Georgism in the Era of Tech
Recalibrating incentives to enable growth
Standard Disclaimer
This is the official blog of Groma. The blog is run by members of our team; its purpose is to explore subjects of interest to us, particularly as they relate to Groma and its long-term aspirations. We believe it’s important to make this relationship clear up front, but we also want our readers to know that everything written here is done so in a spirit of truth-seeking. The blog will often make arguments that are aligned with Groma’s efforts and interests; this is a function of a deliberate effort on the part of the Groma team to create a company that advances the common good. While these posts are written by Groma team members and are therefore representative of the viewpoints within Groma, they are not necessarily representative of our formal policies or governance positions, which are documented here. Instead, they represent the current best understanding of the relevant author. When relevant, we will include viewpoints that conflict with our own to ensure our readers have a more complete understanding of the issue at hand. Additionally, some of our views will evolve over time as we learn and grow as an organization; when this happens, we’ll be sure to update our previous writings in a transparent manner.
Abstract
Economic inequality has been an inevitable consequence of economic growth throughout human history, but this doesn’t mean we can’t find positive-sum policy changes to lessen its degree. In the developed world today, a key factor that exacerbates economic inequality is artificial restrictions on housing that primarily serve to protect the wealth of existing property owners. Groma aims to address this problem both by making real estate wealth more accessible at the individual level and by providing a mechanism (the Geoscalar Polling Core) to help overcome the collective action problems that have held back progress so far.
Main Body
Economic inequality is one of the most salient political issues in the US today. While some sectors of the economy have been growing at incredible rates, millions of people have failed to participate directly in this growth. The reasons for this discrepancy are many and far too complex to address adequately in an article of this length. Nevertheless, it’s worth exploring one particular factor--urban real estate economics--and how it has contributed both to today’s conditions and to an analogous period of growth coupled with relative deprivation over 100 years ago.
The Industrial Revolution brought, on average, an enormous improvement in people’s material well-being in the countries in which it occurred. From 1800-1900, GDP per capita grew by 127% in the UK and by 216% in the US, compared to roughly 40% growth in each of the previous two centuries in the UK. Nevertheless, a huge number of people in industrializing nations remained poor in both a relative and an absolute sense--a disparity that was made more jarring for observers at the time by the fact that this poverty occurred immediately adjacent to the unprecedented overall increase in the standard of living.
How was this possible? Shouldn’t the largest rising tide in history have lifted all boats? This was the central question of Progress and Poverty, an 1879 book by the American economist and social theorist Henry George. George argues that the dynamics of urban economics inevitably result in a disproportionate share of overall economic productivity accruing to landowners relative to the actual value added by the landowners themselves. In a given area, land is scarcer than any other inputs--you can always increase the density of people, capital, and raw material inputs, but you can’t do so with land. This means that as population density and per capita productivity increase, a greater share of total output will be earned by landowners as rents (i.e. payment in excess of the cost of production).
Were it not for network effects, the increase in the price of land relative to other inputs would result in economic activity spreading out to take advantage of cheaper land elsewhere, but, as evidence from George’s time and our own demonstrates, network effects are sufficiently powerful to disrupt this expected progression. Whether it was the returns to scale of assembly lines in the 1870s or the cross-pollination of ideas in today’s knowledge economy, the lower cost of land outside of urban centers couldn’t offset the advantages of the densest cities. This contributed to geographical inequality in both periods--large swathes of the rural US lacked electricity until well into the 20th century, and many deindustrialized areas today suffer from declining populations and crumbling infrastructure.
So: emergent properties of fundamental economic forces strongly favor dense hubs of economic activity, resulting in the enrichment of landowners at the expense of other parts of society whose inputs are arguably more determinative of economic progress.1 However, simple market forces aren’t the full story here. After all, if density is the goal, cities should be able to use modern construction technology to grow upwards, meeting the excess demand for urban real estate in ways unavailable during George’s time. Why haven’t cities like San Francisco, New York, Boston, and DC been filled with skyscrapers to lower the cost of living and allow far more people to live there than can currently do so?
