As a comment on the penultimate post, AusHousingCrash recommended I update my chart of Australia’s total land prices to GDP going back to 1911.
Don’t be misled by the 2007 on the X axis, that was the peak. The last year of the graph is actually 2010.
NOTE: Over the years the average land values relationship to GDP has been about 1:1, so might I suggest 2.86 is looking a bit ‘toppy’?
KEEP UP THE GOOD WORK, GUYS!
In yesterday’s blog I understated the number of people providing leadership in educating people to the Ponzi scheme residential property ownership now represents for new home buyers.
Congratulations, folks! I know it’s a tough often unrewarding job breaking through the sort of media hype that results in people at auctions actually applauding a young couple who’ve just paid a record price for their first home. Applauding? [Sigh!]
We’ll crash through this crazy ‘homeownership at any cost’ mindset yet.
The only doubt that Australian real estate prices are in a bubble of gargantuan proportions resides in the minds of analysts such as former Treasury employees Paul Bloxham, Christopher Joye and their wishful adherents.
By publishing their highly contrived bubble denials, newspapers ingratiate themselves with their real estate advertisers and spruikers for the industry, thereby obscuring the overwhelming truth about the real estate bubble. It is relegated to the occasional article by Steve Keen, Gerard Minack, Gavin Putland or myself, or a rare IMF release.
The latter, though, are usually accompanied by a put-down from a disciple of the Bloxham-Joye school not noted for having found anything wrong with skyrocketing land prices other than an imaginary “shortage of supply”.
No guys: shortage of supply doesn’t cut it. Nor did it cut it in California. Er, how about an errant tax system that gives all the wrong signals ….?
It’s most heartening therefore to see the great number of thoughtful people not sold on the “all’s well” line the media has constructed for them now having their own say in Prosper Australia’s call for a residential buyers’ strike as taken up by the social reform group GetUp.
It might assist discussion for me to provide an interim update of the Kavanagh-Putland Index. This is in two parts, showing 1) total real estate sale prices for Australia divided by GDP, and 2) real estate volatility as a driver of the economy’s direction.
I should emphasise that the broken lines for the current year represent incomplete figures. Although they are extrapolations based upon 2011 real estate sales data from South Australian and Western Australian government departments, I consider figures to come from the other states and territories will eventually confirm these dotted lines.
(A) The 18 per cent bubble line is simply empirical. (With the exception of the last of the banks’ 1994 distressed sales sell-off in other states, and the contemporaneous boom in Queensland, any time the ratio has surpassed 18 per cent Australia has experienced a recession. The better guide, though, is the ‘volatility’ chart.)
(B) During the period of the current bubble, from 1999 until 2011, we’ve expended some $2.8 trillion on real estate, $805 billion of which appears to be within bubble territory.
(C) A significant economic recession has been indicated when aggregate sales prices decline by 20%.
As government resources are currently stretched, questions will be asked about what categories of welfare recipients are less deserving than others, so that the welfare bill may be reduced.
That seems OK, doesn’t it? People shouldn’t be receiving welfare they don’t deserve, should they?
That also appears to be in keeping with Dr Ken Henry’s recent inquiry into Australian transfer payments, where he suggested there are too many classifications for welfare recipients.
But what if there was another way of looking at the question? What if every Australian was entitled to a universal basic income?
That’d be great, but how could we possibly fund it?
Well, I’ve shown that there’s enough land rent available to abolish all taxation. So, what if Australians’ rightful entitlement to their share of mineral, fishing, forestry, spectrum and aircraft licenses were used for the purpose?
It’s certainly possible, and it would provide a universal basic income for everybody: a “citizen’s dividend”.
However, there’s a problem.
We’ve been brainwashed by the few people who aggrandize themselves by stealing our land and natural resource rents to believe that the current tax system is the best we can do for ourselves.
In fact, they’re already telling us that Australian wages will have to be suppressed if we’re not to fall into the economic recession that has gripped the world.
That’s actually a prescription for disaster. Lower wages will send the economy into a downward spiral.
It was understood in the “Progressive Era” that higher wages from production assisted economies, whereas lower wages did not, but Thatcherite/Reaganite economics has turned this logic on its head. We’re now told we’ve got to favour the big boys: risk-takers, entrepreneurs, employers, CEOs. And we’ve come to believe it!
Progressive Era economists of all shades of politics would tell us this is nonsense, that it is workers with a dollar in their pockets to be spent who create employment for others. Today, there is no such middle ground consensus.
We’ve swallowed, hook, line and sinker, the web of lies neo-liberal economists have spun for us over the last thirty years of “economic rationalism”: wages must be kept to a minimum, and there is little or no place for government.
George Orwell’s “Big Brother” is now well and truly ensconced in western society, favouring privileged rent-seekers at the expense of worker and industry alike.
And the results are there for all to see. As the West descends into terminal decline, lowly China is beginning to emerge economically, because she encourages production.
Nevertheless, there are warning signs that China, too, is falling victim to her real estate speculators. The difference is she is trying to deal with them; we aren’t. Systemic indifference to financial corruption is highlighted in the film “Inside Job”, but it’s a pity it failed to make the connection to tax systems’ complicity in setting us up for financial and economic collapse.
I should give Michael Hudson the last word on the incredible “back is white” economic system into which the West has now degenerated, where we penalise workers and production and reward uber-wealthy rent seekers. As usual, he’s right on the money.
AN ALTERNATIVE TO TAXATION
If, as I claim, tax systems are responsible for creating this (and every other) economic depression, how do we make the switch to land and natural resource rents for revenue?
“It’s impossible!” do I hear you say? “Too many vested interests in the status quo!”
