How to Thaw Credit, Now and Forever
GroundSwell, September-October 2008]
The writer owes Dr. Polly Cleveland for her searching
criticism of an earlier draft. Remaining errors are, of course, my
Working capital is the bloodstream of economic life. It is physical
capital, the fast turning inventories of goods in process and finished
goods that supply materials to the worker, and feed and clothe her
family. Short term commercial loans and trade credit buy it, but the
capital is "real" -- a fact often forgotten in the paper and
virtual worlds of high finance whence come the highest inner circles
The bloodstream metaphor harks back to Fran?ois Quesnay, an 18th
century French physician turned economist. Quesnay drew on William
Harvey's (1578-1657) earlier discovery of how blood circulates. Adam
Smith and other classical economists followed Quesnay, distinguishing
"circulating capital" from "fixed capital," the
kind that is stuck in the ground or otherwise lasts for many years.
Today we call the bloodstream metaphor "macroeconomics",
elaborated but not always improved from Quesnay's insights. Now the
economic blood is drained down, and what's left is slushy. We need to
restore and thaw it, and get it circulating, right away as well as
over time. To understand how, let's see what drained it away in the
My thesis here is neither purely Keynesian, nor monetarist, nor
Austrian, nor Georgist, but combines elements of all those models in
ways that are off "mainstream" thinking today. The first
three models suffer two major faults: they ignore the role of land as
"fictitious capital" with a "wealth effect" that
discourages real saving and investing; and they treat all taxes and
government spending alike. The fourth (Georgist) model lacks a good
concept of how capital circulates. Some readers may find it puzzling
and alienating to proceed without one of the old familiar models in
pure form. Considering where mainstream thinking has led us, and how
dismal are its forecasts now, and how it lacks any positive guidance
for recovery, it is timely to modify the mainstream.
2. Public debt as vampire
Each Federal deficit draws more blood from the private sector.
Cumulative deficits add up to the national debt. Washingtonians used
to joke about a hick Congressman whom the voters returned many times
because he never voted against an appropriation or for a tax bill; but
now the Republicans, once the reliable foes of public debt, have
doffed their green eye-shades and become its champions. The debt was
$900 billions when Reagan and Bush took office in 1981. In 1984
Mondale/Ferraro campaigned to stop the bleeding, but voters chose the
lure of lower taxes and higher spending. When Bush Sr. left office in
1993 the debt was $4,000 billions, a number so high we started
counting it in trillions.
From 1993-2001 the pendulum swung back as President Clinton came to
terms with the newly-thrifty Republican Congress. Equally important,
he did not invade any other nations. Some military bases like The
Presidio and Marin Headlands were actually closed, rare as that is;
others, like March A.F. Base, were mothballed. Under this regimen the
nation recovered from several shocks that might have triggered the
collapse of a more anemic economy. Some of these were the Mexican
bailout of 1994, the southeast Asia crises of 1997-98, the flame-out
of Long Term Capital Management in 1997-98, the dot.com collapse of
2001, and the stock market fall from 2000-2002. Now, however,
President Bush and his supportive Congresses have run the debt up to
$11 trillion, $12 trillion, $13 trillion or more, depending on who's
counting. Whichever way recorders spin the story, the debt is a big
fraction of the nation's capital -- our economic blood. This has made
us vulnerable to the housing crash and cardiac arrest of today.
How did Reagan and Bush persuade themselves to invert traditional
Republican doctrine? There were two main gurus: Art Laffer, Jr., and
Laffer drew his famous curve on Dick Cheney's cocktail napkin in 1974
and changed the course of history. Said Laffer, taxes suppress
incentives so much that Washington can actually collect more money by
lowering tax rates. He stressed how taxes "suppress"
incentives to work and to invest. Others also stress how taxes twist
incentives so people allocate resources less efficiently.
Anyone who has read Henry George will relate to how taxes suppress
and twist incentives. Laffer, indeed, quoted him often and
enthusiastically. Tragically, though, he only got half or less of
George's idea. Laffer never specified WHICH taxes suppress and twist
incentives. George, of course, would maintain revenues by raising the
neutral and even pro-incentive taxes on land values and rents, to
compensate for down-taxing other bases. He noted that down-taxing
other tax bases would enhance land rents and values as a tax base.
