The Role of Ground Rent
in Urban Decay and Revival
[A paper delivered as the Henry George Lecture at the
Business Research Institute, St. John's University, New York. October
1988. Originally published November 1989]
YOU MAY THINK me an outlander but my parents were New Yorkers and
never forgot it. One grandfather even went to St. John's, although not
this St. John's -- it's what they once called Fordham in the Bronx,
now one of those dying cities we need to revive. He was to become a
priest and lead the celibate life. As you see, he was not equal to the
calling. His official obit tactfully says, "After leaving college
he enlisted in the U.S. Navy," but Aunt Fan wrote privately, "Papa
left Fordham before finishing and went to California where he taught
school. Fordham required mostly brawn, he said." Violence here is
He married late, so late a young man like me has a grandfather who
served in the Big War. That is not remarkable except that means the
Civil War. Ours is a family of long generations. My other grandfather,
the Yankee Presbyterian, lived in Brooklyn Heights when that was a
suburb for stockbrokers, and that goes way back too.
Now these old timers, to whom the past was only yesterday, spoke
always of New York City as the center of civilization. It was a
livable, optimistic place--a great, growing, vibrant, trend setting,
prospering, cultural city. A little crooked, sure, and
great-grandfather was probably no saint at paving streets for Tammany
Hall. But it had a present and a future, a life and a soul, not like
the dead-end hopeless despair of today's Bronx.
BUT WE'RE HERE to talk of the future. I'd like to see those good
times and better ones come again, preferably without the graft. And
we're here to review the ideas of another commuter between New York
and California, Henry George, and how his ideas might be used to
revive dead cities. Henry George was a journalist who taught himself
economics. He had a flowing pen and a brilliant mind, and his book,
Progress and Poverty, became and remains the all-time best
seller in economics.
People remember him today not for the volume of his sales, but for
the enduring quality of his ideas and proposals. The reform program he
worked out combines the magic of incentive with the magic of justice.
It comprises a plan not just to revitalize cities but to reunify
George's fans have boosted him for the Hall of Fame. It is ironic he
never made it. Not that he would have cared, a stone face was not his
style. The irony is that the Hall of Fame is now decaying and
abandoned in the Bronx, a setting also decaying and abandoned for
failure to use George's formula for keeping cities healthy and robust.
The Hall of Fame in the Bronx exemplifies a malignant propensity to
pour the national treasure into dead monuments while their living
matrices starve, rot, and crumble. For further evidence, tour the
purlieus of your state Capitol, contrasting the vulgar ostentation on
the marbled side of the street with the squalid reality on the living
Dead and Dying Cities
WHAT ARE THESE moribund cities? Some extreme cases are East St.
Louis, Camden, Benton Harbor (Michigan), Ford Heights (Illinois),
along with Robbins, Harvey, Gary, and Newark.
But more commonly and generally, large parts of once vibrant cities
are half dead, seriously blighted and trending downwards. One of these
is the South Bronx, which New Yorkers know well enough to avoid
knowing any better. In Milwaukee, it is the near north side, called
locally the "inner core," a galloping blight whose area I
have seen triple in the last 20 years while Milwaukee's population
dropped 20 percent. In Chicago, it is South State Street, only a few
blocks from the Madison Street crossing which for generations was the
most valuable corner in the nation. In Tampa, it is Ybor City.
Note that blight is not restricted to stagnant or declining regions
and cities. In booming Los Angeles, there is Watts. In nearby
Riverside, California, one of the fastest growing cities in the
nation, the central business district (CBD) is surrounded by blight
which, among other things, frustrates years of subsidies aimed at
reviving the moribund CBD itself.
But let us sound deeper to gauge the full mass of this iceberg. These
extreme cases are not just anomalies. They are more than ghettoes and
embarrassments; they are symptoms of systemic malfunction. They could
be portents and symbols for the rest of the economy. Blight may be
defined as a failure to maintain, to replace, and to renew the capital
inherited from the past. Many studies of American industry indicate
that it has this problem, compared with vigorous foreign competitors.
In learning to cure blight, we may learn to restore the greatness and
pride in this whole troubled nation.
Cities that Have Revived
THERE IS GOOD news too; some cities have risen from the grave.
Indeed, all land development is resurrection in some sense; all land
has been used before by someone for something from the beginning.
Trace the history of any city lot, and you'll usually find there were
several antecedent improvements, layered like the ruins of ancient
Troy. It is a matter of making renewal happen faster and more widely,
while we are still here to benefit.
Germany and Japan recovered from World War II with breathtaking
speed. Atlanta even recovered from General Sherman too, although in
its own courtly time. Chicago burned almost completely in 1871 leaving
90,000 people homeless, but recovered without breaking stride. San
Francisco and Anchorage recovered from devastating earthquakes.
Washington, D.C. recovered from the 14th Street riots and arson. The
basics were right; the locations remained good. The disasters may even
have helped by forcing the demolition of obsolescent capital and
releasing land for rebuilding. "Instant urban renewal" is
more than street jive; it can be true perception.
But some other revivals, less dramatic and publicized, are more
impressive and relevant to us because they are revivals from normal
decay and obsolescence, pushed along by good public policy, which we
can analyze and replicate. There is Southfield, Michigan, bordering on
Detroit and thriving and flourishing as fast as its parent central
city is dying. There is Rosslyn, Virginia, just across the Potomac
from D.C., a forest of high-rises that rose up while Washington was
burning and derelict during the 1960s. There is Sacramento,
California, whose once-depressing center has found new life. There is
Pittsburgh, of grimy repute, recently named the most livable U.S.
city. There are Hong Kong, Singapore, and Taipei, once best known as
rather fetid ports of call, now three of the "Four Tigers"
of Southeast Asia.
