Sunday, February 21, 2016

Forgetting History: "Nothing Like This Has Ever Happened Before"

Back in 2012 there occurred one of those eruptions of comment* that seem to happen for no discernible reason other than some combination of network effects and echo chambers.

The eruptions peak and die away as the crowd moves on leaving almost imperceptible ripples where there had been much thunder and fury.

This is a reflection on one of them, Henry George and the land tax, updated for current values and valuations.

From TechCrunch, Jan. 29, 2016:
“Capitalists both in the Old World and the States, even now, have but little faith in California. They regard this country and everything relating to it as one grand bubble, liable to burst at any moment…. This is how it should be. The wealth of California is thereby passing into the hands of young, active, enterprising men, who in an older country and with these same old capitalists as competitors might have worked to the end of their days, and realized but a mere pittance.” — San Francisco Daily Journal of Commerce, 1850
“It is as though an immense wedge were being forced, not underneath society, but through society. Those who are above the point of separation are elevated, but those who are below are crushed down.” — Henry George, Progress and Poverty, 1879
Nothing Like This Has Ever Happened Before
 [This is the second piece in a series — a history piece on technological change and its impact on cities and land from the Gilded Age.]
In my mid-20s at the very bottom of the last economic cycle, I moved back to the San Francisco Bay Area in 2009.

Several months earlier, I had gone into work in at 6 a.m. in London’s banking district to write about global debt and short-term money markets when an 158-year-old Wall Street institution, Lehman Brothers, had filed for the largest bankruptcy in U.S. history.

It was a moment of financial paralysis unlike any other in recent American economic memory. A month later in Silicon Valley, the legendary venture capital firm, Sequoia Capital, circulated its now famous R.I.P. deck, warning founders throughout the industry to clamp down on spending or face imminent failure.

When I returned home, you could get a room for $800 on Dolores Street. After living in New York City and London, it was the cheapest housing I had ever found.
At that time, the region’s technology industry was still somewhat chastened by the dot-com bust less than a decade before, and it wasn’t as hard to hunt for vestiges of a cyberpunk or freak culture that I remember from the mid-1990s as a teenager.

I was hopeful about it. Young people were flocking into San Francisco from all over the country and world, and it was still inexpensive enough that you could experiment and explore.

But as we all know, less than five years later, everything changed. Silicon Valley’s center of gravity moved north from Palo Alto to SOMA. There was Rebecca Solnit’s Google Bus screed in the London Review of Books, and then the actual protests themselves.
Every day, I get messages.

A protest at the eviction of an African-American pastor, whose house had been sold by his bank after the foreclosure crisis. A white female entrepreneur expressing guilt about buying a home in the Bayview District, because it was the only place in the city that was affordable to her. One of the iconic Mission muralist non-profits looking to raise $200,000 in a matter of weeks as a down payment on the building they’re housed in, lest it gets sold to an owner that will presumably evict them. A handful of tech entrepreneurs of color in Oakland trying to set a respectful, inclusive culture before Uber moves in. Friends who are social workers, and then even highly-paid lawyers or doctors moving out of the region because they can’t see a long-term future here.
It’s just constant.

When the iconic Californian writer Joan Didion left New York for Los Angeles after the age of 28, she wrote, “One of the mixed blessings of being twenty and twenty-one and even twenty-three is the conviction that nothing like this, all evidence to the contrary notwithstanding, has ever happened to anyone before.”

Of course, nothing like this has ever happened before.

Almost one hundred fifty years ago in 1858, a nineteen-year-old arrived in San Francisco after a five-month stint as a steward on ship crossing South America’s Cape Horn from Philadelphia. After staying with a cousin, this young man, Henry George, would eventually take up residence in the Mission District.

It was a few years after the Gold Rush had ended, but just the beginning of a new railroad boom. An indecisive, young man, George tried his hand at being a printer, a farm laborer and a weigher at a rice mill, according to historian Edward T O’Donnell’s new biography, “Henry George and the Crisis of Inequality.” (I crib lots of details from O’Donnell’s work in this piece, so if you like it, you should just buy his book).

George eventually settled into printing and typesetting, although stable employment was always a remote reality for him.

By 1865, his floundering printing business had brought him to the brink of starvation. With an eight-month pregnant wife who had pawned everything but her wedding ring, the situation became hopeless. On the day that she gave birth, he stepped out into the rain to beg for money.
“I stopped a man — a stranger — and told him I wanted $5. He asked what I wanted it for. I told him that my wife was confined and that I had nothing to give her to eat. He gave me the money. If he had not, I think I was desperate enough to have killed him.
That deeply personal experience with poverty left a mark on George for the rest of his life. He would always remember what this feeling of absolute want was like.

Over the years, he became vocal as an editor on issues of the day like the construction of the railroads. The year before Leland Stanford drove the golden spike into the railroads connecting the Atlantic and the Pacific Oceans at Promontory, Utah, George wrote an essay on the promises and drawbacks of the new transportation technology.

Is it too much to say that this city of ours must become the first city of the continent; and is it too much to say that the first city of the continent must ultimately be the first city of the world? And when we remember the irresistible tendency of modern times to concentration — remember that New York, Paris and London are still growing faster than ever — where shall we set bounds to the future population and wealth of San Francisco; where find a parallel for the city which a century hence will surround this bay?
And yet, on the other, George saw that the railroad’s benefits would only advantage a few. Stanford and the other members of Central Pacific’s Big Four, Collis Huntington, Mark Hopkins, and Charles Crocker, initially had problems constructing the railroad profitably. After securing favorable financing terms from the U.S. federal government and about two years of work, they had only managed to lay out 50 miles of track. But once they turned to inexpensive Chinese-American laborers, who were willing to work for two-thirds of the price of European crews, they were able to blast through technically difficult passes like Bloomer Cut near Sacramento.

