Smart Growth versus Wise Growth
by Fred E. Foldvary, Senior Editor
In the United States and elsewhere, there is an urban movement called "smart growth," in which city planners are said to be smarter than the market. Planners design the future growth with zoning, so that there is higher density in some places and a green zone around the city which is left as open space. It's supposed to be smarter to have a higher density, because it leads to more use of public transit such as on light rail, and less traffic congestion.
But the city planners often outsmart themselves. People still want to drive their cars, so the higher density creates more congestion. The population still grows, so development leap frogs over the green zone, increasing rather than decreasing urban sprawl. That smarts!
The trouble is, these city planners are too smart for their own britches. The Austrian economist Ludwig von Mises theorized back in the 1920s that central planning is inefficient, because it blots out the market prices that efficiently allocate resources. The peoples of the old Soviet Union had to learn the lesson of the failure of socialist central planning the hard way.
The problems of our cities today -- congestion, urban sprawl, pollution -- do not come from the market but from government interventions that distort prices and pervert incentives. We have too much pollution because government subsidizes it, allowing polluters to pass on the social cost to the public. We have traffic congestion because the use of streets and highways is subsidized. We have sprawl because those who buy land at the urban fringe get a subsidy. We have problems with addictive drugs in city slums because the profits of dealers are subsidized.
While government subsidizes these bad activities, government penalizes good activities. You work, you get taxed. You invest, you get taxed. You save money; that's taxed. You buy goods, that's taxed too. Put up needed housing: taxed! How can we trust government chiefs to be smart about growth when they are so foolish with their subsidies and taxes? If you know the answer, please let me know, because, frankly, I'm puzzled.
Instead of smart growth, we would be better off with wise growth. We would have the wisdom to know that nobody can allocate resources more efficiently and equitably than Mister Market. But to have a true free market, we need to stop the foolish subsidies and taxes.
The American economist Henry George showed us how to get revenue for civic goods without distorting market prices. All we need to do is to look down, because the answer is beneath our feet. Look down beyond the artificialities of carpets and floors, down to the earth, to land.
Land is like a magnet in having a field around it. A magnetic field creates an attraction for iron objects which is stronger nearer the magnet. Land has a rental field around it which is stronger in charged locations such as the centers of commerce and places with better transit and more civic services. The field of rent is there regardless of who owns the land or how it is used or what a landlord is actually collecting.
This land rent is a pure economic surplus that can be tapped for public revenue without hurting production. To have wise growth, government has to stop taxing productive activities and shift public revenue to land rent, user fees, and penalties for doing wrong.
You can call it a tax, a land-value tax, but it's really a tap, because the rent, like the magnetic field, is gushing out no matter what. Even if a site is owner occupied, the site has a rental that a tenant would pay, and in this case, the owner happens to be the tenant paying rent to himself as also the owner.
To have wise growth, the rent has to be tapped for public revenue, otherwise landowners get a subsidy that incites them to hold more land, especially out in the ultra-subsidized urban fringes. In some places, they delay development, because they expect rent to gush out even more later, rent which they get to keep. More growth and civic services create even higher rents.
Tapping the land rent takes the profit out of sprawl while taking the penalty out of infilling. Developers then put up buildings in urban centers without a tax penalty, and avoid the fringes because they pay the full cost of transit and utilities. When allowed, Mr. Market allocates the use of land efficiently without the need for zoning, urban limits, and smart-aleck controls.
Besides tapping the rent for civic services, government has to stop subsidizing congestion and pollution. During crowded times, there needs to be electronic tolls on highways and streets and parking just high enough to eliminate the congestion. Pollution can be reduced efficiently with remote sensors that measure and bill the pollution from cars.
We also need to stop subsidizing the profits of the drug dealers. The prohibition of marijuana and drugs restricts the supply and thereby raises the price. While it makes drug dealing more risky, for those who do it, the profits are much greater, so they have an incentive to push their stuff. Those addicted to the stronger drugs and who don't have much money then have to steal or become dealers themselves, creating more crime. The legalization of drugs will stop much of this crime. Legalizing victimless acts will concentrate policing to theft and violence, greatly reducing these crimes, making cities safer, and thus increasing investment and employment.
In some places, such as California, the state limits the ability of city governments to tap the land value. Some resort to developer impact fees, which raises funds, but also inhibits development, because it bluntly taxes investment along with some land value. A better approach is an improvement district financed by taps on land value.
A city can also facilitate the creation of civic associations, like the condominiums and residential associations and land trusts of today. As a contractual organization of the owners of real estate, they can be financed by monthly assessments on the rent or value of the land. Civic services such as street maintenance, neighborhood parks and recreation, and security can be transferred to the civic associations, while eliminating city taxes on sales and wage income and on business. The civic associations can then send funds to the city or county to finance services such as fire protection, replacing still other taxes.
So there are ways to get around foolish state limitations on tapping land rent. What's needed is an appreciation of the wisdom of the truly free market. We need a marriage of Ms. Earth and Mr. Market. The children will be prosperous, healthy, and wisely growing cities.
-- Fred Foldvary
Copyright 2004 by Fred E. Foldvary. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieval system, without giving full credit to Fred Foldvary and The Progress Report.
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