THE CASE FOR UNIVERSAL INCOME, SITE RENT AND THE ABOLITION OF TAXES AND DEADWEIGHT LOSSES
The advent of appalling COVID-19 and its variants have exposed the world’s unpreparedness for the virus. It remains a momentous threat, but ironically also offers an opportunity, having brought pause and vast governmental expenditures to the world. In its hiatus, we need of course to address the virus and its financial ills but also to seize the chance to develop an effective responses to the financially troubled times evidenced by extreme levels of household debt and rapidly increasing poverty pointing us towards economic collapse.
We are likely to be better prepared to deal with future viral infections, but there is little sign on the horizon of thoroughgoing economic reform. Two potentially worthy heterodox ideas have emerged from the ruck to achieve attention, namely, the case for a universal income (UI) to address increasing levels of poverty, and ‘modern’ monetary theory (MMT) to support essential government spending. Whilst MMT makes the case that governments having their own currency do not need to borrow to be able to spend, it may be argued that to be effective both UI and MMT need also address devastating economic cycles which are outrageously pardoned in the name of the “natural business cycle”.
THE KONDRATIEFF LONG WAVE CYCLE
Nikolai Dimitrijevic Kondratieff wrote The World Economy and Its Condition During and After the War (1922) in which he had smoothed deviations in 36 analyses of US, UK, French and German price, value and quantity data series in presenting his Long Wave. He neither put a fixed term of years upon it nor explained its existence.
Except for a handful of honorable exceptions including the famed political economist Joseph Schumpeter who gave the Kondratieff Wave its name, the ‘K-Wave’ is not accepted in mainstream economics because its period has proven inconsistent. However, instead of endeavouring to fix a particular range of years upon the Long Wave, it may be best to regard it as the lengthy period between economic depressions.
In the wake of speculative financial madness following the peak of his third Long Wave in 1920, Kondratieff witnessed the deflationary collapse, but in 1930 Stalin had him consigned to a Siberian Gulag as a spy where he was executed in 1938. The chart takes the liberty of completing the third K-Wave in 1945 after the Great Depression and WWII and extending the fourth wave to the expected commencement of the prospective fifth economic depression in 2025/26. An 18-year sequence of real estate cycles anticipates 2025/26 from previous post-war peaks in 1954, 1972, 1990, 2008, (2026).
THE 18-YEAR REAL ESTATE CYCLE
Building on studies conducted by US economist and real estate analyst Homer Hoyt in One Hundred Years of Land Values in Chicago (1933), British writer and economist Fred Harrison demonstrated that the repetitive 18-year boom-bust cycle discovered by Hoyt in Chicago repeated itself more widely across the USA and internationally.
Accordingly, Harrison’s The Power in the Land (1983) correctly forecast that world real estate bubbles would peak in 1989 then burst into recession. His Boom Bust: House Prices, Banking and the Depression of 2010 (2005) similarly forecast that house prices would peak in 2007 and introduce global recession when the bubble burst again. Several of Harrison’s books lay out the conditions generating repetitive boom-bust cycles and although he has received extensive media coverage by extrapolating the 2008 global financial crisis to 2026, sceptics have attacked his forecasts on the basis that “even a broken clock is right twice a day”. That the broken clock repairs itself to chime every 18 years seems remarkably uncanny, however.
Australian Philip J Anderson painstakingly documents the USA’s 18-year cycle back to 1800 in The Secret Life of Real Estate (2008).
The 18-year cycle is nested within Kondratieff’s similarly contested Long Wave, so without necessary intervention it is likely that the financial world will collapse in 2026 as forecast in Harrison’s and Anderson’s analyses. The experience of the pandemic offers warnings that we should be aware of damaging cycles and seek to avoid them.
Inflationary periods are to be found both within the ascending and descending halves of the Kondratieff Wave, but trend economic growth is inflationary in the first half of the cycle and deflationary in the second. The progressively larger size of real estate bubbles within the deflationary half of the cycle bears a close inverse relationship to declining GDP growth.
