The Tiniest Monopoly

(c) by Mark Dempsey

As a follow up to monopoly maven Matt Stoller's recent post about the financialization and concentration of home building, real estate itself is also a monopoly. Ownership, as construed in the US, excludes all non-owners without the owners' permission. Even condemnation/eminent domain for the public good is difficult to achieve.

To me, the biggest abuse of the real-estate-as-monopoly is the practice of land speculation. This is a time-honored way to make money in the US. Both Washington and Jefferson speculated in land stolen from the Indians. 

In modern times, the practice remains widespread in California's Central Valley. Here's one example:

North Natomas is thousands of acres north of Sacramento's downtown. It's floodplain, surrounded by (weak) levees, and until the late '80s was primarily rice paddies. 

It was deemed so unsuited for development that a federal grant to increase regional sewer capacity said that if that added capacity served development in North Natomas, the local government, or the developers, would have to pay a $6 million penalty--big money at that time.

The speculators were undaunted. They went all the way to then-Vice-President G.H.W. Bush and persuaded him to make that $6 million penalty payable in installments. It makes an enormous difference to pay-as-you-develop rather than having a prohibitive up-front penalty. At the same time, the speculators also got $43 million in federal levee improvement grants to bring those weak levees up to pre-Katrina standards.

So...right there, a pretty good deal. Pay $6 in installments to get $43! But wait, there's more!

The speculators bought, or more likely optioned, that North Natomas land for roughly $2,000 an acre. Once they received the entitlements to build, rather than farm that land, they could sell it to builders. In one transaction, it went for $200,000 an acre once North Natomas had local government's blessing to develop as something other than agricultural. If your calculator isn't handy, that's a 10,000% gross profit. 

As an added incentive to pursue land speculation, speculators can pospone paying income tax on their egregious profits indefinitely if they exchange the profitable land for other (income-producing) real estate, like shopping centers and apartments.

All of this leads to the speculators' enormous private fortunes and an impoverished public realm. In Germany, the developers must sell any outlying land they propose to rezone at its current use (typically agriculture) price, then repurchase it at the upzoned price. The entire massive profit, called the "unearned increment," accrues to the public's benefit.

And the Germans have excellent infrastructure, not collapsing bridges. The arts budget for the City of Berlin exceeds the National Endowment for the Arts for the U.S. of A.

Meanwhile, Sacramento is impoverished enough that, rather than a public meeting room at its central library, it has the Tsakopoulos Galleria. Angelo Tsakopoulos is one local land speculator. We can't have the Sacramento Galleria because we gave Angelo all the money. Other libraries offer their meeting rooms without fee to any public policy groups--often political clubs--but not the Tsakopoulos Galleria. You have to pay to use it. It's not public, it's got a toll booth. That's the epitome of what classical economics calls "monopoly rents"--money paid for no productive purpose.