by Fred E. Foldvary

When Germany established colonial territories in Africa and the Pacific towards the end of the 1800s, they developed roads and harbors, which increased commerce, which then increased land values. Speculators rushed in to buy land, and they captured much of the gain from the government's spending.

In 1898 the German Empire acquired a colony in China, Kiaochow (pronounced “kyaaw chaaw,“ now spelled Jiaoxian or Jiaozhou), located in Shangdong (formerly Shantung) province by the Yellow Sea. Its main population center was the fishing village of Tsingtao (now spelled Qingdao). The Imperial Commissioner for Kiaochow, Ludwig Wilhelm Schrameier, sought to prevent the land speculation that occurred in the other colonies. He enacted a single tax of six percent of land value. This prevented the subsidy to land speculation, and with no other taxes, Tsingtao developed into a splendid city. Japan captured it at the beginning of World War I. This ended German rule, but you can still taste the German legacy by drinking Tsingtao beer.

This lesson has been ignored in New Orleans. Land speculators are rushing in where governments fear to tread. They are speculating that New Orleans will rise again, as President Bush vowed there in his September 15 speech to the nation. Speculators are sending big money to real estate agents in the city to buy up depressed land. Homeowners who were flooded out and need cash are willing to sell at low prices. Shrewd land speculators know that land in the city is a bargain.

This is no free-market transaction. Congress has voted to spend many billions of dollars to restore the city. The total spent by all levels of government may well be over $200 billion. Without this governmental expenditure, private enterprise would have to spend the money, which would reduce profits, and thus reduce what residents and businesses bid to rent land.

The government spending reduces the private costs of rebuilding and also subsidizes the protective levies and pumps that keep the water out of the lowlands of the city. This subsidy does not go to wages, because workers are mobile and will go to where wages are higher, pushing them back down to the national level. The subsidies also do not go to the owners of competitive business, since enterprises are also mobile and will go where the profits are, pushing down profits to a normal level.

It is land rent that gets the subsidy, since land cannot be imported or expanded to take advantage of the subsidy. The rental subsidy can be eliminated if governments tap it for public revenue. But unlike Kiaochow, the governments of the USA, Louisiana, and New Orleans all fear to tread upon the domain of public revenue from land-value. Governments eagerly tax wages and sales because they are paid by the many, a bit at a time. In contrast, the concentrated landed interests who will own the commercial sites of New Orleans have a great incentive to organize and promote their special interest -- rising land values paid for by taxed workers!

With much of the housing and business in ruins, the supply of usable real estate around New Orleans has shrunk, and rents have nowhere to go but up. Government officials and business hired for rebuilding need to live in the area also, and increase the demand. This is a bonanza for the landlords, who gain from the disaster and the government spending.

Given that the federal, state, and local governments will spend the billions of dollars to bring New Orleans back, the efficient and equitable way to finance this is to tap the rising land values and rents of the Gulf region. President Bush has proposed a "Gulf Opportunity Zone" for Louisiana, Mississippi and Alabama, with loan guarantees, aid for home building, etc. The site values there should be tapped to help pay for this. Indeed, rather than increasing government debt and interest payments on the debt, the federal government could levy a special assessment on the land holdings of the country. As a substitute for government borrowing, this would be a beneficial revenue subsitute rather than an increase, since government borrowing is ultimately somebody’s tax.

If you wish to promote tapping land value to pay for the Gulf Zone government spending and avoid the subsidy to land speculators, send government officials a postal card with just one word: Kiaochow. If they get lots of postcards with "Kiaochow" printed big, they will wonder what’s up, and the media will notice, and find out about the Kiaochow solution. I think that's better than wordy letters that nobody will read or understand.

This article first appeared in the Progress Report, www.progress.org. Reprinted with permission.

Dr. Fred Foldvary teaches economics at Santa Clara University and is the author of several books: The Soul of Liberty, Public Goods and Private Communities, and the Dictionary of Free-Market Economics.