Financial havoc in the land of Oz

dreamingLast night I had the strangest dream – a nightmare. I was in a land called Oz, a land where the government taxed productivity. There were taxes on people’s earned incomes, on the goods and services they produced and purchased, and on their comings and goings in general. If businesses produced anything at all, they were fined for so doing. If they employed too many people they were slugged with something they called a payroll tax.

This was ‘post industrial’; this was an economy of high finance.

Oz had a Productivity Commission to ensure that as little real wealth as possible was produced. It did a fine job.

But they did give tax breaks to property speculation in Oz, calling it property ‘investment’, or an impetus to ‘the provision of housing’. You could ‘negatively gear’ your investment property and exaggerate your depreciation and repairs, so other taxpayers helped you buy your property. Nice?

Having fined the hard-earned salaries of the people of Oz with taxes on their efforts – as though they had just punched a policeman in the eye, or committed some other crime – the prices of their land shot up spectacularly because that’s what this strange tax regime had encouraged. Their ecclesiastical high priests preached that the phenomenon was “simply a matter of supply and demand: the tax system has nothing to do with high land prices.”

Look, I know this all sounds too stupid, but that’s often the way it is with dreams, isn’t it?

On top of their taxes and a Mediplank levy, the sad little wage earners of Oz were slugged a further 9% penalty called a superannuation levy, because it was thought they were too stupid to provide for themselves in retirement. Truly!

With all these taxes and the skyrocketing land prices of Oz, many people could no longer afford food, clothing and shelter without assistance – much less money for entertainment or recreation – so they increasingly turned to the banking sector or government for help or, at times, for their very survival.

Meanwhile, important people in charge of things called trusts and investment funds shunted around hither and yon the billions to which people had to wave goodbye as it disappeared into almost certainly depleting superannuation funds playing favourites with share and property markets, and inflating with gay abandon bubbles in both. When the bubbles burst, so much for retirement, folks, but gee it has been quite an entertainment with your money, a regular hoot for fund managers and their minions!

Oz’s once efficient shipbuilding industry and most other significant manufacturing had long been shut down as a side effect of all its taxes on production and real wealth creation. It had now become a fantasy land where finance ruled the roost, and any manufacturer wishing to remain in business was forced offshore to where taxes and land were cheaper; or, as the financial spin had it “to where labour is cheaper”. It seemed, however, a well paid workforce in counter-culture land, Germandom, where manufacturing wasn’t regarded as some sort of sin, had no such problem. Nor did it prioritise home ownership as the sine qua non for heavenly bliss. Two-thirds of Germaniums actually rented their homes on long leases and knew not real estate bubbles.

Meanwhile Oz banks continued, unimpeded, to lend on bubble-inflated land prices, their CEOs paid handsomely in multi-millions to completely disregard the prudent risk management practice of not advancing funds into a soon-to-burst residential real estate bubble.

Journalists had become fascinated with the lively, if sometimes incredible, stories in and around the banking sector, putting banks on their front pages and upon a pedestal, quite oblivious to the pedestal’s precarious tilt.

Natural monopolies, once under government ownership and tight management, were sold off to private companies in the name of business “efficiency” and “competition” to help fund extravagant government, the companies craving to suck at the teat of the public’s surplus land rent. Freeways became tollways as the poor were directed into intentionally constructed labyrinthine side streets.

At the first sign of the real estate market flagging, more Oz revenues were directed into home-vendors’ schemes, in order to re-inflate their property prices and keep this unreal finance-based economy happening. They had to be kept primed or it was ‘game over’.

With household debt at record levels and economic instability now abounding, it was thought best the government should guarantee Oz banks, rather than let them go to the wall like failed businesses once ought.

Wasn’t this service industry capturing the public’s rent, that is, the common wealth, per medium of bubble-inflated capital and interest repayments on mortgages, more important than wealth creation itself? Banks were most certainly ‘too big to fail’ in this Noddy land, so the peasants could readily be taxed to bail them out if needs be.

