Fairtrade not Bandaids!

Karl FitzgeraldCommentary, Past EventsLeave a Comment


Thurs Oct 7th, 6.30pm, 1/ 27 Hardware Lane, Melbourne
Karl Williams

Wiki defintion:

Fair trade is a financial relationship between producers, sellers, and consumers based on the principle of equity within the exchange of goods. Equity is achieved via creating a platform for trade that is transparent and therefore accountable for the just treatment of all producers.

The admirable goals of Fair Trade are essentially undermined by the economic systems to which they’re subject. Karl Williams will present an examination of 3 attempts to address sweatshop conditions and environmental degradation in Third World countries and propose the systemic means by which they can be far more effective.

Here is the slideshow:

David Smiley’s Third World Intervention is another useful resource critiquing the role of fair trade and aid.

RSVP appreciated (to assist with refreshments), gold coin donation entry fee.

Land Value Capture for Infrastructure

Karl FitzgeraldCommentary3 Comments

With the federal election campaign today seeing Opposition Leader Tony Abbot promoting Infrastructure bonds with a 10% tax concession for investors, there is an urgent need for better understanding of infrastructure financing.

Abbot’s plan should be written off as the interest rate spread between Australia and the rest of the world is significant enough not to need any incentives. Such a 3 – 4 % interest rate advantage does not require another handout to the top end. Our treasury bonds are attractive enough.

Presumably these same investors would also snap up land in prime locations and benefit two-fold.

The following is a document I prepared for a contact at Infrastructure Australia.

Land Value Capture
Infrastructure adds enormous value to land in prime locations according to proximity and serviceability.

Land Value Capture (LVC) is a simple technique to recycle the publicly funded windfall gains that accrue to land owners.

Importantly, these windfalls are captured over the life-cycle of the infrastructure, such that one generation is not hit with the total infrastructure costs (ie Developer charges).

How it works:
Macro:

  • Government bonds finance the infrastructure project.
  • Government bonds + infrastructure = windfall gains for nearby landowners
  • Yearly land valuations quantify the windfall gain.
  • Council Rates and Land Taxes capture a share of the increase.
  • Over time (20 years) this higher government income repays the government bonds.

Micro:

  • Fixed costs are covered by LVC.
  • Marginal costs are covered by marginal revenue (ie ticket sales on a train).

Political machinations:
A Metropolitan Regional Improvement Tax, similar to Perth’s, could be included in the Federal tax mix. However, it must be set at a higher rate than the 0.14% Perth has used to provide Australia’s most modern PT system.

Revenue from this Betterment Levy type charge could be used to fund the abolition of payroll tax and stamp duties at the state level. We propose a change in the tax mix so that future infrastructure pays for itself by expanding the tax base without increasing the tax burden. A number of submissions to the Henry Review have been made with this in focus.

Examples:

  • MTRC – Hong Kong: has returned dividends for the last decade, dispelling the myth that PT can never be profitable.
  • Japanese Railway East – the efficiencies of LVC have enhanced profitability such that ticket prices have remained at 1987 prices.

We should take stock of how past generations financed public transport:

  • Glen Waverly Station (Vic): How did they do it? Residents were asked and agreed to donate £30,000 worth of land (1925) to build the train station and rail line. Additionally, they were asked to pay a Betterment Levy of £10,000 per annum to cover the first five years operational costs.
  • Sydney Harbour Bridge – 30% financed by council rates on the land only component.

What we are asking:
Windfall gains from infrastructure add up to several times the cost of the infrastructure to surrounding properties. We propose that a sufficient contribution from this windfall be recycled back to the government so that other infrastructure projects can be funded without substantially burdening one generation over another.

At present land speculators baulk at paying barely 10% of the land bounty (windfall gain) back to the community via government’s Land Tax, Council Rates, Stamp Duties and Capital Gains. This abstinence from the public good is limiting government at all levels from funding infrastructure. The LVC rate can be set so that landowners still receive the majority of gains.

