American Interest

The New Landowners

Today’s debates about political economy are not unprecedented; in fact, they bear a striking resemblance to the controversies of 19th-century Britain

Former Senior Fellow
British economist Daniel Ricardo (Hulton Archive/Getty Images)
British economist Daniel Ricardo (Hulton Archive/Getty Images)

p(firstLetter). During the French Revolution, in the days before the Terror, the Constituent Assembly was shaped like a horseshoe, with radicals sitting on the left and monarchists and the nobility sitting on the right. The layout shaped the colloquial language of Western politics for nearly two centuries, as observers generically called workers “the Left” and capitalists “the Right.” The utility of this Left-Right paradigm declined over time, as “culture war” issues displaced those of political economy. But now it is all but meaningless when self-proclaimed socialist Alexandria Ocasio-Cortez allies with the Koch Brothers and the Cato Institute to push for open borders, when the socialist Bernie Sanders joins with the capitalist Warren Buffett in calling for single-payer health insurance, and when Black Lives Matter finds common cause with Silicon Valley billionaires and the libertarian Charles Murray in support of Universal Basic Income. Even free college now has both hefty Democratic and some Republican support. The old Left-Right continuum not only fails to predict how rich and poor might vote today, but also how rich and poor might forge actual alliances.

Failure to take culture into account was always the biggest failing of the Left-Right model of politics. People vote more than just their pocketbooks. There are “values” voters; there are also single-issue voters in which the single issue is not economic—for example, ethnic identity or national pride. Still, economics is important, and there may be some value in stripping the world of everything but its economic motivations, as the old Left-Right model did, at least as a thought experiment.

A new model might start with trying to account for Alexandria Ocasio-Cortez’s political platform, along with some of her press statements. She calls for Medicare for All, housing as a human right, tuition-free higher education, a Federal jobs guarantee, a $15 dollar Federal minimum wage, open borders (euphemistically described as “safe passage” for all people wanting to enter the country), and the abolition of the Immigration and Customs Enforcement agency (ICE). On the surface this appears to be a grab bag of leftist causes, yet there is a pattern here. For example, the health care, housing, and higher education fields that she emphasizes also happen to be the three biggest economic bubbles in the American economy. The housing bubble burst in 2007, but has since re-inflated. Health care and higher education remain bubbles in the sense that they are the last two major economic sectors to be shielded, more or less, from market forces that enable consumers to strongly influence price. For this reason, health care, higher education, and housing are expensive relative to what average people can pay.

Ocasio-Cortez’s open borders position is more curious. One might expect socialists to push for more immigration—to satisfy their allies in the identity politics movement—but not to emphasize it, given mass immigration’s risk to American workers and its undermining of trade union power to the benefit of corporations. Yet she places it front and center. Assuming she is not a shill for global capitalism, or a “useful idiot,” there must be an underlying logic to this new socialist position as well.

p(firstLetter). An alternative perspective on these events can be found in the 19th century. In between Adam Smith, who predicted a harmonious world where capitalism would benefit everyone, and Karl Marx, who predicted violence and revolution, the British economist David Ricardo offered a third view of the economy.

Ricardo divided society into three groups: workers, capitalists, and landowners. He felt sorry for the workers, who, he said, lacked self-restraint, and who would produce a flock of children whenever their wages went up, creating more workers to compete their wages back down. He was less sympathetic to the capitalists, although he did acknowledge the risks they faced from competition, disruptive technologies, and low profit margins stemming from their workers’ constant demand for higher wages. But he hated the landowners. Not only was their income unaffected by population growth or intense competition, he said, but they also gained at everyone else’s expense.

