Basic Elements and Underexplored Potentialities of Community Land Trusts
If you owned all the money in the world, and I owned all the land, how much could I charge you for your first night’s rent?
– Edward Miller
Land is different from everything else; particularly other kinds of wealth. It carries certain fundamental advantages and privileges that make it unique in the social world, and give its possessors asymmetrical power over the economic unfolding of society. This is a fact that economists have recognized since before the discipline of economics bore its name. James Harrington recognized this in one of the earliest modern classics of political economy, The Commonwealth of Oceana, written in the 17th Century. The Physiocratic school of the French Enlightenment recognized land as a unique aspect of social and economic life, as did the founders of modern economics: Adam Smith and David Ricardo. Thomas Paine, one of the ideological architects of the American Revolution, wrote extensively on the land question. Centuries earlier, medieval law tied land tenure to specific duties owed to the King and community, differentiating land from other, mobile forms of wealth.
Land is synonymous with nature and with physical space. In economic terms, land is that factor of production that human labor does not produce. Labor — productive human effort — is identical with itself, and capital is simply stored-up labor, or wealth that has been produced in order to produce more wealth (rather than for consumption). Land is anything given of nature, which can then be used in the process of production. Human effort does not produce land. Tax labor and people work less; they offer less labor for sale in the market because their reward for providing that labor is less than it might be with lower income taxes. Tax capital and people save and invest less; they shift their preferences more toward present consumption, as expected returns on saving and investment is lower that it might be with a lower tax on interest, capital gains, or dividends. Tax land and people may choose to own less of it, but the quantity in existence remains the same. This is a simple illustration of how land is a distinct economic category.
Tied to the uniqueness of land as a factor of production is an asymmetry land displays when it comes to negotiating power in the market. A worker who withholds his or her labor can’t expect his labor to appreciate in value over time as a result of not being used. In fact, the opposite happens; people who are unemployed over long periods of time see their skills atrophy and the value offered for their work decrease. Likewise, a business owner who owns productive property, plant, and equipment — capital — can’t withhold that capital and see a return on it over time; it breaks down and deteriorates even as it sits idle. A landowner, on the other hand, who purchases a piece of property, vacant or unimproved, has only to wait for the surrounding community to grow and develop, increasing the market value of the land based on its location, and then can sell it at a significant return. Even if the landowner doesn’t develop the land, or if he or she under-develops it (for example using it as a parking lot when it would be more productively used as an apartment building), a return can still be realized as long as the surrounding community is growing.
While labor and capital possess an inherent dynamic that incentivizes their productive use, land does not have this same dynamic. That means those who own land can more easily function as economic “holdouts” who are able to command and higher and higher prices in order to bring their assets into productive use, by either by selling or leasing out the land they own. (Note that we are specifically talking about land, and not buildings sitting on the land. Buildings are a kind of capital; buildings are produced by labor and they deteriorate over time, even if kept out of use.)
The most sophisticated analyses of long-term statistics that demonstrate the sources of economic inequality reflect the asymmetrical bargaining power inherent to land. In his best-selling work of political economy Capital in the 21st Century, French economist Thomas Piketty exposited long-term economic data that shows the total share of economic returns accruing to capital (broadly defined) has increased at a rate greater than overall economic growth since the Industrial Revolution began. This difference in rates of return, combined with the fact that capital ownership is highly concentrated, would seem to explain the increase in economic inequality that is so often the subject of concern and debate. What turns out to have been hidden in Piketty’s seemingly straightforward analysis is that he subsumes real estate under the category of capital. In the classical sense, capital is produced by labor and it physically deteriorates over time. Land is given by nature, not produced by labor, and it doesn’t deteriorate, at least in its spatial aspect — remember the first rule of real estate: Location, location, location. This conflation was explicated by MIT graduate student Matthew Rognlie in his paper Deciphering the Fall and Rise in the Net Capital Share: Accumulation or Scarcity? He notes that though Piketty is correct in his assessment that historical returns to capital, broadly defined, exceed the rate of economic growth, Piketty is effectively using gross returns and not net returns — i.e., he doesn’t account for the physical deterioration of capital assets. When real estate, and particularly housing, is separated out from other forms of what Piketty calls “capital”, though, the data in support of Piketty’s thesis become clear: Increases in the price of housing account for nearly all the increase in economic inequality he meticulously documents since detailed economic records have been systematically taken.
