26 January 2024. Land | Planes
Why land value tax makes housing more affordable // What Boeing’s problems with the 737 Max tell us about business culture.
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1: Why land value tax makes housing more affordable
There’s an article by Nick Gallent at The Conversation on how land tax might help to fix the UK’s housing crisis. Since his diagnosis of the causes of this crisis suggests that these causes are not unique to the UK, it’s worth sharing his argument here, I think.
But first a check on the underlying cost of housing:
In the 20 years to 2022, median prices have risen from five to eight times earnings across England, and from seven to 13 times in London.
(If you go back to the 1960s and 1970s, when there were strong guidelines in the financial sector about how income related to size of mortgage offer, this figure was closer to three times earnings).
There has been much discussion about the causes of high house prices, often focussing on conventional ideas on supply and demand. It is true that house building levels have fallen since the 1970s, partly as a result of the Conservative rule changes that prevented local councils from building houses.
But that isn’t enough to explain the increase in house prices relative to income/ earnings. Gallent and colleagues argue in a paper that this is more down to the way in which houses have been turned into an asset class.
Terraced houses in Holywood. Photo: Ross, via Geograph. CC BY-SA 2.0)
The paper is open access, so I had a quick look. They suggest that this “assetisation” was well under way before the 1980s, and — more significantly — was a function of macro-economic economic policy rather than housing policy. They conclude:
First, the assetisation of housing – the foundation of its financialisation – was pursued through housing policy reform well before the 1980s, supported through shifting policy discourses around the consumer subject. Second, and more importantly, this trend was related to the macroeconomic concerns of government, rather than concerns about housing policy itself. The history related here shows how housing policy and its discourses have become functionally integrated with wider macroeconomic goals such as to control inflation, and the pursuit of new forms of economic growth.
This is an important insight, since it explains why the British Treasury has proposed any number of nonsensical tax break/ subsidy schemes to “help house buyers” even in the face of credible evidence and modelling that all they will do is to push house prices even higher.
All the same, as Gallent says in The Conversation article, this process gained momentum from the 1970s onwards:
Reduced credit controls in the 1970s, and further banking deregulations, made it easier for families to secure bigger mortgage loans on easier terms and with smaller incomes. Banks and building societies were encouraged to offer a wider range of products, culminating in buy-to-let mortgages in 1996 .
Some kind of land value tax would reverse this: it would reduce house prices and increase income from work (by reducing the level of tax on those incomes). The rest of The Conversation article explores how this would work.
This land value tax would be fixed to ownership of any housing and distinct from council tax, as is the case in much of Europe and across the US.
Obviously this has to be done carefully, given the scale of the change it represents to the UK’s economic model, but these are some of the likely benefits of such a shift, paraphrased from the article:
The financial reward from work would increase while the reward from just owning housing, and benefiting from rising land values, would decrease. So this has the potential to keep people, the over-50s in particular, in the job market.
It would also make it nonsensical to leave homes empty. Owners would face a tax liability that could either be met by rental income from the building or avoided by selling up.
By increasing the price of luxury or speculative property ownership, taxing land values would help to ensure that land, and the housing on it, is used productively.
Overall, it would reduce wealth inequalities centred on housing and restore the function of housing as home, as opposed to asset.
One of the wider issues here is that homeowners gain from any increase in underlying land values even though they do not contribute to the increase. In legal and economic language, they have a ‘beneficial interest’ in this increase.
Going back to the middle of the last century this beneficial interest used to be taxed—which was another factor that kept house prices under control. In fact, there was a Land Tax in British law from 1692 until 1963.
Householders used to have to pay tax on the imputed rental value of their homes, as a way of acknowledging this ‘beneficial interest’, until this was abolished in the 1963 Finance Act. Its abolition was part of a strategy to encourage home ownership.
