"Owe, owe, owe you bought … Merrily, merrily, merrily, Rent is but a stream."
As in the country-western song, researchers have been looking for the sum of rent in all the wrong places. So far, statisticians have sought a figure for the worth of Earth in America by looking at sales figures of land (Albouy) or land plus whatever’s on it (everyone else; Ch 13). But the value of all locations and natural resources is not a lump sum selling price.
We often forget that the price of locations is their rent, capitalized. If you want to set a price, first you must know rent. Without rent, there is no price of land. But without a price, there is still rent—how much owners lease land for. They don’t have to know price at all in order to charge rent.
Annual output is how one evaluates sites. Not just farmland, which we judge by harvests, but commercial sites, too, we assess by how much merchants make there yearly. Even homesites are worth benefits that don’t make money but save money and provide pleasure each year—proximity to downtown, an arterial street, a school, a park, a view, etc.
To calculate a price, one estimates a decade-or-more’s worth of rent. Thus a price for land has guesswork built in—expected returns over time. OTOH, rent for land is a measurement of a current event. That’s far more reliable than price. And more useful.
When it comes to land, aggregate price is not functional. That is, you could never collect that aggregate price if you sold all land and resources at one point in time. The enormous supply on offer would drive down the price.
If price were the value, then the first buyer could flip Earth; the subsequent buyer would pay a like amount. Yet that’s not possible, and not just because there’s not that much money in the world (not money that holds its value). If it were possible, then landlords would already be doing it; they’d demand the selling price as rent each month. But they don’t because nobody could pay it.
While price is not functional, rent is. If society rented out all locations at once, yes, society could recover that amount, every month. While we could not afford to buy all land at once, we could afford to lease it in periodic payments. Hence the value of all nature in economic use is not a total of prices but an aggregate of rents. Rent, not price, is what measures the value of land.
Why Price Bias?
When you think about it, it’s odd. Why have researchers focused on the non-functional rather than the functional? Why on the derived, not the source? Why sales instead of leases or monthly rents?
Practicality is an easy out. Sales greatly outnumber leases, deals for buildings greatly outnumber deals for raw land, and housing in the GDP greatly outnumbers all other kinds of real estate and businesses based on land like farming or mining. Yet the easy way is less accurate and not scientific, obscuring the business cycle, making forecasting difficult.
The media, too, ignore rent, focusing on price. When the price of housing goes up, the media tell us that’s good news, while forgetting to point out that actually, it’s the location that appreciates as buildings depreciate. Nor are higher prices good for everyone. What’s good for the goose (the seller) is not good for the gander (the buyer).
And why do we see the seller in the driver’s seat? The price for land is not how much the seller asks but the final amount that the buyer negotiates. It’s the demand of—and competition among—buyers that sets price, far more than the stubbornness of sellers.
Economists and the media reflect popular longing. Everyone wants to sell out at an exaggerated price and denies the reality of needing to next become a buyer, likely at an exaggerated price. The prevailing mindset of the typical American is speculator, not money-saver.
Pulled by statistical ease and pushed by cultural norm, almost all of those few economists who do guesstimate the worth of Earth in America used price—a dead end. A few did look at rent, not to measure all land value but to proclaim that, since rental income is so little, then land, too, is worth little. They used only self-reported income—the less owners report, the less tax they pay—and only from rental housing. For some reason, they went out of their way to minimize the worth of Earth anywhere (Ch 5).
When presenting a value for an asset, the default figure for economists is from the POV of the seller, speculator, profiteer, the “winner”—the recipient from the deal—not the buyer, investor, payor, the “loser”—the expender in the deal. In politics, winners write history. In economics, profiteers command statistics.
However, those figures represent a minority position. When it comes to nature, far fewer people are landlords than tenants. While only a few receive rental income, almost everyone pays rent or a monthly mortgage or something equivalent. Hence periodic payments tell a truer story than does rental income.
Flowing to a Total
Who’s going to do what the academics haven’t? As usual, if you want something done right, do it yourself. Don’t think me a delusional megalomaniac, able to solve grand puzzles the experts can’t. Just remember: The …
* astronomers helping NASA identify the landscape of the moon and Mars,
* authors first to theorize an asteroid killing off the dinosaurs, Allan O. Kelly and Frank Dachille, and …
* Michael Faraday, who laid the groundwork for Einstein,
were all amateurs. Amateurs can go where the overly cautious conventional fear to go.
Experts eschew spending; we build on it. Nobody can collect from their sale of land until somebody else pays up. As rent is upstream of price, so spending is upstream of cashing in.
Fortunately for gadflies, official figures for spending for land are likely to be more accurate than official estimates for land. Political pressure influences economists and statisticians to slight land value. This pressure is off—as is the human tendency to adopt the winner’s POV—when it comes to spending.
Most Americans don’t buy raw land, but part of the price of what they do buy goes to rent. Most houses come with land. Food purchases pay for farmland and rangeland. Fuel pays for oil fields and mines and ores. The Bureau of Labor Statistics says in 2017 consumers spent, in trillions, on:
* shelter (inc. property tax) $1.5
* food $1.0
* utilities $0.5
* fuel $0.3
* medical care (patents) $0.6
* entertainment (copyrights) $0.4
* schooling (credential monopoly) $0.2
All from Table 2400.
TOTAL $4.5 trillion,
over 1/4 of national income. If half is rent, then it’s presently at least $2.3 t.
