Why I am no longer a Georgist

“People do not argue with the teaching of George, they simply do not know it”

- Leo Tolstoy

When I first heard about Georgism from my brother, I was hooked.

It seemed to explain everything. In a country with abundant material wealth, millions of people struggle to pay rent. In my hometown of Santa Barbara, scores of homeless people blight the downtown. Rents keep rising. Where does all that money go? Landlords’ pockets.

Whenever anyone complained about the rent, I would bring up Georgism as the system that explained why things were the way they were, and what true justice would look like under a land value tax.

Not long after that, I started reading Astral Codex Ten. Georgism kept popping up, largely because a review of Henry George’s Progress and Poverty had won the book review contest in 2021. After reading this review and subsequent discussions, it became even clearer that both communism and rentier capitalism were for losers. All the cool people knew that the best political economy was Georgism.

Georgism is a very elegant theory. Land (including unimproved land and natural resources), which George cleanly distinguishes from capital (buildings and improvements) and labor, is fixed. Landownership is the unnatural claim of a monopoly on this fixed natural resource. This monopoly is enforced by the state; that is, by the community. Yet beyond a small property tax, which falls as much on the buildings as the land, the community gets little in return.

The injustice of landownership was obvious. According to the logic of Georgism, landowners extracted economic rent by monopolizing value created by the whole community. That explained the persistence of poverty in wealthy cities, from Gilded Age New York to modern San Francisco.

The picture Georgism paints is of a world in which each landowner is incentivized not to develop/improve his land because he can rely on the rest of the community’s labor to develop around him and thereby increase his property values.

The paradigmatic case is the owner of a vacant lot in the middle of a dense, growing city. Another Georgist parable is that of the slumlord who defers maintenance costs, renovations, and further development in the hopes that land price growth will provide a better return than good management.

The way I saw it, Boomers sitting pretty on 2-million dollar low-density tract homes in the middle of Silicon Valley fit the bill(board).

In the Land Value Tax, Georgism seemed to have an answer. By taxing land rents while leaving improvements untaxed, Georgism would lighting a fire under lazy, greedy landlords, while (in theory) perfectly aligning his incentives with the ideal level of development for the property.

I’m a sucker for a well-aligned system of incentives.

Because the supply of land is perfectly inelastic, the state can tax it at no harm to society and spend that revenue on public services. People who would otherwise go into debt to buy land could instead invest their money into productive capital markets.

Cracks

I began to doubt Georgism when I read a Works in Progress article describing how Henry George hoped that the Land Value Tax would destroy the incentive to create dense cities. After mulling it over, I have arrived at three main arguments against Georgism.

The main problem is political:

NIMBYism is about not letting your neighbors build. LVT would give every landowner an incentive to stop development in their area.

Even if it works, Georgism is inequitable.

Capital is required to develop land. No matter the tax structure, working- and middle class homeowners will always lack the capital necessary to densify their property. If widespread homeownership is per se good for society, then Georgism is bad.

Georgism cannot work because the main distinction, that of Land and Improvements, is illogically defined.

The Land/Improvements distinction breaks down when the value of your land is a function of your neighbors’ improvements.

Georgism creates NIMBYs

Unfortunately, Georgism is the solution to a problem that we don’t have.

It assumes that the economy is essentially laissez-faire.

Georgism was a correct political economy for its time. In the late 19th century, American cities were booming. Immigrants were arriving in droves at the same time that industrialization was replacing agricultural jobs with urban factory jobs.

Zoning laws did not yet exist. As cities struggled to accommodate all their residents, demand rose faster than supply. It made sense to look around at underdeveloped land and conclude that the problem was that private landownership incentivized mere speculation over the expensive work of development.

The actual constraint to sufficient housing is NIMBYism.

NIMBYs are homeowners, typically owner-occupiers, who use their political power to stop the development of neighboring properties. In this, they are nearly the opposite of Georgism’s rentiers, whose “unearned increment” comes from the positive externalities of development in their proverbial backyard!

Right now, NIMBY homeowners are not following the financial incentives Georgism predicts either in their personal decisions or in their political actions. If they were, they would realize that upzoning their neighborhood would likely increase the value of their homes, even if they do not themselves plan to develop their property.

This is because the value of a parcel in modern supply-constrained cities is roughly proportional to the number of units one is allowed to build on it. Developers who make it through the gauntlet of NIMBY obstructionism can sell dozens of units for over $1,000 per square foot.

If we want to achieve housing abundance, we need to have an accurate understanding of the bottlenecks.

