Professor Richard Epstein, pioneering Libertarian legal scholar, joins Jason Hartman to explain how income inequality is good for society, but is very dependent on the methods used to produce the best outcome. The current methods our government are attempting to use are causing job losses, it blocks gains in trade, the need for further public assistance increases, which in turn increases taxes, “yet another implicit drain on voluntary transactions,” Richard illustrates. He provides examples to demonstrate the consequences of equality by egalitarian efforts of our government versus voluntary redistribution. Listen for more details at: www.JasonHartman.com.
Richard A. Epstein is the inaugural Laurence A. Tisch Professor of Law at NYU School of Law. He has authored several books, including Design for Liberty: Private Property, Public Administration and the Rule of Law, The Case Against the Employee Free Choice Act, Supreme Neglect: How to Revive the Constitutional Protection of Property Rights, and many more. Richard has written numerous articles on a wide range of legal and interdisciplinary subjects. He has taught courses in administrative law, antitrust law, civil procedure, communications, constitutional law, contracts, corporations, criminal law, employment discrimination law, environmental law, food and drug law, health law and policy, legal history, labor law, property, real estate development and finance, jurisprudence, labor law; land use planning, patents, individual, estate and corporate taxation, Roman Law; torts, and workers’ compensation.
He also writes a legal column, the Libertarian, found at http://www.hoover.org/publications/defining-ideas/libertarian-archives, and is a contributor to Ricochet.com and the SCOTUSblog.
Jason Hartman: Welcome to the Creating Wealth Show. This is your host Jason Hartman and this is Episode Number 312. Thanks so much for joining us today. Today we have a great guest and we’ll have that in a bit here but first I’ve got Steve on and we want to talk to you about a couple of current events and properties. Steve, how are you doing?
Steve: I am doing fantastic. Glad to be back on the podcast talking about the latest shenanigans happening out there, which we’ve got some good ones today.
Jason Hartman: Yeah, and the last time you were on the show, we talked about my upcoming retirement. That was of course the show that we published on April 1st and I — I don’t think people quite got that. We’ve got to give them a lot of clues.
Steve: I warned you. I warned you that would happen.
Jason Hartman: Yeah, well you know, it was a little risky, but I guess my retirement was very short lived, huh?
Steve: Yeah, you’re already out. I knew that was going to happen.
Jason Hartman: I’m already back at work.
Steve: Yeah, yeah. You didn’t stand a chance.
Jason Hartman: I’m — I’m going to try and do though what Tim Ferris and the former work week suggests. By the way, I know a lot of people that know Tim personally and I — I hear he works like 65 hours a week, but I don’t know if that’s true or not. They just say that sometimes.
Steve: I think that that book is probably some of the most genius marketing I’ve ever seen.
Jason Hartman: It’s great marketing. And you know, there’s some great ideas and it really did change my thinking a lot, although I’m honestly not too interested in the four hour work week personally and I don’t know how many people really pull it off. But it did make me think of my businesses in — in a lot of new ways. It was kind of a paragon ship and of course, very well marketed. No — no question.
Steve: Yeah, yeah. You tell Americans that you only have to work four hours in a week, I mean who’s not going to buy that?
Jason Hartman: Yeah, they were thinking the French had it so good at 35 hours a week, right?
Steve: Right.
Jason Hartman: Six weeks vacation every year. But what he does say in the four hour work week is he talks about taking mini-retirements, not really retirement, but taking a whole lot of mini-retirements throughout your life. And I’m going to see if I can take a little time off this summer. I really am going to try and do that a little bit and — but I’m still going to do the show and broadcast from different locations around the world. And so that might be kind of fun. We’ll see how it works out. But hey, since I’m not retiring let’s talk about some business stuff here. What do you want to talk about first? Do you want to talk about student loans or do you want to talk about my friends and their debate and about a $3,000,000 cap Obama wants to see on retirement accounts?
Steve: I think we should start with that one, because that’s a dozy and just like almost everything else that they do, the Government doesn’t sweep in with some horrifying legislation. They just give it to you little by little, and before you know it, you look back and see how far you’ve got.
Jason Hartman: Yeah, in other words you eventually see that your money has been taxed away and your freedom has been taken away slowly but surely. It’s like a business plan, they just slowly, slowly, inch by inch invade your space and — and that’s — that’s the problem is keeping Government at bay. I mean, we need Government. You know, I like Government but I think it’s big and unruly and it’s always a power grab and a wealth grab and that’s just the way things always deteriorate. So, what’s the latest on Obama saying that you don’t need more than $300,000,000 — $300,000,000 — see I think big, naturally.
Steve: That’s right.
Jason Hartman: You don’t need more than $3,000,000 to retire and — and by the way, I should — I should point out that the very famed O.J. Simpson case that if anybody remembers back to the ‘90s. I remember I was in Yosemite watching the chase in the white Bronco, but that famed case, O.J. in the civil suit, protected about I think 3.3 Million Dollars of money that he had in his retirement account. That’s why it was protected and then he — he you know, bought a house in Florida and it had a homestead there and so Daniel Petrocelli was not able — even now, I don’t think has not been able to recover anything although I don’t know if there’s been some break in that at any time in all these years. But — but so Obama says we only need $3,000,000, huh to retire? That’s all we deserve, us little people, us — us little peons, us peasants?
Steve: Yeah, I — I — he must have some kind of a — a table that has told him that that’s what we need and that we should be fine. There — the buzz about this is some official — this was on the — the hill — that website, hill. They found some official who said — and I’ll — I’ll just quote it here and see if you can find the really fun key word, Jason.
Jason Hartman: Oh yes.
Steve: Yes. According to the Obama Administration, it’s only fair to spend a total of $205,000 in nominal dollars per year on retirement, but not more. Did you find the key word?
Jason Hartman: Yeah. Nominal — nominal — nominal is — is that word — that definition of nominal, it means in name only. And you know, we talk about this all the time Steve, in the — in the Creating Wealth In Today’s Economy Boot Camp, which we’re going to have in Memphis, coming right up here in — oh gosh, what’s that about less than 20 days away. I hope you’re all joining us. But it’s amazing, because I — I — usually to demonstrate this, I pull a 20 dollar bill out of my wallet and I say, “What is this called”? And the audience invariably says, $20 or a 20 dollar bill. And then I say, “What was it called 50 years ago”? And they say, well it was called $20 or a 20 dollar bill, in name only in nominal that is the name, $20. The question is what is the value? The value’s the moving target because obviously, 50 years ago $20 would buy you a lot more than it will today.
Steve: Yeah right, right. So, it — it’s highly ironic that you know, with all of the money
printing that they’re — they’re allowing to happen and that they are facilitating by the aggressive spending, they’re saying that we only need $205,000 nominal dollars per year on retirement and that may sound like a lot right now, but you know at this rate, I don’t know.
Jason Hartman: Yeah. And — and I mean, think about it. Why does the Government get to choose? I mean that’s just unbelievably arrogant that the Government would put any number on what our retirement is supposed to be. And you know what I think this is really leading up to, Steve? It’s leading up to the ultimate — and I’ve been predicting it for many years, the confiscation of retirement accounts. Or I shouldn’t say “confiscation”. That’s actually kind of the wrong word, nationalization of them and putting them under Government control because if — if they — if they can get you used to slowly the idea that these are the numbers — this is the numbers — we’ve defined that. We’ve — we you know and everybody’s mind eventually comes to accept these things, $3,205,000 per year. They don’t know what nominal verses real means, most people. And then — you know, if you retire in 10 years, I mean even with today’s inflation rate, and forgive me, I should have this handy, and do an inflation calculation, but that $205,000 is going to be worth about half, I guess, somewhere around there in 10 years.
So, if you’re 55 today and you’re 65 in 10 years, and you want to start taking money out of your account that so far is — has not been nationalized by the Government, it’s only half in real value, so really, really unbelievably arrogant.
Steve: It’s — it’s a big problem and it’s — it’s them deciding what’s fair and what’s not. There was another quote from the story I’m looking at that — this came from Zero Hedge, but this is quoting that the same official who said under current rules, and I’m — I’ll back up, I’m sorry. This is regarding retiring accounts. So they say, under current rules some wealthy individuals are able to accumulate many millions of dollars in these accounts, substantially more than is needed to fund reasonable levels of retirement saving.
Jason Hartman: So — so that means — that’s insane that they can say something like that —
Steve: I know.
Jason Hartman: — some people have been able to accumulate more money, as if there’s something wrong with that.
Steve: Yeah, it sounds insane. What’s substantially more than is needed?
Jason Hartman: Those sneaky people —
Steve: Yeah.
Jason Hartman: — those sneaky people. And it’s more than is needed. Is that right out of the Karl Marx’s Communist Manifesto Workbook? I mean this is insanity that — that —
Steve: It is, it is.
Jason Hartman: — our Government is actually thinking this way. It’s just mind boggling. But, those are such great quotes that you brought to our attention, Steve. So, thanks for bring those up, but this is inspired quite an argument last week between a couple of my friends. And you know, I’m copied on these emails and they’re — they’re quite interesting and I finally got a chance to — to actually read them as they were passing by as I was cleaning up my email box over the weekend, which by the way will never be cleaned up. I’ve just given up on that idea, but I’m never going to have less than maybe 600 or 700 emails in my inbox. It’s ridiculous, but let’s talk about that argument.
