I loved Midnight Oil’s “Beds are burning” both for its great anthemic quality and for the line “the time has come to say fair’s fair, to pay the rent, to pay our share“. It’s a pity it only related to our aboriginal brothers and sisters, when it could have been employed in the broader sense, to include us all.
On radio 3AW this morning Neil Mitchell held the “Oils” lead singer, now Minister for the Environment, Heritage and the Arts, Peter Garrett, responsible for the deaths of the four men who died installing the roofing insulation provided as part the federal government’s stimulus package. Implementing the program hastily and with insufficient training was destined to be extremely risky, if not disastrous, as it has proved to be. As the responsible minister, maybe it could be said that Peter Garrett was ultimately responsible for the four deaths?
On exactly the same reasoning, Neil Mitchel, I trust you accept responsibity for the deaths of those who die for lack of daily wherewithal because of your publicly aggressive opposition to land tax? When the ‘Harvey Report’ into Victorian state business taxes recommended reforming the land tax system you said on 28 February 2001: “I think we (3AW) have a job … to convince the government not to do it!” Every year since then you have sympathetically taken calls from listeners claiming the state land tax to have affected them unfairly. Nevertheless, for all its distortions caused by the threshold, exemptions, multiple rates and aggregation provisions, most of which the Harvey Report had recommended reforming , it remains a fairer tax than any other state tax. Had it been reformed along the lines of the Harvey Report recommendations, but also extended to all residential properties and increased significantly in order to replace Victoria’s share of the GST, payroll tax and stamp duty, it is arguable that Victoria’s state product would currently be double what it is today.
The reasoning behind this statement is carefully explained in “Unlocking the Riches of Oz” showing that Australia’s GDP would now be about $2 trillion instead of $1 trillion, had we captured half our publicly-generated land rent since 1972. In other words, the deadweight costs of the taxation of thrift and industry and bursting real estate bubbles are in fact costing Australians some $1 trillion dollars a year. That’s an incredible amount. If the Australian public were also to get a better return (than the crimnially low 10 cents a tonne) for the natural resources we ship overseas, it is quite arguable that most taxes could be scrapped, and that every man woman and child could receive a citizens’ dividend that would abolish the need for pensions and superannuation. I hope people might peruse the reasoning accompanying the spreadsheet figures in “Unlocking the Riches of Oz” before they were to dismiss this apparently exaggerated claim.
So, I agree that there is, unfortunately, a sense in which Peter Garrett is responsible for the four deaths of the roof insulation installers. But I also consider that your spreading disinformation on land tax has done similarly, Neil. At a minimum, it has acted to reduce Victoria’s gross state product to favour real estate speculation, and is at least partly responsible for Victoria’s decline into the GFC.
A big call? Maybe. But yours this morning on Peter Garratt was no less so.
I made the same suggestion to the previous governor, Ian Macfarlane in “The Coming Kondratieff Crash” in 2001, but Mr Macfarlane sought to place the blame for the financial threat well and truly outside his own backyard, saying in a talk to the Economic Society on 10 July 2001: “The major threat to our future growth prospects now comes from the international economy, not from domestic factors.”
Mr Macfarlane and others will undoubtedly claim that the GFC did indeed emanate from overseas, but this would be to ignore the case made by my colleague Dr Gavin Putland that data show recessions usually begin at home.
Glenn Stevens’ statement does merit a hearing from our policy makers: but it won’t get it. It never does. Nor would ratcheting up interest rates be the most appropriate policy.
Stevens’ earnestness reminds me of a statement made by Don Mercer when he took over as CEO of the ANZ Bank from Will Bailey in 1992. Surveying the rubble surrounding him following the bursting of the 1989 real estate bubble, Mercer bravely declared that we had learned lessons from the ensuing recession that would see to it that such crashes would never occur again.
Maybe Australia’s recession hasn’t happened yet, Don, but it is only a matter of time. Whilst messrs Rudd and Swan congratulate themselves for having forestalled an Australian financial collapse by means of their stimulus package, they might contemplate the possibility that their action was premature, because our real estate bubble hadn’t even burst, and that, in fact, their pre-emptory action acted to re-stimulate Australia’s incredible property bubble.
It’s implicit in Glenn Stevens’ statement that he believes early action on interest rates might choke off future bubbles. It could help a little, Glenn, but didn’t you notice that property bubbles also developed during the high interest rate regimes of the 1970s and 1980s?
No, I’m afraid the ONLY way to put an end to property bubbles, Glenn, is for policymakers and our elected representatives to ensure that a man’s home (or, more properly, his block of land) is no longer his tax haven. That is, tax policy should encourage industry and destroy real estate speculation, not vice versa.
It has come to my attention from a usually unreliable source that the secret meeting of central bankers convened in Sydney for today and tomorrow has come together to discuss my blog. Apparently, most central banks consider that my assertion that we’re having this GFC because tax systems around the world have for too long been slaughtering wage and salary earners and rewarding real estate speculators is valid.
