Charles Lane Has Never Heard of the Federal Reserve

For some reason The Washington Post‘s Charles Lane is trying to compare Thomas Piketty’s Capital in the 21st Century to Henry George’s Progress and Poverty. I haven’t read Piketty’s book—and don’t plan to—but I think it’s mostly hype. Piketty uses the neoclassical marginal product theory of income distribution, whose origins trace back to John Bates Clark’s 1899 treatise The Distribution of Wealth, to argue against “inequality.” It’s a strange turn of events: J.B. Clark’s goal was not to explain poverty but to eliminate land as a factor of production because he was a shill for the wealthy who hated Henry George and his single-tax followers. By fusing land with capital, Clark could argue two things: (1) that poverty wages were just desserts to workers because they were being paid what they contributed, and (2) that as “capital” increased, wages would rise too because, effectively, the land base was growing as well. And you thought trickle-down was bad!

Thus, Piketty is deploying a theory whose intended purpose was to rationalize poverty to cure it. Either someone (Piketty, Clark, myself) doesn’t understand the theory, its history, and its ethics, or someone (just Piketty or Clark—not me) is engaging in sophistry. Like, if you can validly use the same theory to argue opposite points, I swear I will switch to writing about Buffy the Vampire Slayer.

Returning to Lane, he’s not the only person who’s seen the buzz around Capital and has been reminded of George. The problem, though, is his treatment of George’s solution and Piketty’s utterly preposterous global wealth tax. Whereas abolishing deadweight taxes is politically feasible at the state level and doesn’t run afoul of moral issues of transferring one country’s surplus to others—a potential criticism of Piketty that I haven’t seen—a global wealth tax is the most quixotic response to poverty I’ve ever heard of. (If I didn’t know any better I’d think that Piketty was trying to pull a Trojan Horse on neoclassical economics.)

Lane writes:

Alas, Piketty’s global wealth tax and George’s single tax suffer from the same defect, and it’s not political impracticality … It’s the inherent difficulty of separating the productive, untaxed component of the return on land or capital from the unproductive, taxed part.

Clear in the pages of a treatise, the distinction is murkier in practice. The market price of a vacant lot can reflect potential productive uses, as well as the risk a buyer takes by betting on them. A similar analysis applies to the rate of return on capital.

Separating land from capital is one of many repeated and long-refuted criticisms of land taxes, as though real estate appraisal techniques are pseudoscientific divination. But if you want proof that it can be done, Lane should look no further than the Federal Reserve Bank of New York, which in 2008 published a paper titled, “The Price of Land in the New York Metropolitan Area” (pdf). The authors used a dataset of 6,000 commercial real estate transactions that took place between 1999 and 2006 in which the new owner either purchased vacant land or demolished the building on it. They found that the price per square foot of land in the New York metro area rose from $46.65 in 1999 to $366.08 in 2006.

Despite his lack of evidence for the impossibility of assessing land values, Lane concludes:

As a result, it’s hard to devise a tax on wealth that raises a significant amount of revenue but doesn’t discourage at least some socially beneficial saving or entre­pre­neur­ship. The potential for adverse unintended consequences — economic and political — is greater than Piketty seems to realize.

This is true for Piketty but not George. Compare the difficulty of administering a land tax with the “ease” with which government devises taxes that confiscate people’s incomes. Apparently, Lane prefers squelching laborers and entrepreneurs in favor of a benevolent cartel of landowners. John Bates Clark would be proud.


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