So the land tax is actually a tax on the beneficial interest in the underlying value of land, not the house itself. The rationale for this is that:
Land values are created by the agglomeration of human activity. House prices (of which land values are the major component in the highest value areas) increase as cities grow, economies strengthen, and infrastructure is upgraded.
Very little, if any, of the increase in underlying land value is down to the individual home owner. So the purpose of the Land Tax is moving the economy away from “housing-based rentierism” and making housing more accessible.
I’ve written about the case for a Land Value Tax here before if you want to go a bit deeper on some of these arguments. The best short explanation comes from the Scottish Land Commission.
(Estate agent’s signs waiting for a bonfire, perhaps. Photo: Nigel Mykura, CC BY-SA 2.0)
Gallent argues that this change might also help to solve the UK’s underlying productivity problem:
replacing high-land values and low productivity with a focus on productive investment, employment growth, higher rewards from work and more broadly shared prosperity, would be a positive shift.
And he sees second order effects as well, in terms of the wider housing market:
As the economy restructures away from rentierism, lower land values would make it easier for councils, once again, able to build homes, including in new towns.
There’s a bit more to this—lower land values might also make high streets viable for a wider variety of shops as well.
This isn’t a policy piece, and there’s a 2020 article by Reading University researchers that while the theory is solid there are endless implementation difficulties.
One of those difficulties, of course, not mentioned in the Reading article, is the significant number of British MPs who are landlords but do not think they have a conflict of interest when it comes to votes on issues involving housing rental.
But one of the big political tasks to rework our economies in the face of climate change is to reward productive work and limit the attractiveness of financialised and extractive work, which drives other forms of extractive and destructive behaviour. And rentierism is one of the important building blocks of financialisation.
2: What Boeing’s latest problems with the 737 Max tell us about business culture
Boeing’s 737 Max plane is in the news again, and not in a good way. (When a make of plane gets in the news, it’s never in a good way.) If you missed it, part of the fuselage of a Max 9 came away in mid-air, although the captain managed to land the plane safely. Surprisingly, no one was killed or injured.
There’s a couple of pieces published in the last few days that suggest that the history of this failure—not the first problem that Boeing have had with the 737 Max—go deep into the company’s business culture.
One of these pieces is a Harvard Business School ‘Working Knowledge’ paper:
After loose bolts were discovered on other MAX 9s, the Federal Aviation Administration (FAA) grounded the plans and opened an investigation into whether MAX is safe to fly, accompanied by a stern warning, saying, “This incident should have never happened, and it cannot happen again.”
Boeing apparently knew that the fuselage door plug was unsafe. Boeing is also experiencing problems with the design and development of its latest plane, the 787 Dreamliner:
The underlying cause of these issues is a leadership failure that has allowed cultural drift away from Boeing’s once-vaunted engineering quality.
In his Working Knowledge paper, Bill George reminds us that Boeing’s founder, William Boeing, created the commercial aviation industry, and Boeing led it for much of a century, because of engineering and design excellence.
(Boeing Company, N720IS, Boeing 737-7 MAX. Photo Anna Zverera/flickr. CC BY-SA 2.0)
However, at around the turn of the century, its then CEO Philip Condit, made two decisions that changed this. The first, in 1997, was to acquire its competitor McDonnell Douglas, whose culture and business model was based on “cost-cutting and upgrading older airplane models at the expense of all-new aircraft.”
Condit also decided in 2001 to move Boeing’s headquarters from Seattle to Chicago, in pursuit of $60 million of subsidies and tax credits over 20 years:
With none of its businesses based in Chicago, the move separated Boeing’s corporate executives from its engineering and product decisions and alienated its Seattle-based engineers.
It’s not a surprise to discover that Condit was forced out of the company after an ethics scandal. Boeing replaced him with a former McDonnell Douglas and GE executive Harry Stonecipher, who set out, in his words, to change the culture of Boeing:
”When people say I changed the culture of Boeing, that was the intent, so that it is run like a business rather than a great engineering firm.”
