Tuesday, July 28, 2020

Goodbye To The Last True Georgist Economist: Mason Gaffney

Mason ("Mase") Gaffney died on July 26 in Redlands, CA of Covid-19 at age 96.  He was both a great guy as well as arguably what the title to this says: "the last true Georgist economist," with such economists being followers of Henry George, whose 1878 book, Progress and Poverty, was the best-selling book on economics in the US during the 19th century.  George was a journalist who ran unsuccessfully for Mayor of New York.  His book, drawing on influences from Quesnay and Ricardo, advocated that there be a single ("site") tax on land, replacing other taxes.  Advocates of this view, such as Mase, argued that it brought about an economy that was both equitable and efficient.

Gaffney became a follower of Henry George in 1940 in his senior year of high school, when he read Progress and Poverty while convalescing from an accident.  He started at Harvard in econ in 1941, but dropped out from majoring in econ due to his disgust with the non-Georgist approach in the department there, joining the US military to fight in WW II.  He would later say that a virtue of an overseas military deployment was that it made one appreciate life as one felt they were living on "borrowed time."  In any case, he ended up having quite a lot of it.

After the war he attended Reed College and got his PhD at UC-Berkeley.  He worked in many places around the US, including at the US Dept. of Agriculture for awhile, but mostly in academic positions, ending up at UC-Riverside in 1976, where he remained until his retirement in 2012.  I think he stopped attending conferences after that, but I remember seeing him at some up to about that time, when, well into his 80s he was very lively and articulate and fun to talk with.

Unsurprisingly he became a major leader, maybe the major leader, of the organized Georgist movement in mid-century US, working the the Robert F. Schalkenbach Foundation on this and founding the long-running Committee on Taxation, Resources, and Economic Development (TRED), which had some prominent members including the late Nobelist, William Vickrey.  This group did a lot of lobbying and writing of letters to people in many nations and even religions (such as the Pope) urging the adoption of the single land (or site) tax.

He had at least some partial successes in some places, including New Zealand and Taiwan, among a few others.  While very few nations were willing to completely go with such a tax given that in modern economies with large governments they are unlikely to provide enough revenue to fund everything, in quite a few municipal areas there have been efforts to at least tax structures on land at a lower rate than the land they sit on, thus moving in a Georgist direction.  The old argument is that this discourages leaving land vacant and combats pure land speculation, among other things.  The main place in the US that did this for many decades, but eventually gave it up, was the city of Pittsburgh, where several urban economists claimed that it had the desirable effects argued for it.

If the land tax is so much better than the property tax, its great rival at the local (and more practical) level, why then do we see it so rarely used?  This actually goes back to my own PhD dissertation at UW-Madison on "Essays Related to Spatial Discontinuities in Land Values at the Urban-Rural Margin," which involved me gathering lots of data on sales of vacant land around Madison, both inside the city and outside.  I became aware that there could be administrative and just plain old data problems for the land tax in an urban area.  There are lots of sales of vacant land at or near the edge of a city where it is expanding and vacant formerly rural land is getting built on.  But in the interior of a built-up city there are many fewer, a thin market, with the upshot that prices on such sales can wildly vary for plots of land not too far apart and not all that different from each other.  One can scarf over such peculiarities of thin data coming from thin markets, but it involves the imposing of a certain amount of arbitrary judgment that can become subject to whim and influence from especially wealthy and powerful landowners in such downtown areas. The hard fact is that it is simply a lot easier to use a property tax given that there are so many more sales in central areas providing a reasonably reliable data base for property values, although even with these influence and corruption happen in the real world involving assessments of such valuable property.

Interestingly, in recent years since the crash of the real estate bubble starting in 2006 led to the Great Recession, there has been a revival of interest in Georgist ideas, and although I do not think there has been that much implementing of them in practice, I have seen quite a bit of economics literature on the topic that largely reinforces the old arguments for how such an approach might be both equitable and efficient.  Mase got a new burst of support near the end of his life.

As a final note I shall observe  something not mentioned in the various obituaries and commentaries I have seen on him following his passing.  This involves work he did on forestry economics, an unsurprising adjunct to his main interests.  There has been a long debate in that field over "optimal rotation of a forest," the question of how long one should let a tree, or a forest of similar trees, grow before harvesting them for timber (or more general uses, but the older literature focused simply on the timber value.  This is now largely resolved in the existing literature, but well up into the 1970s there was an old debate about this, with obviously what the real discount rate (or interest rate if you prefer) playing a crucial role, with generally speaking higher such rates implying shorter rotation periods, whichever formula being used.

