Renegade Economists 206

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Broadcast Oct, 26th, 2011

K.F: Let’s have a chat with Yanis Tziligakis. He’s a New York based academic – he’s got a bachelors, a masters, and a phd in the field of physics – he’s now realized he’s got to get his head around economics and he’s headstrong into it, in the last 3 years doing some really good stuff on creative commons. We started off talking about Jeffrey Sachs’ new book. He was off to see his speech earlier today. Sachs’ new book is called the Price of Civilization. Anyway let’s get into this right now.

Can you give us a broad brush overview of the Greek economy? How much money do they owe? What’s the next tranche of debt they’re struggling to gain finance for at present? Set the scene for us.

Y.T: the level of the Greek debt is about €350 billion but of course that’s sensitive to the interest rates. Now Greece got about €110 billion bailout from the European Union and this is channeled- it’s been given to Greece in installments so this is exactly what the current problem was because Greece is supposed to be fulfilling certain obligations for each installment to be handed to it. Now as you can understand the problem lies in that those expectations that the Greek economy has to be fulfilling every time the new installment comes due to be paid out is that they are unrealistic. Or let me put it they are overly optimistic.

The Greek government thinks that they can target their deficit by austerity but at the same time losing track of their income – the tax revenues keep shrinking because of the austerity. It seems to me that the battle of tax evasion which is the main affliction of the Greek economy, if not of most of the economies around the world, that’s the battle that is impossible to win without international cooperation and that’s what Greece is lacking right now.

K.F: How do people evade their taxes in Greece? We hear a lot of stories of corruption going on there but tell us some of the stories you’ve heard of how the social contract in Greece is somewhat different to most countries, where only fools pay their taxes.

Y.T: I think the problem of tax evasion is not a moral problem. I’m against this corruption nuance that’s been passed around and I don’t think tax evasion is a corrupt act. I think it’s an act that makes economic sense. It basically shows that the citizens do not trust to give their money to the state. So, actually the Greek citizens have withdrawn their trust from the Greek government way before the markets sniffed something iffy in the Greek economy. Now it’s sort of a vicious circle of merry-go-round.

Greeks are very entrepreneurial people. 80% of the work force are entrepreneurs and only 20% are public servants so that’s another defamation that Greece has been afflicted with that it’s a country of an overgrown public sector – overgrown, overpaid and basically an inefficient public sector . That’s not actually true.

Greece is actually on the bottom tier of the European Union as far as size of public sector workforce and the size of its salaries that are devoted to the public sector. So the tax evasion has a very interesting nuance that actually nobody has picked up yet. The nuance is this – if the Greeks were simply tax evading, Greece wouldn’t have a problem because Greece would have been shrinking its economy and the cost of living in Greece would be going down if the Greeks were simply exporting their money overseas but that’s not really what is happening in Greece.

The money gets evaded to offshore tax havens and mattressed to places like Switzerland, the Caymans – Greeks are champions in offshoring – and the money comes back to the country untaxed – inflating real estate prices – which affects the overall cost of living and the cost of doing business. So that’s how Greece gets doubly hurt by tax evasion.

K.F: Tell us about the size of the Greek property bubble through the 2000s – how high did it grow?

Y.T: Greece’s real estate index inflated from the years 1993 to about 2008 – it inflated about 225%. So Greece has wealth – but it is under the mattress we call “slow turnover yielding capital”. That is called, in common parlance, real estate. Now the tragic-comic aspect to this is that offshore companies hold the bulk of this real estate and they artificially make Greece expensive for its own citizens.

K.F: Phenomenal – and then the property tax system in Greece has the curse of taxing the improvements like it does in so many other countries, so I hear there are lots of unfinished houses with steel turrets poking out of the roof as if the house isn’t really finished (only finished houses pay property taxes on the improvements). Is that one of the common sights around Athens and so forth?

Y.T: The common sight in Athens – but I haven’t visited for a few years – but a number I’m going to give you, Karl, is that a few months ago they had about 200,000 vacant properties – lets say available for sale or rent – I mean that’s an amazing supply of housing, however, the ratio of wages and pensions to rent has been constantly decreasing. In other words it becomes more and more unbearable to come up with the everyday living expenses especially for people who are getting unemployed and especially for pensioners.

