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Essay of the Day: Open Market Sustainability

photo of Michel Bauwens

Michel Bauwens
9th March 2012


“For the first time since the creation of the Cold War economic engine, domestic demographic trends and advances in housing, transportation, farming, and resource utilization make a strategic market reset possible. A massive pool of pent-up demand and an equally large reservoir of stranded capital can underwrite a three-part reset in the critical nodes of the U.S. economy: shifting from sprawl to smart growth, from industrial to regenerative agriculture, and from taxing income to taxing waste. This new economic engine is called “open-market sustainability.”

Excerpted from a policy proposal by Patrick Doherty :

“If our strategic imperative is to lead the transition to global sustainability, and the means is by letting our economy do the heavy lifting, the central question is how to align the American market economy to the task. To do this, this article proposes a set of policies under the rubric of open-market sustainability.

Open-market sustainability would establish a new economic engine for the United States by updating three master nodes of the American economy trapped by Cold War–era priorities: housing and transportation, agriculture, and the price of labor and resources. With these keystone sectors oriented toward the twenty-first century, an open-market—in which the government enforces a legal framework to ensure that the nation’s markets protect property rights, enforce contracts, and remain uncorrupted by distorting concentrations of power among buyers or sellers—will allocate resources and capital consistent with our long-term strategic requirements. Done well, decisive shifts in each of these pivotal sectors will position America for leadership of the larger transition to global sustainability.

Ultimately, this article seeks to articulate pragmatic policy options, not to develop new economic theory. America has great problems to solve in a very short time frame and we need to harness the economy to do the heavy lifting now. Accordingly, the following policy clusters are focused on solving our great strategic challenge, by illuminating the right combination of sticks and carrots to reset the American economy for a difficult new century.

* Housing and Transportation

At the core of open-market sustainability is America’s best-kept economic secret: a deep source of pent-up private demand that, by demographic happenstance, is perfectly suited to power a new era of sustainable American prosperity.

American demographics, the built environment, and economic strategy were fused by the Cold War. America was going to contain the Soviets so that we could ultimately defeat them in a contest of economic and political systems in which subsidized suburban growth competed with the politburo’s central planning. It worked. The American citizen, secure in his or her future prospects, got married, bought a house, and started having children. In the late 1970s and early 1980s, those children, the baby boom generation, started having kids. Today, those two generations are roughly equal in size, in the neighborhood of 77–78 million people each, together making up half of the U.S. population.

The preferences of these two groups have now pivoted decisively away from the monochrome subdivisions that pervade the American landscape. For the boomers, crossing the symbolic age of 65 means multibedroom, large-lot homes in the distant suburbs, which do not offer the lifestyle this generation wants or needs at this stage. Large homes require too much maintenance and time; car-dependent suburbs become unlivable as driving becomes more difficult or unsafe. With savings and retirement uncertain, boomers need to work longer than their parents. The retirement dreams of their predecessors, whether the sun-baked community in Florida or the golf course home in Hilton Head, are either unaffordable or undesirable.

Millennials, the generation born between 1982 and 2000, were raised in the sterile, disconnected suburbs and have had enough. Seventy-seven percent of this younger generation says they will never go back. With diminished economic prospects, this generation feels it cannot afford to live in communities that require two and three cars to move the family around, which is fine, as they also do not aspire to become chained to the minivan for hours every day.

The peak of these two groups’ overlap in the home-buying market will be from 2014 to 2029. Millennials, starting their families, will be looking for starter houses. Boomers, looking to downsize from their larger single-family homes to something more manageable for a smaller household, will be looking for a similar product in similar places.

That demographic pattern is already being picked up in market surveys. In a consumer preference survey released in March 2011, the National Association of Realtors reports that 56 percent of homebuyers want their next home purchase to have the attributes of smart growth. That is, they want right-sized homes in a broader range of housing types (single-family, townhouse, live-work, condo, and apartment) and they want those homes in walkable, service-rich, transit-oriented, opportunity-dense neighborhoods. In percentage terms, this group is just under three times the volume of returning vets and their new spouses after World War II—more than eight times in absolute numbers. Backstopping that convergence is the U.S. Census Bureau’s estimate that by 2050 we will add another 130 million people to our nation, which translates roughly to 50 million new households.

Real estate accounts for more than 30 percent of all asset classes and must be engaged to pull out of the deleveraging. Yet, despite the sizable demand for smart growth, only 2 percent of housing starts have the attributes of smart growth, and new homes are only 1 percent of the residential real estate market. Federal subsidies are the source of the bottleneck, reflecting the long-past logic of Cold War survival. Transportation dollars are required to fund highways, 80 percent of whose cost is paid by the federal government. Fannie Mae and Freddie Mac, though more conservative after the crash of 2008, are still underwriting mortgage products that force buyers to drive farther and farther away from city centers to qualify for a home loan.

