AboutI’m tedious about this I know….
If you sense something is off in our economy in the US, you’ll probably get something out of this post. It’s a bit of a personal journey where I’m trying to answer some of my own questions.
Something feels broken in our society
The US is the most prosperous nation on Earth. But it feels unnecessarily unbalanced.
There will always be inequality…
This would be true even if everyone started off equal. Life’s not fair because our natural endowments are uneven plus there are some weird math reasons to not expect a “fair” starting position to yield equal outcomes. These are topics for another day.
2 observations stand out to me:
- Labor share of the economy has fallen sharply behind capital’s. Wages have significantly lagged asset prices which has had massive distributional effects.
- The distributional effects:
- 70% of US wealth is held by the top 10% (via Fed)
- This top-heaviness is driven then reinforced by the reality that more than 50% of the income is earned by the top 20% whose savings are directed to accumulating wealth via investment.
[See Upside Down Markets for a fuller discussion of these effects]
These observations are unsettling.
We have a progressive tax code yet the winners seem to be accumulating advantages faster than redistribution can hold the center. Whether labor has lost bargaining power (ie globalism) or the inherent leverage in technology allows gains to be concentrated amongst fewer owners or whatever the reasons are it is clear that imbalances are building. And if the flow variable (income) is unbalanced, then redistribution is really just delaying the inevitable swallowing of the stock variable (US wealth) by the few.
I have likened the current environment to the endgame of Monopoly.
My concerns about inequality stem partially from a vague sense of Rawlsian justice and partially from a desire for cohesion. The wider the gap between people the less overlap they have in their concerns. This has as much to do with social fabric as it does with justice.
I think there are many wealthy people who recognize this and would be willing to sacrifice in the name of the collective (there are lots of rich lefties who will vote against their own narrow financial self-interest). But it's a prisoner's dilemma. Nobody wants to be the only confessor.
I find myself at an impasse as I think through the inequality/cohesion problem.
On the one hand, I'm philosophically aligned with large estate taxes and lower thresholds and steeper graduated tax rates.
But my sympathy remains philosophical only. You should demand to know why I cop out when it's time to actually push for these things in the real world and not just on a blog.
There are 2 reasons.
- The government, owned by corporate interests as it is, would probably leave me feeling like I sacrificed in vain. I'll admit this sounds like a grand Zerohedgy, illuminati-phobia. But it's more of a general unease with power and its corrupting influence. I don't believe in either benevolent dictators or moral fortitude at the level of institutions. And in this case, we would be giving the institution of government even more power because of the next reason which is more important than the first.
- Any additional large sources of taxation should not be simply bolted on. The layers of pork and exceptions in our complex tax code require a re-thinking. Unfortunately, they are so load-bearing on
society'sinvestors’ expectations that I don't think it's possible to overhaul them. Being incremental just means more taxes without addressing what's fundamentally broken.
Which begs the question through all this haze…what is fundamentally broken?
This is a zillion-dollar question to which a single answer would discredit the respondent who fell for such a framing. But living in CA, I think I see a clue.
The California Clue
I love living in CA despite its fiscal framework. CA is what you'd get if you told Wario to design public finance. Let me get this straight... a young worker with a good job will pay nearly 50% in combined Federal and State taxes, while an absentee landlord living in Orange County has plenty of time (the app he uses to collect the rent is built by the young worker, by the way, saving the landlord the indignity of paperwork and trips to the local Wells Fargo branch) to scream at "lazy bums" to pick themselves up by their bootstraps, all without a shred of self-awareness about his grandparents' fortunate decision to buy a regular house in Newport that's now worth 8 figures and is protected by Prop 13 from high carrying costs?
My mother bought a house in NJ for $70k in 1982. It has appreciated 5x for about a 4% CAGR. She paid 2% property taxes reassessed every year. In real terms, she lost money. But she had a roof over her head.
An equivalent house in CA cost about the same in 1982. I know because she and her father tried to move us to the Bay Area 40+ years ago. They couldn't find jobs out west, so I was raised in NJ. You could have thrown $70k at nearly any house in the Bay Area in 1982, and it's worth seven figures today. And the property taxes can be safely rounded to zero because of Prop 13.
In CA, the reward for getting lucky once was to get to stay lucky. In other words a landed gentry. Meanwhile, family formation in Bay Area suburbs is limited to millennials or zoomers who will inherit their parents' homes and that sweet stepped-up basis. The ladder is officially pulled up. The rentier is on top while the worker falls behind on the treadmill down below.
CA’s fiscal dysfunction likely has many causes. But the output is plain to see — it’s a state that gives preference to building wealth through capital appreciation instead of labor and the real estate market has internalized that logic. But real estate, in particular, land should be considered a reserved word to use a coding analogy. Thinking land is just another form of capital, like a computer or factory is a subtle but profound error.
To understand why, we will journey back to the late 1800s to meet the economist and philosopher, Henry George.
