Adam Schwab wrote up our fourth report on speculative vacancies in Crikey yesterday.

Shortage or glut? Feast or famine? The question of whether Australia is suffering a housing shortage continues to be hotly disputed, with the real estate and construction lobbies arguing a desperate shortage exists, while other independent bodies, such as Prosper Australia, disputing the notion of a shortage.

The housing glut argument is led by Earthsharing Australia, which last year produced a report suggesting that the vacancy rate in Melbourne (until recently, one of Australia’s hottest property markets) was about 5%. In fashionable suburbs, such as East Melbourne or the Docklands, vacancy rates exceeded 8%. Earthsharing’s report, which was based on water statistics provided by City West Water and Yarra Valley Water, suggested that more than 60,000 properties lay vacant in Melbourne — substantially more than the reported vacancy report suggested by the real estate lobby.

While not a perfect measure, there is a degree of commonsense to Earthsharing’s report. Rather than attempt to guess whether there is a housing shortage based on economic assumptions, the group simply checked whether to see water was being used in a property — it is not unreasonable to suggest that if no water is being used for a length of time, the property is unoccupied.

That view was contrasted by a report released by the National Housing Supply Council, which echoed the sentiments of construction groups and claimed Australia was in the midst of a housing shortage. In fact, according to the council, the shortage actually increased by 28,200 to 186,800 during 2011. Even worse, the alleged shortage is forecast to widen to 640,000 within 20 years.

The National Supply Council is a strange beast — formed by the federal government in 2008, the organisation is a strange mix of academia, property developers and the even respected Saul Eslake. Included in the council are Mark Hunter (CEO of Stockland Residential), Nigel Satterley (property developer and BRW Rich List member), Ruth Spielman (executive officer, National Growth Areas Alliance) and Simon Norris (Clarendon Homes Queensland).

The council’s rationale for deeming a housing shortage is worth considering further. That is because rather than look at actual demand for housing, the council uses “underlying” demand. This leads to strange results.

Last year, the population of Australia increased by 320,000 — this was through a combination of immigration and births (less deaths). This figure is sourced from the ABS, so we can assume it is about a correct a figure as we can locate. According to the council’s report, there were 131,000 dwellings added last year (this figure is lower than what other sources claim, but we’ll accept it).

The council’s own report noted that there are 8.7 million households in Australia — with a population of 22.4 million, that means there are 2.6 people per household. Using fairly simple arithmetic, that means with 2.6 people per dwelling, and 131,000 new dwellings, enough housing was built last year for 340,000 people.

But wait, the population only increased by 320,000 people — that means, despite the council’s claims, there is a surplus of housing being built (even with dwelling construction being less than forecast). This appears to contradict the council’s finding that the shortage increased in 2011.

The council claimed that “on the demand side, at any given point in time underlying demand may not feed through directly into effective (actual) demand” — basically, what that appears to mean is that while there isn’t really a shortage, it will make some assumptions that allow a shortage to appear.

Later, the council noted that “the level of underlying demand is driven mostly by migration and other demographic factors”. Essentially, it appears the council is claiming that demand may increase in coming years (even though immigration levels are falling, rather than increasing), and that is why a shortage exists. The fact that a surplus of housing was built last year is disregarded.

More mysteriously, the Supply Council also claimed that “there were about 8.7 million households in Australia in June 2010. The number of households is projected to be 12 million by 2030, representing a net increase of nearly 3.3 million households between 2010 and 2030″.

This alarming forecast again doesn’t appear matched by recent facts.

Based on household numbers, the council is predicting an Australian population of 31.2 million in 19 years. That’s an increase of 9 million from the current level. The problem? That would require Australia’s population to increase by 473,000 per year — 42% more than the population increased in 2011. In fact, that’s a higher population growth rate than Australia has ever recorded. The claim is more difficult to justify given that Australia’s population growth and migration is slowing after spiking in 2008 and 2009 (see table below).

House prices haven’t increased because of increased demand from migrants outstripping dwelling construction — rather, prices have risen because bank lending has created false demand. Supply factors have played little, if any role in the recent house price growth. As soon as bank lending is restricted (and this is happening already), it is likely the illusion of a supply shortage will disappear. Just like what happened in Japan in the 1990s, or California and Ireland after the recent financial crises.

David Smiley

David Smiley is the author of Crumbling Foundations and Third World Intervention – A New Analysis

Revolutions usually start with the violent toppling of some hated figurehead, for example the French Louis XV, the Russian Tsar or some recent Middle Eastern despot. Revolutions usually finish in confusion. This is because, after the smoke and confusion of battle, a hastily patched up government may have given little thought about what comes next. And so, unless the underlying causes of revolution are carefully examined, then important opportunities for reform may be lost, and the revolution may not be successful.

In these articles I will examine a number of revolutions, look at some of the opportunities that were lost, and draw some conclusions. But first, how do we define revolutions?

Classical Marxists saw revolution as the violent anti-capitalist uprising of an urban proletariat. But the urban poor in Paris and St. Petersburg had fled there from rapacious rural landlords, then to be fleeced by rapacious urban landlords. Even today, in the slums of Rio or Mumbai, most of the proletariat would identify the oppressor with the rent collecting slumlord or protection racketeer round the corner rather than some conceptual capitalist. Marx would not have recognised today’s slum dwellers, without factories, workshops and work, without capitalist bosses, in a muddle of informal and criminal activities far beyond class mobilisation. Finally, since I wish to include some revolutions that have been non-violent, or simply evolutionary, I will therefore take revolution to mean any major socio-economic transition.

I must start with a few simplifying assumptions. I will test each of these against a number of revolutions. Where these assumptions do not fit I must explain why. Here, then, are my preliminary assumptions. Revolutions occur when relative deprivation becomes intolerable and some window of opportunity opens. Whether violent or non-violent, the focus on a king, a dictator or an occupying power prevents clear thinking about the powerful agencies that prop up this figurehead.

