How to Pay for Katrina


September 17, 2005


Browse in Uncategorized

In the psychodrama of market theory, capital is the Promethean force. Its capacity to produce human betterment is without limit. It can surmount any obstacle, extricate humanity from any woe, so long as government does not dispirit it with taxes or bind it with regulations. Mere work is a piker in comparison.

What then about flips? Flipping is the practice of buying real estate in an up market, and then unloading it a few weeks or months later at a big gain. In some jurisdictions the flipper doesn’t even take legal title to the property; he or she deals in contracts to buy, so as to avoid recording and transfer taxes. Apologists invoke “market liquidity” and the like in an attempt to include such scheming in the heroic drama of capital.

But in reality it’s just free loading. The flipper generally contributes nothing to the economy besides higher prices. The ultimate buyer, the one who actually wants to improve the property, then has less money left over with which to do so. The result is fewer jobs not more.

With real capital, higher prices conjure forth a greater supply. Higher prices for hammers bring more hammers to market, in theory at least. But higher prices for land don’t beget more land. Land is finite; there’s only so much of it. Thus higher prices simply mean bigger returns for the existing owners. They bring what economists call economic “rent.” Even George Gilder, that giddy romanticist of the market, takes a dim view of those who speculate in land.

The question is not academic. Flipping has become a hidden force in the real estate bubble of recent years. According to the Wall Street Journal (Sept 14, 2005 p D3), a recent study of 3 hot real estate markets – Las Vegas, Miami and Orange County, Calif. – found that over the last six years, “the annualized rate of return for three-to-six month flips was usually 20% to 40% or more above the market appreciation rate.” (Emphasis supplied.) Flippers aren’t just riding the market; they are pumping gas into the bubble. In some zip codes, flips accounted for more than 40% of total sales.

It will be comforting to prospective home buyers, to know that flippers are competing with them in the tight market and bidding up prices that already are out of sight.

Flippers are poaching on value, not creating it. And that begs the question, what is the source of that value to begin with? Do high real estate prices generally arise from the Prometheus of capital seeking its just reward? Or is something else involved? Insight on that question came from another story in the same Journal (p. B1) entitled “Katrina Payday For Land Owner In Tiny Town.”

It tells of one Jay Roberts, a businessman in tiny Luling, Louisiana, which is about 80 miles from New Orleans. Roberts operates a sewer pipe supply business, and in recent years has been buying local real estate. He picked up a dying strip mall with a shuttered Kmart at a sheriff’s sale. Then he bought a Burger King that was closing. He also owns a hotel and a restaurant bar.

Now, thanks to Katrina, business is booming. He leased the old Kmart to State Farm Insurance for a claims center, for $25,000 a month, plus an upgraded climate system the company is paying for. The hotel is booked solid, long term, for more than twice the usual rate. “By a quirk of fate, we are going to reap a lot of economic benefits out of this storm,” said Joel Chaisson II, whom the Journal describes as “a local state senator and silent partner in some of Mr. Roberts’s real estate deals.” (Hmmmmmm……)

By the Journal’s account, Jay Roberts is a good guy. Meals were free in his restaurant after the storm, “though Mr. Roberts repeatedly admonished patrons to generously tip the overwhelmed staff.” He even smashed open the cigarette machine in the bar (it wasn’t working because the electricity was out) so evacuees could have a smoke. He’s not a Wall Street sharpie, just a local guy who bought some property.

Still and but, there are lots of good guys, and lots of good guys who buy property. Windfalls (as it were) are windfalls, whomever they befall. This goes beyond Katrina. “In my opinion,” Roberts told the Journal reporter, “the prices I paid (for the Kmart et al) were strictly the land value, with the buildings thrown in for free.” Land values are location values. They arise from what the land is close to, not from what the owner does. They are products of nature and of society at large, not of capital that is uniquely deserving. (I suspect his accountant told the IRS that much of the value was in the buildings not the land. That way he could depreciate it.)

A Jay Roberts is entitled to make money, just like everyone else. But there’s a bigger question here. If society and nature create land values, then aren’t they entitled to a return on that which they have created, along with the individual owner? Some have suggested that land values – as opposed to both work and genuine capital — are uniquely suited for taxation for this very reason. With land the levy isn’t really a tax, but rather a reclaiming of that which society helped create in the first place. (See Mason Gaffney’s essay “Conservation In A World Of Private Property Extremists” on this site, and also Gaffney’s other writings. )

At the outset of World War I, Congress imposed a special tax on munitions manufacturers. The reasoning was similar: shouldn’t those who uniquely benefited from the war, do the most to help pay for it? “Jingoes”, declared Warren Worth Bailey, a Congressman from Johnstown, Pennsylvania, “should pay for jingoism.” Added Claude Kitchen of North Carolina, the House Majority Leader and Chairman of the Ways and Means Committee, “We cannot conceive of a more just and equitable tax.”

Now that governments face a Katrina rebuilding effort that is going to cost hundreds of billions of dollars, that same principle applies. I’m talking more about the Halliburtons than the Jay Roberts. The vice president’s old firm, the one from which he still gets deferred compensation, is doing quite well from Katrina, just as it is doing quite well from the invasion of Iraq. Shouldn’t it be first in line when it comes to giving something back?