(Jan.-Feb. 2009 GroundSwell)
EMPTY SPACES
By Dr. Mason Gaffney, Riverside, CA
?Phantom faces at the window.
Phantom shadows on the floor.
Empty
chairs at empty tables
Where my friends will meet no more?
? Marius? song, from Alain Boublil, Les Mis
Many stores have closed in the last year;
they stand empty behind signs reading ?Available?, ?For lease?, or ?First month
free?. So have many industries, their gates padlocked, their girders
rusting. The capital in them is wasted, poured down a rat-hole.
Multi-million dollar freighters are mothballed, with no cargos to carry; others
sail with unfilled capacity. Vast warehouses stand half-empty. Fleets of
trucks wait for loads that never come. Redundant McMansions stand waiting
for buyers, some advertising ?Bank-owned?. Freight trains haul too many
?empties going back?.
This brings us up against a weakness in
locally-oriented Georgism, which emphasizes the benefits of modifying local
property taxation to untax or downtax buildings. Not long ago the Building
Industry Association in my city approached me to help lobby to lower various
fees in lieu of taxes imposed on builders. I could have used the money,
and easily repeated the litany of Georgist arguments against taxing buildings,
when it occurred to me we have too many buildings already, and better uses for
the capital needed to build more.
It looks stony-hearted to read we ?have too
many buildings? when there are still poor families crowded into ?roach motels?,
and outright homeless. However, that is due to maldistribution, and
misdirected investments. Its remedies lie in making jobs, raising wage
rates, untaxing labor, and uptaxing land values. It is the
aggregate of buildings that are a drug on the market, while businesses
wither and die for want of working capital needed to hire workers to fill and
use the buildings.
In the previous Great Depression, as today,
America was loaded with empty buildings and excess capacity.
?Once I built a tower to the sun, with bricks
and rivets and lime
Once I built a tower, now
it?s done. Brother, can you spare a
dime??
-Yip Harburg,
1931
Empty subdivided lots, too, went begging;
owners abandoned many for back taxes. The Georgist message, locked into a
paradigm from earlier times, seemed irrelevant and was shunted aside. This
time around, we need to stress how taxes that ?shoot anything that moves? keep
things from moving. We need to show how removing taxes on labor and
production and sales will raise the value of empty buildings and lands, so
property taxes can yield more revenue to replace them.
I seek no quarrel with the many Georgists who
give splendid service to the cause of downtaxing buildings to uptax land
values. Their work is basic, demonstrating again and again, city by city,
the feasibility and good effects of taxing land values separately from buildings
and other capital. For it?s not just the capital that?s
wasting. There is land under those empty buildings, often more valuable
than the buildings themselves. It might as well be vacant. It?s more
than the land literally under the building, too. Even residences have
yards, garages, and driveways; some have palatial grounds, in the choicest
neighborhoods. Retail and wholesale and industrial buildings have vast
parking areas and aprons for employees, customers, and deliveries. Some
have wide yards for open storage. When city planners count up vacant lots,
if they do, they usually see just lots without buildings, of which there are
many, but nowadays there are as many or more invisible vacant lots under and
attached to empty buildings.
We fret about Al Quaeda, and immigrants from
Central America, but these empty spaces and vacant lands might just as well be
ceded to the Taliban, or drowned like Atlantis, for all we use them. Osama
bin Laden?s attacks are pinpricks compared with the damage we do ourselves by
mismanaging our economy.
Trivializers tell us that abandoned lands in
declining cities are worthless, noting that the median house in Detroit now
sells for only $35,000 or so. However, that is to misunderstand
three important matters. One is that Detroit not long ago was our fourth
biggest and fastest growing city, home of the assembly line, core of the
?arsenal of democracy? and the locus of our bellwether industry. Its
location has not worsened, but improved with the St. Lawrence Seaway opened and
global warming lengthening its ice-free season. The second is that Michigan?s
leaders can renew Detroit and their whole state any time by shucking their
terrible counterproductive ?modern? tax system and returning to the system that
sparked Michigan?s spectacular growth, as documented in this writer?s previous
Insights column, ?What?s the Matter with Michigan??. The third is
that urban renewal in a free market proceeds from the fringe of a slum in
towards the center. Richard Hurd taught us back in 1903 that land values
are marked by continuity in space, because developers seek to anchor new
neighborhoods to the best of the old. The heart of a slum may be hopeless,
if you try to parachute renewal in there, but the edges are always renewable,
and a market revived by untaxing new buildings can proceed naturally inwards
from there.
So property tax reform remains basic.
However, please consider this. Property tax reform carried more weight
when Henry George wrote because - the property tax was the major tax
levied by both state and local governments; federal taxes were light.
Also, taxable property included ?personal? (movable) property as well as real
estate, while most states today have exempted all or part of personal property
from the base. Reforming the property tax then, in George?s day, was
reforming a major part of the whole tax system.