It was somewhat ironic, given that just a few years earlier, Stanford had called Chinese-Americans “a degraded and distinct people” in his inaugural speech as California governor and urged limits on immigration from the continent. Stanford later changed his mind, and wrote to U.S. President Andrew Johnson that without the Chinese, the Transcontinental Railroad would not have been possible, and that they were “quiet, peaceable, patient, industrious and economical” people.

Transportation and communications technologies like the railroads and the telegraph would truly integrate the U.S. economy from coast-to-coast for the first time, and give rise to a new industrialist and banking class that would supersede the merchant class in cities like New York and San Francisco.
George noted that while these new industrialists and land owners would benefit, many others would have to struggle harder:
“Those who have lands, mines, established businesses, special abilities of certain kinds, will become richer for it and find increased opportunities; those who have only their own labor will become poorer, and find it harder to get ahead — first, because it will take more capital to buy land or to get into business; and second, because as competition reduces the wages of labor, this capital will be harder for them to obtain.”
This issue of land, and land engrossment, would become one of the most heated issues of the period. Large-scale farming operations and industrial cattle ranchers like Miller & Lux were manipulating the judicial system in the wake of the Mexican-American War to wrest control of large tracts of land from Mexican owners. By early 1870s, a mere 100 owners controlled 5.4 million acres in California, an area slightly larger than the state of Massachusetts.

One afternoon around that time, George was riding a horse in the Oakland Hills and stopped to ask a passing teamster about the value of the nearby land. The teamster had no idea, but replied that another owner was selling land at $1,000 an acre.
“Like a flash it came upon me that there was the reason of advancing poverty with advancing wealth. With the growth of population, land grows in value, and the men who work it must pay for the privilege. I turned back amidst quiet thought, to the perception that then came to me and has been with me ever since.”
Land would become George’s defining issue. His argument was that land defined the business cycle, not the other way around. Speculators would increase the price of land faster than wealth could be created to pay for it, leaving less left over for labor to earn as wages. The land and housing boom would finally become so unsustainable, that it would lead to a collapse of enterprises at the margin, prompting a recession or depression with widespread unemployment.

He called land an “immense wedge.” Those with the right to it were “elevated,” while those without it, were “crushed down.”

The wedge is obvious today. San Francisco Bay Area poverty rates in all nine counties have increased in the last economic cycle, even with the Facebook and Twitter IPOs and private tech boom. The main transfer mechanism is land and housing costs, as rising rents and evictions push service and other low-wage workers to the brink.

George’s solution was a single land tax that would replace all other government revenue sources. If an owner wanted to develop their property to make it more useful or productive, George argued that they should have the right to keep the value from those efforts.....MORE
HT: MetaFilter's "The Gilded Age, Henry George, the Land Value Tax and the Progressive Era"

*Even by the time we posted "The Economist Calls for More Taxes on Land" in July 2013 the commentariat was moving on:
They are a bit late getting to the party, this discussion has been pursued in relation to the means of production for years and as far as our little corner of the www goes, we made mention of the FT Alphaville robo-rentier commentary back in 2012's "The Road to Serfdom: Where the Robots Are Taking Us":
Not Hayek's "The Road to Serfdom". Rather this is a journey back to medieval society where all income is subject to taxation by the Church or the manor or both. At least in the current case it is freehold rent which is paid in cash rather than the labor rent that villeins and serfs owed their liege.

Let me explain....
In September 2013's "Ben Franklin on Labor Economics (or how to create an underclass)" I intro'd with:
The easiest way to create a dependent class is to price them out of the real estate markets.
In countries fully settled…those who cannot get land must labor for others that have it; when laborers are plenty, their wages will be low; by low wages a family is supported with difficulty; this difficulty deters many from marriage, who therefore long continue servants and single....
In the United States The Land Ordinance of 1785 set the cost of land purchased from the government at $1.00 per acre in sections of 640 acres.

This price was raised to $2.00/acre in 1800 but purchase was paid for in four equal annual payments.
In 1820 the price of Federal lands was reduced to $1.25 per acre with payment in cash.
An alternate conveyance in the 1862 Homestead Act maintained the $1.25 price.

Compare  the wages various craftsmen could command:

In 1785 a journeyman carpenter in New York City was paid  $1.12 ½ per day.  
Here are the average hourly wage for various years, note the post Civil War inflation in the 1870 numbers and the decreases of the latter 1800's deflation:...
By January 2014 it was just a few stragglers:
"Land Value Tax Won't Fix San Francisco
The first thing I thought of when I saw Mr. Smith's post was "Zoning" (it wasn't some flash of brilliance on my part, we've been down this road before)
Yglesias at Moneybox:...
 Finally, our final post, in May, 2014:
Last Word on Piketty
The headline is probably a lie.
Readers who have been with us for a while know I'll see something, somewhere, sometime in the future and want to save it to the blog. I'll do so and lose any pretense to statement/action integration. Which word probably has the same Latin root as integrity.
Oh well.

Hell, I can already foresee a future post that will require making a lie of the headline:

If we are going the route of a Piketty wealth tax we need to look at doing one of these:

A Domesday Book!...