In all those modern success stories of economic and social
revitalization, we find the hand of Henry George at work, if we seek
out the local politics and policies. In Taipei, we learn they are
guided by the philosophy of Dr. Sun Yat-Sen, and if we read Dr. Sun,
we find he was an enthusiastic Georgist convert. In Pittsburgh, we
find a "graded tax plan," applied, framed, and supported by
something called The Henry George Foundation. Throughout Pennsylvania
today, we now see several smaller cities emulating Pittsburgh's
partial application of George's policies: Harrisburg, Scranton,
McKeesport, New Castle, Washington, and Duquesne. Fortune reviewed
their progress favorably in a 1983 article. Recently, steel-depressed
Aliquippa signed on too, as did Clairton. These once declining cities
bear close watching today as they bounce back.
Then there are cities of explosive growth after slow periods. These
include Sydney and Johannesburg, both notable for their use of
Georgist policies. Whatever their social faults, these two cities have
burgeoned to become the economic capitals of their respective
continents, an economic achievement hard to dismiss. There are several
other good examples, like Nairobi in East Africa and Brisbane and
Auckland in the Antipodes. Many cities of western Canada, including
Edmonton, Saskatoon, Victoria, New Westminster, and Vancouver, grew up
with partial use of Georgist policies in the early 20th century. Less
explicit application of Georgist policies was made informally (through
assessment discrimination) by Seattle, Portland, San Diego, Houston,
San Francisco, and many other growing western cities during the same
It is good to know degeneration and failure are not our predestined
fate. We may choose them, but we may also choose renewal and success.
It's a matter of attitude and know-how.
Why Cities Should Be Revived
SOME CITIES AND towns may and should be abandoned. Camps and towns
around played-out mines are obvious examples. Some small farm towns
and hamlets become redundant when roads let customers range farther
and patronize the larger or better towns. Salvage what you can and
Some would apply the same logic to all cities. Dead cities aren't
lost, they say, but are just rebuilt elsewhere. They were cash cows
that have been milked dry, meaning their depreciation allowances are
reinvested on new frontiers and the people and vitality moved with the
capital. That's a clever and important half-truth; but remember a
half-truth is also half wrong. The basic original site stays put; land
can't move. A lot of costly social capital, public and private, can't
We have little room left for throwaway cities in this finite world.
New natural sites aren't that common. There is only one water level
route west along the Mohawk, only one Hudson Valley with only one
mouth, and here New York City has stood for 350 years. We can't really
afford to kiss off the Bronx and build a duplicate environment
elsewhere. We can't rebuild the natural setting at all, and the sunken
social capital is too costly: shipping, docks, rails, the New York
Thruway, airports, streets, expressways, subways, water lines, power
lines, sewer lines, gas lines, phone lines, churches, schools,
bridges, tunnels, museums, Halls of Fame, universities. ...
Of course, we can replace the Bronx out at the east end of the Long
Island Expressway, but that means not only duplicating the
micro-infrastructure but adding the Expressway and corresponding trunk
lines for all the utilities, and paying the price or commuting in
time, fuel, pollution, auto and tire purchases, repairs, paint jobs,
insurance, gridlock, and traffic casualties. And then ultimately, when
we tire of the new suburbs, where do we go next?
Look at the Earth from a lunarcraft photo. There is only so much, and
we already have a big portion of the best temperate zone. This is our
Promised Land. "Don't blow it," God keeps telling Israel in
the Bible. "Don't think I'm giving you another Promised Land if
you can't handle this one." It seems a reasonable attitude. Nor
are other nations disposed to give up their crowded slices of this
small, scarce Earth for us.
Furthermore, these blighted areas have high potential market values.
Picture a topographic map of a city where the contour lines represent
points, not of equal elevation but equal market value per square foot
(psf). On this kind of topo map, the peaks, the Everests and
McKinleys, are in the city retail centers where just one square foot
rises to $2,000 (that's about $90 million per acre, and an acre is
about 91 yards on a football gridiron). Land just a few miles or
blocks away from such dizzying altitudes can hardly be worthless.
Harlem is near Park Avenue; Watts is near Beverly Hills; South State
Street is very near the Sears Tower. Newark is 15 minutes by train
from Manhattan. Newark office rents are $25 psf per year. That is
less, of course, than in Manhattan, but in Riverside, California we
are throwing up offices to get rent of $12 psf per year while Newark
The capital you invest that earns $25 psf is more productive,
obviously, than that yielding $12 psf. I don't mean the capital in the
floor atop the high-rise, because that is likely to cost $25 psf (in
annualized terms) to build and operate. I mean the capital in the
middle and bottom floors, which costs less to build but rents for as
much and yields a surplus. To get more such middles and bottoms, and
the corresponding surpluses, renew more land in those neglected areas
of high potential like Newark. Not to renew those lands is to waste
those potential surpluses. Each year's loss is lost forever, for the
services of land perish with the passage of time.
Shall we treat the Bronx as a residence of last resort for people who
can't afford anything decent? That's hardly necessary. To many people,
cities are the Big Apple--desirable locations of positive values and
strong magnetism. Rich foreigners come from around the world and pay
top dollar to locate in Manhattan, not because they have to, but
because they want to. So it is too with San Francisco, Miami Beach,
Beverly Hills, Newport Beach, Cambridge, and Georgetown. If they want
open country, there is plenty left in North Dakota, Texas, and
Nevada--but they want cities.
Urban revival works best when a healthy piece remains on which to
anchor new development. In the worst scenario, no such place remains,
but even Camden has Campbell Soup. Newark has a great airport, a new
Hartz Mountain Industrial Park, and the Prudential. Life is persistent
and resilient. Vital seedlings keep sprouting; they only want
sunshine, water, care, and cultivation.
