Fred Foldvary is an economist. He has taught at Santa Clara University and San Jose State University. His books include Soul of Liberty, Public Goods and Private Communities, and Dictionary of Free Market Economics.
California exempts solar energy equipment from its property tax. The exemption will last until 2025. The California Wind Energy Association has complained that this exemption puts solar energy at an artificial advantage relative to other renewables such as windmills. Biomass, the use of biological materials such as wood and leftover crops, is also at a relative disadvantage.
Rather than eliminate the solar tax exemption, the other energy industries should seek to eliminate the property tax on all energy capital goods. With this exemption, the government of California is recognizing that property taxes on capital goods – buildings, machines, equipment, inventory – impose costs that reduce production and innovation. Since this tax is toxic, the property tax should be removed from all improvements.
The best revenue neutral tax shift would be to increase the property-tax revenue from land value by the same amount as the reduction in the taxation of capital goods.
The other energy industry chiefs call the solar property-tax exemption a subsidy. We need to distinguish between absolute and relative subsidies. An absolute subsidy occurs when government provides grants to firms, or limits competition. A relative subsidy occurs when one firm or industry receives a greater subsidy than its competitors. All absolute subsidies are also relative subsidies, because they exist relative to the rest of the economy. But if the subsidy is not in funds or protection, but from lower rates on industry-destructive taxes, this is a relative but not an absolute subsidy.
Suppose that there are patients in a hospital suffering from continuous poisoning. The doctor stops poisoning one patient, and he recovers. But the other patients are still being poisoned. The other patients complain that it is not fair for one patient to be singled out for favored treatment. But the just remedy is not to resume poisoning the recovered patient, but to stop poisoning the others. The taxation of capital goods is economic poison, which the state recognizes would poison the solar energy industry they seek to promote. But why poison the other industries? The property tax should exempt all capital goods, all improvements.
A broader issue is the subsidies to energy. All forms of energy, except human muscles, are subsidized by the state and federal governments. Energy from oil and coal are implicitly subsidized by exempting them from the social costs of their environmental destruction. There is no economic need for any subsidies. But to obtain the true costs of energy, governments should also eliminate taxes not only on their capital goods but also on their incomes and sales. We cannot know whether renewable energy can stand on its own until we eliminate all the government interventions, including taxes, subsidies, and excessive regulations.
Since a radical restructuring of public finances is politically impossible today, a politically feasible reform would be to exempt all capital goods investments from the property tax. If this needs to be revenue-neutral, California could replace its cap-and-trade policy with levies on emissions. The relative subsidy to solar power is unfair to the other energy industries, but the real unfairness is the property tax on their investments.
The basic concept of “profit” is simple: profit equals revenue minus costs. But “cost” is a complex concept, and “revenue” too is not all that simple, so the economic analysis of “profit” ends up being complicated.
A business typically calculates the appearance of profit rather than the economic reality. Most enterprises use money for purchases and sales, so for accounting, the appearance of profit is easy to understand. The revenue equals the proceeds from sales, and the costs are what is paid for the inputs: wages, rentals, interest, and materials. In economics, this is called “accounting profit,” which equals revenue minus the explicit costs, costs paid to others.
But the payments for inputs can include capital goods – inventory, buildings, machines and other tools – that last a long time. If an enterprise buys a machine that lasts for ten years, the cost is really spread out over the duration of the capital good. So in the accounting, rather than treat the purchase as a cost in the year purchased, the cost is the depreciation, the loss of value, in each year. For simplicity, the accounting can depreciate the tool in equal amounts each year, or, following tax laws, it could accelerate the depreciation, deducting more in the first years than the last years. The annual depreciation is an explicit cost, since the original purchase consists of funds paid to others.
This accounting convention ignores the effect of price inflation. Suppose a tool costs $100 and lasts for 20 years. Without inflation, the depreciation would be $5 per year. But if during that time, prices have doubled, it will cost $200 to replace the same tool. In the 20th year, the actual depreciation should be $10, but for the income tax in the USA, inflation is ignored, so the company has to record a $5 expense.
To get the real cost, we have to move from accounting profit, which only subtracts explicit nominal costs (not adjusted for inflation), to economic profit, which also subtracts the implicit costs, those which are not paid in money to others, but are nevertheless real.
The implicit costs include all the “opportunity costs,” the costs of giving up next-best opportunities. Suppose you are the sole owner of a business, and your accounting profit is $200,000 per year. Your next best opportunity would be to be employed at another firm for $80,000 per year. Since you give up a $80,000 wage by being self-employed, that is a cost of your business, and in effect you are paying yourself the $80,000 out of your accounting profit.
Suppose also that you own the real estate used by your firm. If you rented, the rental would be $60,000 per year. The opportunity cost of owing your business is the $60,000 you give up if you instead rented the place to a tenant. In effect, your business is paying you as property owner the $60,000 rent from your accounting profit.
Subtract $80,000 and $60,000 from your accounting profit, and your real gain is $60,000. That is the economic profit from your self-owned business.
The same concept applies to corporate profits. Suppose a corporation has an accounting profit of $10 million per year. It owns assets worth $100 million. If the assets were sold and converted into safe bonds, suppose the bonds would pay four percent interest, or $4 million annually. That foregone income is subtracted from the accounting profit, for an economic profit of $6 million. The firm obtains $4 million as an asset owner, and $6 million as an enterprise.
Another aspect of profit is honesty. If a thief steals $1000, this is not economic profit. True profit means that the gain came from voluntary enterprise and legitimately owned assets. Gains from force and fraud are not economic profit. From the viewpoint of the whole economy, profit also has to take into account costs imposed on others, such as from pollution. The absence of compensation for damages is really an implicit theft.
Accounting profit can include government subsidies. But since such subsidies are not from voluntary production, they are not included in economic profit, the real gain from production.
Profit can also consist of capital gains. If you buy shares of stock at $1000 and sell them later for $1500 (after paying the broker’s fee), the $500 capital gain is profit. If you instead had the $1000 in safe bonds and obtained $100 in interest, that would be the opportunity cost of the capital gain, so the economic profit from the asset is $400.
We can also look at opportunity cost from the point of view of society and the whole economy. The opportunity cost of government spending is what the taxpayers would have spent on. Land has an individual opportunity cost for the owner, but for the economy, land has no opportunity cost. The land is here by nature, and no more can be built or imported. Therefore, for the whole economy, all land rent is economic profit.
Economic profit has three origins. First there is entrepreneurial profit, the economic profit of an entrepreneur, due to his skills, insights, and talents. Second is monopoly profit, the economic profit that comes from a price greater than a competitive price, such as the profit from holding a patent. Third is the gains from asset appreciation.
Profit can be negative and zero. When an enterprise has costs greater than revenues, the loss constitutes negative profit. In a highly competitive industry, economic profits tend towards zero, as firms enter to gain profits and exit to avoid losses. But zero economic profit implies just enough accounting profit to pay for all costs, including normal returns on assets values.
If you want to be clear when talking about profits, you should not just say “profit” but indicate whether you mean accounting profit or economic profit. It gets a bit confusing, because when economists say “profit,” they mean economic profit, but when anyone else says “profit,” they mean accounting profit. It may be difficult to calculate economic profit, but we need to do it, because economic profit keeps it real.
Individual sovereignty means that it is evil for any other person to interfere with one’s honest and peaceful choices. This prescription comes from natural moral law, as expressed by the universal ethic:
1) “Harm” means an invasion into another’s domain.
2) All acts, and only those acts, which coercively harm others, are evil.
3) Welcomed benefits are good.
4) All other acts are neutral.
Natural moral law is derived from human individuality and equality, and the premise of equality implies individual sovereignty. For if one is not sovereign, some other person has the moral authority to be a master, and equality does not exist. Individual sovereignty is moral equality taken to its logical conclusion. The concept of “self ownership” is the same as individual sovereignty.
Because individual sovereignty derives from the universal ethic and its premise of human equality, it does not imply that a sovereign individual may do anything he pleases. A self-owner may not impose coercive harm on others. One may do as one pleases so long as one’s actions are honest and peaceful. An honest action does not coercively harm others through fraud.
