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.

photo credit: Maria Gertsovskaya

From South Africa to Bolivia to here in Australia, the failure to approach land as a human right rather than a speculative kite is breeding dangerous undercurrents amongst those excluded from ‘the property game’.

The young firebrand South African ANC youth leader Julius Malema again fired up the masses with these comments:

“You need land to do everything. Without land voting means nothing,” he said.

Malema said South Africans can vote until they are purple.

He said as long as they did not have the economy of South Africa their votes were useless.

“You vote and you still go beg,” he said.

An economic democracy is vital. We need our birth rights, our earth rights. Speculative privileges have superseded those fundamental rights through distortions in the tax system. Julius went on:

—
Malema said he was told one should not talk politics of land and property or nationalisation because it would scare investors away.

“They invest in countries where there are civil wars. ” he said, adding that people should not believe the “lies” that investors would be scared off by talks of nationalisation.

Malema said Investors did not care about people and that they were interested in making profit.

Last night’s Today Tonight rang loud on the fear of Chinese investors buying up Australia. If a higher and flatter Land Tax was implemented on land valued yearly, the profits that attract foreign investors and agri-business would be greatly wound back.

Foreign investment in property is unproductive. No matter how much money is invested, investors can’t make any more land. The profits inherent in land as a scarce resource are the magnet for investment. It has little to do with providing housing for slum dwellers.

With our system there would be a re-balance away from land based profiteering and towards the provision of housing for a steady rate of return.

Nationalisation is not necessary. What is vital is capturing the community created rent (that capitalises into the massive property based profits). Private possession of land is still sacrosanct.

The catch is that this possession is based on the yearly payment of a land rent back to the community (once known as the government) in respect for the privilege of being a custodian of that piece of land. Outright ownership for 99 years is no longer reliant upon on a huge loan to banks.

The ANC has ignored the warnings of South African colleagues such as Godfrey Dunkley that bureaucratic land reform is a slowly imploding mess (witness Zimbabwe, not matter what the role of the IMF/ WB). Legal stouches and community infighting hamper who gets the land by the river and who gets to live next to the dusty quarry.

No farmer no matter what skin colour will voluntarily give up land they have cared for. Perhaps Mugabe and SA’s Zuma need to look at the speculative elite rather than race. Even then, we can’t put the blame on those lucky few, it is the system that needs changing.

Market forces directed by the tax system can do this much more effectively.

After 30 years of neoliberal dominance it is time that the people stood up and promoted an economic policy that delivers reward for effort for businessmen whilst simultaneously protecting the environment with a True Cost Economics system. Read more

photo credit: striatic

Our submission to the Digital Dividend green paper for the sale of 4G Electro Magnetic Spectrum licenses.

Karl Fitzgerald

The electro magnetic spectrum is a scarce resource.

Over time it will increase in value, especially with the advent of new technology.

As such, the recent release of the iPhone 3GS has delivered windfall profits for the telco’s with the additional use of video/ web apps. 4G will dramatically speed up the search times and thus useability of the resource and technology.

In order for the public to gain a share of the naturally increasing value of the 4G resource:

A yearly EMS rent is to be paid by all EMS license holders at a fixed percentage, based on it’s ANNUAL value.

Property valuers and media consultants can quite easily determine the yearly value of a telecommunications license.

We propose a 10% annual licensee rental based on the yearly value.

This will keep a lid on speculative interests that may find motivation in flipping such a resource for exorbitant profits.

By doing so, the Rudd – Conroy government will help to keep a lid on the price of telecommunications, the very breath of the market system with it’s desire to deliver ‘perfect information’ to consumers.

photo credit: OiMax

Not only has the public re-organised spectrum space for the broadcaster’s new channels, but we’ve also gifted a rebate on their licensing fees! Some sort of Digital Dividend, Mr Conroy! A dividend for whom? Where will the missing $200 – $500m p.a come from?

The broadcasters should be paying more for the added access to the commons, not less. A yearly licensing fee commensurate with the value of the spectrum should be implemented.

With the upcoming 4G license to be auctioned, the spectrum issue is heating up. Crikey’s investigative team reveals there’s a lot more to the story:

Free TV Handout’s – We Don’t Know the Half of It
by Crikey’s Glenn Dyer and Bernard Keane

The competition regulator should step in and force Free TV Australia, the television broadcasting cartel lobbyist, to change its name. There’s now no such thing.

A Crikey analysis has shown that the promised licence fee rebates of 33% this year and 50% next year to the television networks will be much greater than previously thought. Rather than $250 million, the likely cost to taxpayers will be closer to half a billion dollars from the Rudd Government.

Which means the free-to-air networks will cost us more than $20 a head for every Australian over the next 17 months.

Based on likely growth in advertising revenue as the economy accelerates, big sporting events such as the Commonwealth Games and the advertising frenzy of a federal election, the rebate could conservatively yield about $240 million in 2010 and $300 million or more in 2011.