In a country sliding towards revolution, one of these agencies may control capital assets, collecting monopoly rents. A contemporary example is the Egyptian military. Another agency, a network of absentee landlords and slumlords, collects the land rent. Contemporary examples can be found in Kolkata, Mumbai or in any Latin American city. And a third agency controls the extraction of natural resources, collecting resource rents. Contemporary examples include the Saudi royal family and, at the time of writing, Colonel Gadaffi. Finally, there may be an external agency, an occupying power or a transnational corporation, often in collusion with one of the other agencies in order to share out the rents. So, when the king has been toppled, reforms that do not understand the power of these agencies may be quite inappropriate and the revolution is therefore unsuccessful.

A major object of these articles is to identify, for each case study, non-violent alternatives that could have avoided the huge costs suffered.

In part one I will analyse three classical revolutions, the French, Russian, and the Chinese up to the death of Mao Zedong. In part two I will examine four non-violent revolutions: an evolutionary one called the Industrial Revolution, the coercive but peaceful creation of the Asian Tigers, the spontaneous one that followed the death of Mao, and one called the bourgeois revolution in India. In part three I will trace recent evolutionary revolutions that are experimenting with something that is itself revolutionary, the use of social media.

PART ONE
The French revolution arose from the relative deprivation of the working class under a wealthy land-owning class. The focus was the monarchy, symbolised by the opulence of the Palace of Versailles. The method was very violent, the removal by the guillotine of royalty and large numbers of the aristocracy. But did it reduce the power of the military? No, within six years Napoleon was dispersing a Paris mob “with a whiff of grapeshot” and, in another nine years, he had declared himself emperor. Did it reduce the power of the landowning elite? No, they soon returned to the building of luxurious chateaux. But though the collusion with outside powers continued it was mostly over strategic marriages, those “dynastic squabbles over real estate”.

The importance of natural resources had to await the industrial revolution. So, what reforms followed the French revolution, and what opportunities were missed? The reforms included a secular constitution and the adoption of some of Thomas Paine’s Rights of Man. What opportunities were missed? For an oppressive agrarian society the opportunities lost essentially concern land reform. With very few exceptions, which we will examine later, land redistribution from rich to poor has been violent, or condemned as property expropriation and therefore legally defeated.

I believe the French revolution missed two opportunities which were both non-violent and legal. One opportunity had been explained by the French Physiocrats, who had developed the first ever econometric model, the Tableaux Economique, which had hinted at the taxation of land rent. But in the revolutionary rough and tumble the Physiocrats had been forgotten. The second opportunity came with the publication of Thomas Paine’s Agrarian Justice, in which he argued the need to match land rights with land taxation obligations. But by then, the French, and also the Americans, had thought, incorrectly, that Paine’s earlier book, the Rights of Man, had said it all. It had not.

In summary, the French revolution seems to conform to my assumptions. Was it successful? The net benefit has been debated ever since, but there is little doubt that it incurred a huge opportunity cost in ignoring the Physiocrats, and Paine’s Agrarian Justice.

The Russian revolution arose in a similar way, with a wealthy land-owning aristocracy owing allegiance, in this case to the Tsar. The focus was therefore the Tsar, symbolised by the palaces of St Petersburg. Peter the Great, in a fit of pique over an unsuccessful palace revolt in Moscow, and with the income from his own immense landed estates behind him, had then ordered the construction of a new capital in a freezing Baltic swamp. In an insane attempt to rival Versailles and Venice, the building of St Petersburg cost the lives of 150,000 serfs and bankrupted the economy.

In 1861 the emancipation of the serfs made little difference to their fortunes since land ownership, and hence rights to collect whatever rents they wished, remained concentrated in the nobility. Under Marxist leadership the revolutionary method was, and continued to be, very violent. Capital assets, land and natural resources were nationalised. Already low production incentives were raised only by extreme coercion. Under Stalin massive assassinations and failed economic plans cost something like 30 million lives.

After further huge costs from the Second World War and the Cold War, Russia started to lose its way.

What then, were the opportunities forfeited by Russian communism? Tolstoy had already recommended land reform, and the implications of Ricardo’s law of rent was not lost on Engels whose Communist Manifesto started with “The collection of all land rent for public purposes.” This was never implemented and, when Russian communism finally imploded and property rights were suddenly up for grabs, an American Georgist economist collected 30 signatures, three from Nobel Prize winners, for a letter to Gorbachev advocating what was essentially the collection of all land rent for public purposes. But by then the Commissars had already morphed into capitalists and it was all too late.

The Chinese revolution also arose from poverty and extreme deprivation caused by the feudal system. But this was made worse by the Japanese invasion which overlapped with the Chinese civil war. After the Japanese were defeated and Mao Zedong’s won the civil war, his revolutionary method consisted of two land reforms and a disastrous industrial experiment. The method employed in the first land reform was the slaughter of ten million landlords. Thus liberated, the peasantry were easily driven into collectives and communes, the largely unsuccessful second land reform. The industrial Great Leap Forward then led to mass starvation and the cost of 35 million lives.

Locked into Marxist ideology and being economically illiterate, Mao was quite unaware of the opportunities of other reforms. After his death, occurred China’s third land reform, perhaps the most successful revolution in human history, the subject of the next article.

PART TWO
The industrial revolution, though it possessed the classical revolutionary ingredients, British dispossessions labelled The Great Hunger in Ireland, the Highland clearances in Scotland, and the Enclosures Acts in England, generated no major uprising. I include it here to compare its opportunity costs with those of violent revolution. Its method included rural dispossession that fed surplus labour into overcrowded factory towns, exploitation of the resulting cheap labour, private capital industrial investment, the extraction of raw material from colonies, and profits from the slave trade.

The short term outcomes were poverty, starvation and mass migrations to America and the British colonies. But the long term outcome was a leap in industrial efficiency in which Adam Smith’s optimism defeated Thomas Malthus’ pessimism. The industrial revolution evolved across Europe and to North America, creating what we now call the “West”, a combination of competitive and monopoly capitalism, an imperialism that once owned more than half the world, and now a neo-imperialism called the Washington Consensus.

The old feudal class system put its money in factories and, in the 20th century, evolved, into a system of agricultural support that rewards landowners at the expense of taxpayers and the third world farmers which the scheme bankrupts. The opportunities forfeited by this laissez-faire system, already labelled capitalism, would by then have included communism. But the socialisation of the means of production would probably have been as unsuccessful as it was to be in Russia, China, Cambodia and North Korea.

