Capitalism reached another of its blind spots in 2007. It had pumped up a massive real estate bubble; basically a bubble in land prices.  And that’s peculiar, because land has no cost of production, yet it costs so much. Maybe that’s because homes are no longer a place in which to live, but a commodity in which we may ‘invest’, or speculate?

When the land bubble burst in the USA in 2008, crashing the economy, it was the banks which (with a couple of exceptions) were bailed out: not the people. Problem seemed to be that the population wasn’t “too big to fail”. The federal reserve and government understanding was that whereas the people of America didn’t matter, banking most certainly did matter.

“Occupy Wall Street” protesters complained, but they didn’t see the need to tax land values if they were to repair the incredibly indebted situation of most Americans. The few who did know, didn’t realise land income may be legally taxed in the USA at the federal level. It used to be done pretty well at local and state government levels, until the ‘temporary’ tax measures of the Great Depression took hold.

This had still been ‘capitalism’, before it was permitted to morph into assisting rent-seekers at the expense of workers. Capitalism’s ills were worsened in 1971 as US Vietnam War debt forced President Nixon to free the Federal Reserve from the gold standard. Land price speculation became rife. With the support of world governments, capitalism had morphed into rentierism, pure and simple.

In Australia in 2008, the Rudd government was fortunate enough to have been sufficiently behind the curve to do as Hank Paulson had suggested to Wayne Swan. The government pumped more than $50 billion into the economy to keep land prices ‘up there’, and was ‘successful’ in doing so. That permitted the Australian real estate bubble to continue apace, virtually unimpeded, until 2017. Rentierism had also come to rule in Australia.

Meanwhile, although it was bruited about that the American economy had ‘recovered’, all that really recovered were share and real estate markets, big tech, banking, and escalated private debt. With no compunction, the Federal Reserve’s quantitative easing has fostered what used to be the previously criminally corrupt activity of public companies buying back their own shares, now with virtually cost-free money.

So here we are now at the ‘mid-term’ recession: that is, within the 18-year real estate bubble cycle: viz, 1954-1972-1990-2008-2026.

With the Covid-19 virus now overlying the recession, the question becomes: What sort of genuine world financial recovery can we really expect to have, before the depressionary crunch in 2026, if central banks keep asset markets inflated, instead of governments looking after the interests of their people, with such positive actions as a living wage universal basic income, complemented by taxing publicly-generated land incomes, in order let asset prices finally deflate?

Things ain’t looking too good in this respect, because governments and central banks continue apace with speculative priorities favouring banking, real estate and monopolies.