In his Principles of Political Economy, Ricardo explained how the tragedy played out in light of the Corn Laws, which were tariffs placed on grain in 1815 to protect British landowners from the falling price of wheat. Take a well-situated British landowner who grows wheat on fertile land, and a second landowner whose land is the same size but less fertile. Both sell their wheat for the same price, but the well-situated landowner enjoys a larger profit. Now let’s say the capitalists in the city expand their businesses, leading to an increased demand for workers. The demand pushes up wages, but the workers procreate more, adding more workers and depressing wages. Still, the new workers must eat, increasing the demand for wheat, which leads to more land being cultivated. Since the well-situated landowners already work the most fertile land, any new land farmed will be less fertile and have higher unit costs relative to output, causing the price of wheat to rise—especially when the Corn Laws have closed the market to imported grain. When this happens, and wages remain stagnant, workers go hungry. Eventually capitalists must pay their workers higher wages to keep them alive, causing their profits to fall. Yet well-situated landowners benefit by doing nothing, because the difference between the new price of wheat and their low unit costs grows even larger.

An analogous situation exists today, except that instead of workers, capitalists, and landowners, we have workers, capitalists, and a consortium of colleges, health care institutions, and smug homeowners. Capitalists expand their businesses, increasing the demand for workers, which boosts wages. This time workers are smarter and procreate less, especially workers at high-income levels. Nevertheless, new workers keep being added through mass immigration, which depresses wages. Although wheat is no longer a problem, as technology has made food production cheap, housing, health care, and higher education care are problems. They are essential to life, or at least to livelihoods in advanced economies, yet they have been shielded from market pressures—almost as if they had a tariff wall around them—causing these industries to remain inefficient.

To continue with the analogy, our expanding population increases demand for college educations, health care delivery, and housing, which are produced inefficiently and expensively, much the same way that using less fertile land to grow more wheat drove up costs under the Corn Laws. Workers then demand wage increases from capitalists to pay the new costs, threatening the capitalists’ bottom line. Both parties are miserable, while those working or living inside the three bubbles make out like bandits.1

In the case of higher education, colleges must add new classrooms, dorms, labs, and staff to meet increased demand, especially in the less selective and poorly situated “mass” colleges that bear the brunt of that demand. This costs money. Shielded from market pressure, they do so inefficiently—for example, most colleges suffer from administrative bloat—which costs more money. The result is increased tuition levels. Despite new spaces having been created for students, tuition has risen at four times the rate of inflation since the demand for college increased 50 years ago, analogous to how the price of wheat rose in 19th-century Great Britain despite more land being put into production, as Ricardo predicted.

It gets worse. The poorly situated colleges should have difficulty passing on the increased costs to the children of workers, just as the poorly situated landowners profited much less from increased wheat prices because of their higher production costs. But government covers their inefficiency through student loan programs, which lets tuition rise even higher. The students themselves—meaning future workers—absorb the new high costs by going into debt. It’s as if the British government in the 19th century had loaned workers money to buy wheat at some inflated price, and then expected them to pay it back. Some professors get government grants that colleges then siphon off to varying degrees to pay for the new facilities; in essence, they are servants who come with their own salaries, part of which is then kicked back to the masters who employ them. If students default, workers and capitalists everywhere must pay higher taxes to reimburse them. If professors fail to renew their grants, they are kicked out and replaced with more productive ones. The poorly situated colleges do reasonably well in this environment, certainly better than Ricardo’s poorly situated landowners.

Meanwhile, well-situated colleges such as the Ivy League schools need not expand at all, since they become even more selective and prestigious by doing little or nothing different. With a fixed number of student spaces amid increased demand, or with a small, albeit inefficient, expansion, they can raise their tuition far above the new prevailing tuition charged by the poorly situated colleges, and choose from among thousands of applicants who will gladly pay the extra money.