In addition to real estate’s massive contribution to economic inequality in general, it also contributes disproportionately to inequality between racialized groups in the United States. Federal Reserve data indicates the average black family in America has approximately a mere tenth of the wealth held by the average white family. The primary contributors to this disparity are, according to the Federal Reserve, the divergence in average incomes between black and white Americans, as well as the much higher on average inheritances received by white Americans. A large portion of this inheritance takes the form of real estate, and thus represents capitalized economic rent that others will have to pay either explicitly or implicitly. If persistent racial inequality is to be addressed and rectified in the United States, there is no way around answering the “land question”.
The equal right of all men to the use of land is as clear as their equal right to breathe the air — it is a right proclaimed by the fact of their existence. For we cannot suppose that some men have a right to be in this world, and others no right.
– Henry George
As we noted above, the land question is something of which economists have taken note since the onset of economics as a social science. The most famous economist to devote his life to resolving this problem was a man named Henry George. He traveled the world as a merchant marine and became intrigued at an early age with the question of why, in the midst of such rapid economic development and wealth creation, poverty and want seemed to persist at approximately the same rate and to the same crushing degree over time. The incredible inventions and increases in productivity brought about by the Industrial Revolution should have begun stamping out poverty, reducing economic desperation, clearing the way for ordinary working people to enjoy leisure, and generally establishing a higher standard of living for all; yet these benefits seemed only to accrue to the very few and to completely pass most people by. George engaged in extensive observation, particularly of the development of 19th Century San Francisco, as well as extremely subtle theorizing, before arriving at his signature insight. He concluded that the ability of landowners to act as “holdouts” — refusing to offer their land for use at anything less than what amounts to an artificially high monopoly price — allows those owners to soak up the economic surplus that hard work and innovation creates. He likened the absentee landlord to a robber who accosts the worker on his way home at the end of the day and takes everything the worker has, save enough to stay alive and return to work the next day. Increases in the worker’s pay in such a scenario do him or her no good in the end. Nor do improvements in labor productivity or technological innovations that could, in principle, reduce the amount of labor required to make a living. If the “robber who takes everything that is left” stands in the way, the worker will always have to work long hours for a consistently low level of real income.
This diagnosis isn’t to say that at all times the great mass of workers have all lived in utter destitution, just that the tendency in real incomes, netting out the expense for the use of land (for housing or any other uses), is down toward subsistence. It is important not to take a mechanical and deterministic view of things. In times of rapid capital investment, public works expenditure, or technical innovation, the increased productivity of labor may well lead to real incomes outpacing the upward march of location rents for a while. The point is that in such an institutional context, progress can only be made by going against the economic current. Periods of general prosperity and rising living standards for all levels of society can only come about by temporarily widening a gap that economic ground rent tends by its very nature to close, given enough time. If labor productivity and technical innovation are the tortoise, the rent accruing to land is the hare.
The language used by George is undoubtedly 19th Century in tone, but many have noted lately that the levels of economic inequality characterizing 21st Century are approaching, and promise to overtake, those characterizing that very same “Gilded Age”. In the face of the grinding logic of economic rent as that “lowest point” in the economy into which the surplus flows, two solutions were advanced by Henry George and those following in his footsteps. The first, favored by George himself and most so-called “Georgists”, is the idea of the “single tax”, a tax on unimproved land value (i.e., real estate value minus the value of buildings and improvements) that would recapture for society the rental value that is created as an “unearned increment” when society grows and develops. This idea used to be very popular in the United States, and Georgists implemented it with varying degrees of success at the local level, particularly in Pennsylvania. It has become less politically viable over time, however, likely because the case for it is so nuanced and “wonky”. It does not fit on a bumper sticker or into a pithy sound bite.
