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Many economics experts are rethinking longstanding core ideas, including the importance of inflation expectations
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- Title
- Nobody Really Knows How the Economy Works. A Fed Paper Is the Latest Sign.
- Published
- Oct 1 2021
- Word count
- 1312 words
It seems like whenever I read about shortages, there’s an expectation that it will be over in a couple years, if not earlier, and then things will go back to normal, which I suppose means that prices won’t change much, and there might even be a glut.
But this doesn’t seem to be true of housing or medical care (in the US) where we expect prices to go up.
Suppose we lost faith that normal is going to happen?
There is the saying: They're not making any more land.
The housing market would do well to tax purely the unimproved value of the land, regardless of the structures built on it (Land Value Tax).
All other things being equal, it would encourage the development of more high-density housing.
Say it louder for the people in the back!
It's amazing to me how well a one-hundred year old economic theory can seemingly hold up to a modern digital economy where a billion dollar company could be ran out of a warehouse in the desert or where rich people are hiding their wealth in offshore bank accounts and specialized cryptocurrencies. LVT doesn't really care -- in the end land is just land and when that wealth is realized in high value properties it gets captured by the public.
Interesting video I happened to watch on the subject the other day: https://youtu.be/CCOdQsZa15o - even with the current set of incentives, the US could be seeing a lot higher density if it weren't literally illegal to build multi-family housing in the vast majority of places.
To adress yours and @skybrian's concerns about legality of dense housing:
In the current state of the USA, the wealthy have the most power. If LVT manages to become law (not very easy), the zoning restrictions will likely ease up real quick since taxes will be lower per-unit in a higher density building.
LVT doesn't care if it's a single-family home or a 12 unit condo complex. If the land usage is the same, so is the tax.
LVT is intended as a replacement for property taxes, not supplementary. Offer a credit against the new tax to even out costs for primary residences as a phase-in, so that rental properties bear the highest burden of taxation.
I think of LVT as property tax reform. Some property taxes will be higher and some will be lower. The bigger the change in people’s property tax bills, the bigger the incentive to do something different, perhaps sell to a developer instead of keeping an under-used property.
But a big increase in property taxes is also a big incentive to organize politically to resist the tax, as happened in California with Prop 13. I think it’s more likely that people would organize by resisting and repealing the tax than by changing zoning laws? Where zoning laws need to change, it seems more politically feasible to do that directly?
You could use phase-ins and exempt single-family housing to blunt the political impact, but that would also make the property tax reform have much less impact, since suburban sprawl is part of the problem and increasing density there is important. The incentive comes from the tax bill and what people do to avoid it.
You're likely correct on the face of things. But any political endeavor is all about messaging, and an LVT has some attractive qualities that could make for a broader coalition of support. It's a very efficient tax that, given a suitable valuation function[1], is also quite simple. So that's appealing to the (non-accountant) wonk-ish types and people who want a simpler tax regime. As a progressive tax it's also appealing to people who want to combat the growing inequality. For people who want an affordable place to live in their community it's also attractive. If you weave all of these together into some cohesive platform I think you'll have a better chance, although something as radical as an LVT will almost certainly fail on a first attempt regardless.
Somewhat of an aside: I wonder if you could successfully pitch an LVT to Trumpworld? An interesting facet of LVT is that it's not a direct tax on the wealthy, only on the expression of wealth through land ownership. So a billionaire who lives like a pauper pays much less tax than the jet-setting "globalist" billionaire with 20 vacation homes. If you could pitch it as vehicle to "reign in the coastal elite" (lol) you could perhaps even make conservative inroads with an LVT. Probably not, but maybe?
[1]
Of course, the devil is always in the details and this is likely one of the biggest challenges for implementing an LVT.I quite like the LVT, and I like what you have written. There is one other problem, along with the valuation; avoidance.
While property/land taxes are perhaps the least avoidable, there are still going to be wealthy individuals going to great lengths to manipulate their valuation (like they supposedly squeeze toilets into rooms to cut property tax).
Ok, and? Tax avoidance is a thing, but are you holding it up as a reason the tax is needed? Not useful? Needs a redesign?
Just wanted it to be mentioned, since people can get a little "in theory" with hypothetical tax reforms. While I'm for simplifying tax codes and LVT, I want to see what a financial incentive to reduce the valuation of an area does to soulless corporations.
We're definitely still in the "in theory" territory but I think the beauty of an LVT is that avoidance is really hard. The tax is on the unimproved value of the land so whatever you are doing as a landowner should have very little bearing on the result of your tax owed.
I say should because obviously what your neighbor is doing to his land does have an impact. So perhaps people could conspire together but that seems difficult -- avoiding any sort of property improvement as a collective to pay less tax seems unlikely? It seems like a bit like trying to convince your neighbor today to sell his house for less money so you can pay less taxes.
Avoidence probably wasn't the best example. When I suggest LVT to someone IRL, they have no interest in it; they have a fully formed opinion on taxes and something unknown may as well be dirt. So the only place to discuss a land value tax is online, with people familiar with the concept.
