“Out on a limb, only your balance has got your back.”
Poking a Wasp Nest Without a Net
It’s not like economists and statisticians to ignore big numbers; normally, they don’t. And $8 trillion for the worth of Earth in America annually definitely qualifies as huge. So why’d they let us go out on a limb by ourselves?
Talk about the elephant in the room no one’s talking about. Or, maybe it’s more like the gorilla in the room that most can not see. Whichever, how much society spends on the nature everyone uses is a vast stream ignored by, or invisible to, most everyone.
While the US publishes the size of aggregate spending (over $18 trillion), the government does not distinguish the size of our largest spending stream. Officials fail to parse our spending into: spending that rewards our efforts—our labor and capital—versus spending that rewards customs—one’s land and privilege.
These gatekeepers do not give adequate explanations, or sometimes not any answer at all, and are not moving forward toward tabulating a useful, accurate total. Even at as many as eight trillions (Ch 24), the figure could be an underestimate. Under-estimate is what officials do. Getting clear is what they don’t do (Ch 18).
With its wealth of “data” and its myriad of bureaucracies, the federal government could clarify society’s surplus. But it doesn’t. The call to raise the bar re measuring rents goes unanswered.
A few researchers do make some educated guesses. The relevant economists and the tasked bureaucrats are moderately helpful, yet do subpar work and rationalize their results. Doing that is easier than investigating property, and safer. Why are they at risk?
The few insiders who now receive the lion’s share of our spending for land and resources—lenders of mortgages, owners of oil companies, holders of patents—exercise their considerable power to keep rent stats under wraps. And keep researchers into rent in the dark (Ch 12). If we get the total wrong, that means ignominy for this quest—by us or anyone to follow us—for a long time to come.
Few of the usual critics and reformers join the call for calculating rent. Probably because they have their own pet worldviews to further, thank you very much. Just try and interest them in facts that do not fit into their frame of analysis.
So we questers of the size of rent are pretty much on our own, tallying staggering figures, walking the high wire alone, while working without a net. Even those who criticize standard economics don’t criticize the inadequate treatment of land. Ironically, the issues they find relevant exist only because they’re downstream of the rent problem.
Academics Criticize Bogeyman
If critics regard land at all it’s to minimize the importance of rent. Try disagreeing, pointing out what does generate undue fortunes—rents. That implies other theorists did not know this factor before. Implying ignorance diminishes any chance of making an alliance. “Land? It’s antiquated,” may the kindest cut you hear as they walk away.
The best known critics, by focusing on non-issues, inadvertently make the land issue seem inconsequential. Thomas Piketty became a celebrity with his fat bestseller, Capital in the 21st Century (2014). He showed how the rich get richer while the poor get poorer due to ownership (or lack) of capital, or so he said. Piketty used “capitalists” and “the rich” as synonyms and proposed taxing them.
Sitting side by side with Piketty on a televised panel discussion, Joseph Stiglitz noted that capital—factories and skyscrapers—depreciates; it’s land—especially urban land—that appreciates. Piketty did not acknowledge the point. And making the point was the former Chief Economist of the World Bank, a winner of the ersatz “Nobel” prize, and a professor at Columbia. A tome that would’ve been correct would have been titled Land in the 21st and Every Century.
Matthew Rognlie (formerly of Reed College in Portland Oregon) noted that it was not capital capturing all the surplus that functional economies naturally exude, it was land, mislabeled “housing”. Hence not capital but land—usually referred to sloppily as “real estate”—was the father of enduring fortunes.
How many know Piketty’s idea? Millions. How few read the correction? Several thousand? Even when getting it wrong, a critic of wealth inequality can achieve fame and fortune, leaving geonomists as lone voices howling in the wilderness.
Certainly, a few capitalists did rake in fortunes. Railroads and steel, oil and cars, did vastly enrich a few. Yet the textbooks leave out that:
- Railroads made more money selling the land they were given by Congress than by ferrying freight.
- Iron—the basic ingredient of steel—was already valuable in the ground, untouched by miners (that value is rent).
- Oil, like iron, was already valuable even before being extracted from the ground.
