The Marginal Economy - When is there too much wealth?

June 24, 2017

[Originally posted on Facebook]

Think about Burlington Vermont. 3% unemployment. New "affordable" apartments going for $1000. Homeless people who work who can't afford a room. Is it possible to have an overheated economy? Can we consider the possibility that there is too much demand to live in Burlington, that with employers unable to fill jobs because the qualified people can't find a place to live, that the demand for housing forces prices up and it's the property owners who are winning?

Let's try this, at the risk that the economy might cool down a little: Tax the highest rents and mortgages, progressively higher, as they rise above the median. The overheated high end of the market cools off a little, and the money can be used to build infrastructure to make down market housing more attractive to developers and more affordable to build.

It is said this will drive the rich people out. I want to know why we are protecting the rich people (see below "dream hoarders"). if they are not paying into the budget enough to actually help other members of the community have decent lives, why do we want the super wealthy in the community to start with?

The argument goes on. The reason that Burlington's housing, like most of Vermont's, is so expensive, is that year after year, each time a property is sold, the seller takes a capital gain. The value of their property grew faster than the wealth of the working people who might buy it or rent it. This is supply and demand run amok, where the property owners accumulate wealth, with thanks to an otherwise healthy economy, while the rest of us have to give it up.

Wealth through property is the original American Dream, the motivation of British entrepreneurs, our own Ethan Allen, and uncountable opportunists since the first European settlement of this continent. Property is the original security, the only investment guaranteed to grow in value decade on decade, century on century. How does wealth continue to flow from property for so long? How is that the population of Vermont has been stable for two centuries, but the value of land has risen from something a a broken dirt farmer from Massachusetts could afford, to something most of us only dream of? 

The law has always protected the right of an investor to take a capital gain. It was taxed, but viewed as a public good. Especially since the writers of law tend to be property owners, and operators of businesses, all of them living in a frontier society where opportunity was super abundant, and benefits of the system were spread widely, scrutiny of this logic was never likely.  But let's look. I'm tempted to discuss monetary policy, but I'll try to dodge that issue. 

Supply-and-demand dictates that when a resource is scarce the price for that resource will rise. Once all of the land is owned, and none is available for free, new purchasers will pay a premium (an amount in excess of the seller's investment) to acquire the property. Hence property owners take a slice of the wealth away from people who are trying to live their lives and might otherwise spend that money locally, and the value of the property has risen relative to the community productivity. When this happens incidentally, the owner of a home to a new owner, the transfer of wealth is invisible because both remain in the community. But most property is handled by large investors, and the transfer of wealth is not incidental. Large volumes of wealth are accumulated by a few, and this wealth no longer circulates in the community. It is not being used to stimulate the economy. It is being held and managed to further increase the wealth of the property speculator. Banks are used to under write mortgages, but the money that enters the community to pay for the property immediately goes to the seller, who is most likely to take the wealth our of the community, and will only invest in enterprises that further concentrate wealth. Meanwhile, the interest on that mortgage flows only out. It leaves the community. It cannot be used for local economic improvement.

But let's look again at "cooling off the economy". What do you think the impact would be if the cost of housing were actually adjusted to the incomes of the residents of the city? They would have disposable incomes, and homes to live in, stability and a mind for the future. Quality of life enhances economic vitality, and if there are rich people making a living here in Burlington, they will surely prosper with the rest of us.