The Urban Surplus
ONE OF THE reasons we remember Henry George was his pioneering work
on cities, how they work and what good they do. Previous economists
showed limited or no understanding of location value and its causes.
Even Heinrich von Thunen, father of location theory, approached cities
in an arid, antiseptic way that left out most of the sperm and egg,
enzyme and ferment that today we call urban linkages and synergy.
George was a mensch, like Holly Whyte or Jane Jacobs, seeing cities in
intensely human, interactive terms.
George saw cities as foci of communication, cooperation,
socialization, and exchange, which he considered the basis of
civilization. He saw cities as the new frontier, an endless series of
new frontiers, because the city as a whole enjoys increasing returns.
The presence of people with good mutual access associating on equal
terms expedites cooperation and specialization through the market.
Multivariate interactions in cities are synergistic. Indeed, while
each part -- each parcel of land -- is developed in the stage of
decreasing returns, the composite city is generally in a stage of
increasing returns, thanks to synergy. The whole is greater than the
sum of its parts; and increases to the whole yield more than the sum
of increases to the parts.
This synergistic surplus, says George, lodges in urban land rents.
Thus he explained an outstanding phenomenon of his times, which other
economists were overlooking completely: the unparalleled rise of urban
rents and land prices, and the wealth and power of the owners.
To the investor in a building, it looks like this. The first $10,000
he spends yields him 30 percent or $3,000; but he pays ten percent
interest or $1,000, leaving him a surplus of $2,000. To acquire the
superior location that confers that surplus, he'll pay up to $2,000
annually, which means he'll pay up to $20,000 for title to the land
(at ten percent, $20,000 will cost him $2,000/year).
Of course, the next $10,000 he spends may yield him more than ten
percent, say 20 percent, conferring more surplus and adding more value
to the land. But the idea is the same. He'll add to the building until
the last unit of $10,000 yields him just ten percent, enough to pay
interest and no more. (You have just taken a flying tour through the
theory of diminishing marginal productivity.)
To understand ground rents and land prices is to understand cities;
not to understand is to remain mired forever in confusion and fallacy,
to be gulled and misled and bamboozled, which is, indeed and alas, the
common lot of mankind. Let it not be yours.
These ground rents are annual, they continue forever, and they
generally tend to rise. To buy title to land, therefore, people pay
prices that look very high relative to current cash flow. In
Riverside, California, a city of low density and 208,000 people, land
prices go up to $18 per square foot. In San Francisco, a city of high
density and 800,000 people, prices go up over $1,000 per square foot.
In Manhattan, they go over $2,000. In Tokyo, probably the top of the
line, one sale is reported at $25,000 per square foot. (1) An official
agency has appraised the top value at $20,000 per square foot,
although this may be puffed up. But $25,000 per square foot is high
enough; urban land prices take your breath away.
Land prices vary extremely from city to city and block to block. The
actual cost of building a square foot of floor space is fairly
constant from place to place, but demand varies with location. A small
rise of floor space rentals translates into a large percentage rise of
ground rent and land price, because rent gets everything above what is
required to operate and amortize the building.
Thus in Riverside at a small neighborhood mall, a floor space rental
of $12 per square foot just pays for the building with only a little
left over to pay for land, resulting in land prices of perhaps $5 to
$8 per square foot. In Manhattan, rentals are triple or quadruple
those in Riverside with all the surplus going to ground rent,
resulting in land prices up to $2,000 per square foot, which are about
300 times higher than Riverside.
This is due to several factors. One is "leverage." Say the
annualized costs of constructing and operating a building are $11 per
square foot, whether in Riverside or Manhattan. That leaves $1 per
square foot for ground rent in Riverside ($12-$11), and $37 per square
foot in Manhattan ($48-$11). This factor alone makes Manhattan land
worth 37 times Riverside land.
A second factor is intensity. At the higher level of floor rents in
Manhattan, it pays to pack more floor space per acre, with high-rise
buildings. Also, in Manhattan there is little need to provide workers
and customers with parking space, while in Riverside six square feet
of free parking are often required for each square foot of floor
Other factors are the greater pooling of demand in the bigger
metropolis, which steadies its flow and gives more assurance of its
continuation and predictability. The commercial vacancy rate in
Riverside is pushing 30 percent.
In bigger cities at key locations, land prices are not just high per
square foot; they are higher per capita than in small cities.
Surprisingly, they are even higher relative to building values in
spite of the high rise buildings. Remember each added floor until the
top one adds more ground rent, because floor space rentals are more
than enough to cover the added cost.
Urban land is also highly concentrated in ownership, meaning a
handful of people and corporations own most of it. It is heavily
favored by absentees of great wealth who want to diversify their
holdings and acquire stable, secure wealth they can manage by remote
control, so today a growing share of income property is held by
aliens. Aliens even hold a good deal of residential property in
selected communities of international jet-set ambiance and repute,
places like Palm Beach, La Jolla, Greenwich, Belvedere, or Beverly
In comparing cities and neighborhoods, land prices are much more
differentiated than other measures economists commonly cite. The
median income in Upper East Side Manhattan is about eight times higher
than that north of Central Park. But the price of land per square foot
is probably 40 times higher. Margaret Reid presents many more
contrasts of the same kind (Reid 1962); so does Harold Brodsky in his
studies of Washington, D.C. (Brodsky:239). (2)
Sharing the Surplus
URBAN RENTS ARE a social surplus, not a payment in reward for
anyone's making or supplying land. So others than the landowner have a
claim. A good deal of American politics deals with how to assert that
claim and share that surplus.