So we return to asking what?s the use of new
buildings when so many old ones are empty? To be sure, new ones may
replace old depreciated and obsolete buildings, there is always some of that,
but many of these unsold buildings today are brand new themselves. Supply
has outpaced demand, leaving us with a great housing crash. There were
some 2.3 million foreclosure filings in 2008. It?s not saying much that
it?s the greatest crash of this millennium so far ? 9 short years - but going
back to the prior millennium it?s worse than 1990, worse than 1975, worse than
1958 ? many are equating it to 1929, for like 1929 it has brought the banking
system down with it, and the rest of the world along with it.
Today we have sales taxes, business taxes,
personal and corporate income taxes, payroll taxes for social security and
medicare, employer responsibility for workmen?s comp and, in many cases,
pensions. We have an income tax system, federal and state, that has turned
owner-occupied housing into the greatest tax shelter while simple basic labor
bears the brunt of what housing does not pay. On top of that we have
subsidy programs for housing, while no one subsidizes the overtaxed worker for
working. Income from commercial buildings is mostly untaxed, too, as
Hudson and Feder?s work for the Levy Institute has shown. This is done
through a combination of accelerated depreciation, avoiding the capital gains
tax, and repeated tax-depreciation of the same building by sequential
owners. Viewing the tax system in its entirety, it?s not buildings per se
that are overtaxed. It is USING the buildings that is overtaxed.
That is why we have more buildings than are being used.
It also helps explain why we have such high
unemployment. Construction makes jobs, yes, but not nearly as many jobs as using
the buildings once constructed. Using buildings, in turn, depends on
entrepreneurs? raising funds to hire workers. These come from commercial
loans, lines of credit, and turnover. The greatest of these, and the least
noticed, is turnover.
Turgot perceived in 1767
(R?flexions) that investing is the independent force that ?animates all
the work of society?. Adam Smith, who learned his economics from Turgot
and his allies the Physiocrats, added the factor of turnover. He put it
this way:
"A capital employed in the home trade will
sometimes make 12 operations, or be sent out and returned 12 times, before a
capital employed in the foreign trade ... has made one.? Wealth of
Nations, Republished, 1937, pp. 338, 41, 349.
Adam Smith is using cargo as a metaphor
for all capital. For generating employment, fixed capital frozen in buildings or
turnpikes was so sterile as not to be worth Smith?s mentioning: the payback is
too slow. Time has not changed that much. One modern desk worker
occupies about 200 s.f. of floor space. The cost of constructing that is
roughly $100 per s.f., or $20,000 per desk worker. Some 20%-30% of on-site
construction cost is labor, say $5,000 per desk worker. If the mean desk
worker earns only $30,000 a year, and the floor space lasts 60 years, the labor
input in using the space comes to $1,800,000, or 360 times the construction
labor. It is using floor space, not building it, that makes most jobs and
produces most goods and services. The greater importance of building is
that it gives labor better access to the location, which might otherwise go
unused. In the absence of working capital, however, as today, even access to
land via floorspace is not enough by itself. There must be working
capital, too. There are two sources of working capital: net new saving,
and turnover (recovery of capital from sales of previously invested
capital). The second item includes bank loans made from repayment of
earlier loans. Most businesses, especially small ones, depend on lines of
credit and commercial loans to finance day-to-day operations, and these depend
mostly on banks? recovering funds they loaned earlier.
Consider retailing. Sales p.s.f. in modern
department stores might be $300 p.s.f. per year - much more in downtown New
York, less in smaller markets. Over 40 years, thus, sales total $12,000
p.s.f., or 120 times construction cost. The flow of capital through the
store - the throughput - accounts for so many times more jobs and products than
the capital in the store building that a macro-economist can nearly ignore
building construction as a job source.
What did other great economists say about
this matter? We have David Ricardo on our side. His Chapter 31, ?On
Machinery? in his Principles makes the same point that Smith makes
above. He draws on the reasoning of his classic Chapter One, ?On
Value?. Economists rightly venerate Chapter One, but then wrongly
disregard ?On Machinery? as an aberration, even though it follows the reasoning
of Chapter One.
John Stuart Mill applied Smith?s insight directly
to taxation, noting how a general sales tax would slow down investing.
Mill?s reasoning, as always, is subtle, and his expression wordy, but readers
who are interested in the history and evolution of economic thought will be
fascinated. My guess is that that includes most readers, because the
history of economic thought in The Corruption of Economics (1994) is more
popular than anything else I have published in the last 20 years. Others
may want to skip directly to the last paragraph; but here is
Mill:
?? if
there were a tax on all commodities, exactly proportioned to their value,? there
would ? be a disturbance of values, some falling,
others rising, owing to ? the different durability of the
capital employed in different occupations.
