Warning: You should probably turn back now. This one is a beast.
Something feels broken in our society
The US is the most prosperous nation on Earth. But it feels unnecessarily unbalanced.
2 observations stand out to me:
- Labor share of the economy has fallen sharply behind capital’s. Wages have significantly lagged asset prices which has had massive distributional effects.
- The distributional effects:
- 70% of US wealth is held by the top 10% (via Fed)
- This top-heaviness is driven then reinforced by the reality that more than 50% of the income is earned by the top 20% whose savings are directed to accumulating wealth via investment.
[See Upside Down Markets for a fuller discussion of these effects]
These observations are unsettling.
We have a progressive tax code yet the winners seem to be accumulating advantages faster than redistribution can hold the center. Whether labor has lost bargaining power (ie globalism), or the inherent leverage in technology allows gains to be concentrated amongst fewer owners, or whatever the reasons are it is clear that imbalances are building. And if the flow variable (income) is unbalanced, then redistribution is really just delaying the inevitable swallowing of the stock variable (US wealth) by the few.
I have likened the current environment to the endgame of Monopoly.
[I’m actually quite tedious on this point]
My concerns about inequality stem partially from a sense of Rawlsian justice (see “veil of ignorance”) and partially from a desire for cohesion. The wider the gap between people, the less overlap they have in their concerns. This has as much to do with social fabric as it does with justice.
I think there are many wealthy people who recognize this and would be willing to sacrifice in the name of the collective (there are lots of rich lefties who will vote against their own narrow financial self-interest). But it’s a prisoner’s dilemma. Nobody wants to be the only confessor.
I find myself at an impasse as I think through the inequality/cohesion problem.
On the one hand, I’m philosophically aligned with large estate taxes and lower thresholds and steeper graduated tax rates.
But my sympathy remains philosophical only. I cop out when it’s time to actually push for these things in the real world and not just on a blog.
There are 2 reasons.
- The government, owned by corporate interests as it is, would probably leave me feeling like I sacrificed in vain. I’ll admit this sounds like a grand Zerohedgy, illuminati-phobia. But it’s more of a general unease with power and its corrupting influence. I don’t believe in either benevolent dictators or moral fortitude at the level of institutions. And in this case, we would be giving the institution of government even more power because of the next reason which is more important than the first.
- Any additional large sources of taxation should not be simply bolted on. The layers of pork and exceptions in our complex tax code require a re-thinking. Unfortunately, they are so load-bearing on
society’sinvestors’ expectations that I don’t think it’s possible to overhaul them. Being incremental just means more taxes without addressing what’s fundamentally broken.
Which begs the question through all this haze…what is fundamentally broken?
This is a zillion-dollar question to which a single answer would discredit the respondent who fell for such a framing. But living in CA, I think I see a clue.
The California Clue
I love living in CA despite its fiscal framework. CA is what you’d get if you told Wario to design public finance. Let me get this straight… a young worker with a good job will pay nearly 50% in combined Federal and State taxes, while an absentee landlord living in Orange County has plenty of time (the app he uses to collect the rent is built by the young worker, by the way, saving the landlord the indignity of paperwork and trips to the local Wells Fargo branch) to scream at “lazy bums” to pick themselves up by their bootstraps, all without a shred of self-awareness about his grandparents’ fortunate decision to buy a regular house in Newport that’s now worth 8 figures and is protected by Prop 13 from high carrying costs?
My mother bought a house in NJ for $70k in 1982. It has appreciated 5x for about a 4% CAGR. She paid 2% property taxes reassessed every year. In real terms, she lost money. But she had a roof over her head.
An equivalent house in CA cost about the same in 1982. I know because she and her father tried to move us to the Bay Area 40+ years ago. They couldn’t find jobs out west, so I was raised in NJ. You could have thrown $70k at nearly any house in the Bay Area in 1982, and it’s worth seven figures today. And the property taxes can be safely rounded to zero because of Prop 13.