By 1979 Laffer had political distractions in mind, like rising with
Ronald Reagan. The voters loved their message of lower tax rates cum
higher public spending, and Reagan used it to help win his election.
Laffer never rose to the heights of a Cardinal Richelieu, but he
served on Reagan's Economic Policy Advisory Board for both of his two
terms, as well as the Chief Economist at the Office of Management and
Budget under Treasury Secretary George Schultz. Reagan and later Bush
bought into Laffer's plan to lower tax rates, even as Reagan's other
economists advised against it. Laffer also got OMB to adopt "dynamic
revenue forecasting" based on assuming that lowering tax rates
would raise the tax base.
Within a few years it was clear that Laffer's tax cuts actually
lowered revenues, and he lost favor. Yet today his ideas linger on in
the highest circles of government. Professor Jeffrey Franken of
Harvard has published a series of Laffer-like quotes from Bush and
various sympathetic Congressmen (2008,
Tax-cut Snake Oil, Economic Policy Institute).
The other new guru was Professor Robert Barro, then of Rochester, now
of Harvard. The same Dick Cheney, a believer, tersely summed up
Barro's message: "Deficits don't matter". Barro claims to
trace his idea back to Ricardo, and even calls it "The Ricardian
Equivalence Theorem". It is loosely related to the assessors'
theory of property tax capitalization - we leave that for another day.
Barro's point is that deficits today mean higher taxes tomorrow.
Present taxpayers and savers fully realize that, says Barro, so they
will save more today to prepare for that burden of tomorrow. This
higher private saving offsets government's dissaving. As of now Barro
is still repeating this chorus with each verse: "... it matters
little whether you pay for government spending with taxes today or
taxes tomorrow, which is basically what a fiscal deficit is"
(Interview with FRB of Minneapolis, Nov. 12 2005, in The Region).
In other words, "Deficits Still Don't Matter" to Barro.
It was not just Barro. Iconic Milton Friedman, the very avatar of
anti-Keynesianism, chimed in with "Why twin deficits are a
blessing" (WSJ Dec 14 1988). (The other deficit was our national
import balance.) Friedman had risen to fame by refuting Keynes and
giving us his "monetarism" instead. Once in favor, however,
with Keynes reduced to a memory, Friedman turned around and endorsed a
new rationale for deficit finance, Barro's "Ricardian Equivalence
This Barro-Friedman rationale has a seductive element of truth, but
more error. The primary effect of deficit finance is that government
bonds, to their owners, are an asset, a "store of value", a
substitute for real capital. George and others labeled bonds as "fictitious
capital" - they are nothing but a lien on future taxpayers, yet
they swell their owners' portfolios just as though they were real
social capital. Thus they satisfy people's needs for retirement funds,
and other comforts and joys of holding wealth, without the people's
having created real capital by their saving. For most people (not all)
the marginal satisfaction from holding additional wealth diminishes as
they hold more. Economists call this "the wealth effect",
even when the wealth is fictitious. (For those whose marginal
satisfaction from holding land does not diminish as they "lay
field to field", see Gaffney, 4- 04, Auri Sacra Fames,
in Groundswell. The fable of King Midas is also in point.)
By substituting for real capital, bonds lower people's marginal
incentive to save and invest more. Barro recognized this wealth
effect. His point was that it is offset by the negative wealth effect
of the prospect of higher future taxes, so "Deficits don't matter".
It is true that some bonds do represent real social capital, as when
public bodies spend the money wisely and honestly on useful objects
and services of general value, like scientific research, replacing
worn-out roads and bridges, air traffic control, education, and so on.
Ideally, all bonds would. The apparent dissaving would be offset by
investing in public and human capital, raising incomes and land values
to fortify future tax bases to retire the bonds.
History cries out, however, that nations in thrall to imperial
overreach and its parasitic lobbies fritter too much capital away on
sterile warfare (Kevin Phillips, 2006, American Theocracy).
Urban history, studied with any insight, shows cities, counties,
states, and nations, dominated by land speculators, doing the same on
subsidizing urban sprawl. Alaska's "bridge to nowhere", even
though aborted by the publicity and embarrassment surrounding its
patent absurdity, dramatizes the matter memorably. (Alaska finally got
the money anyway, for Heaven knows what.)