It seems a pleasant enough problem, cutting up a big pie. The ancient
Chinese knew better: "It is easier to face a common enemy than
share a surplus," Confucius said. The common ways of sharing this
surplus are clumsy, divisive, and destructive. They bear some
responsibility for dead cities. With too much quarreling and gouging
over spoils, there are no more spoils to dispute. Macauley wrote
nostalgically in Lays of Ancient Rome: "Then lands were fairly
portioned; then spoils were fairly sold. The Romans were like
brothers, in the brave days of old." The same might be said of
New Englanders in the early 17th century, whose traditions we still
honor in word and name. But we have come a long way from brotherhood.
Let us see how spoils are shared now, and then how we might do better.
Looting and Graft
Looting is sharing by direct action. We had a bellyful of that in
1967, and its destructiveness needs no homily. Graft and patronage,
the basis of ethnic-populist political machines, are more tempered
kinds of looting which destroy incentives more quietly and
insidiously. Featherbedding, stealing, parasitic behavior of all
kinds, all cut into the surplus. The problem is they are blindly
indiscriminate; they cut into productive incentives, too. But the more
the surplus the more the temptation--the easier is the
self-righteousness that rationalizes looting and graft.
Rent control shares the surplus with tenants. It is a tempting route
and several cities follow it, including New York. Why not? Renters are
the majority. Many landlords are rich and remote; they work through
layers of faceless minions so you probably don't even know their
names. The managers are tough and tight so you have a lot of abuse and
negligence to avenge. Supply is inelastic, at least in the short run,
so the owners can't cut and run. Poetic justice is served. But there
are several spots on this policy.
- Limited number of beneficiaries. The original tenants carve out
an equity in the landlord's estate, but the benefits spread no
wider. Tenants may, and many do, sublet to others, becoming
landlords themselves. Rent control is at best a zero-sum game
among the few, not a social reform.
- Lower incentive to maintain supply. It becomes unattractive to
build new rental units. At first, these are allowed higher rents
but are vulnerable to future caps. So rent control is worse than a
zero-sum game; it becomes negative-sum.
What rent control confiscates is not just land-income, but
building-income too. Land is fixed, but buildings need maintaining and
replacing which they will not get if there is no return. Too, land can
be reallocated to uncontrolled uses; we all know about
condominiumization. The new wrinkle in Santa Monica is to buy a
rent-controlled apartment building cheap and convert it to a
single-family residence for the new owner.
- Wasted space. Tenants lose much incentive to economize on
space, because it is underpriced to them. In the extreme, some
tenants move away, but retain the apartment to use a few weeks of
- New class society. Old renters become a privileged class
vis-a-vis new ones in new units, which are temporarily
uncontrolled or controlled at a higher level. With the lower new
supply and wasted space, uncontrolled rents are forced up above
the free market level.
- Owner/tenant dashes. An owner's main goal under rent control is
to evict and repossess. The resulting nastiness and intimidation
have become routine, and the war stories legendary. In Tokyo,
outright extortion and violence are frequent.
- Aborted incentive to maintain and improve. Landlords lose all
economic motive to serve and to maintain, let alone to improve.
Tenants retaining precarious tenures have at most very limited
motivation even to maintain, let alone improve property.
- Dogged obstructionism. A sitting tenant cannot gain by site
renewal, but only faces eviction. Tenants therefore fight it every
way they can. A class is created of dogged self-righteous
obstructionists with a vested interest in the status quo, however
obsolescent, however decayed, however inappropriate to the site.
- Undertaxation. The equity that tenants carve out of the
landlord's estate has no market value, because it is inalienable
(at least legally). Assessed values therefore drop, and tax yields
drop correspondingly. The new privileged class not only gets
preferential low rents, but also avoids contributing any share to
support public services. The resulting higher tax burdens are
dumped on others; the worsened public services are suffered by
Rent control is usually conceived of in terms of urban land, but the
principle applies to other resources as well. I have personal
familiarity with the perverse effects of capping the price of both
water and energy.
I'm a small farmer with shares in a canal company, and the shares
give me the right to receive water far below the market price but no
right to sell my water. So my fellow shareholders and I do the only
thing the law allows: we waste water and collectively create that
chronic artificial crisis called the southern California water
shortage. I'd be better off to have the state tax the water, raise the
rates, and use the money to raise the salaries of -- well, how about
University of California professors?
The Federal Power Commission (now FERC) has long done the same thing
with gas and earlier with oil, capping the field prices. Their Chief
Economist, David Schwartz, opened my eyes to the moving spirit behind
the policy when he joined a conference I sponsored in Vancouver. Our
subject was how British Columbia (B.C.) might best collect rents from
gas flowing from provincially owned wells. Dave Schwartz is a likable
gentleman, selflessly dedicated to the public weal, but he grew
impatient and finally blurted, "Lets not collect rent; let's cap
the price and eliminate rent." That one foolish remark suddenly
flashed more light onto 20 years of FPC regulation than tomes of NBER
studies, They actually had so little understanding as to believe and
act on that notion. By doing so they contrived to create, among other
problems, the great gasoline shortage of the 1970s.
The rationale with housing, water, and energy all three is that these
basics are too important to leave to the market and must be
price-controlled. The result is to create systems of regulation much
worse than anything a market could accomplish. Mound 1973, there was
also a great coffee crisis, a dearth of raisins, and even a crisis in
toilet paper. These were too unimportant to regulate so their prices
rose, demand fell, supply rose, and the crises quickly disappeared
without a trace or a memory. Rent control ensures that we will not
ever overcome the housing crisis so simply or at all.
"French Equity" (Equity in Kind)
Under the Code Napoleon, every French testator must divide his real
estate equally among all children. There is no substituting money for
land; the Code requires equity in kind, and nothing else will do. The
resulting fine subdivision is called
morcellement, and the Code demands it with no regard for
efficiency. It goes further. Each heir must get an equal share of land
of each quality: meadowlands, pastureland, woodland, etc. The even
finer subdivision is called parcellement, which was once
carded (like most human error) to absurd lengths.