So, my one friend, we’ll call him Greg. Let’s change the names to protect the innocent, and the other friend we’ll call him Paul. But you know it’s interesting, from a Zero Hedge commentator, Paul is saying to Greg — no, no, sorry. Greg is saying to Paul — see, I’m mixing myself up by replacing these names here, that I appreciate your optimism because he wrote back on this article that it oh, wasn’t that bad, blah, blah, blah, but it’s misplaced. And they’re talking about this article and my one friend, Greg is almost a total Xpad. He’s basically gone and pretty much has cut a lot of ties with the United States, okay.
And — and then, why don’t you — if you want to share maybe just some highlights of the next one, Steve where Paul is writing back to Greg, thank you for your concern. I do appreciate that. I’m okay, saved a couple of bucks. You know, have decent business prospects. You want to just comment on that one, because it’s interesting he talks about his Chinese clients.
Steve: Well yeah, he says things could be worse. We could be in Texas or Europe or Asia. Coast — Coastal South Orange County is kind of tough to beat. But you know, he’s talking about how he met with some Chinese immigrants and they were just grateful — grateful to be there, you know. So he’s basically saying hey we don’t have all out Communism. You should be grateful for that.
Jason Hartman: Yeah, yeah. Well — so, I kind of take a middle road on this, but you’re going to hear the way I sum it up and so far no one’s debated with me too much on this email threat. But — but these Chinese immigrants that he’s talking about — he’s a commercial real estate broker. He leases and sells industrial properties in Southern California, and so he toured them around the building that he has for sale in Chino Hills and you know they own a factory in China where they make stuffed animals and candy, and their distribution to North America, South America and Europe will be in the inland empire in the United States, in California of all things, okay. And he’s saying that, you know, he golfs every week in Industry Hills in Diamond Bar and when they have to go back to China a couple of times a year, that’s the way they phrase it, they only have to go back a couple of times a year. They think they’ve died and gone to heaven to live in the leafy, suburbs of Chino Hills, California.
Their 11 year old son is doing great. Will beat his father in golf one of these days and — and — and you know, he’s talking about the filthy air in China and how dangerous it is — dangerous it is and they’re happy and grateful and they just got a brand new Seven Series BMW, and — and then he puts this great article, which we don’t have time to share it, but it’s from the Wall Street Journal. But everybody should go read it. It’s an opinion piece and it’s called the Statesman’s Friendly Advice, and I read that article. It was — it was pretty interesting.
But Steve, let’s go up the thread here and look at the next salvo, and that’s all about–– Paul, just in case you haven’t gotten it, you know, Obama proposes a retirement account limit as — as the first wealth tax — the first wealth tax and Obama’s wanted to do that. You know what’s scary about these wealth taxes and really capital gains or tax on any investment is the concept Steve that you’ve already earned the money. You pay taxes to earn the money and you bought the asset and then later the Government is chipping away. And again folks, this is my whole theory of why you need a self-directed retirement account and you need to be holding that in income property, because it’s much harder to get. It’s hard to value, it’s fragment, it crosses different jurisdictions.
If we do have any kind of nationalization attempt, they’re going to go for the low hanging fruit. They’re going to go for the brokerage accounts, the my end bank accounts, things like that are really easy to do, especially things that are leveraged. Again — again, a — a good point. But is there anything you want to say about this next thing where he’s got CONFISCATION in capital letters and blah, blah, blah?
Steve: Well, he’s making a point that — and I think that there is some validity to it that this is where it begins.
Jason Hartman: Yeah, true.
Steve: You know, it’s about —
Jason Hartman: It’s a slippery slope.
Steve: It’s about — yeah. It is a very slippery slope but the point he makes at the end, I really agree with. He says, remember the income tax started only with the rich.
Jason Hartman: Well —
Steve: So, figure by the time you retire, that $3,000,000 you can have in your retirement account is going to be more like $300 grand which is what you and I talked about earlier, and they’re going to force you to put it into Government Bonds. They don’t do this just in one fell swoop, you know like the Castro Revolution in Cuba.
Jason Hartman: Yeah, in 1959. They have — no — no question about it. It’s always a slippery slope because that’s a much more powered able way to do it. And this really, Steve is why I think Governments just love to inflate their way out of their problems because that’s a nice, easy way to just boil the frog slowly.
Steve: Yeah, because they’re helping the — the poor end down frogging along the way. That’s where —
Jason Hartman: Right.
Steve: — this inflation is all due to the heavy entitlement so they have to inflate, so they keep getting re-elected in the process.
Jason Hartman: Right. And they maintain — so they maintain their power in that way. They debase their foreign debt, and by the way, I just finished the audio book of This Time It’s Different, which is a pretty interesting — and it’s — it’s like a whole history of sovereign debt and in — internal domestic debt and sovereign debt, debt owed inside a country and outside a country. Very interesting, hundreds of years of history about that, and talking about the countries that are the biggest defaulters and just how they inflating — inflating your way out of debt is the ultimate business plan. It really is far and away the most powered able way do it. It really — it really makes a lot of sense for Governments.
I’m not saying it’s right, I’m just saying they do it because it — it’s just the most powered able way and our whole investment philosophy is structured to make our clients wealthy by — by letting the Government do this. All the things that normally hurt most people, it helps us because we are gaining the system. We’re doing it legally, we’re doing it based on incentives the Government has aligned for us through the banking system and through the tax code. It is the ultimate investing equation on steroids far better than any other way, at least I know of, that you can do it.
Well, let’s go to that article where it’s Greg writing Paul, not article, but email okay? And this where it gets interesting. He — he — he says, Paul C Country is out of money, period. Just public debt alone is 16 Trillion Dollars. Add unfunded liabilities and the number goes five to 10 times that amount. The FSA needs to be fed and drugged. They have the votes. The Confiscation will be “legal”. I cannot afford it to happen in my 80s and I should — and if I should be fortunate to live that long, I’m working on Plan B. Greg.
And now here’s Paul’s — these guys get kind of — they get kind of mean, you know.
Steve: Yeah, they — they get after it here.
Jason Hartman: They — they do get after it but — but then — then Paul replies back and then you’re going to hear my reply and then we’ll be done with this, okay. Paul replies back he goes, well why don’t you share this one, Steve? Do you see where I’m talking about?
Steve: Yeah, I can summarize it you know as out of money? How can we be out of money when we still have income paper?
Jason Hartman: So he’s being sarcastic, Ben Bernanke, yeah.
Steve: Yeah, that’s right, like you do at the seminars but you know — and then — then he says, and I dare the Khicongs to come and get their money back. Please, ain’t going to happen and they know it. How do they know that and he — he pasted below a picture of the USS Ronald Regan Aircraft Carrier that — you know, that by itself is powerful than most Military’s on — on earth. And just basically saying that anything that we don’t have that we don’t “have the money for”, and we’re just going to go get it and that goes along with what you’ve been saying all along when you’re the reserve currency and you have the Military that we do, it definitely allows you to prolong the inevitable.
Jason Hartman: Yeah, you can — you can throw your weight around a lot, and Paul is absolutely right in this email to Greg because you — he says, and I dare them — and — and I dare the Khicongs to come and get their “money back”. They’re — they’ve got our debt, they’ve got our Treasury bills and they’re going to be — they’re going to be debased in value, and that’s just the way it is.
And so, the point is when Greg talks about the math, Greg is absolutely right. And this is where most people miss it, in my opinion, is that the math becomes less and less important. So, here’s my reply to all these guys arguing. There were a few other people in the thread that weren’t chiming in yet but here’s what I said. I have to agree with Paul on this one. It seems illogical Greg, but the math doesn’t matter so much when you have the world’s reserve currency, largest economy, most powerful Military, massive natural resources, exceptional geography, international language and a 230 plus year “brand” that is synonymous with freedom, innovation, stability and opportunity for seven billion people around the world.
Yes, America is in decline, but it’s going to take a very, very, very long time to dislodge the valuable assets I mentioned above. And Steve, I mean can you argue with me?
Steve: I — I can’t because in — in every case when we go back through history and — and we look at people who have debased their currency and — and have had economic problems, none of them have —
Jason Hartman: None of them have what we have.
Steve: — positive assets.
Jason Hartman: Yeah, yeah.
Steve: They don’t have all these things, so we — we ultimately don’t know what it would take to — to “bring down America” as the top dog, so to speak, but it’s going to take a lot.
Jason Hartman: This whole dooms day picture of America is completely overrated. Yes, America has problems. Yes, America’s in decline. Yes, things are going to hell in a hand basket, but it could take generations, I mean like another 200 years. It could take 20 generations, 250 years, whatever a generation is considered. Probably about 25 years before — I mean, we could just kick this can for a long, long, long time. And then the next question Steve is the one I always ask about investments. Okay, so America’s in decline. So America’s got problems. Compared to what? I mean nobody else has the largest economy. Nobody else has the international language, English. I mean, think about it, you — if you want to fly a plane anywhere on the planet, do you know what language you’re speaking in Aviation, English. That gives us a huge advantage just right there. No one has our brand and — and our geography is so defensible. I mean, isn’t it amazing we’ve never fought a war on our own land because it’s so hard to get to. Okay. I mean you know, unless Canada or Mexico are going to pick a fight with us, this is a great piece of geography.
