Industry . . . → Read More: Can Killing Government Prevent Special Interest Capture?]]>

In my last post on meat markets and securities markets, I argued that competitive markets require government oversight to prevent fraud and monopoly. The post drew a response from Libertarian friends: didn’t I know that government regulators would immediately be captured by the regulated industry, resulting in worse fraud and monopoly?

Industry capture? Yes, I learned about that in 1969, when I went to work for Ralph Nader in Washington DC. Although Nader began his career with Unsafe at Any Speed (1965), calling for federal automobile safety regulation, he was hardly a naïve supporter of regulation. My project showed how agribusiness had captured the US Department of Agriculture. Another ongoing project showed how trucking and railroad interests had captured the US Commerce Commission.

In 1970, I joined a team of twenty “Nader’s Raiders” in a project on Power and Land in California. We found agribusiness capture everywhere: unnecessary water projects benefiting giant landholders; government-supported producer cartels like Sunkist; inadequate regulation of pesticides; special tax breaks for forest owners like Boise Cascade; or public university research developing labor-saving machinery, like the tomato harvester, as a response to unionization. In 1974, I published a piece on the California dairy industry, showing how excessive health standards—and totally unnecessary price supports—drove up milk prices and squeezed out small dairy farmers.

So what can we do about capture? A long line of “muckrakers,” from Upton Sinclair and Ida Tarbell to Ralph Nader, have advocated traditional “good government” approaches: constraints, openness and professionalism. Plus a good dose of “eternal vigilance.”

Constraints include bans on bribery, rules against conflict of interest, and restrictions on industry-government revolving door employment. Openness includes public hearings on proposed policy, access to government records as embodied in the Freedom of Information Act, and of course freedom of the press to expose misconduct without restrictions or fear of retaliation.

As for professionalism, some 2000 years ago, the Chinese invented civil service. Government bureaucrats had to pass tough exams, went through rigorous training, earned good pay and gained great public respect. At its best, professionalism gives public employees a sense of mission and a devotion to a broad public interest.

Take my father. A US Naval officer during World War II, he could have returned to the Borden Cheese Company as a well-paid executive. Instead, he joined the US Diplomatic Service; I grew up mostly overseas, in Rumania, France, Australia, Thailand and Yugoslavia. Like so many of his generation, my father saw public service as a noble calling, superior to mere business. After retiring from the Service, he directed Meridian International, which promotes international cultural exchanges.

With the Reagan Revolution of the 1980’s—“government is the problem, not the solution”—the traditional “good government” approaches yielded to “kill the government”. When my husband and I worked on drug policy reform in the 1990’s, our Libertarian fellow anti-drug war activists saw hope only in drastically cutting government.

Like any simplistic solution to a complex problem, “kill the government” collides with the Law of Unintended Consequences.

I described one consequence in an earlier post on Cornered, by Barry Lynn: since the lapse of anti-trust enforcement in the Reagan era, international monopolies and oligopolies have exploded. Powerful giants, like Wal-Mart and Goldman Sachs, can far more effectively capture government than the associated dairy producers of California.

In addition, as we found in the California study, the lower the staff and funding of a regulatory agency, the less it can conduct independent research on potential problems, and the more it must rely on industry expertise and “voluntary compliance”. How could Bernie Madoff bamboozle the Securities and Exchange Commission all those years? Easily!

There’s another more subtle consequence: by denigrating public service, and demonizing “bureaucrats”, “kill the government” creates a vicious circle. Ill-paid, ill-regarded public servants become less concerned about the public interest and more vulnerable to capture. They’re less likely to blow the whistle on waste or corruption, more likely to see their work as a stepping stone to a better-paid private job. For example, earlier this year the Federal Communications Commission voted 4 to 1 to approve Comcast’s purchase of NBC. Commissioner Meredith Attwell Baker, who voted yes, then resigned from the FCC to become a lobbyist for Comcast.

