kind of tax alongside all others. In fact, in the United States today, we might consider the current system of property taxation to be a partially Georgist system – but the property taxes are paid alongside income, sales, excise, gift, estate, fuel, and numerous other taxes – not to mention a myriad of fees to fund specific government services.

However, let us assume that it is politically feasible to enact a single land-value tax that supplants all other taxes. Perhaps an added advantage of this simplified approach would be the reduction in the overall cost of administering tax determination and collection – which the most benevolent conceivable government would entirely pass on to the people in the form of a lower tax rate. Even in this ideal situation, why might a land-value tax still be less favorable than other possible taxes?

Consider that certain kinds of taxes can be avoided by a property-owning individual entirely. He only needs to pay an income tax if he earns taxable income. He only needs to pay a sales tax if he purchases taxable goods. He can avoid gift taxes by not giving gifts (beyond the tax-exempt amounts). If he has enough money saved up to live on, grows/produces all of his own goods, and keeps his property largely to himself, he can avoid all such taxes in theory (even though, in practice, he would admittedly be part of a small minority of the population). The similarity among these taxes (no matter their other flaws, of which there are many) is that they do not reduce current wealth kept for personal use. Property taxes are different in that they are able to actually diminish a person’s stock of wealth without that person undertaking any positive action. As long as a person owns a house, or a commercial building, or even a stretch of land for recreational use, he cannot avoid the diminution of his wealth through taxation solely due to the passage of time. An income tax only reduces one’s potential earning opportunities. A sales tax only reduces one’s potential purchasing power if one chooses to make purchases. A property tax, however, reduces one’s existing stock of wealth, no matter what one chooses to do. Thus, with all other things (including the total tax collected) being equal, a property tax is more adverse to an individual because it compels him to engage in positive actions in order to maintain his present wealth, rather than merely discouraging the individual from undertaking certain additional activities that might be taxed to a greater extent than he might prefer.

A Georgist land-value tax is different from the current American property tax in that it taxes the land only and not the manmade improvements on that land. In this respect, the land-value tax is superior. It would probably encourage significant vertical building by landowners/occupants in order to increase the amount of improvements per unit of land. However, it would also probably result in large stretches of land being unoccupied and unused, because there would be a sub-optimal level of interest in developing that land, as the owners/occupants would be responsible for paying tax. This may make the unfortunate phenomenon of urban congestion common even in less populated areas.

Furthermore, one can conceive of a supremely sub-optimal outcome of the single land-value tax, which would be the result of a perverse incentive indeed. This is the scenario where most individuals decide that it is not worth the trouble to own land (or partially own it or “rent” it from the community – however this might be described legally). Instead, large landholding corporations would emerge and purchase most or all of the land. Their owners (probably a lot of dispersed shareholders beholden to an entrenched management and thereby subject to numerous principal-agent problems) would be willing to absorb the costs of the land-value tax in exchange for collecting rents from everyone else who lives and works on that land. Many ordinary people might think that they are getting a good deal by avoiding all legal incidence of taxation – but in reality, the amount of rent they would pay to the landholding corporations would be higher to reflect the taxes those corporations have to pay. In other words, the cost of the land-value tax would be at least partially passed on to the renters/majority of people in the community by the landholding corporations. Economically, this is identical to the scenario that the Georgist proposal seeks to avoid – the situation where (whether or not this is indeed the case) it is alleged that most of people are beholden to a minority of landowners or lienholders by means of payment of rent or repayment of expensive mortgages.

One significant downside of this scenario, relative to the status quo, is that the possibility of “free and clear” ownership of property would be more definitively off-limits to everybody – even in theory. Another even greater concern is that the landholding corporations would essentially behave like supercharged homeowners’ associations – with even more power to micromanage people’s lives and impose arbitrary restraints on the use of personal property and the improvement of land. They would be able to conduct this abuse with impunity, because there would be fewer of them in any given geographical area, compared to today’s homeowners’ associations. This would give the landholding corporations the oligopoly (and sometimes monopoly) power that enables many similar entities to disregard consumer preferences and extract large amounts of unearned money.

The reality is that the market always seeks to correct for economic distortions that are the result of confiscatory or redistributive policies. The correction is always imperfect, because real wealth is in fact appropriated through taxation. However, changing the tax structure cannot, by itself, solve the whole distortion – without addressing how much wealth is kept by private citizens and what they are legally able to do with that wealth. There may, however, be a valid argument for changing a tax structure if this inherently results in a lower total proportion of tax collected, relative to the wealth that exists among the general population. This, of course, depends on the real rates of tax selected for each alternative under consideration. For instance, I would wholeheartedly support (as an unambiguous directional improvement relative to the status quo) a single land-value tax whose entire collections would be a mere 0.5% of the Gross Domestic Product. Irrespective of any concerns about the incentive effects of the tax, those would be dwarfed by the sheer amount of wealth that individuals would be able to keep compared to today’s tax regime. In this situation, though, I would still strongly prefer that the legal concept of full ownership of land be retained and that the land-value tax be administered similarly to today’s property taxes – as opposed to treating the occupant of the land as a “tenant” who owes a “rent” to “the community.”

There may also be a valid argument for changing a tax structure if doing so results in more wealth-generating behavior and increased productivity. However, I cannot find a system that allows for the diminution of current wealth through taxation to be more encouraging of productivity than a system that merely takes a share of future active production or consumption. If one cannot be guaranteed the peaceful and total enjoyment of the wealth one has already earned, then earning more seems less attractive from a psychological (in addition to a purely economic) perspective. Productivity is simply not as enjoyable if one views it as a chore to be done in order to remain in one’s present situation and prevent a decline – rather than an ambitious endeavor of self-improvement and possible enrichment.