Anyone who has ever engaged in political activism or discourse realizes how difficult it is to truly make a case for transformative policies in the sense of building a political constituency for them and bringing them into the mainstream. It can be despairing to limit constructive action to the winner-take-all sphere of politics, precisely because so many people need to be persuaded before any concrete action can be taken at all. Faced with the uphill battle of fighting for the land value tax in the realm of politics, land reform activists have proposed and pursued a second approach to the land question well over a hundred years: That of using municipal, nonprofit, or private land trusts to collect location rent and use it for the benefit of the community. The communities of Fairhope, Alabama and Arden, Delaware were founded on the idea, and survive to this day. The Garden City movement in England was another example, with land trusts in cities such as Letchworth holding ownership in urban land to this day, and using the rental income from long-term leases to offset the cost of social spending and help cities avoid the extremes of fiscal austerity to which many local governments are subject.
More recently, a revival of interest in reformist land trusts has taken root, particularly around the model of the community land trust (CLT), a particular model of land trust that prioritizes inclusive and democratic administration by all stakeholders and aims toward the establishment and maintenance of permanently affordable housing. Community land trusts vary widely in their particulars, but one can identify eight key elements they share:
· They are typically nonprofit, tax-exempt corporations.
· They include an element of dual-ownership, whereby the land trust maintains ownership of land in perpetuity while individuals or businesses hold ownership of buildings and improvements.
· Those who own buildings and improvements lease the land itself from the community land trust on a long-term basis.
· Community land trusts are oriented toward preserving permanent affordability of access to the commercial, industrial, and residential property they hold. Two mechanisms are put in place to achieve this end. The first is the lease arrangement itself, which reduces the speculative value — as opposed to the use value — of land in the trust by reducing the rental returns to occupants. The second is an option built into the lease contract that allows the land trust itself to purchase the buildings and improvements if an owner sells them, at a pre-formulated rate of return to the owner that still preserves relative affordability.
· Though the ground lease contract separates ownership of land and buildings, the community land trust retains a contractual interest in the structural integrity of the buildings on its land, as well as joint responsibility for the satisfaction of any liens against the buildings. In case of severe neglect, the land trust may step in and force repairs on structures built on its land. In case of a mortgage default, the land trust may intervene and resolve the delinquency. As the land is to be held in perpetuity by the land trust, though ownership of structures may change, the trust has an ongoing and contractually stipulated interest in preserving the usability of buildings on its land.
· Community land trusts target a specific area, whether a neighborhood, city, town, or region.
· Governance of community land trusts is inclusive of three major groups of stakeholders: People leasing land from the land trust, people in the community who are not lessees, and the public as a whole. These stakeholders are all represented on community land trust boards of trustees.
· Community land trusts are committed to acquiring more land over time, expanding the scope of the benefits they offer, and freeing more people from subjection to the extractive and speculative effects of the land market.
These elements combine to present a formidable alternative to conventional land title as most of us know it. There are several benefits to this alternative. For one, it reduces the volatility in real estate prices that can disrupt communities, causing rapid capital inflow when prices are rising and equally rapid outflow when the market goes down. The fact that a perpetual land trust, rather than private investors, collects a portion of the land’s rental value — i.e., site location value based on economic activity in the community as a whole — reduces the speculative value baked into the price to tenants and owners of renting or purchasing property on the land. Additionally the contractual limitation on how much a building can be re-sold for (and therefore how much of a capital gain can be realized by its resale) puts a limit on the speculative price that has to be paid by tenants and purchasers for access to the land, which adds further to affordability.
On top of the maintenance of land and housing affordability the community land trust model allows, the organization itself provides an added layer of support for homeowners who may face financial difficulty and potential foreclosure. The Lincoln Institute for Land Policy reports that even though homeowners in community land trusts tend to be lower income on average, their rate of foreclosure is significantly lower than that of the market in general. This difference likely results because community land trusts maintain a contractual interest in the security, both physical and financial, of structures built on land they hold, and can quickly intervene in case of a mortgage delinquency. Many of them offer homeowners quick referrals to housing counseling and mediation services, and will also step in to cure a default directly to prevent a foreclosure, subsequently working out repayment arrangements with the homeowner.