The plutocracy ruled with finance and taxes as their weapons. As the poor and middle class in the land of Oz were left with little wherewithal and pitloads of debt, the economy turned ‘cactus’. So, what was to be done?

Maybe a $900 handout, maybe a BER program here, a home insulation program there, not to keep people paddling, mind, but to keep the weirdly-lopsided financial system and the uber wealthy of Oz afloat in this concocted life raft.

There was a fallback plan in this land of which I dreamt. If things turned really grisly, why not simply roll the money-printing presses, just like its gargantuan neighbour, Brobdingnag, had done? That’ll fix things. It’s that easy!

Suddenly, a bloke by the name Hen Kenry broke into my dream, crashing through a brick wall with a ponderous mallet, announcing Oz to be a financial mess. He and his Alice-in-Wonderland tea party panel that followed him through the wall opined that Oz abolish its taxes and instead tap its vast reserve of land and natural resource rents.

Killjoy! That certainly wouldn’t go down well in the land of Oz.

I awoke in a state of utter confusion and déjà vu.  Had I not visited this fantastic place before …… somewhere? ….. sometime?

THE GREATEST CORRUPTION

LAND ‘TAX’ AND OTHER NATURAL RESOURCE RENTS WOULD  PUT AN END TO IT

Oh, Egypt’s President Hosni Mubarak is probably the world’s richest man, with real estate interests in London, New York and Los Angeles? How surprising.  (Not!)

That’s why privilege, power and landed interests have fought for centuries to have governments wind back land-based revenues. They have the money and influence, so governments listen.  But, by listening, governments and the wealthy generate economic depressions such as this.

Here we are in the 21st century having less to spend after expenses for food, clothing and shelter than people had in the 15th century.  Incredible, but true.

As invention, innovation and science have made great strides, we’ve permitted economics to retrogress back into the dark ages because privilege wants it that way. It suits them to hide this corruption.

In the year 2011, don’t you feel a little silly about allowing the privileged (who by private legislation) channel publicly-created wealth unto themselves? Not just a little bit shamed? No?

Hey, wake up world!

 

You're earning less than people earned centuries ago.
You're earning less than people earned centuries ago.

MOVING MOUNTAINS

William Wilberforce
William Wilberforce

CHALLENGING A MINDSET WHEN IT’S WRONG

At any given moment there is an orthodoxy, a body of ideas which is assumed all right-thinking people will accept without question. It is not exactly forbidden to state this, that or the other, but it is “not done”. Anyone who challenges the prevailing orthodoxy finds himself silenced with surprising effectiveness. A genuinely unfashionable opinion is almost never given a fair hearing, neither in the popular press nor in highbrow periodicals.   – George Orwell, The Road to Wigan Pier

Over the years a relative handful of people endeavoured with mixed success to move the goal posts in connection with:-

Chinese foot binding

Slavery

Duelling

‘Honour’ killing

Female genital mutilation

The plutocracy’s privatisation of the public’s rent

… amongst a number of other worthy reforms.

As Orwell says, it’s just “not done”. To achieve change is difficult, even when it’s essential. The current hegemony employs very tough minders.

It can never happen; so why bother?

All of which makes the challenge the more worthwhile.

RENT SEEKING

rentWHAT IS IT EXACTLY?

It’s a pity the vast majority of Australians don’t understand the term ‘rent seeking’, because they ought to know why the value of average real wages has been declining since 1972. The capitalist system has become terminally ill, because people and companies have given up producing wealth in favour of rent-seeking.

No, real wages simply decline as a result of inflation, some will say. Yes, but what generates that inflation? The printing of excessive paper currency? Yes, but why do governments find this to be necessary?

The decline in real wages and inflation can be traced back to the failure of governments to capture economic rent for their revenue. But what is this ‘rent’?  

Rent arises when people come together in a community. It shouldn’t be confounded and confused with the rent paid under a lease by a tenant.

