A SUMMARY

Tax regimes currently fail to capture enough land rent.  Land prices, reflecting the excessive private capitalisation of publicly-generated rent, form dangerous bubbles.

Ignoring prudential risk management, banks continue to provide credit into the bubble for the purchase of grossly overpriced real estate.

This bubble in land prices eventually bursts and prices tank towards the long term mean.

People cut their spending in an attempt to deal with their over-commitment to mortgages. This adversely affects businesses and the broader economy.

Businesses go broke and people lose their jobs.

Banks fail.

By reversing the process, capturing rent and abolishing taxes (as recommended by the Henry Tax Review) the depression may be remedied.

However, this is not done and the economic depression lingers.

http://www.guardian.co.uk/business/2012/jul/21/global-elite-tax-offshore-economy

£13tn: hoard hidden from taxman by global elite

• Study estimates staggering size of offshore economy
• Private banks help wealthiest to move cash into havens

• Heather Stewart, business editor
• guardian.co.uk, Saturday 21 July 2012 21.00 BST
• Jump to comments (…)

The Cayman Islands: a favourite haven from the taxman for the global elite. Photograph: David Doubilet/National Geographic/Getty Images

A global super-rich elite has exploited gaps in cross-border tax rules to hide an extraordinary £13 trillion ($21tn) of wealth offshore – as much as the American and Japanese GDPs put together – according to research commissioned by the campaign group Tax Justice Network.

James Henry, former chief economist at consultancy McKinsey and an expert on tax havens, has compiled the most detailed estimates yet of the size of the offshore economy in a new report, The Price of Offshore Revisited, released exclusively to the Observer.

He shows that at least £13tn – perhaps up to £20tn – has leaked out of scores of countries into secretive jurisdictions such as Switzerland and the Cayman Islands with the help of private banks, which vie to attract the assets of so-called high net-worth individuals. Their wealth is, as Henry puts it, “protected by a highly paid, industrious bevy of professional enablers in the private banking, legal, accounting and investment industries taking advantage of the increasingly borderless, frictionless global economy“. According to Henry’s research, the top 10 private banks, which include UBS and Credit Suisse in Switzerland, as well as the US investment bank Goldman Sachs, managed more than £4tn in 2010, a sharp rise from £1.5tn five years earlier.

The detailed analysis in the report, compiled using data from a range of sources, including the Bank of International Settlements and the International Monetary Fund, suggests that for many developing countries the cumulative value of the capital that has flowed out of their economies since the 1970s would be more than enough to pay off their debts to the rest of the world.

Oil-rich states with an internationally mobile elite have been especially prone to watching their wealth disappear into offshore bank accounts instead of being invested at home, the research suggests. Once the returns on investing the hidden assets is included, almost £500bn has left Russia since the early 1990s when its economy was opened up. Saudi Arabia has seen £197bn flood out since the mid-1970s, and Nigeria £196bn.

“The problem here is that the assets of these countries are held by a small number of wealthy individuals while the debts are shouldered by the ordinary people of these countries through their governments,” the report says.

The sheer size of the cash pile sitting out of reach of tax authorities is so great that it suggests standard measures of inequality radically underestimate the true gap between rich and poor. According to Henry’s calculations, £6.3tn of assets is owned by only 92,000 people, or 0.001% of the world’s population – a tiny class of the mega-rich who have more in common with each other than those at the bottom of the income scale in their own societies.

“These estimates reveal a staggering failure: inequality is much, much worse than official statistics show, but politicians are still relying on trickle-down to transfer wealth to poorer people,” said John Christensen of the Tax Justice Network. “People on the street have no illusions about how unfair the situation has become.”

TUC general secretary Brendan Barber said: “Countries around the world are under intense pressure to reduce their deficits and governments cannot afford to let so much wealth slip past into tax havens.

“Closing down the tax loopholes exploited by multinationals and the super-rich to avoid paying their fair share will reduce the deficit. This way the government can focus on stimulating the economy, rather than squeezing the life out of it with cuts and tax rises for the 99% of people who aren’t rich enough to avoid paying their taxes.”

Assuming the £13tn mountain of assets earned an average 3% a year for its owners, and governments were able to tax that income at 30%, it would generate a bumper £121bn in revenues – more than rich countries spend on aid to the developing world each year.

Groups such as UK Uncut have focused attention on the paltry tax bills of some highly wealthy individuals, such as Topshop owner Sir Philip Green, with campaigners at one recent protest shouting: “Where did all the money go? He took it off to Monaco!” Much of Green’s retail empire is owned by his wife, Tina, who lives in the low-tax principality.