Our huge and ongoing foreign trade deficit shows that the investment
crowded out of domestic industry must exceed private sector gains from
public spending. That is why we have to buy so much from abroad, and
can sell so little there. How could it be otherwise when so much
public spending goes to maintain hundreds of military bases around the
world, bribes to manipulate foreign rulers, long wars without apparent
net benefit to the U.S., and the whole military-industrial complex?
An analogy to slavery may make this clearer. It is a truism of
economic history that slaves in the Old South satisfied their owners'
need for wealth, substituted for real capital in their portfolios, and
led to a culture of extravagance. Formation of real capital suffered.
So, of course, did the slaves, who also substituted directly for farm
capital. Underequipped Confederate soldiers paid the price on the
As a secondary effect, the prospect of future taxes is a liability to
bondholders and other future taxpayers -- the "negative wealth
effect", as Barro says. It is unlikely that this distant future
possibility shows up on the liability side with the same weight as the
bonds on the asset side, as Barro's critics have pointed out. Most of
these critics, right as they are, have failed to add that our tax
structures at every level have been growing less progressive, or more
regressive, so future taxpayers are more and more likely to be the
working poor, rather than the saving classes. Add to that that our
system is fast making it worse by racing toward distributing wealth
and income less equally.
The net marginal satisfaction from holding wealth actually diminishes
more and faster when the wealth consists of real capital. This is
because owners of real capital, especially working capital, must
manage and maintain it, and constantly replace it as it turns over.
This is hard work, and risky, too. Bonds, in contrast, keep in a vault
with no such cares. Only the most durable forms of capital, gold,
land, and some common stocks can compete with government bonds in this
respect (Gaffney, 4-04, op cit). So big savers, as their
wealth accumulates, more and more turn away from supplying working
capital like short term commercial loans and trade credit.
Working capital, the coursing bloodstream of our private economy,
needs a heart -- the owner-entrepreneur -- to pump it through the
system and recirculate it constantly, often several times a month. But
the stoutest heart cannot pump blood that is not there, as we are
finding today. It is not just loanable funds that are short, not just
abstract "credit", as popular and media perceptions have it;
it is the real capital that loans and credit represent. That is why we
have to import so much of the real capital.
Government bonds "crowding out" private wealth from
portfolios is part of how government borrowing takes capital away from
the private sector. The other part of crowding-out is dynamic. When
The Treasury sells new public bonds they crowd out new private bonds
and corporate IPO's and new investing in unincorporated businesses,
most of them small.
Professor Martin Feldstein sees the wealth effect mainly in social
security, which he blames for the shortfall of private saving. The
comfort and security of knowing your rich Uncle Sam will cover your
later years obviates your saving in other ways. Buying into social
security, even though it is involuntary, is like buying a government
bond. You invest now and recoup later. Feldstein does not qualify
this, as Barro might, by claiming that the prospect of higher future
taxes to pay the retirees will stimulate more saving today.
Feldstein's emphasis on the wealth effect makes sense, up to a point,
but his case has elements of class bias that weaken it. If he is going
to make this case against social security pensioners he should make it
more strongly against bondholders. For one thing their claims on
future revenues, rising over $10 trillion plus huge annual interest
payments, outweigh the annuitants' claims under social security.
For another thing, social security annuitants include many people too
poor to save much in any event, so their prospect of a secure old age
does not abort much saving they would do in the absence of social
security; it simply saves them from indigence, eviction, the
poorhouse, dependence on family welfare or charity, and, more than
likely, early death. For a third point, there is an invidious
subjective value in private wealth, lacking in social security.
Everyone has social security, so it does not make a man or woman feel
wealthier than his or her reference groups.
Critics fault the social security "trust fund" because it
is not really saved, but spent for current Federal operations and
wastes. Worse, it earns only about 2% a year, less than inflation,
making it basically a forced loan to the U.S. Treasury and,
indirectly, to other, richer taxpayers. These critics often write with
a political edge, but our concern here is with the economics of it.
Objectively it is spent to lower taxes on others with more ability to
pay. In the short run it is just a tax, our most regressive one by
This tax does not crowd much capital out of the private sector; the
poor workers who pay it are being forced to save what they otherwise
would consume. It is not by their choice that Congress uses their
money to lower taxes on corporations, on the sensational peculations
of CEO's, on those in what used to be tax brackets as high as 94%, on
"capital" gains, on estates, and on property income of most
kinds. It is those beneficiaries who would reasonably be expected to
pay more future taxes to repay the pensioners, but there is little
reason to think they will, without a radical turnabout in the
evolution of tax policy. On the contrary, the pensions themselves have
now been made taxable, and Congress has stiffened bankruptcy laws so a
tax delinquent without property may become an indentured servant of
the state for life.