Rent is the return, not to labor nor capital, but to natural resources. It includes: land rents; oil and mineral rents; electronic spectra rents; fishing and forestry rents; air traffic rights, etc. Rent is not privately produced but simply arises where a community of people utlise natural resources.

In English law there is a long tradition of rents being part of the common wealth. It is only in recent history that we’ve savagely reduced the collection for revenue of natural resource rents and started to raise personal income, company taxes and sales taxes.

As a direct result, this has allowed companies and individuals to set their sights on trying to privatise and monopolise these publicly generated rents. As governments have failed in their duty to capture the rents of nature for revenue, economic rent has become an easy target for private interests and so-called entrepreneurs.

I’ve shown in the (middle) “GDP graph” on this page that land rent alone could replace all of Australia’s taxation on labor and capital, which is one third of GDP. When you add the other natural resource rents listed above, total economic rent is somewhere in the order of fifty per cent of the economy and we  collect only about 5 per cent of this.

If we captured all of Australia’s economic rent for the necessary running of government and abolished the taxation that raises prices, lowers wages and generates periodic recessions, this would mean that there would be a substantial universal basic income payable to all Australians. There would be no need for pensions of any description.

In the spreadsheet in “Unlocking the Riches of Oz”, I showed how our GDP must rapidly double if we capture rent and abolish taxes on production, thrift and industry.

But we don’t capture rent, so we have those few, including banks, who do capture most of it – most certainly not the average home owner – growing incredibly wealthy at the expense of the other 99.5 per cent of Australians. You can’t become a billionaire without private capture of the public’s rent. This refers not only to holders of the most valuable lands across Australia, and those who take mortgages over them, but to the principals of big mining companies who finance ad campaigns to ensure they continue to retain the common wealth in their profits.   

Once Australians understand rent seeking, they will also come to see the manner in which they are being played for fools by the already super wealthy.

And they’ll come to understand why we’re having this depression.

IRELAND (STILL)

Michael Lewis
Michael Lewis

VANITY FAIR 

I discovered a link on Dan Cox’s insightful Bubblepedia site to Michael Lewis’ nicely researched nine page Vanity Fair business feature “When Irish Eyes Are Crying”. 

The article doesn’t get to grips with causes, but is well worth the read. 

To me, Ireland has come to epitomise the procession of bursting national real estate bubbles. This is not so much because of my own fourth generational Irish background as the relative simplicity of Ireland’s case. It was Europe’s shooting star and then it disappeared.

America’s story can be similarly reduced, but the US has become lost in its Babel of cacophonic opinion.

Lewis’ piece says:  “Two things strike every Irish person when he comes to America, Irish friends tell me: the vastness of the country, and the seemingly endless desire of its people to talk about their personal problems.

Vast and gushing. Ireland is simpler. It’s not debatable that she attracted business by cutting business taxes, and that she attracted real estate speculation by insufficient property taxation. Now she’s bailing out her banks instead of her people. It’s so sad, but it’s terribly representative.  There are none so blind as those who will not see.

Maybe Ireland takes her advice from the cacophony?

TAXES DO DESTROY

THE LAW AND TAX

It was US Supreme Court Chief Justice John Marshall (1755-1835) who famously said “The power to tax is the power to destroy.”

Unfortunately, there have been only a handful of lawyers openly prepared to challenge arbitrary taxation imposts as a government revenue base. The alternative to taxation, namely, capture of the rents of nature for revenue, strikes at the very heart of privilege and vested interest from whence top lawyers earn their living. They don’t want to cut their own throats, so it’s difficult to gainsay the leanings of the most powerful people in the profession, even when they’re wrong.

So, except for this few, The Law remains an ass.

Chief Justice John Marshall was influenced by William Blackstone’s “Commentaries on the Laws of England” amongst which are to be found the following words:  “The earth, therefore, and all things therein, are the general property of all mankind, from the immediate gift of the creator. … there is no foundation in natural law why a set of words on a parchment should convey the dominion of land.”

