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originally posted at http://thehenrygeorgeblog.blogspot.com/

Some of this post is based on the section found at Wealth and Want on Boom and Bust cycles.

Henry George held that the failure to tax the rent of Land leads to speculation in land, which causes the boom/bust cycle. This was predicted 50 years before Keynes was writing. The slack wealth, looking for a tax shelter, will harbor itself in land. As land becomes scarcer and more land is taken out of production due to speculation, this process increases.

(cont)

In this Irish famine which provoked the land agitation, there is nothing that is peculiar. Such famines on a smaller or a larger scale are constantly occurring.
Nay, more! the fact is, that famine, just such famine as this Irish famine, constantly exists in the richest and most highly civilized lands. It persists even in "good times" 'when trade is "booming;" it spreads and rages whenever from any cause industrial depression comes. It is kept under, or at least kept from showing its worst phases, by poor-rates and almshouses, by private benevolence and by vast organized charities, but it still exists, gnawing in secret when it does not openly rage. - Henry George: The Irish Land
Question

Or if you prefer econ speak:

Economic cycles are accepted as a given in both government and business circles. But there is compelling evidence that such cycles have their
roots in the tendency for elements of the financial community to speculate in real estate, fostering bubbles in their market prices that ultimately must be reconciled with the real demand.5 Because the market price of
Land is in good part a function of the settling of rent, the recapture of that rent in the form of taxation can both stabilize those markets and remove the cause of those periodic cycles. - Bill Batt: The Fallacy of the Three-Legged Stool Metaphor

The working poor always notice the effects of an economical downturn more severely and for longer

The amazing thing about George's theory was not that he was able to predict boom/bust cycles, but rather how they happen. An exhaustive study was done back in 1933 by Homer Hoyt called the One Hundred Years of Land Values in Chicago.

What was so outstanding about Hoyt's book was its compelling confirmation of George's analysis, some thirty-five years after George's death in 1897! What is
even more significant is Hoyt's handling of his data in chapters six and seven, the balance of the study. In these two chapters, he selects some sixteen events which not only are present in each cycle, but which occur in the same order in each cycle. - Weld Carter: A Clarion Call to Sanity, to Honesty, to Justice

The following table is sourced from the above as well, with my analysis interjected.

A Case History of Five Major Booms and Busts 1830-1933
1. Machine techniques, production methods improved

Internet boom

2. Population begins to spurt up

"Between 1990-1997 California gained 3.2 million residents (10.7 percent increase, despite the out-migration of an estimated 1.2 million residents in the early 1990s. The highest growth rate was in the Central Valley (16 percent)."

3. Shortage of housing, office & commercial space first felt

http://www.hcd.ca.gov/...

"Residential overcrowding, which doubled in the State between 1980 and 1990, continued to increase significantly in selected metropolitan areas, including Los Angeles, Orange, and Santa Clara counties."

4. Rents begin to rise.

"Sharp increases in rents have occurred in selected metropolitan markets of the State. Between 1995-1997, the asking rents in San Francisco, Santa Clara, and San Mateo counties increased by 20 percent to 35 percent."

5. Selling prices of old buildings begin to advance
"WASHINGTON -- (BUSINESS WIRE) The market for existing single-family home sales rose in November and set the stage for a possible record year, according to the National Association of Realtors®."

6. Vacant lot purchases begin to rise

7. Rate of new construction begins to rise sharply
"A temporary sag in interest rates and the nation's warmest January on record pushed up new home construction for the month by 14.5%, the U.S. Commerce Department reported last Thursday."

8. Credit eases to stimulate volume of new building
Scroll down to long term trends.

9. Rapid growth of population projected far into the future

10. Prices of tracts near settled areas advance rapidly to peak.

"But in the last decade, with development pressures rippling up from Westchester County, that has begun to change. Big-box stores have arrived, along with a spate of McMansions and the occasional town house community. As a countermeasure, the County Legislature recently voted unanimously to place a bond referendum on the ballot in the fall that would allocate $20 million to preserve open space."

Me- Even though this is the community buying land for public use, it is still illistrative of the rising costs of land near the urban center

11. Large tracts subdivided beyond needs of immediate development

and , and of course The Mega-suburb here

12. Lavish public expenditures

Do I really need to list examples?

13. Rate of population growth falls off

14. Vacancies reappear

and then gohere

15. Rise in rents slackens

I personally think this is where we are at now. The statistics above are for the last quarter.