Indeed, just as Ricardo noted that well-situated farmers prefer inefficiency among poorly situated farmers, so do elite schools prefer inefficiency among poorly situated colleges, for if college tuition rises among the “mass” colleges, the tuition that elite colleges can charge rises even higher, since many people will pay a premium for prestige.2 To use Ricardo’s language, the difference between tuition at elite colleges and their actual production costs grows wider, as evidenced by the widening gap between the cost of public universities and elite private ones. Adjusted for inflation, between 1975 and 2018 the average cost of a four-year public college (in-state) increased 240 percent, although if state subsidies had not declined during these years the increase would have been closer to 230 percent.3 During this same period, the average cost of a four-year private college increased 260 percent. Meanwhile, at the top of the tree, the cost of a Harvard education increased 286 percent.4 Like the well-situated landowners of old, the well-situated colleges can benefit by doing nothing new or different.

p(firstLetter). In the case of health care, hospitals, physicians, insurance companies, and drug companies must add more rooms, facilities, services, and products to meet the increased demand for medical care from an expanding population, and from the increased number of Medicaid patients within that expanded population because of the Affordable Care Act (ACA). This costs money. Shielded from market pressure, they do so inefficiently, analogous to the inefficiency inherent in farming marginal land. Not surprisingly, the inflation-adjusted cost of health care per capita, similar to the cost of college tuition, has increased five-fold over the past 50 years, just as Ricardo’s theory predicts, with almost half of that increase due to administrative costs, price increases, and the rise of third-party payers.5

But again, it gets worse. The poorly situated health care operators might be expected to have difficulty passing on the increased costs to workers in the same way poorly situated farmers had difficulty passing on the increased cost of wheat. But government credits, tax deductions, and ACA subsidies buoy them. It’s as if the British government had matched every shilling a worker paid for the high price of wheat with another shilling. Yet today’s workers must still bear the brunt of the new health care costs in the form of higher deductibles and co-pays, and longer wait times for access. In addition, a tariff functions in drug pricing, with drug prices higher in the United States than in those countries that have cut deals with the drug companies, analogous to how the Corn Laws raised the price of wheat in Great Britain relative to Prussia.6

Meanwhile, the well-situated health care operators—for example, hospitals and surgery centers that serve private insurance patients, or concierge doctors who treat cash-only patients—do very well, since they add more space and services at their convenience, while their affluent clientele can easily pay the higher prices. In addition, they get the same subsidies that the poorly situated health care operators get. Even their unit costs are sometimes lower, since patient health status rises with income, so their clients on average may not be as sick. They also benefit from the high production costs in the poorly situated health care sector, since, like the well-situated colleges, they can charge a premium over and above the cost of services in the poorly situated sector—for example, because they have prettier office space, or easier parking, or because their doctors on staff have better reputations. They benefit from the inefficiency that raises costs in the poorly situated sector by gaining a higher floor to work off.

In the meantime, workers with stagnant wages face real hardship, while workers who fail to qualify for health insurance subsidies get hit even harder. The capitalists who employ them worry about rising insurance premiums that threaten their bottom lines. Even if they don’t offer insurance they must still fight against the wage increases that workers demand to pay the new costs. Also, nearly all workers and capitalists alike must pay for health care’s inefficiency through higher taxes.

p(firstLetter). In the case of housing, the housing industry must add more units to meet increased demand, especially on land that builders ignored in the past, often for good reason. This costs money, especially when the labor market in construction is tight.

Worse, the housing industry is far more shielded from market pressure than most Americans realize. Building restrictions such as zoning and other regulations prevent new units from going up, especially in major cities such as Los Angeles, San Francisco, New York, and Boston. Home construction per household nationally remains near its lowest level in 60 years of record keepingpushing uphome prices dramatically. In 2017 alone, the increase was 6.3 percent, or twice the rate of wage growth and three times the rate of inflation. Like college tuition, the average cost of a house has increased four times the rate of inflation since the mid-20th century.

Many underemployed workers would like to move from regions in economic decline to dynamic cities, but they find themselves unable to do so because housing is unaffordable around productive areas. Workers already living in these areas find themselves putting more of their paychecks toward housing. For their part, capitalists in dynamic cities worry about a potential labor shortage, since without affordable housing they can’t get the additional new workers they need. In addition, their current employees demand higher wages to pay for their expensive housing, which threatens to cut into the capitalists’ profits. In no state does working 40 hours a week for minimum wage enable someone to rent a median two-bedroom apartment.