There have been other great lawyers to speak out against taxation, of course, the likes of Justice Louis Brandeis in the US and Sir Samuel Griffith and Justice Rae Else-Mitchell in Australia.

But inertia has carried the day and we’ve seen Australian Taxation Office stationery even bearing the Goebbels-like slogan “Building a better Australia.”  Incredible.

EXAMPLES OF THE DESTRUCTIVE POWER OF TAXATION

Whereas farmers were permitted to pay their land rent in kind, usually rice, under Raffles in colonial Indonesia, colonial powers in Africa used two tactics to keep the native population subservient: “One is to limit sharply the land available to the natives, and the other is to make taxes payable only in money.” (Geography of Hunger, Josue De Castro)

In Population Growth and Land Use, Colin Clark tells us that the second half of Tokugawa Japan (1750 to the revolution of 1868) wasn’t in a state of primitive barbarism despite exchange with foreigners being banned. Japan was largely urbanized and “bore some remarkable resemblances to Baroque Europe. …Taxation was excessive, and there were frequent famines. … both abortion and infanticide were widespread. … The drastic abolition of the old social order must have been welcomed as a great relief.”

Yes, that’s right. Infanticide. They were so financially desperate, they killed their children. That’s taxation under despots.

Today, taxation has become a little more subtle. It removes hundreds of billions of created wealth from those who created it and channels it to the uber wealthy, without requiring us to kill our kids to stay afloat. (That’s done by advancing excessive credit.)

Taxation creates recessions and depressions, but unlike infanticide, economists manage to keep this fact invisible to the public at large and off the front page. That’s the main function of economists: to ignore and hide economic rent, so the wealthy may continue to steal it.

Taxation allows Australian billionaires to protest in the streets claiming “We are paying our taxes, so why do you need your mineral rents?”

It destroys.

Gina

US FINANCIAL CRISIS REPORT

Thanks to my friend Ed Dodson providing me with a copy this morning, I’ve just been able to peruse the official United States of America government edition of this report for answers to the financial crisis. I didn’t find any.

 THE

FINANCIAL

CRISIS

INQUIRY REPORT 

CONCLUSIONS OF THE

FINANCIAL CRISIS INQUIRY COMMISSION

 

We conclude this financial crisis was avoidable.

We conclude widespread failures in financial regulation and supervision proved devastating to the stability of the nation’s financial markets.

We conclude dramatic failures of corporate governance and risk management at many systemically important financial institutions were a key cause of this crisis.

We conclude a combination of excessive borrowing, risky investments, and lack of transparency put the financial system on a collision course with crisis.

We conclude there was a systemic breakdown in accountability and ethics.

We conclude collapsing mortgage-lending standards and the mortgage securitization pipeline lit and spread the flame of contagion and crisis.

We conclude over-the-counter derivatives contributed significantly to this crisis.

We conclude the failures of credit rating agencies were essential cogs in the wheel of financial destruction.

 ________________________________________________________

Four of the ten commissioners held dissenting views, the most revealing sentence amongst which was “Causes of housing bubbles are still poorly understood”.

Amen.

The commissioners and their staff will learn precisely how the tax system creates real estate bubbles when they investigate this blogsite. I forecast and explained this financial collapse. They’ve done neither.

.

HOW PRIVILEGE CONCOCTS ECONOMIES

TUMULT IN TUNISIA AND EGYPT FITS THE EXPLANATION I’VE GIVEN

Make no mistake about what’s now happening in Tunisia and Egypt. It is similar to the European protests that have taken place in Greece and Spain. It’s all to do with a concoction in the distribution of wealth.

Egypt’s well educated younger people are finding they’ve no jobs to go to. What is the purpose of education if the economic system is foundering and employment can’t be found? Where has the economy gone wrong and why are wages so low, anyway?

These are fair questions, and will increasingly be asked in places around the world where the privileged few continue to steal economic opportunity from others. 

Americans and Australians may be expected to be late in taking to the streets. Most are in deep distraction, having entertained themselves to a standstill, certainly into a stunned silence on any consideration of the vast gap between themselves and the privileged few. They have their iPhone and Facebook and all’s right with the world.