The answer, in short, is regulation. For a variety of reasons, American cities and towns have experienced a steady increase in the number of rules and restrictions on what and where people can build. Some of these regulations are in line with the public interest: for instance, those addressing the environmental impact of new construction or preventing enterprises that generate major negative externalities (e.g. slaughterhouses, fossil fuel power plants) from being built in residential neighborhoods. Others, however, primarily serve to enrich a small subset of the population--typically existing property owners--at the expense of nearly everyone else, often justifying themselves under the guise of public-spiritedness (“historic preservation” and “neighborhood character” are two major red flags here, though environmental concerns are also frequently hijacked for this purpose).
Consider San Francisco. 85% of all residential zoning in the city and the surrounding area only allows the construction of single-family homes. This puts a low ceiling on the supply of housing in one of the most in-demand metropolitan areas in the country, resulting in astronomical real estate values: $3700 per month to rent the average single-bedroom apartment and over $1M to buy the average home within the city. This is great for existing homeowners--the average SF home was worth only $160k in 1986, resulting in a 500% return on investment--but terrible for renters or new homebuyers, who have to spend a huge percentage of their income to live in the city.
On top of the city’s baseline zoning, the SF Planning Commission has the authority to reject new developments for reasons not explicitly stated in existing law. This makes it easy for nearly any interested party to subject developers to interminable appeals, making the process of adding new housing even more difficult and costly than it would be otherwise. Economists have estimated that, if New York, San Francisco, and San Jose were to bring their land use regulations in line with the national average, GDP would be 8.9% higher. That’s not just GDP in those cities--this is for the country overall, making the average worker better off by $8,775 annually. The positive impact these changes would have is hard to overstate, but the problem of concentrated costs and diffuse benefits means that a small group of strongly opposed neighbors will often be able to prevail against the individually weaker but collectively stronger preferences of the full set of the city’s residents, creating a stable equilibrium that favors a wealthy and well-connected minority at the expense of everyone else.
So what’s to be done? Hsieh and Moretti’s reforms (see link above) would be great, but are far from being realized. Current SF mayor London Breed has made zoning reform a top priority for her administration as described in the Reason piece above, but the path ahead won’t be easy. Economist Ed Glaeser supports Henry George’s own preferred solution: a tax on the unimproved value of land, so that all landowners have an incentive to maximize the value of the structures built on their land. This aligns economic incentives nicely, as it becomes hard for landowners to earn significant returns without investing in their assets, but it’s politically infeasible in the current environment.
This is where Groma comes in. As described in our whitepaper, widespread GromaCoin ownership will give people a more concrete stake in issues of urban development, and the Geoscalar Polling Core (GPC) will provide a more robust mechanism for them to express their preferences on these issues. A key element of our political thesis is that the aggregated, weighted preferences in favor of increasing urban development outweigh those against it, and that the GPC provides a difficult-to-ignore tool for making these preferences heard by policymakers.
We of course acknowledge that none of this is likely to happen until Groma achieves major scale. Fortunately, Groma’s growth isn’t reliant on the value of the GPC; we expect GromaCoin’s merits as a standalone asset at the individual level will be enough to maintain forward momentum until the broader political aspiration of unshackling housing markets to allow as many people as possible to live where they want can be realized. Housing policy shouldn’t serve primarily to concentrate real estate wealth in the hands of a few (as it has increasingly done over the past few decades)--it should leverage the power of markets to correct the artificial wealth imbalances caused by regulatory capture. We think Henry George would approve.
Further Reading
This post presents an argument in favor of reducing zoning and other development regulations, but there are some strong counterarguments to this viewpoint--see the links below for some good examples:
Slate Star Codex - Steelmanning the NIMBYs
Slate Star Codex - Next Door in Nodrumia
Part of George’s frustration with the conditions of his time was the idea that many of the people who benefited the most from industrialization had not been great innovators, managers, or financiers; they had merely happened to own land in areas that increased in value dramatically for reasons unrelated to their skill, entitling them to a non-trivial portion of the productivity generated by the efforts of others.