Yet the list is incomplete. It’s not just households who consume but also nonprofits, businesses, and governments—the four official groups of purchasers. So switch from purchasing to producers.
Spending underlies GDP. The US government’s Bureau of Economic Analysis put GDP in 2017 just under $20 trillion, not corrected for inflation. The GDP sectors loaded with rent occupy these portions of the total:
* FIRE (Finance, Insurance, & Real Estate) 20.9
* agriculture, forestry, fishing, and hunting 0.9
* mining 1.7
* utilities (water, grids, etc) 1.5
* information (patents & copyrights) 4.8
All from Industry Data.
nearly 1/3 of GDP ($7 t). If half is rent, then it’s nearly $3.5 t, over a trillion more than the $2.3 t above. A trillion dollars may be small change for experts but it’s like Mt Everest for me. Yet the larger figure is reached another way, too.
Sticking with GDP—just over $20 t in 2018 Q2—but now from the POV of expenses. People paid, in trillions, for:
* housing + utilities (why combine?) $2.5
* residential investment $0.6
* non-residential structures $0.6
* eat out $1.0
* eat in $0.9
* fuel $0.3
* intellectual property $0.9
All from Table 3.
TOTAL $7 trillion,
over 1/3 of GDP. If half is rent, then this way it’s also $3.5 t.
Yet the list is incomplete. People also pay to park and to play in parks. Consumers pay for non-solid “land” (as economists define the term)—water and intangible electromagnetic waves. Furthermore, paying the property tax keeps one’s title to land. Compared to other expenses, these would not be huge amounts, but they add up.
This $3.5 t does not tell the whole story. Besides Earth that someone is paying for, there’s land nobody is: land that’s owned free and clear, farmland lying fallow, unlogged forests, capped oil wells, un-auctioned airwaves, uncompensated eco-damages, etc. Paid-off homesites alone are worth $0.7 t—1/3rd of owners of real estate priced at $28 t, rentable at $2.8 t. All the other natural resources together would probably go for a third trillion. Eco-losses (clean ups, health costs, regulation, etc; Ch 23) a half trill. Adding this $1.5 trillion brings the value to … Showtime for the greatest stat on Earth, literally—the worth of Earth in America—$5 trillion (also the global value of exchange-traded funds). This amount per capita registered voter is $2,600/mnth.
That $5 trillion can be doubled. There’s another class of assets that acts like nature—privilege. Like natural resources, government-granted privileges don’t need anyone’s labor or capital to exist. (Disregard the labor of lobbying and the capital of campaign contributions.) Without those two human inputs, privileges can be extremely valuable.
Privileges create rent. Holding them, business can overcharge. Licenses enrich doctors, patents enrich Big Pharma, copyrights overly endow big hits. On and on.
The granddaddy of them all is limited liability. If you plan to put consumer and worker at risk, you can limit your liability by getting a corporate charter for a mere filing fee. Imagine if government were run like a business and charged as much as an insurance company would. That charge, the value of one privilege, could raise $1 trillion. That puts rent at $6 trillion (how much debt China keeps off its books). Per capita registered voter, that’s $3,200/mnth.
Next, patents and copyrights. Getting one is like planting a flag on the field of knowledge, preventing everyone else from exploring there. That confers tremendous competitive advantage yet it, too, costs a mere filing fee. If government were to charge the market value of these monopolies it grants, it could rake in $2 trillion per year (Ch 24). Add that to the $6 t; now we’re at $8 trillion (also the amount of global debt, all stocks in developing nations, and the tourism industry). This amount per registered voter is $4,200/mnth.
There’s more: the money monopoly. Our Founding Fathers gave the power to create new money to Congress, yet Congress gave that away to the central bankers. That forces us to spend far more on interest, fees, and inflated prices—directly in our household budgets and indirectly as taxes—than we would otherwise spend in a competitive market. Inflation and interest on debt owed by consumers (including homebuyers), businesses, and government is well over $2 trillion, much of it rent, putting the total at $10 t (minimum total in 401k's). Per registered voter: $5,200/month (the average salary for professionals).
A Figure for a New Future
At $10 t—half of GDP, more than half of income or spending—nature and privilege are just as valuable as labor and capital. Yet what do economists do? Ignore half of the economy. Perhaps because privilege is a creature of politics while creation is the subject of geology, academics see both as beyond the parameters of economics.
This $10t isn’t authoritative. We’re not authorities. Yet authorities are not up to this task. Of all the totals that are by authorities, none is a statistic for the money we spend for the nature we use. Ours is. Using official stats in a novel way, we showed how it’s done—quit looking for an official price and start looking for an official expense. Turn from price to rent, then from income to outgo, to finally measure the worth of Earth in America.
This datum is now loose in the world, as is the knowledge of how to calculate it. Further, the method is in plain English, accessible to every lay person. It’s what one would hope for from a public agency.
Going forward, a number-cruncher would update the inputs and refine the method—maybe rely less on voluntary surveys and more on actual receipts—in order to hone in on an even more precise number.
Better than a lump sum price, spending flows can tell you what phase of the business cycle you’re in. Once you start tracking this stream, updating daily, quarterly, or as much as feasible, then you’re in business as a prognosticator. Its positive changes, negative changes, they’re great indicators. One can have faith in economic statistics again. Now to announce that from the mountain tops.
This article is Part 37 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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