- Cars needed paved roads; funding them came out of the public purse. Plus courts permitted the destruction of the trolley which reduced competition early on.
The list of favors for capitalists goes on but it should be clear that both rent and privilege played a huge, albeit downplayed, role in their amassing monumental fortunes.
Still today popular oversight continues, mainly re the role of patent hoarding in making possible tech billionaires (Ch 24).
Criticize Finance Yet Overlook Funds
In keeping with their penchant for changing names and definitions, economists no longer use “capital” to refer to heads of cattle (the term’s original meaning) or to tools, factories, and supplies (in contrast with consumable goods). Rather, they just mean big piles of money, stuff of investments and huge savings accounts. An enormous portion of this capital is curdled rent, invisible to critics and reformers, while steroids for bankers.
Gerald Epstein and Juan Antonio Montecino in their “Overcharged: The High Cost of High Finance" measured by how much bankers pad their profits. Bankers’ higher charges cost borrowers more money, which in turn harms the economy.
They use “cost” in the sense of “harm” or “damage”, not in the sense of an input’s expense. The two senses differ greatly; economics would benefit by keeping them straight. (So when did consistency become a virtue within economics?)
Epstein and Montecino find that:
* Starting in 1980, shadow banking’s share of intermediation (handling money) began rising sharply, from about 20% to almost 70% during the first half of the previous decade.
* The IRA 401K pension system is bloated and non-competitive. It creates hundreds of billions of dollars in annual costs (asset management and advisory fees). Yet it does not create better allocation of resources.
* The share of financial sector “earnings” relative to total corporate profits rose from about 10% around 1980 to about 40% at the turn of the 21 century.
* Despite their best efforts, the net returns of actively managed portfolios are more than 2% points lower net returns relative to index funds—4.73% vs. 6.94%.
* In general, the asset management sector generates significant amounts of incomes for themselves, less so for their customers and society.
* Beginning in the 1990s, the gap between wages in financial services and other sectors started increasing, and that the gap was especially high within investment banks and securities brokers and dealers.
Building on Philippon and Reshef’s research, Epstein and Montecino estimate wage rent (excess wages with excess profits) to be $1.4 trillion between 1990 and 2005. Adding losses from slower growth and recession brings it up to $3.7 trillion. They project that from 1990 to 2023, this number would add up to $22.7 trillion.
Should we add wage rent to the growing total of natural rent? What would the annual amount of all sectors in 2017? I could not find statistics so whether it belongs or not with natural rents is moot.
Leading up to the recent recession, the American financial system—by which Epstein and Montecino mean Wall Street and not credit unions and community currencies—increasingly failed at providing basic banking and became more involved in speculation. Their solution? Rules and regulators, no matter how much the bureaucracy would cost.
Activists Fry Downstream Fish
It’s understandable that ivory tower types downplay rent. Putting rent in its proper place—showing how it drives the business cycle and contributes to great fortunes—could put their careers at risk of retribution by the powers that be. But why do the usual critics and reformers overlook rent?
Despite wanting to close the income gap, wannabe do-gooders don’t know what widens it. They suspect that enormous fortunes must be unearned simply because they’re enormous. They assume that the lever is capital while actually it’s land.
People blame people. Certainly, being extra rich or extra powerful does not automatically make one extra innocent. However, the problem is not so much the elite behaving badly as it is certain customs we all live by—rights without duties, power sans responsibility. But blaming custom is dull, it pales beside blaming others.
Besides the instinctual fun of blaming others, several factors bolster the prevailing worldview of capital guilty, rent invisible.
- The press reports hi-tech minting billionaires, and previously oil fueling fortunes, but not prime sites enriching a handful of owners.
- Most people, never buying or selling downtown lots, have no idea how valuable downtown is. On 3-D maps, central city sites tower over others.
- Academia dismisses land as a major factor in generating income.
- And bureaucracy makes a morass of statistics re social surplus.
Turn from the inequality of being able to afford nearly everything under the sun to the inequality of not being able to afford a home. Some can not see land but only what’s on it—unaffordable housing. This blind spot lets urban advocates miss two key facts.