My source, who shall remain nameless, believes that the final paragraph of the letter calling the meeting posed the question: “If Kavanagh is correct that finance, insurance and real estate is not the hub of the economic universe as we had previously thought, and if we are to end issues involving sovereign debt, then maybe tax systems do need be altered to send the right signals?”
Were this most unreliable rumour found to be true, the central bankers’ Sydney initiative would deserve international support.
PATERNALISM (‘WE KNOW BETTER THAN YOU WHAT TO DO WITH YOUR MONEY’)
Phew! Good to hear from Davos 2010 last week that things are looking up again. A ‘fragile’ recovery is underway it seems. Looks like I was wrong and will have to pull the plug on this blog!
Not really. What a cacophony of misbegotten ideas to set world economies aright! Try as I might, I didn’t hear one suggestion that came close to solving the world’s social and economic problems, notwithstanding the presence of Sharan Burrow, the Australian president of the International Trade Union Confederation.
Davos didn’t properly define the cause of the collapse, so it stands to reason that it can’t possibly have a valid response to it.
Banks got a bit of a hammering. While they can’t hold their heads high over their part in the GFC (and many bankers were conspicuously absent from Davos 2010), might I suggest we dig a little deeper than the role bank credit played in the collapse?
People understand how taxes reduce net incomes: but land prices? That’s a bit more difficult to explain but, trust me (or else take a peep at Unlocking the Riches of Oz again), there is necessarily an inverse relationship between escalating land prices and real wages. It’s also explained by the equation P = R + W + I (production is the sum of publicly generated land rent, plus private wages and the return to private capital).
So, if real wages are declining and real land prices are heading moonward, OF COURSE people had to resort to taking on greater and greater levels of debt!
Hey, Davos! Here’s a hint: maybe we can create effective demand, pay down debt and abolish impossible land prices if we capture more land rent for revenue, and pay less taxes on our productive efforts! So, stop patronizing us with stupid, interfering solutions! Get out of the way, and out of our pockets!
But that’s not all! Listening to the entertaining breakfast team of Ross Stevenson and John Burns on radio 3AW this morning, I learn that the superannuation industry isn’t happy taking only 9% of Australians’ wages to make some asset or other favourite in their speculative binges with our billions. They want more – maybe 12%-15%! So, that’s taxes taking, what, a third?; mortgages taking a third; super taking a sixth? I guess that still leaves us another sixth on which to live (i.e. for food, clothing, entertainment, etc.)?
The really sad part is that when Ross and John ran a survey on whether we should pay more, as the super funds are seeking, one third of the respondents said ‘yes’! Sigh! When will we be left alone to retain the salary we have earned – without the government and super funds demanding we give more and more of it to them? When will we begin to stand on our hind legs about this enormous con! There’s a natural source for government revenue, fellas! Try publicly-generated land rent! [Sorry, I forgot: that’s a ‘no-no’!]
Oh! And I just heard on the news that the federal treasurer, Wayne Swan’s got plans to assist with Australia’s ageing society. [Isn’t it great the government’s always coming up with these ideas to spend our money?] Hey! It doesn’t include getting out of our pockets so we can look after ourselves, does it, Wayne?
It’s not stretching the truth to say that current revenue regimes were designed by sociopaths. Here’s a story that might reinforce this proposition.
Edward Gibbon Wakefield’s dad, also Edward, was a rotten father. Oh, yes, he hung around philosophising with John Stuart Mill’s dad, James Mill, but, what with that and his real estate business and his farm, he had no time at all left for young Edward Gibbon.
By age 15, Edward Gibbon Wakefield fulfilled every criterion for a sociopath. He’d been kicked out of three schools. His mother, not being able to control him, had sent him to his stronger-willed grandmother. When Edward was 11, grandma Priscilla wrote back in 1807: “my mind painfully engaged in the perverseness of dear little Edward – his obstinacy if he inclines to evil terrifies me“. His “pertinacious inflexible temper makes me fear for his own happiness and of those connected with him” He “has a mind that requires delicate handling“.
Whilst in Newgate prison for marrying the second (or was it the third?) heiress he had abducted, Wakefield had this great idea! You could keep the masses genuflecting to the landed gentry if they couldn’t afford the price of a block of land! All you had to do was to set the land at “sufficient price” and they were your slaves! So, you didn’t need convicts in new colonies if you had tax-paying wage slaves who couldn’t afford a block of their own!
The idea was enthusiastically taken up in founding the new, gentrified colony at South Australia. Although it worked up to a point, it was a bit of a pity that workers were thrown into unemployment within the year and that economic depression ensued.
Nevertheless, Adelaidians still erected a monument to Wakefield and named roads after him, because he was part of the landed gentry, you see, and he foreshadowed the very system to which we adhere today: i.e. let landowners line their pockets with the real wages stolen from those who work and produce. The middle class won’t even understand the process, or, for that matter, why recessions always follow the bursting of land price bubbles. Just ask all those who attended Davos last week.