Fundamentally, I would like to dig in to LVT and attempt to reason about how it shakes out beyond tax efficiency. Seeing it in practice would be a great start of course.
So how about other side effects? If primo strip mall lots rise in valuation (question mark, because generally the idea is a slight reduction in tax burden, offset by reduced overhead), smaller shops on the periphery might be forced somewhere with less traffic.
So let's assume we are talking about a mall landlord and their tenants. Let's also assume the landlord is charging the market rate for their spaces -- if they charged any more they would find people are unwilling to pay or the spaces wouldn't fill fast enough etc.
In your example if some external factor increases the market rate -- i.e. what tenants are willing to pay (increased wages/area improvement/etc) -- then the landlord will raise their rents such as they are able to under various laws. This could result in the displacement of shops. However, this exists today without LVT, nothing about LVT should affect this in any way.
This is actually what makes the tax progressive -- it's very hard for landowners to pass it on to tenants. Instead of the market rate increasing let's imagine we just raise the LVT. The landowner cannot charge any more for their land as they are already charging the market rate -- if they charge anymore they won't fill the space. Thus the tax is a tax on the rent value of the land.
A strip mall is an outdoor mall. Maybe a developer owns the whole area, but I am concerned about shops at the edge/outside. How does that work?
Not sure I understand your question? All the shops are landowners or tenants at the end of the day.
Stores on the periphery of an outdoor strip mall are probably on very cheap land, but the valuation may be falsely inflated due to the neighboring strip mall with high rent outlets.
Basically, gentrification? LVT is economically efficient, but a consequence of encouraging development of unused, perhaps less desireable land and the knock-on side effect of gradually raising the value in the area, can force existing tenants out. This already happens, but wouldn't a land value tax encourage it?
Sorry, I must have missed this.
How so? Gentrification is actually mitigated under an LVT. The positive spillover effects of land development that push rents upwards are partially captured by an LVT and socialized instead of captured by land speculators who can free-ride off investing in up-and-coming areas.
Higher property taxes would be an incentive to increase density, but financial incentives aren’t enough if zoning laws and NIMBY activism forbid higher density.
I think there are sufficient incentives to build already if zoning is improved? Recent changes such as the new law allowing duplexes everywhere in California should help.
There can be other restrictions though. You can’t build if you can’t get the water, which is a problem in Monterey’s water district.
So the actual implementation for determining land value is somewhat of an open question but I think any reasonable LVT would quickly make a lot of detached homes in metro areas unaffordable. For this reason you'd likely have to phase it over time, but NIMBYism won't stop the properties from becoming unaffordable.
So the LVT in this case eliminates NIMBY opposition to zoning changes because the 'MBY' part becomes obsolete. Of course, opposition to an LVT is likely to be fierce from NIMBY types who own detached homes but at least they will all be fairly compensated for their property.
This is similar to vord’s argument so see my other response.
I would challenge your position that the cost of housing has gone up.
Here is real rental costs in USA over time. It's on the high end, but within historical ranges.
https://fred.stlouisfed.org/graph/?g=HoZJ
Owners equivalent rents track actual rents closely over time
https://fred.stlouisfed.org/graph/?g=HoZZ
House prices are abnormally high right now, but owners equivalent rents are kept low due to low rates)
https://fred.stlouisfed.org/graph/?g=Hp02
Rents in certain areas are high, but salaries are also high for some folks in those areas as well
https://fred.stlouisfed.org/graph/?g=Hp0w
It seems like you’re not arguing that housing prices didn’t go up? There are reasons why it’s affordable for some (low interest rates, high incomes) but they still went up. These are reasons why prices could go up.
I'm arguing the cost of housing didn't go up. The cost of housing is rent or owners equivalent and relates to the subject of inflation.
If you were talking about the cost of houses as an asset going up, then there is no disagreement there, but I think we saw in 2008 what happens if people suspect house prices might fall.
Okay, I did say housing rather than houses. But the CPI component for housing seems unlikely to match people’s expectations for either what’s going to happen to the price of an average house in a particular area, or what they expect to pay to rent an apartment.
It seems like expectations would be based more on trends in market prices than what people actually pay (which is often very different, and is what CPI tries to track).
Agreed
From the article:
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Here’s the paper.
Here’s an alternative link.
Discussions about inflation online have become a political team sport. It seems a lot of conservatives kinda want high inflation to punish the idea that the quick monetary aid during COVID was reasonable.
Well, yes, it’s easy to take the outside view and ask “who would this benefit” because you don’t have to learn anything more about what’s really going on before speculating. We all do it, but we should prefer articles by people who actually did their homework over speculation that anyone can do.
Inflation is an abstraction over prices in general and I find it more enlightening to read about specific bottlenecks, which is why I’ve been sharing articles about shortages. When things go wrong you find out about how the world really works, which tends to be pretty complicated. It seems pretty clear that energy prices are high and likely that they will remain so this winter.