However, having seen how the expropriation of peasant land created a factory underclass and an urban upper class of landlords and factory owners, Engels in 1848 published, along with Marx, the Communist Manifesto. Item one advocated “the collection of all land rent for public purposes”. This revolutionary idea was developed into Henry George’s Progress and Poverty. Though the idea found its way into local government revenue systems, it was never fully implemented. This reform could have raised incomes, reduced inequality, and avoided the recent Great Financial Crisis.

The creation of the Asian Tigers was a response, by General MacArthur, to instructions to stop the spread of communism into South East Asia after World War 2. Given absolute power to do so, he recognised the link between feudalism and poverty. So, his focus was on feudal landlords. His method was non-violent, agrarian land redistribution, from the rich to the poor, in Japan, South Korea and Taiwan. The results were spectacular.

Feudal class relations were replaced by egalitarian family farms, and the sudden leap in production incentives carried economic growth from zero to eight percent per annum.

“In all three of Asia’s biggest successes – Japan, South Korea and Taiwan – the groundwork for both fast growth and the income equality that eased the social strains of development was laid by a radical land reform.” (Economist, 29 June, 1991, p. 16.).

But there are two large opportunity costs of land redistribution that become obvious as a country urbanises, as I will examine in the case of China.

First, land redistribution is inappropriate to cities. Second, as urban migration responds to industrialisation, they leave behind assets of falling value but must pay high rents in the cities to those who were there first. Rural poverty migrates to urban poverty.

The third China land reform arose in the inter-regnum after Mao died in 1976. Deng Xiaoping recorded that “Almost immediately, and perhaps spontaneously, the peasants began to divide up the land themselves and grow food as they thought fit instead of following state directives.”

Then, in 1978 Deng Xiaoping was smart enough to claim this as his Household Responsibility System. Later, Deng admitted that “What took us completely by surprise was the development of township and rural industries” as the peasants invested surplus and turned capitalist.

By the mid-1990s, over half of China’s industrial output came from these rural enterprises that operated outside the planned economy. Was there an opportunity lost to Deng? This third land reform, in one of the most egalitarian countries in the world, was non-violent and led to an unprecedented and almost continuous economic growth of ten percent per annum. What more could he want?

But after three decades of prosperity China now faces corruption and social unrest resulting in 15 million urban migrants a year. And the vibrant underlying economy must still carry inefficient state-owned industries and a largely unnecessary political bureaucracy. To keep ahead of popular uprisings, China’s domestic policy must be continued high economic growth while trampling on human rights. But to achieve this it needs natural resources it does not have. Therefore, China’s foreign policy must be to control or obtain these resources as ruthlessly as necessary, from anywhere, anyhow, controlling water from Tibet, food from Africa and energy from Australia.

Paralleling that of the Washington Consensus, China’s new foreign policy has now been labelled the Beijing Consensus. To get these it must provide money, guns, bribes, political leverage, anything, to any state, good, bad or ugly, that is rich in oil, gas, coal, minerals and steel.

There is one opportunity still overlooked. Engels called it “The collection of land rent for public purposes” but communism ignored it to its peril. George called it the “Single tax” but the West also ignored it.

PART THREE
India’s bourgeois revolution. Robert Stern in Changing India: Bourgeois Revolution on the Subcontinent attributes India’s economic takeoff to the effects of capitalism and parliamentary democracy. That he calls it “change from the middle upward”, one that is bypassing the poor, is well illustrated by this quote from World Hunger by Lappe and Collins

“The buyers are a motley group, some connected with land through family ties, some altogether new to agriculture. A few have unemployed rupees acquired through undeclared earnings, and most of them look upon farming as a tax haven, which it is, and as a source of earning tax-free supplementary income.”

The medical doctor from Jullundar who turned part time farmer is sitting pretty. The 15 acres he purchased four years ago have tripled in value. To listen to him, he is farming ‘for the good of the country’. His only vexation is whether or not he will succeed in buying another ten acres he has his eyes on – and what a disappointed man he will be if they escape him. As we watched him supervise the threshing, he was anything but a gentleman farmer.”

What, then, are the opportunity costs of this bourgeois revolution? Marxism has failed in Kerala, been abolished in West Bengal, and discredited elsewhere in the world.

Since India’s economic takeoff has benefited mostly the landowning class, we must look to land reform. But every attempt at rural land redistribution in India has been defeated by people powerful enough to legislate around it. Meanwhile urban slumlords extract rent, even from those squatting on footpaths and railway sidings.

This leaves land value taxation as the only way out of poverty while, at the same time, increasing economic efficiency.

Conclusions
Our preliminary assumptions closely fit the case studies so far, encouraging me to look at other world regions in a later article. For example, I grew up in South America and extensive studies since then suggest for me the relevance of my assumptions to that region. For Sub-Saharan Africa I would add bureaucratic rents to those of capital, land and natural resources before proceeding. In a previous article I hinted at Georgist solutions to the problems in the Middle East and North Africa.

Though my assumptions closely resemble the agencies propping up kings and dictators in that region, events are still unfolding. Therefore, it is too early to know what effective reforms, if any, will follow the toppling of the tyrants. But I am sure, without tax reform, they will carry large opportunity costs.

So, when do revolutions succeed? When the tyrant is toppled? Or when the power behind the tyrant is reformed? The more diffuse the power, as with feudal, caste, oligopoly and reciprocity systems, then the less effective is legislation, and the more effective are financial incentives. Economists always reach for taxation when they want to change behaviour to achieve social objectives.

Our good friend Frank de Jong has set up Earthsharing Canada. Check the new look website where you can read Frank’s erudite writings like:

Untax Business, Uptax Nature
By Frank de Jong

Well, the federal political parties are saber rattling again, threatening an election over the corporate tax cuts which will be in the upcoming budget.

The Conservatives are sticking with their plan to roll back corporate taxes from 22% in 2007 to 15%, that corporate tax cuts are good for the economy…, while the Liberals say this is a bad idea in the face of a $56 billion deficit. The NDP are of course lined up behind the Libs.