Today, we approach "French Equity" indirectly and
expensively. First, we distribute the land haphazardly, but then seek
to make every parcel as good as every other. We do so by extending
public utilities and roads to every parcel on the same terms,
regardless of location and differential costs of service. A familiar
example is the U.S. Postal Service, and it has given its name to this
kind of pricing, called by economists "postage stamp pricing."
Here are some quick examples.
- B.C. Ferry Service. This socialized system has two main lines
to its Big Apple that make money: Vancouver-Victoria and
Vancouver-Nanaimo. But the whole system hardly breaks even because
there are some dozen lesser lines serving small islands and
peninsulas. The worst of these costs $12 for every dollar of
revenue. The losses are made up from the profits of the trunk
lines. The generic name for that is cross-subsidy.
- B.C. Hydro. This socialized power system serves the entire
province, an area so vast it exceeds those of California, Oregon,
and Washington combined. Its rates are uniform throughout. Half of
the people live in Vancouver at high density and are cheap to
serve. A few live up north on the Yukon border where (I surmise)
it costs several hundred dollars to earn one dollar of revenue.
That is cross-subsidy.
- Water and sewer service in Milwaukee County, Wisconsin. Here
the city investments have been captured, controlled, and milked by
suburban interests, with a lot of help from the state legislature.
Capacity in the city plants is taken up to serve the suburbs, and
capital is poured into long interceptors (trunk lines) linking
suburban land developments to city plants. That is cross-subsidy
and has been called worse things.
- College and university campuses. The legislative ethic demands
something for every electoral district. Not every assemblyman
requires a college campus, for there are other prizes too, but the
horse trading process seems to spawn too many. Just now we have
eight UC Campuses, most of them with excess land, a few with
excess floor space. Faced with rising enrollment, the preferred
solution in Sacramento is not the lower-cost option of
intensifying, improving, and staffing existing campuses, but the
higher cost option of creating new ones. Each will enrich some
influential land speculator and tantalize a hundred others who are
busy lobbying for the new spoils.
- Water supply in California. To summarize a complex tale, the
low real cost of serving older settled areas is passed on to new
settlements through an accounting device called "melding,"
a nice name for shutting your eyes and stirring all the accounts
in the same pot. Melding passes through several levels: a state
wholesaler serves the Metropolitan district, which serves local
districts that serve cities. But the net result I have calculated
is this: at the end of the line in Riverside, it costs society
$1,800 to serve the marginal acre-foot (a unit of water) which
sells for $20. That is cross-subsidy. It is worth fortunes to
people developing land at the end of the line; the cost is spread
over everyone else so they won't notice. Professors are supposed
to keep quiet about it, but some of us never learn the rules.
- Postal service. How we love to dump on the postal service for
raising rates and to moralize about the inefficiency of
government. But do the harassed clerks really deserve the entire
onus? Manhattan has 64,000 residents per square mile, plus the
daytime population; Montana has 5.4 per square mile. It obviously
costs a lot more to collect and deliver the mail in Montana. The
main reason postal rates rise is because the whole U.S. urban
population is spreading out more like Montana and less like
Manhattan (which once had over 100,000 per square mile). Henry
Schechter calls it the "cost-push of urban sprawl."
What's Wrong with "French Equity"?
There are two big problems with cross-subsidy as an approach to
equity. First, it is not equitable; second, it is wasteful and
The kind of equity achieved by regional cross-subsidies is not
interpersonal, but inter-regional. It is something like Washington's
programs of "foreign aid," which tax poor people in rich
countries to aid rich people in poor countries. Some of the main
beneficiaries are among the richest people and corporations in the
country and world.
Here are a few who hold speculative land and enjoy subsidies on the
growing fringes of southern California. Largest is probably The Irvine
Company, owned by Donald Bren, among the 20 richest Americans on
Forbes' latest list. This company holds some 70,000 acres in Orange
County, including and surrounding Newport Beach, Irvine, and Corona
del Mar. Others include Robert Campeau, who recently acquired
Federated Department Stores; Chevron; Edward J. De Bartolo, also high
on Forbes' list; Kaiser Development Bedford Properties; Connecticut
General Life; Mobil; Lusk Realty; Bell Canada; Southern Pacific; Union
Pacific; Cadillac Fairview (Olympia and York); Bank of Montreal; the
Hunt oil family; and Newhall Land. The list goes on, but you see the
point. Equity is not served by milking middle class neighborhoods to
enrich owners like these. "Public works for private gain" is
bad enough, but worse when the profiteers are already the richest.
How about efficiency? Subsidy creates waste in the amount of the
subsidy, almost by definition. Spread City, by the New York Regional
Plan Association, estimated that the social cost of creating one new
lot at the metropolitan fringe is four times (4x) the value of the lot
(and that is probably an underestimate, for the truth is so awful many
readers would block it out or blame the messenger for the bad news).
Why do people develop lots worth only one quarter of their cost?
Because other people are paying the other three-quarters.
This process does transfer ground rent from areas of overcharge to
areas of undercharge. But in the process, it simply destroys much of
the ground rent, a process known to economists as "dissipation of
rent." To spread the surplus, we lose much of it.
Being neither equitable nor efficient, has "French Equity"
any kind of merit? Once it passed for a way to make jobs, in the salad
days of J. M. Keynes, when he actually urged waste as a route to full
employment. Those ideas are now dormant, but we still don't have the
feel of it. If we had to fire a few teachers or policemen each time
some city council yields to a major campaign donor and extends
utilities to his raw acres, we would better sense the true cost of
these "public works for private profit."
Sharing Surpluses Constructively
IT IS IN fact possible to mobilize the social rent surplus and put it
to good use without waste. It is possible to create a just society of
people unified and bound together in mutual satisfaction with the
terms of their association, without contempt for their own government.
