All posts by Bryan Kavanagh

I'm a real estate valuer who worked in the Australian Taxation Office (ATO) and Commonwealth Bank of Australia (CBA) before co-founding Westlink Consulting, a real estate valuation practice. I discovered, by leaving publicly-generated land rents to be privately capitalised by banks and individuals into escalating land price bubbles, this generates repetitive recessions and financial depressions. We need a tax-switch: from wages, profits and commodities onto economic rents/unearned incomes, if we are to create prosperity and minimise excessive private debt.

RETIREMENT

How’re you doing?  Are you going to be OK in retirement? You’ll have a decent amount coming to you from your superannuation?  No? You won’t?  Well, you’ll probably at least get a part pension, won’t you?

It’s little known these days that in 15th century England the unskilled labourer had between 50% and 65% of his income left after providing for food, clothing and shelter for his family of five. The skilled carpenter was even better off. His discretionary spending or saving was greater again; some 66% to 73% of his wages after paying for necessities.

They were well off. They didn’t have superannuation or pensions. They didn’t need them. We do, because our wages and purchases are taxed. That has had the effect of pumping land prices and bank mortgages skyward. 

People in the 15th century didn’t have land prices, bank mortgages and debt because they paid their land rent to the lord of the manor in exchange for access to living on and working the land or providing a service to his lordship.

Now we’re ‘financialised’, we’re often in hock to the banks, but we may look forward to retirement when we’re able to access our pension or what’s left our super so that we may live out our lives.  That is, blokes anyway. Women will tend to struggle a bit more.

Retirement has become such a problem these days, hasn’t it?

Wonder why that is?

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BANKS CONTINUE TO PUSH LAND PRICES & SPEC

Australia experienced an increasingly gigantic bubble in land prices during the 1880s and the beginning of the 1890s, and the city of Melbourne became bubble-central. Michael Cannon provides an excellent account of the period in The Land Boomers.

Henry George’s masterwork Progress and Poverty had hit the streets in the United States in 1879 and was well received in Australia. However, it was not sufficient reception to keep a lid on its real estate bubble. It was as though Australians were seeking to test George’s rationale that when land rent remains uncaptured and begins to explode into a land price bubble, it is always at the expense of wages and profits which fall together, inversely to rent, culminating in an ‘industrial depression’.

[It’s currently accepted as fact that wages are low and profits high, but no attempt has been made to divorce the unearned rent accruing to land (via bank and real estate profits) from capital’s earned profits. The exercise P – R = W + I would undoubtedly show earned profits to be doing as poorly as wages in the existing speculative scenario.]

During an exhausting 3-month tour of speeches throughout the eastern states and South Australia in 1890 Henry George got to experience the peak of Australia’s land bubble first-hand. He’d been to Melbourne decades ago as a foremast boy on the Hindoo and clearly enjoyed the experience of the newly emerging nation on both visits, especially as he’d come to marry Australian Annie Fox since the first trip.

The headquarters of the Commercial Bank of Australia, erected at 333 Collins Street Melbourne in 1891, closed its doors to panicking depositors as the 1890s depression hit with a vengeance in 1893. Eighty-nine years later, following the bursting of another residential bubble, the Commercial Bank was to merge with the Bank of New South Wales in 1982 to become the modern Westpac Bank. Westpac, in turn, managed to hold on only by the skin of its teeth in the 1991/1992 commercial recession that destroyed both the State Savings Bank of Victoria and the State Bank of South Australia.

Chastened by the 1890s depression, it became impossible for Australians to continue to ignore Henry George’s remedy any longer. Georgists of all political persuasions joined to lead Progressive Era reforms between 1890 to 1920 to ensure that no such social calamity would again be visited upon the nation.  The Australian Capital Territory was to be founded on the basis of a leasehold land system, and the federal land tax was instituted in 1910 to break up the latifundia of land squatters. The depression of the 1890s was to prove even more damaging than that which was to break out in the wake of the mid-1920s property boom, the latter showing again in terms of Henry George’s analysis, that Australian governments had failed to tax land rent out of its destructive existence.