A spokeswoman for UK Uncut said: “People like Philip Green use public services – they need the streets to be cleaned, people need public transport to get to their shops – but they don’t want to pay for it.”

Leaders of G20 countries have repeatedly pledged to close down tax havens since the financial crisis of 2008, when the secrecy shrouding parts of the banking system was widely seen as exacerbating instability. But many countries still refuse to make details of individuals’ financial worth available to the tax authorities in their home countries as a matter of course. Tax Justice Network would like to see this kind of exchange of information become standard practice, to prevent rich individuals playing off one jurisdiction against another.

“The very existence of the global offshore industry, and the tax-free status of the enormous sums invested by their wealthy clients, is predicated on secrecy,” said Henry.

Terence M. Dwyer FTIA
B.A. (Hons), B.Ec. (Hons) (Sydney)
M.A., Ph.D. (Harvard), Dip. Law (Sydney)

17 July 2012

Compulsory Licensing of Patents Productivity Commission
LB2 Collins Street East Melbourne Vic 8003
Att: Delwyn Lanning

Dear Sirs,

PATENTS: AN IMMORAL AND INEFFICIENT ANACHRONISM

Patents are immoral, contrary to the principles of natural liberty, natural law, to the common law and detrimental to the progress, prosperity, safety and health of all peoples. The patent system should be destroyed for same reason that slavery was destroyed – as an offence against natural justice and natural liberty.

Patents are immoral

John Stuart Mill observed that the laws of private property have never conformed to the principles upon which private property is justified.

What is the justification of private property? The right to property can only rationally be found in the act of creation. The word “property” comes from the Latin “proprium” – that which is of us. As John Locke observed, it is only by impressing our labour into objects that we can claim to have created them. But ideas and knowledge are like the air, they belong to all and to none. No one can claim to have made an idea anymore than any man can claim to have created the Earth, which belongs to all as the common inheritance of mankind.

Invention cannot found a just claim to property. The Latin root “invenio” means to come across. There is no real difference between discovery and invention – and neither is creation. The tortured efforts of harassed judges to make sense of the distinction between an “inventive step” and mere discovery has polluted the law books and led to conflicts between nation states, as each set of higher courts reaches different conclusions. Are genomes patentable? Are seeds patentable?

Can we find patent a new quinine for the millions suffering across the world from malaria? Pick your Court and take your chances.

No, discovery is not creation. Nor is discovery a good root of title in morality. If it were otherwise, the heirs of Eric the Red or Christopher Columbus would be vying in the Courts for ownership of the North American continent and demanding rent from several hundred million people (leaving aside the heir of him who first crossed the Bering Strait).

Nor should it be thought that any single human being ever invents anything alone, as though born full-formed like Aphrodite. All men enter the world as babes and learn and copy from others as they grow. Isaac Newton wisely and truly declared that he would not have seen so far had he not stood on the shoulders of giants. We are all heirs of those who went before us. Why should the direct and indirect result of the discoveries of many over the ages be appropriated by the first person to reach a patent office?

Slavery is now widely seen as immoral. But is there such a vast difference between telling a man he does not own himself and must labour for his master or telling him that he may not work except on condition he pay rent to a monopoly patent holder?

Patents contrary to natural liberty

Imitation, so we are told from an early age, is the highest form of flattery. No man injures another by copying what he has done, on the contrary he acts as a publicist.

Adam Smith had a well-justified distaste for monopoly and would have regarded as objectionable and obnoxious to the “simple and obvious system of natural liberty” a legal system which leaves men in terror of lawsuits from the holders of patent of monopoly.

Patents contrary to natural law

The fact that “industrial property” as the first patent laws were called only arose in the second half of the 19th century should give us pause for thought as to whether patents can be justified in natural law. If they could, we would doubtless be paying the heirs of he who first invented the wheel.

The very fact that patents are time-limited and that that time has been arbitrarily increased from 10 to 20 years in our legal system demonstrates that patents have no basis in natural law and are not entitled to the same respect from the legislature as obligations so arising.

Patents contrary to common law

Patents are a creature of statute not of common law. Queen Elizabeth I in her Golden Speech had to apologize to the Commons of England for the oppressions which her ill-considered grants of patents of monopoly had wreaked upon her subjects. Before and after, the policy of the common law was set against such instruments of monopoly, so much so that Blackstone and others took it that Acts creating monopolies could be void as against the law.

The common law presumes and defends liberty of action for the subject. Patents are an infringement of this common law freedom and were ever therefore regarded with just hostility by the common law.

Patents detrimental to progress and prosperity

It is well known that the patent system is used to discourage competition. Who will dare research or explore new ways of manufacturing anything in an area where the road to new products is well sprinkled with upturned nails in the form of patents, actual or pending, waiting to explode his tyres and send his commercial enterprise off the road into financial ruin in the Law Courts?

