Extra Environmentalists: how Real Estate 4 Ransom drives the growth paradigm

Karl FitzgeraldMultimediaLeave a Comment

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One of the world’s leading podcasts, the Extra Environmentalists, has shown an increasing interest in Georgist economics over recent episodes. I sat on the other side of the fence for once, as the interviewee in Supply Shock – an exciting way to finish 2013.

We covered many of the topics I race through on the weekly Renegade Economists podcast, including the role of increased capital mobility on real estate prices, Blackstone Capital, rental backed securities and the big one, how the value of the earth was removed from analysis through the corruption of economics.

Justin and Seth write:

When the profession of economics began to think that land and capital were equivalent and interchangeable, the roots of real estate speculation and environmental crisis were established. Because the origins of neoclassical economics became deeply influenced by the interests of early 20th century land barons, a new economic paradigm will have to challenge the assumptions of powerful landowners. Will a world in search of economic growth embrace a steady state that properly analyzes the role of land in economic life? Can the rampant real estate speculation across the planet be tamed with an overhaul of our tax system?

Listen to the entire show:

Part one of the two hour show was Brian Czech from the Centre for Steady State Economics on his new book Supply Shock, which includes analysis of how Henry George and Classical economics were removed from the curriculum.

In part two, I point out that small business aims for a 6-8% return on capital invested. Share investors are happy with 8 – 10% but real estate investment in Australia is pushing 15% returns.

I would liked to have built upon that to say it is this 15% return that drives the growth paradigm. On the revenue side, all other facets of the economy are clamouring for similar growth levels and try to cut corners to keep up with these easy returns, known as unearned incomes.

On the cost side, many small businesses and tenants face higher rents because of this speculative largesse. Each time a property is sold at a higher price, rents must be increased when a new lease is signed to justify the higher land price.

The end result? The few independently owned small businesses remaining in our neighbourhoods are often those that own their premises. Have you ever seen any such small business, perhaps one that does not look very busy and wondered how it stays alive? Pop in and ask them if they own the building. Perhaps they are enjoying their ‘privilege’, using the rising rents they are able to charge their tenants to finance what they love (retailing a product perhaps of dubious popularity).

Thus the treadmill speeds up due to the opportunity cost of business people sweating away trying to earn their 6% (and wage earners hoping just to keep up with inflation, let alone land prices) whilst property flippers earn 15% and are barely taxed. On some level we try to keep up with those earning more money for less effort, pushing the need for economic growth at the ballot box. Few realise that those enjoying unearned income will always outstrip society whilst the tax system is structured to penalise those working (with income and company taxes).

Within reason, we should all be sharing in this rising value of the earth, such that pressures to keep up with the 15% returns are minimised by land taxing away the easy profits (unearned incomes) in real estate. Then we can slow down a little to establish long lasting relationships in our community before being pushed on by speculative gentrification practices.

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