If you’re in Europe or Russia or Asia, I mean that’s just really not good in terms of — we have this giant mode of two oceans around us. It’s a very good piece of geography we’ve got here.
Steve: Yeah, and — and this is one of those instances where globalization really is and America’s favor because it’s — the world is so interdependent now and with the size of America’s economy, you know, everybody — well most people do have an interest in America doing well. I mean it’s at the forefront of consumerism and you know, all these other countries, a lot of what they do depends on what’s happening in America. And — and so it — it doesn’t make sense for some kind of scenario where America falls flat on its face. And — and like you said, it would take such a — a unique set of circumstances to happen very quickly for — for something like that to — to occur.
Jason Hartman: Everybody’s talking about the demise of Grease, Italy, Spain, Portugal, maybe Ireland, Japan, for sure — Japan’s got terrible math, okay. They’ve got huge problems and — and they’re talking about how other countries would bail them out because they’re just — Japan is too important.
Hey, Grease was too important. Spain and Italy are too important. Can you imagine if it’s America? I mean, what country is going to like — well what, China’s going to go to war with us? They’re going to kill their best customer? Are you kidding me? It’s — it’s — folks, just think about this stuff. Everybody has an interest in keeping America going. Yes, there’s going to be gradual inflation, maybe hyperinflation, whatever that means. Get your investment ducks on the road and follow our plan because we are the ones that have the plan for the GL political environment in which we live. Okay, let’s switch gears, Steve.
Before we get to the student loan thing, let’s talk about a couple of properties real quick.
Steve: Yeah, of course. One of them being in our — one of our very favorite markets in Atlanta, Georgia and I — I’ll tell you, there’s a few things I like about this property right now. This is what we would call a tier one, meaning it’s a — a newer construction. This one was built in 2004 and it’s a four bedroom, two baths. So, it’s a good home you know for a family to rent and hey, if you wanted to exit in five to seven years and resell, you would have some very substantial upside, because get this Jason, you’re into this thing for only $38 a square foot.
Jason Hartman: That’s unbelievable. That’s way, way below the cost of construction.
Steve: Way below. It — it’s 2,790 square feet. It’s a nice brick exterior with a two car garage, a two story house. It — it looks like a great property. I would live in this thing and you’re still getting a 12 percent cash-on-cash return on the property and a 35 percent total return. But keep in mind, I noticed that the local market specialist for whatever reason in their mortgage assumptions for this property, they’re basing this on an interest rate of 4.75 percent, and a loan to value ratio of 75 percent.
What I’m seeing more frequently from our clients though, assuming they’ve got good credit and no black marks and good debt income ratio, they’re getting below 4.5 percent. Usually four and a quarter in many cases and if it’s one of the first four properties they do, they can get 80 percent loan-to-value, meaning they’re only putting 20 percent down. So, you can see a whole different set of numbers come out. I think this is conservative, and this is one of the better deals I’ve seen come out of Atlanta in a while.
Jason Hartman: Yeah, fantastic. That’s good, good. But you quote on the performer there. Did you quote the projections on the rate of return?
Steve: Yeah, rate of return meaning 35 percent? Is that what you’re talking about?
Jason Hartman: Yeah, 35 percent annually. Wow.
Steve: Yep.
Jason Hartman: Unbelievable. And that’s with all the assumptions and their vacancy rate, etcetera, right?
Steve: Yeah, and — and — exactly right, yeah as they always are in there. But I think, you know with how you’re buying you know —
Jason Hartman: Yeah.
Steve: — on your cost of construction here, or below the cost of construction, this deal’s a home run.
Jason Hartman: Fantastic. Okay, give us one more.
Steve: This one is in the Austin, Texas Metro area.
Jason Hartman: Austin, Texas. Oh, okay.
Steve: Yes sir. We’ve just started doing some properties there again. We were there for quite a while back before the boom and got priced out of it and now we’re back. And this is a — a market where you’re buying — you’re getting a little bit lower cash-on-cash, but you’re thinking hey, I would like some gravy here. I would like some growth. We obviously never invest just for that. Growth is above and beyond the cash flow, but on this one in Austin, we’re getting eight percent cash-on-cash for 39 percent total return and this is a — a fantastic property, a fantastic area because our — our Austin LMS told me the other day and I think you and I mentioned this when we were going through the case studies. They saw 14 percent increase in their asking price in the Metro area last year. So, it’s a — it’s performing very aggressively, has that low unemployment rate of 5.6 percent and you have huge companies moving to Austin very regularly, plus the big education presence that we have in the Metro area.
Jason Hartman: Yeah.
Steve: I just —
Jason Hartman: And — and the big Government. You’ve got three big employers. You’ve got Tech companies and you’ve got the University of Texas, UT, which is a huge campus, maybe the second largest in the Country, I believe. And then of course you’ve got the Government and the damn Government never goes out of business.
Steve: That’s right. And the Government’s right there behind the education sector, as we will talk about here shortly.
Jason Hartman: Right. And — and that’s a whole other different kind of scam. But yeah, it’s — it’s amazing. You know, I don’t know why, Steve that — this is what’s interesting too is, I always like to say the geography is less meaningful than it’s ever been in human history, and that is definitely true, but still meaningful. There’s no question geography still matters, okay, it just doesn’t matter as much as it ever did in the past. It matters less than ever before in history and that’s for reasons I’ve discussed in depth on prior shows — prior episodes. So just listen to them if you want to hear what my thoughts are on that.
But, it’s sort of interesting. It’s like why doesn’t all of Silicon Valley just move to Austin, Texas or some of the other tech areas around the Country that are much more business friendly than the Socialist Republic of California? And I — I guess they are doing it. There’s — there’s some doing of that, right but not — not enough in my opinion. I mean it’s just surprising that there’s still so much tech in — I mean, look at the movie industry in — in Southern California. So, you’ve got the tech industry in Northern California, you’ve got the movie industry in Southern California and the movie has abandoned ship a lot. I mean they’ve just — they’re filming all over the Country, all over the world, now and they didn’t used to do that nearly as much as they are now days.
I remember when I was in Wilmington, North Carolina a charming little City, little Town and we looked at doing some business there and I scouted that market a few years ago and — and that’s where Dawson’ Creek was filmed. It’s just a charming place and didn’t really open it as a market but I’m glad they got to explore it. They talked about how many movies and TV shows were being filmed there and things like this. And you know, in Florida there’s a lot of that going on and just in a whole bunch of other places. Even Detroit by the way, terrible Detroit, which thankfully now believe it or not Michigan became a right to work State a couple of months ago. That is mind boggling. But let’s not get off of a tandem here.
You know there’s even a — a bit of a movie industry in Detroit but the tech industry doesn’t seem like it’s abandoned ship as much as the movie industry has. Maybe it just takes a little more time, I don’t know. Thoughts, if any?
Steve: I — I don’t know why. It does seem though that they are expanding it to other areas. I — I don’t know that they’ll continue to grow their — their business in Silicon Valley. I mean we know that Apple, part of their — their business is headquartered in —
Jason Hartman: Nevada.
Steve: — Reno, Nevada and that saves them a couple of billion a year in tax.
Jason Hartman: Yep, I remember that article, Liberal Apple with Al Gore on their Board and —
Steve: Yeah.
Jason Hartman: — all — all their liberal ideals that when it comes to taxes, they act pretty Republican, don’t they?
Steve: They certainly do. And they — they have an office — a large office in Austin. So does Google.
Jason Hartman: Yeah.
Steve: So does Dell. Right here by my house in — in Utah where I live, Adobe just finished building their new headquarters. Intel Micron is down the road, you know. Micro Soft has an office here too. So, you know they may not be jumping ship but I don’t think that they’re putting all their eggs in that basket, either.
Jason Hartman: Yeah, that — well that’s for sure, that’s for sure. But you know, Austin you have a lot of have a lot of little start ups and things like that too. It’s just kind of interesting. So you know, something to keep monitoring and I’m not — I’m not saying anything conclusive here, I just think it’s kind of interesting to notice.
Steve: Yeah.
Jason Hartman: But hey, we got to get to our guest. Let’s just very quickly touch on the student loan debt thing. This article has decided housing’s big challenge, One Trillion Dollars in student debt. And you know, I’ve been talking about this for a long, long time. This is what is going to keep, in my opinion generation wide, the largest demographic cohort in American history from becoming home buyers as soon as they might want to be — they’re going to be renters and they can rent from you. The demographics in terms of renters coming at rental housing over the next decade, are nothing short of phenomenal.
And Steve, I’ve just got a little — like two minute video here I’d like to play and then we can make a couple of comments and get to our guests. Okay?
Steve: Fire away.
Jason Hartman: All right, here we go.
Tyler: Affording a home is getting tougher and tougher, especially for first time buyers. Diana Olick is looking at housing’s Trillion Dollar headache. Diana.
Diana: Well, that’s right, Tyler. Affording a home is getting harder because more Americans than ever are saddled with student loans and it’s showing up especially among first time home buyers who are lagging in the housing recovery. Now total student loan balances nearly triple between 2004 and 2012 to a debt burden of about One Trillion Dollars according to a new survey from the New York [inaudible]. In fact, student debt in the U.S. is now second only to mortgage debt and in turn has a direct affect on getting a mortgage.