Neoclassical Economics has served its purpose well: to bury and make obscure the role played by banks and proactive taxation policy in escalating land prices into repetitive bubbles. The manner in which our national accounts are presented to ignore economic rent/unearned income assists to maintain the misleading facade to which Australian polity has dedicated itself at great cost to the nation.

Dr Terry Dwyer’s “The Taxable Capacity of Australian Land and Resources” has proven textbook assessments of economic rent at between 1% and 4% of the economy to be risible, insofar as it demonstrates rent to be capable of replacing both company and personal income tax.

Financial analysts remain pig-ignorant of the destructive role of speculative rent-seeking in the economy, happily interpreting financial struggles as between labour and capital, when reality reveals them to be between those two factors of production and the private rent-seeking in land values that maintains and reinforces an all-powerful elite: a 0.1% which, though getting wealthier on the backs of the poor and middle class, claims further public capture of unearned economic rent to be a form of ‘class warfare’.

Henry George’s explanation of escalating land prices and taxation as the generator of economic depression meanwhile proves itself valid at the turning point of every boom and bust. Therefore, it may be worth noting that we’re nearing the peak of yet another bubble in our land prices. What then of the separate interests of Australians and their errant banks?

WORKABLE ECONOMICS

Nature is both natural and ethical – as are the laws of distribution in economics.

The natural distribution of production is to land, labour and capital, as rent, wages and the return to capital (the latter not being money, but the goods employed in the production process). Interest as the natural return to capital was the original sense of ‘interest’, a term debased and confused with the more appropriate term ‘usury’. The natural distributional equation therefore is that production goes to rent wages and interest, i.e. P = R + W +I.

Rent, being the surplus product (the net national income or ‘economic rent’) is owed equally to all citizens and needs to be captured publicly to protect the currency from inflation instead of taxing labour and capital as now (thereby destroying the natural flow by being extracted from earned incomes). This has a doubly destructive debt-inducing effect, as taxes on labour and capital are immediately passed off into the price of goods and services. In the natural order, with rent as the public charge, competition between producers at different locations ensures that it can’t be passed on, as rent isn’t a cost of production.

So, once adjusted for the public charge, the distributional equation then becomes P – R = W + I. Arbitrary taxation, as such, doesn’t appear in the equation until we mistakenly introduce taxes to aid the rent-seeking in unearned incomes.

Of course, a nation may additionally deem it necessary to tax ‘bads’ such as pollution and smoking, to ensure environmentally and socially just outcomes, but the removal of the destructive features of the taxation of labour and capital is obviously beneficial socially and economically.  

The argument that there may not be ‘enough’ rent demands the question: “Enough rent for what?” Just as a national government having its own currency doesn’t spend its taxation on programs, neither does it spend publicly-captured rent. It simply spends money into existence into the private sector and doesn’t need to ‘borrow’ to ‘fund’ its deficit budgets. In fact, by taxing unearned economic rent out of the system, instead of governments literally stealing from wages and profits, part of the many salutary benefits of doing so would be the ability for national governments to be able deliver a non-inflationary living wage universal income to all citizens. This would abolish poverty, dispossession from land and much private indebtedness in one fell swoop.  

We need to consider this seriously and act upon it before the financial collapse due to hit the world in 2027 following the 2026 collapse in real estate prices.

LAND PRICES: THE MEASURE OF A NATION’S SOCIO-ECONOMIC ILLNESS

The social philosopher-economist Henry George demonstrated what neoclassical economics was later established to deny, that is, that an inverse relationship exists between taxes on incomes and purchases and a nation’s economic health.

Therefore, understanding the need to tax away the economic rent (or ‘surplus product’) instead of taxes on incomes and purchases, we may observe that land prices, namely, the private capture and capitalisation of land rent, is quite pathological in respect of a nation’s socio-economic health.

So, let’s take a peep at the rapid increase in this disease in Australia. Remember, the growth in land prices may be seen as a measure of the unnecessary infliction of private debt, dispossession and poverty on the Australian people. Of course, banking, real estate and media don’t accept the initial premise, because it’s not in their rent-seeking interests.

The Australian data on land prices are arguably the best in the world. By virtue of the Commonwealth Grants Commission and the Australian Bureau of Statistics, here are Australia’s impossibly increasing land prices from 30 June 1984 to 30 June 2023: –

It must end badly. Nuff said?