Both sides are half right and half wrong, giving the Green Party an excellent opportunity to promote our economic program.

Harper is correct, corporate taxes are bad for the economy. Taxes on productive activities are “dead weight” taxes which make some marginal productive activities uneconomical that otherwise would be viable, creating jobs.

But the Libs and NDP are also right, that the gov should not run a deficit, should not mortgage our future, nor should it cut programs that hurt people, especially the vulnerable, and lower the quality of life.

Green economic theory agrees that governments should untax businesses to encourage economic activity, jobs, providing goods and services. There should be no taxes at all on businesses. We want businesses to be successful so why would we punish them with taxes??

But green economics is socially progressive and fiscally responsible, so clearly governments should not run deficits and governments need revenue to provide the programs we need and want.

What to do?

The Green Party solution is to untax people and businesses and instead generate needed revenue by collecting fees and levies on the use and abuse of nature. This approach will right-price nature, preserving it, and at the same time encourage businesses to be more resource efficient (conservation) and labour intensive (more jobs).

If the next federal election is fought over corporate tax cuts, we will have an excellent angle, a very strong platform.

Our slogans can be: Pay for what you burn, not for what you earn. Pay for what you take, not for what you make. The government should collect unearned income, not earned income. Government shouldn’t punish someone for having a job or punish a business for being successful!

By untaxing jobs and business and instead collecting “economic rent” (revenue without a corresponding cost of production), government would be putting renewables on a level playing field with fossil fuels, would make walkable communities attractive compared to sprawl, and bias organic, local agriculture over industrial/factory farming.

Land Value Taxation comes to Ireland

A very good development coming out of the Irish meltdown, the introduction of nation-wide land value taxation policy. http://www.thejournal.ie/government-announces-new-site-value-tax-from-20…

Site Value Taxation (or Land Value Taxation) is like the property tax except that it levies only the value of the lot underneath the buildings, not the value of the buildings (improvements). It is a tax shift, not a tax grab, since other taxes will be reduced.

One benefit is that it doesn’t punish those who renovate, expand or who build affordable housing. In Canada, multi-unit and commercial buildings pay 4 – 10 times the rate of detached houses.

Another is that it “right prices” land which will incent efficient land use, reducing sprawl. A vacant lot will carry the same charge as a lot with a building on it, encouraging people to build or sell, rather than hold land out of production for speculative purposes.

Also, assessments are more accurate and simpler when only the lot is assessed, and not the buildings, a problem which hit the papers in Ontario.

LVT is not just for the municipal level. The Ontario and Canadian governments should generate most of their revenue from land value taxes plus levies on resource use and pollution, in lieu of income, business or consumption taxes. Income and business taxes kill jobs and damage the economy, but taxing nature doesn’t.

“When capitalism started, nature was abundant and capital was scarce; it thus made sense to reward capital above all else. Today we’re awash in capital and literally running out of nature”, Peter Barnes, Capitalism 3.0

“A commons arises whenever a given community decides that it wishes to manage a resource in a collective manner, with special regard for equitable access, use and sustainability. It is a social form that has long lived in the shadows of our market culture, and now is on the rise.”, David Bollier, www.onthecommons.org
.

“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?”, Herman Daly

These 3 quotes were part of a document we prepared for the Sustainable Living Festival. Download the double sided A4 paper Earth Based Economics and share it around.

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:

Joseph Stiglitz: October 2002 Interview
with Christopher Williams, of the Robert Schalkenbach Foundation,
published in Geophilos, Spring, 2003

Q: I want to follow-up on what you had said some months ago about land reform:

JES: “The main, underlying idea of Henry George is the taxation of land and other natural resources. At the time, people thought, “not really that too,” but what was underlying his ideas is rent associated with things that are inelastically supplied, which are land and natural resources. And using natural resource extraction and using land rents as the basis of taxation is an argument that I think makes an awful lot of sense because it is a non-distortionary source of income and wealth.

Q: In Globalization and its Discontents, you write (p. 81): “But land reform represents a fundamental change in the structure of society, one that those in the elite that populates the finance ministries, those with whom the international financial institutions interact, do not necessarily like.”

JES: Yes. Let me try to approach the question a little more systematically. Once you take the perspective I just gave, that means the management should be done in such a way that it maximizes the amount of money available to the US government from natural resources because they are within its domain and control. So, looking at the United States, one of the implications of this is that a foundation such as yours [the Robert Schalkenbach Foundation, created to promote the ideas of Henry George, as expressed in Progress & Poverty] ought to be very much against the policies of the US government of giving away our natural resources. Here is a case where we not only are not taxing it much, we’re actually giving it away.

Q: I assume you’re speaking in particular of oil and mineral rights, but would not Broadband Spectrum rights also be included in that category?

JES: Yes, Broadband Spectrum rights as well. Now, giving away rights such as those would be anathema to the spirit of Henry George. And the second part is that when you sell them, you want to do so in such a way as to maximize the revenues. And whether you decide to sell it or whether you decide to rent it, would be the question of what is the way that maximizes the extraction of public revenues.

Q: And those revenues go to the people. Not to private concerns.

JES: Exactly. So you’re trying to say, from the perspective of public management, how can we take this inelastic supply of public resources and maximize the rents that we can extract from it, consistent with other public objectives? That is a very deep philosophical approach, and requires a re-thinking of how we manage all aspects of those public resources. However, much of what we do is inconsistent with that. Now, the issue of land reform is a little bit different. There, it’s a two-step analysis. My concern that I expressed about land is that in many developing countries, you have most land owned by a few rich people, and the land is relatively little taxed. But the land is worked in a system of sharecropping in which workers have to pay the landlord 50% of their output. In a way, you can look at that 50% as a tax. The sharecroppers are paying a 50% tax to the landlord. But it’s worse than a tax. Because it’s not a land tax, it’s a tax on their labor. And it’s a tax that goes to the landlord rather than to society. So the notion is that land reform could take a variety of different forms. For instance, the government could take over the land and rent it to the people. Or give it to the people and have a land tax that would not have the distortionary effect of land reform. So, in a way, these systems of share-cropping are worse even than anything that Henry George was worried about in terms of misuse of land.