I mentioned on Sunday that China has belatedly recognised the gigantic problem latent in its property bubble, but that we haven’t done anything about ours. We’re going to ride it out, after having force-fed our residential real estate market with (first) the first home owner’s grant and (second) the first home owner’s boost. If the Real Estate Institute of Victoria has its way, these will be followed by a third boost to the residential real estate sector.
As with the banks, it’s deeply ironic that the real estate profession, the very bastion of so-called ‘free enterprise’, is extending out its hand as a supplicant for privileged perks. So far, and presumably unto the death of the economy, the Rudd government has come to the party. The government has also bet Australian taxpayers’ money on our banks’ ability to survive the upcoming real estate crash. What chance, then, of the credit and property markets finding their own levels without unmitigated disaster? In today’s Business Spectator, Karen Maley reports on Andy Xie’s concerns that China hasn’t done enough about its property bubble. Might I observe that it has done a lot more than we have?
However, Peter Martin tells us in today’s Sydney Morning Herald that a federal land tax is off the agenda as far as the Henry Tax Review goes. While this might seem to be good news to many Australians on Australia Day, if it’s true, the Chinese action to subdue the property market suggests that Australia’s lack of fortitude in this respect will prove to be incredibly bad public policy. But, of course, every western government is still taking advice from the same orthodox economists who drove us into this mess. Incredible!
Maybe it’s easier to set a proper economic course in a communist economy than in a democracy, even though the property bubble explains the crater into which westen economies are tanking. (Other than the Land Values Research Group‘s data, Patrick in the USA, House Price Crash UK, and Bubblepedia in Australia all clearly attest to this.)
In view of the wests’ absolute inaction on ramping property taxes up – to keep the lid on speculation (yes, ESPECIALLY when prices are heading down!), and so that taxes on productivity can be slashed – we’re quite entitled to inquire just to what extent western governments ARE in the thrall of property lobbies.
On 13 January 2010 “Online Opinion” published an article “Propping up Australian real estate” in which I asserted that over-investment in real estate is a rational reaction by individuals to the dictates of perverse tax regimes. But how stupid are our representative governments that they refuse to acknowledge penalising people for generating real wealth and rewarding them for inflating real estate bubbles will escalate land prices to all time highs at a terrible cost to the real economy and to society itself?
Unions and the bosses of industry remain light years away from perceiving how tax systems have been set up to benefit speculators at the expense of workers and business alike. So, speculators we’ve had to become. Economic Indicator Services’ Phil Anderson (author of the excellent study “The Secret Life of Real Estate“) was recently moved to tell subscribers to his newsletter:-
“Here’s a very good chart of US wages. Goes to show that under the present monopoly capitalist system, you will get slaughtered as a simple wage earner. But you know that already.”
You start to wonder at what point western governments would ever admit to the complicity of the tax system in cyles of boom and bust which, left uncorrected, direct us into economic depression and war.
This was long ago spelled out in Henry George’s seminal work “Progress and Poverty“. It remains the world’s biggest seller in economics and, in view of the Global Financial Crisis, its sub-title “An inquiry into the cause of industrial depressions and of increase of want with increase of wealth … The Remedy” should be attracting the interest of policy makers. However, as long as the economy’s handmaidens, finance and real estate, rule from the pedestals on which we’ve placed them, the wisdom contained in the book is unlikely to come to the attention of President Barack Obama and Prime Ministers Gordon Brown, Kevin Rudd and others.
The Australian Bureau of Statistics (ABS) figures parallel the US phenomenon shown in the chart above but, as the ABS time series was not as extensive, I’ve chosen to use the US data. This also suits the Taylor Caldwell reference. I used the Department of Labor Statistics’ helpful inflation calculator to bring average weekly earnings to 2009 dollars, but please note Mason Gaffney’s contention below that the increase depicted in the average real wage since the mid-1990s may be more apparent than real.*
You couldn’t get a more succinct nor poignant sentence than “Taxation destroys.” It’s a statement whose meaning has clearly eluded our policy makers and political representatives, but Taylor Caldwell’s citing of Thomas Jefferson’s “When we are taxed on our earned incomes, in our food and our drink, in our coming and going, in our property, we will face the return of slavery and the reestablishment of an all-powerful and despotic elite” shows that it hadn’t eluded her.
If we left private property alone, and drew our revenues instead from publicly-created land values, we’d not be breaching the dictum that taxation destroys, as it has destroyed the social fabric of the US by distributing wealth away from the vast majority of Americans to a small, rent-seeking elite.
A brief diversion that will come back to the point: After 50 days, Peter Spencer the New South Wales farmer remains on a hunger strike for not being adequately compensated for native vegetation regulations that deny him the ability to chop trees down on his own land. Regardless of the merits in Spencer’s case, I looked in vain in an article about it in THE AGE yesterday, “Lost property: home in deed but not in fact“, for land to be distinguished in some way from private property – such as Thomas Jefferson had distinguished it. In fact, as John Locke – approvingly cited by the article’s author, Chris Berg of the Institute of Public Affairs (IPA) – had himself distinguished it:
“It is in vain in a country whose great fund is land to hope to lay the public charge on anything else: there at last it will terminate. The merchant (do what you can) will not bear it, the laborer cannot, and therefore the landholder must.”