People do care about justice, always have and always will. They have
funny ways of showing it sometimes: just now we're absorbing the "me
generation," but this too shall pass. The problem is the older
sharing-caring generations did some fuzzy thinking and foisted on us
some clumsy, wasteful, and counter-productive ways to share and care,
including substantial exploitation of the new generation they now
brand as selfish. The "me generation" reacts against the
stupidity and hypocrisy, not the noble impulse itself.
Rent will be shared, one way or another. Chicago economists preach
that economists should only care about getting resources allocated
efficiently to maximize the national product. "Entitlements"
they say are arbitrary and don't much matter, just so they are clear
and definite and everyone knows exactly what he owns and can trade it
freely. In practice, that means leave them as they are today, whatever
their origins. But life doesn't work that way. Eager supplicants swarm
around rent like flies around fresh pie.
The key to renewing cities is shifting from obstructive ways of
sharing rent, like rent control, and the destructive ways, like
looting and cross-subsidy, to constructive ways.
George's Constructive Program
THIS BRINGS US to Henry George, for whom these lectures are named. He
showed us how equity and efficiency go hand in hand: how to combine
the magic of justice with the magic of incentive.
First, by George, equity need not be in kind, that's clumsy. Use the
monetary mechanism, that's what it's for. If you and your brother and
two cousins inherit a house sized for one family, you don't crowd all
four families in; you sell and divide the money. Or one buys out the
others. There is equity in money as well as real estate. Money is
often better; you can reinvest it anywhere. It puts your house on a
magic carpet to follow you around. Money is wonderful! (Just take care
not to blow it.)
Second, by George, use the tax mechanism. Don't divide land into
unusable morsels; don't shackle the market with rent controls; don't
dissipate rent in cross-subsidies. But turn land over to the highest
bidder, and tax ground rents to support government.
Taxing ground rent produces a range of social dividends. First, it
overcomes the traditional trade-off between equity and efficiency by
achieving both simultaneously. Second, it promotes renewal by
permitting a reduction of taxes on buildings. Third, it encourages
construction by reducing the liquidity constraints on developers of
new buildings. Fourth, it produces synergistic effects (i.e.,
increases productivity) through positive spillover effects in the
surrounding region. Fifth, it promotes better stewardship and more
efficient land use by encouraging owner-occupancy. Sixth, it
stimulates capital formation. Seventh, it encourages economy and
discourages corruption in government.
Those are strong claims. Can economic policy do everything? No, but
those are the things it can do, as I will explain more fully below.
The basic impulse, however--the striving for justice and brotherhood
and the sense of personal ethics--those come from within, from family,
community, schools, and religion. So too does the sense of
workmanship, the striving for excellence and competence, without which
no system works.
The Primary Effect: Reconciles Efficiency and Equity
We've always heard that taxes destroy incentives. Economist Colin
Clark said years back that the country would fall when taxes exceeded
25 percent of income. Arthur Laffer said tax yields would actually
fall if rates rise, and rise if rates fall.
The news in Henry George is we can tax all the rent out of land and
not one square foot will walk away. Nor will God switch off the
Creation. Man creates capital by saving; some Other Force created land
and sustains and serves it every day the sun rises, undeterred by
Nor will Georgist taxes leave owners sulking on their land, but the
contrary. Fortune headlines them as "Higher Taxes that Promote
Development" (Breckenfeld 1983). The tax is a fixed charge based
on land's market value, derived in turn from its opportunity cost. The
owner will use it harder and improve it more to meet the fixed tax. If
he doesn't care to do that--if he has more than he can use--he will
sell, releasing surplus land to meet the demands of others, of whom
there are many with urgent needs and many more with enterprise wanting
more space. Taxes stifle enterprise only if they increase with
enterprise. Land taxes increase only with opportunity cost, which is
independent of the enterprise of the individual owner. The only
incentive this tax impairs is the incentive to withhold land from use.
George's land tax promotes equity toward the landless in at least
four ways: (1) it relieves them of taxes, to the extent that
landowners pay more, (2) it supplies them with more goods and services
as land is used better, (3) it offers them jobs producing those same
goods and services, and incomes with which to buy these, and (4) it
offers them a better chance to acquire land themselves, as surpluses
are released to the market.
This is supply side economics with a real kick. It works through tax
transformation rather than tax reduction--the total tax take may be
raised or lowered as a separate issue. If desired, we can raise taxes
and stimulate supply together; there is no hard choice to make between
So George's simple program not only reconciles efficiency and equity,
it squares taxes and incentives. What more can a reasonable person
demand of economic policy than to resolve these ancient basic
standoffs that have confused and divided us, blocked understanding,
and deadlocked constructive action for generations? It is an
achievement on a par with resolving Evolution and Creation, except
George's program is something we can do something about. We can use
and implement it as quickly as we are willing to unclog the cerebral
arteries and follow through with action.
Many people, it is true, are morbidly fascinated by deadlocks and
standoffs and cling to them as old friends and comforters. They
actually prefer irreconcilable disputes as cherished parlor games. It
may ease the conscience to think justice must be sacrificed for
efficiency, and schools starved and libraries closed to free up
incentives, so nothing really can ever be done.
We all feel compassion by nature, but to survive and stay whole in
this world of beggars and bandits, we learn to harden our hearts and
cork it in. We learn to screen out evidence of suffering and injustice
and rationalize what we cannot deny. This mindset, while
understandable, is unaffordable in a period of dangerous national
decline and growing division between haves and have-nots. Corking in
feelings is hard on a person, too. There is relief and satisfaction in
venting compassion via support of constructive public policies.
The Double Effect: Permits Untaxing of Building
The counterpart of sharing rent through taxation is to untax things
people do and make, like buildings. This doubles the incentive effect.