Tyler: If you look at the average student loan balance, it’s about 30 — $35,000 per — per person or per student. So, if you take a family of two, that’s 60 — $70,000. I mean in certain markets that’s almost a mortgage payment. That’s almost as much as a house would — would cost. If you look at the immediate income a mere price of $200,000, you’re talking half of the — half of the house.
Diana: And that directly hits first time home buyers like Sophia Charley who has $60,000 of student loan debt from graduate and under graduate schools. She had to move back in with her parents and stay there far longer than she expected and her debt is now affecting the home she is finally buying.
Sophia: Without a student loan debt, a year and a half to two years earlier would have been the time in which I could have afforded a house two years ago, and probably something a little bit bigger.
Diana: Now adding to that burden is the fact that one-third of borrowers on their student loans are delinquent and that’s going to keep them out of the mortgage market for many years to come. We’ve got plenty more online. Realtycheck.CNBC.com. Simon.
Simon: You know it — it is a huge dynamic. Some people are talking about a lost generation. On the one hand they’ve got the debt from college, 100 — 200,000 if you studied from the bar. On the other, they’re just aren’t the jobs for those young people, as we saw in the Employer Report on Friday, Diana.
Diana: That’s right, and it’s just getting harder for them as they build up these debts to be able to think about even putting money down on yet another debt which is supposed to be the largest of their lives, being a mortgage.
Simon: Okay, Diana Olick in Washington for the moment. Thank you very much.
Jason Hartman: That’s interesting, Steve. I feel really sorry for that lady, Sophia, with $60,000 worth of not dischargeable in bankruptcy student loan debt. You never get a second chance on a student loan, huh?
Steve: Yeah, she probably got her degree in you know, playing the underwater bongo drums or something.
Jason Hartman: Yeah. It is — it is amazing how misguided this generation — they’ve just been coned. And you know, listen I’m a fan of higher education. I — I’m — I consider myself to be a pretty self educated person, but I — I got to tell you, college has turned into a bit of a scam and maybe more than a bit, actually. So —
Steve: Yeah, it — it’s a racket. She said the total student loan balance tripled since 2004. That’s insane.
Jason Hartman: Yeah, it’s totally insane. It’s — it’s doubled — tripled and sometimes quadrupled the rate of in — inflation. There’s no way a tuition should be that expensive. If the Government would stop insuring loans, the universities would have to get more competitive, if the money wasn’t pumped into the system. This is classic definition of inflation. So many dollars chasing a limited supply of goods and services, and this whole thing has got to be revised. It just doesn’t work, and the point is though, for us as investors, is there’s going to be a lot of renters that can’t buy a home. So, serve them, help them out. Provide rental housing to them so that they don’t have to live in some crumby apartment. They can at least live in a single family home that they can rent from you or they can live in a nice four plex or something like that. And it’s just a much better scenario. So, we’ll give them some other options and I think our investors are providing a really good service for them. Any closing comment on that?
Steve: No, I think they’ve said it all — all pretty well. You know, there’s — there’s more demand and there’s going to continue to be more demand from renters. We always talk about here how when somebody gets foreclosed, that’s somebody who still needs a place to live. They don’t get wiped off the books.
Jason Hartman: Right.
Steve: So, people panicking about, oh there’s going to be too many — too many rental properties. Well, there’s going to be just as many renters, and according to this, a lot of people who can’t buy houses — and there are two alternatives, move in with the parents or rent a property.
Jason Hartman: Or become homeless.
Steve: Yeah, right.
Jason Hartman: Not a good alternative.
Steve: Rent under the bridge.
Jason Hartman: Exactly. So a lot of good things going on for investors. A lot of good demographics coming to the rental market pusher. Okay hey, without further a due, we’ll be back with our guest in just a moment and we will look forward to talking to you on the upcoming shows too. We’ve got some great shows coming up and here is our guest. We’ll be back with that in just a minute.
Female Voice: Jason provides an extremely unique service, deal evaluator. Are you interested in a property outside of our network? Need a second opinion? No problem. Let our experts evaluate the deal. Find out more about it at Jasonhartman.com.
Jason Hartman: It’s my pleasure to welcome Richard A. Epstein to the show. He is a Professor at NYU School of Law. He has served as a Senior Fellow at the Hoover Institution since the year 2000, and he has many books, but I’ll just give you a couple of the titles that I like, Design For Liberty Private Property Public Administration and the Rule of Law, the Case Against the Employee Free Choice Act and Supreme Neglect, how to Revive Constitutional Protection of Property Rights. Richard welcome. How are you?
Richard Epstein: I’m very fine, thank you.
Jason Hartman: Well good. It’s a pleasure to have you coming to us today from Palo Alto. You’re in Silicon Valley, and I don’t know — where can we start? Your body of work is so large, but may — maybe on the income inequality question. Now days it’s — it’s popular to talk about back from Joe the Plumber, I guess and of course, Obama, redistribution of wealth, income inequality and — and frankly, my impression is that income inequality is becoming — if it is a problem at all, a bigger and bigger problem as the — the rich are becoming very, very rich and the middle class seems to be disappearing. That’s — that’s my impression.
Richard Epstein: The whole question of equality is extremely important. The harder question is to figure out what particular methods you can use in order to achieve it. And this is a case where indirection out performs direction. While the President seems to be committed to a very high progression taxes on the one hand, and to master programs of entitlement benefits on the other. The consequence of that, at least in the short run, has been a steady decline in middle class income so that it’s now down to about the levels that it was in 1996. It is to some extent offset by transfer payments, although those are very unevenly divided amongst various people, and in effect what has really happened is that the effort to run the transfer system and the regulatory system has resulted in the following fast end bargain no longer has situations where opportunities of value for what you can acquire from them.
What you’re told is that you’re going to surrender those implicitly and receive an exchange fixed sums of cash. For many people it turns out, although they’re not making it consciously, this is a very, very bad bargain. And so then the question is, how is that you’re going to engage first in the creation of wealth, which will then reduce the pressures on redistribution? This is not an easy thing to do if you believe in effect that virtually all voluntary arrangements are to some extent exploitive as many people in the White House and in the Democratic Party seem to think.
What happens therefore is you block gains from trade, the levels of employment go down, the need for further assistance through the public sector starts to increase, that increases the taxes which are yet another implicit drain on voluntary transactions, so that what you have here is a situation which you’re trying to build a larger and larger transfer society with a smaller and smaller fix.
Now, this theoretical difficulties with respect to egalitarianism start from one very simple kind of proposition. Do we want to make a world in which everybody is better off or do we want to make a world in which everybody turns out to be more equal? You cannot in effect do both things at the same time. So, to give you an illustration of how this difference plays out, assume you started at a state of nature where two people have exactly equal endowment, and then what they do is they enter into a voluntary transaction in which one of them doubles their wealth and the other quadruples their wealth. The question you have to ask yourself is the greater inequality something that you’re worried about or is the fact that both parties are better off in the transaction something that you want to celebrate?
And egalitarian is actually in some ways more troubled by distribution of 30 against 40 and then a distribution of 15 against 15. And the question you have to ask is what? And their view about it is that the spread that really matters. It’s a sense of relative deprivation that really matters. My view about it is they get it exactly backwards.
I to the extent of you dealing with voluntary transactions don’t think you want to worry at all as a public matter about the distribution of the gains. That’s something which you ought to let the private parties do for themselves, as they happen to see fit. And at that point what happens is you will get large numbers of transactions, not single isolated ones, and this constant, repetitive situation, that virtuous circle that you could create by increasing wealth, will in effect swamp the distributional efforts that you want to get by Government programs which shrink the total amount of wealth in order to create the equality that you have.
So that what really is going on in this case is that the debate about income inequality is that you start to see is divorced in some crazy way from depression of how you start to deal with the growth stuff and what you do therefore is you get a situation in which the only way in which you can achieve equality of the sort that many people want is through a form of leveling down rather than a form of leveling up.
I did a broadcast on Paul Solomon show on the Public Broadcasting Network about a year and a half ago in which I quoted wrongly, it turned out Abraham Lincoln for the proposition that you do not make the poor rich by making the rich poor. It turned out that Lincoln did not say that but it would have been nice if he had, but if you think about this, the truth of the matter stated therein as some lawyers like to say, it turns out that there’s a great deal of truth with respect to that situation.
So what happens is you start to go forward. Is the amount of wealth that you will have in this sort of Megan class will start to shrink, given the reductions of productivity. Capital will be taken away from people who know how to invest it best and sort of put into other people’s hands will turn itself into consumption and that means, in effect, that we’re going to over consume today and under save tomorrow. So in the long term, dynamic consequences of this constant effort for equality, turns out to be everybody will be worse off. The object in legal terms or in economic terms of this society is to try to create what we call parade of improvements, have transactions with a voluntary coheres which leave everybody worse, better off and nobody worse off. And the consequences of this Whoa on inequality is to have — not parade of improvements but the parade of declines. And you will make everybody worse off, some people directly from taxation and other people indirectly through the loss of opportunity.
Jason Hartman: Okay. So — so — so hang — hang on a moment. That’s a lot to follow what you just said.
Richard Epstein: Okay that’s my — I’m – I’m —
Jason Hartman: So — so let me — let me — let me just ask you a couple of questions about it.