3. The Greater Dracula: land value
There is a Greater Dracula, land value, sucking blood from our
economy. Land value is invisible to most economists. Those cited
above, however deep their insights about public debt, rarely mention
it; their neo-classical training blinds them to it.
We noted earlier that U.S. bonds serve as "fictitious capital"
to their owners, a store of private value that is not real social
capital. So do land values, only more so. They satisfy the need to
hold assets without there having been any corresponding net social
saving by owners collectively, present or past. Individuals may save
to buy land, but the seller dissaves in the same sale. Most home
buyers, in fact, finance their purchase from selling a previous home.
Mere ownership turnover of a fixed stock does not constitute net
Not only do land values substitute for real saving, they promote
dissaving. Notoriously, we have just been through several years of
homeowners' heeding the siren songs of bankers to "unlock the
equity in your house (and its land)" to pay for cruises, cosmetic
surgery, golfing, yachts, vacation homes, fast cars, stables, and any
other extravagance that lust and envy and boredom and impulse can
devise. Rising land values seem to the owners like current income that
they can spend on current consumption, so long as banks are ready to
lend on them. That is the dynamic side of it. Then, after the values
have risen, they stand in for wealth to some owner or lender, muting
via the wealth effect their urge to save.
In the case of U.S. bonds there is a reverse or compensating Barro
Effect. In spite of Barro's overstating it, still there is something
to it. It is a "negative wealth effect" from the prospect of
higher future taxes to pay off the bonds, even though it is, as shown
above, only an echo of the "wealth effect" of the bonds to
their owners. There is no corresponding Barro Effect with rising land
values, they rise up spontaneously, on their own. They are a free gift
from human fecundity and progress, economic and social. They result
from our having traveled a few more years through time, into the
infinite future. Infinity remains infinite. It has simply grown more
highly rentable, in the rosy visions of optimists, the ones who
dominate the market. The land in a portfolio of assets is not, per se,
a debt that someone must retire.
It is true that prospective buyers are now poorer, in that they must
pay more for land. This might stimulate them to save more. However
they, too, share the vision of higher future rents, so they are paying
more simply because they think they are getting more. Sometimes they
actually are. If the price to rent ratio rises it is because of the
promise of higher future rents or resale values, whether or not the
promise comes true.
What about common stock? I omit it here for four reasons. One, a good
deal of its value represents indirect ownership of real estate. Two,
in our times its total value has dropped well below that of dwellings.
Three, the media and public consciousness greatly overstate its role
in the economic scheme. News reporters parrot phrases like "a
fall of stock prices has wiped out a trillion dollars of wealth The
wealth is still there; all that's changed is expectations of future
earnings, or taxes, or subsidies, or bail-outs, or even more trivial
and superficial matters. Four, space and time limit us here and now:
we must neglect something. What's uppermost now is the housing
4. Housing and land values together
Ever since 1913 the capital invested in owner-occupied housing, and
the land used for it, have enjoyed virtual exemption from the tax
levied on other forms of income. Income? What income? If A rents a
house to B for cash rent, that rent is taxable income. If A evicts B
and moves into the house for his own use, the taxable cash flow stops,
but A gets as much service from the house as B did. That service flow
to A is called "imputed income". Economists recognize it as
income; they even make a nominal gesture at counting it as part of the
national income. But Congress does not tax it as income.