Looked at another way, the roughly $500 million involved is 25% of the combined budgets of the ABC over the current and 2011 financial years. Imagine the complaints from the television networks (and not to mention News Ltd, Fairfax and Foxtel) if the ABC got a budget increase of that scale.

But this is effectively what Nine, Seven and Ten will be receiving.

The Seven Network will share in about $187 million in the next 17 months, based on its December half year 38% share of television advertising revenues.

The big beneficiary is Kerry Stokes and his family with whom, as The Australian noted yesterday, Kevin Rudd spent the night at Stokes’s Broome mansion. Stokes owns 48% of the Seven Network Ltd, which in turn controls 50% of Seven Media Group, where the TV network in the five metropolitan markets and rural Queensland sits.

About 47% of Seven Media Group is controlled by US buyout group, KKR, with a tiny stake held by Seven executives. The identity of the executives is unknown and the KKR investors are secret, but most are believed to be offshore. They will all derive a benefit from the taxpayer in that the value of Seven Media Group will rise now that this extra money will roll in the door.

Seven Media group was written down to nil value by Seven network a year ago. That is now a very obvious fiction.

The millions coming from the Australian taxpayer to bolster the finances of the over-geared media group will ease any concerns bankers to the media group may have had about its finances, thereby relieving Seven Network and Stokes from having to tip in any money.

Nine will get about $156 million, based on its ad share of a touch under 32% in the December half year. That will flow to PBL Media, controlled by CVC Asia, on behalf of unknown offshore investors, and executives including David Gyngell and Ian Law.

As in the case of Seven Media Group, the licence fee rebate represents a direct transfer from taxpayers to the benefit of a small number of paid executives.

Nine also shares its rebates with WIN, controlled by billionaire tax exile Bruce Gordon and his family. Gordon has to spend six months of the year outside Australia because he doesn’t want to pay Australian tax personally.

Nine also controls the regional broadcaster NBN. These fees will help it finance the huge $250 million purchase price for NBN a few years ago.

Ten is a listed company, 11.9% owned by Gordon as well, although Gordon doesn’t have a board seat. He will get the benefit of any increased dividend Ten pays as a result of these fees. It slashed dividends last year when it looked as though it could founder. Ten shares its fees with its affiliate, Macquarie Media, which has also emerged from a near-death experience, this time by staying too long in the Macquarie Group orbit. Now it is free, but it has some struggling newspapers in the US that are a drain on finances.

In each of the cases, the main networks, Seven, Nine and Ten, could claw back some of the rebates that end up at WIN, Seven affiliate Prime and Macquarie Media by way of higher affiliation fees. Those affiliation fees are a major source of easy money for the big networks.

The rebates will be given with no strings attached — not even a requirement that the money remain with the networks and not be returned to shareholders or sent overseas.

Likewise with the struggling PBL Media: the extra money will help keep the bankers and their $3 billion-plus debt happy. That also means the value of the equity the executives have will rise as the viability of PBL Media improves.

So it was no wonder Stokes, the younger, has hailed the rebate as an important outcome for the industry.
“Not only does it help bring the Australian industry closer toward international peers, it recognises the growing investment in Australian content and the increasing need for quality local content in a digital environment,” Stokes told a conference yesterday.

Stokes said free-to-air television was facing a time of “unprecedented change”, with competition from the internet and pay TV and the challenge of negotiating the switch over to digital television.

“In this context, we welcome the recent government announcement to protect Australian content on commercial television,” Stokes said.

That is a load of self-interested, conflicted rubbish, just as the comments to The Oz by Free TV Australia chairman, former Queensland Premier Wayne Goss, are rubbish.

According to Goss, “fees in Australia were much higher and completely out proportion to what they were in comparable countries”. Free TV Australia CEO Julie Flynn said in the News Ltd tabloids this morning the rebates will enable the networks to keep their local content commitments. Both comments are simply spurious

What others charge their broadcasters is simply immaterial to Australia. Our broadcasters do not compete with US, Canadian or UK broadcasters. If spectrum licence fees were higher in the US, UK or Canada, then Australian broadcasters would be charged more for programming by the likes of CBS, ABC, NBC, Fox and ITV to recover the higher fees.

You can argue that in fact our networks enjoy a programming subsidy because these foreign licence fees are lower than ours.

When you throw in that it is taxpayers who provide much of the war chests for the major parties’ electoral advertising campaigns, and it is taxpayers’ stimulus package money that has kept the economy and big-advertising retailers afloat over the past 12 months, it is clear that so-called free-to-air television networks are firmly fastened to the taxpayer teat.

With Treasury fronting Estimates all day today, the Opposition should be demanding to know whether Treasury was consulted, and if so exactly what the hit on taxpayers will be from this sleazy Rudd handout.

Alanna Hartzok

The global financial crisis has demonstrated a deep systemic failure of the prevailing economic paradigm. So far, efforts to remedy the situation have failed to address the root causes of the meltdown and are digging the American people deeper into the hole of public debt.