We owe the phenomenon of declining real wages and the GFC to the innumerable think tanks and institutions (such as the IPA) which have failed to comprehend the difference between land rent and the taxation of production, thrift and industry. Remember, “quit rents” used to be mandated on freehold titles! To even these dull-witted laggards, it should be starting to become apparent that we are having a new economic depression because our revenue systems penalise doers and reward land speculators; to the point that the middle class and poor are left with nothing but debt, or as some economists might say, with ‘ineffective demand’.
Let’s not forget that it is the poor and middle class who forge nearly all of our national wealth. Therefore revenue systems need to be reformatted to ensure that they start to get their fair share of it.
* I am indebted to Mason Gaffney for explaining to me yesterday that the APPARENT growth of real average weekly earnings shown in the graph since the mid-1990s “could be a trick of understating the Consumer Price Index ….”
Professor Gaffney provided two articles in support of this suggestion that are worth reporting in full, because they both bear directly on the matter:-
1. THE SHRINKING DOLLAR
for Insights, December 2007
In January 2006 Insights showed how successive administrations in Washington have doctored the Consumer Price Index (CPI) to conceal the real rise in the Cost of Living (COL). Self-defined “mainstream” economists have served as tools, some as active leaders and others as sheep in the herd.
As late as the spring of 2007 Professor Robert Gordon of Northwestern University, speaking at U.C. Riverside on another topic, strayed from his theme to defend the doctored CPI. He himself had been one of the doctors, as a member of the (Michael) Boskin Commission of 1995. That Commission, recall, had accepted a directed mission from House Speaker Newt Gingrich to show why the CPI should be lowered; and it obliged. Since then its findings have been parroted, and never questioned, in dozens of new economics textbooks by individual authors supposedly responsible for their own judgments.
By the spring of 2007 it was clear as a silver bell that the true COL, led by land and raw materials prices, had far outraced the CPI. Dozens of journalists had ganged up on the obvious point, but Gordon did not budge. Neither did the dozens of overpriced textbooks foisted on college students taking economics, even though they come out in new editions every two or three years to spoil the second-hand market that would save students hundreds of dollars yearly.
Gordon’s stance was a personal sorrow, too. His father, Aaron Gordon, had been a Professor of Economics at Berkeley when I went through that mill. Aaron was a Mensch, one of the few in that icy group. He had pulled my chestnuts out of the fire, although I had given him no reason to care what happened to me. Some other professors had tried to throw me out of graduate school for the misdemeanor of soliciting a letter of recommendation from Carey McWilliams, Editor of The Nation and a land reformer sympathetic to Henry George. This was during the McCarthy era, when the “charge” was not as laughable as it would seem at most times. Professor Paul Taylor, on whose support I had counted, disparaged me as “that single-taxer”. Aaron befriended and helped me through that time of troubles. It also helped, I suppose, that the Dean of the Graduate School doted on my new wife, a favorite student of his, but, well, one goes to war with the army one has. Anyway, I owed Aaron and he still holds a warm spot in my heart.
While Robert gravitated rightwards to Northwestern, which hasn’t changed much since Richard T. Ely, Aaron’s other son, David Gordon, took a left turn to the New School in New York. David was outstanding but died young, and Aaron is gone, leaving us with Robert and the Boskin connection, a sorry trade.
You can fool some of the people all of the time, but it is harder to fool traders on the foreign exchanges. The dollar price of the Euro has soared over 60% since the Boskin Report. The dollar price of copper on the London Metals Exchange has risen six-fold, 2001-date. The price of gasoline, which is somehow kept out of the CPI, is on everyone’s mind. Corn is way up, along with corn-land, while Congress continues its annual giveaways to the “poor farmers”. Meantime the CPI creeps up at about 2-3% a year, along with the social security checks that are keyed to it, while politicians in Washington blame national bankruptcy on these elderly pensioners who might interfere with their routine welfare for the rich.
An early theory of foreign exchanges was called Purchasing Power Parity (PPP). The idea was that if your COL doubles, your currency value is halved. It was far too simple, by omitting many other factors that move foreign exchanges, so economists disparaged it. They overreacted, as herds will, and PPP became “politico-academically incorrect”. One hardly dared mention it, for fear of losing caste, so the profession threw out the wheat with the chaff. Today we might benefit by noticing there is a strong connection, since all prices are linked by markets.
The various “other factors” have sustained the dollar for years now, while its domestic value fell. It has been a glorious time for big spenders in Washington, careening down the primrose path, but there is a reckoning due. These factors can work in reverse, and turn an orderly correction into a rout. Here are some of the factors.