If the land tax is the stick, untaxing buildings is the corresponding
carrot, and George's program is to make both of them larger.
Every lot with an old building is pressed between that building, the "Defender,"
and a potential replacement, the "Challenger." The trouble
with taxing buildings is that it stacks the fight; it rigs the score
against the Challenger. Say the lot-cum-Defender is worth $100K and
the Challenger would cost $500K to build. Challenger cash flow must
exceed Defender cash flow by enough to pay off the $500K plus added
taxes based on it. If the tax rate is high, that will stifle new
investment as thoroughly as a communist coup.
The Georgist tax by contrast is impartial between Defender and
Challenger, and lets the market decide. In Milwaukee in 1965, after a
long detailed study, I found switching to the George program would let
30 percent of the city be renewed forthwith, simply by untaxing
Challengers vis-a-vis Defenders. (The sad news is the mayor went the
other way, so Milwaukee has lost 20 percent of its people and more of
its wealth and is a sick city today.)
The Triple Effect: Enhances Flow of Credit
Most buildings when new have to surmount a liquidity crisis. Almost
every one is built on credit with a small equity and takes a while to
yield cash. During this critical period, builders need all the help
they can get.
The property tax on buildings is a maximum during this crisis. The
timing is such as to maximize the damage for any given tax yield over
time. Now, of course, a building uses public services and something
must be taxed to pay, but new buildings in older cities nearly always
pay for more than they receive, while old ones receive more than they
pay for. Think of building taxes as a kind of forced loan from the
builder to the treasury, to be recovered down the line when buildings
are older. But what could be more counterproductive than forcing a
loan from a person passing through a credit crisis already?
The Georgist tax works the other way. It spares the builder when he
needs it, and rises slowly under him over time as the site ripens to
its next best use.
The Quadruple Effect: Produces Regional Spillovers
Urban blight is cumulative and self-reinforcing; blighted buildings
cast a pall on land around them, discourage upkeep, and stifle
renewal. Whatever slows renewal of one site therefore slows the
neighborhood, which reflects back blight to the first -- a vicious
Conversely, new buildings help stimulate renewal around them. There
are exceptions, I know. Some new buildings, especially banks and
corporate headquarters, sterilize a block with blank walls. I will not
defend that, but the exception is not the rule; the abuse is not the
precept. The rule is new buildings draw tenants from old ones and
weaken other Defenders, so other owners have to renew, too. When they
do, where better but next to the newest, hottest building? So renewal
is cumulative, just like blight, only upwards in a benign spiral.
This competition for sites raises the tax base--not from buildings
but from land prices derived from ground rents. Using the higher base,
the city can improve public services, if needed, but without taxing
any building, without scaring away any generators of fiscal surpluses.
In this scenario, buildings raise the tax base indirectly by raising
the value of land around them.
The Quintuple Effect: Reunites Ownership and Occupancy
Riverside, California built itself a lovely downtown pedestrian mall,
back when that was in vogue, and has been sorry ever since. Nothing
worked out, retailers deserted, and half the stores are empty.
Recently I asked the developer of Tyler Mall, a success, why he
thought downtown failed. I got the answer in two words: "absentee
ownership." I should have known; I've preached it for years.
An agricultural adviser in Fresno once told an impressionable boy, "The
best dressing for soil is the owner's shadow, applied daily." In
town they say, "Who's keeping the store?" Absentees aren't
the only negligent owners, nor are they all bad. Torpid owners are the
problem, and they come in many forms. Basically to make a city go, you
want to be rid of owners who see real estate mainly as a cash cow for
their retirement and replace them with owners who see it as a vehicle
for their enterprise, who apply their shadows daily. Those shadows
will also follow them into local civic clubs and enterprising downtown
and neighborhood associations for making joint improvements.
This is a surprisingly delicate area. Walter Goldschmidt was
persecuted and maligned for his classic Small Business and the
Community, 1946 (republished in his As You Sow, 1947). His sponsor,
the Bureau of Agricultural Economics, fared even worse; it was
terminated with extreme prejudice. But he documents the points
abundantly by contrasting Arvin, Dinuba and Wasco, California.
It is the surplus in land use that attracts outside buyers. Absentees
are redundant parties in production, but often top bidders for pure
ownership; that is the legal privilege of receiving ground rents plus
unearned increments that accrue over time. Georgist taxation spares
the rewards of enterprise and cuts most directly into those "runs
of free income" (as Veblen called them in Absentee Ownership),
which attract absentee owners. For that reason, it slowly makes the
market transfer ownership from absentees to occupants and managers on
the spot, with all the good community effects that must follow. In a
period of rising concern over alien takeovers of U.S. real estate,
these points merit focused attention.
The Sextuple Effect: Increases Capital Formation
Untaxing buildings obviously draws in outside capital, which is good
but is not capital formation to the whole economy. In Keynesian
models, however, reducing taxes on new capital raises the rate of
return after taxes ("marginal efficiency of capital") and
does create new capital. In supply side models, it is more important
to increase saving. Land taxation helps here, too.
Land taxation, if vigorously applied, tends to reduce the investment
value of land through a process called "tax capitalization."
There is a diminishing marginal utility of savings to any wealth
holder, meaning the more you have, the less you need more. With land
devalued, those needing wealth seek substitute assets to replace land
in their portfolios. To acquire those additional assets, they must
save more and invest the savings in real new capital, rather than
The Septuple Effect. Greater Economy and Less Corruption in
Georgist taxation tends to reduce the need for public spending in at
least two obvious ways. One is to increase job opportunities, which in
turn reduces welfare spending. The other is to obviate much of urban
sprawl with its costly, wasteful cross-subsidies.
In the longer run, it seems reasonable to expect that more genuine
productive job opportunities at home would reduce the pressures for
military spending, at least those portions which are strictly
boondoggling of a make-jobs nature.