16. Volume of building construction at peak.

17. Asking prices of land advance in face of fewer land sales
18. Financial institutions continue loans on peak values in face of lessened construction
19. Holders of 2nd mortgages begin to foreclose with faith in 1st mortgages
20. Stock market crash
21. Unemployment mounts to peak; wages down
22. Increased movement of population to small city or farm; doubling up in city
23. Vacancies mount to peak in houses, apartments, offices, stores; industrial rents down
24. Interest charges high in proportion to net rents
25. Taxes high in proportion to net rents
26. Second mortgage holders wiped out in flood of first mortgage foreclosures
27. Bank failures mount; loaded with real-estate "frozen assets."
28. Volume of new building at bottom
29. Subdividing stopped; most vacant land not salable at any price
30. Construction costs at lowest point

Where am I going with this? We are not very far away from entering another major recession. The one we experienced around the year 2000 was nothing compared to the one that will be coming soon. Not a day goes by when we don't hear about the AIMs conundrum. We are already seeing #18 and so we are really only one or two small tiping points, according to this analysis, away from another bust cycle.

The neoclassical myth is that Boom/bust cycles are a natural part of the economy and we can not prevent them. The best we can do is minimize them. However, this is not true. If we wish to get rid of the boom/bust cycle we would need to implement the LVT as envisioned by Henry George in Progress and Poverty and his other writings.

Originally posted to eire1130 on Thu Jun 15, 2006 at 06:54 PM PDT.

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Comment Preferences

  •  Henry George is way under-appreciated (3+ / 0-)
    Recommended by:
    eire1130, LVTfan, Kujo AAR

    I've discovered over the years that a surprising number of city planners who have reason to care about urban land values are familiar with George's views, and many admire him.

    Lester Thurow in one of his books mentions that the great fortunes in the USA were built on land much more often than on manufacturing, agriculture, or services.  Land as private property always stands in tension with simple (or simple-minded) market theories, because land is a differentiated commodity (no two parcels have the same location), and it is in mostly fixed supply.

  •  Yeah, cause (0+ / 0-)

    boom/bust cycles have nothing to do with energy prices.

    The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries.

    by deathsinger on Thu Jun 15, 2006 at 07:30:36 PM PDT

  •  Henry George (0+ / 0-)

    I wrote my MA thesis on Henry George back in the dark ages.  I didn't buy his ideas then and I still don't.

  •  great work! (1+ / 0-)
    Recommended by:
    LVTfan

    I can't comment on the technical merits. I just like that you're helping the community explore this theory, and how it may impact their lives.

    It's actionable information.

    Remember those in prison as though you were there with them.

    by Kujo AAR on Thu Jun 15, 2006 at 09:45:41 PM PDT

  •  Boom-Bust Cycles, Poverty and Human Misery (1+ / 0-)
    Recommended by:
    eire1130

    If we knew how to reduce or eliminate boom-bust cycles, it seems to me that it would be our duty and our pleasure and our privilege to act on that knowledge.

    I think Henry George saw clearly, 125 years ago, the same phenomena that are at work today, and that he correctly identified the underlying causes.  Better yet, he described how to remedy the problem.

    But those who profit from the current way of doing things represent a powerful force (not dissimilar from what we've recently seen with respect to the 18 billionaire families who have sought the end of the estate tax, by trying to convince ordinary folks that they are negatively affected by it).  Who profits?  Those who own our most valuable land, which can be worth $250 million per acre -- a far cry from the land most of us own, which might be worth a tiny fraction of that amount.  (You know about the Lion's Share?  They are getting the Lion's Share of the economic benefit of the labor of all of us.  The Lion's Share doesn't leave much for anyone else.  No wonder so many of us must struggle just to meet our families' most simply defined needs!)

    When I first read George's landmark book Progress and Poverty, the thing that most amazed me was that by 1879, the economic and social problems that we face today were already so prominent that he (a) saw them clearly and (b) was moved to figure out the underlying issues.   I had tended to think of concentrated wealth and income as reasonably new problems.  Not new at all, and think how they have spiraled out in the intervening 125 years.

    If more of us understood the causes, and forced our elected representatives, at all levels of government, to become conversant, we might move the debate and discussion ahead.

    Unfortunately, where we are right now is something like trying to learn physics while pretending gravity is irrelevant!

    Our system creates misery for the many, huge land profits for the few, and high hopes for just enough people.  Sort of like the lottery.  And maybe part of the reason so many people take a chance on lottery tickets  -- and have such high hopes for them.  Wages just haven't kept up with the price of land -- and can't, the way we do things now.

    Can we correct it?  Yes.  Emphatically, yes!!

    But we need to look at real tax reform, tax reform that goes outside the income tax box within which most of what currently passes for tax reform resides.

    Where to start?  Read more of George's ideas, or material on the wealthandwant website.   Check out the online courses at the Henry George Institute (free, or nearly so, depending on how you do it).  Check out CGO
    and their upcoming conference.

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