Meanwhile, homeowners, especially well-situated homeowners, see their home values skyrocket. They have a vested interest in restricting the number of houses that can be built, just as Ricardo’s landowners had a vested interest in the Corn Laws. Even poorly situated homeowners do well, since, as Ricardo noted, one’s situation is relative. The owner of a house near a park in Palo Alto is well situated. The owner of a similar house near a noisy highway in Palo Alto is poorly situated. A third person might want to build a similar house in a different part of town. But if the only land available for development requires an expensive permit, bulldozing a mountain, or draining a swamp, and sits next to the city’s garbage dump, then this third house’s production costs are going to be very high. Indeed, economists have shown that land constraints as well as local government regulations contribute to the current housing shortage, particularly in major metropolitan areas.

The result fits with Ricardo’s theory. The third house’s high price and bad location raises the value of the second house by the noisy highway, even though the latter’s production costs were small. The value of the first house by the park increases even more. In this way, established homeowners enjoy a financial benefit from land shortages and restrictions without doing anything.

p(firstLetter). With the inner workings of our economy now exposed, the logic behind Alexandria Ocasio-Cortez’s platform becomes clear, as does the logic behind the nascent alliance between socialists and some capitalists on key issues. The two groups are joining forces against the landowners of our day who have been advantaged by the Corn Laws of our day.

The higher education, health care, and housing issues in Ocasio-Cortez’s platform are all analogous to the problem of wheat prices in the 19th century. They are the most pressing issues facing workers today. In 1973, American families put 50 percent of their discretionary income toward education, housing, and health care; today they put 75 percent. To solve these problems, Ocasio-Cortez offers free college, Medicare-for-All, and housing as a right. On some of these issues major capitalists have climbed on board, since they also want these problems solved, preferably at someone else’s expense, mainly because of the upward pressure they put on wages. For example, the new J.P. Morgan-Berkshire Hathaway-Amazon venture to lower health care costs recently appointed Dr. Atul Gawande, a supporter of single-payer health care, as its CEO. Facebook CEO Mark Zuckerberg and Virgin Atlantic founder Richard Branson have pushed for Universal Basic Income, which would give workers more money to pay for services.

Some activity has also begun on the housing and college fronts. Google has jumped on the “housing as a right” issue, starting a large home-building project for its employees, while companies such as Starbucks, Wells Fargo, and Walmart have started to pay college tuition for their employees. At present, these ventures are private, similar to how health insurance began as a private company benefit in the 1940s; however, as costs continue to rise, putting pressure on wages, some employers will inevitably start to agitate for government assistance, as many of them now call for in health care.

Even today’s politics have begun to resemble the politics of British urban industrialists of old allying with the working class to repeal the Corn Laws. Even some of the complications are similar. First, not all British industrialists were on board the pro-repeal movement. Indeed, many manufacturers opposed repeal. Yet certain key industries, especially the wealthy cotton industry, pushed for repeal and funded the first large political action committee in British history: the Anti-Corn Law League. Something similar is happening today. Few employers support socialist ideas—indeed, most of them still reject socialism—yet important ones do support them at least selectively, and they are building organizations to push them.

Second, the working class in Great Britain strongly supported repeal of the Corn Laws—for example, the Chartist movement. Yet while manufacturers in the Anti-Corn Law League eagerly associated themselves with the Chartists, and took pride in the connection, the Chartists despised the Anti-Corn Law League, kept its distance, and even defaced or destroyed the latter’s property, for they saw into the manufacturers’ ulterior motives.7 Today’s socialist movement presents a similar double-face. On the one hand it embraces rich capitalists who support its social causes. On the other hand, it despises the “one percenters,” decries income inequality, and, in the form of Occupy Wall Street, destroys corporate property.

