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Seasteading, Tiebout, and Federalism: Seasteading FTW

July 2, 2009

(This post is part of the Thursday: Federalism day in our Secession Week blogging series)

Dan Rothschild at GMU’s Mercatus Center posts about Seasteading, Tiebout, and Federalism.  Since this post is about the same three topics, I have shown my admiration by stealing his title – although I had to add my own twist :).  He discusses competition between jurisdictions:

One of the most interesting things about state and local policy research is that localities are engaged in (admittedly imperfect) competition with one another. The Tiebout hypothesis, proffered by Charles Tiebout in his famous article “A Pure Theory of Local Expenditures,” suggests that in federal systems state and local governments compete with one another: if you don’t like the public services provided by your town or state, you can move to another one that provides a basket of public goods and services (and tax structures) more to your liking. People vote not only with ballots but with their feet.

It raises interesting questions for the future of the Tiebout model that sovereign nations may be forced at some point in the not-too-distant future to compete more for their citizens’ fealty.

And speaking of Tiebout, Bryan Caplan, points out a weakness to Tiebout competition in Standing Tiebout on his Head: Tax Capitalization and the Monopoly Power of Local Governments.

His basic point is that if local government is financed by property taxes, then wasteful taxes will get capitalized into real estate values, and this eliminates the landowner’s incentive to exit, which is required for competition.  For localities to compete, it must be the case that if the local government raises taxes, you can leave and avoid paying those higher taxes.  But a new, wasteful tax reduces the amount someone else is willing to buy your land for by exactly the amount that it will cost you to pay the tax.  So there is no incentive to leave – you can stay and pay the tax, or leave and pay the tax in a lower resale value.  In essence, the property tax increase transfers value from the landowner to the locality.

I found the thesis quite interesting, because I had previously thought of property tax as a good way to finance a private government (on a floating city), naively thinking it aligned the city and landowner incentives.  While Caplan has an excellent point that changes in property tax are not subject to competitive pressure, two solutions occur to me.

First, I don’t think the argument applies to the government’s incentive to make good laws, because the government wants to maximize revenue.  A bad law which decreases property values will decrease the future expected revenue from the property tax.  If the law is “increase property taxes”, the decreased tax base is compensated for by the increased tax rate.  But if it is a change in how the locality is administered or regulated, then the government will increase or decrease its future revenue based on whether the law makes real estate there more or less valuable.  Hence, even if local units don’t compete on tax rates, they will compete on spending it efficiently.

Note that the mechanism for this effect is different from competition via exit.  Caplan is correct that the landowner is not incented to leave by the bad regulation, because its effects will be priced into his land values, just as with a tax change.  However, unlike a tax change, this decrease in land values in the locality decreases the local government’s revenue, which they do not want.

Second, we might structure a city solely via leases, not ownership.  That is, the central government owns all the land, and merely rents it out.  Now the landowner and the government are the same, and revenue is based on how much land can be rented for.  Better administration and laws will make the locality more attractive and increase rental rates, while bad laws will decrease them.

On land, of course, this is problematic to implement, because much value comes from large buildings which cannot be moved, people building them will insist on long leases (99 years for buildings in Palm Springs built on Indian Land, for example), which reduces the market feedback.  Short-sighted administrators, once long leases are locked in, may not care that they are decreasing land values.  (This is ameliorated somewhat if the administrator continues to sell new leases on new land within the domain, as that is essentially spot market based on the current and expected future regulatory environment).

In a floating city, however, things are quite different.  What the local administration owns is not territory but aquatory.  It leases the right to locate a floating, mobile building at a certain spot within its demesne.  These leases can be much shorter (1-10 years, say), because if they expire and are not renewed, building owners suffer much lower costs than on land, as they can pay to move their buildings rather than abandoning them.  The ownership of the underlying medium (and all its laws) is divorced from the capital which sits on it, allowing for the greatest jurisdictional competition.

Several people have correctly pointed out that seastead competition is weakened by social ties – even if it is cheap for a family and their house to move, they may be tied to a region by jobs, family, and friends.  This is certainly true, but it does not eliminate competition, it only lessens it.  An interesting implication of the model above that in the aquatory lease model, cities will compete for buildings, not just people.  After all, a building is worth the most in the best jurisdiction, and if the building is mobile and the difference between two jurisdictions is greater than the cost of transporting it, it will get moved.  The aquatory is leased to the building, the building is leased to the inhabitants, and everyone has an incentive to provide the most cost-efficient, useful environment for their customers.

Hence, Seasteading FTW.  Or as Eelco Hoogendorn said, “Seasteading is the worst method to increase freedom – except for all others which have been tried.”

  1. July 3, 2009 1:33 am

    I think that even if Caplan is correct, the ‘problem’ of attrition for these wasteful-tax-implementing locales could still salvage the Tiebout model, though in a roundabout kinda way. Those thinking of moving in will find it less attractive.

  2. July 3, 2009 5:49 pm

    The key with Seasteading (or any other form of Nationbuilding for Fun and Profit) is that the inhabitants are not taxed as such. Instead the land is leased to them and they pay rent (which the landowner may choose to vary according to use). If ever land is sold, the sovereignty of the land is sold with it.

    • July 3, 2009 5:53 pm

      Oh, whoops. That’ll teach me to comment half-way through reading.

  3. Eelco Hoogendoorn permalink
    July 4, 2009 4:12 pm

    Several people have correctly pointed out that seastead competition is weakened by social ties – even if it is cheap for a family and their house to move, they may be tied to a region by jobs, family, and friends. This is certainly true, but it does not eliminate competition, it only lessens it.

    An important subtlety to keep in mind, in my opinion, is the different layers of governance that would presumably arise.

    Say you have several tribes, united under one supra-tribal federation of liberarian-minded tribes. Tribe A feels LSD use is an unacceptable public safety hazard. Tribe B is completely cool with it. Switching between these tribes would not be a very big deal. The busines that employs you would probably not be affiliated with any specific tribe anyway, but only with the federation, and best case, you wouldnt even have to move your house at all, merely alter what hallways you can access uninvited, and which you can not.

    You would have greatly increased freedom to choose the policy details. Moving from the white seperatists to the black seperatists or vice versa might be more difficult, but then again, that is a restriction i can live with.

  4. September 20, 2013 4:27 am

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