Martin Wolf says we’re not thinking big enough about the real estate crisis. And he’s thinking Big indeed, saying that incentives for resources like property ought to be reversed to discourage the rent-seeking that distorts economic growth.
In 1984, I bought my London house. I estimate that the land on which it sits was worth £100,000 in today’s prices. Today, the value is perhaps ten times as great. All of that vast increment is the fruit of no effort of mine. It is the reward of owning a location that the efforts of others made valuable, reinforced by a restrictive planning regime and generous tax treatment – property taxes are low and gains tax-free.
I have long been persuaded that resource rents should be socialised, not accrue to individual owners. Yet, as Mr Harrison tellingly remarks, “as a community we socialise our privately earned incomes (wages and salaries), while our social income (from land) is privatised.” Yet, whatever one thinks of the justice of this arrangement, the practical consequences have become calamitous. Do we want to start yet another credit-fuelled property cycle as soon as the debris of the present one is cleared away, some years of misery hence?
If “a crisis is a terrible thing to waste”, here is an urgent case for action. Socialising the full rental value of land would destroy the financial system and the wealth of a large part of the public. That is obviously impossible. But socialising any gain from here on would be far less so. This would eliminate the fever of land speculation. It would also allow a shift in the burden of taxation.
Of course it will never happen, but it’s fascinating to see this argument laid out by a mainstream economic thinker like Wolf.
— The Wall Street Journal reports that Bank of America “incorrectly hid” quarter-end transactions similar to Lehman’s Repo 105 ones, but which were much smaller.
The bank’s disclosure also suggests the trades may be an example of end-of-quarter “window dressing” on Wall Street, in which banks temporarily shed debt just before reporting their finances to the public. The practice, which The Wall Street Journal has uncovered in a series of articles, suggests the banks are carrying more risk most of the time than their investors or customers can easily see, and then juggling it during quarter-end reporting of financials.
ProPublica points out that this raises questions about what BofA told it a few months back:
How is it that the bank can say it believes its “actions are consistent with all applicable accounting and legal requirements” while also admitting accounting errors to the SEC?
It can, but it shouldn’t.
— Ross Douthat calls for a “conservative class warfare” and that “conservatives need to recognize that the most pernicious sort of redistribution isn’t from the successful to the poor. It’s from savers to speculators, from outsiders to insiders, and from the industrious middle class to the reckless, unproductive rich.”
In case after case, Washington’s web of subsidies and tax breaks effectively takes money from the middle class and hands it out to speculators and have-mores. We subsidize drug companies, oil companies, agribusinesses disguised as “family farms” and “clean energy” firms that aren’t energy-efficient at all. We give tax breaks to immensely profitable corporations that don’t need the money and boondoggles that wouldn’t exist without government favoritism.
And we do more of it every day. Take Barack Obama’s initiative to double U.S. exports in the next five years. As The Washington Examiner’s Tim Carney points out, it involves the purest sort of corporate welfare: We’re lending money to foreign governments or companies so that they’ll buy from Boeing and Pfizer and Archer Daniels Midland. That’s good news for those companies’ stockholders and C.E.O.’s. But the money to pay for it ultimately comes out of middle-class pocketbooks.
Perhaps there’s a Grand Bargain to be struck. Somehow I doubt it.