Everybody’s talking about unemployment relief and extra relief to the pensioners but nobody can see that an immediate relief, which would be of no cost to the budget of the government, is by taxing rents and thus forcing them (house prices) down.

Another impact of the high rents is also on Greek businesses. About 1000 Greek businesses outsourced themselves – like they leave the country to go across the border – it’s a similar situation between the United States and Mexico. Its almost like it reaches the realm of the tragic-comic in Greece because it looks like Greeks keep shooting their own feet but they don’t seem to realize they are doing that. And it’s tragic for all these Greek companies that Greece is too expensive for them but Bulgaria isn’t. That’s the effect of high rents of an inflated real estate market which affects both workers and businessmen – it affects both labor and capital.

K.F: What taxation – what capturing of economic rents is there in Greece?

Y.T: Right now even though I had predicted and I had been fighting with my fellow Greeks because Greece is a country where 80% of the people have land. It’s not a country where the people are renters. I mean it’s not like the United States where the land belongs to a few people – a few moguls. In Greece almost everybody has some kind of property. So people know the value of their land and it’s hard for them to realize that this economic factor of production needs to be targeted. They don’t understand that land is a passive factor so if you invest in it you hurt the productive aspects of the economy. Greeks don’t seem to realize that.

However, the government realized it recently so they have actually tried to impose a real estate tax which they’re going to collect through the utility bill because that way they hope that they will be able to pinch everybody and nobody can avoid paying their utility bill so that’s the way they think that this tax is going to be imposed. Now as you said before this real estate tax is faulty, economically, in the sense that it punishes improvements on the land but it doesn’t punish speculation on the land values.

K.F: we’ve certainly got some topsy-turvy economic policies filtering around the world and no doubt the Jeffrey Sachs of the world will be continuing on this misinformation that we should be taxing our food and we should be cutting the public service and cutting the wages rather than ensuring that the precious resources we own are used efficiently and the naturally rising value of this earth is recycled back to the people, through the government, rather than all these taxes that just go mad.

So lots of rioting – there’s obviously some passion on the streets as we love Greek people for but what are the N.G.O’s, the resistance – are they actually looking at serious economic policy or is there still too much pain and hurt on the streets for people to be looking at alternative policies?
Y.T: I’m not sure – besides the Communist Party who has a very clear and ironclad ideology – which still doesn’t sound to me very clear on how it can be implemented. It’s one thing to say “support the workers” and another thing how are you going to provide the funds to support the workers in a climate where the businesses that employ the workers leave the country. So besides that I don’t see a very clear and well thought out plan on how to tackle the economic inconsistencies in Greece.

As soon as the government announced this extra real estate tax everybody attacked it. They think that boosting the real estate market is the way that the Greek economy should be going. However, they fail to see that that is actually what doomed the Greek economy. We had a 225% rise in the real estate and yet we are down in the dumps. So I don’t think there’s a clear understanding, even among Greek politicians. Even though I’m not a fan of the PASOK party, or George Papandreou, it sounds to me that he is the more likely to come up with the right economic solution.

As far as the conservative party, it sounds to me like its going to be a Greek version of the American Republican- the American G.O.P. party. So I’m not really hopeful if the conservative party takes the lead of the country – I’m not very hopeful about that.

But the people need to be on the street. The people need to protest not only about the economic demise of the country which is the result of an elite proportion of the population and that is something that the media don’t pay their due justice – their fair justice. They engage in a carpet criticism of the entire Greek people which almost borderlines racial slurring instead of targeting the true culprits which is an economic elite of 5 or 10% of the population.

An indicator that this is the case is that nobody, even from the Europeans, bother about the € 80 billion outflux of Greek savings to Swiss and other European banks last year. They almost put the country to the brink of revolution just for almost a billion dollars discrepancy in the reduction of the deficit this past October. However they don’t seem to bother about the €80 billion of savings that fled from the Greek banks to other European banks. It looks like some people do benefit from the panic by instilling panic into the minds and the psyche of the Greek people. So the Greek people need to think better of who their allies are and who aren’t.