My father understood that, at its best, government is “we the people”, cooperating for our collective benefit. The contempt and spite directed at public servants these days threaten to give us government at its worst: unresponsive, paranoid, and captive to narrow interests.

Travel back in time to 1811, the . . . → Read More: From Public Meat Markets to Derivatives Markets: A Lesson from Old New York]]> Starting in the Colonial Era, New York, Boston and Philadelphia required all fresh meat to be sold by licensed butchers in regulated public markets. New York abandoned public markets in the 1840’s, with disastrous effects on public health. A working paper[1] by economic historian Gergely Baics lays out the story:

Travel back in time to 1811, the year the Commissioners’ Plan lays out the street grid for Manhattan. Since 1790, New York City population has tripled to 96,000; housing now straggles north as far as Christopher Street on the west side.

On a cold and rainy night in April, a drover holds up his lantern and taps his stick on the backsides of six muddy steers. Mooing in the dark, the steers stumble from the Brooklyn Ferry on the East River, up Catherine Street, and across Division Street. The stench grows as they enter the slaughterhouse district near Collect Pond. By lamplight, blood-spattered workers hack up the animals, distributing the parts to waiting butchers, tanners, bone-boilers, soap-makers and tallow chandlers. Raw leftovers will be dumped in the river. The butchers wheel away slabs of beef to their stalls at the Fly Market. The Fly, occupying three blocks of Maiden Lane between South Street and Pearl Street, is the largest of nine public markets established by the New York City Council.

In the gray dawn before 6 AM, the butchers open for business. There’s no refrigeration; most of the meat will be gone by 10 AM. The first customers are men and servants from the wealthiest households. They buy the choicest cuts, at the highest prices. Over the hours, prices and quality fall. At 2 PM closing, butchers scrub their cutting blocks in a swirl of flies, while a few poor women hurry down the street looking for bargains. In the course of a year, New Yorkers will consume some 160 pounds of fresh red meat per capita, close to modern levels.

The City Council forbids private butcher shops. As the city grows, it establishes public spaces in easy walking distance of residents. Here, highly-skilled, city-licensed butchers operate from small stalls, paying fees to the city. City inspectors patrol for unsanitary conditions, mystery meat, or thumbs on scales. Customers comparison shop, keeping prices and quality competitive. The butchers also watch one another, reporting violations and creating peer pressure to maintain high standards. Butchers often keep the same stall for years, building trust with regular customers.

In short, the markets operate much like the ideal competitive markets we meet in Economics 1: many responsible sellers of standard products in a stable relationship with many well-informed buyers, meeting in a single physical location.

But things change in the 1830’s. As population explodes,—reaching 800,000 by 1860—the City Council fails to plan new markets or control illegal meat vendors. It stops maintaining the existing markets, which become dilapidated and filthy. In 1843, it legalizes private shops, and fully abandons public markets in 1848. Only a handful of inspectors remain to police hundreds of widely-dispersed private butcher shops. Health consequences are dire. Per capita fresh meat consumption falls, as does average adult heights—indicating poorer nutrition. The death rate triples from diarrheal diseases.

So why does the city abandon a successful policy? The cholera outbreak of 1832, and the Great Fire of 1835, impel the city to build the Croton Aqueduct, completed in 1842, bringing abundant clean water 41 miles from Westchester County. To pay the huge construction debts, the city diverts fees from the meat markets. The panic of 1837 and ensuing depression further cripple city finances.

What’s the lesson for derivatives markets?

Public securities exchanges, such as stocks and bonds, corn futures, or gold, operate on the same principles as public produce markets. Be it contracts or sirloins, licensed professionals trade standardized products on designated exchanges, according to rules meant to curb fraud and monopoly. Since the 1792 founding of the original stock exchange, new financial products have been brought onto regulated public exchanges—typically following a scandal. In 1998, a new private market sprang up in “derivatives”, like “credit default swaps”. Brooksley Born, Chair of the Commodity Futures Trading Commission, proposed that the Commission be given oversight—only to run afoul of the free market trio of Alan Greenspan, Larry Summers, and Robert Rubin. The private derivatives markets mushroomed from 100 to 700 trillion before blowing up in 2008.