He turned down a proposal from the head of Boeing’s commercial aviation to develop a new plane to replace several of its ageing model, preferring to “maximize profits from older models and use the cash to buy back Boeing stock.”
It’s not a surprise to discover that Stonecipher left the company after two years in charge after violating Boeing’s code of conduct. But the culture war continued. There was an obvious internal candidate, but the Board brought in another GE alumni, Jim McNerney.
By the mid-2010s, Boeing was losing out in the market to its only significant competitor, the European firm Airbus, but rather than designing a new plane, McNerney decided to upgrade the 737 Max, despite the technical , regulatory, and other limitations this imposed:
These decisions minimized short-term cost to maximize short-term earnings.
George notes that
In my experience with advanced technology products, quick fixes often lead to design compromises that create more problems. This happened with the 737 MAX in 2015 when it encountered stall problems. Rather than further design changes that would have risked the 737’s original type-certification, Boeing opted for a major software change that was not disclosed to the FAA or described in its pilot’s manual.
That part of the history of the 737 Max is well known. It led to two crashes, several hundred deaths, and the grounding of the 737 Max by the Federal Aviation Administration—after Boeing had failed to do this.
Of course, Boeing is a Harvard Business School case:
I ask participants, “Are Boeing’s problems caused by individual leadership failures or a flawed culture?” The answer “both” eventually emerges. It was the actions of Condit and Stonecipher that turned Boeing’s culture from excellence in aviation design, quality, and safety into emphasizing short-term profit and distributing cash to shareholders via stock buybacks.
There are also poor individual decisions during the earlier 737 Max crisis. So far, this pursuit of shareholder value has wiped $87 billion of the company’s market cap since 2018.
And some of this reminded me of the British business ICI—a chemicals behemoth—which similarly chose during the 1990s to pursue financial engineering instead of technical excellence, and ended up being acquired by Akzo in 2007.
The second piece here, by Matt Stoller, who writes about monopoly at his Substack BIG, puts some of this into a wider context. He spells out more starkly what happened when Boeing acquired McDonnell Douglas:
Boeing was the acquirer, but somehow the finance-obsessed beancounter executives who had run McDonnell Douglas into the ground ended up taking over the combined company.
That struck a chord for me. In the few acquisitions I’ve been close to, I’ve noticed a kind of Gresham’s law of company culture: the bad culture drives out the good if given a quarter of a chance.
But there’s a much bigger picture here. The international commercial airliner market is a two company market, and it takes years to place orders, let alone design a new plane. To some extent, customers are locked in, because of the vast systems of maintenance and training that sit behind each commercial airline.
Stoller’s argument here is that at a certain size, strategically significant companies get a backstop from the state:
Boeing is America’s number one exporter, its third biggest defense contractor, and a core infrastructure provider to our air system. American society simply doesn’t function without aerospace capacity, and hasn’t since the 1930s... Since the creation of the industry, we subsidized aerospace.
And more: 40% of Boeing’s current revenue comes directly from the American government. There’s more detail in here, but Stoller basically says that the notion that Boeing is a private company is a convenient fiction:
Boeing is a state-backed national champion, constructed by the state, financed by the state, protected by the state, and with much of its revenue supplied by the state... The fairy tale of a private firm is only hindering a fix to this once-great organization. Since the combination with McDonnell Douglas, Boeing has been run by Jack Welch-proteges (from GE) who tend to resign in clouds of scandal.
And Stoller concludes that the government is getting the wrong end of this deal. Boeing is effectively squandering America’s capability in aerospace. It’s become a strategic problem for the government rather than just for the company.
All of which is to say that it’s time to acknowledge this situation and have the government step in directly and reorganize the firm, as it would during a war or in a bankruptcy. (I)t wouldn’t be uncommon throughout most of American history for it to step in here.
Or as his headline says:
It's Time to Nationalize and Then Break Up Boeing.
j2t#537
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