UK’s Economist and Financial Times own up
|September 16, 2013||Posted by Staff under Archive, Book Reviews|
Looks who’s saying the emperor wears no clothes
Lately the most prestigious British press has run several articles on the most fundamental economic reform, something you could implement in your own locality simply by shifting the property tax off buildings, onto locations (an aspect of geonomics). We trim, blend, and append three 2010 articles from The Financial Times, July 7, (1) by Martin Wolf (among the most well-regarded and well-connected financial writers in the world ) and (2) by Michael Hudson (chief economist of the Reform Task Force Latvia think-tank) and (3) The Economist, the same week.
by M. Wolf, by M. Hudson, and by The Economist
Austerity is not the only option
Most discussions of how to stabilize national finances assume only two options: “internal devaluation” (shrinking the economy by cutting public spending) and currency devaluation.
The Baltic states have applied the first option. Government cuts have shrunk the gross domestic product of Latvia and Lithuania by more than 20% in two years, while wages in Latvia’s public sector have fallen by 30%. The hope is that falling wages and prices will see economies “earn their way out of debt”, creating a trade surplus to earn euros that, in turn, can pay the debts that fuelled the post-2002 property bubble.
The second option has been tried less often. Those eastern European countries that have not yet joined the euro know that currency depreciation would delay their planned European Union membership. It would also raise the price of energy and other essential imports, aggravating the economic squeeze and trade deficit.
To most leaders, austerity seems the only choice. The problem is that austerity prompts strikes and slowdowns, which, in turn, shrink the domestic market, investment, and tax receipts. As unemployment spreads and wages fall, mortgage arrears, and defaults soar. Property prices have plunged too. Some business owners are even now taking a novel approach to escaping their debts: emigration.
A third option: public recovery of land value. Hong Kong promoted its economic take-off by relying mainly on collecting the land’s rental value. Raising taxes on land leaves less value to be capitalized into bank loans, thus guarding against future indebtedness.
Housing costs typically absorb 40% of family budgets in eastern European countries. A reduction to 20% — the typical rate in Germany’s much less indebted economy — would help to boost demand elsewhere in the economy.
Recovery of the socially-generated value of land makes it possible to lower other taxes. Lowering taxes on wages would reduce the cost of employment without squeezing take-home pay and living standards.
To avoid needless austerity, the clear alternative is recovering the rising land values created by general prosperity. Taxing the “free lunch” of rising land values was part of the original liberalism of Adam Smith, John Stuart Mill, and the Progressive Era reformers in the US.
JJS: Wolf adds at his FT blog, “Why were resources expunged from neo-classical economics?”, noting:
In classical economics, land, labor and capital were the three factors of production. Neo-classical economics had just two factors of production: capital and labor. Land — by which we mean the totality of natural resources — was then incorporated into capital. The idea that land and capital are the same thing is evidently ludicrous. It requires us to believe that the economic machine is self-sustaining — a sort of perpetual motion machine.
Why we must halt the land cycle
The people of the US, UK, Spain, and Ireland became feverish speculators in land. It’s the resultant credit-fuelled property cycle that lays behind the financial and economic crisis into which the world has fallen.
In 1984, I bought my London house. I estimate that the land on which it sits was worth £100,000 in today’s prices. Today, the value is perhaps ten times as great. All of that vast increment is the fruit of no effort of mine. It is the reward of owning a location that the efforts of others made valuable.
So I am a land speculator — a mini-aristocrat in a land where private appropriation of the fruits of others’ efforts has long been a prime route to wealth. This appropriation of the rise in the value of land is not just unfair: what have I done to deserve this increase in my wealth? It has obviously dire consequences.
First, it makes it necessary for the state to fund itself by taxing effort, ingenuity, and foresight. Taxation of labor and capital must lower their supply. Taxation of resources will not have the same result, because supply is given. Such taxes reduce the unearned rewards to owners.
Second, the artificial scarcity of land. Newspapers hail upward moves in the price of a place to live — the most basic of all amenities. The rigged land market is the biggest single cause of this calamity.
Third and most important, the credit cycle, which has yet again destabilized the economy. Fred Harrison argues that this cycle — with a duration of 18 years — was predictable and, by him at least, predicted. In essence, buyers rent property from bankers. A host of agents gains fees from arranging, packaging, and distributing the fruits of such highly speculative transactions. In the upswing, they all become rich together. When the collapse comes, recent borrowers, the financial institutions, and taxpayers suffer huge losses. This is no more than a giant pyramid scheme.
I have long been persuaded that resource rents should be socialized, not accrue to individual owners. If “a crisis is a terrible thing to waste”, here is an urgent case for action. Socializing any gain from here on would eliminate the fever of land speculation and allow a shift in the burden of taxation.
The Economist book review
In the same book Adair Turner, the head of the Financial Services Authority (Britain’s soon-to-be-restructured regulator), points out that only a minority of bank activity concerns the channelling of savings to businesses investing in productive assets, what you might call the classic raison d’être of banking.
Instead, lending is dominated by the residential- and commercial-property cycle. These cycles are self-reinforcing: more lending pushes up property prices, which encourages more lending. At the margin, the property cycles might lead to the construction of better buildings, but such modest benefits are outweighed by the accompanying financial and economic instability.
The financial industry has done so well for itself, in short, because it has been given the license to make a leveraged bet on property. Yet almost everyone from bankers through regulators to politicians missed one simple truth: that property prices cannot keep rising faster than the economy or the ability to service property-related debts. The cost of that lesson is now being borne by the developed world’s taxpayers.