Richard Epstein: Sure.
Jason Hartman: And I want to — I want to make sure everybody understands what you’re saying. So, the first question I would have and maybe this is a little bit of the Devil’s Advocate here, you know and of course I agree with you, okay, but the — the egaliarterians would — they’re — they’re trying to equalize wealth and — and resources, of course, which is — it never works. Of course it never works. When you say that everybody is worse off when it happens, I — I — I don’t know if I really agree with that, Richard because I think that the certain ruling class always seems to become better off by doing this, through — through crony capitalism and through just the power that they usurp in the market place that they — they — they tax, they give favoritism, they do nepotism, you know, they — they engage in all of these things.
Richard Epstein: I will accept this as a friendly amendment. What happens is, if you sort of look and try to find out where the greatest concentrations of wealth and improvement are in the United States today, it’s not the tech capitals in Silicon Valley that rank high, it turns out to be the Government Pluda Kranz. It’s not so much that they gain through salary as they gain through influence. They may not earn a lot in their Government jobs but they have immense power which is an offset, then they go into the private sector and they become people who pull the lobbying games and the levers so that yes, you will find that there is, generally speaking, whenever you seek to get equalities with Government coercion you get this kind of privilege to lead to run the political classes who do very well for themselves.
When I was talking about the question of everybody being worse off, I was essentially talking about the private citizens who are subject to the Government Rule not to the Government Rules themselves. And of course, this is why it’s so utterly dangerous is because you do have an in class which is extremely benefited or — benefited in extreme amounts by this kind of behavior and — and they have very little willingness to sort of give up their prerogatives and there’s no question to my mind if you look at the way in which the President is trying to operate things, he is quite insistent that virtually all benefits are dispensed not by private charity but through the Government. And the reason I mention private charity is it takes a genuine adult to assume that the — not adult, dolt, d-o-l-t. It takes somebody who’s really dense to come to the conclusion that the value of the first dollar to a poor person is no greater than the value of the last dollar to a rich person.
The question is, how is it they managed to effectuate that particular impulse to have some degree of transfer without gumming up the entire productive system? And the correct answer to that is that you do it through charitable transfers backed up at least in part by charitable deductions. So you get decentralized ways in which you can transfer wealth from those who have it to those who don’t. So, I would much rather have a billion dollars transformed by Warren Buffet with whose foundations would have to endure the certificate again about national tax policy about which I think you know, is essential nothing. And so that’s the way in which you want to handle that stuff, but notice follows.
If in fact you can raise people up by increasing opportunities, you will have the following very benevolent situation. They’ll be more resources that are available to help people who are down on their luck and there will be fewer people who are down on their luck. So essentially what happens is you cannot achieve by shrinking the total pods through consciously redistribute efforts, the kinds of things that you can get by expanding the pod and allowing private voluntary redistributed efforts. People will remark and say, this is just a very poor small part of society.
But you know, one of the things I’d like to tell people is, go around the United States and start asking the following questions. Who founded Stanford University? It wasn’t a Government agent. It turned out to be Leland Stanford upon the death of his son, Leland Stanford, Jr., who founded the University of Chicago. It wasn’t some steel worker from the West side. It turned out it was John D. Rockefeller whose name still sits on the Trustee stationary. And you can go through huge numbers of institutions, public and private, which essentially have benefited from public — from the benefactors who were wise enough to know that they cannot consume all the wealth that they create. And it’s that inability to consume a Billion Dollars once you make, which is the great extension for redistribution that you can imagine.
Jason Hartman: That is fascinating. And if anyone questions my prior question to you a few minutes ago, I remember when I first really, really noticed this and you talk about the influence pedaling in Washington, D.C. and other Capitals — State Capitals, you just look at the rates back in the ‘90s and I — it — it was when Mike Huffington was running for California Senator and spending so much of his own wealth, not — not campaign contributions. They — they spent a lot of their own money and I believe at that he was running against Feinstein — maybe it was Boxer, but I can’t remember for sure. We here — here we’ve got these very wealthy people spending massive amounts of their own fortunes to get a job that pays 200 grand a year. It’s — it’s insane. I — I mean, you — you obviously know that doesn’t — if that isn’t a sign that there is massive corruption in Government, what else is, because no one would make that investment. No one would spend millions and millions of dollars of their own money to get a $200,000 a year job.
Richard Epstein: They’re not doing it for payment. It’s not necessarily a sign of corruption, it is a sign of the enormous amount of power and influence that you can rule by taking Government positions.
Jason Hartman: But — but that — that influence is profitable. That’s what —
Richard Epstein: It is profitable, but it depends. I mean, you know int — interestingly enough, it’s very complicated to figure out whether or not the guy who’s really on the take is a guy who has so much money that he doesn’t need any more, or the guy who gets into Washington, making all sorts of promises and in effect can’t lead the Government and quadruple his wealth. So, the wealth in effect is not a sign of corruption. Power may be a sign of corruption but it’s very difficult to figure out which of these people are engaged in that. But you know, it just wasn’t Huffington. We had Meg Whitman trying to —
Jason Hartman: Well sure, of course. Yeah.
Richard Epstein: — [inaudible]. But what’s most interesting about all of this stuff, is you mentioned three people who spent fortunes all of whom lost and — and this I think is related to the whole question of our campaign financing, which is I’m not at all afraid of the constitutional right that people have to spend their own money to get elective office. Because one of the things that’s so characteristic about it, the moment you are self financed, it sends out a message to the rest of the world that your base is extremely narrow, whereas somebody who like the President has always been able to do, can rely on a zillion small contributions through message. At that point it’s sending a different message.
My wife is a professional fund raiser and one of the things that you hear about is in a list, the fund raising pyramid, which always starts with lots of little gifts at the bottom and then you get smaller gifts as you get to the top and then you hope to get a crowning gift say of $10,000,000 to start some kind of institute. What you quickly discover in this kind of business is you cannot specifically decide to say, I’m going to get the money from this top guy and ignore all those little guys. And the explanation doesn’t have to do so much with the dollars that you get from small people, it turns out to do with what we want to call signaling function. What that means in effect is, nobody’s going to commit himself to a venture that only he is favor of, unless he thinks that there are other people out there who have some degree of sympathy.
So, when these small contributions come in to an uncertain enterprise, it is a kind of validation which make people willing to give larger gifts to that kind of institution. It doesn’t always work that way. Sometimes there are particular institutions that are founded with single grants, but they interplay of wealth on the one hand to influence the public acceptance is not a simple linier kind of relationship where you hear all these denunciations about private parties and corporate spending and the way in which they have to be regulated. This is another illustration of all sorts of people hyperventilating about a problem which is subject to massive self-correction mechanisms in ordinary political discourse. So you know, what we worry may not only be the maximum amount for the eminent, but in many cases, it’s the maximum Richard Epstein to sever a set of problems that are so effervescent and spend so much money trying to cure them that the basic functions of a civil society, which is to maintain order and to provide external defense and to insure that voluntary transactions could take place and to provide infrastructure. Those things tend to get lost in the shuffle.
Jason Hartman: Well, those — those — those original things that are found in callers outlined have been blown way out of proportion. The one that scares me the most that I think has been blown the most out of proportion is the general welfare statement because that’s just — they’ve – they’ve been rolling over in their graves for decades now.
Richard Epstein: Oh, you’re talking about the Founders, right?
Jason Hartman: Yeah, I’m talking about the Founders but — but you — you alluded to it in what you just said.
Richard Epstein: Well let me actually talk about that a little bit more because I did get shows — some of the series difficulties associated with the modern Superior Court, and the land which is the lasting contours of the spending and taxing —
Jason Hartman: Okay —
Richard Epstein: — powers —
Jason Hartman: — okay, but — but Richard, after this I want to ask you because you’ve written just a wide range of articles on — on various legal topics and since a lot of our listeners are real estate investors, they’re interested in finance. I want — I want to ask you a little bit about that too, so leave time for it. But go ahead about the Superior Court.
Richard Hartman: Okay. This is just a very simple point. The power of the United States is truly there to raise taxes and this was designed to offset the difficulties from the Articles of Confederation where the National Government had to beg for contributions from the States, which in Winston Churchill’s language, were always too little and too late. So they gave you the power to tax and then you could spend it for the debt, meaning the public debt which was a public would for the common defense and for the general welfare of the United States. And the question is, how elastic is the phrase general welfare of the United States? And this I think is the correct analysis.
Start with the filing proposition. Treat the United States as though it’s a corporate venture amongst the several States and then take the corporate business analogy, because that’s what your listeners do right, and take it very seriously. And ask yourself whether or not any member of the Board of Trustees of any corporation — the Board of Directors of any corporation could go forward and announce the following proposition. In order to advance the general welfare of the various members of this particular corporation, we know you all have common stock but we’re giving a huge cash dividend to some of you which is coming out of the pockets of others. And I think everybody would clearly understand that’s the perendic matic violation of every fiduciary duty known to man with respect to corporate wealth.
So when you’re talking about the general welfare of the United States, what they really meant was the creation of public goods that benefit all citizen, more or less, not perfectly but more or less equally. And that the one thing that it precluded was the kind of transferred payments which now consume the Federal Government. And it only was starting with the new deal in a case called Feldman v. Davis and that Justice Cardozo who was always a great fan of Willie Thorpe sort of announced, gee it’s so hard to figure out what is and is not in the general welfare of the United States. We will have to let the Congress do that. And that’s basically putting the fox in charge of the hen house.