Foreigners hold a big part of the national debt, denominated in dollars. As the debt turns over, why should they relend to a prodigal nation whose leaders keep spending more and taxing less? Each withdrawn loan weakens the dollar, prompting more withdrawals, and round and round she goes, and where she stops, nobody knows
Foreign banks hold huge dollar reserves. They have used the dollar as the basic international currency because its value was so stable. Now it is dropping fast they are likely to seek a replacement, of which there are many candidates. Iran has already stopped selling oil for dollars; Chavez could well be next. This could lead to a run on the dollar. Such a run is cumulative in a positive feedback loop aka a “vicious downward spiral”.
We have induced oil-exporting nations to “recycle” their huge rents into buying U.S. assets, including lots of “income properties” and “trophy properties” in high-grade locations – i.e. land. The combination of a falling dollar and falling land prices will encourage dumping, possibly in a panic.
U.S. banks and other mortgage lenders have “bundled” their loans in what once seemed like attractive packages, hiding the sub-prime loans in the bundles. Foreigners bought into these bundles, which seemed sound on the upswing of the land cycle. Bundling made it so easy to forget that it IS a cycle, always has been and probably always will be. On the downswing, all the bundles, good and bad, are tainted by the subprime loans hidden in the bad.
Collapse of the U.S. homebuilding industry lowers investment opportunities in the U.S., sending foreigners looking elsewhere for higher yields and sounder collateral. Bernanke of all people should have seen this coming: he published an early career-building article on how credit-rationing cum collateral value collapse choked off loan volume in the Great Depression, even though the few loans that were made were at low interest rates, because they were made only to the few borrowers whose collateral was still good.
Ben Bernanke has bet his reputation and our farm on there being a continual glut of foreign loans from thrifty savers in new economic giants like China, to sustain the dollar. He is losing that bet.
Washington’s fiscal crisis will force cuts in military spending, releasing and encouraging obstreperous foreign nations to go their own way, as several, including Putin’s Russia, already are. The glorious hayride is over; the bills are coming due.
“Far-called our navies melt away; on dune and headland sinks the fire
And all our pomp of yesterday is one with Nineveh and Tyre
Lord God of Hosts, be with us yet
Lest we forget; lest we forget” – Kipling
Michael Hudson did not forget, he warned us more than once. A majority did forget, however, and here we are facing an ever-shrinking dollar and all the wrenching adjustments that will imply. More denial won’t change the facts, and the Lord God of Hosts is not likely to let us off the hook, however much we invoke His name to get votes. The Fed cannot stop the recession by easing money because we must keep interest rates up to attract foreign loans, and avoid losing those we already have. This is a constraint that small nations have always had to face and understand, but it is new to the swollen-headed U.S.A. which still lives in denial and will probably not learn without a severe economic chastisement.
Higher interest rates will help collapse land prices. This is desirable and inevitable in the long run, but painful in the short because it is offer prices that will fall first, not asking prices. How do I know that? Because it has always happened that way, cycle after cycle. Sales and records of “deeds recorded” have always fallen much sooner and faster and farther than prices after the peak of a land boom, it’s the nature of the human beast, almost as though genetically imprinted. Oh, yes, governments will intercede, as they always have, to sustain land prices and avoid the “calamity” of making land affordable. This we will observe from our storm cellars, hoping the value of our remaining dollars does not blow away in the tempests. Let us Georgists resolve to use this opportunity to promote better ideas for avoiding the next cycle of boom and bust.
2. DENYING INFLATION: WHO, WHY, AND HOW
MASON GAFFNEY (Revised May 4, 2007)
Henry George foreboded that landowners might take a growing wedge [your old geometry teacher called this a “sector”] of the national “pie”, or product. Labor’s wedge might grow absolutely, as the whole pie grows, but still fall as a fraction. [The arc of its sector would shorten.] It might even shrivel.
In our times, George’s grimmer scenario is coming true. Since about 1975, labor’s wedge of the pie is shrinking as an absolute. “Real” wage rates have been falling since about 1975. “Family wage” used to mean a breadwinner’s wage high enough to support a family; now it means the combined wages of two adults. Many of these are “DINKS” (Double Income, No Kids) because that is all they can afford without cutting their customary material and educational standards.
What is this “real” wage rate? It is a ratio: the nominal money wage rate on top, divided by an index to the Cost of Living (COL) on the bottom. The higher the COL, the lower the real wage. Landowners cut into labor’s share from both the top and the bottom, because the COL includes many products of land (like building materials and energy) and land itself (like homesites). Shelter costs are by far the largest part of household budgets.
The standard index to the COL is the Consumer Price Index (CPI), calculated and published regularly by the Bureau of Labor Statistics (BLS). This index is, we will see, a political football.
Henry George said little about inflation because it was not a threat in his day. That was a time of “hard money” and the gold standard. Prices were stable or falling; DEflation was the great bugbear. Today, though, to check on George’s forecast, we have to distinguish between nominal money wages, and real wages.
An old Kingston Trio classic offered the following folk wisdom about survival in The Everglades: “If the skeeters don’t gyitcha then the gators will.” If the skeeters of life are nicks taken from money wages, the big gator now is the price of buying and owning a home.
