The Balance of Wealth,PT 3

The Balance of Wealth,PT 3

For the Bankers

Yet another way in which farms are subsidized is to subsidize the consumption of farm products. Food stamps and export subsidies fall under this heading. To some degree, these program ameliorate the harmful effects of farm subsidies, but having one program to make food more expensive while having others to reduce the expense strikes me as needless complexity.

We have a similar program for the consumers of capital: the home mortgage deduction. Make mortgage interest deductible does indeed partially ameliorate the negative effects of higher interest rates on homeowners. But there are multiple downsides to this program. And the major beneficiaries are not the homeowners, but the banks.



First, the deduction is primarily of value to those in the higher income brackets; so much for the poor being helped into home ownership. Secondly, to receive the deduction, one needs to stay mortgaged. This encourages long mortgages and second mortgages. Houses tend to stay mortgaged. This ties up capital that could be used elsewhere.

The home mortgage deduction is particularly valuable to the rich, since they are in a high bracket. This encourages rich people to build bigger houses. Hello, McMansions. This encourages second houses. Hello, vacation homes and timeshares.

The mortgage deduction discourages paying off the loan quickly. This discourages the old practice of buying starter homes; that is, a young couple would buy a small house as their first house, and quickly build equity in the house. When they get children, they would then sell the starter home and use the equity on a larger house. The starter homes would become low income housing as they age.

But suppose you want to encourage home ownership. (There are good reasons for doing so: homeowners do have a bigger stake in maintaining their neighborhoods than renters, and each home ownership is one less rental contract for the government to enforce.) One answer would be to have a deductible on property taxes for the house you live in, a homestead deductible. You could make the first $50,000 or so of home value tax free. The amount of this deductible could vary by jurisdiction. Such a deductible would be far more progressive than the current system, and extremely simple to implement.

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On Population and Progressivity

Consider an agrarian society, such as much of the population has lived under until the past century. The primary inputs to the economy are labor and land. In a sparsely populated country, labor is the limiting factor, so income would tend to go primarily to labor in such a country – if it were free. (Under Czarist Russia, such a situation existed, but the country was extremely unfree, and unequal.)

On the other hand, in a densely populated country, land would be the limiting factor. Those who owned land would get a larger share of the national income. This income could be reinvested into more land leading to a feudal type of wealth distribution. This pattern has happened repeatedly.

Note the important difference between Land and Capital: Capital can be created, Land is fixed. Over time, capitalism evolves from a windfall for the first capitalists to a surplus of Capital, leading to an eventual windfall for Labor. Land based economies evolve in the other direction: growing populations mean less Land per person leading to an increasing windfall for the Land owning class.

There are several ways out of the problem. One is to have a forcible reallocation of Land. This can be via a brutal revolution as happened in France and Russia, or it can be done in a orderly process as is prescribed in the Old Testament (every 50 years, according to genealogy).

Another approach is to keep the population in check. Traditionally, this was done by war. Tribal societies keep each other’s population in check by a near-continuous state of war. In return, they maintain low enough populations so that they can live by hunting, herding, and low-intensity agriculture. Such societies tend to be more equal and more democratic. Compare the tribal societies of ancient Northern Europe with the empires of Egypt and the Fertile Crescent. Compare the tribal societies of the northern part of North America with the civilizations of the Aztecs and the Incas. Given a choice between these two modes of life, I would rather live in a tribal society than an agrarian civilization. But it would be nicer yet to be able to preserve freedom and equality without all the killing.

Yet another approach is to obtain more land by opening up a frontier. This approach lead to a great deal of economic mobility for the citizens of the United States up until the frontier closed about a century ago. Such economic and social mobility lead to millions of peasants from Europe to immigrate, at great expense and danger, to the U.S. Of course, all this came at the expense of those population-controlled tribal societies I mentioned earlier.

Land redistribution can be a brutal business whether it be by communist revolution or by the conquest of tribal societies. I realize that many in the audience many find it weird that I am grouping these processes together, since today tribal rights are now considered a Leftist cause. But consider, in terms of land, the Native Americans were immensely rich by the standards of European peasants. And the life of a tribesman has much in common with the life of a feudal lord: hunting, fighting, vigilant maintenance of status and honor, and a great deal of leisure time. In Mark Twain’s “A Connecticut Yankee in King Author’s Court” the protagonist refers to the Knights of the Round Table as “White Indians.” And it is also no coincidence that the first anti-aristocratic president, Andrew Jackson, was also a noted Indian fighter.

