The Impact of Rent and Rent-Seeking on the Economy

Most recent economics texts have devoted little or no space to the subject of rent and rent seeking. In classical economics, that which prevailed over a century ago prior to what is today known as neoclassical economics, rent was a pivotal idea and factor of production.

Historical studies have put rent at about a third of the economy. Today’s college texts typically put economic rent at between 1 and 2 % of GDP. The amount is inconsequential because our National Income and Product Accounts ignore the imputed rent of owner-occupied homes as well as the rent that is deferred and hence discounted from capital gains. For example, Paul Krugman’s intro text states “Rent is 1% of U.S. economy in 2004.” William Baumol, noted Princeton economist and sometime federal official, put “Rental income … at 1.5 percent.” Karl Case and Ray Fair, linked with Harvard and Yale respectively, estimated “Rental Income … at 0.079% of GDP in 1992.” Besides real estate, other elements of nature that are rent-yielding are not taken into account at all.

An interesting passage appears on a recent blog reflective of the current economic thinking about the potential revenue sufficiency from rents. Michael Scott Moore (2009), an American journalist who has written for The Atlantic Monthly, Slate, and the Los Angeles Times, recounts an experience in Germany when Paul Krugman came to speak:

            Paul Krugman came to Berlin in 2008, right when the subprime crisis had started to rumble, and I asked his opinion of Henry George. He squinted and tried to remember the name of the book. “Uh — Progress and Poverty I think is the [main text]?”

            “That’s right.”

            “Well, look. Believe it or not, urban economics models actually do suggest that Georgist taxation would be the right approach at least to finance city growth. But I would just say: I don’t think you can raise nearly enough money to run a modern welfare state by taxing land. It’s just not a big enough thing.”

Todd Buchholz, also with impeccable pedigrees, writes that

“George fans can proudly point to property taxes as a source of state and local finance. But they cannot point as confidently as they could sixty years ago. George over-estimated the future importance of rents and rental income. …  In 1929 property rents accounted for about 6 percent of national income. The percentage has steadily dropped to well under one percent today. Whereas property taxes once provided 65 percent of state and local budgets, they now supply 17 percent.”

Gregory Clark opines in his Princeton U Press book,

“[i]n the modern world, land per person which had completely dominated income determination before 1800, no longer matters in economic growth. This is because land rents have fallen to only a few percent of total output in modern high-income economies. … Farmland rents, which were 23 percent of national income in 1760, fell to 0.2 percent by 2000. In part this decrease was offset by arise in the site rental value of urban land. But by 2000 urban land rents represented only 4 percent of national income, even in crowded England with its very high housing costs.”

But Henry George’s Progress and Poverty, in 1879 is very clear:

“In every civilized country, even the newest, the value of the land taken as a whole is sufficient to bear the entire expenses of government. In the better developed countries it is much more than sufficient.”

Those experts, economists and others, who haven’t “drank the Kool-Aid” of neoclassical economics can corroborate George’s claim. In his 2009 article “The Hidden Taxable Capacity of Land: Enough and to Spare,” the late Mason Gaffney enumerated many potential sources of economic rent that could support government goods and services. The title of this analysis summarized his argument.

Harvard-educated Australian economist and lawyer, Terry Dwyer, concluded in his study that,

“The ‘bottom line’ reinforces the overall conclusion … that land-based tax revenues are indeed sufficient to allow total abolition of company and personal income tax. Further, to the extent that some taxes, such as rates, land tax, resource rent taxes and even part of income tax on land rents are already capitalized in lower market values for privately held land, the figures would tend to understate the capacity of land income to replace existing taxes.”

Joe Stiglitz wrote:

“ Not only was Henry George correct that a tax on land is nondistortionary, but, in an equalitarian society, (in which we could choose our population” optimally, the tax on land raises just enough revenue to finance the (optimally chosen) level of government expenditures. That observation comes at a time when the proportion of government is typically over a third of the economy.”

The task and the challenge we have as Georgists is to pursue what opportunities we can to compute and calculate rental income from natural resources of all types, all that have a market price and which have now become captured titles of private interests and parties.