" ?
The gross produce of industry consists of two parts; one portion serving
to replace the capital consumed, while the other portion is profit. Now
equal capitals in two branches of production must have equal expectations of
profit; but if a greater portion of the one than of the other is fixed capital,
or if that fixed capital is more durable, there will be a less consumption of
capital in the year, and less will be required to replace it, so that the
profit, if absolutely the same, will form a greater proportion of the annual
returns.
"? To derive from a capital of 1000 ? a profit of
100 ?., the one producer may have to sell produce to the value of 1100 ?., the
other only to the value of 500 ?. If on these two branches of industry a tax be
imposed of five per cent ad valorem, the last will be charged only with 25 ?.,
the first with 55 ?.; leaving to the one
75 ?. profit, to the other only 45 ?.
" ? To equalize, therefore, their expectation of
profit, the one commodity must rise in price, or the other must fall, or both:
commodities made chiefly by immediate labour must rise in
value, as compared with those which are chiefly made by machinery.? ?
Principles, 1848, ?Of taxes on commodities?. (Emphasis mine.)
Where Mill says ?machinery? he clearly means
durable capital of all kinds, including buildings, tunnels, trees, breeding
herds, freighters, wells, highways, airports ? you can name a thousand examples.
And where his numerical example contrasting two ?branches of industry? is
understated and abstract, let us contrast buildings with the ?commodities made
chiefly by immediate labor? inside the buildings.
A building may last for,
say, 50 years, and return the principal of the capital in it in, on the average,
about 2/3 of that time (a little in the first year, a lot in the last years,
according to the standard formula that lenders and the I.R.S. use to divide
level monthly installments between interest and recovery of principal).
The ?immediate labor? of workers inside the building adds value to materials to
be sold in, say, a month, returning capital that the entrepreneur can reinvest
immediately, for a turnover of 12 times a year.
?Turnover? is the single
word that epitomizes Mill?s labored prose, and ?loan turnover? expresses its
effect on bankers. Taxes on commodities tax capital each time it turns
over. They ?disturb The Force? (as Darth Vader might say), where the
market is The Force, and push capital out of producing commodities ?made by
immediate labor?, hence more into commodities and services rendered over long
periods by durable capital: capital of slow turnover.
After Mill, the baleful influence of J.B.
Clark engulfed the profession like a miasma. In his tortured efforts to
conflate land and capital Clark deleted the turnover of capital from the
professional consciousness. His followers call the new, improved approach
?neo-classical economics?. His main objective was to avoid singling out land for
taxation, but a byproduct was to remove capital turnover from micro-economics,
as explained in The Corruption of Economics. He and his disciple
Frank Knight were obsessed with attacking the ?Austrian? economists who sought
to keep capital turnover at the center of economic thought.
Other economists struggled for a while to fit
the Austrian B?hm-Bawerk?s ideas into their neo-classical models from which time
had been largely banished, only to reject or isolate such ideas when they could
not fit them into their static, Clarkian models. From 1870-1920,
?much of the economics was ? an economic theory of acapitalistic (note the ?a?
before ?capitalistic) production. Considerations of capital theory proper
? simply disappear from the picture? (Robbins, 1934). It was Auguste Comte
who wrote that all science consists of relations either of coexistence or
sequence. Clark confined neo-classical economics into a box that shut out
relations of sequence. Not until Keynes did they return, and then in
distorted form.
Keynes picked up on Turgot?s insight, but in
a twisted sort of way that loses much of its force. In Keynes,
?investment? is the autonomous motor of the system, but it means net new
investment only. He takes reinvestment and turnover for granted, as
results of ?consumption?, regardless of what is consumed ? it could even be the
services of land, for all he and his followers seem to care. Keynes
puts everything in monetary terms, the ultimate abstraction, with little
attention to the corresponding flows of goods and services, as though their
composition had no effect on the outcome. Thus for him construction is
just as good as tailoring or cooking or delivering mail or waiting on table or
baby-sitting for making jobs, and maybe even better because construction soaks
up the capital invested for long periods, and Keynes saw capital as being formed
in excess of need ? quite the opposite of today?s problem when businesses are
starving for want of working capital and commercial loans to finance day-to-day
operations.
What we need today is to get rid of taxes on
Mill?s ?commodities made with immediate labor?, and taxes on labor itself.
We need to show that the present system, by seeking to spare property values,
actually depresses them by more than would direct taxes on property, because of
the ?Excess Burden? of indirect taxes. As we make this great shift we
should continue to champion focusing the property tax more on land rather than
capital, but as we do so let us give higher priority to untaxing work and
turnover and cash flow and sales than to untaxing buildings. We already
have empty buildings to burn, with empty chairs at empty tables. <<
(I am indebted to Polly Cleveland for major editorial help.)