Are there better, less violent, ways to achieve some degree of equality? Well, for starters, there is Capitalism. Capital can substitute for Land to a significant degree, and Capital builds up, so over time more of the national income goes to Labor. (In the early stages of Capitalism, the owners of Capital experience a windfall, making Capitalism appear to be regressive.)

Another approach is birth control. This goes along well with Capitalism, since evidence indicates that wealthy societies voluntarily choose to have a lower birthrate. The wealthier, developed nations would have low or even negative population growth were it not for immigration. Part of this phenomenon stems from the fact that in a wealthier society you have retirement options other than having children to take care of you in your old age. This could be used as an argument for Social Security. But it can also be used as an argument for teaching investment theory as part of the core curriculum in high school, or for having a hard money system so even the financially naïve can understand how to preserve their nest egg. It is also an argument for taxing the Labor class with consumption taxes instead of labor/income taxes, so that saving becomes easier.

There are also possibilities for opening up new frontiers, frontiers that are currently uninhabited. Space travel comes to mind, but the mass use of spaceships is still some ways into the future. The oceans, on the other hand…I will have more to say on this subject in another chapter.

Finally, there is the possibility of using existing land and natural resources more efficiently. Some of this has to do with technology, so with changes in law. And just like with Capital, there are government subsidies for the owners of Land that we can repeal.

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For the Plantation Owners

Back to the farm subsidies – again. In the light of the previous pages, we see that farm subsidies are subsidies of land owners – at the expense of Labor. Consider: farms consume huge amounts of land, land that could be used for housing or natural habitat. True, those who live near farms get to enjoy the open vistas they provide, and animals to varying degrees share the fields and pasture lands of farmers. Also, many farms include actual wilderness area along with fields. But still, farms use a tremendous amount of land, less intensely than cities and suburbs use land, but a tremendous quantity nonetheless.

Farm subsidies provide cash to those who own these great tracts of land. They also bolster real estate prices for non farmland by producing scarcity. Farm subsidies also raise food prices, which puts the greatest burden on the poor, or at least those poor people who are not on Food Stamps. Yet, farm subsidies are sold as being “progressive” since they are supposed to help preserve the small family farm.

Do they actually preserve the small family farm? If so, what happened to the small farmers? Was it simply a matter of not enough subsidies? The answer is that farm subsidies do not answer the issue of economies of scale. If big farms are more profitable than small farms, then small farms will get squeezed out over time regardless of the subsidy level.

While it is true that existing small farmers do benefit from higher farm prices, the reality is that not everyone wants to be a farmer. The descendents of small farmers may opt for other careers. At this point the farm goes up for sale or lease. High farm product prices raise land prices. For those who want to go into small farming, the benefit of the subsidy is already discounted into land prices. So the primary benefit of the farm subsidy is to those who own farmland before the subsidy went into effect.

If you inherit a big old plantation, then you are a prime beneficiary of farm subsidies. If you are a descendent of the slaves who worked the plantation, who lives in the inner city, you get to pay for this benefit. This does not strike me as progressive.

Meanwhile, if big corporate farms can make more money per acre than smaller operations, then they can better afford to buy up small farms as the come up for sale. Thus, over time, small farms disappear despite the subsidy program, and most of the value of the subsidy goes to corporate farms and the agribusiness industry.

If preservation of the small farm lifestyle is desired, there are other ways this could be done, ways that don’t raise food prices. Here are a few possibilities:

Have a homestead deductible on the property tax value of farms; that is, make the first x thousand dollars of farm property value tax free for those who farm their own land. This deductible would be relatively more valuable for small farms vs. big farms. Thus, we automatically target our subsidy.

Make the first x thousand dollars of farm income tax free. Once again, the value of this tax break is much more valuable for the small farmer than the big farmer.

End the mandatory contributions to the commodity advertising funds (the folks who run the “Got Milk?” ad campaigns and the like). Such mass marketing favors the big farms.

More gradations of farm products. There is a wide spectrum of options between modern factory farming and completely organic. More market niches mean room for more players and less market share for the dominant players.

Also, see the proposals in the next chapter for shrinking corporations. They would discourage corporate farming to the benefit of the small farmer.