In CA, the reward for getting lucky once was to get to stay lucky. In other words a landed gentry. Meanwhile, family formation in Bay Area suburbs is limited to Millennials or Zoomers who will inherit their parents’ homes and that sweet stepped-up basis. The ladder is officially pulled up. The rentier is on top while the worker falls behind on the treadmill down below.
CA’s fiscal dysfunction likely has many causes. But the output is plain to see — it’s a state that gives preference to building wealth through capital appreciation instead of labor and the real estate market has internalized that logic. But real estate, in particular, land should be considered a reserved word to use a coding analogy. Thinking land is just another form of capital, like a computer or factory is a subtle but profound error.
To understand why, we resurrect late 1800s economist and philosopher, Henry George.
Taking the role of docent, I’ll soon hand you a map of the learning journey I took myself and let you begin a self-guided tour.
Before pointing out features of interest, a personal thought:
As a parent looking at…
- exploding college costs,
- the Hunger Games of achievement and admissions,
- and scandals where well-resourced celebs take giant risks to bribe their kids into higher ed,
dead people fear.
Pair this with anecdotal observations of more people obsessed with “generational wealth” or becoming a “family office” (my friends Jason and Corey puzzled over this as well and apparently it triggered a bunch of listeners!)…and I think I either see the common thread or I am just projecting:
Successful people, either self-aware of the role of luck in their fortune or not, sense what I sense — the ladder is pulled up.
I live in a nice Bay Area suburb. Re-run my life 100x from my starting conditions and I get here in maybe 5 of them. My kids, without help (either by inheritance AND me footing the bill for college), have almost zero chance of one day being able to afford living here — and I’m not living in luxury. I rent an old house that hasn’t been updated in 40 years that sits on valuable land. It’s worth more than $2mm. It will be torn down by the next owner.
That recognition makes many people who on paper look they’ve “made it”, feel insecure because they see how cold it is out there and they worry for their kids. The left tail of outcomes looks dreary in America. And if you are doing well but not “financially free” that left tail starts in the next town over where the schools are ranked a 3.
[Aside: “Financial freedom” — just jab me in the eye with a Bottega keychain — I f’n hate these words. I just had dinner with a friend who works in a personal setting with billionaires — they don’t sound free in any meaningful sense of the word. Money doesn’t unbreak your brain. No matter how much you got you still gotta live with that thing. If you have the luxury of reading a substack, a lot of what you think you want could be achieved right now when you acknowledge that what’s holding you down isn’t material. Every one of you knows rich people who are slaves and average people whose hearts soar. Maybe take the clue seriously. Follow some breadcrumbs.]
Back to this Henry George journey.
That sense that the ladder is pulled up, that sense that the American prosperity that we can plainly see on a Wikipedia ranking feels somehow more distant when we try to shave off a bit for our own security creates dissonance. “I know the facts say we’re alright, but I don’t feel we’re alright.”
George gave me a provocative perspective. He predicted a paradox of poverty being chained to progress. Just as a back or knee problem can be caused by weak core, in a system as complex as the body or an economy, the root of an unbalance can feel unrelated. George put his finger on something I had felt but never was able to articulate — treating land as just another form of capital is a profound and fundamental mistake.
It is a bold argument when he proclaims:
the resilience of poverty, oppression, and inequality in the face of advancing economic development is not some embarrassing accident we’ll eventually get around to fixing, it’s an inescapable consequence of our socioeconomic system.
His ensuing argument was a lightbulb moment for me. Land deserves a special place in our financial framework because its supply is fixed and it’s a “monopoly of nature”. We cannot understate the extent to which this breaks much of the economic thinking we are accustomed to.
If you treat land the same way you would a bar of pig iron, an hour of work, or a dollar bill, before you know it you’ll get poverty paradoxically advancing alongside progress, inexplicable bouts of industrial depression, literal genocides and holocausts (he’s dead serious about this), and The Rent Being Too Damn High.
The analysis will build a familiar economics framework from first principles but what stands out to me is how important it is to account for land correctly. It’s as revolutionary a measuring insight as Sabermetrics and Moneyball was to sports.