In this mad scenario, people don’t matter.   

~~~

Problem is Oc, ol’ sport, people don’t go for easy solutions these days.

They want erudite sophistication instead. We must talk around points, not get to the nub. Basics won’t do.

That allows people to keep on criticising things as they are, because we’re pretty good at that, and wary of any solutions that may be offered because “There are no simple solutions.”

See? Another simple solution!

A Powerpoint presentation of 12 x 30 second slides. (Be patient with the first slide?)

Ayn Rand and her extreme libertarian supporters who see governments as an unnecessary and insidious part of capitalism (this would include organisations such as the US Heritage Foundation and the Australian IPA) are increasingly appalled.

They know private enterprise was lacking with the advent of the COVID-19 breakout, but are up in arms about the extent governments have stepped in to provide leadership and direction.

“This can’t be allowed to continue!”

“Look what’s happening to economies!”

People don’t matter to those organisations supporting the expropriation of economic rent in the name of ‘private property’. “Oh, yes, people serve a purpose ….” – sotto voce: “….. insofar as they’re the ones who provide our unearned income”. “But the government expenditures have got out of control, and people must be sent back to work!”

All in good time.

The extreme right sees issues only in binary terms: they see little difference between government playing an essential role in critical times and the onset of communism.

Watch out for this perspective pushing these misbegotten ideas in the name of ‘Liberty’. It represents anything but freedom and is dangerous. Beware! [….. Hello, Rupert! Hi Gina!]

Sending production overseas to save on wages costs has come back to haunt the west. Offshoring to China and other Asian countries has proven misconceived, insofar as wage levels purported to be generous still found workers struggling with excessive levels of debt at home. So clearly, there were also other reasons that had driven business profits down. Gross domestic product growth had actually declined since 1974, and it wasn’t only ‘high wages’ that had been responsible. Something else was afoot.

Banking, the big tech giants, and a handful of other monopolies had been making extraordinary profits—we may say unearned ‘super-profits’—and this played a significant, if seemingly invisible, part in sending small businesses and workers into financial difficulty, and some businesses overseas, long before Covid-19 arrived to compound the damage.

We need to know about super-profits, or ‘rent-seeking’ if we’re to see how monopolies had succeeded at great cost to workers and those businesses unable to secure unearned income to themselves. A High Tory media has managed to keep the lid on this rent-seeking rort that has needed exposure to daylight. We’re certainly not short of examples of outlandish scams these days, but it’s the ‘money-for-nothing’ rent-seeking at the commanding heights of the economy that needs to be remedied. The coronavirus offers a hiatus in which to undertake essential reform.

Although tax regimes designed in the interests of rent-seekers can be seen to be the root cause of economic disarray and growing poverty, the left of politics is now fully on board and comfortable with the arch-right in taxing the incomes of working people and small business. Political consensus on the point is sold on the pretext that federal taxes ‘fund’ necessary social services, such as schools and hospitals, when there is no necessary connection between taxation and federal government spending. The government spends before it taxes money back out of the economy; but it has become difficult to challenge the myth that we need more taxes because they constitute ‘a pot of revenue’. Yes, a certain amount of money needs to be taxed away in order to deal with the threat of inflation and to maintain the value of the currency, but there are far superior ways to fulfil this need than to fine workers and businesses. There are unearned incomes to be taxed away.

Those who comprehend the ills of the unequal private capture of publicly created land rent understand that it’s not coincidental that neoclassical economics seeks to confound the classical definition of economic rent. Whereas it relates only to the surplus income from land and natural resources, neoclassical economics endeavours to conflate it with what they call surpluses arising to labour and capital. (Mason Gaffney’s “Neoclassical Economics as a Stratagem Against Henry George” elaborates on the point.) 

The following unique chart explains how prominent companies and individuals are able to expropriate unearned land income–‘economic rent’–the publicly generated surplus in the production process owed therefore equally to everybody.

Dr Gavin Putland reminds us that all taxes come out of rent (ATCOR) and that excess burden also comes out of rent (EBCOR); therefore, we can see Australian economic rent (red, dark blue, green) has achieved 50% of GDP. Despite being the economy’s surplus, much of it is expropriated by banking and other monopoly rent-seekers, instead of being distributed equally as a universal basic income (UBI). Were this done, the share to labour and capital (pale blue) would increase well beyond the residual 50%, thus resolving industrial relations between workers and businesses who involve themselves in a madcap fight over the 50% of the economy that rent-seekers so generously leave to them.

As the taxing of productivity inserts deadweight losses of some twice the amount levied, we need tax away land rents to have the same effect achieved by the mindless taxing of productivity. Capital gains in land (green) would also be reduced were annual ground rents (dark blue) taxed away instead of taxing labour and capital (red).

Public capture of currently privatised land rent would vastly reduce the price of land and the cost of mortgages. In this scenario, banks will have solvency issues, but it’s not as though they’re not experiencing them right now, as a result of having offered easy debt against impossibly inflated land prices. Governments continue being remiss in propping up land prices to protect banks. This, too, has come at a great cost to the wider community.   

There’s an economy of abundance out there once economic rents are taxed away.

A UBI is the nub of the argument, however. Everybody from the age of 16 could receive a living wage basic income to distribute the economic rent equally, instead of it being largely expropriated by the 0.1%. In “Capital in the Twenty-First Century”, Thomas Piketty was alert to the problem of rent-seeking and growing inequality, but he failed to provide a workable solution.

In a thus remedied economy, quite apart from a UBI offering a fair and efficient public distribution of rent, businesses would not have to pay the same wages. They would only have to offer some lesser amount in addition to the UBI in order to attract employees. Of course, people could choose to use the UBI as a base upon which to establish and pursue their own interests. The latter seems to offend those who’d settle for a ‘job guarantee’.

UBI: an overarching view

Are we ready for a living wage universal basic income? [‘No’ is the wrong answer.]

Were Australia to abolish all taxation, and everyone over 15 years of age to receive a universal basic income of say $40,000 pa, this would amount to about $800 billion pa, or 50% of our GDP.

The chart shows ‘economic rent’ to be currently running at 50% of GDP (including taxation, in terms of John Locke and Mason Gaffney’s ‘ATCOR’ and ‘EBCOR’*), and very little of this has been properly and efficiently captured. It’s a mess.

The tax regime actively fosters privatisation of publicly-generated economic rents, so the public does what it is encouraged to do, namely, invest/speculate in inflating land prices. As a result, taxation and its associated deadweight losses have caused productivity to wane since 1974. Related increasing poverty has come to undermine Australia’s social fabric, but our media have been deaf to it all those years.

If families and businesses were to pay the rental value for the land over which they hold title, instead of existing taxes, gradually increasing to the full rental value of sites–which would reduce land prices to zero–counterproductive taxes could be abolished accordingly.

Decreasing land prices (as opposed to land rental value, which is likely to increase in this scenario) protects the currency from inflation’s fundamental driver, land price inflation (land having no cost of production) and acts to reduce deathly levels of private debt, because land price constitutes by far the greater part of bank mortgages.

It would be the role of government also to tax away other unearned income, such as electromagnetic spectrum rents, and to consider whether to apply ‘sin’ taxes on polluters, smokers, &c.

Benefits of the UBI/land rent proposal?

1. A UBI does not pay Australians to do nothing: they’d have the comfort of a living wage to employ themselves to do anything.
2. Australian businesses would have a secure home ‘market’, in an increasingly threatening world economic environment. Moreover, their wage costs would actually reduce, because they need only offer amounts additional to the UBI to attract workers.
3. The current deadweight losses from taxing productivity* (estimated to be twice the amount of taxation levied) would vanish–as land rent inserts no deadweight losses into the economy–as would the economic recessions resulting from burstings of recurrent land prices bubbles.

Yes indeed, a UBI, and taxing unearned economic rent away, is quite a change from the status quo, but the coronavirus threat period presents an hiatus, a positive opportunity for Australians need to consider genuine reform.

Together with NZ, Australia once led the world in political reform. With a little bit of spine, we could do it again.