Dean Baker Gambles on Real Estate, Claims Land Prices Aren’t a Problem

It’s a little more complex than that, but Baker is known for provocative blog post titles, so it’s fair: On Thursday he put one up titled, “The Crisis of Too Little Land,” which is a response to Noah Smith’s Bloomberg View article, “The Threat Coming by Land.” Baker is well known for predicting the real estate bubble as far back as 2002, but notably, he used his insight to his personal advantage—which is totally justified: Ignore economists who get things right at your own peril.

In his excellent free book Plunder and Blunder (pdf), Baker writes that in 1996 he and his wife paid $160,000 for a condominium in D.C. and then sold it for $445,000 in 2004, a 158 percent increase once inflation is included. They only painted a few rooms. Consequently, Baker knows full well that Smith is referring to “land” as a production factor, not a physical quantity. (In equal rebuke, Smith refers to “land” as “capital,” which makes me want to bang my head against a wall.)

However, Baker goes on to correctly characterize Smith’s argument as “too much money going to owners of land,” but he disagrees as to the causes and implications. For one, higher land prices are a response to lower interest rates, and those have been falling since the 1980s. Two, dying cities with cheap land offer alternatives to employers (and workers) hoping to set up shop. Three, he dislikes smith’s use of the term “landlord,” when most of them are really “homeowners.” Finally, with stagnating or declining populations, the industrialized world will see lower land prices.

I’m mostly fine with the interest rate point, but I question whether significant changes in fiscal policies, especially property taxes beginning in the 1970s, are also responsible. Proposition 13 in California and S7000A in New York have done enormous damage to poorer households in those states. I’m sure the Reagan tax cuts didn’t help either, so I wouldn’t lay as much blame on interest rates.

The same goes for Smith’s use of “landlords” rather than “landowners,” which is a mannerism I see among land-value taxation advocates. I prefer “landowners” as well, but Baker’s preferred “homeowners” confuses quantity of owners with quality of ownership. Large corporations (think McDonald’s) own the most valuable land in the country, so taxing land values as Smith supports would hit the wealthiest landowners first and foremost. To the extent taxes would be shifted away from incomes (especially the regressive payroll tax), the harm to suburban homeowners wouldn’t be as pronounced. (They also can’t invert themselves overseas.) There’s also the problem of the sensitivity of land consumption to income and wealth: Wealthy people use more space than what they simply own, e.g. private golf courses, yacht clubs, etc. Thus, I’m dissatisfied with Baker’s terminology too.

Baker’s second and fourth points discuss the same effect somewhat: Populations leaving cities (or dying off) reduce land prices, but no one wants to set up shop in areas that are declining. There’s a post hoc quality to Baker’s argument here: If urban sites outside of New York, San Francisco, Silicon Valley, etc., are cheaper options, why haven’t industries moved to them already? The reason is clear: There is no good alternative to a good location, so when the government subsidizes location owners and taxes producers, our economy seizes up. This is why Smith writes, “It doesn’t matter how much empty land is out there — who wants to live on the Kansas prairie? What matters for the value of modern land is the incentive to locate close to other people.” It’s also why Baker’s title appears to miss the point in contrast to his usually innocuous tongue-in-cheek blog posts: It matters quite a bit if land-market failures have cost the U.S. 13 percent of its GDP since the 1960s.

I have two points of my own to add: One, Baker is often concerned with the U.S. trade deficit, particularly with China, but a lot of it is due to oil consumption caused by urban sprawl. Our energy policy contributes to other problems, so it’s unfortunate Baker doesn’t draw the relationship.

Two, Baker regularly touts financial transaction taxes and even taxes on vacant homes. It’s bizarre that he’s unwilling to endorse land value taxes notwithstanding his arguments against Smith. LVT is better than both.

Ultimately, Baker understands land prices in a bubble context, but he doesn’t understand land as a production factor, even though he an recite “land, labor, and capital” as a mantra (see the comments). Frankly, I’m not sure if this is worse than Smith’s land-as-capital model, but it’s highly problematic. For example, Japan has a declining population, and with it low expectations of future land rents, which in turn leads to lower inflation, low interest rates, and low growth. By Baker’s reasoning these forces should also lead to higher land prices. The virtue of LVT is taking the speculative element out of investment. It’s disappointing that Baker sees land pricing only in its excesses but not in its general effects on factor distribution and growth.

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