5 5 You built a factory and it turned into something terrific—God bless!
Keep a hunk of it. But part of the underlying social contract is
you take a hunk of that and pay forward
for the next kid who comes along.
So far, I’ve described rent as a negative force in our economy. Now I want to present it as a potentially positive force—as money that, rather than being extracted by a few, is shared among many. I’ll call this virtuous variant recycled rent.
There are two key differences between extracted and recycled rent. The first has to do with how the rent is collected, the second with how it’s distributed.
The collection of extracted rent is done by businesses whose market and/or political power enables them to charge higher-than-competitive prices. It leads to unnecessarily high costs that serve no economic, social, or ecological purpose. Recycled rent, by contrast, is money that we, as co-owners, receive from businesses that use our co-owned assets. It too can lead to higher prices but for good reasons: to make businesses pay costs they currently shift to society, nature, and future generations, and to counterbalance extracted rent.
The second difference is distributional. Extracted rent flows upward to the small minority that owns most of the stock of rent-extracting businesses. Recycled rent, by contrast, flows to everyone equally.
At the moment, of course, extracted rent totals trillions of dollars a year, while recycled rent (outside of Alaska) is a concept rather than a reality. But the core idea of this book is that recycled rent can and should grow.
To understand how recycled rent could grow, it’s necessary to explore two other concepts: co-owned wealth and externalities.
Co-owned wealth has several components. One consists of gifts of nature we inherit together: our atmosphere and watersheds, forests and fertile plains, and so on. In almost all cases, we overuse these gifts because there’s little or no cost attached to doing so.
Another chunk of co-owned wealth is gifted to us by our ancestors: sciences and technologies, legal and political systems, our financial infrastructure, and much more. These confer enormous benefits on all of us, but a small minority reaps far more from them than does the large majority.
Yet another trove of co-owned wealth is what might be called “wealth of the whole”—the value added by the scale and synergies of our economy itself. The notion of “wealth of the whole” dates back to Adam Smith’s insight two-and-a-half centuries ago that labor specialization and the exchange of goods—pervasive features of a whole system—are what make nations rich. Beyond that, it’s obvious that no business can prosper by itself: all businesses need customers, suppliers, distributors, highways, money, and a web of complementary products (cars need fuel, software needs hardware, and so forth). So not only is our economy as a whole greater than the sum of its many parts; it’s also a highly valuable asset itself, without which its parts would have almost no value at all.
The sum of wealth created by nature, our ancestors, and our economy as a whole is what I here call co-owned wealth. Some, including myself, have called it shared wealth, the commons, or common wealth.1 Whatever we call it, it’s the goose that lays almost all the eggs of private wealth.
Several things can be said about co-owned wealth. First, because it’s not created by any individual or business, it belongs to all of us jointly. Second, because no one has a greater claim to it than anyone else, it belongs to all of us equally, or as close to equally as we can arrange.
A third thing that can be said about co-owned wealth is that we’re managing it terribly. Several years ago, Jonathan Rowe, David Bollier, and I decided to audit America’s co-owned wealth and report back to its owners, much as corporations report to theirs. We surveyed a broad sample of shared assets and found that “maintenance is terrible, theft is rampant, and rents often aren’t being collected.” To correct these persistent problems, we recommended sweeping management changes—not just new people dropped into old slots but new institutions designed to manage co-owned wealth responsibly.2
The big, rarely asked question about our current economy is who gets the benefits of co-owned wealth? No one disputes that private wealth creators are entitled to the wealth they create, but who is entitled to the wealth we share is an entirely different question. My contention is that the rich are rich not so much because they create wealth but because they capture a much larger share of co-owned wealth than they’re entitled to. Another way to say this is that the rich are as rich as they are—and the rest of us are poorer than we should be—because extracted rent far exceeds recycled rent. That being so, the remedy is to diminish the first kind of rent and increase the second.
EXTERNALITIES ARE THE COSTS that businesses impose on others—workers, communities, nature, and future generations—but don’t pay themselves. The classic example is pollution.
Almost all economists accept the need to “internalize externalities,” by which they mean making businesses pay the full costs of their activities. What they don’t often discuss are the new income streams that would arise if businesses actually did this. If they did, they’d have to confront the question of whom businesses should pay when they internalize their externalized costs.
This isn’t a trivial question. In fact, it’s among the most momentous questions we must address in the twenty-first century. The sums involved can, and indeed should, be very large—after all, to diminish harms to nature and society, we must internalize as many unpaid costs as possible. But whose money is it?