Well, consider this. What if Australia was to introduce an all-in federal land ‘tax’ as advocated by Ken Henry’s panel of inquiry into “Australia’s Future Tax System”, and the new revenue could be offset by companies and individuals, not against other income, but directly against other taxes payable?
Think about it. You could reduce your tax liability by the amount you paid in land ‘tax’ (more properly, land rent).
Therefore, it does not become “just another tax”, but an alternative to tax, because it actually reduces the amount you have to pay in other taxes.
Let’s re-visit the mining tax fiasco, where Australian mining billionaires protested in the streets, claiming they couldn’t bear a 40% resource rent tax on their profits. The principle would also apply to them. What if the resource rent abated their company tax, their payroll tax, etc., by the amount of resource rent they paid? Wouldn’t this pull the rug from under their argument?
Proceeds from land and resource rents could also be used to abolish the Goods and Services tax.
This in-built compensation system is so patently fair it would be interesting to see from which quarter detractors might arise.
No doubt existing rent-seeking parasites would trot out the case of the poor widow, crying crocodile tears for the fact that she doesn’t earn income against which to offset her land tax. “She’s currently exempt from tax, but now she’ll have to pay!”
Oh, she doesn’t pay GST now? You’re not currently worried about that? In circumstances where the poor widow’s children who might inherit her real estate can’t help her out, she could do what she is currently allowed to do, that is, not to pay municipal rates or land tax, but have them put as a charge on title, payable when she passes.
Bring on the tax set-off!
(Acknowledgement to Ray Brownlee and Bob Keall)
My colleague Dr Gavin Putland at the Land Values Research Group has provided a list of warnings readers might find interesting.
Just as “Australia’ Future Tax System” has recommended capture of land and natural resource rents in order to abolish taxes inhibiting employment and productivity, James K Galbraith has now lauded the capture of economic rent to Congress, saying:
What creates jobs is the revolving capital that supports payrolls. A tax policy aimed at supporting employment would shift the tax burden away from labor, and off of short-term capital, and place it instead on long-term capital accumulations. If this reduces the investment in fixed capital that is desired for other reasons — in particular, investment with broad public benefits — then that sort of investment should be done by public authority, funded by an infrastructure bank.
Thus as a general rule fixed assets — notably land — should be taxed more heavily than income. The tax on property is a good tax, provided it is designed to fall as heavily as possible on economic rents. This basic argument, going back to Ricardo, remains sensible, for it aims to not-interfere where there is, in fact, no public purpose to interfere with private decision-taking. Payroll taxes and profits taxes do interfere directly with current business decisions. Taxes effectively aimed at economic rent, including land rent and mineral rents, and at “absentee landlords” as Veblen called them, do not.
There is little doubt that the cuddly populist Mike Moore, who recently gave a rousing speech in Madison against Wisconsin selling off its patrimony, would be on song with this call from the son of the late John Kenneth Galbraith.
Many others, such as David McWilliams and Michael Hudson, aware that debt that can’t be repaid won’t be repaid, argue that badly risk-managed housing debt must be written off: banks should shoulder their share of the responsibility in financing a housing bubble.
Hudson’s studies go back to biblical times to show that enlightened kings and emperors did indeed write off debts that were impossible to pay, so why do today’s governments, reputedly representing their citizens, try to shackle them (and, indeed, future generations) to meeting both impossible mortgages and impossible bank debt? It is surely the great abomination of our times that people are turned into tax slaves for banking institutions?
We can learn from history. Sensing a revolution from the people, the Physiocrats tried to argue the case for l’impote unique (the single tax) to Louis XVI … or else. The French people eventually chose a bloody revolution to replace their aristocratic plutocracy, but failed to put the necessary economic reform into place. (Shades of Egypt? Libya?)
On the other hand, by virtue of his benevolent dictatorship in Java, Sir Thomas Stamford Raffles was able to act differently. He listened to the people of the ‘Spice Islands” (now Indonesia), abolishing their incredible amount of taxation in favour of a 30% rent that could by paid in kind. Thus were the Spice Islands able to exit from economic depression as Europe and America continued to languish.
So, although there are these signs the planets are aligning, and leadership is being given, it clearly needs to be supported by basic education about how the rentier class aggrandises itself by stealing the public’s rent, and by sending the populace deeply into tax-induced debt. The widening gap between rich and poor is solely explicable in these terms.
That Louis XVI preferred to lose his head rather than consider l’impote unique, should serve as a timely warning, even in the 21st century, that people in the street still need to be educated to understand how arbitrary taxation hinders production and employment whilst the capture of land and natural resource rents – as suggested for Ken Henry’s panel in Australia and James K Galbraith in the USA – actually fosters both.
Events issuing from the Japanese earthquake have taken the ongoing economic collapse of The United States, Portugal, Greece, Ireland, Italy, Spain and other world economies off newspapers’ front pages.
Live on TV we witnessed yet another natural disaster, this time an earthquake, its after-shocks, and several tsunami waves hammering Japan. The horror of loss of life and destruction transfixed us as people, sometimes in vain, attempted to flee the terror of the tsunami in their vehicles.
We pray the attendant man-made accidents, failing nuclear power plants, may be cooled and remedied without further loss of life.
This tragedy, overlaid on top of Japan’s failing economic performance over twenty years seems to pose insuperable hurdles with which she has to deal.
A GLIMMER OF LIGHT?
So, where’s the good news?
As he travels in New York’s subway, it’s nice to see Irishman David McWilliams recounting a heartening story. He relates the successful turnaround in the fortunes of the New York subway to the approach Ireland must take with its billowing debt.
One hopes Ireland’s new Taoiseach, Enda Kenny, has the wit to see that the Irish want change – and McWilliams’ formula to initiate that change is quite correct.