Why deny inflation? Those in power have several reasons to understate rises in the cost of living (COL), measured by the CPI.
1. To mask the fall of real wage rates. This is supposed to placate working voters. It is supposed to support orators declaiming that our standard of living is ever rising, and we should all feel good. Actually, real wage rates have fallen steadily since peaking in about 1975. That is using the official Consumer Price Index (CPI) to measure rises in the COL. If the CPI understates rises in the COL, real wage rates have fallen even faster than the data show.
As a by-product, this denial of inflation supports those who like to dismiss George as a false prophet of doom.
2. To mask the fall of real interest rates, making savers and lenders feel better, and more willing to lend to governments. In this age of massive and growing federal debts, the U.S. Treasury depends on willing lenders more and more, to stay solvent.
3. To cut the real value of social security payments. This point is straightforward. These payments are also indexed to the CPI. If the CPI understates the COL, real social security benefits fall every year. Congress gets to spend the savings on wastes like Alaska’s “bridge to nowhere”, redundant imperialistic ventures, tax cuts for major campaign contributors, and no-bid contracts for the well-connected.
4. To cut rises in labor union and other wage contracts that are indexed to the CPI. The Federal minimum wage, like most state minima, is also indexed to the CPI.
5. To give the Federal Reserve Bank credit for having “tamed inflation”, when in fact inflation of land prices is running wild.
6. A lesser point today, but important before Congress leveled out the rise of tax rates with income, is to slow the rise of income tax brackets. That is because these brackets are indexed to the CPI. That is, when the CPI rises by, say, 5%, the income level at which you pass into a higher tax bracket also rises by 5%. Congress, briefly in a reasonable mood, enacted this sensible provision when enough people became aware that they were victims of “bracket creep”. Bracket creep is when inflation boosts your money income into a higher tax bracket, although your real income has not risen.
However, if the true COL rises by 10%, while the CPI rises by only 5%, this provision no longer protects us against bracket creep. It just gives a talking point to those who claim to protect us. Sneaky! That is why you, dear reader, may have had a hard time following the bean under one of the three shells. Politicians, of course, are good at withdrawing promises. The sneakier the method, the easier it is for them to cover their tracks.
That is the “Why” of veiling inflation. Now let us look at the “How”. There have been two major steps in recent decades.
First was removing the costs of buying and owning homes from the CPI. The Bureau of Labor Statistics (BLS), the agency that calculates the CPI, did this from 1983 onwards. They didn’t remove it altogether, that would have been too transparent. Instead they substituted the “rental equivalent” of housing. This is supposed to be what your house would rent for, or what you would pay to rent a similar house. It is a hypothetical and casual figure – sloppy and unverifiable, that is – based simply on questionnaires to a sample of homeowners. It takes no account of the fact that some people will, and therefore everyone must pay a premium to own, because of expected higher future rents and resale values.
The “rationale” (cover story) for doing this is that a home is both an investment and a residence, and only the residence cost belongs in the cost of living. In fact, the annual economic cost of owning a home is the market value times the interest rate (plus the property tax rate, homeowners’ insurance, depreciation, etc.). When prices are rising we may deduct annual gain from the cost, but when prices are falling we then must add the annual loss to the cost of ownership, and now that losses are becoming current, there is no thought of adjusting the CPI for that. If the BLS were constructing a true measure of the COL they would be on top of this point; but they do not balance their act. They seize on reasons to lower the CPI, not to raise it.
Thus the land boom of 1983-89 was mostly blanked out of the official published CPI of those years. The CPI rose gently as though the land boom never happened. Again, in 2004 housing prices rose by 13%, while these “rental equivalents” rose only by 2%.
The CPI also takes no account of the price of extra land around some houses. It takes inadequate account of recreational lands, which now have displaced farming and forestry over whole counties and regions. And can we believe that the price of access to recreational lands has advanced as slowly as other prices? In 1946 a summer family membership in the Dorset Field Club, Vermont, cost $100, giving access to the links, tennis courts, and clubhouse privileges for three months. Today there is no access for non-members. A membership costs about $30,000, by private negotiation, and annual dues were $3,000 in 2003. Meantime, in the big leagues, Donald Trump is asking $300,000 or so for a membership in Ocean Trails C.C.; and even Rupert Murdoch is complaining about the green fees at Pebble Beach, $450 for one round. I am grateful that I got my fill of golf when I was young and dad could afford it.
The second major step was the Boskin Commission Report of 1995 (Newt Gingrich was dominating Congress), and its acceptance and implementation. Michael Boskin of the Hoover Institution was called upon to legitimize allegations that the CPI overstated inflation. He and his Commission obliged, and supplied the rationale for several rounds of trimming down the CPI even more.
