FT.com / Columnists / Martin Wolf - A question for chancellor Osborne.
It's Martin Wolf time again.
I don't agree with him on the Office of Budget responsibility or cutting the number of budgets, but the rest is so spot on I'll sweep those aside.
As he says:
Your government is preparing the ground for a large, sustained and pre-programmed reduction in the structural fiscal deficit. But if this tightening is not to generate an even more prolonged period of economic weakness, and so a bigger cyclical fiscal deficit, there must be strongly offsetting reductions in the surpluses of the household, corporate or foreign sectors. The first is surely undesirable: the UK wants higher household savings, not less. The second is indeed desirable, since corporations ran a financial surplus, of 8 per cent of gross domestic product, in 2009. But considerably higher corporate investment is unlikely if the economy itself now weakens. Last but not least, the crisis in the eurozone, the UK’s most important trading partner, not to mention its enthusiastic embrace of the fiscal hair shirt, makes escape via far higher net exports unlikely.
With luck, I will be proved too pessimistic. But what are you going to do if I am not? Are you going to stand by if the economy goes into a steep decline? Have you discussed this possibility with Mervyn King, the governor of the Bank of England? In such circumstances, the most effective instrument might be central bank financing of additional public spending. But your commitment to pre-programmed spending cuts would seem to rule this out. The alternative might be a temporary reduction in taxes, of the kind you condemned under the previous government. In any case, the UK should have a plan for growth of nominal demand at a rate of 6 per cent and preferably more, for some years. Who is to take responsibility for this — and how?
However carefully you carry out your public relations, the cuts you intend to impose will be viewed as punishment of the innocent for the sins not just of the guilty, but of the rescued and now bonus-receiving guilty. You can answer that cuts are necessary because the economy is durably smaller than hoped and so pain must now be borne by public spending, the part of the economy that has not yet adjusted to reality. But if, at the same time, you made the economy weaker, so throwing away the advantage of policy autonomy, your decisions would be unpardonable — and unpardoned.
I have no question that the structural deficit must be eliminated. But I will judge your emergency Budget by whether it also contains a credible plan B for demand. If it is believable that monetary policy will work, on its own, even in today’s circumstances, well and good. But I, for one, doubt it. So remember this: the imposition of futile misery is not an act of wise policy, but rather a sign of folly.
I hope they'll forgive such a lengthy quiote on the grounds of genuine public interest (and there's more - go read the rest - please).
The fact is this: Wolf is saying what is obviously true to all but the banking class who (like Osborne) saw no sign of a recession coming and were demanding ever greater deregulation even as it swept over us.
We are being gripped by another economic madness of which the outcome - a slump -is as inevitable as a bank crash as a result of over extended lending based on inflated property prices was.
And I really would rather it did not happen. Even if I - and a few others - will once again have the advantage of saying "I told you so" when it does.
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“…result of over extended lending based on inflated property prices…”
Are you sure you don’t mean inflated property prices based on over extended lending? Surely that is a more plausible causal link? If so, isn’t this the mechanism that caused the crisis? And if so, wasn’t the damage done way before the banksters, regulators and government had any clue what was going on?
@James Tyler
No, I got it right
Bankers made the mistake
They didn’t have to lend
The basic cause of the economic crisis was not due to the banks but due to the way that our laws are preserved without correction for the times in which we live. This is a government responsibility and although the banks did add to the bad situation by easing credit for too many risky mortagages, it is not because of this that we now face austerity.
Every 19 years with the present system of land tenure, the price of land goes through a cycle and it ends with a collapse and shock. This is due to land monopolists with bank assistance, thinking that the rising prices of land will never end. Real estate includes buildings too, but the cost of their construction does not vary to such an extent and it is important to place the situation in true perspective.
The government should control the way that land is used and to do this in a natural way by introducing a tax on land values instead of our present tax regime on incomes, purchases and possessions (not including land here). The effect of this gradually introduced change to land would be to reduce land prices and allow the unused valuable parts of it to return to efficient use. By making the cahnge slowly, speculators (whose cries of “bankrupcy for banks” if land is taxed) are unsubstantial since they will have time to transfer their investment elsewhere and without the run on the banks becomming such a threat as would occur were the new tax regime suddenly introduced at full power. A simple calculation shows that over 5 years the loss in value of land is 1/10 of what is lost by unemployment being sustained.