For a long time in the English language literature the dominant solution was due to Irving Fisher from his influential 1905 The Theory of Interest, with the problem being one of his iconic ones in developing his theory.  His solution was neatly intuitive and simple: cut the tree (or trees) when its growth rate equals the real rate of interest (Fisher was the one who first emphasized the importance of real versus nominal interest rates). As long as the tree(s) is growing more rapidly than the rate of interest, the tree's owner's wealth is growing more rapidly than money sitting in a bank.  But once that growth rate falls below the real rate of interest then one gains more wealth by cutting down the tree and selling it for timber and then putting the money so gained into a bank to earn interest.

It turns out that despite having such an intuitively appealing solution, Fisher was wrong.  He left out an important part of the rotation question, in particular he failed to take into account the implication of replanting another tree (or trees in a forest) after the tree(s) is/are cut down, which is what is implied by the term "rotation," a patch of land on which trees grow, are cut down, are then replanted with more growth, and so on, in principle forever.  It turns out that this complicates the solution and implies a shorter rotation period than the Fisher solution as, assuming a positive real interest rate, one wants to get those new young and more rapidly growing trees into the ground sooner.  An actual analytical solution was in fact discovered in the 1840s by a once-little known German foresty economist named Martin Faustmann, who wrote the solution in an obscure pamphlet that would eventually be translated into English in the 1960s.  We do not need the details of this that are more complicated than Fisher's solution, but as noted it implies a shorter rotation period than Fisher's and can be generalized to account for non-timber amenities, and so forth.

In any case, it turns out that before Faustmann's pamphlet was translated and became known in the English language literature, there were two American economists who figured out that Fisher was not right and why, although neither of them went all the way to come up with the precise analytical solution.  One of those the late Armen Alchian.  The other was the now late Mason Gaffney, who always thought very seriously and deeply about the land and what it produces and how people use it.

Barkley Rosser

9 comments:

Peter Dorman said...

I taught for a couple of years at UCR and got to know Mason a little. Even though I was working on a number of environmental issues, he didn't seem the least bit interested in what I was doing. I suspect there were departmental dynamics, and I was perceived as being on the "wrong" side. (But I was sort of on the wrong side of everyone.) It was a crazy time, with the central administration beginning the process of shutting down the heterodox PhD program.

Anyway, I was aware of Mason's Georgist inclination but not his interest in the analytics of renewable resources, which I would have wanted to discuss with him. He seemed easy-going and not your typical zippy, disputative economist.

rosserjb@jmu.edu said...

It is too bad what happened at the UCR econ dept. I gave a seminar there once in the old days before it got wrecked. I know Mason was dept chair for awhile, but I am not sure when that was. I doubt he supported ending its role as a heterodox dept. He certainly viewed himself as heterodox, but I was never in a dept or organization with him. Basically interacted with him at receptions at conferences.

Polly Cleveland said...

Thanks so much, Barkley, for reminding us of what Mase considered one of his most important works, the revival of the Faustmann formula for cutting timber or replacing inventory or any number of cyclical economic activities. Mase worried that taxes on output, like stumpage taxes or sales taxes, harmed the economy by slowing the cycle of replacement. See Concepts of Financial Maturity of Timber and Other Assets on www.masongaffney.org/publications.html.

If Mase were here today, he (and any good professional assessor) would dispute your claim that land is hard to assess separately because sales of vacant lots are few. The primary way to assess urban land is through teardowns, property where the improvements are promptly torn down and replaced after purchase. The value of the site is just the purchase price plus the cost of demolition. Sydney and many other Australian and New Zealand cities have maintained a system of land value taxation for over a hundred years; assessors Down Under can predict land values with high accuracy.

Mase would also dispute your claim that land is an inadequate tax base. All taxes, plus deadweight loss from inefficient taxes, are capitalized into land values. Shifting existing taxes onto land can actually increase land values in prime central locations—by eliminating deadweight loss and increasing the synergy of density. See “The Hidden Taxable Capacity of Land: Enough and to Spare,” on www.masongaffney.org/publications.html.

Mase was both friend and mentor to me. I'll always miss him.

E.J. Dodson said...

I came to know Mase Gaffney after becoming an active supporter of Henry George's system of political economy. At the time I was managing the residential mortgage lending program for a large commercial bank. One of my responsibilities was to increase our lending activity in what were defined as under-served communities. A city planner in central Pennsylvania took pains to explain to me why our efforts would have little permanent effect so long as the conventional property tax remained in place. He recommended that I study Henry George for the background and gave me one or two articles written by Mase and others. Later, in 1989 Mase came to Philadelphia to speak at a conference organized by the various organizations supporting Henry George's analysis. Any question I raised over the years thereafter, Mase patiently did his best to explain the links between theory and what occurs in the real world. He taught me a great deal.

rosserjb@jmu.edu said...