Q: However, when you speak of land reform, do you have concerns about compensation as an issue in its implementation?

JES: That is one of the key issues. And there’s a program at the World Bank that’s been started in Brazil, which is called “Market-Based Land Reform” where they buy the land and give it or sell it to the workers. They use government power to obtain the right to buy it.

Q: Has President Mugabe of Zimbabwe’s misuse of government power to return land to its so-called “rightful owners” given land reform a bad name?

JES: That’s true, but it doesn’t have to be done that way. Now, one of the things that is again in the spirit of Henry George is that, if you have land taxes, then the market value of land goes down. What you’re willing to pay for land is the difference between what you pay and what you get to keep after paying your land taxes. So, in a Henry George world, the amount of compensation would be very low. So one could argue that moving toward a land tax would facilitate that reform. Once we raise rates on land taxes, the market value will have to go down. The government can buy the land and redistribute it to the workers, and they then would be able to keep the fruits of their labor. They will continue to pay the land tax, but the product of their own efforts — their labor — will be their own, as opposed to sharing fifty percent with the landlord.

Q: Do you think land reform could possibly find a way onto the political agenda in the United States?

JES: No. Land reform is not a big issue in the United States because we don’t have a lot of sharecropping. There’s some, but it’s very limited.

Q: What countries do you regard as the most politically open to tax reform as a means of achieving meaningful land reform?

JES: I think some countries in South America are moving in that direction. They’re beginning to do this form of taxation because they want the land to be utilized. Some people own land but make no use of it.

Q: You mentioned the World Bank’s program titled “Market-Based Land Reform.” Is that the only international forum in which there is a chance of gaining politically-effective support for “land value taxation” as an instrument for land reform?

JES: There’s not a lot [of] discussion going on in those circles about land reform. The World Bank is still talking about it, as in the program I was talking about. And certain countries are continuing to talk about it within themselves. But the IMF is not, and I don’t know of any NGO (nongovernmental organization) that is.

Q: What are the greatest political obstacles confronting developing countries to the extraction of economic “rent” for public purposes? Is it simply a matter of “vested interests?”

JES: Yes, it’s not very complicated. You know, in the Clinton Administration, we tried to reform the disposition of natural resources — mineral rights — by saying the US Government should not be giving this away to a few wealthy people. But the mining interests were adamant in opposing this reform.

Q: In your opinion, would it be more effective to attempt to achieve support from economists about the need for such reform, or to bypass them in seeking to build popular support independently from them, in that the views of mainstream economists on the topic of land reform might fairly be characterized as an “intransigent”?

JES: There are some economists who are interested in this. I think most economists would like the idea, and would support it. But, economists spend their time on things that they think have marketability. So it isn’t that they don’t think it’s a good idea; they don’t think there’s any resonance in it. President Bush is still talking about the inheritance tax, and income tax, and they want to get involved in what other people are talking about. It’s a social phenomenon, I think. So, if you get a lot of other people talking about it, then they’ll join the fray.

Q: You are aware that Henry George was a critic of the moral foundations of our economic institutions. What do you think of reform efforts toward land value taxation based on an appeal to morality?

JES: What it fits into is that there is a wide view today that we should tax environmental “bads” such as pollution and the like. And switch from taxing good things like labor. So, in a way, that’s where it comes in: let’s stop taxing good things like labor, and tax things that are resources. So the argument is, “why tax things that are contributing to society?”

Q: I’d like to move to topics related to globalization because I read your book, Globalization and its Discontents, and, like many other people, found it fascinating. What has happened to the idealism that was supposed to make institutions such as the World Bank and IMF serve the inclusive interests of everyone in what was then called the Third World? You make the point that these have become institutions that serve the interests of wealthy nations almost to the detriment of poorer ones.

JES: The problem is that they believe that by helping the rich you help the poor.

Q: The old “trickle down” theory?

JES: Yes, “trickle down.”

Q: But that’s been fairly discredited, hasn’t it?

JES: Yes, it has. But as a general phenomenon, nobody likes to think badly of themselves. They always end up in arguments about why it’s in the “General Good.” But, on the other hand, I think that self-interest is a very strong force. That’s what Adam Smith said, and I see it all the time.

Q: But haven’t these institutions detached themselves from the grass-root interests of land-less people around the world?

JES: The IMF never thought of itself in that way. It began as a club of the rich countries to help each other out. And when the colonies got released, and the developed countries managed their own economies better, they went in and became the new imperialist power. That’s an over-simplification, but they then became the agents of the advanced industrialized countries.

Q: You criticized “The Washington Consensus.” From reading your book, I see that you summarize that set of doctrines as “1) Fiscal Austerity, 2) Privatization, and 3) Market Liberalization.” What are, in your view, the central weaknesses of the policies that flow from the Consensus?

JES: It didn’t work. I mean, the weaknesses are not that these are necessarily bad in their own right, but it’s the balance. Fiscal prudence is a good thing. But they pushed it beyond where it ought to have been. Market Liberalization is a good thing, but not if it’s done too fast.

Q: Would you say, then, that there is a structural flaw in the market system?

JES: There are many limitations. We all know that there are lots of examples where markets fail, and you need a role for government. So where the structural problem is, it’s their belief that there’s not a role for government to play. And that markets can solve every problem. That’s the structural failure: “Markets are perfect, and can solve every problem.”

Q: For this interview, I also read George Soros’ book, On Globalization, which I know you reviewed in the New York Review of Books. In it he states, “It is market fundamentalism, which holds that the social good is best served by allowing people to pursue their self-interest without any thought for the social good — the two being identical — that is a perversion of human nature” (p.179).

JES: Yes, George and I are very similar in our views.

Q: Don’t you think we need to go deeper and look at the rules that govern the unequal bargaining power between the rich and the poor? Isn’t that what really has to be attacked?

JES: Yes, that’s what I’m saying in the book. The underlying problem is the way the rules are made. If the rules are bad, you need to ask the question, “how did those rules get established?” And it’s the processes by which the rules get made that is the underlying source of the problem.