The reduced production costs will result in greater demand for goods and this means that unemployment will reduce along with poverty and homelessness. This is the opposite of what Britain is facing today.
The value of land is created by the population who live around the site in question. The land owner does nothing to gain from this, but past taxation has caused the land to become useful due to the infra-structure. So morally this better way of tax and land regulation will help us out of the present crisis.
TAX LAND NOT PEOPLE; TAX TAKINGS NOT MAKINGS!
14 ASPECTS of LAND-VALUE TAXATION affecting Government, Land Owners, Community and Ethics
Theory of Land Value
As a community grows, the use of land and other natural resources is limited by the territorial claims of its occupants, the poor means for access to its bounty and the slow external communications. The government invests tax-payers’ money in various local and national infra-structures and the benefits from these improvements to the surroundings, gradually raise the living-standards of the population, allowing it to be more active. However, this enhanced productivity of the land is not returned to the community as a dividend on its public investment. Instead, this advantage is taken by a small number of land-owners whose monetary gain is in the form of a potential or actual ground-rent, which is the true measure of the land value. The ground-rent on urban sites becomes progressively greater with the more central locations, having been intensely developed due to their high-density populations.
Speculation in land values often results in choice sites being unused, which wastes their potential. The relatively few land owners and their production-managers also control the opportunities to earn of the landless majority of workers, whose labour needs access to the land and its improvements.
These two social injustices should be rectified by the introduction of land value taxation (LVT) instead of the main tax burden being placed on the earnings, goods-sales and ownership of built-up property. The following 4 economic aspects of LVT are as listed according to the above titled categories:
3 Aspects for Government:
1. Most of the ground-rent being collected as LVT, adds to the national income. It allows the taxes on earnings, purchases and family/corporate ownership of buildings to be reduced or eventually to be eliminated.
2. The cost of collecting the LVT is much smaller than for income tax and other production-related taxes. The ownership of each land parcel is registered. Using regularly updated maps, the rental value of each site (as if without buildings) is public knowledge. Then the LVT is simple to understand, the amount of tax easily found and its payment by the land owner impossible to avoid. The many problems arrising from legal and confusing escape-clauses in the other tax regimes require an army of tax inspectors. This is not needed with LVT, the the only additional jobs being the up-dating of the land-rent maps and tables of sites data.
3. With LVT, the national economy stabilizes and no longer experiences the 18 year housing boom and bust cycle, which was due to the changing prices that arose from speculation in land-values during town expansion. Without LVT this cycle initiates due to the growing land prices as building sites are used, however speculators begin to withhold the opportunities to use them and the prices inflate. After the speculators have sold land to them, the site developers eventually find the land too costly to use,. When in panic, they try to sell the real-estate, it quickly drops in price. Instablity from co-lateral borrowing on land value also decreases with LVT.
6 aspects affecting Land Owners:
4. LVT is progressive, the owners of the most potentially productive sites pay the most tax. None is paid on marginally productive sites, since their owners cannot claim ground-rent from possible tenants.
5. The land owner pays his LVT regardless of how the land is used. When the land is leased to tenants most of the resulting ground-rent is the tax. After LVT is introduced, the majority of the population benefit since they are consumers, whilst a minority who are monopolists and speculators in land values and their banks, sustain losses.
6. Without LVT, as time passes the speculators in land value withhold more sites from use. This raises the prices chargeable for access to all the sites, due to their increasing unavailability.When the community is not growing and more so when it is, the tax payers’ money is continuously being invested in the infrastructure. So the urban sites become more useful, scarce and valuable. When LVT is collected it stops the speculation in land prices because any withholding of land from proper use is too costly for its owner.
7. The transfer of tax from production activities and the introduction of LVT, reduces the sales price of sites. Then the government investment in infra-structure no longer influences the land sales-prices, even though their value (or potential usefullness) may continue to grow.
8. With LVT, land owners are unable to pass the tax on to their tenant renters, due to the competition for land use. The users of (untaxed) marginal site price their produce according to the costs of their labour, the use of the durable capital and the added transport needs. Owners/occupiers who access more productiuve land pay LVT/ground-rent and compete in their producton, so this tax cannot be added to what buyers willingly pay.
