San Francisco is in the news for all the wrong reasons. But you should pay attention.
It will explain so much about today’s economy.
And hey, if you ever get to go there, you’ll know one thing you absolutely must do.
I can say that with confidence. I went to San Francisco last year. Practically nothing went to plan. I booked a tour of Alcatraz – and was mistakenly taken to the giant redwood trees outside of the city.
They’re beautiful, no doubt about it. But the walk in the woods is not much fun when it’s pissing rain and you’re dressed in a t-shirt and sneakers.
Later, my tour driver dropped me off downtown and either forgot to come back and get me or didn’t care to. The stroll back to the hotel was one way to discover just how steeps the hills in San Fran are.
But the misstep that bugged me the most was my fault. I was due to do the Henry George tour early in the morning, and I overslept. Jetlag simply knocked me out. I made a mad dash – unshowered, unshaven and sweaty – into the street to make it. I couldn’t even find the damn meeting point.
I didn’t have enough time to book it in again.
But you’ve never heard of the Henry George tour, let alone the man.
Today’s Profit Watch reveals why you should care…
The best selling economics book of all time
San Francisco has a major problem – homelessness. But how to solve it?
The Financial Times reports:
‘Marc Benioff, chief executive of Salesforce, has endorsed Proposition C, which would raise money to tackle the city’s homelessness crisis through a half-percentage point tax on gross revenues for companies that have sales over $50m. San Franciscans will vote on the proposal next month.’
This is not a unique problem to the city. Seattle is a major tech hub in America, and a similar dynamic is playing out there.
The sheer, staggering wealth creation that’s pouring out of the technology sector has sent property values sky high where these firms operate. This is a huge windfall for anyone who happens to own land in the area.
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But too bad for the schmucks not part of the game. Not only do they miss out on the capital gain, rents rise too, squeezing flat wages.
San Francisco is American’s most expensive city.
How ironic. Henry George wrote a book in the late 19th century called Progress and Poverty.
This book electrified the world at the time – including men like Leo Tolstoy and Winston Churchill.
George wanted to know why the huge increase in productivity power in the modern economy bought homelessness and wretchedness with it. And he was writing and lecturing around 1878! They say it’s the highest-selling book of all time.
George himself had been so desperate at one point as to consider killing a man and robbing him.
His study of economics traced the cause back to the land market. Progress and Poverty identified the problem, and made the case for the solution.
Alas, it was not implemented, and here we are, a century later, wrestling with the same issue.
And it leads to some strange impressions, and conclusions.
America’s companies, who have created enormous value, jobs and wealth, are at times resented for it.
And, as you can see above, there’s a movement afoot to tax their earnings to pay for the problem.
That’s punishing them for being successful.
They can afford to pay, you might cry.
However, that doesn’t make it the right policy. If you did it, it would be called extortion or fleecing.
Such government policy is usually not conducive to keeping business in your jurisdiction, either.
The devil’s bargain for any city that ‘wins’
When the Seattle authorities threatened to tax Amazon recently, Amazon was quite happy to halt further investment in the city and move out of town.
Amazon is an instructive case, because it’s hunting for its second headquarters. We’re going to see this play out in real time. American cities are bidding to be chosen.
Any cities would love to have them, especially anyone with holdings of real estate in the area.
Amazon’s arrival brings thousands of highly paid employees into town. Property values will go roaring up…with any property owner doing nothing to create this jackpot… but the same homelessness problem would eventually arise, too.
But how can high-paying jobs and massive wealth creation be a bad thing? Isn’t that what we want from an economy?
Of course it is!
We can therefore deduce, as Henry George did, that the problem is how the tax system treats the land market.
Rather than taxing the earnings of a wealth-creating business, the city would be well advised to capture more of the wealth Amazon’s presence creates via an increase in the charge on the value of land now made more valuable.
Nature’s harmonious loop- hijacked
This extra revenue could then be used to reduce inefficient sales and income taxes on the general populace…and that’s good for everybody. The buying power of wages would rise. iconngroup
And we would find, in a self-sustaining and harmonious loop, that a population with more to spend does so, increasing the demand for good and services, which increases the value of property, which increase the revenue for the government, which increases its ability to provide services and infrastructure or to reduce taxes even further.
Unfortunately, this outcome is highly unlikely. The powers that be will tax anything and everything other than property, no matter what damages it does to the economy.
California is notorious for this via the 1978 Proposition 13 legislation.
So, when you finally hear about Amazon’s second headquarters, you’ll know, if you ever decide to visit wherever it eventually goes, there’ll be plenty of wretched souls pushing shopping carts to meet you there alongside the hip cafes and cocktail bars.
It’ll be San Francisco or Seattle 2.0.
In other words, its progress – and poverty.