The whole point of the Constitution is to restrain the Congress and when people say, as they often do, that national problems require national solutions, that doesn’t mean that Congress is the solution. Often times it means that Congress is the problem and that the national solution is a limitation on the power to tax and to spend by way of running a transfer society. And so, this is an exceedingly important point and Justice Roberts musted so badly when he started talking about the healthcare case that it really was a sort of a great tragedy for the fans of limited Government.
Anyhow, what do you want to ask about real estate?
Jason Hartman: Well — well, I just want to also make a statement here too. When — when you — you keep mentioning transfer payments and — and just the — the basic concept, what you mean by that is when the Government takes from one and gives to another, robbing Peter to pay Paul.
Richard Epstein: Well actually taxing Peter to pay Paul.
Jason Hartman: Well, fair enough. I call it robbing.
Richard Epstein: It’s — it’s interesting because one has to observe that kind of technical difference because robbery is essentially randomly done by one individual against another and the great advantage of the transfer state rel — relative to the robbing state is that you institutionalize, organize and limit the amount of transfer payments that are made. Taxing is in fact an extremely dangerous power, but if the choice that you had to make was one between a system of coordinated Government and ruffians running all around the world, and having huge Government transfer powers run by a plutocracy the latter beats the former every time. The problem is limited Government beats the plutocracy —
Jason Hartman: Sure.
Richard Epstein: — and we’ve lost on it. So now amount over two-thirds of our federal budget is essentially transfer payments. I mean, this is not a question of trying to help the indigent and the needy. This is just massive transfer payments. Nick Eversole I think wrote something on the Wall Street Journal — so with the co-author we sort of made the point about the size of this growth and yet the President and most of the Democratic Party’s far from seeing this as a sign of trouble, seeing it as a sign of national help. We are in a very bad philosophical state.
Jason Hartman: They’ve got to maintain that power base. When you — when you’re doing payoffs and bribery to a permanent built in voting block, you’ve got to keep supporting it otherwise that voting block will not support you.
Richard Epstein: Well, it is extremely important that you essentially reward the people who vote for you. What happens is, the same people who vote for you do not understand that as the money is coming in through the transfer payments, the law says that they get economic opportunities are attributed to the same policies. And what happens is everybody, whether you’re running a Union or a National Government, takes advantage of the differential time versions. You can make it appear in the short run of the transfer payments or positive contributions. In the long run they are not and to many people they are quite sub — you know, quite cynical, as that in the long run I’m dead. So, if I get huge amounts out of Social Security relative to everybody else, so be it. They could pick up the pieces later on. And so oddly enough the transfer society kind of exaggerates degrees of sort of excessive individualism, rather than tampering them down.
But anyhow, what about real estate?
Jason Hartman: Well, you know I just wanted — you know of course, real estate has been very much in the news the past several years with the mortgage meltdown and the financial crisis and this complete level of — of — of fraud and dirty dealings on Wall Street and with the banksters, and so forth. I haven’t read any of your articles on real estate or finance, but I — I read that in your bio that you’ve written about it. So I just thought I would ask you any — any of your thoughts on what’s going on in the current real estate?
Richard Epstein: I mean, I have spent an enormous amount of time not only with taking it slow but I actually teach real estate finance and development from time to time. And I’ve worked in this industry one way or another for the last 40 years. My daughter is in fact a real estate developer, so I get a lot of it up in the front and there’s basically two kinds of problems with respect to real estate that you have to worry about. One is promise to build and the other is the financing side of the operation and each of them are in serious states of disrepair today.
Now the common law rules with respect to building and so forth, always allow for the issues of the permits, but the permits were essentially designed to make sure that you did not engage in the kind of conduct, which have occurred — result in mayhem to other individuals. So a building permit was designed to make sure that the building would not fall down, would not permit toxic substances into the airs, would not impose a danger to traffic and things of that sort. But lately, of course, the permit power’s now used to do everything else. And so what we’ve set up through permits is what is essentially an extortion game.
You want to build this nice building in New York City or in Los Angeles, tell you what you do. Are you set aside some wetlands for people so that they can do it and you pay for them, or you know this subway station which is nearby, it needs a lot of refurbishing, don’t pay for it out of public expenditures. You pay to fix up the train station as a condition for building your structure.
Now once you start to allow these kinds of conditions, what happens is it completely waxed up public finance. The train station is a public good and you’re going to get more or less the right decision on how to invest in financing it if the public at large has to pay for it. But the moment you give people the option of saying, hey you want to build this building, fix our train station, they’re going to start to impose conditions and they’re going to say I win either way.
If the conditions are so onerous that they don’t like it, my nice open spaces that all those people might live in these buildings, well who cares about them? And on the other hand, if they do build, my taxes start to go down. So I’m going to engage in this extortion racket as much as I can and as long as I can. And right now this issue is actually before the Supreme Court. And it turns out I think there’s very little knowledge at this end, particularly on the bench of the dangers to resource allocation that comes from that.
So the permit system, here’s what it basically does. It can slow down new construction by five years, it can add 20, 30, 40 percent to cost. It can make the units that you get much less valuable than they would otherwise be, but it’s a public partnership. What happens is, the public provides the break in the obstacles and the private capital takes place. In major Cities like New York and sort of exclusive coastal areas in California, the rate of development is very low. The incomers get huge rents from the scarcely value of their own premises, so the insiders turn out to be wonderfully happy and the outsiders don’t vote in the local elections so their preferences don’t count. And unless you can reverse that cycle, whether it’s for zoning, road ordinances, conditions and so forth, the real estate markets will in these very high valued areas remain in the tank and the development will take place in areas where people are just crying to get you in and now the problem is not that they’re giving you permits, the problem’s on the other end, they give you extraordinary substitutes and often times those come from other parts of the same State so you get yet another form of transfer system. And generally speaking, no substitutes and no penalties is the appropriate form of real estate development, and we have excesses on both sides.
Jason Hartman: It — it — it — it’s basically just an issue of — you know, it becomes another crony capitalism in power structure.
Richard Epstein: It’s — it’s — it’s transfer payments all over again —
Jason Hartman: Yeah, that’s right.
Richard Epstein: — and it — you never want to do them in cash. It’s better to decide — disguise them in some form and hope that people either celebrate them because they’re winning from them —
Jason Hartman: Build — build — build a school, preserve a — a certain area. I had Thomas Sowell on the show about a year and a half ago and it was interesting. I — I — I kind of coined a term out of that. I don’t know if I mentioned it on the show with him, but you know I call it environmental racism. You know I used to live in Orange County in Newport Beach and there’s all this dedicated open space everywhere, and you know what that really is, is — is the people who already live there trying to keep their — make their property values higher by causing artificial scarcity and keeping others out.
Richard Epstein: These people are perfectly non-discriminatory.
Jason Hartman: Yeah, sure.
Richard Epstein: They want to keep everybody happy.
Jason Hartman: Right.
Richard Epstein: The racial side of this action came up in the Mount Laurel cases in New Jersey back in the 1980s, when we had these highly restrictive zoning ordinances, large plazas, no apartment houses, and instead of knocking down the zoning ordinances, which most of the judges in New Jersey in favorite, what they decided to do is to force integration by mandating that certain large accommodations be built are primarily for members of minority groups, and that created an ongoing tension of insufferable nature between the local communities and the Court’s massive distress on both sides. The correct thing to do is to scribe down the zoning ordinances and at that point people will then be able to site projects and prices that they think to be appropriate. If you tax them correctly they’re not going to get these huge kinds of subsidies running one way or another but the great liberal can see with respect to Mount Laurel is that we can offset one form of imperfection to — with huge and indefensible zoning ordinances with another form of indefensible behavior forcing people down the throats of their neighbor. And generally speaking, you’re better off. It’s far cheaper and far more equitable to do neither of those two things then it is to do both of them simultaneously, and fortunately, the Mount Laurel experiment failed and it has not, to my knowledge, been repeated anywhere else.
Now with respect to the real estate finance side, which is the other thing of what you asked —
Jason Hartman: Well, wait a second. I want — I want to talk to you about a couple of things here before we go into that. So first of all, my comment on racism was sort of a generic comment in the sense that the people know who can afford to live there and who can’t, and by making the prices higher, you automatically get certain types of people. It just — it just happens. It’s the way the market sorts itself out.
But you know, we — we don’t need to go into that heavily because it kind of ties in with this — this riddle I have for you and — and the riddle is, what do you call a developer, someone who wants to build a house in the woods or at the beach. What do you call an environmentalist, someone who already has a house in the woods or at the beach. You know —
Richard Epstein: Well I mean, this is — the incumbent rolling of the door on entries is a very common theme, and it’s exactly the same point. And what happens is these people are now smart enough to realize that you may not be able to shut the door tight on new development, so what you do is you tax it through all sorts of indirect burdens and hope to achieve much of the same affect. There is no question that differential pricing by income will have certain kinds of consequences with respect to race. Most of the people who do this in fact are quite happy with having rich Black and Hispanic neighbors. What they are worried about are poor people coming in and to some extent that’s a policing problem. You can understand what the concerns are, but in many cases it just turns out to be kind of snobbery in some form. And you know, I lived in New York City and I live in Chicago. I live in neighborhoods that are highly diverse by way of income. I mean, not that I live in a poor building or anything, but you go essentially the — the range of value of the units within a quarter mile of the place where I live is very, very high.