As significant escalation of land prices resumed in 2021 following the 2020 recession, current definitions of inflation appear inadequate. While the impact of COVID-19 on the economy is clear, a case can be made that the 2020 recession would have occurred anyway, as a mid-term recession is usually to be found within the 18-year cycle. In a news release dated 18 January 2019 I forecast a recession in 2019/20 and provided reasoning. https://www.macrobusiness.com.au/2019/01/property-index-points-aussie-recession/
The Consumer Price Index fails to reflect Covid-related supply chain shortages in timber and motor vehicles. So what is it that more generally creates the “higher prices” to which we commonly attribute inflation? Woolly definitions of “excess demand” and “excess money” don’t cut it in market economies purported to adjust to shortages and excesses in supply and demand. Adam Smith’s ‘invisible hand’ was underperforming before the pandemic. Markets were falling into disrepair as private debt escalated. Something was awry before the pandemic.
Hardheaded social philosophers and economists from John Locke, the Physiocrats, Adam Smith, David Ricardo, Thomas Paine, Thomas Jefferson, John Stuart Mill and Henry George, to Mason Gaffney, Michael Hudson, Joseph Stiglitz and Fred Harrison have suggested that market failure can be traced to the taxing of wages and profits instead of greater public capture of land rent. Modern economists lamely acknowledge that taxes on wages and profits are passed on in the cost of goods and services, whereas levying a charge against land rent cannot be, so it is curious that tax policy is not constructed to beneficial effect on this understanding. This would remove the substantial tax-induced deadweight losses injected into prices of all goods and services and favour national exports.
Inflation is much more nuanced than simply a matter of “excessive wages”, “excessive money” or “excessive demand”. It is more particularly a function of the enormous deadweight costs of taxation incorporated into everyday purchases, along with the more usually acknowledged cost of materials, wages and profits. These passed-on deadweight costs result in the phenomenon of often inadequate wages being deemed to be “too high”, rather than taxing inflated prices for being too high. We accordingly find Australia seeking cheaper labour by offshoring production to countries where wages, taxes and prices are lower.
Backpackers, ‘gig’ jobs and the issuing of migrant visas are also used for ‘cheap labour’ purposes. The return to ‘blackbirding’ has become a sore point with many Australians, whereas operators have comfortably adapted to regarding appalling worker exploitation. This is sadly said to be the employment market in action.
Along with the taxation passed on in consumer prices as deadweight, land rent has become privatised excessively following the neoliberal ‘austerity’ economics taht inserted itself into policy from the late 1970s. Land price inflation has since risen remarkably, but policymakers have ascribed this to an ‘undersupply’ of suitable land rather than the under-taxation of its rent. It is worth understanding that unlike other consumer necessities, land has no cost of production.
As the consumer price index fails to measure these aspects of ‘hidden’ inflation, reasons for the declining value of the dollar become invisible. That land prices and the taxing of productivity are fundamental generators of inflation is ignored by legislators, presumably on subjective ideas that increasing land taxes as a quid pro quo for abolishing more than one hundred ineffectual and costly taxes (as argued by the Henry Tax Review) is a non-starter.
The cost of the financial recessions resulting from the aforementioned boom-bust cycle in real estate prices needs to be included in assessments of taxation-generated deadweight losses. It is not. Rectifying this oversight, I have assessed the total excess burden of taxation at more than twice the amount of taxation levied. https://thedepression.org.au/excess-burden/
The incredible costs injected into the economy by taxing workers and businesses instead of land values are unlikely to receive attention in Jason Falinski’s current inquiry into housing affordability where the supply and demand argument may be expected to receive overwhelming if unconvincing attention.
Unproductive rent seeking is the beneficiary of tax policy neglect. This curious backwardness in economic progress appears to explain much the world’s financial plight in which the 0.1% have been greatly rewarded at great cost to all others. The phenomenon of the wealthy currently becoming much wealthier needs to be seen in terms of who is receiving the economic rent or surplus product owed equally to everybody.