Georgism suggests that the problem is insufficient desire on the part of landowners to invest capital into property development. If only we incentivized landowners sufficiently to develop their land, we would have a more optimal built environment.

That’s just not an accurate picture. There is plenty of capital ready to be deployed to develop property in our most expensive cities as soon as regulatory barriers are lifted.

Regulatory barriers ultimately depend on the political durability of the NIMBY coalition: “neighborhood character” conservative homevoters, knee-jerk anti-capitalist lefties, renters worried about gentrification, historical preservationists, degrowth environmentalists, and legacy political institutions.

The YIMBY project relies on convincing enough people to switch to a more positive-sum coalition that supports development.

It can and should do so by arguing that development is a win for everyone.

Most importantly, though, homeowners need to be brought over to the YIMBY cause.

YIMBYs should be convincing homeowners that they stand to gain from upzoning and from nearby development.

Right now, this is mostly true!

More development and more people means more and better-paying jobs. It means more shops and amenities, more taxes for better public services. Property values tend to rise dramatically as areas undergo development and “gentrification.”

The promise of rising property values is key to getting locals on board with the YIMBY program. The institution of a Land Value Tax is a declaration of war on homeowners.

Homeownership is good, actually.

In the Georgist conception, rents increase in cities because of induced demand from immigration chasing the productivity gains that density makes possible. The denser the city, the higher the rent.

Standard YIMBY economic theory, on the other hand, sees demand as inelastic but exhaustible. A denser city means greater supply, and therefore, lower rents.

Homeowners are often concerned that increased density in their neighborhood will lower their property values, while renters worry about rising rents as wealthier newcomers gentrify their neighborhoods.

YIMBYs are almost certainly correct on the national level, where total demand for housing nationwide is a function of population, and housing abundance would lower rents.

Separating land from improvements

On first thought, separating land from improvements seems hard. On second thought, it seems maybe tractable. The more you think about it, though, the more issues arise. The core problem is that the value of land in a city comes almost entirely from your neighbors’ improvements.

Under Georgism, constant development would be ruinous even to landowners who develop. Coordination to stop development is the optimal strategy.

Equilibrium under LVT

If there were a land value tax, property owners would be incentivized to fight even harder against upzoning. Homeowners would see that if their neighborhood gets upzoned, density will increase as their neighborhood develops and land rents will rise. This is true even if the added supply lowers the rent that each tenant pays. Under a land value tax, this means that homeowners’ tax bill will rise until they are eventually forced out.

Some Georgists would celebrate seeing the greedy “rentier” owner-occupier get forced out. I see a political disaster. The fact is, homeowners comprise majority of the electorate and a supermajority in most local governments. The last thing YIMBYs should be doing is threatening to drive them out of their homes.

There is no path to housing abundance that doesn’t allow homeowners to come out ahead.

The problem is actually worse than that. A Land Value Tax, even when paired with a robust right to build, disincentivizes development.

The idea that Georgism incentivizes development goes like this:

Suppose you own a single family home in an inner suburb and there is an LVT. Assume that this is Houston and zoning is not an issue. The city grows, and soon your land is very valuable. Its location near a new transit line makes it ideal for a high-rise apartment building. So the government appraisal comes in with a land rent of tens of thousands per month. You cannot afford to keep the house as is, so you sell to a developer¹¹This is under the questionable assumption that there would always be a developer willing to buy an asset with highly negative cashflow.This is under the questionable assumption that there would always be a developer willing to buy an asset with highly negative cashflow.. The developer then forecasts what will happen if they develop the land.

If the developer predicts that the Land Value Tax will remain constant, they can make a modest profit by building an apartment building there. If every property owner makes the same calculation, many apartment buildings will be built, which will raise land taxes. At the same time, the added supply will lower the rents they can charge each tenant. This combination will drive them all bankrupt.

If the developer (or their banker) predicts that the Land Value Tax will rise over time, then building on the land will not be profitable, and they will not be able to finance development in the first place. Their only remaining option is to cede the land to the government.

The developer’s incentive, then, is to develop their own land while trying to prevent others from developing.

Georgists try to get around this paradox in a variety of ways.

One method is simply to exempt developers from tax increases for some period, usually 30 years.

Fixing Georgism

As I have shown, Georgism has fatal flaws as the theoretical basis of a YIMBY policy program. That said, it provides a few key insights.

Land is important!

Perpetual private ownership of land is a policy choice, not a natural right.

The value of land is in large part determined by the prosperity of the society around it.

Inefficient land use is a political problem. Rentierism is an extractive institution similar to monopolism.

Improvements to land and economic growth create externalities that manifest in surrounding land values.