“A person has a functioning mind and the actual or potential ability to make choices based on reason and awareness” (Dictionary of Free-Market Economics). Young children have such minds and are therefore also sovereign. But the ability to use reason is something that develops as children mature, and therefore the parents have a responsibility to exercise some of the sovereignty rights on behalf of their children. Conversely, creating a child also creates a moral obligation of the parent to provide judgment as well as material needs for their children. Upon some age of maturity, the child becomes a fully sovereign human being.
In political theory monarchs have been said to be sovereign, and are called “the Sovereign”. But even if the king has absolute legal power, he is a human being equal to all others, and any coercive power he has over others is a usurpation of individual sovereignty.
When republics and democracies replaced absolute monarchs, the state and its government were said to be sovereign. A country is sovereign when there is no other political body above it. In the United States, the federal and state governments have parallel sovereignty, and the native Indian nations are supposed to have some elements of national sovereignty. The US federal government has entered into treaty obligations and has joined international organizations such as the United Nations and World Trade Organization, but it could withdraw from these organizations and treaties, as the UN and WTO have no sovereignty, but only delegated powers.
Power is always exercised by individual persons, not by mental constructs. Governments and states are mental constructs, having no reality other than what people believe. If a government exercises its sovereign power, in reality, it is the president or prime minister applying the forces of government, ultimately its army, police, and prison guards. Arbitrary state power is ultimately the unequal power of some individuals over others. There is no moral authority or legitimacy for government other than to enforce the universal ethic, which implies that it is immoral for government to interfere with peaceful and honest individual sovereignty. If government makes theft legally a crime, it is already morally a crime, and government simply acts as an agent of the people to enforce moral law, although if it does that, the financing must also be moral.
Therefore individual sovereignty implies peaceful anarchism, with no imposed government, because even if the government confines itself to enforcing the universal ethic, the rulers are human beings who have no greater wisdom, in general, than others, and they could end up imposing their wills to alter peaceful choices. Therefore, pure equality implies that there be no rulers imposed on unwilling persons.
Anarchism, as the absence of imposed government, does not imply chaos and disorder, as connoted by the unfortunate other meaning of “anarchy”. Human beings have always lived in organized communities. In anarchism, most people would join associations such as condominiums, cooperatives, and proprietary communities (owners with tenants). These local communities would federate into broader or higher associations, ultimately covering a continent or the whole planet. The benefit of government – a uniform rule of law – would be provided, without its fatal flaw, the denial of individual sovereignty.
One more element of individual sovereignty needs to be addressed: the issue of land ownership. Self-ownership implies the ownership of one’s labor, the products of labor, and the wages of labor. But self-ownership does not apply to nature, all that is apart from persons and human action. The premise of human equality implies that all persons have an equal share of the benefits of natural resources, and that can be accomplished by collecting the economic rent of land, its yield when put to optimal use, and distributing that rent equally.
The local site rentals, generated by the local population, commerce, and public goods, would be paid to the community’s providers of civic goods. The multi-level federations of voluntary communities and associations would implement the collection of land rent and local rentals, and this geo-anarchism would provide the funding needed to implement the voluntary governance.
Individual sovereignty is therefore feasible and is consistent with, and indeed best generates, peace and prosperity. Wars, such as in the Middle East, would cease if most people recognized individual sovereignty and equal rights to natural benefits, rather than fight over the coercively collective and fictitious sovereignty of states.
It is standard economic theory that the best way to prevent pollution, as with other negative effects, is to make the polluter, hence also the buyer of its products, pay the social cost of the pollution. The economist Arthur Cecil Pigou provided a thorough explanation in his 1920 book The Economics of Welfare. A tax on pollution has since then been called “Pigovian.”
One of the most discussed Pigovian taxes has been on the use of carbon-based fuels such as coal, natural gas, and oil. A “carbon tax” can be on the fuel inputs or on the emission outputs. The most effective Pigovian levy is on the emissions, as that provides an incentive to reduce pollution such as by capturing the carbon before it gets spewed out. If the polluter does not compensate society for dumping on the commons, then in effect it gets subsidized, as it sells its output at less than the total social cost of production.
Many countries have been confronting pollution with inefficient policies such as regulations, credits for offsetting pollution with purchases of forest lands, and permits that can be traded. Australia enacted what was called a “carbon tax” with the Clean Energy Act of 2011, implemented in July 2012. But this was not a Pigovian tax. The Act created a “carbon price mechanism,” a cap-and-trade emissions trading scheme that at first set a price per ton of emissions. This mandated price had the effect of a ‘carbon tax’. But after 2015, the mechanism would have transitioned to a trading scheme.
However, in 2013 the newly elected prime minister sought a repeal of the “carbon tax” emissions trading scheme. In 2014, parliament passed the repeal.
The opponents of emissions taxes claim that this increases costs to business and households. This is narrowly true, but policy should consider the total costs to society. The pollution imposes a social cost on Australia and the rest of the world. This is not a cost paid in explicit money, but costs in the form of illness, a less productive environment, and possible effects on the climate.
The opponents of emission levies overlook that the absence of compensation for the pollution costs is in effect a subsidy to the polluters and their customers. A pollution charge is not a tax in substance, but rather the prevention of this subsidy, and compensation for dumping toxic materials on other people’s property.
The repeal did not provide a replacement, and this creates uncertainty for business about any future anti-pollution policy. This policy uncertainty reduces investment and growth.
The best way to implement a pollution tax is as a replacement of other taxes. Taxes on income, sales, and value added impose the excess burden of higher costs and less output and employment. If politicians are concerned with tax costs, why are they not repealing these taxes? When a pollution tax replaces such market-hampering taxes, the total costs paid by consumers does not increase, but rather shifts in favor of less-polluting products.
Actually, the revenue obtained from Australia’s brief carbon tax was used to compensate taxpayers and affected companies. But the most effective policy would have been to have an explicit tax on pollution instead of a trading scheme, and to lower other tax rates, along with a transitional compensation to those with net losses.
Some opponents claim that Pigovian charges would be good if applied globally, but in a single country, would put its industries at a disadvantage. But that would not happen with a “green tax shift,” the replacement of inefficient taxes with a “green tax” on pollution. A green tax shift would reduce the environmental cost of pollution while not increasing the total tax costs for the country’s economy.
I live in California. It’s a great state. Too great.
A proposition to split California into six states may be on the ballot in 2016. “Six Californias” has announced that it has collected sufficient signatures. Why six? California’s population of over 38 million is six times lager than the US state average. The ruling powers may find a way to block the proposal, as some opponents claim that the signature gathering was unlawful. If “Six Californias” does get on the 2016 ballot, in my judgment, this will be a rare chance for fundamental reforms.
Many Californians have said that the state is too big to govern effectively. But the governance problem is not size, but structure. After the property-tax limiting Proposition 13 was adopted in 1978, taxes and political power shifted from the counties and cities to the state government. California could be governed well if decentralized, but the concentration of fiscal power to the state has made the state among the highest taxed and worst regulated in the USA.
There have been many attempts to reform the lengthy California constitution, but they have all failed. Attempts to replace the Proposition 13 have gone nowhere. The best option is to start over. Creating new states would provide six fresh starts.
Critics of the six-state plan say that the wealth of the new Californias would be unequal. The Silicon Valley state would include the high-tech wealthy counties of San Francisco, San Mateo, and Santa Clara, among others. The promoter of this initiative, Timothy Drapers, happens to be a Silicon Valley entrepreneur.
But the current 50 US states are also unequal in wealth. The income inequality problem is a national and global problem. Income can become more equal without hurting production by collecting the land rent and distributing it equally among the population. Since the critics of Six Californias are not proposing or even discussing this most effective way to equalize income, their complaints should be dismissed as irrelevant, immaterial, and incompetent.
US states have been split in the past. Maine was split off from Massachusetts in 1820, and West Virginia was carved out of Virginia in 1863.
If the initiative passes, a board of commissioners would draw up a plan to divide the state’s assets and liabilities among the six new states. A good way to do this would be to divide the value of the assets by population, but to divide the liabilities (including both the official debt and the unfunded liabilities such as promised pensions) by the wealth of each state. That would go a ways to deal with the inequality problem.