Karl, the last point I want to make is that Andrea Merkel spoke yesterday in a very different and clear tone. She said very clearly that she wants to get her hands on the Greek real estate – on the Greek land, on the Greek natural resources; and solar power- that’s the key for the future. Greece has 50% more sunshine than Germany and yet is 80% behind Germany in taking advantage of that. The Germans want to take a piece of the Greek sun and that’s what this debt crisis is all about.

K.F: Whoa, that is a mad point to finish off with Yanis – thank you very much for joining us here on the Renegade Economists.

Thanks to Paolo Rosa for the pic

What role is there for artists in a community? Long looked down upon as dole bludgers, why is life such a struggle for those who like to use image, texture and craft to express rather than words or numbers?

After yesterday’s excellent article Fitzroy Snubs Gentrification on our upcoming Anti-Gentrification festival, a poorly written piece by Marcus Westbury must be re-butted.

Artists need to exist on the edge of the system. Wages are required to pay for basic living expenses such as rent and food. Time is required to be creative.

Cheap rent gives artists more time for their passion. This sees many creative communities develop on the periphery, often in rundown ghetto-like communities that are close to the city.

Unfortunately, land speculators know this.

How many times do we have to see an artistic community moved on from the community they create?

Chapel St central to Chapel Windsor, Brunswick St moved on to Gertrude St, then to High St, Northcote – now out of the city to Castlemaine?!!!

A few years after change agents set up the sort of community we should all aspire to, the fabric of the community is undone through it’s own success. Willingly. By our government’s policies.

Higher rents acts as a large paint brush, smothering a creative community with beige.

What are the economic forces behind this?

Attend a “Tax Minimisation for Lawyers” seminar and you will hear how land speculators are given a racial cultural profile of what a hipster looks like. “It’s your job to find them on a Saturday morning and figure out what they look like and what atmosphere they look for. Then you have to try and find that look, that feel, in another suburb further out. Buy there and wait”.

Artists are pawns under the current system. Artists give the ghetto a makeover with some tactile graffiti, a few cool cafes and bars emerge and then the wanna bees start to move in.

Aha! But the speculators are already there, rubbing their hands with glee.

Why should they take all the benefits of community creation?
Is it fair to blame the land speculator for a systemic failure?

If taxes were moved off our wages, off goods and services and yes dare we even say off corporations (the average paid is closer to 3% than 30%) and placed on natural resources and licensed monopolies, then the speculative incentive is minimised.

By far the most valuable and most sustainable resource of all is land value, particularly in urban locations. Every year land goes up 4 – 6% (4 out 18 years are a downturn – see Fred Harrison’s Boom bust 2010). Land speculators know this.

They understand that with a dash of population here and a mash of social progress there (volunteers planting trees to public art, let alone a new train station) the community becomes more desirable.

A higher and flatter land tax slows the growth in land prices, removing the speculative intent. This slows the pace of gentrification as the desire to live in a community encourages us to grow upwards (more apartments or lofts), helping to meet the supply of an area.

With lower land prices there are massive spin-offs. Consider your life with a 70% lower interest bill on your mortgage (no interest on the land component now)! Wow you could now afford organics.

You could also imagine your artistically repressed sister starting to do art in her community down south. Why? Because she doesn’t have to work so many hours to pay her rent/ mortgage.

Thus the spawning of a multitude of artistic communities is possible in many suburbs. This isn’t naive whinging. Read Ken Henry’s Tax Review and you will see this thinking is bound in the most efficient form of economics possible.

Just remember – the earth will always get more valuable. Who do you want to profit from that?

Thanks to Groundswell for the link and Signal Fire for the photo

Watch a video describing how artists create the scene but speculators wipe it clean, then proposing the much needed solution:

Second placegetters in the I Want to Live Here film comp were Ghafouri Productions. A slick look at how communities are split apart by the speculative mentality dominating economic policy. Can you hold on? Please read on!

Ingrid Brooker’s winning entry for the $3000 I Want to Live Here film comp.

Well done Ingrid for a unique portrayal of these vital issues.