Your journey to being “George-pilled” is not meant to be a religious conversion. Approach it as mind-expansion. It’s a very fun tour.
I have re-factored Georgist expert Lars Doucet’s review of Henry George’s Progress & Poverty with my own commentary. The links are at the end of the post.
The path you’ll find before you:
- Define termsGeorge insists sloppy terminology leads to sloppy thinking. Naturally, he spends an entire chapter beating words to death to correct this.
- Address the central questionWhy, in spite of increase in productive power, do wages tend to a minimum which will give but a bare living?
- Define the “laws of distribution”When society produces wealth, who gets different shares of it, and why?
- Put it all together into a framework that properly reflects economic realities and justificationsKris: George’s commitment to proper return attribution warms my heart. One of the most difficult aspects of performance evaluation in trading/investing is decomposing luck from skill. In the ideal framework, you’d want to extract all the return that is not due to “beta” which is cheap exposure to acquire. You want to identify idiosyncratic skill/alpha/edge. By isolating the components of return we are more capable of assigning prices we are willing to pay for those idiosyncratic and often “uncorrelated” sources of return. George was a stickler for creating an accounting paradigm that actually represented reality. Thus represented, we can have meaningful discussions about the trade-offs of policy and outcomes just as accrual accounting gives a better representation than cash accounting for a business’ opportunities and challenges.
- The remedy Make land common property!
He doesn’t want to confiscate land, or force everyone to live on some giant hippie commune. He proposes instead to let everyone continue to “own” land exactly as they do now, but we should impose a special tax to neutralize the perverse incentives of land rent. He anticipates a lot of pushback on this, and promises that his remedy is just, can be practically applied, and will actually solve our problems.
Kris: It’s important and worthwhile to read the above arguments, counters, and justifications. But the key point, in my opinion, is a land value tax is not happening in isolation. This tax would be in lieu of many existing taxes and in fact I think taxes on the commons are preferable to taxes on income. In fact, George’s followers are often referred to as “single taxers”.
Final comments before I give you the keys.
1) I didn’t know there was a single tax movement (except the regressive “flat taxers”.) I’m conceptually aligned with wealth and large estate taxes instead of income taxes but for practical reasons (collections, loopholes, corrupt government power) I don’t push those ideas. George’s idea of a land value tax strikes me as a more promising response to imbalances that provoke me in the first place.
2) Our failure to account for the role of land properly (specifically by treating it as equivalent to other forms of capital as opposed to a fixed, inelastic supply granted by nature) leads to a host of economic distortions. But the most critical is causes us to conflate monopoly with capitalism. George’s case is not against capitalism. He’s against substituting human monopoly for nature’s monopoly because we fail to do proper attribution of factors of production and their respective returns.
This is a giant error. To quote the review’s author Lars Doucet:
People are now paying 50% of their income just for rent. And that’s not sustainable in the long term. The cycle you have there is revolution. I’m not kidding.
Look through history, you either have land reform or you have revolution. And you know, it’s, it’s either like either you have a never-ending cycle of, of, of transfers of income from the unlanded to the landed. Eventually the unlanded will not put up with that. You know, there was a real chance in the 19th century, at the end of the 19th century of America going full on socialist or communist and the only thing that saved us. It’s either Georgism or communism. And if you want to save capitalism and not go Totalitarian we need Georgism.
What George failed to anticipate was the automobile. And the automobile kicked the can down another couple generations. And it came at the cost of sprawl. And the cost of sprawl are enormous in terms of pollution and poor land use.
But now we’ve come at the end of that frontier and now we’re at the same question. And it’s like, you see this resurgent interest in leftism in America and that’s not a coincidence. Because the “rent is too damn high”, poor people and young people feel shoved out of the promise and social contract that was given to their parents and they’re jealous of it and they’re wondering where it went.
3) Our misunderstanding of land leads to a misallocation of returns to capital vs labor
- We can’t see how treating land as capital (or a private “option”) perpetuates inequality as a) populations grow and b) as technology advances. This is spelled out in the tour.