Lesson learned again: “free” markets need government oversight to operate safely and fairly. The 2010 Dodd-Frank Act will require derivatives to trade on regulated public exchanges. But a loophole allows the Treasury Secretary to exempt some derivatives. April 29, the Financial Times reported a “Victory for dealers and defeat for reformers,” –Secretary Timothy Geithner exempted over-the-counter foreign exchange swaps.

Meanwhile, public produce markets have returned to New York in the form of Greenmarkets. Natural and spontaneous though these markets appear, their annual report makes clear they’re licensed, inspected and regulated just like the old meat markets.

As reported Feb . . . → Read More: Can Cyberspace Liberate Us from Earthly Space?]]> The internet, it has long seemed, frees us from the bounds of location. We can work from home. We can shop in London or Tokyo. On Skype, we can chat with friends in Sydney, Australia as if they were next door. Meanwhile, Mozy.com backs up our computers to a bank of servers in Texas.

As reported Feb 15 in the New York Times, “Egypt Leaders Found ‘Off’ Switch for Internet“, that illusion crashed to earth when the Mubarak government shut down the Egyptian internet for five days. In fact, they shut most of it down from one specific location, “an imposing building at 26 Ramses Street in Cairo, just two and a half miles from the epicenter of the protests, Tahrir Square.” In this spot, engineers turned off the main fiber-optic cables connecting Egypt to the rest of the world. Not only did this cut off the flow of news in and out of Egypt, but it utterly crippled the internet within Egypt by blocking access to internet address services outside Egypt.

As the Times article points out, many other despotic governments in the Middle East and Africa can shut down the internet at will because they control the key fiber-optic cables. Likewise, by controlling the cables, China can impose its “Great Firewall” to block politically-sensitive information. Even the well-connected US might be vulnerable to political interference with the internet. In an interview on PBS Newshour Feb 16, Times coauthor James Glanz observes that “there’s been some thought as to how sensitive the United States would be to about 20 phone calls.”

In short, for all the blather about a space-free world, control of key real estate matters as much as ever.  That’s a fact well-known to political parties in the US, where elections turn on who can be brought to the polls–or kept away from them.

Property taxes are wealth taxes, intrinsically more progressive than . . . → Read More: To End Deficits, Allow Localities to Raise Property Taxes]]> In Higher Taxes Wouldn’t End Some Deficits (Jan 20) the New York Times reported how a few state governors have timidly proposed small income tax increases. There’s a better alternative: undo the legal shackles that keep residents of towns or school districts from voting themselves higher property taxes.

Property taxes are wealth taxes, intrinsically more progressive than income taxes—because personal and corporate property ownership is much less equal than income. Until World War II, property taxes were the dominant tax in the US. Since then they have been constricted by caps—notoriously Proposition 13 in California in 1978—and whittled down by exemptions and favors for influential owners. New York State’s constitution already limits property taxes to 2% of real value; Governor Cuomo proposes a further cap. Still, in an age of income tax loopholes, property taxes remain the only tax many rich people and corporations pay.

Yes, property taxes are unpopular. So are sales and income taxes—yet states don’t forbid localities to vote for an increase. In the name of democracy and fiscal sanity, let’s free our citizens to tax property for the services they need.

The property tax? Our most hated tax? The tax . . . → Read More: To Save Essential Public Services, Restore the Original Wealth Tax!]]> State and local officials propose drastic cuts in public services. There’s an alternative: restore the property tax. It’s the oldest wealth tax of all, the tax that financed Chinese civilization over 2000 years ago, the tax that until World War II financed most of government in the USA.

The property tax? Our most hated tax? The tax that new Democratic Governor Cuomo of New York has vowed to cap—in the face of unprecedented budget shortfalls? Yes, that tax.

