Beyond Flat Earth Economics

Karl FitzgeraldArticlesLeave a Comment

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A document prepared for the 2013 Sustainable Living Festival, where a talk on this topic was delivered. Download the PDF with poster designs (10MB).

We have just seven years until the 2020 deadline for significant pollution reductions. To speed this process up, the public must understand the drivers of business behaviour and how this impacts our lives. Economics is the framework for such analysis. The good news is a new framework for economic thinking recognises the earth as finite. At the heart of this change is an acceptance the economy is reliant on a healthy environment.

Unfortunately, lobbyocracy (the hypocrisy of democracy) has savaged such common sense. From land speculation, to extraordinary mining profits to water privatisation, government policy has fostered the commodification of nature. Whether it’s ‘location, location, location’ or ‘drill baby drill’, the owners of the earth chase easy profits from the naturally rising value of the planet. Economists have traditionally recognised that those who own the earth have an un-natural advantage over anyone running a business or earning a wage. The tax system was seen as the great leveler between those in the know and those on the go.

The moral grounding for such an outlook is a recognition that we are all borne onto the earth as equals. The scientific argument looks at externalities and the failure of economics to relate to reality. The economic basis is about efficiency. The Total Resource Rents of Australia report finds that prices are 23% higher than they should be. Those who own natural resources and licensed government monopolies generate 27% of GDP. But the economic textbooks state such economic rent is only 1 – 3% of the economy.

Imagine if you could earn $2 million per hour, even in your sleep? Gina Rinehart enjoys this sensation, despite the fact she has never delivered one ton of iron ore to the market. Each day we walk past land that has gone up thousands of dollars over the last year, despite no effort by the owner. Neo-classical economic theory has papered over these advantages as if there were enough places for us all.

A classic example is workers taking on a second job. They are taxed. But if you own a second property, you receive a tax subsidy via Negative Gearing (NG). These tax writeoffs have totaled $33.5 billion (1993 – 2010). Since mid 2010, national property prices have fallen 8.6% in real terms. Most negative gearers are average Australians – 800,000 of the 1.1 million NG’s earn less than $80,000 p.a. They can’t afford to throw money down the drain for much longer. Tick, tock ….

The favourable treatment of property speculation has seen the number of investors in the housing market increase from 12% in the mid 80’s to 34% in the last decade. Families and first home owners have been squeezed out.

The property development lobby has predicated affordable housing upon a ‘sprawl baby sprawl’ mentality. “We need more land supply” has been their incessant catch-cry. The government succumbed, re-zoning 97,000 hectares of land residential over the last decade. Equivalent to the size of Canberra, this could house over two million people.

Last year, with land prices falling, the development lobby pulled 30% of land supply from the market in the Shire of Mitchell. This was a sign of market power, attempting to curtail the fall in land prices. It demonstrated a breach of faith that few have questioned. The ability to offer ‘real estate 4 ransom’ continues around the world, despite the role the global property bubble played in blowing the world economy apart.

Power is further compounded by the biased information one bases the largest financial decision of their lives on – housing. Earthsharing Australia has conducted a study of ‘Speculative Vacancies’ for six years.

Our findings are generally three times higher than the REIV’s more widely publicised housing vacancy rate. This is because we include investment properties held empty in lieu of capital gains. Many are aware of one or two vacant properties in their neighborhood. These add up to 90,000 empty houses in Melbourne. This study conservatively ignores the land banks making up the 97,000 hectares of sprawl. Vacant homes -> more sprawl -> more pollution. Higher rents mean less for organics.

In short, the Next Economy must encourage a ‘steady state’ of natural resource management. The raping and pillaging of planet earth must end. An Earth Rights Democracy supports life by respecting the economy as a subset of the environment.

High economic growth rates can be wound back when those earning millions in their sleep are brought back a peg with tax reform. Society then no longer has to pedal so fast to keep up.

Society’s debt overhead will reduce. With land prices accounting for 65 – 70% of a typical mortgage, lower land prices will result from less speculation. Added flexibility and reduced work hours then become an option.

Business can be attracted by removing most of the current 126 taxes, and replacing this burden with a few charges on the economic rents that monopolists earn in their sleep.

Land Value Tax is the lynchpin, deterring property speculation and rewarding entrepreneurs. Self financing public transport then becomes possible. Tax havens are written off. Urban density and walkable communities are natural flow ons. Increasing Resource Rents on precious resources encourages green industry. By taxing away more of the ‘brown’ profits, our best and brightest will look to more sustainable industries. There is no economic justification for privatisation – natural monopolies belong in public hands. An enhanced Carbon Tax will see the pricing mechanism signal with urgency the permafrost challenged future. The valuation of eco system services is another positive development to support.

By changing our philosophical outlook on how we finance government, the privatisation of nature will no longer be a priority. We can become custodians rather than consumers of our dear planet.

3 Things to do:

Watch Real Estate 4 Ransom
Take a free trial subscription to our 108 year old Progress Magazine
Listen to the Renegade Economists, 5.30pm Wednesdays (podcast)

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