The Boskin Commission’s advanced methodology included a lot of old-fashioned cherry-picking. They accumulated evidence supporting the foregone conclusion, and omitted contrary evidence. Most tellingly, they were silent about the biggest factor by which the CPI understates inflation: that is the use of “rental equivalence” in place of home prices. Now, shelter costs are about 40% of consumer budgets, and hence of the true COL. To accept an extreme understatement of shelter costs, while distracting us with lesser factors and arcane methodology, shows bias.
Most professional economists, sad to say, treat Boskin’s report as holy writ. They come on like preachers, salesmen, or just cheer-leaders, not like scientists exercising independent judgment. I have recently surveyed 20 current texts in Macroeconomics. They all list the same four “biases”, in the same order, that they allege make the CPI overstate inflation. These are:
a. Substitution bias. When the price of something rises, you use less of it, so it should be weighted less in the index.
b. Quality improvement bias. Products of the same name keep getting better, so they say.
c. New product bias. The CPI lags in showing how new gadgets raise our welfare. Microchip products, of course, are the example of choice.
d. “Discount bias”. The CPI scriveners assume that products sold in discount stores are of lower quality, when they really are just as good, according to Boskin et al.
As to point “a”, above, when the price of food rises elderly pensioners turn to cat food, so now the cost of fresh fruits and veggies counts for less in their cost of living, and they have shown a preference for cat food, whose weight in the CPI should rise, and they are as well off as ever. Hmmm – something fishy there.
Let’s take point “b”, above, quality improvement bias. The texts give some examples, but not a single counter-example. Here are a few of the latter.
2×4 dimensional lumber is no longer 2×4, but 15-20% smaller in cross-section, and of lower grade stock
salmon is no longer wild, but farm raised in unsanitary conditions, and dyed pink (ugh)
“wooden” furniture is now mostly particle-board
“wooden” doors are now mostly hollow
new houses have remote locations, far from desired destinations
ice cream is now filled out with seaweed products
the steel in autos is eked out with fiberglass, plastic, and other ersatz that crumbles in minor collisions
airline travel is no longer a delight but a series of insults and abuses
gasoline used to come with free services: pumping the gas, checking tire pressure and supplying free air, checking oil and water, cleaning glass, free maps, rest rooms (often clean), mechanic on duty, friendly attitudes and travel directions. They served you before you paid. Stations were easy to find, to enter and exit. Competing firms wanted your business: now most of them have merged.
cold fresh milk was delivered to your door
clerks in grocery and other stores brought your orders to the counter; now, many clerks, if you can find one, can hardly direct you to the right aisle
suits came with two pairs of pants and a vest, and they fitted the cuffs free. Waists came in half-sizes
socks came in a full range of sizes
shoes came in a full range of widths; the clerk patiently fitted the fussiest of customers
the post office delivered mail and parcels to your door or RFD, often twice a day
public telephones were everywhere, not just in airport lobbies. Information was free; live operators actually conversed with you, and often gave you street addresses
public transit service was frequent, and served many routes now abandoned
live people, living in America, used to answer commercial telephones, with no telephone tree to climb, and tell you what you actually wanted to know
autos used to buy “freedom of the road”; now they buy long commutes at low speeds and rage-inducing delays. One must now travel farther and buck more traffic to reach the same number of destinations. Boskin et al. dwell on higher performance of cars, and the bells and whistles, but rule out taking note of the cost-push of urban sprawl.
classes keep getting larger, with less access to teachers and top professors, and more use of mind-numbing “scantron” testing.
before world war II, an Ivy-league college student lodged in a roomy dorm with maid service and dined in a student union with table service, and a nutritionist planning healthy meals. All that, plus tuition and incidentals, cost under $1,000 a year. Now, to maintain your children’s place and status in the rat race, you’d put out $40,000 a year for a claustrophobic dorm and junk food. On top of that, a B.A. no longer has the former value and cachet. Now you need time in graduate and professional schools to achieve the same status. Many students emerge with huge student loan balances to pay off over life, with compound interest.
warranties on major appliances cost extra, aren’t promptly honored, and expire too soon. Repair services and fix-it shops used to abound to maintain smaller appliances. Now, most of them are throwaway.
replacement parts for autos are hard to find, exploitively overpriced, and are often ersatz or recycled aftermarket parts
musical instruments are mass-produced and tinny instead of hand-crafted and signed
piano keys were ivory; now plastic
many new “wonder drugs”, if you can afford them, have bad side-effects, while old aspirin still gets the highest marks
a rising array of taxes and other payroll deductions stand between one’s nominal income and consumer goods it might buy. Income and social security taxes are not counted as part of the CPI.
Medical doctors once made house calls, in the dim mists of history. Since then, access has become progressively more difficult, until today … well you know, you’ve been there. In many small towns there is no doctor at all.
In 1998 the BLS dropped auto finance charges from the CPI. I do not find the cost of other consumer credit in the CPI (although I stand subject to correction). Certainly the largest cost of consumer credit, mortgage interest, has been removed by use of the “rental equivalent” substitute, with never a squawk from Boskin.
In 1995 the BLS eliminated an “upward drift” in the “rental equivalent” index, with no explanation. It is probably relevant that Congressman Newt Gingrich was in the saddle.
