by Bryan Kavanagh
An abbreviated copy of this paper was published as Resource Rents hold the property key in THE AGE on 15 June 2005. A slideshow version was presented at a symposium on the equitable sourcing of revenue organised jointly by Prosper Australia and The Centre for Public Policy at Melbourne University on 2 August 2005.
About William Petty
After his bloody victory in Ireland (1649-1652), one of the first things Oliver Cromwell did was to establish the worth of the lands of Ireland. He wanted to know the annual value of what he had acquired here. William (later Sir William) Petty won the tender to value the newly-conquered land by using cheap labour in the form of some of Cromwell’s by then unemployed soldiers. He trained them in valuation techniques, including how they would survey Ireland, and oversaw the professional completion of the valuation contract within an amazing thirteen months.
Petty was a larger than life character who some hold to be the father of modern economics and its first econometrician. At one point he is said to have commented on the extent of the Irish holding which Sir Jerome Sankey, one of Cromwell’s more formidable knights, had chosen for himself following the invasion of Ireland. Insulted, the brawny knight challenged the notoriously near-sighted Petty to a duel, offering Petty the choice of weapons and location. When the almost blind Petty chose broad axes in a darkened cellar, Sir Jerome retreated gracefully after finding reason to reconsider the seriousness of Petty’s offence.
Both Cromwell and Petty saw the need to know the annual value of Ireland’s natural resources, but the modern neo-classical economist is all but clueless on the quantum of resource rent within the economy, or for that matter to where it is allowed to disappear. He is even heard to say that as we no longer exist predominantly in rural communities, land-based revenue systems are no longer appropriate; this, despite the fact that the greater part of land rent is now located within our large cities.
Whereas it was accepted in Petty’s day that the annual rent of land was a surplus which arose by the mere existence of community and that its collection and use was the cheapest and most equitable source of revenue, we are now educated to disregard this fairly fundamental fact. Consequently, as the annual value of our natural resources have become privately expropriated and we have morphed into the very same taxing and landholding system that destroyed ancient Rome, it has become necessary to levy myriad taxes on every sort of productive activity.
In 2002, only $25.2 billion, or 14% of Australia’s $180 billion of publicly created natural resource rents was captured for public purposes. The $154.8 billion foregone in resource revenues was gratefully received by Australia’s property owners, but the chart below suggests that this bonanza may have come at enormous cost to the country. It evidences that the growing quantum of Australia’s resource rents and taxes has been at the expense of the net incomes of labour and capital. This is particularly so since 1972 where as a proportion of GDP taxes have increased by 28%, net incomes have declined by 35%, and natural resource rents have escalated by a remarkable 125%.
Accordingly, it is possible to argue that the real battle is not between capitalist and worker (who are fighting over the 41% of GDP which remains after rent-seekers and taxation have first staked their claim), but that both labour and capital have common cause against such a pathological revenue system. The greatest prospect for reform in industrial relations is a shift from reliance upon taxation to an entirely different revenue base, the collection of our natural resource rents.
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Kondratieff’s Longwave Cycles
The Russian economist Nikolai Kondratieff had no explanation for the cause of the three 50 to 60 year long wave cycles he discovered in the economies of the US, UK, France and Germany. However, the data herein demonstrate that cycles of boom and bust are inextricably linked to:
* the failure of economies to capture the national rent to their coffers
* taxes levied upon labour and capital, and
* the consequent escalation in land prices.
Whereas most modern economic analysts don’t like to acknowledge the existence of the longwaves cycle because it highlights their impotence during the deflationary downslope (which Kondratieff noted culminates in economic depression), the great economist Joseph Schumpeter confirmed its existence. The three graphs which follow showing GDP growth at current prices within the economies of Australia, the USA and the UK clearly demonstrate the continuing existence of Kondratieff’s longwave cycles.
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Real Estate Bubbles
The index below represents the value of total real estate sales as divided by GDP for each year since 1972. It gives a perfect picture of Australia’s boom and bust economy. At the bursting of each property bubble (that is, those parts of the index which exceed the empirical 19% ‘bubble line’) the Australian economy has declined into recession as the graph cut back below the 19% mark again.
The period shown represents the second half of the fourth Kondratieff wave, and it is apparent that as property sales to GDP increased GDP growth has tended to decline. So, whereas lower tax rates and land prices had assisted post-war GDP recovery until the outset of the 1970s, increments in taxation, inflation and interest rates since that time have had the effect of taking Australians’ eyes off the ball. They began to follow the dictates of the tax regime to play another game altogether, namely, that of real estate speculation. The current residential bubble has been inflated to voluminous proportions and economic growth is primed to tank into a sharp deflation.
In case it should be attempted to argue that the economy may in fact be driving the real estate market, and not vice versa, the following chart depicting year-on-year growth in real estate sales preceding economic growth provides an unequivocal response.
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Australia’s Future
The trends in the chart below need to be reversed if Australia is not to come to a sticky financial, and thereby social end within the next few years. In the week ended 3 June 2005, the Australian Treasurer Mr Costello warned that the Reserve Bank of Australia should not increase interest rates. Early the following week, the RBA appeared to have listened.
However, Mr Costello’s advice may have been redundant in the current deflationary environment, because the next adjustment of Australian interest rates would more properly be down. Analysts need to get to grips with the huge potential for Petty’s national resource rents to replace damaging taxes if we are to arrest the decline into financial collapse. Replacing taxes with resource rents could also help to keep the lid on skyrocketing land prices which have played such a destructive role in the Australian economy during the second half of the current Kondratieff wave.
It should finally be understood that the Reserve Bank of Australia (RBA) breaches it charter to safeguard:
* the stability of the Australian currency;
* the maintenance of full employment in Australia; and
* the economic prosperity and welfare of Australians
each time land price bubbles are permitted to develop and burst. Instead of fiddling with interest rate policy, the RBA, and the central banks of all nations, need to administer a much more discriminating structural tool, namely, a flat rate charge on all land values under their jurisdiction. This would be tweaked a manner which would stop socially devastating land price bubbles from being allowed to develop.
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Bryan Kavangh is Research Associate of the Land Values Research Group. He is also a director of Melbourne-based real estaate valuation company, Westlink Consulting. Mr Kavanagh’s related ‘Case for a Federal Charge on Land Values’ was published in the Australian Property Journal in February 2005