Third, today’s capitalists do have ulterior motives. The industrialists in the Anti-Corn League wanted lower wheat prices to help their workers—but mainly to relieve pressure on themselves. They also wanted lower duties on imported cotton, less regulation on business, and a reversal of the Factory Act, which limited the workday to ten hours. The Chartists knew all this and resented it. In the same way, today’s socialists know that some corporations want to help workers on health care, housing, and higher education, but that they do so primarily to benefit themselves. Their paths quickly diverge, for example, when business calls for less regulation. Socialists think the policy anti-worker.

Many of today’s capitalists also want more immigration. Ocasio-Cortez also supports more immigration, which is confusing. According to Ricardo’s economic theory, expanding the population in the current environment will increase the cost of housing, health care, and higher education, just as it increased the price of wheat in the 19th century. This would hurt workers. It may be why Ocasio-Cortez demands a Federal minimum wage and the right to a Federal job along with her call for open borders: These policies, along with Universal Basic Income, would give workers an economic floor to help them cope with the rising cost of housing, health care, and college stemming from mass immigration. Another explanation, of course, may be that more immigrants simply means more Democrats, who will vote for the socialist programs on housing, health care, and college, thereby solving the problem altogether—assuming that money can be extracted from somewhere to pay for all of this. Still, until such legislation is actually passed, workers facing population growth while the three economic bubbles remain intact will be very uncomfortable.

This suggests a major difference between how our politics are unfolding as compared to the 19th-century version. In 19th-century Britain, landowners faced a gradual destruction of their favorable tariff, starting with a “sliding scale” that lowered the tariff when wheat climbed in price. Our “landowners,” on the other hand, remain as insulated as ever. Rather than cut into the profits enjoyed in the housing, health care, and higher education bubbles, today’s worker-capitalist alliance demands more government assistance, which simply sustains the bubbles, buoys the position of those working or living inside them, and ensures that today’s “landowners” still get much of the reward, despite their inefficiency. It’s as if instead of gradually exposing wheat farmers to the free market, the British government had increasingly subsidized them.

Unlike in the 19th century, today’s workers and capitalists imagine that through government assistance all parties can benefit, including our “landowners.” This is impossible. There is not enough money to pay for Ocasio-Cortez’s social programs given the current level of government debt and the growing demands on entitlement programs. At best, government-run health care or free college will inevitably lead to a two-tiered system. High-income people will exit the cash-strapped government-run system and leave workers without the help of those who might pressure bureaucracies to maintain good services.8 In the case of health care, for example, the Sanders Medicare-for-All plan bans private health insurance to avoid this problem, but it doesn’t prevent high-income people from paying cash, which they already do in the form of high deductibles and concierge care. Thus, high-income people will be able to exit the system, creating the two tiers. Similarly, in the college system, free tuition through government subsidies will do nothing to control costs. In fact, as noted above, they will raise prices further. This will put elite colleges even more beyond the reach of average workers and reinforce the class divide.

The big government solution will not work. On the contrary, it will simply condemn workers to the margins and frustrate capitalists who find their profit margins under constant attack. All the while, those working in or living inside the three bubbles will sit back and get richer.

The only way to solve the problem is to pop the bubbles, or at least to help people circumvent them. In higher education, that means tying a college’s receipt of government money to greater efficiency, or by letting workers circumvent college altogether. There is, for example, Walter Russell Mead’s idea of a National Baccalaureate Exam, which would let young workers who pass the exam bypass college and still get jobs. There is also the option of greatly increasing apprenticeship programs in tradecraft skills, which we now do to a large but still inadequate extent through the community college vocational track.

