Causes Behind the Global Financial Crisis and 70′s Stagflation
Presenter: Steven Spadijer (ANU)

119th Annual Henry George Commemorative Dinner
Thursday Sept 2nd, 6pm onwards
RSVP by Friday 27th August.

Steven Spadijer is an honours student in Arts/Law at the Australian National University, where he is currently completing a series of papers on business cycles the role federalism could play in lead to a resurgence of Georgist ideas.

In addition to this, he has written on the utility that Georgist principles can contribute toward business cycle research, having presented papers at History of Economic Thought Society (HETSA).

He is is also writing a book which involves applying the insights of George into the population debate and what he calls ‘single tax enterprise zones’ and is an avid supporter of federalism through the Samuel Griffith Society, taking a keen interest in constitutional law.

Steven will dispel on the night the notion that “stagflation” was caused by the 1973 oil price shock. Instead, he will detail how a synthesis of the Georgist, Austrian (Hayek, Schumpeter) and post-Keynesian theory (Minsky, Sweezy) provide a more viable explanation for the 1973-75 recession. He will then apply this to the current GFC.

He promises a lively presentation – we hope you can join us.

RSVP pls by Friday 27th August if possible.

Meals are on a pay as you go basis – meals are $15. We will gather at around 6.30pm with meals preferably ordered by 6.45.

The venue is the Conservatory, Pumphouse Hotel, 128 Nicholson St, Fitzroy. See this map for more detail.

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photo credit: Nicholas Erwin

At the moment, Victoria’s Metropolitan Fire Brigade and Country Fire Authority are funded by the Fire Services Levy, a charge added to fire insurance.

But the FSL gives a free ride to uninsured property owners – they don’t pay for the level of fire cover provided.

Free riders increase the cost on other property owners.  Estimates of this non‐insurance vary from as little as 4 per cent to almost 30 per cent.

Expensive fire insurance deters homeowners from buying protection.  Then the uninsured risk disaster if their home is destroyed.

The government proposes replacing the FSL with a property charge – eliminating the free rider benefits and making fire insurance much cheaper.  This is eminently sensible and deserves support.

As always, the devil is in the detail.

The government wants to base the property charge on Capital Improved Value – the combined value of land and buildings. Worse, its Green Paper says: “The component of CIV that relates to the value of the underlying land would need to be removed.”

Fire services protect buildings.  They give citizens the confidence to build – and to build bigger and better.  But that is not where the tax base lives.

Like all amenities, the benefit of the fire service is capitalized into land values.  To put it another way, a quality fire service raises land prices regardless of whether a building is put up or not.

The overwhelming cost in fire fighting is the ‘stand by’ expense – of having a team of trained professionals available to fight fires at a minute’s notice 24 hours a day.  In the end, the cost differential of extinguishing a fire in a large house versus a small one is tiny.

A property levy that charges extra for a four bedroom two bathroom house over a simple two bedroom cottage is a disincentive to building. Meanwhile, both enjoy an identical level of protection.

The natural tax base for this property service is land.  The Victorian government should lift the owner-occupier land tax exemption and adjust other land tax rates to meet this necessary cost.

Victorians can anticipate a simple direct charge of $100 per property – effectively a poll tax that heavily subsidizes rural living North East of Melbourne, one of the most fire-prone areas in the world.  Residents there are more likely to need firefighting and ought pay more.

On another note: The government insists the property charge must raise no more revenue than the existing system. The 2009 Victorian Bushfires Royal Commission said our fire services need better equipment, better training and better leadership.  These things cost real money. Without them, the next dry summer will predictably result in tragedy and deaths.  Insisting the new cost be no more than the old might be good politics, but does nothing to prepare for the next big fire season – the one starting 1 November.

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photo credit: Sushanta Meh

Letter to the Editor – AFR
31/08/2010
Gavin R. Putland, Melbourne

Instead of prosecuting small businesses for making mistakes with capital gains tax concessions (“Tax Office hits small business”, AFR, August 30), why not abolish the concessions and use the extra revenue to lighten the compliance burdens concerning personal income tax and goods and services tax?