What is happening around the globe isn’t the politics of envy; it’s rapidly becoming the politics of survival.

But governments have no answers because they won’t address the chicanery in the process that directs wealth away from the middle class and the poor.

As I’ve recently been asked to re-explain the basic perversion in all economies, I’ll try to do so again here.

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The American social philosopher Henry George noted when taxation is introduced into the distribution of annual production (P), it diminishes the earnings of labour and capital.

In itself, this isn’t a surprise, but if the returns to labour (W) and to capital (I) should not be taxed, how can necessary government be funded?

George said the public revenue ought to come from natural resource rent (R), the surplus arising out of production by the mere existence of the community – that is, not from the efforts of private individuals nor companies.

In other words, where production is distributed to land, labour and capital as rent, wages and interest (P = R + W + I), taxation upon labour and capital would be unnecessary were the annual rent of land and natural resources to be captured for public purposes (P – R = W + I).

If the theory is true, it should be demonstrable in actuality.  It is.

But it can only be shown in the negative, because we publicly capture only a small percentage of our revenue from land and natural resource rents. Therefore, George’s corollary should hold. That is, if we fail to capture publicly-generated rent, wages and the return to capital will fall, and privatised rent, expanding at the expense of labour and capital, will repetitively create unnecessary periods of recession and depression. 

OK, let’s see if this is so:-

  • The following chart demonstrates the decline in average real wages in the US. (US Bureau of Labor statistics extend back further than those of the Australian Bureau of Statistics, which commencing in the mid-80s nevertheless show the same pattern).

US earnings decline 2008

 Be warned, the apparent increase from the late 1990s is when the CPI was re-defined!

  • This next chart shows the declining after-tax incomes of labour and capital and the increasing share of GDP to taxation and privatised economic rent.

Lifting lid on GFC

  • And here is the picture of real estate booms leading to economic recession in Australia. I developed it, along with the previous graph, and believe it to be unique.

Barometer (2)

As these are the most basic data relating to the production and distribution of wealth, Henry George’s case is proven, before we concern ourselves with money, credit and debt, which are not wealth but tokens of exchange.

From Henry George’s theory, it would follow that increasing amounts of credit necessarily have to be extended to labour and capital after the fact, because their fair returns have been diminished by taxation. Meanwhile, inadequate land value capture has created unaffordable land prices. It’s not the price of homes that skyrockets, it’s the land.

Therefore, explaining industrial depression in terms of money, credit and debt, which have no place in the above fundamental distributional formula are ex post facto and this is a logical fault.

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Although one income is earned and the other is not, neoclassical economics signed onto the scam that makes no distinction between the returns to land and capital in order to defeat Henry George’s conclusions (which I consider to be proven above). 

Failing to address the misdistribution of wealth to the wealthy can only have two outcomes, people turning either to fascism or socialism in the vain hope of a remedy.

A radical centrist alternative that doesn’t lead to war is possible: correcting this perverted distribution of wealth by the capture of economic rent for revenue instead of taxes.

INCOME TAX LEVY TO PAY FOR FLOOD RECOVERY

                       Kangaroo finds refuge
Kangaroo finds refuge

Most Australians have a feeling there’s something wrong with the manner in which Australian Prime Minister Julia Gillard proposes to assist the tragically flood affected residents of south-east Queensland. They need our help, but is increasing income tax the way to do it?

Of course not.

An Abbot-led Liberal government would certainly have done no better, but Prosper Australia’s David Collyer today shows how the Labor government has let another positive opportunity (that could have more easily been sold to the Australian people) slip through its grasp.

Moreover, when capturing land rent, valuations of catastrophe-affected lands will decline sharply and naturally, to recognise the plight of people. As land value always fairly reflects owners’ situations, they will always make the best revenue base. Relative incomes don’t do this. Big landowners recoup their taxes in the rise in the price of their properties.  Can renters and the poor do this?

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