One could go on, but the point is that Boskin et al. seem not to have considered counterexamples to their foregone conclusions. If they did this where we can observe them, what else did they do under cover of black box models? The BLS, succumbing to the political pressure, keeps modifying the CPI to show less inflation, even while our daily experiences and shrinking savings tell us there is more. A 1999 study of the changes in the 20 years between 1978 and 1998 showed the cumulative effect of many changes had been to lower the CPI substantially (Monthly Labor Review, 6-99, p.29).
George warned that landowners might take most of the fruits of progress, leaving labor barely enough to survive. Critics then and now have urged us, instead, to don rose-colored glasses. The rosiest of these is the CPI as manipulated to screen out bad news, especially news about soaring land prices. Let us be aware of who is manipulating the news, why, and how.
The parties have hijacked the political process by representing privileged interests instead of the people. Rather than attend to the interests of their denizens by obtaining revenues from whence they ought to come–thereby setting the economy on a course of steady and sustainable growth–politics has degenerated into a popularity contest behind which deals are done with the big rent-seekers.
As far as the parties are concerned, the decision-making necessary for a quick exit from the GFC can go jump, because appropriate action will bring unpopularity, not the least with those special interest groups who lobby and largely fund them. To turn this situation on its head and re-educate the public away from a speculative mindset is too big a brief for them! Better to try to forestall further economic and social collapse for as long as possible by printing money, austerity, anything, rather than taking the necessary medicine by acting now.
Parties of all shades have come to endorse dilatory tactics, because they don’t want to see beyond this blinkered, short term view. One party is as mediocre as this other in this game; they only have to attract enough of the middle ground punters to get their party back into power. The major parties march under seemingly alternative populist banners of ‘greater social justice’ or ‘better economic management’, whilst at the same time cosying up to rent-seeking interests who’d like to own society’s natural monopolies so they can extract risk-free incomes.
Once in power, none of the parties delivers what it had represented to swinging voters, nor even what the other party had represented, because it hasn’t an economics capable of supporting those programs. As the economy seems to have a mind of its own, parties will simply cling to power as long as possible, until the people, having had enough of them, will put the other party into office in a forlorn hope of improvement. And so the cycle repeats: just as certainly as the cycle of boom and bust which mocks the parties’ efficacy.
Some examples that political parties are obsolete? President George W Bush and his advisors, representing the ‘better economic management’ of the Republican Party, managed to engineer the financial downfall of the United States of America. [“Phew! Lucky you got outta there, George Dubbya?”]
The other side is no better. In the UK, Gordon Brown, representing Labour and ‘greater social justice’, helped the wealthy get rich at the expense of the poor and the middle class during his time as ‘the world’s greatest treasurer’. Having won the prime ministership of Britain by backstabbing Tony Blair, Brown now blames the ‘Global Financial Crisis’ for Britain’s economic woe – as though it’s unrelated to his inept decision-making during his chancellorship of the exchequer! In that position Brown had actually boasted there would be no return to boom/bust!
Meanwhile in Australia, Peter Costello, also claiming a supreme ability for his economic management, managed to widen the rich-poor gap as he clasped to his breast the faux-prosperity he manufactured out of arguably the world’s greatest real estate bubble.
When Australians sacked the Liberal Party/National Party coalition from government in 2007, they also removed Prime Minister John Howard from his seat of Bennelong. Peter Costello seemed to have read the portents from his time as treasurer, not wishing to lead the Liberal Party in opposition during a period of slowing economic growth emanating from the real estate bubble he fostered. So he’d sit on the backbenches, write his memoirs, then get the hell out of there!
Labor Prime Minister, Kevin Rudd, has decided not to draw attention to Costello’s failure to address the incredible ten year real estate bubble, because he’d been silent on it, too. Speaking out on it might involve him in taking action against it instead of keeping it inflated, and that’s not what politics is about these days: fixing economies. It’s about continuing to grant favours to rent-seekers and hanging on in there and making yourself look good for as long as possible before they wake up to you.
So, rather than face the music and let the bubble deflate, Kevin Rudd and treasurer Wayne Swan have chosen to delay Australians from taking their depressionary medicine – by feeding the bubble. Wage earners were given $900 to spend; although numbers of real estate sales were down, the First Home Owners’ Boost kept prices up, while government capital spending on house roof insulation and spending on schools ensured a positive GDP. Both know this will only delay and worsen the crash but, these days, it’s all about buying time.
There’s a history to be written, so, during this period of deferring the inevitable, Rudd plays the climate change tune. Although nothing came out of Copenhagen, few doubt Rudd’s committed involvement on the world stage, and he’ll certainly take his extensive networking and the negotiation skills he displayed to the next election! But as for taking action that will resurrect the economy …. forget it!
Political parties’ preference for counter-productive taxes and encouraging real estate bubbles has slowly but surely eroded initiative and delivered us into another economic depression.
It’s beyond time to let political parties know they’re failing us.