Next, I will address how land might properly be approached from a libertarian/classical liberal standpoint, with beneficial practical consequences to most and the avoidance of effects that might stifle economic growth or decrease individual opportunities.

The Vital Importance of Property in Land: Part 1 – Arguments for Land as Property – Article by G. Stolyarov II

The Vital Importance of Property in Land: Part 1 – Arguments for Land as Property – Article by G. Stolyarov II

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The New Renaissance Hat
G. Stolyarov II
October 14, 2012
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In this small series on land and private property, I hope to counter the claims of Henry George and his contemporary followers, who generally support a libertarian view with respect to all property except land – which they do not consider to be legitimate property. I, on the contrary, see the ability to own property in land (based on a true Lockean understanding of “mixing one’s labor” with rightfully owned land, or legitimately acquiring it from those who did) as indispensable to the existence of other property rights – as well as, more generally, to the expression of human individuality and the improvement of the human condition.

Why is property in land essential for the exercise of all other property rights? In this first installment, I provide six arguments.

Argument 1: Use of Personal Property: If there is no property in land, one cannot be guaranteed the ability to set one’s personal property in any location for its use and enjoyment. This means, ultimately, the use and enjoyment of one’s personal property is always at the discretion – and with the permission – of whichever governing authority or collective decision-making would supplant the right of private property in land. This is not liberty; the best that it can be is a kind of benign neglect from the persons or committees who have the power to dispose of the land and what is on it.

Argument 2: Complete Ownership: If there is no property in land, then there is never an ability – even in theory – to enjoy the use of land “free and clear” – without paying some sort of rent or “usage fee” to someone. Ignoring property taxes (whose absence is wholly conceivable and would be tremendously beneficial – even if other types of taxes are kept in place), it is possible today for people to pay off any mortgages and liens on their property and to enjoy it outright, without fear of losing the property if they do not pay a continuous stream of money to a third party.  The greatest value of private property comes about precisely when the ownership of that property is absolute – not contingent upon future services or payments rendered to other people.

Argument 3: Opportunity to Choose Leisure or Work: If there is no property in land, and one must continuously and inescapably pay a stream of money to a third party in order to avoid losing the property, then this means that one must continuously earn a sizable income to support that stream of payments. The ability to lead a life of leisure (after having made adequate provision for one’s other needs) is forever closed off to most people (unless they are beneficiaries of trust funds or a fortuitous investment strategy). Whatever the relative merits of work versus leisure might be in any particular situation, a libertarian would hold that the choice to pursue either (or any combination of each) should be up to the individual. Restrictive institutions should not permanently foreclose individuals (in multiple senses of that word) from pursuing one of these alternatives or the other. My own ambition, for instance, is to pay off the mortgage on my house while I am still relatively young. I would continue to engage in paid employment (and hopefully earn decent money) for many decades thereafter, but a lot of the economic pressure would be removed by getting rid of the largest recurring expense, and the same amount of earnings could achieve a much higher standard of living in other respects.

 Argument 4: Incentives for Improvement: If there is no property in land, then there is little incentive (other than sheer benevolence) for the occupant to improve the land by the addition of permanent fixtures, for someone else (or “the community at large”) would capture the values of the improvements, while the occupant would spend his personal resources on the improvements. This is the classic case of a “positive externality” not being realized – or, alternatively, a “tragedy of the commons” situation arising from the community laying claim to a resource that becomes over-exploited and insufficiently maintained. If one wishes for private residential lots to begin to resemble the public roads of a large city in appearance, then doing away with land ownership is an excellent means to that dubious goal.

Argument 5: Individuality: Only through the exercise of the right of private property can a person truly actualize his individual aspirations and distinctive esthetic. True private property enables an individual to act within his own realm as he pleases, as long as he does not infringe on the identical prerogatives of all others with their property. Only private property in land can give an individual the unfettered ability to paint a house with the colors and patterns of one’s choice, to determine the surrounding landscaping, to select the appliances and amenities therein, and to decorate it (which is a right that should not be undervalued, lest we lose it in the age of draconian busybody “homeowners’ associations”). An individual who owns land can truly turn the land and the improvements on it into reflections of himself, rather than just another barren, drab, or cookie-cutter plot (though any of those are within his prerogative as well, if he wishes to be unimaginative). True innovators are always in the minority and always unconventional. If they do not have a sphere where they can act unfettered, then many of their creations may never come to be.

Argument 6: Owned Land versus Land in the State of Nature: While I do not support arbitrary claims of ownership to undeveloped land, I do hold to the Lockean view that a person comes to own land by mixing his labor with it as the first occupant – and only to the extent that he does so. Locke himself argued that a person’s legitimate claim to land extends only to whatever land this person (or others acting on his behalf, through the voluntary exchange or offering of their services) was able to transform with his labor and put to use. Any other (undeveloped) land remains in the state of nature, free for others to claim. This is why Locke opposed arbitrary claims of the King of England to all of the prime forests of that country as the King’s “hunting grounds”. Likewise, one might question whether a Lockean view of property rights would allow national governments today to lay claim to vast undeveloped territories and to preclude development thereon (or sell “development rights” or “resource rights” to those territories). A fully libertarian system of property law would recognize the right of the first occupant and user of a property to be its owner, but only with respect to the land which is truly inextricably involved with such occupancy or use – i.e., land that has been improved and transformed. This is a consistent and universalizable standard for legitimate ownership, and it is a standard that follows directly from the desire to use and transform objects in nature for the improvement of human well-being. Such improvement and transformation are precisely what differentiates owned land from land in the state of nature. Owned land is much more usable and often dedicated to specific purposes, whereas land in the state of nature remains to be adapted to human needs. In practice, the two would look quite different and would enable natural demarcations of private land holdings.