9. With the introduction of LVT, land prices will drop. Speculators in land values will tend to foreclose on their mortgages and to withdraw their money for reinvestment. Recent mortgage contracts will cease to be worth retaining and the banks holding these contracts will experience losses, after they reposess their properties and need to sell them quickly and cheaply. (The property prices depend on the natural demand for homes, the current rate of LVT and the response by the land owners, not all of whom speculate.) Depending on the rate of these changes bankrupcies can result. LVT should be introduced gradually to allow the investors sufficient time to transfer money to company-shares in durable capital goods, where their greater use will meet the increased demand for produce (see below).
3 aspects regarding Community
10. With LVT, there is an incentive to use the land for production, rather than it laying idle or being partly used. An optimum amount of urban land is brought into use, which reduces the spread of the suburbs onto rurual land and avoid vacant city centers. Some of the urban land was previously held out of use by land value speculators. As these sites become available, their costs decline resulting in the same competition for their greater use.
11. With LVT, greater working opportunities exist due to the cheaper land and an increased number of available sites. Consumer goods become cheaper because entrepreneurs have less difficulty in starting-up and running their businesses. Demand grows, unemployment decreases and with it a reduction in the polarization of our class-society and its degree of poverty.
12. As LVT is introduced, investment money is withdrawn from land and placed in durable capital goods. Then production with more modern tools becomes less costly. The investors in company-shares tend to be wage-earners (as well as banks and monopolists). Their decisions favour more competition and cheaper local production without heavy transport costs, whilst the monopolists have less control of prices and the unavailability of alternative goods. This is a natural trend of our free-marketing social system.
2 aspects of Ethics
13. The collection of taxes directly from productive effort and commerse is socially unjust. The associated philosophy favours coersive robery and is “Robin Hood” in style. LVT replaces this form of extortion by gathering the surplus rental income which comes without exertion. Consequently LVT is a natural system of money-gathering, which avoids the present-day distortion of business economics. It also implies the need for taking better care of the environment and that spoilers of nature should repair or pay for the damage.
14. Bribary and corruption cease with LVT. Before this was due to the leaking of news of municipal plans for housing development. However the speculation in land values is no longer worthwhile after LVT is in place.
And the people didn’t have to borrow.
@Greg
Ah, of course not
No pressure for somewhere to live
No assembled mass ank of advertisers saying spend, spendx, spend
No marketing effort from any bank
No mass mailing sending credit through every post
Of course everyone was utterly immune to all that
Are you really as barking mad as you seem?
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Richard,
The truth is somewhere between you and Greg. Our society has been based on consuming stuff we don’t need, at great environmental expense. But as someone with a Quaker background, surely you can agree that part of the problem is not just the temptation that exists, but the speed with which people succumb to it. Does anyone actually save up for anything any more, for example?
@mad foetus
I can
But then Quakes are a pretty small group
And the simplicity they espouse is decidely counter-cultural right now even if I’d strongly recommend it
In which acse the suggestion Greg makes is that everyone act counter culturally
As a basis for saying something ought to happen that’s a perfect example of the naturalistic fallacy – you can’t get that ought from the is that is happening all around use however much libertarians might like to think that possible – especially as they also promote the right to the advertisier to make claims with substantiation – caveat emptor being their motto
So no – there’s a great chasm between us – and I’m the one on solid ground
Richard,
At your suggestion in anothert thread I will answer the points made by Martin Wolf with an overall comment. It has been the practice of the previous government to spend money without concern for the quality of goods and services received in return. It has ofeten ssemed that government targets have been spending money simply to boost reported GDP rather than to achieve anything productive. The bill for all this profligate spending is being sent to our grandchildren, but it clearly cannot go on for ever. Given that the situation has to be reversed there will be some people who find that they don’t have the same income as before, but equally those who come after us will not have such enormous liabilities as they would have had.
@Alex
No – answer the question
That’s drivel
@ Richard.
Why do we have such a belief that owning a home is essential? The rest of Europe manage to live by renting.
The problem is that we consistently try and live beyond our means. So what if advertisers say “spend, spend, spend”…are we unable to make our own decisions on whether we can afford something or do we constantly need someone to hold our hand?
@Greg
This is not continental Europe
And unless we curtail advertising – which I’d like – we will overspend
Would you support massive curtailment in advertising?
@ Richard, so why should we think ourselves better than continental Europeans by needing to own our home?
With regard to advertsing, I’m not sure. It would probably be a good idea to reduce the amount of credit offered blindly to all and sundry via advertising. But on the whole, if people are stupid enough to believe advertising then I have little sympathy!
@Greg
And that sums it up
I care
You don’t