Polly,

Thanks for your comments. I know New Zealand and Australia (and I think also Taiwan) have managed to have a land tax for a long time. So it is clear that it can be done. It may be that it is fear of getting it going that holds many back from doing so. Wallace Oates was one who wrote about how the differential/partial site tax in Pittsburgh worked in the way forecast by George and Mase, but I could not get out of him before he died why Pittsburgh abandoned their system and reverted to a conventional property taxe.

It is clear that a site tax would be sufficient for local government. The problem is going to all levels, and I do not think tha NZ or OZ or Taiwan fund all their levels of government with only it. They have other taxes. Piketty has shown that indeed land has been an increasing portion of wealth in recent decades, so it is tempting to think about it. But even with his large views of it, I doubt that a land tax in the US could fund the federal, state, and local governments all by itself. But local governments? Yes.

All the best and stay well.

Polly Cleveland said...

Barkley,

The logic of tax capitalization applies at the state and federal level as well. A shift to state and federal land value taxation would of course somewhat change the incidence of taxes, for example reaching now virtually untaxed mineral and timber lands. Other forms of "land" merit taxation too, such as broadcast licenses, drilling rights, patents and copyrights--all of these constitute the conscribed right to certain economic activities in a designated geographical space, including all the US. All have a market value which could be taxed ad valorem.

The US Constitution requires federal taxes to be distributed in the same proportion as collected--except for the income tax per the 16th Amendment. The states used to rely on statewide property taxes and could again, where it's not forbidden by the state constitution.

Stay safe

rosserjb@jmu.edu said...

Polly,

I do not know the legal status of land taxation at the federal level. It is certainly legal at the state and local levels.

My concern is that even though with an expanded definition of "land" that would include the things you have suggested, as well as resources such as oil and coal and so on, I fear that the income generated by all that land is simply not sufficient to cover the costs of our federal government. Well, it might be to cover just the federal government, but I seriously doubt it it sufficient to cover all levels of government, which is like a third of the GDP. Last time I checked even at the broadest interpretation, land-derived income is not that high a percentage of national income. One might place the tax officially on land, but it will in the end be effectively drawing labor and capital income in the end. Anyway, that is how I see it.

Stay well.

rosserjb@jmu.edu said...

I have just seen a link on Marginal Revolution about housing policy in Singapore, being put forward by some as much better than we have in US. Government owns 90% of the land and about 80% of housing built by the government, but then mostly sold to homeowners. Price to median income ratio is about 4.6, about same as Salt Lake City, and there is a very high rate of homeownership. Main problem is that while it seems to be good for middle class, it does not provide housing for poor, and large numbers of poor migrant workers not well served and living in filthy dormitories.

Polly Cleveland said...

Barkley,

Article I Section 2, Par 3 of the US Constitution begins “Representatives and direct Taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers…” Those three innocent words, “and direct Taxes” were designed to prevent property taxation of the richer states for the benefit of the poorer ones, forcing the then small federal government to rely on excise taxes. See Gaffney, “The Property Tax is a Progressive Tax,” https://www.masongaffney.org/publications/G17Property_Tax_Progressive_Tax.CV.pdf. It took Amendment XVI to allow the income tax (but not a national property or land tax): “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”

While the Constitution keeps land taxes off limits, that doesn’t mean they couldn’t collect the same revenue currently collected by income and other federal taxes, and then some. Again, all taxes—income, sales, corporate, cigarette--are capitalized into economic rents within any jurisdiction, small or large. Statistics on land income are misleading. “Land” income is deliberately omitted or excluded from the National Income and Product Accounts, which omit capital gains realized and unrealized, or confound them with profits. State and local assessors underassess property as a whole, but particularly the land component, allowing owners more depreciation on the building. Mineral resources are drastically underassessed, if they are assessed at all. A huge array of land-like assets, such as patents and licenses are never taxed, even though such taxes would be much harder to evade. For example, a broadcast corporation could report its profits from a PO box in the Bahamas, but could not relocate its licenses, which are territorial rights: the right to broadcast at a specified power and frequency in a particular US region, such as New York City.

Yes, Singapore, like Hong Kong, is a good example of a land tax city-state with a large middle class. That doesn’t keep it from being a dictatorship and abusing the non-citizen migrant workers on which it depends.

Stay safe