Imputed income of owner-occupied land (under housing, for example) is
not taxed, but interest on mortgages is deductible, unlike other
consumer interest (e.g. on credit cards and auto loans). Most small
homeowners do not itemize, so the deductibility of interest (and
property taxes, too) mainly benefits richer people. If you own six or
seven houses (who's counting?), a horse farm, a duck blind, a ski
chalet, a lakeside cottage, a wild forty for hunting or riding, a golf
club membership, a beachfront, etc., all that imputed income is exempt
The service flow of an owner's house -- the building per se, that is
- is not all net income. The owner must maintain and operate the
building and grounds, rewire, replumb, repaint, reroof, remit utility
bills, replace the furnace and air, repel pests and termites, remodel
and redecorate now and then, and still some day retain or resell or
retire only the remains of a building whose value has regressed to the
dust from which it sprung. The site of the house, i.e. the space and
location, demands none of those expenses, and generally appreciates
besides - not this year, obviously, but more years than not. The
current crash should not blind us to what has happened since, say,
1970. A $35,000 house and site bought then, through a chain of sales
and purchases and a little luck, was priced at about $1,100,000 in
2006, and now after the crash (stage one, anyway) is still worth about
Unearned increments (aka "capital gains") are not taxed
until time of sale, if that ever comes, although owners may take out
cash, tax free, any time, by using a line of credit or other form of
mortgage, whose interest is deductible. If one does sell for a gain
the tax is deferred so long as you buy another home of equal or
greater value within a two-year window. Most homeowners continue this
chain of deferral until death, at which time all the accrued gains are
exempted forever -- the so-called "Angel of Death"
As to rental housing the renter cannot deduct the rent, but the
owner's rents are generally untaxed because the owner can often
tax-depreciate the building much faster than it really depreciates
economically, wiping the rental income off his tax return. This same
benefit also goes to office, commercial, and industrial buildings, but
not to wage and salary incomes, all of which are taxed - even the part
that is taken away as the social security tax, as well as social
security pension payments when the worker collects them - if he should
live that long. Workers on average die a lot younger than rentiers.
When owner A has depreciated a building down to zero he sells to
owner B, who does it all over again, and so do C, D, E, ... etc. until
the building dies. When A sells to B the excess depreciation is
nominally "recaptured" by taxing the nominal gain, but it is
called a "capital gain", subject to a lower tax rate, at a
later date, a higher price level, and a new tax structure lowered from
when A took the original depreciation.
When B tax-depreciates the building, he normally depreciates a good
deal of land value, too, even though the land is appreciating. Michael
Hudson and Kris Feder (1997, Levy Institute) have shown how all this
lowers the taxable income from all the income property in the U.S.A.
to an aggregate of zero - Repeat, ZERO!
Little people get a cut of the action, too, enough to nail down their
votes, but it's the big people who own several mansions apiece in the
choicest locations. Ever since labor got the vote in the mid-19th
Century, politicians have fostered
la petite propri?t? as a bulwark to protect la grande
propri?t? from la canaille, the dogpack, the rabble.
Peter Kropotkin noted how well this system worked west of Russia. In a
new revolution "the workers would have against them, not the
rotten generation of aristocrats (of 1789) ... but the middle classes,
which are far more powerful, intellectually and physically, (plus) the
machinery of the modern state" (1899, Memoirs of a
Revolutionist, p.290). Only Russia failed to foster its middle
class, with the result we know so well.
In the 1920's, the first peaceful decade in the U.S.A. under the new
income tax, popular music manifested the ethos spawned by the
exemption of homes from the tax: "My Blue Heaven"; "Robins
and Roses"; "Tea for Two". These were to be followed by
the more tentative "Just around the Corner there's a Rainbow in
the Sky"; and then, all too soon, by "Brother, Can You Spare
Fast forward to 2001. Other kinds of consumer interest, as on credit
cards and autos, were no longer deductible. Accelerated depreciation
had been decelerated. The ENRON collapse taught investors to beware of
overpaid CEO's and opaque corporate accounting. The dot.com collapse
taught us to be leery of rosy promises unsecured by hard assets. All
the investment guru's told us to buy a home or two, it's the last and
greatest tax shelter. And so we did, from ticky-tacky little houses on
the hillside to McMansions to palaces and compounds for the
super-rich, and bankruptcy-safe havens in Florida and a few other
states, even Kansas, that protect residences from bankruptcy
proceedings. If all this is supposed to protect family life you would
not know it from our soaring divorce rate, so Tea for Two became tea
for one each in two dwellings.
The arrangement has been and is bipartisan. Call something "housing"
and it becomes sacred, a fetish, unassailable, even if it is San
Simeon with its 82,000 (sic) attached acres and 17 miles of coastline.
The result has been a massive overallocation of the nation's capital
stock and land to housing. We are "overhoused America".