Q: Do you think that changing the rules is possible?

JES: I wrote the book because I believe that, in a democratic society, pressure can be brought to bear on the rule-making process. As you become aware of who’s at the table, why things are biased, they’re responding, criticizing. Even if it doesn’t quickly change, it circumscribes the ability to continue with self-interest. The World Bank is already changing enormously. That was relatively easy. President Clinton appointed someone who has a very different mind-set from previous World Bank presidents. The rest is very hard. The IMF has not made that kind of change. It’s still a long, hard road for both of them. In some ways the WTO [World Trade Organization] is in an even more difficult position. But that’s the great thing about democracy: we have so many critics. We have newspapers, and people like me and George Soros writing books.

Q: Aren’t you also saying that the real impetus will come from democratically-elected representatives with the political power to make changes?

JES: But they also respond to public pressure. In the last Presidential Debate between Bush and Gore, both sides said that we had to change the IMF. Clearly, the issue of the IMF had raised itself to a level — it’s still not in everyday talk in that it’s not what most Americans think about — that it got thirty seconds or a full minute in a Presidential Debate between Bush and Gore. Well, that’s a big achievement from where it was before. The IMF is a very important institution for developing countries and most Americans have never heard of it.

Q: I was at a conference recently on the French concept of “mondialization” as opposed to “globalization.” The French consider the spirit of “mondialization” to be more “generous” towards less developed countries, in contrast to the American idea of pursuing our national interest without regard to theirs. Would you call yourself a proponent of “mondialization” rather than of “globalization”?

JES: It is interesting that my book has been selling fantastically in France, so they obviously sense the commonality on our views.

Q: Let me ask you about Russia. President Putin has been a prominent advocate of the need to shift the fiscal base away from people’s wages and savings and on to the rents of natural resources. But this strategy flew in the face of conventional tax wisdom, which favored a “broad tax base” that included the use of “stealth” taxes. The IMF, by its actions (if not its public declarations), strenuously opposed the Putin strategy. What might President Putin do to remain engaged in the process of pro-market reforms while retaining the support of foreign investors and at the same time shifting the tax base on to the rents to be derived from Russia’s natural resources?

JES: Russia provides another good example of what I’ve been talking about. The fact is that their economy has been imploding. And it’s become nothing more than a natural resource economy as a percentage of the GDP — about 60 to 70%. At that point, natural resources become the only major source of revenue. So they’ve been forced to move in that direction by necessity. And, obviously there’s a political economy tension: the rich guys don’t want to give it up. But that’s the distinction they’re going to move in because there’s no alternative.

Q: Your academic work led you to formulate what you called “The Henry George Theorem.” This demonstrated that public spending — where this was efficient — generated additional rental value that surfaced in the land market. Other distinguished scholars, such as the late Nobel prize winner, William Vickrey, confirmed your findings. You also noted in one of your books, co-written with Anthony Atkinson, that the Henry George Theorem was attractive both because it was the revenue-raiser that did not distort private incentives and because “it is the ‘single tax’ required to finance the public good.” [Anthony B. Atkinson & Joseph E. Stiglitz, Lectures on Public Economics, London: McGraw-Hill, 1980, p. 525] Now, public investment, unless of the wasteful kind designed to serve the privileged interests of rent seekers (the classic type being a land speculator), should be viewed as working in partnership with the private sector and not a drain on the community. How can the reputation of publicly provided services and investments be rescued?

JES: That’s a very good question. What we did when I was at the Council of Economic Advisors was some studies to try to show what the social returns would be to public investment in R&D, etc. And we became convinced that the rates of return of those investments are very high. So you ask the question, “what can we do to restore confidence in public investment?” We need to realize how much we depend on them. I keep telling people, “The Internet.” That’s one example. It was publicly funded. It’s now a public-private partnership. The government did the basic research, and the private sector ran off with it. But, arguably, we would never have had the Internet if it were not for government expenditure. So I think a major industry in the United States — biotech — is based on NIH (National Institutes of Health). NIH does all the basic research.

Q: From the conference on “mondialization,” I saw a major difference in attitude among the French with regard to public investment. The French believe strongly in public funds for public works, whereas Americans believe they shouldn’t be taxed more in order to support public projects. Which view do you agree with?

JES: There’s been a lot of so-called “bad rhetoric” in this whole area. The real point is that we need to recognize that there are some things in the area of “the public sphere.” We’re not having investment in basic research; we need to have the government do it. And that’s what I’ve consistently been arguing; you don’t want the government building steel factories. But you do want the government doing certain research, and the relative size of that depends on the society. Right now, we should be spending far more on basic research. So what is the message. I think how much we depend on the government. And the new economy, we take it for granted, but it is the public sector. I think you’re right that we have the wrong view. But I keep saying, “The Internet.” How much as it changed our lives? And it’s [the result of] the government.

Q: And yet, in American society, the idea is instilled that one ought to take for one’s own benefit, so as to have the big cars and houses, etc., that will impress other people, rather than to give in order to promote a public benefit. Aren’t those the actual values of American society?

JES: We need to realize that our livelihood today depends on our innovation, and our innovation depends on our sciences. Our livelihood depends on our global position. For example, we have to be able to fly, to go to the airports.

Q: I wanted to ask your view on the adequacy of land as a tax base. At one time, as you know, there was a “Single Tax” movement, for the purpose of deriving revenues sufficient to run the government solely from land value taxation. In your view, how feasible is that today?

JES: Most economists would say that you cannot run the US economy on the “Single Tax.” In my mind, the “Single Tax” is the wrong way to think about it. The question is: “Would it be better if we had more taxation of land and natural resource, and more revenue from natural resource management, and I would include atmosphere and spectrum.” And less tax on income and savings. And I would say, “Yeah.” And I think many economists would agree with that. So, if you want to sell it as a “Single Tax,” then, no, you won’t get anyone to agree that there’s enough revenue there. If you look at is a more “central” tax, then, yes, you will get most economists to agree with you.

Q: A former Director of Robert Schalkenbach Foundation was given a grant recently to research the adequacy of land as a tax base. He’s a professor at the University of California, Riverside, named Mason Gaffney, and he wrote a book titled, “The Corruption of Economics.” Are you familiar with his work?