A further benefit to the land trust model is that it cuts the Gordian Knot that plagues philanthropic efforts conducted in communities where the conventional land tenure model prevails. That is, there seems to be a long-term tradeoff between public and charitable services offered to better people’s lives on the one hand, and the affordability of housing on the other. When efforts are made to substantively benefit residents, the price of housing goes up and those who happen to own land in the community soak up many of the benefits in the form of higher rents and appreciated sale prices for their land. As outlined above, this is because of the unique quality of land as a fixed quantity the owners of which can hold out of use indefinitely until they receive their desired price. Unlike labor or capital, the land doesn’t disappear and it doesn’t necessarily depreciate. The result is that as social programs and philanthropic endeavors are implemented, land prices tend to rise to meet any increased capacity of residents to pay. The extent to which such efforts are successful is the extent to which the cost of access to land increases and counteracts those gains. This means higher rents for tenants and higher purchase prices (capitalized rents) for homeowners. Increased minimum wages, spending on social programs, infrastructure spending, successful charitable projects, neighborhood renewal, etc, all tend to increase the location value in a community, and that “unearned increment” (to use George’s terminology) then goes into the pockets of (largely absentee) landlords. In a community wherein an increasing amount of land is held by a community land trust, successful efforts to raise the standard of living also leads to increased rental values, but this increment is largely captured by the land trust itself and then reinvested in the community, creating a virtuous cycle rather than a Malthusian trap. This change in land tenure means charitable, philanthropic, and social efforts have the potential to be more effective at improving the lives of residents in the community and the resulting higher rents can go toward further beneficial social investment, rather than counteracting it.
Anything which is physically possible can always be made financially possible; money is a bugaboo of small minds.
– Robert A. Heinlein
Not only do community land trusts reinforce all of the philanthropic efforts undertaken in the communities they service, they open possibilities for other bottom-up enterprises in the New Economy or Solidarity Economy. For example, though it has scarcely been explored except in the theoretical work of community economist Dan Sullivan, community land trusts are ideally placed to be the issuers of alternative, complementary, and local currencies. Just as land, due to its not having a cost of production, constitutes an economic “tollbooth” for the collection of rents, money as a form of liquidity exhibits rent-bearing qualities when it is artificially scarce; i.e., though the cost to produce most money is near zero, the cost to access and use it (interest, broadly defined) may be relatively high.
If state currency issuance is not sufficient to both (1) accommodate consumers’ savings preferences and (2) provide sufficient liquidity to effect all the exchanges that would clear the market (i.e., every willing seller of a good or service is able to sell that good or service, provided someone else demands it), one of three effects can follow. The first option is that the exchanges aren’t made and inventories pile up as sales decrease, potentially leading to systemic layoffs and accelerating unemployment which feeds back into reduced effective demand and economic recession.
The second possible outcome is that consumers use credit to purchase the goods and services for sale, which tends eventually to simply lead to outcome 1 in a more roundabout way, since the bank money created by lending disappears from the economy as borrowers reduce their consumption in order to repay loans. The interest, in the meantime, is transferred to the financial sector from the rest of the economy. As institutional economist and economic historian Michael Hudson observes, this interest, insofar as it exceeds the operating cost of the financial sector as well as the risk premium inherent in exchanging demand deposits for promissory notes, constitutes a scarcity rent and is a drain or overhead on the economy as a whole. This fact is hidden in the national economic statistics because interest income as a whole is counted in GDP and not disaggregated between that which covers financial operating costs, that which constitutes risk premia, and that which is purely a rent on the scarcity of national currency vis-à-vis goods and services for sale. Like ground rent, then, under such circumstances interest, or a good portion of it, constitutes a flow of purchasing power from ordinary consumers and workers toward financiers. Additionally, as loans are repaid money categorized as M1 is actually deleted from the macro-economy; if this happens at a rate that leaves goods and services for sale and unpurchased, the result is deflation and economic recession.