As capital gains overwhelmingly represent economic rent, it is both efficient and equitable to tax them at a high rate. But requiring small businesses to work as unpaid collectors of income tax and GST is neither efficient nor equitable, and appears to contravene section 82 of the Constitution, according to which the “costs, charges, and expenses” incident to collection of tax are chargeable to consolidated revenue.

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photo credit: Catherinette Rings Steampunk

Letter to the Editor – AFR
26/08/2010
Gavin R. Putland, Melbourne

The High Court of Australia’s decision to strike down the Cadia copper royalties — on the ground that the NSW Government didn’t own the copper — is a vindication of Treasury secretary Ken Henry’s proposal for a federal resource rent tax to replace state royalties.

A federal RRT would be immune to disputes over ownership because it would rely on the power of taxation, not the prerogatives of owners.

The objection that the minerals generally belong to the states rather than the commonwealth is easily met by refunding the RRT from each mine to the state where the mine is located. And if the resource super profits tax was flawed (as I believe it was), then the appropriate response was to fix it — not to water it down as Julia Gillard proposes, let alone dump it as Tony Abbott proposes.

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photo credit: malweth

We all need somewhere to live, a place of privacy and rest. For the last sixty years, it made economic sense to buy and own a home – generally, prices went only one way, UP!

Australia now has a fully inflated housing bubble awaiting a pinprick.

When it happens (soon, soon), the housing market will be flooded with houses for sale by motivated sellers.

• There are 1.3 million Australian taxpayers with negatively geared properties.   With interest charges consuming the rents and their personal incomes, and only capital losses to look forward to, the motivation to hold residential real estate will evaporate.
• Distressed owners – with large mortgages and negative equity – will try to hold out, sometimes for years. Eventually, these holders will capitulate.  Heavy mortgage repayments are futile when prices are falling and rents are a fraction of the interest charges.
• Buyers will sit on their hands.  Why buy today when prices will be lower tomorrow? Why commit in the face of great uncertainty about future price direction?

So, with the home owner market fighting for its life, what does the rental market look like after the bubble bursts?

The USA is nearly four years post-bubble and their experience holds grim lessons for Australia.

Firstly, there will be a change of psychology.  Renting will gain a new allure, particularly among young adults.  The total cost of shelter is known and risk-free. Repairs and maintenance are the owner’s problem. Rates and taxes fall on the owner too.

Their views will be informed by what they have seen happen around them: home ownership can destroy people’s lives.

Secondly, the supply of property available to let will grow strongly, driving down rents.  Many unable to sell will turn to renting out their properties.  While there will be more renters, the number of distressed owners (including banks) seeking a return – any return! – will drive down rents.

The USA now has rental vacancy rates above ten per cent. This is imposing a firm ceiling on rent rises, a situation expected to last for years.

“There is no iron law that real estate must appreciate,” says Stan Humphries, chief economist for the US real estate site Zillow. “All those theories advanced during the boom about why housing is special – that more people are choosing to spend more on housing, that more people are moving to the coasts, that we were running out of usable land – didn’t hold up.”

Australians have been seduced into buying homes at inflated prices by a mismatch in supply and demand – a mismatch prompted by feverish speculation. This is about to reverse.

Exempting owner occupied property from taxation is modestly helpful to the middle classes and a great boost to the wealthy.

But this tax-free status has funnelled savings away from productive investment into consumption.  This misguided policy is about to destroy the dreams and finances of a generation.

Major trauma leaves its survivors determined to make sure the tragedy never happens again.  We have the tools to make this so, to deter speculation and the misallocation of scarce resources with a powerful automatic stabilizer.

That stabilizer is Land Tax. The money it raises can be spent on infrastructure, in reducing distortions like Payroll Tax (a tax on jobs) and Company Tax (a tax on enterprise).

A universal Land Tax would confer massive benefits on Australia, greater than the gains of the Keating reforms that floated the dollar and removed tariffs. It is all in the Henry Taxation Review.

Ending the free ride landowners enjoy on the backs of working Australians would galvanize economic activity and liberate our animal spirits.

Economists call this happy state a ‘Golden Age’.  I’d like to see that!

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