My view about it is you draw strength from that kind of interaction, now weaknesses. It changes the nature of the kinds of people on the street, greater variety, greater richness. It turns out you get stores which serve many more kinds of persons —
Jason Hartman: A lot — a lot more flavorful society, no question about it. We’ll be back in just a minute.
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Jason Hartman: It’s interesting that you mention that because I remember reading an article and I don’t know who it was. I think it was a Forbes article several years ago about someone who went to Club Fed for a white collar crime and talked about how the prisoners in there for high end white collar crimes generally didn’t divide themselves up by race, they divided themselves up socioeconomic, which is —
Richard Epstein: That — that — that is always the case. I mean, even if you go to a place like South Africa where there’s been deep racial devise, there’s no question that today if you start looking in the fancy restaurants, wealthy Blacks and wealthy Whites get together and they’re perfectly comfortable with one another, and then you start looking at the shanties and you realize that those are all Blacks and they are created by the very policies that those two groups getting together worked out.
Just to give you one story. When I was in South Africa I was the guest of a great man named Leon Leub and he was one of the few Libertarians there who had actively opposed the part [inaudible] when it was David Goyer. And what questioned was how you redress the issue of inequality between the races as a consequence of a part [inaudible]. The first thing that you realize is that imposing high minimum wage laws doesn’t do anybody any good.
Jason Hartman: Well, they — they — what they did — you know minimum wage is a terrible idea —
Richard Epstein: Yeah.
Jason Hartman: — because all it does is create unemployment. But — but what they did — and I’ve been to South Africa as well and — and studied it a lot when I was there, they did a whole transfer payment system. They said, you have to have a certain number of Blacks on the Board of Directors of this company, and —
Richard Epstein: And — and that’s the mistake —
Jason Hartman: Yeah.
Richard Epstein: And then this is what Leon proposed and I actually defended it at a public meeting and was savaged for it. He said we have huge amounts of lands which are relatively neglected in public ownership with minerals. And what we want to do is to spin these off into corporations and give the shares of the corporations that we create to the victims of a part [inaudible], give them a management board place restraints on alienation of the shares for a couple of years until these companies get established and the ANC went crazy with respect to this proposal, because what it meant in affect was the devolution of influence of power to private organizations which meant that their political power would be set.
And so what one has to understand about all of this very complicated racial politics is that rich Blacks can exploit rich Whites — rather, rich Blacks can exploit poor Blacks just the way rich Whites can exploit poor Whites.
Jason Hartman: Right.
Richard Epstein: Is that the transfers take place in these crazy “patterns” not morally defensible but morally concealable. But anyhow, should we get to the finance for a second, because —
Jason Hartman: Yeah — yeah — yeah, but I’ve got one question for you —
Richard Epstein: All right, keep going.
Jason Hartman: — on that. I want to run something by you because it’s — it’s a current event. Okay so Michigan, believe it or not, Michigan actually became a right to work State but — and — and I want to tie this into real estate and I’ve never discussed this before on the show, but I view Homeowner’s Associations as — is generally far too powerful. Like Unions, a good concept but they’ve — they’ve gone — they’ve gone hog wild like Unions and — and if you can have a right to work State where you have Union employees and non-Union employees working side by side on the assembly line, why is it, Richard — and I know there is some physical issues with Homeowners’ Associations, of course, but — but why is it that you’re — you’re mandated that you have to join a Homeowner’s Association if you want to move into this area? And I talked to one of my attorneys about it, I ran this idea by her and she represents a lot of Homeowner’s Associations in defending them and — and collecting for them and so forth, and I said to her you know, why — why do you have a right to join or not a right to join the Homeowner’s Association? And she says, well you — you don’t have to live there. And I thought, isn’t that interesting with racial politics, and we just talked about that, of course there are fair housing laws and you can’t say, you have the right to go live somewhere else if you’re — you’re green or purple. I — I mean, that’s absurd. Of course we have these fair housing laws and — and — and I think they’re just. You should be able to live wherever you want
Richard Epstein: Well let me, I — I disagree and agree. Let me start over —
Jason Hartman: All right.
Richard Epstein: — and try to explain what I think is the position of your attorney with respect to Homeowner’s Association. The question is not whether there are or not restrictions for the collectivity. The question is what is their origin and when you’re dealing with a Homeowner Association this is what typically happens. You have a developer with the unified pieces of land and he starts selling up all of these units to various kinds of individuals. And one of the things that you discover if you try to sell them all is that the only things that keep people together are the common law rules against nuisance. The amount of money that you can get from this particular parcel is going to be less than if you oppose a more rus — a more robust government system upon these individuals so that Homeowner’s Associations, for example, worry about uniform exteriors. They worry about the maintenance of common spaces like the internal roads and parks and so forth.
And their attitude comes — stems from the following proposition. Every time the developer imposes a restriction on any or all owners, he’s going to get less money out of that project. So, that’s a bad. But on the other hand, every restriction that he imposes on one or multiple owners is in fact going to give benefits to other owners. So if in fact he understands this particular tradeoff, and developers do, they will impose Xanti upon all people coming into this development, the set of restrictions when — when you sum up the benefits and burdens that they impose, maximize the value of the total operation.
Now if they’re doing this, there’s no monopoly element in this because this is a competitive Home Association along with every other Home Association. If you now allow people to buy lands and to escape the covenants that are attached to them, the whole system will fall apart. That means in effect that you cannot credibly present the mixed to various kinds of people, so that you’re back to the common law, minimum rules of nuisance. Now when you’re dealing with a Union, it’s exactly the opposite situation. This was never any operation that was formed by unanimous consent. If you go back to the national — National Labor Relations Law, what it does is it sets up a system of Union democracy in which you will define through Government action, a bargaining unit. In that bargaining unit you stage your Government election. If the Union wins by 50 plus percent, it buys everybody in that unit, regardless of whether they voted for or against them.
At that particular point, you do not have the assurance that you have with Homeowner’s Association that the Union’s going to be value maximizing. Suppose for example it’s opposed by 60 percent of the workers who are common tradesman and opposed by 40 percent of the Union workers who are craftsman. Back in the late ‘30s, the question of whether these two groups were put in the same Union, was in fact the subject of enormous disputation and hostility. And what the 40 percent are always worried about is the 60 percent will vote parity and wages. Their wages will go down, the other guys will go up and so the Union becomes a transfer mechanism. And if what I said was correct about the Homeowner’s Association, given the source of unanimous consent of the origin, the transfer payment stuff is different.
So, you’re right to say that these two things are the same if you’re looking in them Ex-post after they’re formed and somebody wants to get out. And the Unions understand this because they always say the problem of course with having right to work laws is that people free ride on the Union agreement, just the way people would free ride on a Home Association. They’re correct in the Ex-post world but the difficulty that they don’t understand is this, the reason we like free riders against the Union is it breaks the Union monopoly. The reason we don’t like free riders in the Homeowner’s Association, it breaks up the efficiency of a competitive operation. So if you understand the industrial structure and you understand the origin, it turns out that she’s right.
Now, there is the next question about these Homeowner Associations, are they in fact dictatorships? And so suppose what happens is the homeownership got together and they decided that you, Jason rather are the guy who we really don’t want to be in there and we’re going to force you to sell your unit to the Home Association for One Dollar. That’s the case of majority power that’s gone crazy. And so when you start dealing with these Homeownership Associations, the implicit understanding is you can regulate common spaces on a pro rata basis, but you cannot condemn individual units.
What can you do? Well, it depends what kind of association you have. In the old days with cooperatives, it turned out if you wanted to sell the unit, the cooperative had to give its approval and they could hold you up terribly if they didn’t like the new person coming in, and so the cooperative firm tended to be used by individuals who wanted to stay in a particular development for the long haul. But the moment that condominiums became legal, that meant the people could sell their units at their own consent and the only thing that the Board could do was to match the price of an outside bidder. You got much more alienability with respect to the units and we had a kind of a natural experiment. And what’s quite clear is that 90 percent of the time, the condominium situation, the free alienation, turns out to be a more valuable concoctination of rights other than the old coop model. And so the new subdivisions have developed in exactly that way.
So, this is a classic case in which you know, go back to your libertarian instance again, right. And understand that democracy is always imperfect because the losers are bound by the winners, whereas contractor’s always going to be much more perfect because everybody is bound by his individual consent. The implication therefore is you’d like to move institutions from the cohere of variety of Union type Governments into the voluntary sort. Okay, is that clear enough, I hope?
Jason Hartman: It — it — it is. You’re talking about condos and you — you live in —
Richard Epstein: And — and – so do Homeowner’s Associations.
Jason Hartman: — New York City, right? Yeah. So — so — but that — and that’s a little different. I’m — I’m more talking about the suburban — I know it — I know it varies and I think the coop model was bad. I — I don’t like it. The condo model is better but in a — in a suburban type, single family home environment, these Homeowner’s Associations, sometimes they become these little dictatorships and —
Richard Epstein: Absolutely.
Jason Hartman: — and these little fee toms. It’s unbelievable the way they abuse their power. And — and they’re like — they’re like these uncharted illegal Governments.