California’s complex water rights could be simplified by eliminating subsidies, instead charging all users the market price of water. There could continue to be a unified water system with a water commission with representatives from the six state.
If this measure is approved by the voters and by Congress, each state will design a constitution. The new constitutions should be brief, like the US Constitution, in contrast to the lengthy current California constitution that contains many provisions best left to statute law.
The new constitutions should retain the declaration of rights in the current state constitution, including Article I, Section 24: “This declaration of rights may not be construed to impair or deny others retained by the people.” This wording, similar to the US 9th Amendment, recognizes the existence of natural and common-law rights. This text should be strengthened with something like this: “These rights of the people include the natural right to do anything which does not coercively invade the properties and bodies of others, notwithstanding any state interest or police power.”
These new constitutions will be an opportunity to replace California’s market-hampering tax system with economy-enhancing levies on pollution and land value. There should be a parallel initiative stating that if Six Californias passes, the states will collect all the land rent within their jurisdictions and distribute the rent to all six states based on their populations. A tax on land value is by itself market enhancing, better than neutral, because it promotes an efficient use of land, it reduces housing costs for lower-income folks, and eliminates real-estate bubbles. Combined with the elimination of taxes on wages, business profits, and goods, the prosperity tax shift would raise wages and make California the best place in the world for labor and business.
This is all a dream, but the past dreams of abolishing slavery, having equal rights for women, and eliminating forced segregation all came true. This proposition will at least provide a platform for discussing such fundamental reforms.
Israel’s bombing of Gaza has not stopped its rocket attacks, so it is counterproductive. Instead, Israel should help the people of Gaza establish a communitarian democracy.
The government of Israel would announce on radio, television, web sites, and leaflets, that it will be sending in troops, not to fight against the people of Gaza, but to empower their communities.
The Israeli government would also apologize for its misguided policies of the past, and for the suffering and humiliation it caused for the Gaza Palestinians. Of course the Israelis have suffered also, but if one demands a counter apology, one is not really repenting and regretting.
The Israeli administration would designate neighborhood boundaries for communities of about 1000 residents and also enterprise owners. Residents would volunteer to serve on the community council. The Israeli troops would defend the community from any extremist opponents of the new democracy. The communities would set up their own protective elements, and the Israeli troops would withdraw.
Israel should have democratized Gaza in 1967 rather then let the area fester. Then in 2005, Israel removed its settlements without negotiating with the Palestinian rulers. Now Israel should do what occupiers world-wide have failed to do, lay down an infrastructure of democracy.
The community councils of Gaza would elect representatives to regional associations, and the regions would elect representatives to a Gaza parliament. The Palestinians of the West Bank should also elect their own parliament. Then the two parliaments would elect a Palestinian federation of two provinces, Gaza and the West Bank (perhaps renamed East Palestine). It would be best to leave local matters to the two provinces.
Israel should then stop imposing tax policy on the Palestinians and let them set up their own public finances. But advisers should encourage the Palestinian councils to collect the land rent and use that for public revenue rather than tax their wages and goods.
Unfortunately the Palestinian governors have focused their resources on fighting Israel rather than economic development. But after the communities in Gaza have become empowered, Gaza will no longer be occupied territory. Israel would remove the barriers around Gaza gradually, since there will still be extremists who seek destruction. But Israel should facilitate the greatest possible mobility for the Palestinians under the constraint of protection, rather than treat the Palestinians with the arrogance that has been practiced in the past. “No more humiliation” should be the stated slogan.
A similar policy should be pursued in the West Bank. The Palestinian authority chiefs will resist transferring power to the people and their local councils, but a democratic Gaza (or West Palestine) will cause the East Palestinians to demand genuine democracy. A bottom-up governance in the West Bank would then result in a federation of West and East Palestine that would then negotiate a lasting peace with Israel.
There have been some peace gatherings among Israelis and Palestinians to humanize their relations and to see that individuals are people much like themselves. But such personal interactions are no substitute for confronting the essential issue of who shall own the land.
The solution that is both just and politically feasible is to recognize the pre-1967 boundaries and then convert the Israeli settlements as leaseholds that pay rent to the Palestinian government.
Ideally all landowners in Israel and Palestine should pay the market rent of their land possessions. Land rent would serve as the best public revenue for a Confederation of Israel and Palestine. Palestine would be a state within the Confederation and would itself also be a federation of West and East Palestine.
The other contentious issue has been the return of displaced Palestinians to their pre-1948 lands. A peace treaty should allow a limited return of Palestinians to Israel, with some compensation for lands that have become homes for others. So long as justice is sought, the maximalists will usually be in the minority.
If justice is not established, time will be an enemy of both the Israelis and the Palestinians, as extremists and nuclear perils are on the rise. The choice is either justice now or destruction later.
After World War I, Germany had to pay reparations to the United Kingdom and France. Having sold off its gold, the German government had no specie with which to back its currency, the mark. Therefore Germany issued fiat money, not backed by anything. It was called the Papiermark, the paper mark.
With its economy in ruins, the German government printed more and more currency with which to pay its bills, and the German expansion of money became the world’s most famous example of hyperinflation.
The inflation induced alternative currencies in Germany. In 1922, the Roggenrentebank was established, issuing notes backed by rye grain. In 1923 several local governments issued small-denomination loan notes denominated in commodities such as rye, coal, and gold. The commodity front served as a price index relative to marks for the notes.
The inflation came to a halt with the replacement of the Papiermark with a new currency, the Rentenmark on October 15, 1923. One Rentenmark could be exchanged for a trillion Papiermarks.
The Rentenmark was fronted by bonds indexed to amounts of gold. Since the US dollar was backed by gold then, the Rentenmark was thus also pegged to the US dollar at 4.2 RM to $1. To “back” a currency means to exchange it for a commodity at a fixed rate. It was not enough to merely index the units of the Rentenmark to gold. To become stabilized, the new currency needed to be fronted by a commodity that was actually used. That commodity was real estate.
The Deutschen Rentenbank, the central bank of Germany, established reserves that included industrial bonds as well as mortagages on Germany’s real estate. A currency is fronted when the issuer has collateral that it can deliver in exchange for indexed units of the money. Real estate rentals payable in Rentenmarks were fronts for the new German currency. “Rente,” derived from French, means income in German, such as a pension.
After having stabilized the money, the Rentenmark was replaced by the legal-tender Reichsmark in 1924 one-to-one, although Rentenmark notes continued to serve as money until 1948.
Previous attempts to front a currency with land value failed, because such frontage is insufficient. In France during the early 1700s, John Law’s bank issued money on the collateral of land in Louisiana, but that hypothetical land value did not constrain the over issue of the banks’ notes. Then during the French Revolution, the government issued “assignats” on the collateral of confiscated church land, but that too did not prevent the inflation of the money.
Land rent cannot “back” a currency, since there are no uniform units of land that can be exchanged for units of money. But land rent can be a “front” for money when taxes are payable in that currency, which helps give that money its value. But that alone does not prevent an excessive expansion of the money. To stabilize the currency, it also needs to be backed by or indexed to some commodity. And gold has been a common and suitable backing for paper and bank-account currency.
The German experience also shows that the gold backing does not require large amounts of gold. It is sufficient for stabilization that there is some credible limit to the expansion of the money. The Germans were lucky in 1923 in having monetary chiefs such as Hans Luther of the Finance Ministry, and Hjalmar Schacht, Commissioner for National Currency, who maintained the gold index by limiting the expansion of the new currency.
But as the experience of France, shows, it is risky to depend on the integrity of monetary chiefs. Permanent monetary stability requires a structure of money and banking that is self-correcting. That structure is best provided by free-market banking, in which the real money (outside money) is some commodity beyond the control of the banks, and the banks issue “inside money” or money substitutes backed by the real money. Competition and convertibility prevent inflation.