Consider:
Northbridge railway redevelopment in central Perth – 50,000 square metres of prime commercial land will be made available by the Rudd government’s recent Federal Budget infrastructure initiative (and local WA government efforts). At present it seems that the plan is to sell this prime location to private interests by moving the station underground. It would be in the community’s best interests if the government could lease the land so they capture the upkick in land values over future years.

For example, the Northbridge railway station tunnel development has a Federal budget of $236 million. Conservatively estimated at $3000 p/square metre, this would see the site worth $150m in today’s figures. With an average 6% growth rate in land values, this would see all such site holders pay the majority of the $236m back in just 7 years. Land values would no doubt have grown by more than 6% p.a since the infrastructure announcement.

Seven years is perhaps too much, over a 20 year lifetime the costs would be shared amongst multiple owners.

Bonds finance the initial investment. Land owners pay the community back for the new services over the lifetime of the asset.

Such an LVC would also keep a lid on land prices (the extent reliant upon the rate set at). With land comprising over 70% of a mortgage, the reduced land-based interest payments would assist the creative small business Perth needs to compete with Fremantle.

By widening the tax base, more Infrastructure Australia proposals could get off the ground.

Advantages:

  • Common sense: Those that benefit, pay
  • Can be revenue neutral
  • Cheaper public transport ticket prices
  • Widens tax base
  • Expands public transport and public services as financed with minimum leakage
  • Spreads load over the entire community, rather than slugging commerce (ie trucks on tollways)
  • Encourages walkable communities by providing a dis-incentive for land speculation
  • Can prevent future GFC’s by deterring land speculation

Resources:

Stiglitz on America’s Economic Dystopia

Karl FitzgeraldTrue Cost Economics5 Comments

Today I had the pleasure of seeing Professor Joseph Stiglitz speak on the topic of From Measuring Production to Measuring Well-Being, courtesy of the Economic Society of Australia.

I became a fan of his following his timely defection from the World Bank as outlined in Greg Palast’s The Globalizer Who Came in from the Cold. I read this article in my formative days of studying geonomics. Palast writes –

So then I turned on Stiglitz. OK, Mr Smart-Guy Professor, how would you help developing nations? Stiglitz proposed radical land reform, an attack at the heart of “landlordism,” on the usurious rents charged by the propertied oligarchies worldwide, typically 50% of a tenant’s crops. So I had to ask the professor: as you were top economist at the World Bank, why didn’t the Bank follow your advice?

“If you challenge [land ownership], that would be a change in the power of the elites. That’s not high on their agenda.” Apparently not.

Back to today’s talk.

Stiglitz framed the discussion around the importance of accurate information, following his specialty of asymmetrical information. The core focus was the need for a Green GDP measure. Paraphrasing his speech, he mentioned:

“What is measured, affects what we do. The distortion created by price (what you can con the market in to paying for a piece of land, for example) rather than value (what can be realistically earnt from that location) causes multiple problems. This lured 40% of all US investment to be channeled into real estate, delivering phony profits. 40% of all corporate profits in the years running up to the GFC bust were in finance. Again these were phony profits, not based on any form of productive value, and so were wiped out by the subsequent market correction.

This was an example of the economics of information. Measurements like GDP included phony profits, making countries look better than what life actually is for those on the ground. ‘Bad accounting leads to bad decisions.'”

Stiglitz segwayed onto the UN’s Human Development Index. He gave the tentative thumbs up to such measurements of the quality of life, saying that incorporating both health and education with GDP per capita was a more rounded measure. Eyebrows were raised when he commented that more weighting should be given to the health and education sectors of the UN HDI than economic growth.

He went on: “It would be negligent of a business not to depreciate it’s capital. This is a key component that all investors consider. Why then do we not incorporate a measure on natural resource depletion?”

