RENT CONTROL No, this posting is not about the policy, made famous in NYC, of holding the price of an apartment fixed for as long as the apartment is occupied by the same tenant. It is intead my musings on the power that comes with landownership. In summing up the century of 1750-1850 in Europe, Rondo Cameron writes that "most workers... improved their situation slightly, but the incomes of those who depended mainly on rent, interest, and profit rose in greater proportion." This is a familiar story. While there have certainly been places and times when people at all income levels improved their lot by roughly the same proportion (1947-1973 in America, according to Paul Krugman) tales of widening income gaps are far more common (for instance, 1973-present). And it is hard to find stories of narrowing income gaps anywhere at any time.

Why is this? No one really knows, but there are theories. In the specific case of 1980s America, Krugman mentions several. He believes that while tax policy certainly favored the rich (the Congressional Budget office estimates that the median family paid more in overall taxes [taxes plus Medicare and Social Security] in 1989 than in 1980, compared with a drop from 36.5% percent of income to 26.7% for the richest 1%) this alone cannot account for the widening gap in pre-tax income. Some theories for the gap go as follows: technological change placed a new premium on skilled labor, that technological change created temporary shortages and thus huge windfalls for certain types of skill labor, and that mass communication has allowed greater numbers of people to employ the services of those few companies or people perceived to be the best, the so-called "superstar" theory. But while any of these might explain the particular case of the 80s, none explains why the world over income gaps often widen and almost never narrow.

For what it's worth here is my own best guess, good across time and place: the rent power of landowners. Landownership is different from most other types of gainful employment, because you don't actually have to do anything. In fact, the cost of owning land is zero (some people pay for upkeep, but this is not strictly necessary). Futhermore, barring space expedition or the raising of Atlantis, there is a limited amount of usable land. In a free market the rents paid to landownership, given its marginal cost of zero, would themselves be driven down to zero. But the limited amount of land means that normal people cannot become new landowners at will and drive down prices. There is no free market, so landowners can and do receive rents. I think this may be a large part of the reason why wealth consistently gets concentrated at the top. At the end of any chain of business transactions is a person who can make money just be holding a deed, and that person has an incredible advantage in any sort of bargaining. There are of course many other important types of wealth nowadays, but I feel (I don't have the tools to demonstrate) that landownership in some way underwrites them all.

Supposing for a moment that I'm right, what can be done to limit the inexorable ascendency of landowners? I haven't a clue. Public land has its own extensive set of problems. It would seem a progressive state that taxes the rich and provides services for the poor is as good a band-aid as anything else.

HOW BIG A PROBLEM WAS THE DEFICIT OF THE 80s? I've taken a bit of a detour from the depths of the European past to read a book about economic policy in the recent American past, Peddling Prosperity by Paul Krugman (Norton, 1994). The book follows several economic ideas from their conception among professors, through their perversion in the hands of people he calls "policy entrepreneurs" -- mostly pundits, journalists, and think-tankers -- and into practice in the American economy. Then he tries to evaluate the effect they had. I'm already a big Krugman fan from his columns in the New York Times, but this book puts him over the top. It's one of the most interesting, well-thought-out, well-researched, and well-written pieces of work I've read in a long time. I read and read and can find almost nothing I can quarrel with.

Until today, at least. Given Krugman's usual meticulous attention to accounting details, I'm a little suspicious that I might be misunderstanding him. He is trying to estimate the how much richer the US would be if Reagan had not run up the budget deficit over the course of the 80s. During that decade the debt increased by $3 trillion, or about half a year's GDP. According to Krugman, and I have no reason to disagree, public debt crowds our private investment because money that could have been invested productively now must be spent on bonds and so forth. So how much wealth did the debt cause us to lose? Assuming that the $3 trillion was instead invested privately, and got the average real rate of return (6% over those years), the loss would be 1/2 of GDP times 6%, or 3% of GDP. Not crippling, though still quite large.

But something seems amiss. In order for Reagan to have cut the deficit he would have had to do one of two things: raise taxes (or in his case, cut them less) or cut government spending more. Suppose he raised taxes and left government spending untouched. Then at least some of that $3 trillion dollars spent to finance the deficit would not have been in the hands of private investors in the first place. Suppose instead that he had cut spending on services and let taxes be. Govenment spending on education, public works, and a great many other things is not money down a hole -- it is investment, though not private investment. To cut spending would have been to lower public investment at the expense of higher private investment. Whether he raised taxes or cut spending, a deficit reduction would have eaten into some form of investment. It seems to me the 3% of GDP figure ought to be significantly lower because of this.