Richard Epstein: Let’s — let’s put it this way, when you create a Homeowner’s Association — and I wrote an article called Covenants and Constitutions about the comparison of the two, you have essentially to create centralized management for the common spaces. Whenever you have a Board of Trustees of a business, there are fiduciary duties of loyalty and care. Whenever you have a Federal Government, they have to do the same thing, and I think the point that you’re making, and I — I fully endorse, is simply because you’ve created this Board and have these various distribution of rights. The moment this Board starts to act, it has to be subject to the same constraints as other kinds of Boards and so you get this kind of delicate question as to which way to go. But here I’m going to draw distinctions I think is sort of powerful and I hope you agree with it.
Let’s suppose what happens is you wanted a voluntary market to start in place in which the only people who can move in are 65 years old and that’s done at the front end and it’s perfectly unambiguous. It seems to me that anybody at 65 and wants to sell to a teenage family is somebody who’s violation of the basic rules because there’s no abusive governs. But suppose with this governs situation they establish a Board and what the Board starts to do now is to say we’re going to tax all the people on the North side of the condominium in order to make transfer payments to people on the South side of the condominium. That turns out to be exploration. So the essential rule is, if you — the — the extent that you can set things out in stone in the original agreement, that’s one way of avoiding the danger of exploitation. But every business requires discretion in its management and intelligence and its operation. And for those things you need the kinds of duties of care and loyalty that I talked about and that’s exactly true in condominiums like it is in Labor Unions, where they do have duties of fair representation, not very effective but they’re there, and in Government.
So, I — I agree with you on that particular point and I think, by the way, if you ask your interlocutor, she would also say that just because you have a Condominium Board, doesn’t mean that it’s always right.
Jason Hartman: Right. Good point, good point. Well touch on what — what — anything you want to say in finance real quickly? I know we’ve got to wrap up.
Richard Epstein: I mean — I mean you know, we’ve gone over our time but I think it’s been talked about.
Jason Hartman: It’s — it’s very interesting.
Richard Epstein: When you start dealing with the — the finance markets — I have written extensively about this, because I’ve taught mortgages I guess now for 40 years, and let’s start with the mid-evil view and this was know as the theory of strict foreclosure, and this is actually the following proposition. If you have a piece of property, which is say worth $100 and there’s a mortgage on it which is worth $50, to the extent that the cushion is there, it means that the guy who’s in possession of the property knows that the only way that he can exploit his lender by trashing the property is to trash the $50 of equity that he has first. And very few people are willing to do it.
So, as that cushion starts to become large, there is no real problem of joint management, but the mortgagor — what the lender can do is essentially free ride on the good intentions and the self interest of the property owner who wants to maximize his value. So, if the property’s now worth $100 and he realizes, you put in $20, it’s going to be worth $130. He’ll put the $20 in, he may even get a second loan, but the cushion increases by 10 and the lender sits there fat and happy. That’s why in normal situations there is no monitoring whatsoever by lenders of what their debtors do.
But now let’s suppose that the market tanks like it did in 2007 and so on, and now the equity of the property goes down to 55. Well, your cushion is shrunk and if you do something which is really foolish, you lose the first $5, but the lender loses everything else. And now when they stop making payments on the situation, the great temptation of the owner in possession is to trash the property, avoid the mortgage payments, so that the lay and removal of this person from the property in question means that the underlying asset will tank in terms of its value. So the correct view is to essentially say, the moment there is a default, the moment there is evidence of mal-management of the property in question, the landlord gets a summary, though not the landlord, the lender gets a summary right to evict the tenant by what is called a foreclosure procedure.
If you pay off the loan, at which point you could trash the property again if you want to, or you simply have to surrender control. Modern American policy does not believe in that. What it believes in effect is that, whenever there is a decline in the value of property, the lender has to socialize the risk with the borrower, whereas the original loan agreement was one of strict priority that the lender gets paid first before the borrower gets anything.
So, all of these relief laws are massive transfer payments from debtors to creditors. And it’s not just the zero sum game, the longer you let this go on, the less the underlying property is worth.
Now banks of course, do understand that foreclosure is costly. They have to keep the property and inventory, it’s no longer productive and with certain borrowers what they will do is they would work out loan renegotiations. You extend the period of payments and reduce the annual payments and all of a sudden the guy can keep things going. There’s always in the interest of the bank to do that if it makes economic sense but it doesn’t make sense for the Government to mandate that in cases where foreclosures ought to be strict.
So what has happened is, starting around 2007 you get these endless delays, you get these mandatory refinancing programs which fail at about a 95 percent level. The properties now remain occupied and dilapidated. What you really want to do is to foreclose the current owners out of those properties, send them back into the rental market where they can pay monthly payments, have the banks suffer perhaps some kind of a loss but resell the property at market rates. Now have somebody borrow a loan of a smaller amount on a lower valued property so that the market returns equal Librium.
So what we have done essentially through Republican and Democratic Administrations for the last six years is to try to postpone the inevitable and this is a terrible investment. You wait a year. It’s not that you’re going to get three percent return on your delayed investment. What you’re going to do is you’re going to probably get a huge negative return. And remember, many of the people were thrown out of these properties. In the olden days they borrowed three to five percent on equity, and if they’re wiped out, that’s not very much money at all.
The bank, when they sell the property for half value, if you think of my numbers it takes 90 percent of economic loss associated with the proposition. So, what has happened? We now have these reform laws and virtually all of the discourse today is on whether or not the lender has validated the papers that are needed in order to execute the foreclosure, when it turns out that they have slipped up or used robot signing or something of the sort, we now get indignant for them and what we forget is that in none of the cases where all this outrage takes place —
Jason Hartman: Has anyone actually made their payments?
Richard Epstein: Well, and live happily ever after.
Jason Hartman: Right.
Richard Epstein: And on that particular note, I think you basically get the message and I actually wrote about this in 2008 and predicted exactly what was going to happen out of this situation. One of the things Jason, you have to understand is if you really want to figure out how to understand the past, what you ought to do is to have some fairly serious understanding of the historical evolution of the various instruments in question. And one of the great things I got from my English legal education, which has many defects, is I really learned 13th Century landlord/tenant law, 13th Century mortgage law and it’s from those simpler roots that you have a firmer grasp of the land which modern situations look.
Jason Hartman: Yeah, very interesting. We reward all the wrong behaviors. People are sitting in their house for three years but the banks are — are — are guilty parties, too in many things.
Richard Epstein: Yeah.
Jason Hartman: It’s — it’s — it’s —
Richard Epstein: Yeah, [voice over] —
Jason Hartman: — it’s a complicated mess.
Richard Epstein: Yes, it is. Banks get too big to fail. Banks get desperate. Desperate people do foolish things. The great mistake that they made when they had the collapse was the take Washington Mutual Bank and throw it into Chase. The thing is so big that what happens in one part of the enterprise is not felt by the other. What one should try and encourage today with these spin laws, out of this situation so if you have more concentration in general homes of economic affairs is always an extremely dangerous state. And of course we concentrate power in the large banks and then when you look at the regulators — my former student, Rich [Inaudible] — Rich is a terrific guy, really smart but no single person should have that degree of power with respect to a key segment to the economy.
But this is going back to checks and balances, separation of powers and all the rest of that stuff and concentrate in vast amount of powers in the hands of single administrative is one of the most dangerous things that a nation can undertake.
Jason Hartman: It’s a recipe for disaster, no question at all. Well Richard Epstein, thank you so much for joining us today, very interesting discussion. Please tell people where they can read your articles and books and learn more about you.
Richard Epstein: Okay. Well I mean, thank you for this. I mean, I tend to blog on a regular basis on two places. One of them is the Defining Ideas at the Hoover Institution and the other is an outfit known as Rickochee.com. I’ve also done things from time to time for other organizations upon request, most notably, the Manhattan Institute. My books — you can buy them from any of these standard purveyors. The one that is coming out probably next fall from the Harvard University Press is a book which I call the Classical Liberal Constitution, which is a very long book, I must say. Some people will find it tedious, but it’s about a quarter of a million words in which I go through virtually every major constitutional doctrine that you can think of and so far as it relates to the organization of our [inaudible], and the discussion of individual rights, and try to indicate what a classical liberal would do with these things and constantly play that all against the progressive Constitution that was first put into place in a very exquisite fashion in 1937 and which is certainly the dominant constitutional pyridine today.
And other books can be found there. I have a — basically, if you just put my name on Google, you’ll see that the NYU or the University of Chicago website and you can trace my writings there. I’ll — I’m not hard to find. I try to write a great deal of stuff. I think it’s extremely important for scholars to engage not only in these long kinds of tones like my new Harvard book, which I think are essential to our enterprise, but to engage in a translation mechanism whereby the apparatus and the footnotes disappear from view, so that ordinary readers who are not fully trained in the law can get the jest of the ideas by reading the — in more accessible forth versions.
You try to keep the rigger of the ideas, but you let go of the mathematical type arguments that you sometimes make — because I sometimes make and the huge footnote documentation, which is sort of a stock and trade of the standard academics scholar.
Jason Hartman: Fantastic. Well, very good stuff. Richard Epstein, thanks so much for joining us today. I appreciate it.
Richard Epstein: My pleasure.
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