Any kind of tax can serve to help endow money with value, but a land-value tax offers the greatest frontage for currency, because in effect, LVT acts as a mortgage on land value, and the government can take over land when the tax is not paid. Unlike with taxes on income, nobody goes to prison for not paying a real estate tax, because the rent serves as a reliable collateral. Land rent can serve as collateral not just for real estate loans, but also for taxation, and for currencies. All countries can have “renten money” when they covert from market-hampering taxes on production to market-enhancing taxes on the economic surplus that is land rent.
Thousands of children are entering the US to escape threats by drug gangs and drug lords. The US has for many years exported its war on drug users to Mexico. The increasing force applied in Mexico has driven the drug dealers to Central America, and now the governments of those countries are being increasingly corrupted and destabilized.
Anti-immigrant voices in the USA are obsessed with the effects of their policies, the child migrants, and seek to strengthen immigration barriers rather than confront the causes. The children are not coming to the USA to take advantage of welfare aid. They are fleeing from physical danger.
The drug gangs in Central America are forcing teenagers to join them, or else get killed. That is how they recruit new members. That is why children are fleeing.
US immigration policy contributes to the problem. With legal immigration restricted, and paths to legal residency blocked, immigrants are forced to work in the underground economy, where they are vulnerable to being arrested by the immigration authorities. The undocumented persons then become victims of extortion rackets. Traffickers tell parents that their children left behind in the home country are in danger, and demand money to bring them into the USA. But often the children are abandoned in the desert or used to carry drugs.
The US government is telling the Mexican government to do more to stop children from entering Mexico. But when a child’s parents have been killed in the drug war, and the children are threatened with death, they will swim across rivers, trek through jungles, and cross deserts to save their lives. The US government is committing policy child abuse by refusing to remedy the causes.
Now US government officials are offering the Central American governments aid to programs to keep children in their home country. But until the violence stops, children will not stay in a school where the drug gangs will kill them or make them miserable.
The only way to stop this tragedy is to end the war on drug users and to legalize immigration. Children are not being victimized in the production and sale of alcohol, because it is legal. When a substance is legal, there is a competitive market, and profits are competed down to normal. There is advertizing, and goods can be transported and traded at normal costs.
When a substance is illegal, we get turf wars and coerced children. The criminal systems treat minors with special care, especially when they have been forced to help criminals. Therefore, the drug lords use helpless children, who are also more dependent on adults.
Besides decriminalizing drugs, as Portugal has done successfully, the US should legalize the immigration of all persons who are not threats. US policy has created violence in Latin America, and then the US refuses entry to the victims of that violence.
Critics of immigration claim that the new residents take jobs from American citizens. This claim has been disproved by economic studies. But immigrants would be even less dependent on governmental welfare if labor were fully legalized. It is illegal even for American citizens to freely engage in labor in the USA; the penalty for labor is a levy on the wages earned. When labor is fully legal, it is free of any tax or minimum wage law. A tax on wages has an excess burden or deadweight loss, making it a penalty for working.
In this way, three deeply unjust policies have created the crisis of immigrant children. First, the prohibition of drugs drives the industry towards drug lords and gangs that enslave children, who seek escape by emigrating. Secondly, anti-immigration policies make children have to suffer long and dangerous trips without protection, to evade immigration controls, and risk getting deported. Third, the children are not allowed to work, work opportunities for undocumented adults are limited, and legal labor is suppressed with heavy taxes.
One hundred years ago, prior to World War I, the US did not suffer this inflow of children. The causes were absent. There was no war on drugs, there were no immigration barriers, and there was no tax on wages. Millions of immigrants entered legally, became employed, and contributed to American prosperity. Now we have a declining labor participation rate, drug violence, and a big immigration problem. Our technology is better, but smarter phones will not save us from fundamentally bad government policy.
Central banks such as the Federal Reserve have obtained their income from interest on the bonds they hold. But with interest rates so low now, the central banks, like other bond holders, are receiving little revenue. So now, central banks are buying shares of stock to get higher income from dividends and capital gains.
It’s a bad idea!
First of all, the reason interest is so low now is because central banks around the world have been pushing rates down. The low income from savings accounts and bonds has hurt retired folks and have distorted stock markets. The U.S. stock market averages have been making new highs to a great extent because bonds yields are so low, and also because US companies are borrowing funds at low rates to buy back their stocks.
Secondly, when central banks buy up shares of stock, they, as agents of government, socialize the ownership of otherwise private companies. Government already taxes and regulates the economy, and they own industries such as education and much of medical care, and now they want to own more of the whole economy. Even if a central bank buys shares in an index fund, they artificially raise share prices, and they do it with money they create. Moreover, what happens when the price of stocks has a large drop? Will the central banks contribute to the selling, or buy more?
According to a report to be published this week by the Official Monetary and Financial Institutions Forum, governments and their agencies have already made twenty-nine trillion dollars of market investments. The largest governmental investor is China. The Swiss and Danish central banks have also been buying substantial equities. Central banks have also been buying real estate. Ever more financial and real assets are being acquired by central banks, and thus also by the governments that own and control them.
The ownership of the economy is not what the founders of central banks had in mind. When the Federal Reserve was established in 1913 in response to the banking panic of 1907, its role was to stabilize the banking system as a lender of last resort. For a long time, the Fed purchased US treasury bonds to expand the money supply, as it created the funds it used to buy bonds. But after the recession of 2008, the Fed also bought mortgage-backed securities as well as shares in companies it wanted to bail out.
But now central banks are not buying shares to bail out failing companies, but to increase their income. Ultimately this buying is self-defeating for central banks and all investors, because such massive purchases raise the ratio of share prices to yields, reducing the rates of return.
The pension funds of government employees have, of course, been investing in the stock markets, as well as in bonds and real estate, but these funds can be regarded as belonging to the employees rather than to governments. Governments with surpluses such as from exports or oil sales have set up “sovereign wealth funds” that invest in financial markets, with the potential to manipulate and distort markets. There should be a global treaty to confine sovereign funds to government bonds and global index funds.
It is even worse for central banks to invest in private financial markets because they are creating the money they use for these purchases. This inflation of the money supply is not for stabilizing the currency or helping the banking system, but just to get stock market yield. That monetary inflation will eventually cause price inflation and fuel an even bigger real estate bubble than that which ended in the Crash of 2008.
The ultimate remedy for such asset distortion is the elimination of all central banks. Since that’s not about to happen, we will have to witness a coming financial tragic horror. Just as in the years prior to 2008, we are sitting in boats on a river whose current will take us ever faster the financial waterfall. The most likely year of the next crash will be in 2026, as the 18-year real estate cycle has been the leading cause of the business or interventionist cycle for the past two centuries.
Last time around, government-sponsored enterprises such as Fannie Mae helped stoke the boom by packaging and selling real estate mortgages. The financial reforms after 2007 did nothing to stop the basic causes of the real estate cycle. Now, the massive purchases of stocks, in addition to bonds and real-estate related assets, will help make the Crash of 2026 the biggest ever.
Now that the Islamic State of Iraq and Syria (ISIS) has conquered territory in both states, the US policy response is up for debate. We should, first of all, heed one of the major axioms of economics: in making a decision, ignore sunk costs, and consider only the future costs and benefits. The USA has spent huge amounts of treasure and sacrificed many lives, and also cost the lives and health of its allies and the people of Iraq. That is all in the past, and the US and other players should not make the mistake of being slaves to history.
One of the problems of US foreign policy has been that there is no unifying vision. The US seeks to defend itself from enemies, but it also claims to promote human rights and democracy, and it seeks to protect the status-quo, current boundaries and governments. The US is also pursuing an aggressive foreign war on drug makers and users. Another policy goal is greater trade and economic development.
Another economic principle is that it is often less costly to prevent problems than to have to remedy them. The best foreign policy for the US is to, first, prevent the generation of enemies, and secondly, to defend against them when the enemies insist on that status. That proposition implies that US policy should avoid automatically protecting the status quo, and deal with the reality that exists.
The US has been fighting al-Qaeda because that organization has declared war against the US along with other countries, but we should not assume that all self-proclaimed Islamic regimes are necessarily at war with the USA. The problem in Iraq is that there are two clashing Islamic sects, Shiite and Sunni, and the US occupation set up a veneer of mass democracy that established a Shiite domination over the Sunni. That domination fuels an insurgency which now has been captured by ISIS.
