To string too many metaphors together: when the music stops, we have too many claims to the one pie. However, although we can’t avoid the wave, we can learn to surf.
To string too many metaphors together: when the music stops, we have too many claims to the one pie. However, although we can’t avoid the wave, we can learn to surf.
Australian politicians’ real estate holdings: $300 million. What chance of getting Dr Ken Henry’s reformative land tax policy through this little lot – our federal “representatives”?
Congrats! Doing very well, at the expense of Gens X and Y, guys! What’s that? “Our young people don’t really count when there’s a dollar to be had!” Oh, that’s how it works, is it??
Modern tax systems are based on the land’s usufruct, with governments having the right to tax this on the logic that:
(1) land still belongs to the state or community
(2) that its market price is created by a combination of public infrastructure spending (e.g., on roads and other transportation, water and sewer systems, and other public utilities) and by the general level of prosperity rather than by the landholder’s own efforts; and
(3) failure to tax the land would leave its “free lunch” ground rent to be capitalized and pledged to banks for loans, thereby loading down a nation’s natural resources with debt service – while forcing governments to tax labor and industry, raising the cost of living and doing business.
– Michael Hudson, “Fables of Land Ownership and of Who Obtained its Rent”
WWI started one hundred years ago today. No matter how historians may relate its battles, events and heroes, it probably remains humanity’s most gross obscenity – even its armistice carrying with it the seeds for WWII.
Like the current Hamas-Israeli war, WWI was fought over land and territory. Like the current Ukraine civil war it was fought over shifting power allegiances and boundaries. Although they should be, wars are rarely commonly seen in terms of who wants to ‘own’ what land.
Their beginnings are usually born of hard times and rationalisations for going to war over land. That proponents for war should be locked together in a room until an agreement has been ironed out is a great idea when considered against the alternative, the mass slaughter of human life, but then I guess there is always the position of the armaments industry, the military and the 0.1% to consider?
“According to research undertaken by Paul D Egan and Philip Soos, in 2013 we lost a staggering $73 billion of output stemming from deadweight losses of taxation, yet, economic rents, which exhibit no deadweight loss, are a significant component of the Australian economy, comprising 23.6% of GDP.”* (Catherine Cashmore in MacroBusiness)
It’s worth noting that these publicly-created economic rents are largely privately captured. It’s called rent-seeking, and it’s bringing the financial system to its knees. Philip Soos further notes in The Conversation that the negative gearing of real estate investments cost Australia $33.5 billion over the last seventeen years (or more recently approximately $3 billion a year).
A big part of the costs of public service is endeavouring to manage the socially damaging outcomes from this counterproductive tax regime to which we have shackled ourselves – a system which taxes the incomes of labour and capital instead of land, effectively fining Australia’s doers for working whilst it rewards the increasing number who speculate in real estate land prices.
The point is that all taxes add to costs, whereas taxing economic rent does not. This surely points to the urgent need for switching revenues from taxes to economic rents if we are ever to resurrect our declining economy?
Tax ‘reform’ which looks to shore up the GST, or introduce a financial transactions tax, is no reform at all.
The only tax reform Australia needs is tax abolition, the revenue to be replaced by capturing our natural resource rents.*
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Now for a little relaxation with “Weird Al” Yankovic: –
The BBC asks: Is your house making more than you are?
Usually, yes, but the only trouble is you can’t capitalise on the situation by moving and selling (unless you have a few houses).
We’re like this, idiotically taxing purchases
and the incomes of labour and capital,
because the 0.1% has made us afraid
to tax the annual value of land.
Now that tax reform is in the air,
their emissaries tell us we need
a tax on financial transactions.
Anything, anything at all,
to keep taxes off land values.
DENYING INFLATION: Who, Why, and How
by Mason Gaffney (from The Mason Gaffney Reader: Essays on Solving the “Unsolvable”)
Henry George forebode that landowners might take a growing wedge[1] of the national “pie”, or product. Labor’s wedge might grow absolutely, as the whole pie grows, but still fall as a fraction.[2] 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 folk song offered the following 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.
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.
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[1] Your old geometry teacher called this a “sector”.
[2] The arc of its sector would shorten.