John Buell

Land and the Bubble Economy

How is a hungry planet to feed itself? In addition to concerns about a population explosion, governments are now becoming alarmed by the effects of climate change on scarce food resources. The increasing likelihood of extreme weather events such as draughts and floods clearly endanger our food supply. But equally significant is the way in which the market for land itself may affect the economics of food. The collapse of the housing bubble has paradoxically left investment bankers even more in charge of the world economy and created both the need for and opportunity to fashion bubbles that endanger food as well as shelter worldwide.

Veteran science journalist Fred Pearce points out that concerns about food supply have occasioned a dangerous transformation in international land markets: In a recent Guardian interview he commented: “Soaring grain prices in 2007/2008 led to countries such as Saudi Arabia and South Korea worrying about their national food security and buying up overseas land. Then speculators and investors started piling in on the back of that. The net result is that poor farmers and cattle herders across the world are being thrown off their land. Land grabbing is having more of an impact on the lives of poor people than climate change.” The speculators to whom Pearce alludes include not only governments but also pension and hedge funds and even environmental organizations.

Mainstream economists reassure us with reminders about supply and demand. Increasing demand for land will purportedly drive the price up and thereby curb future appetites. Supply and demand will reach a socially optimal equilibrium. That faith in market mechanisms underlay what Karl Polanyi famously labeled the great transformation. Many societies used markets for the production and exchange of specific goods, but capitalist market societies even turned the basis of all economic activity, land, human beings, and financial resources, into commodities to be bought and sold on speculative markets.

Even a cursory look at recent history should disabuse us of the simple faith in supply and demand. Increasing demand for land and houses will raise prices but does not necessarily lead to diminished appetite and stable equilibria. Those price rises may stimulate a continuing ratcheting up of demand and prices. Because land is vital and finite it can become an ideal target for speculation, and that speculation can in turn distort and harm the economy of goods and services. University of Missouri-Kansas City economist Michael Hudson puts the case in these terms: “Land is the economy’s largest asset. A site’s rental value is set by market conditions – what people pay for being able to live in a good location. People pay more to live in prestigious and convenient neighborhoods. They pay more if there is local investment in roads and public transportation, and if there are parks, museums and cultural centers nearby, or nice shopping districts … Landlords do not create this site value. But speculators may seek to ride the wave by buying property on credit, where the rate of land-price gain exceeds the interest rate. This “capital” gain is the proverbial free lunch. It is created by public investment, by the general level of prosperity, and by the terms on which banks extend credit. In a nutshell, a property is worth whatever a bank will lend, because that is the price that new buyers will be able to pay for it.”

Mixing an unregulated market in land with deregulated financial markets is a dangerous brew. Even in good times, when the land prices are going up, someone is losing. The cost of housing is rising and the real value of one’s earnings is shrinking. Businesses must pay their workers higher wages even to provide minimal subsistence. Hudson sees these costs as one major aspect to the US economy’s lack of competitiveness. But the dangers are even greater. It is an economy built upon a house of cards, a ponzie scheme that would make Bernie Madoff’s look like child’s play.  Hudson comments: “Rising property prices were fueled largely by banks providing mortgage credit on easier terms. But by 2008 these terms had reached their limit. Interest rates were seemingly as low as they could go. So were down payments (zero down payment) and amortization rates (zero, with interest-only loans) and property values were becoming fictitious as a result of a tidal wave of fraud by the banking system’s property appraisers, while the income statements of borrowers also was becoming fictitious (“liars’ loans,” with the main liars being the mortgage writers).”

It is too early to tell whether global land and food markets will become subject to the same bubble and collapse dynamic. But it is not too early to take preventive measures. Land markets are easily subject to monopolization and manipulation and even the great classical economists were concerned with this likelihood. Hudson argues:

“If the rise in real estate prices (mainly site values) had been taxed, there would have been no financial overgrowth, because this price-gain would have been collected as the tax base. The government would not have needed to tax labor either via income tax, FICA wage withholding or consumer sales. And taken in conjunction with the government’s money-creating power, there would have been little need for public debt to grow. Taxing rent extraction privileges thus would minimize debt levels and taxes on the 99%.”

Bankers, hedge fund managers, sovereign wealth funds never sit still. The collapse of the housing bubble has left them not only unscathed but even stronger. They do not like to sit on money. Taxing land appreciation, even via international agreement if possible, is more necessary than ever.

John Buell lives in Southwest Harbor, Maine, and writes regularly on labor and environmental issues. Email jbuell@acadia.net.

From The Progressive Populist, April 15, 2013