The paper “The hidden rent-seeking capacity of corporations”, published in International Journal of Social Economics has been selected by the journal’s editorial team as the Outstanding Paper in the 2015 Emerald Literati Network Awards for Excellence.
By Henri De Groot, Gerard Marlet, Coen Teulings, Wouter Vermeulen
Only a few decades ago many talked about the ‘death of cities’. Today, many cities have emerged as hubs of economic activity. This column argues such a phenomenon is due to spill-overs and agglomeration of human capital. The popularity of certain cities is explained by their attractiveness for innovative enterprises and high-educated top talent. But since locations where top talent clusters are scarce, land rents on these locations are high.
“Ask an economist about which are the most efficient kinds of taxes, and property taxes will be high up on the list. They distort behaviour less, and are more growth friendly, than taxes on income, employment or even consumption.”
The mentioned tax should more properly be called “land value tax” instead of “property tax”.
A recent report, written by Nobel laureate economist Joseph Stiglitz along with Roosevelt Institute fellows Nell Abernathy, Adam Hersh, Susan Holmberg, and Mike Konczal — sheds another light on the contemporary economic problems.
It is not just one of distribution, the report argues. In fact, the economy is fundamentally broken, shot through with opportunities for the rich to get richer not by building wealth but through exploitation and taking.
The problem, Stiglitz and his co-authors write, is that the rise in wealth isn’t coming from productive investments. It’s coming from what economists call rents. Stiglitz and his co-authors apply the rent concept, which was originally connected with land, on a wide and more modern array of rents (such as patents or copyrights).
“Rent-seeking”, as economists call it, is generally viewed as economically counterproductive. It’s especially counterproductive when it becomes so lucrative as to provide a more attractive outlet for people’s money than real investments. The report’s authors argue that’s exactly what’s happening with Wall Street. Its growth has fueled a big rise in credit — credit that tends to go to those who already have wealth, often in the form of rents, exacerbating existing rent-based problems. Financiers have also identified novel ways to rent-seek.
Also the “too big to fail” status, for example, can count as a rent. It increases the value of firms like Goldman Sachs or JPMorgan Chase not by making them more productive, but by providing an implicit government subsidy. Trading mortgage-backed securities for profit, similarly, does little to actually increase wealth but a lot to redirect it. That makes it attractive as a business activity for banks and hedge funds, redirecting their energies from profitable activities that create wealth.
The report, originally published on May 12 by the Roosevelt Institute, can be downloaded here:
Another strike against the argument of Piketty: In a recent paper, launched by Knoll, Schularick and Steger (2014), a different channel of redistribution of wealth has been stressed. The article is tied to the work of Bonnet et al. (2014), who have shown that the late 20th century surge in wealth-to-income ratios in Western economies is largely due to increasing housing wealth. Moreover, in a recent study, also Rognlie (2015) established that (net) capital income shares increased only in the housing sector while remaining constant in others sectors of the economy.
In contrast to Piketty (2014), the authors show that higher land prices can push up wealth-to income ratios even if the capital-to-income ratio stays constant. The critical importance of land prices for the trajectory of wealth-to-income ratios evokes Ricardo’s famous principle of scarcity: Ricardo (1817) argued that, over the long run, economic growth profits landlords disproportionately, as the owners of the fixed factor. Since land is unequally distributed across the population, Ricardo reasoned that market economies would produce rising inequality.
The paper of Knoll, Schularick and Steger (2014) traces the surge in housing wealth in the second half of the 20th century back to land price appreciation. The paper presents annual house prices for 14 advanced economies since 1870. Based on extensive data collection, they show that real house prices stayed constant from the 19th to the mid-20th century, but rose strongly during the second half of the 20th century. Land prices, not replacement costs, are the key to understanding the trajectory of house prices. Rising land prices explain about 80 percent of the global house price boom that has taken place since World War II. Higher land values have pushed up wealth-to-income ratios in recent decades.
The paper of Knoll, Schularick and Steger can be downloaded HERE (please click)
Bonnet, O., P.-H. Bono, G. Chapelle, and E. Wasmer (2014): Does Housing Capital Contribute to Inequality? A Comment on Thomas Piketty’s Capital in the 21st Century, Science Po Department of Economics Discussion Paper.
Knoll, K. / Schularick M. / Steger, T. (2014): No Price Like Home: Global House Prices, 1870 – 2012, CESifo Working Paper No. 5006.
Piketty, T. (2014): Capital in the Twenty-First Century, Cambridge: Harvard University Press.