Ideally, property taxes collect a uniform percent of market value of real estate within a given jurisdiction, let’s say a town or school district, or an entire state. On average, half of that real estate is homes, and half is corporate property. The assessor, an elected official, assesses—that is, estimates—that market value, based primarily on comparable sales. Then the town imposes a tax rate, say 1.5% on the assessed value—often by a vote of the residents. Very democratic.

Even at a uniform rate, a property tax is intrinsically more progressive than an income tax! How so? Simply because property ownership is far more unequal than income. Most of us receive some income, yet the bottom 60% of Americans owns no significant wealth. Recent data from Edward Wolff of NYU shows the top 1% of Americans receiving 17% of income, but holding 34% of net worth, and 42% of non-home wealth—ie corporate securities and other assets.

In the age of loopholes, the property tax remains the only tax many rich people and corporations pay. Yet a triumph of confused statistics and cunning rhetoric has led most of us to perceive it as a burden on the poor and middle class, obsolete and unfair. How could this happen?

Confused Statistics

Over the last 60 years, income and sales taxes have largely replaced property taxes at the state level, leaving property taxes to local governments, school districts especially. This shift creates the primary strike against property taxes: rich districts can finance good schools at low rates, while poor districts can only finance lousy schools at high rates. Unfair? Yes. But the same goes for any local tax. States could mitigate the problem by consolidating small school districts—notoriously in New Jersey—and by sharing some revenue among districts—as New Hampshire is attempting. But look what happens when the naïve researcher throws statewide data on property taxes into her computer: lo and behold, poorer people apparently pay higher property taxes! She concludes the tax is regressive!

Moreover, many wealthy people use property to shelter income from taxes, for example by deducting excessive depreciation. But they still pay property taxes. While Ronald Reagan was California Governor (1968-72), reporters found he paid heavy property taxes on his famous ranch—and zero income taxes! So we get a bunch of high property tax/ low income tax pseudo poor like Reagan. Our naïve researcher throws them into the statistical pot with ordinary folks, and finds—surprise!—property taxes burden the poor.

And then there’s the naïve assumption that property taxes are simply “passed on” to renters, and to corporate customers, just like sales taxes. T’ain’t so. Too complicated to explain fully here, but in brief: A shopkeeper partially avoids sales taxes by selling less; while (short of bribing the assessor) a property taxpayer has no way to reduce the tax. Hence property taxes fall almost completely on property owners—be they owners of apartment buildings, or shareholders of corporations.

Cunning Rhetoric

In his book, Revolt of the Haves (1980), Robert Kuttner described the successful 1978 campaign for Proposition 13 in California. Prop 13 rolled back and froze property taxes. Its real estate mogul promoters depicted property taxes as a tax on small homeowners. Yet large corporate property owners enjoyed the primary benefits of Prop 13. Standard Oil of California saved $25 million in annual taxes.

Prop 13 set off nationwide anti-property tax campaigns. There were copycats like Prop 2 ½ in Massachusetts. There were reductions for special classes of property, like farmland and forest land. There were tax holidays for businesses. There were caps, “circuit-breakers”, limits on rate increases, and other gimmicks for homeowners. New York adopted a constitutional amendment limiting property taxes to 2% of real value. Assessors got into the act too, allowing assessments to fall way below market value, and giving friendly breaks to large property owners. With every hole gouged into the property tax, it became more inequitable—and more vulnerable to demands for special breaks from additional groups. States replaced some local revenue with grants from state sales and income taxes, but school quality declined. California schools fell from the top to near the bottom.

Now the crisis

The clamor for cutting and capping property taxes continues unabated. Only New Hampshire has resisted—so far! Tragically, leaders of the anti-property tax campaign include union-funded Citizens for Tax Justice—apparently befuddled by the statistics.

It’s time to wake up, to recognize that even in this crisis we can still fund the services we need. The means lie right under our feet!

(For further reading, see Mason Gaffney’s “The Property Tax is a Progressive Tax.”)