Patents suppress innovation; they force the creation of artificial differences and incompatibilities between products so that instead of getting the efficiencies of common architecture and standards arising by consensus for products, each producer must labour to differentiate his product lest he be sued for patent violation.

A large number of fundamentally mis-educated economists seem to consider externality as an aberration in a market economy. They are wrong. Beneficial external economies are everywhere around us and they need not be charged for. Fame is the spur for many; for others, the mere knowledge that they have benefited their fellow man. As Henry George remarked, Nature laughs at a miser and no man can keep the good he does to himself (even if he were so disposed) than it can shelter others from his evil. No man is an island, we are made for each other – as John Donne and Marcus Aurelius understood.

As for the argument that patents reward invention and innovation, this is a venerable and hoary lie.

It is not necessary that the “inventor” (and to identify that person is an exercise in itself) be rewarded with a rent from millions across generations that he do what gives him pleasure. No, the natural reward to invention and innovation is that he brings his discovery to the notice of men – to be first in the field and have the accolades of all. Goodwill is the reward to invention and innovation, nothing more is required.

The man who first enters the field with a new product is entitled to be recognized as such, no more no less. He is entitled to prevent people passing off their works as his, he is entitled to stop others lying as to themselves having discovered what he did, but he is not entitled to lay humanity under a burden to pay for what anyone else may have discovered sooner or later.

The proper and natural reward for invention is the premium for being the first in the market place. Patents reward laziness and tardiness, they discourage emulation and competition.

It is noteworthy that most of the great inventors of the Industrial Revolution, which brought such blessings to hundreds of millions of human beings, opposed the introduction of patent laws in the nineteenth century. They admitted and acknowledged they had all learnt freely of each other, as they strove to uncover the mysteries of natural philosophy and harness the latent powers of Nature for the good of Man. The little boy who first tied the string to the Newcomen engine to regulate the valve so he could go and play with his friends had his natural reward. He required no patent right or patent attorney to make him a lord of commerce before he revealed his idea to the world and revolutionized the design of the steam engine.

Those so-called economists who may yet argue that patents are necessary to encourage innovation and bring benefits to humanity may care to ask themselves how it was that the incandescent light globe was made less efficient and turned into a regularly disposable product and whether such a scheme would have been possible without the protection of patents.

Patents detrimental to safety and health

Nowhere is the evil and immoral effect of patent monopoly more apparent than in the operations of the legal drug cartels.

Patents force innovation and research away from natural cures towards patented proprietary drugs. Chemotherapy drugs are a notorious example of how research has been corrupted into third rate remedies by the vested interest of drug companies. Vast vested interests stand in the way of new and better cancer treatments such as photodynamic or sonodynamic therapy or enzyme therapy.

Australia has suffered directly from patent licensing and the suppression of innovation. The Opal Clinic which was in Melbourne and cured cancer through new therapies had to close and move to China because it could not afford to compete with licensed yet inferior chemotherapy drug therapies protected by the patent system and subsidized by the Pharmaceutical Benefits Scheme. It is a curiosity of the patent system that it forces taxpayers to protect the market for, and pay for, useless drugs which kill them. Such are the benefits of monopoly and regulation – the two ugly sisters ever eager to blot out the fair face of genuine competition.

Indeed, the patent system has created the absurd situation where it is actually economically rational for a drug company to create a super-disease for which it alone has the patented cure and then release that disease into the population. Such an illustration is not fanciful, as one sees companies (as is alleged of Monsanto) working to pollute their natural competitors’ fields with artificial seeds – and then sue the victims of their pollution for patent infringement.

The mere existence of such perverse incentives should be enough to illustrate both immorality and the economic absurdity of the patent system.

What is to be done?

Diplomacy, as M de Talleyrand understood, lies in honouring one’s undertakings while securing the national interest.

The international patent system is in no country’s national interest. Even the United States, a nation magnificently founded upon the ideal of natural liberty but too often afflicted with the best legislators money can buy, has started to recognize the costs the patent system imposes through inflated costs of medicines paid for by its depleted treasury. The patent system serves only the supra-national or non-national patent holders and the bankers who finance their monopolies.

We have already advised overseas governments to think upon these lines and Australia should do likewise. Competition lies in not doing what others do but in learning from their mistakes and acting differently.

Faute de mieux, if outright abolition is deemed impossible at this time, a system of compulsory and easy licensing should be introduced. It is not necessary that Australia renounce the WTO treaties or dishonour any international obligation. Compulsory licensing can be the means of bypassing their nefarious and evil effects while retaining what is valuable.