Ricardo, D. (1817): Principles of Political Economy and Taxation.
Rognlie, M. (2015): Deciphering the Fall and Rise in the Net Capital Share, Brookings Papers on Economic Activity.
The meaning of land as a factor of production has been disguised successfully by neoclassical economics for more than one century. Meanwhile, the concern over land has come roaring back. The issue is not overall scarcity, but scarcity in specific places—the cities responsible for a disproportionate amount of the world’s output.
The good news is that the high price of land in these places is
in part an unavoidable concomitant of success;
and largely an “artificial” problem, caused by land use regulations.
The bad news is that
such land use regulations are necessary in order to internalize external costs of land use;
the problem is a hardly soluble one. One estimate suggests that since the 1960s such distortions have reduced America’s GDP by more than 13%.
The topic is illustrated very well in the article of The Economist, published at April 4th:
Note: This article is subsequently published in an English and a German version. Dieser Artikel ist unten stehend in einer englischen und einer deutschen Version veröffentlicht.
Although in Germany a reform of the property tax is on the political agenda, there is almost no public discussion about changing it into a land value tax. Even tax experts are not familiar with this concept, and many of them even never have heard the name Henry George. The campain “Grundsteuer: Zeitgemäß!” is so far without big response in politics.
The situation in the English speaking world is quite different. In this week’s print edition, The Economist takes a look at land and its importance as a factor of production. In particular, it is discussed why poor land use in the world’s biggest city carries a huge cost. Many economist have therefore argued for a land-value tax, which could be used to make the market for land more efficient.
Obwohl in Deutschland die Reform der Grundsteuer auf der politischen Agenda steht, findet so gut wie keine Diskusssion statt, ob diese nicht besser in eine Bodenwertsteuer abgeändert werden solle. Sogar Steuerexperten sind mit diesem Konzept nicht vertraut; viele von ihnen haben den Namen Henry George niemals gehört. Die diesbezügliche Initiative “Grundsteuer: Zeitgemäß!” wird im politischen Spektrum bislang nicht wahrgenommen.
Die Situation in den englischsprachigen Ländern ist diesbezüglich vollkommen anders. In der Druckausgabe dieser Woche wirft The Economist einen Blick auf Land und seine Bedeutung als Produktionsfaktor. Insbesondere wird diskutiert, warum Defizite in der Bodennutzung in den größten Städten der Welt hohe Kosten nach sich ziehen. Viele Ökonomen haben daher für eine Bodenwertsteuer plädiert, die den Bodenmarkt effizienter machen könnte.
The article describes why poor land use in the world’s greatest cities carries a huge cost. It is written in an excellent, understandable way. Among others, the impact of zoning on land prices is discussed and land value taxation is promoted.
All over Europe, small parties have sprung up to register discontent with austerity. People are fed up, and they are determined to voice their opposition to mainstream politicians who have no solutions to persistent problems.
Syriza was the first to make the breakthrough, but the people of Greece will end up realising that the party-from-nowhere is also bereft of ideas.
Podemos may be the next to make it to the big stage, in the Spanish elections next year. But, as of today, they don’t have better answers than the Syriza politicians who are currently being humiliated by the IMF and Europe’s finance ministers.
But these and the other new parties will not endure, unless they come up with a Big Idea. Can they? That’s the only way to break through into the mainstream. What happened in Britain is revealing.
In the 19th century, the minority Liberals made the breakthrough to government with Free Trade as their Big Idea.
In the 20th century, the embryonic Labour Party made the breakthrough with its big idea – socialism was going to cure all.
The Liberals, and Labour, have now been humiliated by events. They failed to make the difference to the recurring booms and busts and human degradation, which stem from a set of rules that manifests itself in the economics of apartheid.
There is one big idea only left to be picked up: reform the finances of government, to liberate people in the workplace. That would automatically trigger the rehabilitation of both the extended family and both the material and cultural fabric of communities.
Furthermore, removing the taxes that debilitate and distort both the economy and interpersonal relationships in a million-and-one ways would soon be perceived as the one strategy that can launch the process of renegotiating the terms of deployment between nations.
It’s a simple idea. It boils down to a homely proposition, one that governs our private lives: keep what you create, pay for what you receive. But it constitutes a revolutionary challenge to those who occupy the seats of power. It forces transparency on “the system”, and makes politicians accountable for their actions.
Doesn’t that sound like the Big Idea for a small party wanting to make it into the big time?
The original text is published in Fred Harrison’s Blog