- It’s not existing housing—already built—that rises in value but land. Further …
- It’s not owners and landlords who raise what they charge—they’re innocent; it’s others who earned more money and use it to spend more on locations.
Giving these two factors their due, activists might craft a policy that makes housing affordable. An eye-catching total for rent could highlight those factors.
Plenty of activists and economists criticize the GDP as a measure of economic health and a guide for policy and offer ideas to reform it. Yet few if any of them notice that the strongest stream in the GDP is our spending for the parts of nature we use. That means, what GDP measures is not so much the output of our labor and capital but output due to the advantages built into our locations.
For now, looking around in their own particular box, people worried about inequality, housing, and GDP leave us to our own devices.
Regulate Or Apply Ounce of Prevention?
Most claim that not enough government—de-regulation—
Sure, deregulation plays its role, but something like it, some slightly different way government loosens the reins on financiers, happens every turn of the business cycle. Blaming deregulation is very ahistorical and is not deep.
Of all the assets that economists and financiers consider, non-human land is special. We need land more than we do, say, laptops. We need land to live, laptops to watch Youtube So everybody pays much more for land, more than for laptops. Further, land has a much greater impact on the west of the economy. It’s tied to housing, and housing to furniture, appliances, driving from suburbs to downtowns, etc.
To understand the cycle, one must know much more than de-regulation. One must know debt for land, the life’s blood of bankers, particularly the central bank. For more, see Phil Anderson’s Secret Life of Real Estate and Banking, a thorough and powerful work of economic history.
Fans of regulation missed that the money that enriches and empowers financiers is rent. Leaving out that huge piece of the puzzle … no, maybe regulations won’t cut it. A broader and deeper analysis suggests that the role of the state as the main cause pales beside the concentration of rents.
Remember that Woody Allen joke about two old Jewesses complaining about the resort they went to in the Catskills? Not only was the food bad but there was not enough of it. We laugh because we get it. Yet the same attitude holds with those wanting to control others. They fault government’s favoritism, yet want more government. Why not better government?
The world’s foremost organic gardener offered advice. Author of The One Straw Revolution, Masanobu Fukuoka said, when something goes wrong in my garden, I think first not what to do but what to undo. Applied to financial collapses, regulations and the rest of the apparatus would be what not to do. But what would be what to do? Repeal limited liability or at least charge full market value for it? Find another use for rent other than reward speculation?
All that attention paid to what bankers do, and none paid to what they do it with—rent—legitimizes surface issues and marginalizes a deeper analysis.
Howl Until Heard
What could show others the error of their ways? The harder you try to intrigue the likeliest receptors, the more stubborn they get. Your facts not only fall on deaf ears but also raise pointy hackles. Psychological research shows that people set in their ways merely entrench themselves even deeper into what they “know to be true”. Staying loyal to ideology suits human nature.
Do the gatekeepers of statistics see this investigative gadfly as partial? As a critic? An amateur? An agitator trying to rock the boat? Does merely asking a question of an official seem like prying? Imply criticism? Appear to be taking sides? Who knows?
Once you know the role of rent and the magnitude of rent, the only thing left to do is be a lone wolf howling in the wilderness where the trees are silent, to howl with each rising moon and each Earth rise, until the howl is heard. Totals for the surplus output of the economy must get out—as must the story of why the effort is so lonely and difficult.
Could the number for the size of rent be found stashed somewhere? Could the total of the value of land, resources, and privilege be greater than already calculated? Could a smoking gun—a policy calling for ensconcing rent—be found anywhere? If so, where? Where is a sump for all the significant statistics? And who towers over the myriad of number crunchers?
As they say, follow the money. Who makes the most money off the Earth? What institutions do those aristocrats control? Let us soldier on into the belly of the beast, the Federal Reserve. To whom else can we turn? Can we get some ten-year-old kid to hack the Fed? (joke) Will finding out the size of our spending for nature and privilege—our social surplus—wake up Leviathan?
This article is Part 25 of a series highlighting the forthcoming book, “Bounty Hunter: a gadfly’s quest to know the worth of Earth,” by Jeffery J. Smith. To date, the experts have not risen to meet the challenge. Indeed, some have even stood in the way. Yet the payoff for knowing this datum is huge.
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