If the Attorney-General’s Department and the Parliamentary draftsman can regularly invent means of avoiding Constitutional restrictions on Commonwealth legislative power, it would be child’s play to design a WTO-complaint compulsory licensing system which leaves a naked title in the hands of patent holders while restoring liberty and freedom of enterprise to those who would use knowledge rather than seek to “own” it.

For example, one could legislate that any person should be able to serve a statutory demand on a registered patent holder for a licence which shall be deemed granted if served 6 months after the patent has been granted. The statutory fee payable could be, say, 1% of the sale price of the good or service supplied by use of the patent. If there is more than one patent holder, they should share the 1% royalty equally. If a patent holder has not sought payment of his share of the 1% royalty within 30 days of the end of a calendar year, he should be deemed to have waived his right to any royalty.

There are many possible permutations on this theme and we would be happy to assist the Federal Government or the government of any other country design legislation to loosen or undo the shackles of the patent system and gain a competitive advantage for its own industries. Imperial Germany and Meiji Japan understood the importance of access to technology for their industrial progress as does modern China. There is no reason why any country should subordinate the interests of its people to the dictates of foreign patent rent collectors.

Conclusion

The spirit of monopoly is, alas, the spirit of the age. National “competition policy” has been perverted into an instrument for the protection of vested interest under the guise of assuring proper returns to “investors” in monopoly, much as the fugitive slave laws of the United States protected the investments of slaveholders.

The Productivity Commission should take a principled stand in this matter and declare itself, like Adam Smith, in favour of the public interest in the freest and most productive use of human talent, unshackled from vexation by those vested interests who, armed by misconceived statutes, claim to stand in the way of the advancement of their fellow men until they pay a toll-charge for the privilege of producing.

Yours sincerely,

Terence Dwyer

MacroBusiness notes despite the glut of houses on the market, Melbourne builders are proceeeding hammer and tong.

Why?

ANNOUNCEMENT: THERE WILL BE NO NECESSARY CHANGE

Australia once had the gumption to lead the world in matters of social reform.

Without obsequiously establishing whether it was being done overseas, Australia saw the need to introduce a federal land tax under the Fisher government in 1910.

It was abolished by the Menzies’ government in 1952.

Australian governments now check with the halls of power and privilege whether it’s OK or not for a tax measure to be introduced.

Kevin Rudd failed to do this in the case of the RSPT and lost his prime ministership over it.

Julia Gillard then consulted with the big boys before coming up with the MRRT which will capture tens of billions less of Australians’ common wealth to the public purse.

Australians have become completely beholden to the 0.1%.

Whether or not we like to admit it, we’ve become their muppets.

USB it and see it on your big screen. It’ll be forty minutes well invested!

A top article by Philip Soos in “The Conversation” today:

BEWARE THE RENT-SEEKING ORGANISATION: DON’T BE DUDDED BY HOUSING DATA

One of the more interesting outcomes the 2011 Census produced was the figures concerning the housing market. The reason for this interest is how the results contrasted with the idea that Australia currently suffers from an acute housing undersupply or shortage. Taking the lead in promoting this idea is the National Housing Supply Council (NHSC), an organisation formed by the federal government in May 2008 to provide an in-depth analysis of the housing market. The NHSC is widely considered to be the peak body in this field.

Unsurprisingly, in its first report – State of Supply Report 2008 – released in March 2009, the NHSC concluded that a deficit or gap of 85,000 dwellings existed. Here was the most comprehensive study of Australia’s housing market, a dense 172 pages. The alarming shortfall of dwellings made instant headlines in the media, not least because it provided concrete proof that Australia’s rocketing housing prices were strongly affected by this shortage. Both government and industry broadcasted the NHSC’s results because it confirmed the suspicion that a shortage did, in fact, exist – and that something could now be done about it. The banking and real estate sectors were also very supportive, as their own arguments about a housing shortage were now considered irrefutable.

There was only one small problem: the purported shortage of 85,000 dwellings was complete fiction.

In order to arrive at the shortage, the NHSC had to employ a methodology of the most dubious nature – a travesty of basic science. The shortfall of 85,000 dwellings was composed of the following: 1) 9,000 to address homelessness of those sleeping rough, 2) 35,000 to address homelessness of those staying with friends and relatives, 3) 13,000 to house marginal residents of caravan parks, 4) 26,000 to increase the rental vacancy rate to three percent, and 5) an extra 2,000 to round up to the nearest 5,000!