ROOT AND BRANCH RESPONSE TO SOCIO-ECONOMIC COLLAPSES
In troubling pre-depressionary times, the subtitle of US political economist Henry George’s best-selling Progress and Poverty: An inquiry into the cause of industrial depressions and of increase of want with increase of wealth … The Remedy (1879) should seize our attention. The heart of Progress and Poverty is not so much the classical distributional formula
P = R + W + I
which demonstrates that production is distributed between land rent, wages and profits, but George’s transposition to
P – R = W + I
showing that the greater power of landowners to extract rents, the more meagre the leftovers for wages and profits. Whereas Henry George saw that wages and profits fall when land prices are high, modern macro and microeconomic theory has it that rent is simply a residual, thereby dismissing the reality that wages and profits decline as land prices rise.
George’s tweaking of the all-inclusive classical distributional formula demonstrates that public capture of land rent makes the taxing of labour and capital unnecessary. Joseph Stiglitz’s “The Henry George Theorem” suggests that there will always be sufficient economic rent to finance government and to deal with inflation. The privatisation of publicly generated land rent is an extractive process, not only leading to reduced returns to wages and profits, but also fostering the 18-year cycle of land speculation and recession. There is a lesson for policymakers here on boom-bust.
In Kondratieffian and 18-years cycle terms, the world has been delivered to the financial precipice by neglecting insights of the classical economists. “Job Keeper” and “Job Seeker” served a useful Treasury response to the initial phase of the COVID-19 attack, but should the next ‘plague’ prove to be a private debt based financial collapse in 2025/26, a permanent universal income and the immediate abolition of self-defeating taxes on incomes and goods and services would prove to be more efficaceous.
A universal income supported by the taxing of land values has much to offer Australians, insofar as women, poorly served by compulsory superannuation, would receive it as a payment of right. It would also abolish poverty, replace all pensions and settle many industrial relations wage disputes. The counter argument often put that people in receipt of a universal income would not want to work is to deny the natural inclination of people to gainfully employ themselves.
Importantly, a rent-based universal income substantially reduces the cost of wages for businesses, insofar as employers then need only to offer a wage additional to the universal income to attract or retain employees. This would be hailed most heartily by numerous Australian small businesses whose profits have long become marginal.
As government funding of Australia’s many infrastructure projects creates jobs, they need to be pursued through any major downturn. Public capital works are paid for as they are spent into the private sector, regardless of the canard that deficit budgets represent ‘national debt’ and are a cost to future generations. The taxing of land rent instead of wages and profits, moreover, completes in a virtuous circle the uplift in land values provided by such capital expenditure.
THE POLITICAL IMPASSE
Treasury and governments face insurmountable problems in addressing the socio-economic threat. Not the least of these is the bifurcation of politics into two separate camps: the political left requiring higher taxation to provide essential social welfare to combat rising poverty, whilst the right demands that taxation be reduced to stimulate the economy, the latter, short of taxing away the privatised site rent that has seen land prices escalate incredibly. By failing to address a failed tax regime and speculative rent-seeking, neither side has been able to offer workable solutions.
Longstanding Australian Labor Party policy of taxing land values (not entirely resisted by conservative parties) was jettisoned in 1963 in favour of ‘private property’ in publicly generated ground rent (Cameron 1984). No political party has been prepared to put the compelling case for a universal income, the abolition of taxes on productivity and the need to capture site rents. Although this remedies ‘hidden’ inflation and disastrous private debt, any such action is considered to be ‘political suicide’ by the parties. Public education could fill the void of ignorance.
Banking, mining, and other rent-extracting monopolies will not willingly surrender super-profit advantages. This presents a major stumbling block, because rent-seeking interests have both the funds and political clout to retain their privileges. Australia experienced the political power and retrograde advocacy of this cohort when the Rudd government tried to legislate the Resource Super Profits Tax in 2010. The valiant attempt to capture Australia’s mineral rent to the public purse was defeated by misleading advertising, such that the mining companies now continue to make super profits at great cost to Australians. It remains a distinct possibility therefore that upcoming financial collapse will have its catastrophic way with Australians, unimpeded by necessary economic reforms.
A challenge to this powerful rent-seeking rump would present Australians with the happier prospect of again becoming world leaders in socio-economic reform as with the introduction of universal suffrage and the taxing of land values early in the 20th century.