The Principles of Georgism The primary way we will learn about Henry George’s framework is through a book review of George’s seminal work Progress and Poverty (1879). Before diving into that let’s set the table with Wikipedia.Moontower Refactors Lars Doucet’s Review of Progress & Poverty
From the Georgism wikipedia
Georgism is known historically as the single tax movement, an economic ideology holding that, although people should own the value they produce themselves, the economic rent derived from land—including from all natural resources, the commons, and urban locations—should belong equally to all members of society. Developed from the writings of American economist and social reformer Henry George, the Georgist paradigm seeks solutions to social and ecological problems, based on principles of land rights and public finance which attempt to integrate economic efficiency with social justice.
Georgism is concerned with the distribution of economic rent caused by land ownership, natural monopolies, pollution rights, and control of the commons, including title of ownership for natural resources and other contrived privileges (e.g. intellectual property). Any natural resource which is inherently limited in supply can generate economic rent, but the classical and most significant example of land monopoly involves the extraction of common ground rent from valuable urban locations.
Georgists argue that taxing economic rent is efficient and equitable. The main Georgist policy recommendation is a tax assessed on land value, arguing that revenues from a land value tax (LVT) can be used to reduce or eliminate existing taxes (such as on income, trade, or purchases) that are unfair and inefficient.
The concept of gaining public revenues mainly from land and natural resource privileges was widely popularized by Henry George through his first book, Progress and Poverty (1879). The philosophical basis of Georgism draws on earlier thinkers such as John Locke, Baruch Spinoza and Thomas Paine.
Economists from Adam Smith and David Ricardo, to Milton Friedman and Joseph Stiglitz, have observed that a public levy on land value does not cause economic inefficiency, unlike other taxes. A land value tax also has progressive tax effects. Advocates of land value taxes argue that they would reduce economic inequality, increase economic efficiency, remove incentives to under-utilize urban land and reduce property speculation.
Georgist ideas were popular and influential during the late 19th and early 20th century. Political parties, institutions and communities were founded based on Georgist principles during that time. Early devotees of Henry George's economic philosophy were often termed Single Taxers for their political goal of raising public revenue mainly or only from a land value tax, although Georgists endorsed multiple forms of rent capture (e.g. seigniorage) as legitimate.
With that bit of background, we will now turn to a book review which is less of a review and more of a Cliff Notes to Progress and Poverty. The anonymous author of the review submitted it for a contest. It shines in its thoroughness, clarity, and how it weaves in other sources to enrich the context.
I encourage readers to read the full review (I haven’t read the book itself but that would obviously be recommended). But in fractal appreciation of time and priorities, I hope you find this summary of a review of a book to be helpful. I created it as a personal reference because I’m sure I will want to revisit them as I assimilate the ideas into my broader understanding.
Learn MoreMore from Lars DoucetOn GeorgismOn Distributism (a close cousin to Georgism)
- My substack post distills why this is a worthwhile topic
The Monopoly Connection
In 1903, Elizabeth Magie applied for a patent for what would later be known as "The Landlord's Game," which was granted in 1904. The game is played on a board that is strikingly similar to the modern-day Monopoly board, where players move around a track, taking ownership of properties and charging rent to those who land on them. The Landlord's Game was originally designed to demonstrate the damage that a system allowing the monopoly of land ownership can cause, and to highlight how some of that damage can be avoided with the use of land value tax, as Georgism dictates.
The game existed in two separate versions.
The first version is essentially modern-day Monopoly, where players move freely around the board, acquiring as much property as possible and grinding other players down to the point where they are forced to sell their own lands. The winner is determined by who ends up with everything at the end. This version was supposed to represent the current system that Americans were living under, and the goal was to show how horrible a system like this can be for everyone except the person who ends up with the monopoly.
Once the players had been subjected to the drudgery of the first version of the game, Magie would introduce the second version of the game that followed Georgist principles. The anti-monopolist, Georgist version of the game not only showed that land tax would prevent one person from running away with everything and leaving all the others destitute at the end, but it also had a more cooperative end goal, with the win-state being when the player with the lowest monetary amount had doubled their original stake.
If it's not clear already, "The Landlord's Game" is the Monopoly that we all know today. However, you may not have heard of Elizabeth Magie before today. She is not credited as the original designer, and until the 1970s, her design was entirely lost to the public eye. But how did this happen? Enter a man named Charles Darrow.
[This is excerpted from the video version of Why does everyone hate Monopoly? The secret history behind the world’s biggest board game (Dicebreaker)]
Check out the rest of the video to learn the controversial and impossibly ironic history of the Monopoly game you grew up with.
- How Henry George’s Principles Were Corrupted Into the Game Called Monopoly (LandReform.org)
- Landlordsgame.info: A giant resource devoted to the rules, story, and legal proceedings surrounding Monopoly and its predecessor Landlord’s Game.