Thucydides had it all worked it out. Watch out for really nasty stuff when the ruling power is being challenged. It can’t be avoided and won’t be pretty.

The once supreme USA, caught busily financialising its stock and real estate market bubbles, is being overtaken by the industrialised Chinese powerhouse.

Not that China hasn’t pumped up its land prices to nosebleed heights, too. It’s just that China now makes the US look sick as a producer of industrial and IT wealth. The US had actively partaken in outsourcing much of this to China, to save on wage costs, and seems to be paying a penalty for being caught napping with its speculative financial interests. So, beware of the US-China shakeout.

The Doves are out, saying that it’s not inevitable: that diplomacy will forestall any military confrontation, because we can’t possibly afford to have have a full-on war these days. It would wipe out the world.

China is becoming more assertive: Hong Kong’s lease to the Brits having expired and it’s population having been recently shown who’s boss, China’s now eying off Taiwan.

So it’s looking bad.

If you look at China, however, its issues have been with Tibet, Japan and India, shared border or neighbouring countries; and its new ‘islands’ in the South China Sea. Although there’s not the same history of world military involvement as the US, there is the ‘Belt and Road’ initiative. Will that remain peaceful, or used to for support and military advantage?

As much as I’d like to believe the Doves, my money’s on Thucydides. It’s just a matter of when, because the USA won’t go down without a fight. It will likely be sold as the Western Good Guys v. those Chinese Commies.

The acronym VIMMLBUTT is composed of:-

LVT land value taxation

UBI universal basic income

MMT modern monetary theory

Actually, LVT isn’t a ‘tax’ – it’s a rent. And MMT isn’t ‘modern’, Abraham Lincoln used it to fight the Civil War. Moreover, it’s arguable that a UBI shouldn’t be ‘basic’; it needs to be a living wage.

However, the fundamental principle behind each term remains valid:-

LVT is the public capture of Ground Rent, advocated by the classical economists. UBI provides a Universal Income to everybody from the nation’s net income (currently being largely expropriated by the rent-grabbing 0.1%). MMT says deficit spending by the federal government isn’t ‘debt’, it’s paid for the moment it’s spent and greatly assists the private sector.

So, more correctly, maybe VIMMLBUTT should be GRUIDEFICIT?

I’ll stick with VIMMLBUTT.

Isn’t this all kid’s stuff?

No. The point is that genuine economic reform is not simply LVT, UBI or MMT as their followers claim. All three are an essential package!

A 2017 article from ‘The Conversation’

h/t: Cross-posted from the Global Arts Collective website.

Macro-prudential policy? Hmmm ……

John Stuart Mill barely survived the rigorous upbringing forced upon him by his father, James Mill. He recovered from contemplating suicide at 20, however, to become a great liberal thinker.

Edward Gibbon Wakefield wasn’t as fortunate. He survived the inattentions of his real estate agent father and social philosopher (also Edward Wakefield) but went from being the son of a shit into a little shit himself.

By 1811, at fifteen years of age, Edward Gibbon had been kicked out of three schools for obstinacy and trouble making . His mother hadn’t been able to cope with him, having farmed him out to her physically stronger mother, who wrote back in February 1807 (just before his 11th birthday in March): “… 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”.

The purported quote of St Ignatius Loyola rings true about the young Edward: “Give me a boy until he is seven, and I will give you the man“. Wakefield came to develop all the traits of a sociopath. It’s interesting that his father used to get together with James Mill and other social reformers; too often, it seems, for the sake of “dear little Edward.”

Edward Gibbon Wakefield went on to abduct at least two heiresses, in order to increase his fortune and his chance of becoming a member of the UK parliament. However, his attempt to become a parliamentarian failed until he got to New Zealand.

While he was in prison in London for the second of his abductions, Wakefield wrote what became known as “The Wakefield Scheme”. It was a system of colonisation that didn’t require slaves or convicts for cheap labour: If you simply sold land at a sufficiently high enough price so that most people couldn’t afford it, you had your captive workforce. The idea was a hit with British investors, so the scheme was adopted for South Australia.

The colony developed a property bubble and an economic collapse within two years of its founding and the British military man, explorer and administrator, George Grey (who was to become a friend of the American Henry George) was sent to Adelaide to sort out the mess.

We can see that Wakefield’s “scheme” of high land prices and a servile workforce is the system under which Australia currently operates. It’s unlikely that most parents who support such a perverse system are as irresponsible as messrs Mill and Wakefield senior. Like most economists, they’re probably just unschooled in certain aspects of history and fundamental economics.

It begins with acceptance of the greatest of all corruptions, the taxing of earned incomes instead of publicly-generated land values.

This ensures the protection of privilege and wealth, and the continuing existence of poverty and unemployment.

It might have been so different had the fundamental corruption been abolished. Too big a task? Capitalism did have a brief period redressing corruption. It became known as the Progressive Era (1890s-1920s) and the ideas of Henry George loomed large.

However, in compliance with the demands of wealthy interests each political party eventually signed onto this perverse contract, taxing work instead of land values. In turn, this leads to obscenities such as the ever-moving non-accelerating inflation rate of unemployment (NAIRU), instead of abolishing involuntary unemployment altogether.

Along we move, onto accepting all the ensuing corruption that stems from having accepted the fundamental corruption.

A ‘game of mates’ to which the criminal justice system has become inured ensues. We try in vain to ‘regulate’, to put an end to all the dishonest outcomes: we put an ill-equipped fleet of ambulances at the foot of the cliff instead of putting a preventative fence at the top.

Relentlessly, the malady lingers onward …….

And now, the Australian parliament descends to this.

DENYING INFLATION: WHO, WHY, AND HOW 

MASON GAFFNEY 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.

Couldn’t that mean that our cost of living has become hopelessly inflated by both?

Couldn’t that mean that taxes and land prices have assisted in generating poverty and unemployment as the wealthy become wealthier?

Couldn’t that explain recurrent periods of boom and bust?

Couldn’t that mean that economists, education and governments are taking us down the wrong path?

Couldn’t there be an alternative – such as publicly taxing land rent away?

Wages couldn’t be kept down–with no inflation!–in the 15th century and the first quarter of the 16th when land rent was collected. Henry VIII fixed all that by selling off monastery land to adjoining lords, the enclosures, debasing the currency, &c.

In today’s THE AGE Clancy Yates says the RBA Gov has a tough job getting us a pay rise.

He’s right, of course, because the LNP and ALP are beholden to banking, real estate and property investors being tied to these escalating high land prices, despite Henry George having proven that wages and earned profits are what’s left after publicly-generated land rent is capitalised into high land prices by private interests.

Some would say that intense property speculation is what capitalism is all about, but it hasn’t always been so. During the Progressive Era, following the 1890s depression, most revenue in the USA was derived from taxing property values at state and local government levels. In Australia we did it even better, capturing land tax also at federal level from 1910 to 1954.

What if tax regimes are promoting non-productive asset price increases at a vast cost to most people and productivity?

But we’re faced with the canard that the central government is more powerful today, needs to tax more, and there’s not enough rent.

Rubbish! It’s 50% of the economy. There’s plenty there and it wouldn’t involve generating the excess burden/deadweight losses of other forms of taxation.

Time to revisit the recommendations of the Henry Tax Review which recommended we abolish some 100 damaging taxes and look to a better use of land tax?