It is probably now too late to restructure the governance of Iraq. Exhortations for greater inclusiveness are useless. Aiding the current government of Iraq would amount to taking sides in a civil war. The US should instead seek contact with the chiefs of ISIS and find out what they ultimately want. If they seek the destruction of the USA, then the US should defend itself now, before the ISIS becomes more powerful. But if they only seek to govern territory and re-establish a caliphate, and do not threaten other countries such as Jordan, then the US should monitor their activities but not become an ally of the Iraqi and Iranian Shiite governments in a religious war against ISIS. The US and its allies would then accept the fact that Iraq is no longer a unified country, but has split into three governments, the Kurdish region, the ISIS, and the remaining land governed from Baghdad with the help of Iran.
The human-rights angle should still remain, as when the rulers become vicious, committing mass murder, then if that can be stopped, action would be warranted. But many regimes around the world are repressive and corrupt, and the US can do little about it other than to stop aiding them. The USA has its own violations of natural rights, and reform should start at home.
One of the contributions to economics made by Friedrich Hayek is the theory of scattered knowledge. In his famous article, “The Use of Knowledge in Society,” Hayek analyzed how the knowledge needed for economic activity by consumers, producers, legislators, and bureaucrats is dispersed, tacit, and ever-changing. Sellers of goods can conduct surveys to find out what people want, but such data collection reveals only a small fraction of the subjective desires of buyers. The knowledge of how to produce goods is decentralized among the firms, each of which has its own local knowledge of the costs and the demand for its goods.
Much of the knowledge about goods is tacit, not written down. A label can list the ingredients, but it will not tell the buyer about how good it will taste, and does not reveal the full story about the nutritional benefits and harmful effects. A government bureaucrat cannot know all the details about the way a company handles its goods. The biggest and fastest computers cannot be programmed to know everything the economy is doing. The supplies and demands for goods are dynamic, always changing, like the weather, so that even when knowledge is gathered and analyzed, it soon becomes obsolete.
The Hayekian knowledge problem is one reason the Austrian school of economic thought concludes that only a truly free market can effectively apply the relevant knowledge. Government officials who try industrial policy, the promotion of some goods at the expense of others, often fail. For examples, subsidies to energy from the wind end up wasting resources, as a uniform policy cannot be applied to suit local conditions, and the full effects (such as windmills killing birds) are not known in advance, resulting in bad unintended consequences.
The natural environment, everything apart from human action, is too complex for human beings to fully understand it. As with economic knowledge, the data needed to understand human effects on the environment is both global and local. The knowledge of environmental conditions is tacit, and changing. The ecologies of the earth, like the economies, have interconnected elements with feedback loops. Kill the mountain lions, and the deer multiply, eat up the vegetation, and then the rains wash away the soils.
The Hayekian perspective on global climate change as well as local impacts is to admit that we don’t know the full effects of human activity, but we do know that interference with long-established interconnections can be deadly. The policy implication is that we should minimize unnecessary human interference with the natural environment. Any human presence displaces the natural presence, as a farm replaces meadows and forests. But it is excessive to burn down large areas of rainforests in order to have a few years of crops until the soil nutrients are depleted.
The optimal application of the knowledge issue is to understand that we can apply some general knowledge but not specific knowledge. For example, we know that emissions from power plants, factories, and vehicles have bad effects. Costs are ultimately subjective, but some costs, such as lost income and resources, can be quantified. We cannot precisely measure the social cost of pollution, but by comparing places with various amounts of pollution, and the various rates of diseases in those places, we can obtain some estimates of the ill effects. Policy can therefore require a payment for emissions that invade others’ property. To do nothing is to declare a price of zero, which is less accurate than the positive price obtained by statistical means.
The Hayekian policy for emissions is therefore a payment for the estimated damage. A pollution charge requires less knowledge than detailed regulations such as engine requirements, gasoline additives, and smog tests. The emissions charge would not be based on uncertain climate changes, but on the proposition that human interventions into the atmosphere and oceans could be catastrophic. The probabilities are uncertain, but what we do know is that a small probability times a huge cost equals a substantial present value. Because the earth’s environment is a balance of water and air temperatures, cycles of carbon emissions and absorptions, feedback loops, and substances such as the ozone layer, the probability that human interventions are harmful is much greater than the chance that they are beneficial. The mutual relationship of wolves, deer, and vegetation imply that killing off either the wolves or the deer will have bad effects.
The knowledge problem implies that policy has to confront the environmental issue rather than ignore it, because human activity is inherently environmentally interventionist. In some cases, intervention can help the environment, such as with artificial coral reefs. But large interventions such as deliberately dumping iron compounds into the ocean should be avoided.
The Austrian school of economic thought is critical of central planning due to its absence of economic calculation via market prices, and due to the knowledge problem. But the absence of pollution charges itself implies mispricing and the presumption that we know nothing about the effects of emissions. Given today’s highly regulated economy, the implication of Hayek’s thought on knowledge is to replace regulations and emissions trading schemes with the requirement to pay the estimated social costs. Firms (and their customers) can then either pay that cost or else avoid that cost by polluting less. To be most effective, pollution charges would need to be applied globally.
Some free-market economists respond to the pollution issue by stating that property rights are sufficient to solve the problem. But any negotiation or lawsuit to compensate others for negative external effects necessarily requires an objective estimate of the damages. A complete prohibition of an external effect, whether of emissions or noise or visual effects, imposes a cost on the emitter. Tort law, or lawsuits, as well as arbitration and mediation, could replace governmentally enacted pollution levies when the victims can be identified, but there is no avoiding some objective estimate of costs. And where torts are not effective, an international agreement on pollution charges would be optimal.
The legal basis for land ownership in the Americas is “Christian Discovery.” This land doctrine derives from the 15th century theology of the Catholic Church. The moral origin of the Vatican’s land doctrine is its old claim of the supremacy of Christianity over all other religions. The “Christian discovery” doctrine is not in the US Constitution, yet it has been adopted by the US government and upheld by the courts.
“Bully’s Justice” by George Zebrowsky, an eye-opening article on Christian Discovery, was published in the June/July 2014 issues of Free Inquiry. Under Christian Discovery, the first Christians to “discover” land previously unknown to the Christian chiefs of state, and held by non-Christians, have a legally legitimate claim to that land. The indigenous and current dwellers have no legal property rights.
A court case in 2005 showed that the Christian Discovery doctrine is still in force. The Onondaga Indian (native American) nation in the State of New York sought federal-court recognition to title of ancestral lands. Also in 2005 the Oneida and Cayuga Indian nations had their land claims dismissed by the US Supreme Court. The Onondaga claim was dismissed in 2010 based on the 2005 Supreme Court decision.
The Supreme Court stated that “Under the doctrine of discovery,” the ownership of “lands occupied by Indians when the colonists arrived became vested in the sovereign, first the discovering European nation and later the original states and the United States.”
There are three moral justifications of land ownership. First is natural moral law, the universal ethic that is inherent in human nature and is a moral imperative for humanity. Second is tradition. Third is force. Natural moral law invalidates both tradition and force as moral rationales.
The laws of the United States derive from English common law, the US Constitution, natural moral law, and the Vatican’s doctrine of land discovery. The US Constitution recognizes the supremacy of natural moral law in its Ninth Amendment, and it also recognizes common law. The US Constitution does not recognize the legality of tradition, force, or the Christian Discovery doctrine, yet the US Supreme Court continues to adhere to Christian Discovery.
As stated in “Bully’s Justice” (p. 28), this Doctrine of Discovery is “one of the rare principles of American law that came not from English common law or from the pen of some Enlightenment philosopher but rather from the Vatican.” The US Supreme Court recognized the doctrine in Johnson v. M’Intosh in 1823 under Chief Justice John Marshall.