The third possibility is that consumers and businesses can introduce bottom-up complementary currencies to supplement sovereign money circulating in the economy with debt-free liquidity. This last option is obviously the preferable one, short of a successful political campaign to compel adequate and responsible spending and currency issuance on the part of the state. It is largely for this reason that alternative and complementary currencies have been implemented, mostly in times of economic crisis. One of the most prominent examples is the WIR Bank transfer system in Switzerland, which was started in 1934 during the Great Depression and helped mitigate the effects of the Depression in Switzerland, and operates in the country alongside the Swiss Franc to this day. The WIR has provided a significant and needed source of additional liquidity to keep profitable exchanges going in the Swiss economy, particularly in times at which there has been insufficient sovereign liquidity to effect all of these exchanges and meet the savings desires of citizens. Another interesting example was the Wörgl Experiment in the city of Wörgl, Austria, started in 1932, two years before the Swiss WIR Bank, but was shut down by the Austrian central bank the following year. Participation by the city government of Wörgl in the project of creating and circulating a local currency parallel to the Austrian Schilling allowed the city to pay for public works and significantly mitigate unemployment and economic hardship in the midst of general economic depression in the rest of the country. Both of these projects were initiated by disciples of German economist Silvio Gesell, who did important theoretic work in the spheres of both land and monetary economics.
In a more contemporary context, community economists are prototyping a mutual credit clearing exchange called Sardex on the Italian island of Sardinia, one of the largest islands in the Mediterranean Sea. Sardex is a mutual credit clearing network that allows exchanges of goods and services to occur between residents of the island without the use of the national medium of exchange (i.e., the Euro), which tends to be in short supply due to European Union and European Central Bank austerity policies. The local government is even exploring the possibility of accepting Sardex for payment of local taxes, which would secure demand for the medium at a level similar to that of the Wörgl Experiment mentioned above.
A major (possibly the major) hurdle to successful implementation of complementary currencies to address liquidity shortages has always been how to “back” such currencies in order to create demand for them. Sovereign currencies have relatively stable value because they are required for the settlement of tax debt; the taxation power of states is primarily what creates demand for the money they issue. If people in a community do not need to use a particular currency to pay something that is widely demanded, they likewise have little reason to demand that currency. Though communities may benefit from an increased circulation of interest-free liquidity, it can be difficult to get that circulation off the ground if there is uncertainty that a given unit of that liquidity will be widely accepted in commercial exchange. Everyone needs to pay taxes, so everyone wants to get a hold of the unit in which taxes are due. But apart from some other universal or near-universal obligation, there is an extreme challenge getting non-sovereign, complementary currencies into circulation. Land trusts potentially fill this void. Rent may be thought of almost as a private tax. Many people need to pay rent, come what may, and those who do not all know and deal with others who need to pay rent. No matter what activity in which we wish to engage, we need somewhere to do it. This means land trusts have the theoretical capacity to issue complementary currency where and when it would be appropriate to do so. It would be most appropriate to issue such complementary currency in depressed and impoverished areas where the available economic resources, particularly labor, are unused or underused and therefore available to be purchased and brought into use by means of complementary currency issuance.
Imagine a poor neighborhood in which jobs and money are scarce. If many people in the neighborhood live on land owned by a land trust, the land trust could pay some of them in complementary currency (or in a mix of Dollars and complementary currency) to clean or maintain properties in the neighborhood, to do necessary landscaping, etc. This currency may then be used to make ground lease payments back to the land trust. As many residents in the neighborhood need to pay their ground leases, there is built-in demand for the currency, and it can be used in exchanges between residents or even with those in close proximity to the neighborhood who regularly do business with residents. This creates value for the land trust and the residents, allows the land trust to spend the Dollars it holds elsewhere, and puts unpurchased labor to work so it does not atrophy and so those residents do not have to say they are not working when they go to job interviews. The more land a land trust owns, the more viable such an approach becomes. Were land trusts to network with one another and develop common rules and practices for such stimulative measures, it would be even more effective as a way to build a non-governmental safety net that addresses fundamental problems in the economy having to do with what are often called bottlenecks and tollbooths. If a good or service is demanded and on offer, and the only thing preventing the exchange from occurring is a lack of liquidity (itself and artifact, not a fact of nature), complementary currencies present themselves as an option to close that gap. Land trusts are the foundation that would allow such remedies to take hold without facing as many difficulties as they have in the past.