The problems with this analysis are legion, and were quickly unmasked by Australian economists Kris Sayce and Steve Keen, and are covered briefly here. While homelessness is indeed a serious problem with tens of thousands suffering from this plight, these persons (typically on the lower income scales) do not have the financial power to turn their needs into demand on the property market. Instead, the NHSC produced evidence of social need but not actual demand. The same goes for the residents of caravan parks.

The fourth category is an interesting one because it assumes that data sourced from the Real Estate Institute of Australia (REIA) and its state-level affiliates are also based upon sound methodology. As I have covered elsewhere, the reported vacancy rates are likely to be severely biased downwards given the appalling methodology, data-gathering techniques, and lack of independent oversight (auditing). The last point is self-explanatory: who on earth rounds up to the nearest 5,000?

These highly questionable statistics were produced by Australia’s “peak” body. The NHSC is a body stacked with industry and former government professionals. Its continued funding would most likely quickly dry up were they to find that no shortage existed. If instead a surplus was found, the NHSC’s brief existence would come to an end as dwelling supply considerations are found not to be an issue in price inflation.

The outcome is obvious: if a shortage can be found, then government is much more likely to enact policies favourable to industry. Asking the NHSC if there is a shortage is similar to asking Dracula if the blood bank needs to be expanded because of a deficit – the answer is already predetermined and reflexive.

Little more could be expected in the 2010 and 2011 reports. The NHSC performed a backflip, admitting that it was uncomfortable with its previous methodology given the obvious problems with it. It is unlikely that the NHSC would have changed course if not for the barrage of ridicule it experienced from those who read the report and were honest enough not to give their silent approval. Each report provided an increasingly dismal prognosis as the shortage had increased to 185,000 in 2011 and, if present circumstances remained the same, there is expected to be a shortage of 640,000 dwellings by 2030.

But nothing changed. The NHSC had to find another pretext for the pre-supposed shortage, this time by creating a category called “underlying demand”, driven primarily by immigration and other demographic factors. This would appear to be a more sound methodology if not for the fact that the numbers were simply made up again.

The pseudo-science of the NHSC has not prevented vested interests from promoting its conclusions as fact and crucially relies upon the public not reading through hundreds of pages (630 in all) of economic and statistical analysis to understand this. After all, the public is supposed to trust the “experts”. It is worth reading through these three reports in order to realise how the phrase“lies, damned lies, and statistics” rings true.

The non-existent housing shortage probably comprises the most popular argument used by the bubble deniers to justify astronomical housing prices. As Australia is apparently suffering from a chronic deficit of dwellings, demand is greatly outstripping supply, leading to rising prices.

The problem with this argument is it can’t explain why prices started to rise in 1996 and have skyrocketed onwards, especially during 2001-2004. Annual population growth between 1996 and 2005 registered at approximately 1%, but dwelling growth (adjusted for demolitions and discontinuations) was greater over this period. In fact, 2007 was the first time since 1950 that population growth was higher than dwelling growth. If the housing shortage argument was correct, housing prices should’ve started to rise from 2007 onwards, not 1996.

The shortage argument, however, is not new. Every country that has suffered through a housing boom followed by a crash (a bubble) in recent years have always had its so-called ‘experts’ claim that prices were based upon fundamental valuations due to dwelling shortages.

Take the US as a case study. Leading institutions such as the Federal Reserve, National Association of Realtors, California Building Industry Association and Harvard University’s Joint Center for Housing Studies produced sophisticated studies to show that the $8 trillion housing boom was caused, in part, by dwelling shortages. These studies were authored by professors, PhDs, and businesspeople, all with extensive knowledge and experience but with conflicts of interest that could fill a small book. Yet, their expertise was as illusory as the shortage when the housing market crashed. The same again occurred in Ireland and Spain to the point where these three countries are now bulldozing entire neighborhoods to reduce some of the massive oversupply.

Going back to point first made in the introduction, the 2011 Census revealed Australia had 7.8 million households, 900,000 lower than the NHSC’s figure, with population also growing by 300,000 less than previously estimated. These figures have come as such a shock that the NHSC chairman has reported that an undersupply could be incorrect. In fact, Morgan Stanley researchers have found that the current 228,000 dwelling undersupply has now become an oversupply of 341,000, a huge turnaround.

Given the flawed nature of the NHSC’s reports, the run-up in housing prices is likely due to other factors, specifically the escalation in mortgage debt used to finance real estate speculation. As of 2011, mortgage debt reached $1.2 trillion or 85% of GDP. Combined with personal debt, this climbs to $1.3 trillion or 95% of GDP, a staggering sum. Also of concern is the $53 billion in subsidies and tax breaks that property owners receive.

Perhaps the NHSC can stop wasting our taxpayer dollars and instead investigate these leads.