JES: No.

Q: I’ll send you a copy of the book. Basically, he argues that the founders of neo-classical economics, which, as you know, is the paradigm taught in schools such as the University of Chicago, distorted the science of economics to protect vested interests. For example, Rockefeller money was spent to hire professors of economics with a view to their discrediting the ideas of Henry George. Did that happen?

JES: My general impression is that most donors that give money to universities don’t take a very strong view of [who should be on] the faculty. Sometimes it ends up on one side, sometimes on the other. It would have been unusual [at Chicago], but it could have happened there. What is striking about Chicago as a school of economic theory is that it’s very conservative. One would have thought that Henry George was someone who would have been liked by “Conservatives.”

Q: In that George wanted to reduce tax on the fruits of one’s own labor?

JES: Exactly. And you want non-distortionary taxes, so I would have thought that every “Conservative” would be in Henry George’s camp. Now, as far as I know, I’m one of the few people who keeps emphasizing that you ought to view Henry George in a broader way, to include natural resources. I didn’t think that people thought about that a hundred years ago. But if they had, and maybe Rockefeller was smart — he realized that he obviously didn’t want a tax on natural resources.

Q: He wouldn’t have wanted rents flowing from natural resources to go to the people rather than to him.

JES: Yes, he obviously wouldn’t like that perspective. But I don’t know if that view was at that time recognized, and I just don’t know whether he actively intervened at Chicago.

www.wealthandwant.com

… because democracy alone hasn’t yet led to a society in which all can prosper

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!

First published in The Times as Tax land: it can’t be hidden from the Revenue

Filling the gaping hole in the Government’s finances is, in George Osborne’s words, the “great national challenge of our generation”. Unwise spending cuts and tax rises could sap economic growth; unfair ones provoke political unrest; inaction a market panic.

Faced with a national crisis, who better to turn to for advice than Winston Churchill? A century ago, the great man — who, like the present coalition, was both Liberal and Conservative — advocated introducing a land tax as part of a bold package of fiscal reforms. In his emergency Budget on June 22, the Chancellor should set up a commission to consider how best to implement that recommendation.

Taxing land values would be a fair way to help to plug the budget gap while stabilising — and even boosting — the economy. Land is routinely valued each year as property changes hands. With all the land in Britain worth perhaps £5 trillion, a 0.5 per cent levy could raise £25 billion a year — as much as a five-point rise in income tax.

Neither tenants nor leaseholders would pay a penny; only freeholders and landlords would, with the owner of a large estate paying a higher rate than someone who owns a small suburban semi. The proceeds could be used to cut the deficit and national insurance, creating jobs, boosting take-home pay and stimulating growth. Over time, the aim would be to shift the tax burden off hard-working families and on to idle landlords — as in Hong Kong, where revenues from land taxes keep income tax low, there is no VAT or capital gains tax, and enterprise flourishes.

Read more on Phillipe’s website

photo credit: iLoveMountains.org

With this weeks poll showing that many Australians were undecided on the Super Profits Resource Tax, they are effectively saying ‘please sir, tax me’. ‘No I wouldn’t think of ensuring that the privileged pay their fair share, please I emplore you – tax me!’.

With 20 leading economists coming out in favour of the tax (thxs John Quiggan), the muted response by the Australian public really does warrant an education program.

Ross Gittins is on the front foot (watch video in 2nd link above) with the call that what mining supremos like Tom Albanese are really fearing is the global trend this could trigger. They fear the Brazil’s, China’s and South Africa’s following suit. With the Henry Review targeting the pot of gold at the end of every privatisation rainbow – economic rent in land, in minerals, in taxi licenses, in pokie licenses, the business elite are throwing everything they can against this government.

Read some of our responses to this debate and FIRE up – we need you on the comments pages of the Murdoch press:
RPSTing Australians and their Mineral Resources – Bryan Kavanagh’s new piece in Online Opinion
Levelling the Playing Field

With Australia’s reputation as an economic fighting machine in having avoided the worst of the GFC (really?), Wayne Swan’s upcoming visit to the G20 will be a revealing affair.

Will the world’s leaders give support to Swan when the finances of so many countries are decrepit because of their outdated tax system in an age of tax havens and resource scarcity?

This Swan tour to China & the Korean G20 meet will be one the government is hoping will elicit support for the move to untax enterpreneurship and capture some of the naturally increasing scarcity rents that accrue to natural resources and natural monopolies.

In another piece of mining fearmongering, the head of Australia’s largest goldminer, Ian Smith of Newcrest said that the SPRT is ‘a tax on our grandchildren’ (AFR 0306, p5). This is outrageous when considering that he is proposing a lower a tax on NET PROFITS. He is effectively saying tax the working classes more so that we miners can remove these non renewable resources and profit from them at great extent. What will be left for the grandchildren Ian?

For mining to slow down a little would be a good thing, especially with China’s shaky economic outlook.

The mining elite’s hired gun – Opposition leader Tony Abbot – said recently that the SPRT will increase the price of food. The SPRT cannot be passed on because miners in other countries have different cost structures. Competitors can undercut any price that Australian based mining companies offer.

The only place this additional SPRT tax can come from is by taking some of the profits from magnates (like the 2nd richest man in Oz Andrew Twiggy Forrest) and giving them to the government.

Who would want to grow up to be a doctor when so many are making a killing from simply digging up the earth?

We must re-balance the playing field.

The Rudd- Swan government’s flat denial of negative gearing reform proves that modern politics is incapable of dealing with the difficult questions. It was all too risky in an election year.

The dreams of working families are set to play second fiddle to the propertied class for years to come. But yet the announced reforms are the most significant tax reforms in living memory Mr Swan? Who are you playing us for?

Even more so today as interest rates are again raised. Hurrah – those who already own property don’t even have to ask for a subsidy from their subjects – the government is cheering the way via negative gearing write-offs.

The higher the interest rate, the greater the write-off.

Today’s write-offs equate to a $29.44m gift to the owners of the Great Australian Dream (1.6m negative gearing property owners with an average $300K mortgage over 30 years x 0.25/ 40%).

