Recession
Okay, I keep thinking I’m going to write a post about how I lost my job, but really I haven’t got a lot to say about it. I’m mad that they just yanked it out from under me–they’d think themselves ill-used if I didn’t give THEM two weeks notice, and train my replacement, and make sure everything was organized before I went. But they don’t have any trouble laying me off, then locking me out of the computer system before I even have time to get back to my desk. This was inconvenient for me–I was in the middle of refinancing my mortgage, and a little flexibility or forewarning about my impending doom would have gone a long way–and it was inconvenient for them, since I’m the one that knew where all the files were, and kept my bosses’ records, and they’re going to NEED those.
But, whatever. I want to try out a new idea.
I’ve been puzzling myself about economic stimulus. There’s a lot, obviously, that I don’t know; to me, the economy looks like just a giant thermodynamics equation, and I know that this can’t be right. It can’t be right because an equation like that would make economics and planned economies really simple, and there’s no way that this system can be as simple as it seems to me.
So, there are still some things to think about, though. We always talk about “encouraging small business,” and I think that’s a good idea. If you can get more money to small businesses, that money gets passed to employees more readily than it does if you give them to big businesses. I’m in favor of that, I like that.
But on the one hand, we talk about wanting to grow entrepeneurship, and on the other hand, all we can do to help small businesses is give them tax credits. Tax credits, it seems to me, don’t help small businesses a lot, because taxes are a percentage of your income, and entrepeneurs don’t make a lot of money when they’re starting out.
We also complain a lot about making sure people get to keep what they earn. There’s a big “feelings” argument in all of this, “oh, I’m sad because I have to pay taxes,” or “oh, I’m going to cry because the government thinks it can spend money better than I can,” or “oh, I’m a big baby and think no one matters but me.” I think most of these arguments are misleading, but, for the sake of argument, I will CONCEDE THEM!
You weren’t expecting that, were you?
So, good. Now, what area of business makes money, but doesn’t actually require all that much work? Like, if you’re making money this way, mostly you’re not doing very much? Real estate. I mean, owning real estate. Owning a property and renting it out means that you have basically three jobs:
1) Pay the taxes on it.
2) Keep it in good repair.
3) Make sure someone’s renting it.
Well, odds are, if you own a lot of real estate, you hire people to do the first and second things, anyway. And the third thing…you also usually hire someone to do, they’re called “Real estate agents.” If you don’t want to hire someone to do number 3, you can accomplish it with a Craigslist ad. So the argument here that people that make money through owning real estate deserve that money because they earned it is horseshit (obviously, making money by working as a real estate agent is a different story).
But again, whatever, I’m NOT going to suggest that we steal all that real estate from anyone. What I am going to do instead is propose a scheme.
Here is the scheme: the city of Philadelphia locates a neigborhood that needs economics stimulus. Then, they buy, say, ten percent of the commercial/retail properties in that area.
They set a value for the properties; let’s say the average value is $1500 a month. Then, they lease these properties out to small businesses at a fixed rate of 10% of that business’ gross income. The business then has three years to earn a gross high enough that 10% is equal to the value of the property, or just start paying regular rent on it if they want.
Here is what I think this would do: in the first place, a huge chunk of an entrepeneur’s expenses come in the form of renting space, so this would make it easy for people to get new businesses off the ground. In the second place, it would serve as a kind of economic heat sink–other people that rent properties would be forced to lower their rates in order to compete. But, because the amount of properties that the city can own is fixed, this pressure would not be so high as to drive other companies out of business. In the third place, it would increase the city’s revenue from these properties without increasing the tax burden on the businesses that rent them. Instead of collecting taxes on commercial space, the city is basically just collecting rent.
Maintenance could easily be folded into the existing maintenance programs that the city runs, so the cost of maintaining the buildings wouldn’t be that much higher than current costs. Businesses would have an incentive to grow–because they lose their lease if they can’t make appraised value within three years. They also have an incentive to move on; if the percentage of their gross ever exceeds the value of the property, then they’re actually paying more on it than it’s worth, and they’re better off moving to a new location and giving the old location up to someone else.
Unlike buying residential properties, this plan would contribute directly to business development. It would also avoid the extremely uncomfortable situation of having residents be tenants of the city–that seems a little too much like feudalism. But we’re not talking about farmland or residency; people still own their own homes, there’s still even opportunity to buy a commercial property yourself (in fact, that could be built into the program–maybe after a certain number of years, you can buy the space from the city).
You could tinker with the percentages and the appraised rental value as needed–you’d need to look at a couple other small businesses to make sure that the percentage is a little bit less than what most businesses pay, but not too much less (so, if the average business pays 40% of its gross to rent, then your fixed value is 30% gross, and so forth).