Other statistical discrepancies of note included the predominance of mean measures for analysing incomes. The tremendous increase in the ultra wealthy over the last 30 years has dragged the mean upwards. Stiglitz was adamant that ‘more than all the growth in wealth was going to the top, none to the bottom tiers of society’. Far more accurate was to look at medians – measuring the income of those people half way between rich and poor.

As he has throughout the tour, Joseph threw his support behind the mining tax.

“Why does America return such poor results for the 16 – 17% of GDP spent on health? We spend a lot for so little in return. Infant mortality rates are comparable to the Developing World.”

Thoughts flowed to Alanna Hartzok’s 2006 tour when she discussed the Health Olympics (the greater the wealth gap, the poorer the health).

“But yet GDP was pushed higher by poor health outcomes (requiring even more spending).” Why not a similar Defence Spending Olympics as Joseph ridiculed how some US states spent more on new prisons than schools, despite the police and war efforts.

Professor Stiglitz concluded with the need for distinction between what society says makes it happy and what we end up doing. Families not eating together in the main was anathema to the common belief of the family first.

Measurements must reflect what we care about.

This brought me back to the MC’s opening remarks – ‘what doesn’t get measured doesn’t matter’. Why aren’t economic rents measured? Have we learnt anything from the land bubble – the giant black hole of economic analysis – that led to the GFC? Two income earners are working so many hours to cover the mortgage, no wonder they don’t eat together. How extensively would the Riches of Oz be unlocked if we captured the rents for all?

The question I would have asked if I had the chance was, ‘with price to value such an issue in a world of resource scarcity, when are we going to look beyond Reactive Economics (like struggling to find health finance) and look towards Preventative Economics (where our behaviour is influenced before the act)?’

Having sat directly behind Stiglitz pre-talk, I reminded my neighbour that I might have missed out on asking a question, but it was all about location, location. Soon Stiglitz had a copy of Hudson’s Counter-Enlightenment in the post talk rush to speak to him.

A quick prompt of him got the desired response – ‘I’m a huge fan of Henry George’.

With that I encourage you to read this insightful interview with Joesph Stiglitz (h/t – Geophilos & Wealth and Want:
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Herman Daly – Scarcity Rents For All

Karl FitzgeraldHot Issues1 Comment

Sydney Drinking Water
Creative Commons License photo credit: SvenDowideit

Respected Ecological Economists Herman Daly writes in Modernizing Henry George:

Economists have traditionally considered nature to be infinite relative to the economy, and therefore not scarce, and therefore properly priced at zero. But the biosphere is now scarce, and becoming more so every day as a result of growth of its large and dependent subsystem, the macro-economy.

As the macro-economy expands into the ecosystem it displaces what was there before, namely habitat of other species (and of indigenous and poor members of our own species). Consequently, biodiversity decline is a salient index of the increasing scarcity of nature, as is involuntary resettlement of people to make way for dams, mines, soybeans, and cattle; and of course increasing depletion and pollution.

Sacrifice of nature’s scarce services constitutes an increasing opportunity cost of growth, and that in turn means that nature must be priced, either explicitly or implicitly. But to whom should this price be paid? Nature would prefer not to sell herself, but if forced to it by growth, would at least like to divide equally among her children the revenue from the forced sale of her previous gifts. From the point of view of efficiency it does not matter who receives the price, as long as it is counted and paid by the users. But from the point of view of equity it matters a great deal who receives the price for nature’s increasingly scarce services. Such payment is the ideal source of funds with which to finance public goods, and to redistribute to the poor.

“Value added” belongs to whoever added it. But the original value of that to which further value is added by labor and capital, the value of scarce natural resources and natural services, should belong to everyone. It is the original commonwealth. These “payments to nature” should be the focus of redistributive efforts.

Payment for what is now too scarce to be treated as a free gift is measured and appropriated by markets as a rent (payment in excess of necessary supply price). Rent is unearned income to the recipient, but allocative efficiency requires that it be paid by the user of the resource. Taxation of value added by labor and capital is certainly legitimate. But it is both more legitimate and less necessary after we have, as much as possible, captured natural resource rents for public revenue.