But the problem is not just with federal policy. Counties on the suburban fringe often see suburban development as the path to increased tax revenue, unaware that after the wave passes through they will be left with a heavy infrastructure burden and a thin tax base. Ironically, after subprime mortgages and high gas prices triggered the Great Recession,14–16 publicly traded homebuilders were able to go back to Wall Street investors with an argument that, even though home prices had gone down, agricultural land prices had dropped even further, increasing builders’ profit margin.

While this massive pool of pent-up private demand sits virtually untapped, Wall Street is resting on an equally large reservoir of liquidity that is looking for “certainty” before investment. Uncertainty comes in many forms, from licensing and regulatory requirements, to the price of carbon, to taxation and market demand ambiguity. A decisive policy that sets a clear framework for investment can tap this pool of capital through a new era of right-sized mortgages, municipal bonds, and equity investment in the businesses building the next American Dream. The prize is larger than any federal stimulus: the Federal Reserve and market research firms estimate that, between corporate cash and institutional investors’ money market funds, $3.6 trillion is waiting for improved conditions for long-term investment.

We already know this will work. In the early 1990s, as part of its strategy of constraining sprawl and keeping its urban core vital, Portland, Oregon, built a $100 million light-rail network. In the 11 years since the streetcar route was identified, real estate within two blocks of it has attracted more than $3.5 billion of private investment. The Greater Salt Lake City metropolitan region, a region that voted 67 percent for McCain-Palin in 2008, is another good example. The state and various municipal governments, the chamber of commerce, and stakeholders from across the spectrum came together to figure out how the region was going to double in population while attracting outside investment without diminishing the quality of life. The region chose the most aggressive of the four scenarios they developed, minimizing vehicle miles traveled, preserving farm and wild lands, and saving $5 billion in local government expenditures over 20 years.

* Farming: From Depletion to Regenerative Agriculture

“The Nation behaves well if it treats the natural resources as assets which it must turn over to the next generation increased, and not impaired, in value.” —Theodore Roosevelt, 26th president of the United States17

The United States cannot become sustainable, nor can we induce global sustainability, without addressing the way we farm here at home. Part of the coming challenge is rising global demand; the International Monetary Fund’s food price index has risen 220 percent since 2000, as Asia’s economy creates more purchasing power seeking a more diverse diet. As another three billion people enter the global middle class over the next 20 years, we are going to have to put as much of the planet’s arable land under cultivation as possible—and do so while restoring our ecosystem, not depleting it. That is going to require a different kind of farming revolution, forging a regenerative agricultural system that meets increasing global demand and provides good jobs, all while restoring our soils, our waterways, and our atmosphere. Increasing global yield is still absolutely necessary, but no longer a sufficient metric of success.

We cannot make this change given the way American farms operate today. At present, the United States uses six calories of hydrocarbon energy to produce one calorie of food energy, meaning that food prices are tied dangerously to oil prices. The water we use for irrigation and the fertilizers we use on the land are also unsustainable. Total federal irrigation subsidies are approximately $22 billion, while the giant Ogallala Aquifer that irrigates $20 billion in agricultural products in the Great Plains is being drained at the rate of 18 Colorado Rivers each year—with recharge rates less than one-tenth of 1 percent of withdrawals. Fertilizer-intensive agriculture has led to rapid soil depletion, while nitrogen-rich farm effluent is poisoning our waterways, choking off spawning grounds, estuaries, and shellfisheries.

Depletion and waste on this scale indicate a major market failure. In this case, the failure is a function of policy: agricultural production in the United States is incredibly subsidized and the costs of ecological depletion are external to the market. A Canadian agricultural industry report published in November 2010 estimates that the total value of direct and indirect federal agricultural subsidies amounted to $180 billion dollars in 2009, or over half of total U.S. farm revenue.18 This massive government intervention in the farming sector is in part a product of the disproportionate weight given to farming states in the American political system, specifically the electoral college and the Senate. According to Dan Glickman, former U.S. agriculture secretary, the subsidies are “largely an income transfer program.

It is not just the ecosystem and markets that are affected by the subsidies. Ill-conceived subsidies are at the heart of America’s obesity problem and are undermining the family farm, depleting rural and maritime ecosystems, increasing our carbon emissions, and suppressing agricultural exports from developing nations.

The superiority of regenerative farming is now firmly established: organic agriculture outperforms and outearns conventional industrial farming. In September 2011, the Rodale Institute released the findings of its 30-year study of farming systems.20 Organic techniques beat conventional methods in every category, most importantly in productivity and in profit per acre. Controlling for premium pricing (the Whole Foods effect), organic production brought in three times as much per acre per year. Equally important, organic production produced slightly better yields than standard industrial techniques. Organic farming is also regenerative, rebuilding soils and retaining 15–20 percent more water, in turn improving drought resistance. These regenerative techniques consume 45 percent less energy and emit 29 percent less carbon than conventional methods.