ADDENDUM: THE FIGURES
The chart derives and is extended from data in The Taxable Capacity of Australian Land and Resources (Dwyer 2003) appearing in different format in Trickle Up Economics: Assessing the impact of privatized land rent on economic growth (Putland 2018). It is in effect Henry George’s P – R = W + I writ large, where the red, dark blue and green segments represent total economic rent, and the pale blue the combined net incomes of labour and capital. It may be seen the latter is decreasing as the privatisation of economic rent has increased. This clearly needs to be reversed and remedied.
The chart acknowledges John Locke’s understanding that all taxes come out of economic rent (ATCOR) and Mason Gaffney’s extension thereof, that the excess burden of taxation also comes out of rent (EBCOR). Therefore, the total economic rent at 50% of GDP in 2017 makes derisory the unestablished claims of some modern economists that rent is somewhere between 1% and 4% of the economy. (Examples of these estimates are found at https://thedepression.org.au/down-the-garden-path/.)
Inserting actual 2017 GDP figures from Putland’s chart into Henry George’s P – R = W + I formula, a GDP of $1762.3 billion minus economic rent of $881.15 billion leaves an after-tax income of only $881.15 billion to be shared by workers and businesses.
Extractive rent-seeking businesses such as banking, the mining industry, and other monopolies will lose their super-profits under a regime which taxed these unearned increments away to leave incomes of individuals and other businesses untaxed. Delivering a universal income of that part of economic rent occupied by deadweight losses, a dividend to all citizens over the age of (say) 18 years is attainable if supported into the future by the public capture of land rent. Apart from earlier mentioned benefits , it would provide a stimulus to real wealth creation, protect the environment, abolish deadweight losses and all existing transfer payments. As the public capture of land income would do far more for the economy than taxation is able to do, the process is sustainable.
On 2017 data, Putland assessed imputed land income to be some 16% of the economy. Hence, rent @ $881.15 billion (50% of GDP) less $282 billion (16% of GDP) leaves $599.15 billion (34% of GDP) to be distributed as a universal income. (The 34% of ‘deadweight’ incurred, that is, more than twice the amount of land rent, confirms the assessment of deadweight losses estimated differently.) Dividing the $599.15 billion by the 20 million Australians over 18 years of age would conservatively deliver a universal income of some $30,000 per annum.
The potential benefits flowing from such an extensive cleanout of Australia’s Augean stables are immense.
POSTSCRIPT: WE’VE BEEN HERE BEFORE
Neoclassical economics sees prices determined only in terms of supply and demand, but land prices are different. Whereas population, zoning, size, shape, topography, location, supply and demand will affect a site’s rent, its price is determined by (a) how little the government taxes its rent, (b) to what extent banks are prepared to advance credit against its price, and (c) to what level interest rates are manipulated by central banks. It is not widely understood that the price of a site represents the private capitalisation of its rent, net of public charges, as with the valuation of any developed parcel of real estate.
In Neo-classical Economics as a Stratagem against Henry George (1994) Mason Gaffney documents that the morphing of land income into those of labour and capital came at the behest of landed interests claiming there was no difference. They found John Bates Clarke and his supporters to be willing proponents of this idea:
“It took a generation, but by 1930 they had succeeded in reducing him [George] in the public mind. In the process of succeeding, however, they emasculated the discipline, impoverished economic thought, muddled the minds of countless students, rationalized free-riding by landowners, took dignity from labor, rationalized chronic unemployment, hobbled us with today’s counter-productive tax tangle, marginalized the obvious alternative system of public finance, shattered our sense of community, subverted a rising economic democracy for the benefit of rent-takers, and led us into becoming an increasingly nasty and dangerously divided plutocracy.”
The following chart shows US neoclassical economists took the opportunity of the Great Depression to make a major ‘temporary’ switch from taxing real estate values to the taxing of earned incomes. Australia was to follow suit.
A major collapse in land prices provides an excellent opportunity to rectify tax regimes that favour asset price speculation above real wealth generation. With the rest of the world Australia has arrived at a watershed. Without the reforms canvassed, Australia is headed for the gurgler.
Australia’s Future Tax System Review Final Report, 2 May 2010
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