Working class people will have to pay the wealthiest via their taxes to cover this $30m trickle up.

All this and more is obvious to foreign economic experts. Our government and selected media insiders are the only ones that can’t acknowledge our bubble mania.

Our land and housing prices are more than 70% over their long term average, according to one visiting expert, Edward Chancellor, but yet the Rudd government has failed to even consider reforming the two most obvious tax distortions, negative gearing or the 50% capital gains tax deduction.

Post bubble, will renters thank negative gearing for keeping housing so high that they can’t enter the market?

Will they be happy when their superannuation investments are wiped out 2 – 3 times before retirement because of the dominance of lobbyocracy lording over long term thinking? Asset Bubbles in a financialised economy are ever so risky.

And Swan tempts young people to scream by saying that he is proud of the $700m first annual federal permanent infrastructure fund. Remember the statement:

“Your Taxes Fund the Infrastructure That Makes My Land More Valuable.”

“Cheers”

The Henry Review has opened up the field of discussion on land taxes – hurrah! However, we must take them to task over this statement:

Though the Review’s proposed reforms to taxes, in particular stamp duty and land tax, could play significant roles in addressing housing affordability, other policies are likely to have a more pronounced impact on the responsiveness of housing supply.

This has been jumped upon by the property lobby as another clarion call for further urban sprawl forever policies. What about the property lobby’s willingness to openly declare they will crimp supply to bump up profits? See Mirvac here and Stockland there.

Forget the fact that the National Housing Supply Council wimped out on stating that there are 622,781 speculative vacancies in Australia. Read our calculations plus other immediate supply resolutions in One Handed Housing Supply.

Christopher Joye even critiques the ABS/ government for there being no solid land valuation statistics. For years we have been wanting a central body to release the State data uniformly; S.A’s land price data is released the month after collection, whilst Victoria’s takes 18 sleepy months.

However, back to the land supply versus zoning issue. No government body has openly recognised the role of speculative vacancies. This must become a central COAG issue.

Few are talking about the need to build upwards, not outwards. Rob Adams talks about 500,000 people being able to be housed along our transport routes. Nothing was done about that by the Vic State Govt, but you can bet your bottom dollar the astute investor would have bought up along tram routes in cultural hot spots (see Sydney Rd).

The government must look at these factors to have a rounded view of the housing market.

Yesterday’s announcement’s that property prices have increased by 20% in the last year must make minimum wage earners wince. Workers received no wage increase last year, following a 4.1% increase (Oct 08) and a 7.7% increase in Dec 06.

‘Working families’ KRudd? The joke is on wage slaves when capital gains holds the reins.

Who lays the ALP’s golden eggs?

photo credit: Ian Sane

On the one hand, the market delivers the best for the least cost.
But on the other hand…. few are willing to call it as it is.

Yesterday’s National Housing Supply Report used coded language to hint at a ‘possible over-supply of housing’ due to housing investor tax breaks (p50).

However the usual suspects were missing from analysis when commenting on the role of vacancies:

Specific purposes include vacant stock awaiting sale, demolition or replacement, and holiday homes.

“Awaiting sale”. How very polite! People are screaming for housing and this is the best the nations peak body on housing supply can come up with?

Census data was used to show 830,374 properties as ‘awaiting sale’ or as holiday homes.

The said analysis focused on ABS statistics, which don’t include vacant land. This figure could easily be doubled if the nation’s residentially zoned land banks were included.

To bring the rental vacancy rate back to 3% – the rental market equilibrium, it is stated on p87 that:

The Council estimates that an additional 26,000 vacant private rental dwellings, mainly in New South Wales and Victoria, would be required in 2008.

We identified 14,149 here in Melbourne in a survey covering just 44% of Melbourne’s housing stock.

The ubiquitous Productivity Commission was quoted regarding the changing of the capital gains tax:

… has added to the recent housing price boom by encouraging investors to reduce current income in favour of longer term capital gains.

Only 830,000 vacant properties….but yet there is a possible shortfall of 200,000 dwellings by 2026???

And over at Rupert Murdoch’s Australian, Housing Shortfall Locking Out Thousands, the usual lines are run:

In a carefully worded criticism of the tax system, the report said the rules were skewed towards home buyers and mum and dad landlords at the expense of investors to build more medium-density housing for the future.

Medium density is mentioned twice in the report but from what i can see never is there a carefully worded mention along these lines.

Lower yields are of course mentioned. Is that why housing supply is dropping? What is the other hand saying? Shhhh…..

That’s what happens when you have a land boom. The pursuit of capital gains ensures that rental yields drop (slowly increasing rental income compared to Melbourne’s Dec 09 $70,000 jump in land prices).

In the final pages (p176), the report states:

In 2008, Port Hedland had a capital growth rate for property as at March 2008 of over 37 per cent according to Residex statistics.

Rising incomes and the Law of Rent demands that landlord’s can demand higher rents, as miners have the capacity to pay. It’s either that or go live in a shipping container house in 45 degree temperatures.

The Age’s Jason Dowling states:

The report also noted a large proportion of Australian homes were empty. It found one in 10 homes were unoccupied and that a quarter of these were holiday homes.

If one quarter of all vacancies are holiday homes (a mysterious stat we have been yearning for), this implies that 7.5% of Australia’s stock are speculative vacancies.

The pursuit of justice demands that we calculate the supply of speculative vacancies. Why didn’t the National Housing Supply Council? What was this ‘committee’ set up to do? (Fair enough they do say they will next time…when the bubble has popped)

That total is 622,781 properties.

622,781 speculative vacancies are holding the market to ransom, demanding their capital gain.

To emphasise, that is 3 times the supposed under-supply predicted in the far future of 2026.

To re-re-emphasise, these speculative vacancies could add 350% more to supply than was needed in 2008.

Until housing is seen as a human right rather than a speculative kite, the housing supply analysis will always have one hand behind its back.

Will Ken Henry have the ticker to recommend that higher and flatter land taxes replace payroll, halve income taxes and fund the abolition of the regressive GST? That is what is needed to restore the Great Aussie Dream.