Combined with the successful development of full-scale biochar, the agricultural sector could sequester up to 20 percent of the carbon that flows through the farming cycle.21 Biochar, similar to charcoal, is produced when agricultural waste is heated in a low-oxygen environment, locking the carbon in the waste into a stable form for centuries. In addition to sequestration, biochar rebuilds soil volume, nutrient composition, and water retention. Biochar production, however, also produces syngas, a biofuel, up to ten times more efficiently than corn ethanol production per kilojoule of net energy.22

A shift from a policy of federally subsidized farmland depletion to regenerative agriculture would allow America’s farming families to lead a prosperous life caring for the land. Farmers would once again be stewards of the soil, rebuilding fertility, sequestering carbon, and protecting our waterways, all while feeding the American people wholesome food. Indeed, such a program would likely bring more American farmers back to the land as less profitable, less efficient, capital-intensive industrial agriculture is priced out of the market. ” (http://www.thesolutionsjournal.com/node/1039)

* Tax Shift: From Taxing Income to Taxing Inefficiency

In 1942, in order to pay for the war effort, the U.S. government extended the income tax from a high-earner tax to a universal tax on income from labor. In 1950, national security advisors recommended to President Truman that the wartime income tax be continued, based on the experience gleaned in World War II, in which a productive, highly employed economy was able to generate considerable revenue for national defense. Today, more than 80 percent of the federal government’s revenue comes from individual income and social insurance taxes, while we subsidize resource consumption, yet another legacy of the inherently industrial strategic challenges of the twentieth century. Reversing the relative prices of labor and resources—taxing waste not wages—takes smart growth and regenerative agriculture to the next level, harnessing them to form an innovation juggernaut that can capture the resource productivity prize for the United States.

Though important 60 years ago, the universal income tax has created perverse incentives, most importantly, an incentive for businesses to conserve labor and waste resources. Under our present-day system of taxing work and subsidizing resource use, total per capita consumption of material in the United States rose by 23 percent from 1975 to 2000. Today, American material flows are 50 percent higher than the average of 15 European nations, and unemployment is chronically high. With 675 million people arriving in Asian cities and an additional 3 billion entering the global middle class over the next 20 years, commodity prices will only continue their steep rise, making resource efficiency the key driver of competitive advantage for businesses and nations alike.

When the relationship between tax and subsidies is as dysfunctional as it is today, the opportunity for a tax shift is clear. With minimal pricing of carbon ($30 per metric ton of CO2 equivalent) and unsubsidized water, the McKinsey Global Institute estimates that approximately $3.3 trillion in resource productivity gains are waiting to be harvested by the private sector.4 A sustainable tax shift would generate revenue for government operations from material, energy, and natural resource inefficiency—or waste—and reduce the percentage of revenue that comes from traditional sources, most especially individual income, payroll taxes, and business income from small- to medium-size enterprises. Needless to say, reducing the tax burden on hard-working Americans and job-producing small businesses would likely prove popular politically.

Under open-market sustainability, the approach is to shift the tax base to throughputs and away from income and payrolls. Former World Bank economist Herman Daly wrote, “Shifting the tax base onto throughput induces greater throughput efficiency, and internalizes, in a gross, blunt manner the externalities from depletion and pollution.”23 Different from either a consumption or value-added tax, throughputs are those resources—oil, minerals, fertilizers, or renewable resources like forest products—that are essential material inputs to economic production but not the products themselves.

At a time of domestic recession and low-cost overseas labor competition, reducing the cost of working while supporting small businesses and the entrepreneurs who start them will simultaneously boost employment and innovation. With prices established for keystone resources, prices in the market will reflect our strategic necessity. With a phased and predictable introduction, such a shift will allow the marketplace time to work through which technologies are appropriate, while ensuring that the United States leads the way to a resource productivity revolution. Applied in the context of the simultaneous resets in housing, transportation, and agriculture, under the tax shift, families will be assured of higher-efficiency options to reduce their household footprint, workers will enjoy a strong job market, employees will experience the increase in take-home pay, and industry will be powered by a new engine of innovation and investment around resource productivity. Combined with long-needed tax simplification, the package is positioned to win popular and bipartisan support.

The tax shift described in the “Innovation Tax Shift” sidebar embraces this long-overdue opportunity, creating a predictable schedule of prices that will allow businesses to plan their own strategies to compete and win. Income taxes are ended for 79 percent of Americans, who also receive a break on payroll taxes, while the income cap on social security is lifted. Business income taxation is fixed to encourage the small entrepreneur, with no taxes on firms with less than $5 million net business income and a flat tax on all other businesses thereafter. Taxing waste provides the first opportunity to price environmental costs in the economy, ending one of the greatest market failures in human history. Toxic releases, water withdrawals, carbon, forest services, and municipal waste all get a starting price that increases over time to push innovators while paying down the national debt.”

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