There's not "too much housing" in an absolute sense. Many
folks at the bottom are underhoused. Thousands are homeless, including
many children. That's a matter of unequal distribution, but also at
the core of modern politics. The former rabble have become the
rationale for exempting mansions, playgrounds of the rich, and little
castles of the middle class from taxation.
All that housing and land for the mansioneers take capital and land
away from other uses, and sequester it in unrecoverable form. Housing
pays out slowly at best, and a corresponding 30-year mortgage ties up
the lender's capital in a highly visible and countable way. A bank
can't make new loans much faster than it recovers capital from the old
ones. So we reach a point, as now, where new loans are hard to come by
- to meet payrolls, buy materials, and produce the daily needs of
That's "at best". At worst, builders glut the market,
values drop, and the capital is not even recovered slowly, it's down
the drain forever. Thus this housing capital is thrice frozen. First,
its "net service flow" above expenses goes mostly not to
recover capital, but to pay interest (imputed or cash) and imputed
rent on the resources, capital and land, tied up in it. Second an
oversupply gluts the market so the owner cannot sell without a big
loss. Third, bank loans secured by mortgages on this housing go bad,
leading to a financial meltdown.
This is not just a domestic matter. Wall Street has been peddling
these mortgages all over the world, and the international bills are
coming due. We need to export more, but we can't export the surplus
houses, and we can't recover the capital. That's where we are today.
So what are Congress and Treasury and Ben Bernanke proposing along
with the bailout? More of the same, more "stimulus", raising
the debt some more to save the housing-land market and the banks that
have inflated it. Supply-siders, faced with crisis, convert quickly
into demand-siders; free-market fanatics into dirigistes.
Even as we write, October 23, 2008, Alan Greenspan himself is
admitting to Congress that deregulation failed. Even some kind of
Federal regulation (but what kind?) is acceptable to prop up a failed
system so we can repeat the same cycle that is crashing around us
Thus, traditional Keynesian macro-economic thinking, supposedly
buried by monetarism, never really died; Friedman forgot to drive a
silver stake through its heart, or bury it deeper than a few inches.
Today it has risen again to high circles in Washington. The idea that
public borrowing "crowds out" private borrowing, dominant in
the thriftier 1990's, is seldom heard today. Now the leading
physicians picture clogged Wall Street as a case of cardiac arrest, to
be cured by what FDR, in a more rural and less medicated age, called "pump-priming".
Tragically, this year's Nobel Laureate Paul Krugman, like other
influential liberals, is reverting to the same old demand-side
panaceas. "... right now, increased government spending is just
what the doctor ordered, and concerns about the budget deficit should
be put on hold" (Paul Krugman, NY Times, Oct 16). At
least Krugman's spending proposals are more egalitarian than those of
Wall Street's Henry Paulson. Larry Summers and Alan Blinder, nominal "liberals"
(I have my doubts), join the chorus for deficit finance. Like Paulson,
they see this as a paper shortage, to be cured with more paper. This
does not augur well.
Where is this new Federal money to come from? Borrowing from the
public? That would mean more crowding-out of private borrowers, the
very ones we need to have put capital back into the private sector.
The other fallback is borrowing from willing Bernanke's Fed which will
create new paper and virtual money. New money without real goods
behind it means inflation, more imports with fewer exports,
devaluation, and a real risk that our foreign creditors will take
their money and go home.
Ben Bernanke has staked his reputation and our economy on his belief
that we can depend indefinitely on a glut of savings in foreign lands
(March 10 2005, Sandridge Lecture, and elsewhere). I suppose that
comforting faith helped persuade him to accept his present unpleasant
job, but his claim seems dreamy and even arrogant now that the glory
days of American hegemony are fading fast away. Wall Street has
already sullied its credibility by dumping bad paper on the world. The
U.S. Treasury is not far behind. Let's ask what we should be doing
How can we raise the capital we need now? It's time to think big,
it's survival time for the U.S.A. We need to tap two enormous sources
of capital that the vampires have created, one public and one private.
The U.S. Government can create great gobs of lifeblood capital and
quickly transfuse it into private arteries. We can do this without any
giveaway, without rescuing failed banks with overpaid CEO's, without
overpaying for and writing down toxic debt while pampered executives
use our money to throw themselves lavish parties at sumptuous spas. We
can do this without pouring capital into banks so they can go back to
their prodigal ways. We can do this without Federal meddling with free
markets and enterprise and playing favorites with bailout billions.