I think that this is a reasonable plan. So. Problems?
February 4, 2009 at 2:51 pm
Hmmm. Okay, not exactly problems, but “things to think about”:
“Maintenance could easily be folded into the existing maintenance programs that the city runs, so the cost of maintaining the buildings wouldn’t be that much higher than current costs.”
The existing maintenance programs will have to be increased to deal with the buildings, which means increasing taxes to pay for equipment and manpower. Which…it’s gonna bite SOMEBODY in the ass, that’s for sure. I don’t know WHO, but somebody.
“[Businesses] also have an incentive to move on.” But…what about the draw of location? More specifically: Location, location, location? Maybe they don’t want to move on. Then they have to be forcibly ejected.
And hired goons have to get paid, so there we have that tax issue again.
February 4, 2009 at 3:54 pm
The first problem is, of course, where does the city get the money to buy the properties to begin with – it’s already running a deficit this year and unlike the federal government it can’t actually use deficit spening to accomplish anything. Secondly, you are expanding the size of government to oversee the purchase, renovation, rental, etc of the new properties. And, not to put too fine a point on it, the opportunities for graft and corruption seem altogether obvious.
I’ve always been kind of suspicious of the way we look at small business – yes, small business create new jobs, but for every small business that starts up, another one folds, so I’d think that the state of employment among small businesses would be fairly static. It’s when a small business becomes a large business that employment, taxes, etc become statistically relevent.
February 4, 2009 at 4:38 pm
@Jeff: They don’t have to be forcibly ejected–if the location is so valuable to them, then they can stay there and just continue to pay 30% (or whatever) of their gross into the program. And, with the lease-to-buy option, if the location is *that* great, then they can just buy the property.
As for maintenance…well, yes, someone is paying for it, but someone was paying for it before–maintenance costs on the building get passed onto the leaseholders, who either fold as a result, or else pass the expenses onto the customers.
So, let’s say for the sake of argument, that the city pays the maintenance costs at first, and the leaseholder has to pay some percentage of annual maintenance, which goes up as their gross income goes up. Yes, the city spends more money on maintenance in the short term, but this is a) potentially offset by the increased revenue from the properties, and b) should be further offset by the increased revenue from economic development.
@Bill: Well, okay, maybe this year is too soon.
I don’t object to expanding the size of the government in principle; and, if by expanding here, we could decrease the size of the government somewhere else, then it’d be feasible. And, besides that, I haven’t heard of a government program that *doesn’t* provide ample opportunities for graft. Graft is a crime that can only be committed by government precisely because the government does things. So, we’ve got a rabid ethics board now, I don’t mind letting them earn their keep.
Besides all that, a program like this is precisely designed to encourage the move from small to large business: by giving small businesses an opportunity to thrive, we increase the likelihood that they’ll be able to move across that earning threshold.
February 5, 2009 at 1:31 pm
Any initial investment in updating these buildings would be a sound decision for the community; the longer spaces remain vacant when they could be filled with businesses and residents, the harder it is to convince potential investors that these buildings are worth the resources needed to bring them up to code. Instead of focusing on roads/infrastructure with the intention of promoting interstate commerce, cities should consider spending inward (refurbishing public spaces so they are more appealing shopping areas; polishing up squatting sites) to get the immediate return they hoped for, while developing something that draws people over state lines. Keep the toll booths up for a little while longer, despite their reputation as a deterrent for interstate commerce. This is what NYC is aiming for over the next few (spending money locally and–something new for NYC–encouraging strictly insular consumerism) and other places like Cambridge, MA (the idea of the “Storrow Tunnel Project”). Never underestimate the potential of a really good-looking neighborhood with people living in it and green stuff growing on it.
- The upside of a crappy economy; mass production might be down, but it allows time for artists to create…writers to write, etc…
February 13, 2009 at 9:18 am
the primary flaw in your real estate market analysis is that it only applies to landowners that are wealthy enough to:
A) own a lot of real estate
B) hire people to maintain the property and to manage the people that maintain the property
C) hire people to find rentors (for which craigs list is a poor subsittute if the property you’re renting is a giant office building)
not everyone in the real estate market makes enough money off of real estate to hire all these people or own that much land. there are a lot of people in the upper middle class that own a few rental properties and do all the property management themselves because if they didn’t they wouldn’t be making any money at all.
it also completely ignores how time and cost intensive it is to develop a property into something someone would want to rent; especially in the case of office and business space. it’s a huge upfront investment for the landowner that puts them at significant risk for loss if they can’t rent the property out fast enough or consistantly enough. people don’t get paid to own land they get a return on the investment in the land.