Friday, January 3, 2014

Wrong Ideas From Living Economists

I'm throwing out old books at my parents' place. One that struck me was New Ideas From Dead Economists: An Introduction to Modern Economic Thought by Todd G. Buchholz, who was George H.W. Bush's economic policy director, in 1989.

Predictably I turned to see what if anything he had to say about Henry George. It was bad. On the single-tax, he wrote:

There are several problems with the proposal. First, economists distinguish between "economic rent," which [David] Ricardo discussed, and the simple rent tenants pay landlords. According to Ricardo, economic rent is a payment beyond what is necessary to keep land or labor or capital in its present use. (78)

Buchholz should've found better economists. Economic rents are payments beyond what is necessary to put land or labor or capital to their most efficient uses, not just present uses. For example, workers tend to supply more labor as their wages increase, but this is not rent; it's productivity. Likewise, giving a worker a raise above inflation to do the same work is not necessarily a rent either because it might be that the worker was underpaid.

By contrast, because the quantity of land supplied by landowners is unaffected by changes in price, all "simple rents tenants pay landlords" are economic rents. This gets Buchholz into trouble later on:

Movie stars receive economic rents also. Let us say that Sylvester Stallone constantly makes the choice between acting and working as a professional seamster. If he received less than $30,000 per movie for acting, he would switch to sewing hems and cuffs. Thus if a new movie, Rocky Meets Rambo II in 3D, paid him $5 million, we would ray that $30,000 was "transfer earnings" and $4,970,000 was economic rent. Maybe Henry George would have been brave enough to take away all the rent.

No, the $30,000 is the opportunity cost Stallone "pays" for making movies instead of seaming. The $4,970,000 is a wage (or "transfer earnings" as an actor). If it only cost the producers $5,000,000 to hire Stallone, then anything above that would be a rent because the quantity of Stalloneness supplied by the actor doesn't increase even though the price does. As Stallone's movie income is not a rent, George would have no reason to take it away. I can't believe Buchholz got this wrong.

But how would Henry George know which part of the total payment is economic rent to be taxed? Here he would need even more heavenly help than he has revealed.

Gee, maybe he could ask real estate assessors how they separate building values from land values, or he'd look at a map of recent land purchases and calculate area land values. It's not like governments don't track that stuff, nor is it harder to measure land values than trust people to tell it how much money they made last year.

The single tax on land movement also faces moral hurdles to either leap or transcend. If fairness demands taxing economic rents, fairness requires taxing economic rents from land labor and capital. How would George distinguish between Stallone's transfer earnings and economic rents?

He wouldn't distinguish between transfer earnings and economic rents because Buchholz misunderstood the distinction. George would also point out that a single tax on land is in fact a single tax on land, not on labor or capital. Modern Georgists would tax all monopoly rents, but why this is unfair or a moral hurdle escapes me. That's why George advocated taxing it; unearned incomes are in fact unearned.

George fans can proudly point to property taxes as a source of state and local finance. But they cannot point as confidently as they could sixty years ago. George overestimated the future importance of rents and rental income.

If rental income is unimportant, then I offer to purchase all of Buchholz land (whether directly owned or indirectly capitalized via stock values) for one U.S. dollar.

It's funny when wealthy people say they don't have any money to pay taxes.
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