The principle is simple: pay down the national debt. It's called "reverse
crowding-out". Governments can save, too, even as you and I, by
earning more and spending less. The question would arise, in what
shall the government invest without interfering in private markets?
Thanks to our past prodigality the answer is easy: invest in paying
the debt. Turn the vampire into a source of fresh blood, bringing new
life and vitality to the once-hale, now pale and failing private
The principle may be easy but the practice is hard: we must tax more
and spend less. However the present plan is to spend more anyway,
selectively bailing out prodigals and debtors and the very culprits
who led us into this morass. Better to invest in the nation's own
credit, while pumping new capital back into the private sector. We
have to do it soon anyway, and now is the time before interest eats us
alive, our creditors lose faith and withdraw, the dollar collapses,
and we become history's biggest fallen braggart, bully, pariah, and
moral object lesson to illustrate
Proverbs 16:18: "Pride goeth before destruction, and a
haughty spirit before a fall".
But how, one naturally asks, can government tax more without
suppressing and bleeding the very private economy we aim to revive?
This leads us back to the second and Greater Draculas defined earlier:
land value, and land value cum housing. It leads us back to the part
of Henry George that Art Laffer suppressed.
Land value, we have seen, is fictitious capital, an asset and store
of value for individuals that has no real social capital behind it. By
taxing it and lowering its value we do not destroy any capital. On the
contrary, we raise the owners' propensity to save and create real
capital to restore the missing store of value. We also raise revenues
without suppressing or twisting the incentives of free markets, as
generations of economists have shown and agreed.
As for how, this writer has published a catalogue of no less than
sixteen ways to tax land and resource values at every level of
government, using income taxes and severance taxes and even certain
kinds of user charges, along with the obvious and traditional property
tax. For some examples, we can and should levy what Netzer called "a
family of user charges" for preempting space on, over, and under
city streets. We should charge people, cities, water districts, power
companies, and others for withdrawing water from surface and
underground sources, and harnessing power drops. We should tax
unearned increments to land values (miscalled "capital gains"
by their apologists) in the Haig-Simons-Pechman manner as they accrue.
We should let each building be depreciated only once, by the original
builder, and land never. We should rent out, rather than auction off,
the radio spectrum, adjusting values quickly and often as the market
rises. We should tax polluters, rather than paying them not to
pollute. For the rest of the long story see Gaffney, 2008, "The
Hidden Taxable Capacity of Land", International J. of Social
Economics; previewed in April 2006, Groundswell.
Retiring public debts is not enough. Andrew Jackson did it, 1829-37,
and kicked off the greatest land boom and bust of the 19th Century.
Andrew Mellon did it, 1921-32, and repeated the experience in the
greatest debacle of the 20th Century. Where did they go wrong? It's of
no benefit to pay off the national debt if the Greater Dracula, land
speculation, guzzles away all the blood. In both decades land values
swelled and working capital ran short. From 1798 to 1929 the 18-year
cycle of land booms and crashes was broken only once, in 1911, 18
years after the crash of 1893. What went right then? That was the only
time before or after when the nation's treasuries depended mainly on
the property tax, and there was no big runup of land values.
What about banks and our money supply? Federal bonds and real estate
have become their major assets. The pressure is on to issue more
bonds, and support land values, to save the banks and the
virtual-money they have created. Must we? Do the banks and mortgagees
have us over a barrel? Banker and Treasury Secretary Henry Paulson
thought so recently, and created over $700 billions of new debt for
their benefit, but has already moved beyond that, following England's
initiative, toward socializing banks. Well, the U.S. Constitution
empowers Congress to "coin Money (and) regulate the value thereof",
so maybe to roll off the barrel we should be thinking in those terms.
This is a big topic for another day -- a long day.
The changes I propose are massive and radical, I know; but we have
been massively, radically wrong, and the times call for equally
massive, radical reforms. People will resist, will object, will twist
and turn and contort in dozens of ways, as Washington now is, to
protect banks and landowners and the current power structure,
resisting the unwelcome inevitable. They have eaten, drunk and been
merry on low taxes, cheap credit, foreign loans and rising land
values. Meet The Great Reckoning: it is time to foot the bill. We can
do it and turn America healthy in one stroke by taxing land values and
rents to retire public debts.