Stephen Schwarzman is the chief executive of the Blackstone Group, which is one of those Wall Street operations that is described as a “private equity firm.” He was on the cover ofFortune magazine in February, which means he’s a pretty big cheese right now. He’s definitely big in my corner of the world. Blackstone recently bought up 14% of the office space in Marin County, California, through a leveraged buy-out of the owner. Leverage is debt. Leveraged buy-outs involve tons of it.
To get out from under this load, Blackstone is going to have to sell off quickly – ie “flip” — the office buildings here. That means more debt, more taxes – and most likely, higher rents. Blackstone will have built nothing and improved nothing. It simply will have taken existing assets and used debt to conjure money out of them. But don’t blame the Big Cheese for the higher rents in prospect, “Rents are only what the market will bear,” a local real estate man said. That’s what they always say, when something bad happens at least. “We didn’t do it. The market did.”
This is strange. Market boosters talk without end about individual responsibility. It’s the moral argument for market culture: individuals have to take responsibility for their actions and for their lives. Yet look at what is happening here in Marin. The individuals who set this process in motion say it wasn’t really them. Schwarzman and his Blackstone Group bought the former owner and piled on the debt. They likely will flip the office buildings as a result. The rents likely will rise partly as a result of that.
But when the time comes to assign moral agency, somehow they disappear. Market boosters talk about responsibility. But for them the concept of the market serves as a kind of cosmic cop-out, an abstraction onto which they can pass the buck (even as they rake them in.) They scoff at liberals who blame society for crime. Hold the criminal responsible, they say. Don’t pass the buck to an abstraction. But in the realm of money they do that very thing.
“Market forces” are the Right’s equivalent of “social forces.” Oil companies aren’t gouging. They are just obeying market forces and economic law. Of course such forces exist. But often they are little more than polemical cover for those who do the forcing – that is, the human and corporate agents. The market alone isn’t making the rents go up, Mr. Schwarzman. You are too.
And about this matter of economic “law.” Law implies inexorable principle. Break a genuine law and you pay the price. Defy gravity from the top of a tall building and, after a euphoric few moments, you will come to a crashing end. That’s law. Break market “law” by contrast and what happens? Say you are a landlord and charge less than you could. You become a community benefactor, maybe even a hero. People speak of you with great affection. What kind of “law” is it that, when broken, produces such benign results?
Often what they call law is really just consensus, an agreement to deem a certain kind of economic behavior as okay. Not just okay, but more, to be applauded. It’s another way to get the people who behave this way off the moral hook.
There is a particular twist in the case of real estate, which is where this post started. Even assuming that “the market” does decide, who and what actually creates the value it decides upon? Do the rewards go to the actual creators of that value, or to people who find a way to poach upon it? Most of the value of real estate resides in the location – that is, where it happens to sit in relation to everything else. (This includes the oil or other minerals that might lie underneath. )
The value is relational in other words and not inherent. It arises from the gifts of nature – as in the case of beachfronts or underground deposits – and from the efforts and investments of the society at large. Why would a building on Park Avenue in Manhattan be worth more than an identical building in Gary, Indiana, if such a building existed? Not because of the efforts of an owner.
Yet it is owners who reap this value that they do not create. This includes the people at a Blackstone Group. They don’t want to take responsibility for the impacts of their own behavior, but they do want to reap the gain from the behavior of others.
This is one reason we so desperately need an economics of the commons – that is, to make such distinctions that conventional economics deliberately fudges. The beginning of such an economics exists already, in the writings of that home grown economic thinker Henry George. (I say economic thinker rather than economist. The two are not necessarily, or even often, the same.)
George’s legacy has been corralled by the single-tax fetishists. Untax structures, they say, tax only location values, and society’s problems will be solved. But his import was much broader. He articulated the distinction between earned and unearned gain; and how the land speculator and resource owner reaps where he does not sow. He showed how this “unearned increment,” as he called it, comes from the hides of workers and entrepreneurs both. The rigid Marxist categories and antagonisms went out the window. This was a moral economics that was truly American, and therefore truly dangerous.
There hasn’t been much on George in recent decades, but maybe he is ready for a comeback. The New York Observer, which covers the city’s media/politics/money beat with insight and panache, recently ran a full-page feature (subscription only) on the 75th anniversary of the Henry George School of Social Science in New York. The piece got off on the single-tax foot. But it turned into a respectful treatment of the ideas. The writer recounts this exchange with Cay Hehner, education director at the School:
“ ‘Look at all the recent conflicts,’ Mr Hehner said. ‘They’re all natural resource conflicts. We are in Iraq not to give them democracy; we are in Iraq to secure the oil! Look at the three major forces that rule us. Who’s ruling the United States of America.’
George W, Bush.
‘Oil man, yes. Who has just been elected Governor of the State of New York?’
‘And how did his daddy make his money?’
‘And last but not least, who is the Mayor of New York City? And how did he make his money? Financial services and information technology – but in monopolizing it. George has two banners under which he sails. One is, Tax land, not labor and capital. The other is, Don’t build monopolies, because we need competition.’”
Not a bad start.