In housing, popping the bubble means loosening restrictions on building. An even better practice would be for companies to create more branches in unpopular regions where housing costs are still low, yet the trend has been in the opposite direction as companies forsake the suburbs, exurbs, and rural areas for urban downtowns to compete for millennial talent. This practice worsens the class divide while also being a symptom of it. Advantaged young people who grow up in the well-situated housing sector, who receive medical care in the well-situated health care sector, and who attend college in the well-situated higher education sector have coalesced to form a closed caste with its own culture, including a desire for urban amenities. Since the high-tech information economy values these employees most of all, companies chase after them and pay them enough to live and propagate the next generation of well-situated lives in an urban setting. Meanwhile, the great mass of workers who grow up and receive their education in the poorly situated sector are less prized by companies, and less well-paid, and they find themselves unable to follow their well-situated counterparts into the cities. Their best chance for housing in the cities would come from a loosening of building restrictions.

In health care, popping the bubble means handing the now-existing institutions a fixed sum of money, telling them to “take care of the problem,” and if they can’t, then telling them that new institutions that can will be permitted to come into being through market forces. One example would be in-state health insurance markets being opened up to out-of-state competitors. Another example would be the easing of state certificate-of-need regulations that currently prevent health care entrepreneurs from competing for customers. A third approach would be trimming down the supervisory health care bureaucracies, including accreditation organizations, that increasingly issue well-intended regulations that actually compromise patient safety while also raising the cost of health care.

p(firstLetter). Almost 30 years passed between Ricardo’s book on economics and the repeal of the Corn Laws in 1846. The alliance of workers and capitalists finally broke the power of the landowners and gained the importation of cheap food. But it took time. So will today’s struggle.

Unlike the old Left-Right model, Ricardo’s model is not a continuum with only two points but a triangle with three. Desperate workers sit in one corner, many of them accomplishing little more than subsistence. In the second corner sit the capitalists who feel cheated by their efforts, as they save and invest, but then find their profits shrunk by wage increases. In the third corner sits a consortium of colleges, health care institutions, and homeowners content with their ever-growing spoils. Given that our workers and capitalists have yet to fully grasp the nature of their problem, and therefore usually keep pushing the wrong solution—more government—and given that our “landowners” will not surrender easily once our workers and capitalists do push for the right solution, Ricardo’s model will likely explain our predicament and our politics for some time.

The old Left-Right continuum stripped an important aspect of the world to its essentials and laid things open for everyone to examine. It was unreal in the sense that it failed to take into account non-economic motives such as culture. But by simplifying the world it did elucidate vital questions about fights over money.

Ricardo’s triangle also involves much simplification, as all thought experiments must. Like the old Left-Right continuum, it fails to take culture into account. For example, Alexandria Ocasio-Cortez’s support for open borders may be based simply on ethnic affinity and with no deeper rationale. “Values” voters exist whether workers and capitalists relate to each other as opposite sides of a continuum or as two points of a triangle.

Nor does Ricardo’s triangle take into account the qualitative improvements in health care, housing, or higher education over the past forty years that might substantiate the new high prices. Yet this point poses less of a challenge to the integrity of Ricardo’s triangle than the cultural argument does. After all, better health care, housing, and higher education are useless if they have grown so expensive that workers can’t access them.

In addition (and speaking from experience), the notion that health care and higher education are four times more valuable than they were in the 1980s, and therefore worth the price rise, is very suspect. In health care, the period between 1980 and 2018 cannot match the dramatic pace of medical discovery that occurred between 1940 and 1980, although health care costs increased at roughly the same 4 percent rate during both periods.9 The practice of anesthesiology, my own specialty, for example, hardly differs from its practice when I finished my residency in 1989. In higher education, standards have actually declined compared to 1980, as many colleges now offer what was once considered a high school education.

Ricardo’s triangle does essentially the same thing as the Left-Right continuum of old did, but as a triangle it arguably does a better job for our time in piercing through the distractions of everyday life and explaining the current array of forces. Like most economic models, it is basic, bare, and unadorned. It views people as two-dimensional characters. Yet it offers a powerful tool of abstraction to our politics and gives us a new way to plot the direction of their current.