The doctrine of Christian Discovery originated in 1455 when Pope Nicholas V issued the papal bull Romanus Pontifex. Without any Biblical justification, this declaration justified the conquest of African lands by the king of Portugal. Pope Alexander VI extended the doctrine to the Spanish conquests in the Americas. The doctrine of Christian Discovery authorized European Christian explorers and their monarchs the rationale to claim lands not occupied by Christians. The doctrine deprived the indigenous inhabitants of any legal land rights.
As ultimate legal owner of the land, the state can then lease land to private tenants, and it can sell or transfer land titles to private persons, but such titles are always secondary to the state as senior and supreme owner, as the state can tax land, control its use, and forcibly buy back title with eminent domain.
The current Pope has expressed concern with global inequalities, but he has not gone to the core cause of inequality and poverty: privileged land tenure and the denial of labor’s self-ownership rights. The Catholic Church would have to confront its old doctrine on the conquest of land, and this it cannot do, and therefore popes must confine their concern about poverty and inequality to laments and exhortations. Now come economists such as Thomas Pikkety calling for massive redistribution to treat the effects of income inequality, but refusing to acknowledge the origins and remedies in land and labor.
The Christian Discovery doctrine is based on supremacism, the belief that one’s religion, culture, and traditions are superior to those of others, justifying the use of force to maintain this supremacy. Such supremacy has been adopted by several religions, but this violates the human equality that is the basis of natural moral law and that has been recognized in declarations of human rights. Such constitutional cognitive dissonance does not seem to bother legal authorities.
If we seriously apply natural moral law to the question of land ownership, we need to confront both the false justifications of Christian Doctrine of Discovery and also the aboriginal land claims. As stated by John Locke in his Second Treatise of Government, human moral equality implies that one may fully own land only so long as there is free land of that quality available to others. When such land is scarce and has a price, the analysis of Henry George kicks in, that one may have possession conditional on paying the land rent to the members of the relevant community in equal shares.
Therefore the native American Indians may not take full ownership of their former lands. The land rent belongs not to them but to all humanity. Also, the rental value of land due to civic improvements is a return on the capital goods, not the natural spacial resource.
Justice requires the abolition of the supremacist Doctrine of Discovery and its replacement with natural moral law. Some compensation and restoration of rights of possession are due to the aboriginal inhabitants, but history cannot be erased, and the current residents, users, and title holders, having followed the current rules, also deserve some consideration.
The US Service Women’s Action Network (SWAN) reports that sexual assaults and harassment continue to occur “at alarming rates.” Sexual violence has long-lasting effects, and the many years of Pentagon studies and Congressional hearings have not ended it. There were 5,061 sex assault reports in the 2013 fiscal year.
As stated well by SWAN, sexual assaults in the military reduce the strength of the US armed forces and threaten national security. Defense Secretary Chuck Hagel has vowed to prevent these assaults, but we need more than vows and speeches.
An effective tool in preventing such assaults would be to declare that any assault by a soldier against another soldier is treason. Attacks of any sort against a member of the armed forces aids the enemy by weakening defense against external enemies. The assaults and harassment reduce recruitment and the retention of skilled personnel. It is outrageous that the military that is supposed to protect the country cannot protect its own members.
A declaration that assaults within the military are crimes of treason would make a stark impression. This declaration should be buttressed with posters and repeated in military news media. The troops should be ordered to say out lout in unison, “Assault is Treason!”
The punishment for proven assaults, after a trial, should include public shaming. The best preventative is internal, the feeling that such acts are shameful and odious.
Some generals and Pentagon officials say that actions to reduce and investigate assaults should remain within the military, to avoid breaking up the chains of command. But they have had many years to deal with this. It seems that the civilian practice of hiring attorneys and bringing the matter to court with representatives chosen by the victims provides better assurance of justice. Moreover, the victims should have the common-law right to sue those who assault them for damages. Such lawsuits would be most effective if the victim had the legal ability to sell the tort claim to those who would have a better ability to prosecute the case.
All Americans should support the idea that assaults among the military are treasonous acts. An assault on a fellow soldier is not only an attack against that person, but an attack on the whole military and an attack on the whole nation.
Treason is not to be treated lightly, and neither should sexual attacks in the military.
The debates on raising the minimum wage have ignored one important consequence: the effect on land rent. I illustrate the relationship between a raise in wages and land rent with a quantitative model.
Suppose there is a factory that produces dried papayas. The firm pays all workers the market wage of $10 per hour. There are 10 workers, and the “marginal product” of the 10th worker, i.e. the extra output added by that worker, is 10 units. The marginal product of the 11th worker is only 4 units. The 9th worker added 12 units The 8th worker added 14 units. If we add up the value added per hour by each worker, we get 10 + 12 + 14 + 16 + 18 + 20 + 22 + 24 + 26 + 28 = 190 units. The dried papayas sell for $1 each, so the sales per hour equal $190. The total wage per hour is 10 times $10 = $100.
The owners invested the equivalent of $400 per hour in the business, and seek a return of ten percent, or $40 per hour, which they withdraw from revenue. $190 – $100 – $40 leaves a surplus of $50. Where does it go? It is the rent charged by the landlord per hour for the work space.
Now impose a minimum wage which raises the wage rate to $12. The last worker hired produces only $10 worth, so he is fired. That last worker had the same skill as all the others, but one worker has to be fired so that the marginal product of labor is raised to $12. Total wages now equal 9 times $12 = $108. The total value sold is now 180 units, for sales of $180. After subtracting $108 for labor and $50 for rent, there remains $22 for the hourly return on investment, a return of only 5.5 percent.
Now there are four possible alternatives. First, the owners can get a return of 10 percent elsewhere, so they shut down the business. Second, the owners can offer to renegotiate the rent paid to the landlord. Third, the owners can raise the price of the product. Fourth, the owners can reduce their labor costs by substituting more machines, if possible.
If the firm competes in a global market, the third option is not possible; the owners cannot raise the price. So they negotiate with the landowner. If the owners kept their return at $40, the surplus becomes $180 – $108 – $40 = $32. The landlord replies that their assets are less productive, generating sales of $180 rather than $190, so a new firm would have capital goods of 18/19 of $400, for $379. A ten percent return is $38. Therefore the rent surplus is $180 – $108 – $38 = $34. The owners accept this as the new hourly rent. Much of the increase in the hourly wage has been at the expense of less commercial land rent. That is how the firm can stay in business while paying the higher wage.
The total purchasing power is now $108 in wages, $38 in capital yields, and $34 in land rent, for a total of $180. So the income is sufficient to buy back the product.
Now let us go back to the workers. The worker who is fired is now on government welfare, and the nine working at $12 per hour get taxed $1 per hour to generate $9 for food and housing subsidies for the former worker. The housing landlords realize that they can raise the rents by $1 per hour of labor, since the workers could afford to live their prior to the increase in the minimum wage. The higher taxes and rent eat up all the wage increase.
Thus the housing landlords gain $10 per hour of rent paid by the nine workers plus the laid-off former worker. This raises their total rent to $44, offsetting some of the loss of the commercial rent paid by the firm.
If the firms implement option 3 and raise the prices of their products, the workers are now worse off than before, after paying more for goods plus higher taxes and higher rent.
In effect, a minimum wage is a tax on the employers of low-wage workers. It is economic folly to concentrate the minimum-wage tax on employers. If the people wish to raise the lowest wages, a better tool is to widen and raise the earned income tax credit. The reduction of taxes on low-income workers would be paid for by raising taxes on everyone else.
But the best solution of all to the problem of poverty is to do what the American economist Henry George proposed: to abolish all taxes on earned income, and shift to public revenues from land rent. That shift would increase both employment and wages.
When the minimum wage is raised, people only see the superficial appearance of some workers getting a bigger paycheck. What is not so visible is the reduction of land rent in commercial real estate, and the increase in the rent of residential real estate, especially as it occurs over time. The reduction of rent is often relative rather than absolute, as rents rise but not by as much as they would if enterprises were more profitable. And people do not connect the rise in residential rent to the general increase in low-income wages.
The original problem is in not allowing the market to work. Wages are artificially reduced by taxation, while land values are raised by subsidies. If higher minimum wages are mostly at the expense of commercial rent, and end up being eaten by higher residential rent, it is simpler and more effective to directly tap the land rent for public revenue while eliminating taxes on wages.
