Landowners Indulged with Trillion-Dollar Subsidy

by Fred E. Foldvary

If there were ever any doubt that government is instituted by the landowners for the landowners and of the landowners, the trillion dollar subsidy being granted to landowners should confirm the proposition. It should show this, but it will not. People don’t learn from history, and when they do, they learn the wrong lessons.

Having already stepped in with hundreds of billions of dollars to save firms such as AIG and to ease the losses of landowners, the US federal government is about to spend another $700 billion to buy delinquent mortgages, to bail out the lenders and some of the borrowers. The wrong lesson that politicians, government chiefs, and even economists are learning is that there was insufficient regulation. We hear from candidates and Congressional chiefs that the free market failed, that a lack of regulations resulted in markets gone wild.

The thinking is wrong because first of all the vocabulary is misleading. The central issue is not regulation, but intervention. This linguistic confusion is deliberate. You will never hear a politician say that there was too little government intervention.

Intervention includes taxation, subsidies, and restrictions on peaceful and honest human action. The politicians who cry that there was no regulation seem to think that the Securities and Exchange Commission, the Federal Reserve, the Treasury Department, the Department of Housing, and the state agencies that regulate insurance companies, all do not exist.

The bigger interventions are punitive taxes and giveaway subsidies. Taxes on labor, enterprise, and goods create a social waste called an “excess burden” or “deadweight loss.” Subsidies also create a deadweight loss because the tax cost is always greater than the gain in well being. By reducing the cost of an item, the subsidy gets folks to buy or use it who would not obtain it at the higher market price, so resources become misallocated, going from more valued to less valued uses.

World-wide, the greatest government intervention is on land value. It is mostly an implicit subsidy, in the form of civic goods and services that make land more valuable. Most of taxation today ultimately falls on wages. A sales tax paid from wages is a tax on wages. The tenant-worker gets double billed, paying both a tax and higher rent. The landowner gets subsidized.

The business cycle is caused by the real estate cycle. During a speculative land boom, rising land values choke off investment in construction and durable goods, which creates unemployment and recession. The only way to eliminate the real estate and business cycles is to eliminate the land-value subsidy. Do that by tapping most of the site values or land rent for public revenue, while replacing punitive taxation.

But you will seldom, if ever, see any editorial in a major newspaper or magazine, or even any article in academic journals (other than the American Journal of Economics and Sociology) that explains how the land subsidy creates financial panics and economic recessions. “Free market” publications, other than Georgist or geoist, have also refused to publish such articles, as they don’t wish to irritate their landed sponsors. There is intellectual dishonesty and willful ignorance in the mass media and even among scholars about the role of land in the economy.

Professor Mason Gaffney uncovered the cause of this refusal to recognize the land problem in his chapter “Neo-classical Economics as a Stratagem against Henry George” in The Corruption of Economics. The corruption in economic thinking is so strong that no economic textbook mentions the capitalization of civic goods into land value. The use of site rents or land value for public revenue is usually ignored, and when it is mentioned, it is almost always criticized as impractical and insufficient. The role of land or real estate in business cycles is never mentioned.

And so not just the public and politicians but also scholars will not learn the lesson that the subsidy of land values, combined with financial manipulation by monetary authorities, creates a boom-bust cycle. The $700 billion mortgage rescue, on top of several hundred billion spent to bail out financial and real estate interests, is in essence another subsidy to landowners. They borrowed heavily to buy land, hoping that the land value would rise and make them rich, and now that land values have fallen instead, the taxpayers will take the loss.

The economy will recover and land values will rise again, just as they always have after each collapse. The 18-year cycle will continue, and the next financial waterfall will occur in 2026. The difference is that by 2020 the US government debt will be so sky-high that T-bills will no longer be super-safe, and in the financial panic of 2026, the government will suspend paying interest on its debt.

The gigantic subsidy to real estate is ultimately based on the unlimited borrowing power of the government. When borrowing power disappears, landowners will finally be left in ruins. But the previous landowners will have had the biggest party in global history.

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.