The unique discretionary fiscal power land trusts possess in potentia opens up still further horizons for how they might intervene to target foundational economic problems that trap millions of Americans in poverty. It creates the possibility for land trusts to take on some of the functionality of public institutions where the latter fail to adequately create conditions for broadly shared prosperity. The first and most direct discretionary power land trusts can wield is the decision of to whom they lease their land. Land the occupancy of which is priced below market rate, such as that held out of the speculative market by community land trusts, can be expected to invite a multiplicity of bidders for tenancy, which means it is up to the discretion of the freeholder (the land trust) which individual or business to lease to. By clearing space for affordable access to land (and therefore markets) for favored types of businesses, in addition to spending complementary currencies into circulation in depressed areas, community land trusts can exercise discretion in favor of locally owned businesses in order to diversify the local economy and promote rooted local industries, as opposed to larger or chain businesses.
Land trusts can also use their fiscal stimulative capacity in cooperation with local credit unions to favor the cultivation of certain business models more likely to generate lasting, quality employment, such as worker self-directed cooperative enterprises. Businesses that are run by their employees — i.e., with upper management elected by the workforce as a whole — are statistically less likely to lay off workers in times of reduced demand and economic want. Conventional firms tend to “get the misery out the door” if they need to cut back on expenditures, and so will lay off some of their employees rather than reduce wages; worker cooperatives are more likely to broadly share the burden of wage cuts rather than cast any of their members adrift. This difference was evident in the Basque Country in Spain during the economic recession following the global financial crisis of 2007–2008. The Basque Country is home to the Mondragon Cooperative Corporation, the largest network of worker self-directed enterprises in the world. In 2012, the rate of unemployment in the Basque Country, while still high at 15%, was a full 10 percentage points lower than that of Spain generally. A related characteristic is that cooperative enterprises tend not to outsource jobs to foreign countries, for obvious reasons. As market institutions they must remain profitable over the long term, but they do not have to be profit-maximizing. As long as working capital is available to them — which it increasingly is, through a network of supporting institutions such as the National Cooperative Bank, the Shared Capital Cooperative, and the Working World — worker self-directed cooperatives present a viable alternative economic strategy that integrates the interests of a wider circle of stakeholders than conventional firms. For the reasons outlined above, community land trusts have the potential to serve as anchor institutions for these new and regenerative enterprises.
Community land trusts not only constitute one effort among others in cultivating and vitalizing the social ecosystem in which Americans live; they form a foundation on which the myriad efforts to create an economy that works for everyone can be built and given traction. Without them, or something like them, results will likely be identical to what they have been since the advent of modern philanthropy, with a great deal of energy expended but not much progress made. Likewise, community land trusts represent one of the nonpolitical strategies for improving the lives of working people that actually target foundational and structural sources of economic privation. As such, they are a rare opportunity to bring people together from across the ideological spectrum to work cooperatively toward improving the lives of our communities in general and those of the economically worse off in particular. There is strong case to be made to charitable givers and philanthropists, as well as foundations and all manner of benevolent associations, that appropriating even a portion of their funds and efforts toward cultivating the general “soil” of communities will also yield more fruitful results for their more particular concerns and projects. Community land trusts, complementary finance and liquidity institutions, and worker self-directed enterprises constitute potential elements of that soil, and community land trusts serve an even more radical role, as they anchor the other two and have the potential to qualitatively ground their effectiveness. Amidst political deadlock and seemingly insurmountable obstacles to social progress, adjusting our tack to target issues as far upstream as possible offers us the most leverage, and nothing is further “upstream” than the very ground on which we stand.
— TS