There are city councils and councilpersons who can botch up and
corrupt the best system ever blueprinted. But the Georgist program may
even help straighten them out. Lincoln Steffens taught us that the
troublemaker in Eden was not Eve, nor even the serpent, but ... the
apple! The apples of discord that corrupt city councils are unearned
increments to land value, which they create or deny with every
decision about extending sewers or changing zoning. Georgist taxation
dehydrates those apples by attaching higher tax liabilities to each
Does Renewal Destroy Housing for the Poor?
SOME PEOPLE, RECOGNIZING that George's idea of taxing land values
will be effective, fear that it will be too effective. They are
reminded of earlier programs of urban revitalization that made victims
of those they were supposed to help.
"Slum clearance" in the 1950s had a negative cast, with a
name catered solely for middle class consumption. Reuse of cleared
land was often at lower density, inevitably throwing an increment of
unhoused people on the private market. Federal "Urban Renewal"
in the 1960s was better named, but the actual emphasis was all on
clearing, not rebuilding. The inventory of cleared, unrebuilt land
under the Federal program grew vaster each year. "Bombing Out"
and "Negro Removal," the cynics' cracks, were on the mark,
although blacks were not by any means the only evictees. Any talk now
of demolition and renewal evokes the specters of those tragic, cruel,
wasteful public programs.
But George's program begins with fostering renewal and intensive use.
Clearance is involved only as needed to serve renewal, never a goal in
itself. The first land taken would generally be vacant or unused, such
as boarded-up buildings. New buildings would draw renters and buyers
from old ones, releasing more space. The idea and the impact are to
increase supply of rentable and salable floor space. There would also
be more stores with more competition in selling, and more employers
with more competition in hiring.
How do we know there would be an aggregate increase of supply? Higher
density is one test. Untaxing buildings fosters higher density,
because density, exemplified by high buildings, is the substitution of
capital for land. Untaxing capital obviously makes that more
Higher quality is the other test. The richer the new tenants or
buyers, the more space they release elsewhere when they move to new
quarters. Now this is the hardest point to see and accept, if you are
poor or an advocate for the poor. There will always be specific cases
where the rich bump the poor. There is a certain mindset that locks
onto such specific cases and makes up contemptuous names like "trickle
down" to dismiss effects on the aggregate market. But the
aggregate is what should concern us. If we mobilize local tenants to
fight new building, we are marshaling a minority with a particular
vested interest to fight against the interests of the majority of the
poor, and everyone. We will spend our lives straining at gnats and
swallowing camels. For the plain fact is that building new homes for
the rich, the ones who can afford new homes, is what releases useable
space for everyone else.
There are three kinds of slums. Only one kind, the narrowest of the
three, is likely to witness evictions for the rich. This is the slum
on high-valued land. These slums develop in the van of expanding
commerce or high rise apartments, where landowners neglect their
buildings because they expect to demolish them soon. These areas are
limited. The second kind is on bad land, which will stay bad.
The third and most common is on good land covered with old buildings,
which have filtered down to people who generate bad neighborhood
effects. Many of these units go vacant. The land value is low. The
market will never renew these slums at one stroke, but by nibbling at
their fringes. But as it nibbles incrementally in, if it does, it
unavoidably creates more space than it consumes, raising the aggregate
Another fear for the poor is gentrification. But this, by definition,
is where new gentry displace the poor without renewal, occupying the
same old buildings. This is one result of not renewing; renewal as
such is innocent. It seems a bit carping to criticize people for
maintaining and restoring old buildings. The alternative may be viewed
in many ungentrified neighborhoods where buildings simply go out of
use, sheltering no one.
An example of what happens when renewal does not occur is Camden, New
Jersey, which has the highest tax rate in the state. It's a depressant
now and a vicious circle as the high rate drives away capital and
further erodes the depleted tax base. But what if the tax were on just
land value? The depressant would become a stimulant, the drag a motor,
by the simple magic of converting a variable charge into a fixed,
unavoidable one. So it is with most other cities in need of renewal,
which today look vainly to Washington for salvation and redemption.
They do need enabling legislation from their states, on the
Pennsylvania model, but given that, they can save themselves. They'd
better; no one else is going to do it for them.
But the ultimate end of Georgist policy is to be viewed in terms of
the nation, not just single cities. The idea is to pit cities against
each other to attract people. Nothing is better for people than to be
competed for. It raises their bargaining power as tenants, buyers, and
A Summary of Reconciliations
GEORGIST POLICY HAS been shown as a means to revive dying cities, and
in the process to reconcile equity and efficiency, to reconcile supply
side economics with taxation, and to reconcile capital formation with
taxation of the rich. It can be seen as a means of harmonizing
collectivism and individualism, in the most constructive possible
ways. I know of no other program whose proponents even make such
claims, let alone substantiate them. As you issue forth with cap and
gown into a world that has already priced you out of the real estate
market, you will find George's program worth your intense study and
(*) Professor of Economics, University of California at Riverside.
(1) Editor's note: This figure comes
from 1988, before the Japanese economy -- and its land values --
(2.) See also Schwab (1998).
(3.) A primary concern expressed by environmentalists about land
value taxation is that it will cause "overdevelopment,"
particularly by forcing farmers to sell to developers at the urban
fringe. The opposite is the case. The tax encourages more intensive
development of the sites with greatest value, leaving sites of lesser
value (those at the urban fringe) undisturbed. Nevertheless, if
citizens are not persuaded that this principle will be effective in
stemming sprawl, it is possible to draw an urban growth boundary, and
apply the land tax more heavily inside it than outside. In a perfect
market, with perfect planning of public works, this might not be
necessary; but in this imperfect world it may be the best device to
recover from the present aggravated condition of urban sprawl.
[See original source for references]