We, the people of this land, recognize natural moral law as the proper foundation for governance. By unanimous consent, we thereby establish this constitution to provide the structure of governance that will best implement justice, preserve our liberty, and protect our natural rights.
Article I: The structure of governance
1. The transition. Upon the designated date of the adoption of this constitution by individuals, the existing governance powers in the old territorial realm shall be transferred to those seceding individuals who join the libertarian federation (the new realm) by their written signature either on paper or in electronic form. The lands held by these individuals shall also secede into the federation. A percentage of land value held by the old realm government shall be transferred to the new realm in proportion to the seceding population. The same percentage of the government debt shall also be transferred to the governance of the new realm. As new persons secede from the old to the new realm, in stages the corresponding land value and debt shall be transferred to the new realm, with the land value and debt set to that which existed at the date of first secession.
2. Electoral districts. Prior to the date of the secession, the old realm shall establish neighborhood electoral districts, each with a population of approximately one thousand persons. In locations where there is already an established governance structure such as a homeowners’ association, that organization may serve as the neighborhood district.
3. Councils. Each neighborhood district shall elect, from their residents, a council of seven persons plus one alternate council member. The neighborhood council is designated “level one.” A local group of 20 to 30 councils shall form a level-two council, and each level-one council shall elect one of its members as its representative to the level-two council. The elected level-2 representative shall be replaced by a new representative from the level-one council. A group of 20 to 30 level-two councils shall similarly form a level-three council. This process shall continue to the broadest and highest council, level-H, which shall be designated as the parliament or congress. Each council shall elect a chair or president.
A neighborhood council member may be recalled by a petition of one tenth of the members which elected the representative, followed by a vote for recall. A member of a council of level two or higher may be recalled by a vote of the majority of the council that elected that person.
4. Secession. Any member of the federation may secede as a person and may also withdraw land that is owned by that member in fee-simple title or other title forms that are easily separable from other real estate. However, the seceding person must pay his proportional share of any debts held by all councils for which he is a member, and is also liable for any personal debts owned to others in the federation.
Article II: The public finances
1. Prohibited taxes. In accord with the equal self-ownership of all persons, no tax shall be imposed on personhood, interest income, exchanges of property, value added, capital gains, wages, produced goods, or on profits and dividends from enterprise. However, a council may charge payments using the method of demand revelation, as described in III C.
2. Land-value and rent. A board of professional real-estate appraisers shall be appointed for each level-two council. Each council level shall appoint one such assessor for each board. The assessors and their hired assistants shall estimate the land value or land rent for each plot of land within the level-two district at least annually. The assessment values shall be a public record. Any land title holder may appeal the assessment to an appeals board selected by the level-two council, and if not satisfied, to a jury randomly selected from all level-two residents.
Each level-two council shall appoint a treasurer who shall collect and account for the public finances. Each month, the treasurer shall bill each land title holder for at least 80 percent of the assessed land rent, as the community rent that properly belongs to the people. Payments more than two months late shall be subject to a penalty of ten percent annually above the price-inflation rate. Payments not received within year shall result in a lien on the property and, after two years of non-payment, the sale of the property so that the owed funds are recovered. The level-two or higher-level councils may enact rules for the postponement of the community rent payment for cash-poor elderly title holders.
3. Pollution and congestion. Each council shall, in coordination with other councils of the same or other level, levy charges on pollution and other environmental destruction. Each council shall similarly levy charges on traffic and parking congestion just high enough to prevent congestion.
4. User fees. Each council may charge user fees for services that are voluntarily agreed upon by the residents, such as for the collection of trash and garbage, but the councils may not prohibit competitive services, and the councils may not impose charges for similar services provided by private substitutes.
Article III: Legislation
1. Implementation of natural moral law. The councils may not impose any restriction or cost on any adult action that does not coercively harm others. “Harm” is defined as an invasion, and not an offense due merely to the beliefs and values of those affected. The councils shall enact or adopt legislation that prohibits acts which coercively harm others, including threats of such acts. The council may also enact liability rules for acts which are penalized after the fact.
Residents may form clubs, including territorial organizations, within which the members may enact restrictions and dues, provided that any club member may exit the organization.
2. Majority rule. The councils shall enact legislation by majority rule. A council may also submit legislation to be put to a vote of the residents.
3. Demand revelation. Decisions on the provision of collective goods may be determined by the method of demand revelation. Each member is assigned a cost to be paid if the decision is to provide the good. Each member may enter, on a web site or on paper, the most that the member is willing to pay. Those who do not state any value shall be assumed to have stated a value equal to one’s cost. If the total values exceed the total cost, the collective good is provided. Any member whose stated value changes the outcome, relative to having stated a value equal to one’s cost, shall compensate the community with a payment equal to the net loss of all the others.
4. Adults. The standard age of adulthood shall be set at 18 years of age, which includes voting and the ability to enter into contracts and buy any products. A council may set a younger age for limited purposes, such as driving vehicles. When a minor becomes an adult, he shall sign in agreement with this constitution if he seeks to be a voting resident.
5. Jurisdiction. Legislation enacted by a council shall supercede any conflicting legislation enacted by a lower-level council within its jurisdiction.
Article IV: The judiciary
1. Trial by jury. All those charged with crimes punishable by prison, or by fines of value greater than one fifth of an ounce of gold, shall have the right to a trial by randomly selected jury of at least nine persons residing within one’s level-two council. Unanimous agreement shall be required for convictions punished by prison.
2. Law suits. All law suits under common law or civil law shall be transferrable, so that a person suing may sell the law suit to another party who will prosecute it. The default practice shall be for the loser of a law suit to pay the legal costs of the winner, unless a council overrides this with legislation.
3. Courts. The level-H council (parliament or congress) shall establish a supreme court with nine members, and each council above level-one shall appoint judges and establish courts of law. Private courts and arbitration shall also be permitted. The level-one neighborhood councils may establish courts as they wish.
Article V: Amendments
This constitution may be amended by a 3/4 vote of the level-H council together with a vote in favor by 3/4 of the level H-1 (the level below H) councils by their majority votes. However, Article II paragraph 1 and Article III paragraph 1 may not be repealed or substantially altered.
of interest to Dave Lakhani, President Bold Approach (Mar 8) and Matt Ozga (Jan 29): “I write for the Washington Square News, the student run newspaper out of New York University. Geonomics seems like it has great significance, especially in this area. When was geonomics developed, and by whom?”
About 1982 I began. Two years later, Chilean Dr Manfred Max-Neef offered the term geonomics for Earth-friendly economics. In the mid-80s, a millionaire founded a Geonomics Institute on Middlebury College campus in Vermont re global trade. In the 1990s, CNBC cablecast a show, Geonomics, on world trade as it benefits world traders. My version of geonomics draws heavily from the American Henry George who wrote Progress & Poverty (1879) and won the mayoralty of New York but was denied his victory by Tammany Hall (1886). He in turn got lots from Brits David Ricardo, Adam Smith, and the French physiocrats of the 1700s. My version differs by focusing not on taxation but on the flow of rents for sites, resources, sinks, and government-granted privileges. Forgoing these trillions, we instead tax and subsidize, making waste cheap and sustainability expensive. To quit distorting price, replace taxes with “land dues” and replace subsidies with a Citizens Dividend.
Matt: “This idea of sharing rents sounds, if not explicitly socialist, at least at odds with some capitalist values (only the strong survive & prosper, etc). Is it fair to say that geonomics has some basis in socialist theory?”