Check the photostream of the night’s festivities

photo credit: Pink Sherbet Photography

Adam Schwab from Crikey:

In one of the more remarkable occurrences, residential property, despite macroeconomic indicators to the contrary, has been an incredibly resilient asset class this year. In fact, the “affordable” sector of the property market is trading at record high levels, while auction clearance rates in major cities remain above 70 percent (in Melbourne, the clearance rate is above 80 percent). The use of inverted commas around the word “affordable” is intentional  — for many, the “affordable” sector of the housing is perhaps ironically, relatively unaffordable.

To purchase a property within 15 kilometres of a major city, first home owners are required to spend often upwards of six times average incomes, double the amount previous generations would spend on a home. That means one of two things is happening; people really like buying homes these days, or punters are vastly overpaying for residential property, or perhaps a little of both.

Property bulls will no doubt argue that the housing sector in Australia is not really over-priced, but due to the shortage of satisfactory property, the price is at an equilibrium level.

While supply issues no doubt have a short-term effect (Australia still has significant net population growth), in the longer term, the free market requires capacity to increase to match the higher demand. (Australia isn’t Monaco, urban centres take up a mere fraction of total land).

No, the major impetus for the prevailing boom is the continued, boosted first home owner’s grant and the ongoing lax lending standards exhibited by major banks. The FHOG is a dreadful piece of policy which has the unfortunate effect of inflating the cost of homes for young people. Various potential buyers, all with the grant in their back pocket, simply bid up the price of a property to what they could afford, plus the value of the grant, plus the leverage they are able to obtain. (Figures released last week indicated the “first home buyer” sector continues to dominate property prices with data indicating that 29.5 percent of owner-occupied mortgages were to first home buyers. Before the grant was boosted, the figure was around 12 percent).

Read More

With all the promise of a tough budget, the biggest concern is the limp wristed, white flag response to the First Home Owners Grant (FHOG). Rudd’s recent mention that’ the FHOG won’t go on forever’ must have seen some furious lobbying in the halls of power by the Ron Silverberg’s (HIA) of the property lobby.

Last night we learned that it will go on. The FHOG will be extended in full for another 3 months and then halved and continued – for another 3 months. Why doesn’t the government just give the property lobby the money directly? The $539million allocated over three years will have a tragic multiplier effect on land and housing prices.

The Age’s Chris Vedelago showed that average prices in poorer suburbs increased by more than the grant, with the average uplift in these Victorian suburbs being $27,000.

Since the FHOG increase in October 08, and by averaging the monthly First Home Grants over the last 4 months we have stats for, we can assume that 146,201 renters will have been manipulated into buying property by the start of the spring real estate season. Then the traditional spring seasonal demand will replace any downturn from the halving of the FHOG at the end of September.

The average FHO loan over the last year was $255,000. By adding the $27,000 bump up that the FHOG will add to the average loan, these aussie battlers will pay $195 extra per month.

Over the next year this means that first home owners will pay $28,509,195 in additional payments to the land banking developer and the lip-licking bank executive.

Over the 25 year lifecycle of the loan, this will add $31,548 in total payments to their mortgage. Taken to it’s logical conclusion, 146,201 first home owners (make that 200,000 according to the latest figures) will pay a combined 4.6 billion dollars more to the property and banking industries than they should have.

That’s how $539 million turns into a $4.6billion handout for the lucky few.

We are being conservative in these figures as they do not include the $6000 increase in FHOG from the Brumby State government. New house owners will now receive $32,000 in handouts ($21k federal and $11K state), and as Saul Eslake warned the ALP before they took office, this will naturally cascade into higher land and housing prices. Economics dictates this, no matter how smooth Swan looks.

The infrastructure boon will also prop up land prices in prime locations. Lucky speculators in Werribee South will be very happy when they can advertise a reduced travel time to the CBD.

Year on year from February 2008 there has been a 19% increase in the size of FHO loans. This is a $52,700 spike.

Tragic economics Mr Swan. Casino economics for the lucky speculative retiree.

These extra payments will undermine the so-called pump priming benefits of the $57.6bn deficit. Why? Because these households and indeed any other recent home purchaser will not have the comfort money to engage in the consumer lifestyle so necessary to bounce this economy back into 4.5% growth territory.