- We suffer industrial depressions due to land speculation.The monkey wrench that causes the boom-bust cycle of industrial depressions is rent, and even though we have more than enough material wealth to provide for everybody’s needs, rent prevents us from distributing it fairly and equitably.
Kris: Note that “equitably” has nothing to do with some moral justice as we are used to considering in classic tradeoffs between equality and efficiency.
There is no tradeoff here!
What we are seeing is that we do our accounting wrong and that much of the return we ascribe to capital is really just rent and as demonstrated needs to be treated differently.
You are ready to begin. Here’s the map:
- The master document: On GeorgismThis is an outline and a container for links.
- Moontower Refactors Lars Doucet’s Review of Progress & Poverty I’ve condensed and refactored the review while adding many of my own comments. The link to the original review is included and encouraged.
- More from Lars Doucet Lars has devoted his life to nudging Georgist principles into reality, including building a startup devoted to using better technology and analytics to assess land and property.
He’s written a book called Land Is A Big Deal and many articles on the web. But I want to highlight my first contact with Georgism — Lar’s interview with Dwarkesh Patel on the Lunar Society Podcast.
You can find the interview, transcript, and my favorite excerpts here.
If you are interested in this topic but don’t want to read the review, books, or my re-factored version this interview is the next best thing. Dwarkesh is prepared and does not pitch Lars softballs. It’s a challenging interview (although very much in a kind collegiate, spirit) that demonstrates Lars’ depth of knowledge. It’s very impressive Lars’ graciousness and open mind is exemplified by how he ends the interview:
Thanks for grilling me. Thanks for all the hard questions. You know, I really, I really, I really like to be challenged in that way and like really engage with the best faith, hard-hitting critiques to make sure we like really understand what we’re talking about here. Because none of this matters unless it works. I’m not here to like defend Henry George’s honor. I’m here to like really explore whether this can actually be a solution to our problem.
Personal favorite sections of the interview include:
a) a practical discussion of what’s feasible to transition from our current tax code to a land value tax system including where in America and abroad it’s already being experimented with!
b) The pitfalls of land monopolies in video games
Lars has spent most of his career as a game developer. The conditions of land scarcity in games and the metaverse are profoundly insightful since they exist in a digital universe.
20 years later, I checked back in [with Ultima Online]. And that housing crisis is still ongoing in that game. That housing crisis remains unsolved! You have this entire black market for housing. And then I noticed that that trend was repeated in other online games, like Final Fantasy 14. And then recently in 2022, with all this huge wave of crypto games, like Axie Infinity, Decentral Land and the Sandbox. Then Yuga Labs’ Bored Ape Yacht Club, the other side, had all these big land sales.
At the time, I was working as an analyst for a video game consulting firm called Naavik. I told my employers we are going to see all the same problems happen. We are going to see virtual land speculation. They’re going to reproduce the conditions of housing crisis in the real world. And it’s going to be a disaster.
I called it, and it turns out I was right. And we’ve now seen that whole cycle kind of work itself out. And it just kind of blew my mind that we could reproduce the problems of the real world so articulately in the virtual world without anyone trying to do it. It just happened. And that is kind of the actual connection between my background in game design and kind of getting George-pilled as the internet kids call it these days.
- And finally…a fun bonus you’ll find in the master document, and the origin of Munchie’s title today:
It has been so fun to get “George-pilled”. Rebuilding an understanding of value creation and how it flows, mapping economics to what appears to be happening around me in the US and especially California, moving away from wanting to tax wealth and instead wanting to tax land (and being consistent about not wanting to tax income in either framework), and discovering the ironic, controversial of Monopoly — this entire journey has felt like a boardgame in its own right.
I hope you get past the “rules” and play for yourself. I played the 20 hour version of this quest so you can hopefully get the one-sitting experience.
(I love that Lars decided to play the fully-immersive-throw-your-life-into-the-game-version. That’s the true aspirational model of financial freedom — not “let me be so rich I can idle as an absentee landlord” but let me sustain a life doing the thing I want to be doing anyway.)