The above seems to be the basic insight of early American economist Henry George (1839-1897) who applied it specifically to rent on the scarcity of desirable locations of land rather than to rents on natural resource scarcity in general. Could we not extend Henry George’s logic to resources in general? For resources the necessary supply price is the cost of extraction — so any payment above cost of extraction is rent. Since land has no cost of extraction all payment for land is rent. If no rent is paid, land does not cease to exist. Neoclassical economists accept this definition of rent but resist Henry George’s ethical emphasis on rent as unearned income.

The modern form of the Georgist insight is to tax the rent from land, and by extension from natural resources and services of nature, and to use these funds for fighting poverty and for financing public goods. Or we could simply create a trust fund from these rents, and disburse the earnings from it to all citizens, as in the Alaska Permanent Fund. Our present practice of taxing away a lot of the value added by individuals from applying their own labor and capital creates resentment, and discourages the supply of labor and capital.

Taxing away value that no one added, scarcity rents on nature’s contribution, does not create as much resentment, and the resentment it does cause is less justified. In fact, failing to tax away the scarcity rents to nature and letting them accrue as unearned income to a landlord class has long been a primary source of resentment and social conflict. Furthermore, taxing land and resource rent does not diminish their quantity. Soviet communists tried for a while to abolish the category of rent because it represented unearned income — a part of “surplus value” like profit and interest. They jumped to the conclusion that therefore resources and land must be free. But that makes it impossible to allocate resources efficiently.

Better to follow Henry George and retain rent as a necessary price for measuring opportunity cost, but to then tax it away as unearned income to the landlords. The more we tax away rent the less we have to tax the value added by human labor and capital.

Charging scarcity rents on natural resources and redistributing them to the commonwealth can be effected either by ecological tax reform, or by quantitative cap-auction-trade systems. In differing ways each would limit expansion of the scale of the economy into the biosphere, thereby preserving biodiversity and also providing revenue to run the commonwealth. I will not discuss their relative merits here, but rather emphasize the advantage that both have over the currently favored strategy. The currently favored strategy might be called “efficiency first” in distinction to the “frugality first” principle embodied in each of the policies mentioned above.

“Efficiency first” sounds good, especially when referred to as “win-win” strategies, or more picturesquely as “picking the low-hanging fruit.” But the problem of “efficiency first” is with what comes second. An improvement in efficiency by itself is equivalent to having an increased supply of the resource whose efficiency increased. The price of that resource will decline. More uses for the now cheaper resource will be made. We will end up consuming perhaps as much or more of the resource than before, albeit more efficiently, as pointed out in the nineteenth century words of economist William Stanley Jevons:

“It is wholly a confusion of ideas to suppose that the economical [efficient] use of fuel is equivalent to a diminished consumption. The very contrary is the truth.” (The Coal Question, 1866, p. 123)

We need frugality (diminished consumption) more than efficiency. “Frugality first” induces efficiency as a secondary consequence, an adaptation; efficiency first does not induce frugality — it makes frugality less necessary, and it does not give rise to a scarcity rent that can be redistributed. Let us put frugality first by reducing physical throughput with ecological tax reform and/or cap-auction-trade systems for basic resources, and by so doing both avoid the Jevons effect and collect the scarcity rents on nature for the commonwealth rather than the elite.

If we could directly limit population and per capita resource use (scale of the macro-economy) to a level that nature could easily sustain, then nature’s services could remain free. But if we insist that population and per capita consumption must be free to grow, then the rising cost of natural resources must indirectly limit growth, and the question of who receives the increasing rent (who owns nature) will become ever more pressing, and Henry George’s thinking ever more relevant. Alternatively, our increasing takeover of nature will, beyond some point, render moot the question of distribution of rents by eliminating all potential claimants! When an overloaded ship sinks all aboard drown — even if the overload is justly distributed and efficiently allocated!