One answer was proposed nearly a century ago by British economist Arthur Pigou, a colleague of Keynes’s at Cambridge. When the price of a piece of nature is too low, Pigou said, government should impose a tax on it. Such a tax would reduce our usage while raising revenue for government. In this model, businesses would internalize their externalities by writing checks to government.
In theory, Pigou’s idea makes sense; the trouble with it lies in implementation. No western government wants to get into the business (at least in peacetime) of price setting; that’s a job best left to markets. And even if politicians tried to adjust prices with taxes, there’s little chance they’d get them “right” from nature’s perspective. Far more likely would be tax rates driven by the very corporations that dominate government and overuse nature now.
An alternative would be to bring some nongovernmental entities into play; after all, the reason we have externalities in the first place is that no one represents stakeholders harmed by shifted costs. But if those stakeholders were represented by legally accountable agents, that problem could be fixed. The void into which externalities now flow would be filled by trustees of co-owned wealth. And those trustees would charge rent.
As for whose money it is, it follows from the above that payments for most externalities—and in particular, for costs imposed on nature and future generations—should flow to all of us together as the rightful co-owners of shared wealth. They certainly shouldn’t flow to the companies that impose the externalities; that would defeat the purpose of internalizing them. But neither should they flow to government, as Pigou and others have suggested.
In my mind, there’s nothing wrong with government taxing our individual shares of co-owned wealth rent, just as it taxes other personal income, but government shouldn’t get first dibs on it. The proper first claimants are we, the people. One could even argue, as economist Dallas Burtraw has, that government capture of this income may be an unconstitutional taking of private property.3
THIS BRINGS US BACK TO RECYCLED RENT. In essence, recycled rent is rent charged for use of co-owned wealth that’s paid to its rightful owners (see figure 5.1). Several points can be made about this sort of rent.
First, paying rent to ourselves would have a very different effect than paying rent to Wall Street, Bill Gates, or Saudi princes. In addition to discouraging overuse of nature, it would return the money we paid in higher prices to where it did our families and economy the most good: our own pockets. From there we could spend it on food, housing, or anything else we chose. Such spending would not only help us; it would also help businesses and their employees. It would be like a bottom-up stimulus machine in which people rather than government do the spending. This would be no small virtue at a time when fiscal and monetary policies have lost their potency.
Second, recycled rent isn’t a set of policies that can be changed when political winds shift. Rather, it’s a set of pipes that, once in place, would circulate money indefinitely, thereby sustaining a large middle class and a healthier planet even as governments came and went.
And third, though recycled rent requires government action to get started, it has the political virtue of avoiding the bigger/smaller government tug-of-war that paralyzes Washington today. It is, after all, property income that doesn’t enlarge government. It could therefore appeal to, or at least not offend, voters and politicians in the center, left, and right.
A TRIM TAB IS A TINY FLAP ON A SHIP or airplane’s rudder. The designer Buckminster Fuller often noted that moving a trim tab slightly turns a ship or a plane dramatically. If we think of our economy as a moving vessel, the same metaphor can be applied to rent. Depending on how much of it is collected and whether it flows to a few or to many, rent can steer an economy toward extreme inequality or a large middle class. It can also guide an economy toward excessive use of nature or a safe level of use. In short, in addition to being a wedge (as Henry George put it), rent can be a rudder. And our economy’s outcomes can dramatically shift depending on how we turn it.
Think about the board game Monopoly. The object is to squeeze so much rent out of other players that you wind up with all their money. You do this by acquiring monopolies and building hotels on them. However, there’s another feature of the game that offsets this extracting of rent: all players get a cash payment when they pass Go. (In my day, the payment was $200; nowadays it’s $200,000.) This can be thought of as recycled rent.
As Monopoly is designed, the rent extracted through monopoly power greatly exceeds the rent returned to players when they pass Go. The result is that the game always ends the same way: one player gets all the money. But suppose we built a wider set of pipes for recycled rent, then decreased the amount of extracted rent and increased the flow of the recycled kind. For example, we might pay $1,000 for passing Go and reduce hotel rents by half. What would happen then?
Instead of flowing upward and concentrating in the hands of a single winner, rent would flow more evenly. Instead of the game ending when one winner takes all, the game would continue with many players remaining. An everyone-gets-a-share flow of rent might not be as exciting as a winner-take-all flow, but it would wreak less havoc, benefit more players, and last longer.
The point I wish to make is that different rent flows can steer a game—and, more important, an economy—toward different outcomes. Among the outcomes that can be altered are levels of wealth concentration, pollution, and real business investment as opposed to speculation. Rent is thus a powerful tool. And it’s also something we can fiddle with. Do we want less extracted and more recycled rent? If so, we can build the requisite pipes and start filling them.