As a spin-off, such FHOG distortions will also help consolidate small business in wealthy areas. Wealthy communities will be the only ones willing to support boutique, creative enterprise. Choice will expand at the top but yet gets dumbed down for the traditional Labor supporter.

In years to come someone will release a study proving the effectiveness of handing lobbyists the money directly rather than using economic trickery to boost their bottom line. If young people knew about the sucker punch they are falling for, they would offer to roll out the red carpet for the property lobby. Why not? It would be more economical for us to give them the money directly AND to fly to Canberra to put on a giant party for the property lobby, with Gen X, Y and Z waiting on them hand and foot for a whole weekend rather than spending their lives hocked up to their eyeballs in debt.

The 6 month reprieve for the housing market has now been extended. The Rudd government is aiming to lock us into 40% plus payments on our mortgages, more than any other generation.

And to top it off, clean coal was given the majority of funding in the clean energy component of the budget.

photo credit: lrargerich

Karl Fitzgerald

as published in Crikey 20/02/09

Mirvac yesterday admitted what many affordability watchers know. The housing market is manipulated to suit shareholders over householders.

Due to the fear that an $81.4m half yearly operating profit is insufficient, first home buyers will have to pay higher land and housing prices to support Mirvac’s Executive Incentive Scheme.

Mirvac managing director Nick Collishaw admits to the immense power of land monopolists in Mirvac to delay land releases in existing estates:

“Effectively what we are doing for the bulk of the projects that we have in Victoria is managing a staged release — rather than have a release with 100 lots in it, the stage sizes will be much smaller.”

This behaviour exhibits why Brumby’s land supply handout to the property lobby will do nothing to assist affordability. Land and housing releases are manipulated to suit profiteering over people.

As Australia’s affordability epidemic gets left behind in the backwash of the GFC, the genuine land supply issue is that controlled privately by land banking developers.

Compounding these issues, the write-offs on Mirvac’s investment properties total more than $800 million dollars. Top and tailing the benefits of the system, Mirvac has the power to drip feed land and housing to market such that home buyers of all generations are guaranteed to pay 40% of their income on rent or mortgages.

And the government is silent on this market manipulation.

Governments at all levels are complicit in the rights of land speculators over and above the future of its people. One need only refer to the recent AEC figures to understand the power of lobbyocracy.

For the productive economy to survive, we must push for more effective public finance policy. Higher holding charges on land are needed to force land prices back to affordable levels. Spin-offs include the abolition of payroll, GST and a massive cut in income taxes. Investment in new infrastructure becomes self funding through land value capture.

When this occurs, the land and housing market will no longer be seen as a casino. The risk of global meltdowns will be reduced when we no longer have to borrow so much to put a roof over our heads. Speculators will become producers, hopefully funding the inventions needed for a sustainable rather than sprawling society .

Relatively speaking, who really benefits from rising land and housing prices?

Media Release

Housing Shortage in Inner City a Myth

2,317 properties have been found empty in central Melbourne during Australia’s worst ever housing crisis.

Read the Full Report (PDF 432kb)

“The 2008 I Want to Live Here report has found a 7% genuine vacancy rate in the inner city as compared to the much publicised 0.9% vacancy rate. The reported rate is a shocking one tenth of the genuine vacancy rate that speculators withhold from the market” said report author Tohm Curtis.

“At least $1 billion in vacant property exists in the inner city, and over $10 billion in Greater Melbourne.”

“The suburb of Carlton alone has sufficient vacancies to house all 220 reported homeless students at Melbourne Uni” said Mr Curtis.

“Last week the Housing Industry Association tried to claim that land supply is the cause of rising housing prices. Yet the 90,000 blocks opened up by Brumby earlier this year, on top of the 38,000 existing empty blocks of land held by Australia’s 6 biggest developers, have done nothing to curb rising land prices. Obviously there is another factor at play and our report demonstrates that it is speculation.” stated Project Coordinator Karl Fitzgerald.

“Brumby’s 2030 expansion is nothing more than a handout to property speculators. What he should focus on is tax reform to ensure that existing housing is used for living rather than the ‘laughing all the way to the bank mentality’ that land speculation enables.”

“Council budgets are stressed by further infrastructure expansions when existing residentially zoned land should be further utilised.”