A closer descriptor would be Christian. Beyond ethics into praxis, Alaska shares oil rent with residents, and they’re more libertarian than socialist. While individuals provide labor and capital, no one provides land while society generates its value. Rent is not private property but public property. Sharing Rent is predistribution, sharing it before an elite or state has a chance to get and misspend it, like a public REIT (Real Estate Investment Trust) paying dividends to its stakeholders – a perfectly capitalist model. What we should leave untaxed are our sales, salaries, and structures, things we do produce.
a manual. The world did not come without a way for people to prosper, and the planet to heal and stay well; that way is geonomics. Economies are part of the ecosystem. Both generate surpluses and follow self-regulating feedback loops. A cycle like the Law of Supply and Demand is one of the economy’s on/off loops. Our spending for land and resources – things that nobody made and everybody needs – constitutes our society’s surplus. Those profits without production (remember, nobody produced Earth) can become our commonwealth. To share it, we could pay land dues in to the public treasury (wouldn’t oil companies love that?) and get rent dividends back, a la Alaska’s oil dividend. Doing so let’s us axe taxes and jettison subsidies. Taxes and subsidies distort price (the DNA of exchange), violate quid pro quo by benefiting the well-connected more than anyone else, reinforce hierarchy of state over citizen, and are costly to administer (you don’t really need so much bureaucracy, do you?). Conversely, land dues motivate people to not waste sites, resources, and the ecosystem while rent dividends motivate people to not waste themselves. Receiving this income supplement – a Citizens Dividend – people can invest in their favorite technology or outgrow being “economan” and shrink their overbearing workweek in order to enjoy more time with family, friends, community, and nature. Then in all that free time, maybe we could figure out just what we are here for.
a study of Earth’s economic worth, of the money we spend on the nature we use, trillions of dollars each year. We spend most to be with our own kind; land value follows population density. Besides nearness to downtowns, we also pay for proximity to good schools, lovely views, soil fertility, etc. These advantages, sellers did not create. So we pay the wrong people for land. Instead, we should pay our neighbors. They generate land’s value and deserve compensation for keeping off ours, as they’d pay us for keeping off theirs. It’s mutual compensation: we’d replace taxes with land dues – a bit like Hong Kong does – and replace subsidies with “rent” dividends to area residents – a bit like Alaska does with oil revenue. Both taxes and subsidies – however fair or not – are costly and distort the prices of the goods taxed and the services subsidized. By replacing them and letting prices become precise, we reveal the real costs of output, the real values of consumers. Then, just by following the bottom line, people can choose to conserve and prosper automatically. A community could start by shifting its property tax off buildings, onto land – a bit like a score of towns in Pennsylvania do; every place that has done it has benefited.
an answer for Jonathan of the Green Party (Nov 7): “What does ‘share our surplus’ mean?”
Our surplus is the values that society generates synergistically. It’s the money we spend on the nature we use: on land sites, natural resources, EM spectrum, ecosystem services (assimilating pollutants). It’s also the money we pay to holders of government-granted privileges like corporate charters. We could share it by paying for the nature we use and privileges we hold to the public treasury then getting back a fair share of the recovered revenue. Used to be, owners did owe rent (“own” and “owe” used to be one word). And presently, some lucky residents do get back periodic dividends: Alaska’s oil dividend and Aspen Colorado’s housing assistance. Doing that, instead of subsidizing bads while taxing goods, is the essence of geonomics.
Jonathan: “Is local currency what you mean?”
Editor: It’s not. Community currency is a good reform, but every good reform pushes up site values. That makes land an even more tempting object of speculation. Now, any good will eventually do bad by widening the income gap – until you share land values.
a scientific look at how we divvy up the work and the wealth, how some of us end up with too much or too little effort or reward. That’s partly due to Ricardo’s Law of Rent, showing how wasteful use of Earth cuts wages. And it’s partly due to how a society’s elite runs government around like water boys, dishing out subsidies and tax breaks. While geonomists look political reality right in the eye, without blinking, conventional economists flinch. When Paul Volcker, ex-chief of the Federal Reserve, moved on to a cushy professorship at Princeton cum book contract, the crush of deadlines bore down. So Volcker asked a junior associate to help with the book. The guy refused, explaining that giving serious consideration to policy would ruin his academic career. The ex-Fed chief couldn’t believe it and asked the department chair if truly that were the case. That head honcho pondered the question then replied no, not if he only does it once. And economics was AKA political economy!
suitable for framing by Green Parties. When Greens began in Germany two decades ago, they defined themselves as neither left nor right but in front. Geonomics fits that description. The Green Parties have their Four Pillars; geonomists have four ways to apply them:
Ecological Wisdom. Want people to use the eco-system wisely? Charge them Rent and, to end corporate license, add surcharges. To minimize these costs, people will use less Earth.
Nonviolence. Want people to settle disputes nonviolently? Set a good example; don’t levy taxes, which rely on the threat of incarceration, to take people’s money. Try quid pro quo fees and dues.
Social Responsibility. Want people to be responsible for their actions? Don’t make basic choices for them by subsidizing services, addicting them to a caretaker state. Let people spend shares of social surplus.
Grassroots Democracy. Better have grassroots prosperity. Remember, political power follows economic. Pay people a Citizens Dividend; to keep it, they’ll show up at the polls, public hearings, and conventions.
a study of a phenomenon David Ricardo noted going on two centuries ago. When wine grapes rise to $10,000 a ton from the very best land (last year, cabernet sauvignon commanded an average of $4,021 a ton in the Napa Valley), then vineyard prices soar from $18,000 an acre in the 1980′s to $100,000 an acre five years ago and now for a top pedigree up to $300,000 an acre (The New York Times, April 9, via Wyn Achenbaum). Pricey land does not make wine pricey; spendy wine makes land spendy. While vintners make their wine tasty, nature and society in general – not any lone owner – make land desireable. Steve Kerch of CBS’s MarketWatch (April 5) notes that much of what a home sells for on the open market is a reflection of intangible factors such as what school district the house sits in. The price the builder has to pay for the land also tends to be driven by the same intangibles. Because the value of land comes from society, and because one’s use excludes the rest of society, each user owes all others compensation, and is owed compensation by everyone else. Sharing land’s value, instead of taxing one’s efforts, is the policy of geonomics.
shaped by reality. In the 1980′s, the Swedish government doubled its stock transfer tax. Tax receipts, however, rose only 15%, since traders simply fled to London exchanges. Fearing a further exodus, the Swedish government quickly rescinded the tax altogether. (The New York Times, April 20) That willingness to tax anything leads us astray. Pushing us astray is that unwillingness to pay what we owe: rent for land, our common heritage. Assuming land value is up for grabs, we speculate. We cap the property tax on both land and buildings and the rate at which assessments can go up; while real market values rise quicker, assessments can never catch up. Our stewards, the Bureau of Land Management, routinely sell and lease sites below market value, often to insiders, says the Government Accounting Office. Once we grasp that rent is ours to share, we’ll collect it all, rather than let it enrich a few, and quit taxing earnings, which do belong to the individual earner. That shift is geonomic policy.
the Great Green Tax Shift maxed out”
Economically, taxing pollution and depletion does reduce pollutants and extracts – and thus the tax base; plus such taxes are regressive, requiring a safety net. On the other hand, collecting site rent is progressive and generates a revenue surplus payable as a dividend to residents, which can serve as the safety net.
Environmentally, taxes on waste and extraction do not drive efficient use of land, as does getting site rent. Better settlement patterns do reduce extraction upstream and pollution downstream.
Politically, green fees have less impact if applied locally; local is where grassroots movements have more impact. Yet getting rent usually entails shifting the property tax (or charging user fees), the province of local jurisdictions; both mayors and city voters have been known to adopt a site-value tax.
Ethically, putting into practice “tax bads, not goods” skirts the issue of sharing Mother Earth which collecting rent confronts head on. Since nothing is fixed until it’s fixed right, ultimately, greens must lead humanity into geotopia where we all share the worth of Mother Earth.
the annoying habit of seeing the hand of land in almost all transactions. In geonomics we maintain the distinction between the items bearing exchange value that come into being via human effort — wealth — and those that don’t — land. Keeping this distinction in the forefront makes it obvious that speculating in land drives sprawl, that hoarding land retards Third World development, that borrowing to buy land plus buildings engorges banks, that much so-called “interest” is quasi-rent, that the cost of land inflates faster than the price of produced goods and services, that over half of corporate profit is from real estate (Urban Land Institute, 1999). Summing up these analyses, geonomists offer a Grand Unifying Theory, that the flow of rent pulls all other indicators in its wake. Geonomics differs from economics as chemistry from alchemy, as astronomy from astrology.