In an op-ed titled “Obama’s Ersatz Capitalism” earlier this year, Joseph Stiglitz wrote that the bailout of banks by taxpayers is a “partnership in which one partner robs the other.” Considering that in 2004 the top 1 percent of the population of the United States owned more than $2.5 trillion more wealth than the bottom 90 percent, and that even in 1996 about 350 billionaires held more wealth than nearly half of humanity, we have surely arrived at the end of the capitalist monopoly game.

Rent-Seeking and Economic Restructuring

Alternative economic analysts have traced the severe wealth gap problem to the ability of the so-called FIRE sector—finance, insurance, and real estate—to concentrate large amounts of money, resources, and power into ever fewer hands via a variety of rent-seeking behaviors. “Rent” connotes unearned income. Alternative analysis considers economic rent to be a socially generated surplus that is being privately captured.

As an economy generates wealth, the price of land and other natural resources increases. Because the gifts of nature cannot be produced by human effort and supply cannot be increased to meet demand, holders of land and natural resources are in a position to capture the surplus—economic rent—generated by labor and capital.

While economic rent is essentially a measure of the social surplus it is not regarded as such under neoliberal economics, which treats this value as a market commodity for private profiteering. This fundamental flaw in market economics has created a highly inequitable global economic system. Lack of knowledge as to how to correct this flaw, and retain the benefits, efficiencies, and individual freedoms of the market, was the impetus for the emergence of centrally managed and controlled state socialism. An economic restructuring based on a full understanding of the role of economic rent is needed for a new economic framework beyond both the old right and the old left.

Read more at Policy Innovations

photo credit: hans s

Michael Hudson

As published in today’s Business Age Opinion section

HIGHER land and house prices typically lead to an increased supply of housing. Yet at the peak of Australia’s perennial housing affordability crisis, the Housing Industry Association declared that there would be a 13 per cent fall in housing starts this calendar year, compounding last year’s 18 per cent fall.

In light of massive rezonings in Victoria and improved planning bureaucracy in many states, this can only be seen as a warning that property insiders expect there to be a price crash.

The public face of the housing industry is quite different. So, what do property investors expect that the rest of the population does not?

Government spokesmen reflect assurances by bankers and their major category of customers – the real estate industry – that Australia’s economy is defying gravity. In reality, that is as impossible in economic life as it is in physical nature.

Property prices are defined by how much a bank will lend. Donald Trump claims that a man is worth what he can borrow. This usually depends on what a borrower can afford to pay, after meeting basic break-even needs (the cost of living, plus taxes). In the corporate sector, it means after-tax cash flow. So property prices are set by the banks, subject to the tax system.

The motto of real estate investors is that rent is for paying interest – and whatever the tax collector relinquishes is available to be capitalised into a bank loan as a flow of interest payments. The guiding idea is that affordability determines property prices. One example of how the tax system affects property prices is in its failure to distinguish land from capital improvements. Speculative withholding of prime locations from the market in an undeveloped or unsold state creates artificial scarcity. This raises prices.

Property speculators are able to afford this hoarding to the degree that the land’s potential site rent remains untaxed. Taxing the land would bring underutilised land and other property on to the market. It also would reduce the available free-lunch rent that is currently capitalised into bank loans to raise prices.

The myth is that higher property taxes increase the cost of housing and office space over time. The reality is that higher taxes would leave less site-rent to be pledged to banks – thereby reducing the financial cost of property ownership – while also enabling the government to shift the tax burden back off labour on to property, as used to be the case in Australia before the mid-1970s.

This explains why the financial lobby supports the real estate lobby in shaping public perceptions of the property market – along with government financial policy towards the finance, insurance and real estate sector.

Australia’s fiscal-financial system has become increasingly dysfunctional in giving tax preference to land-price ”capital” gains and hence property speculation rather than tangible capital formation. Instead of raising living standards by producing more, what passes as post-industrial ”wealth creation” takes the form of inflating asset prices on credit. The result is a bubble economy. And inasmuch as asset-price gains are fuelled by debt leveraging, wealth creation is more accurately viewed as debt creation.

The problem is that debts remain in place even as prices drop.

And they are dropping in response to the economy’s shrinking ability to pay, as more and more income is earmarked to pay debts run up in the past. This debt service is not available for spending on goods and services. The result is debt deflation. Lower spending on goods and services shrinks the domestic market (and also shrinks imports), leading to lower business profits and also lower business rentals. Lower rental income results in lower property prices – and at a point, property falls into negative equity: the mortgage debt exceeds the current market price that home owners or commercial investors can recover.

This is the end stage of debt-leveraged bubbles. In this respect it behoves Australians to look ahead. It seems that Australian property investors are also doing this. How else to explain the cutback in new building?

Michael Hudson is distinguished research professor at the University of Missouri.