“The least we should be doing to tackle climate change is to ensure that people are living as close to their places of employment as possible. It makes no sense for packed suburban trains and busy roads to be driving past vacant property after vacant property when there is space for people to live close enough to walk and cycle to work and school.” said Mr Fitzgerald.

“These speculative vacancies are unacknowledged by economists and politicians despite being reported in the Census as recently as 2006. Government should rely on its own reliable sources of information instead of using figures provided by the real estate industry. The REIV and Australian Property Monitors regularly report vacancies of 0.7-0.9%, based on those properties up for rent.” claimed Mr Curtis.

“These speculative vacancies exist because government policy reinforces this speculative behaviour. Policy at all levels of government have been designed to keep the housing bubble inflated” said Mr Curtis.

The I Want To Live Here report calls for genuine tax reform as the only means to ensure long term housing affordability and ensure future Boom Bust cycles are avoided. Higher and flatter holding taxes on land should be implemented to balance out the advantage that property speculation has over all other forms of business.

Key Findings:

* 2,317 vacant properties in inner Melbourne.
* 18,070 vacant properties in CityWest Water’s client base of Greater Melbourne.
* $1,044,967,000 worth of vacant property in the inner city.
* If 44 of the 2,317 vacant properties were leased or sold per week it would take over a year to clear the backlog.
* If this extra supply of housing was to hit the market the price of housing would become more affordable.
* Government policies of all levels are critiqued and fall short on many levels.

Read the Full Report (PDF 432kb)

Appendix 1 – CWW vacancy findings

Read the 2007 report

For questions or comments please contact:
Tohm Curtis, Researcher, Report Author, 0416 313 273, tohm@earthsharing.org.au
Karl Fitzgerald, Project Coordinator, (03) 9670 2754, k2@earthsharing.org.au

When: Wednesday 3 December 2008, 7pm to 9pm.
Where: The Order, Level 2, 401 Swanston Street, Melbourne.
Cost: Free.

The screening of The ‘I Want To Live Here’ short film competition will be an event of great importance. Here finally young people will be able to tell their story of the ludicrous situation that sees them paying more than any the generation in rent. Mainstream media ignores many of these issues.

The 10 finalists to be screened are challenging, humorous and sometimes risque. Whatever they are, they all make you think. The winner of the $3000 first prize will be announced on the night.

Along with these 10 fabulous films you have the chance to peruse and support the Melbourne Craft Cartel’s creative stalls set up on the night.

Get some Christmas shopping done and support local craft at the same time! It’ll give you a warm fuzzy knowing that you are helping local economies thrive, saving on consumer miles (goods flown around the world polluting) and putting your money where the sweatshops aint.

Comic stalwart Rod Quantock will also be featured on the night.

More details

RSVP appreciated

Today’s big announcement promoted by the Rudd government:

The $512 million Housing Affordability Fund, promised before the last election, is expected to help 50,000 new home buyers in the next five years.

“What I am signalling loud and clear is that we want to tackle the housing affordability crisis for Australian families which has gotten out of control, and we need to start bringing it back under control.” said Mr Rudd.

Will the same sort of economic ‘oversight’ for the First Home Owners Grant be claimed as a defense to this policy handout? Basic economics teaches that when the land market receives a subsidy, land owners have the monopoly power to claim all of the benefits. Similar to the FHOG in effect, the Housing Affordability Fund will result in a subsidy for those who own land where infrastructure is required, typically in sprawl zones.

What is missing is a fairer method of infrastructure funding, one based on the tried and tested technique of Council bonds. Bonds are sold to fund the roads and sewerage infrastructure. Then the beneficiaries to the lifetime of new services pay something back to the Council over 20 years via Council Rates. The present upfront Developer Charges see one generation paying for the infrastructure services in one go. Reform that Rudd!

What is needed to address housing affordability is a genuine supply side solution to unravel the thousands of empty blocks of land withheld from the market by land bankers. Importantly, these are already in established urban communities, requiring less infrastructure and resulting in less travel pollution. Just keep an eye out for them near your local train station. We were shocked to see how many vacant blocks there were in Altona over the weekend. Have a look (above) Julia!