Prosper Australia

photo credit: brian glanz

Dr Michael Hudson on Iceland Recovering From Neoliberal Disaster

Another ‘must listen’ in the build up to Professor Hudson’s tour of Oz: Oct 12 – 26

photo credit: tholmb

Letter to the Editor – The Post (W.A)
Niels Charlier
Jolimont

Dear Editor,

Re your report, ” ‘Wrong’ rates ping home builder” (POST 15/8). Gill Vivian is absolutely right when she says she is being penalised for helping to improve her suburb, and that the system is wrong.

The alternative is however much simpler and more obvious than Cottesloe mayor Morgan seems to suggest.

Instead of basing the rate on the gross rental value, it should be based on the unimproved value of the land or “site value”, which is only determined by the location of the property.

While the value of improvements are created by the land owner, site values are created by the community and depend on closeness to schools, government services, economic and social activity and so on.

Taxing improvements naturally causes a decrease in improvements and an increase in house rents.

Site value taxation, however, is the only tax that has no negative effect on the economy because the supply in land is fixed; this has been acknowledged by all economists since Adam Smith.

On the contrary, site value taxation heavily encourages land owners to use land productively and discourages property speculation (which bring about housing booms and busts, one of the main causes of the global economic crisis).

Shifting rates from the gross rental value to the site value would therefore increase the supply and lower the prices of accommodation.

It would thus benefit people with the lowest incomes the most. Taxing land and natural resources in replacement of taxing useful economic activity should be a policy of higher governments too.

More information on this topic can be found on http://www.prosper.org.au.

photo credit: Ivy Dawned

The Australian stated:

THE International Monetary Fund believes the tax treatment of housing is too generous and has called for capital gains tax to be levied on the family home.

Let’s look a little deeper into this IMF Report: Debt Bias and Other Distortions: Crisis-Related Issues in Tax Policy (PDF). The Exec Summary starts off with:

Tax distortions are likely to have encouraged excessive leveraging and other financial market problems evident in the crisis. These effects have been little explored, but are potentially macro-relevant. Taxation can result, for example, in a net subsidy to borrowing of hundreds of basis points, raising debt-equity ratios and vulnerabilities from capital inflows.

Little explored? Heard of the 18 year land cycle? See Phil Anderson explain it clearly here on Sky News.

32. Housing is commonly subject to special tax treatment that may have increased
household leverage and house prices. Taxation does not explain the widespread house price boom—that occurred in countries with very different tax systems—and there are no obvious tax changes that might have triggered its collapse. But taxation does create substantial distortions in a market of central macroeconomic importance. (p17)

Great to see the acceptance that taxation does create distortions, but ‘Taxation does not explain the widespread house price boom’ ? Dr Gavin Putland’s report on Recessions Begin at Home showed how domestic, independent tax policy and the continual ignorance of land rents was the catalyst to a property-led recession.

Putland states:

If, as I contend, recessions come mostly from domestic property markets, then the real significance of globalization lies in international arbitrage by property investors, which causes property bubbles and bursts to form global waves: recessions are global chiefly because property bubbles are global.

Back to the IMF:

76. Tax effects on asset prices, however, can be complex and hard to predict. Three
aspects of price behavior are potentially important: level, rate of increase, and volatility. Tax measures can affect all three, and in ways that may be difficult to anticipate:
• A higher rate of CGT may cause the price of an asset to fall but its rate of appreciation to increase (in order to continue yielding the after-tax return available on other assets). It is even possible for a higher CGT rate to be associated with higher asset prices (because any capital loss attracts a larger tax break). (p31)

Here the IMF’s Fiscal Affairs Department points out that a Capital Gains Tax (CGT) may impede the ability of taxation to curb the next inevitable property bubble. Why not go to the source and place the tax on land as a holding charge, rather than rely on a turnover charge as per the CGT? Then land prices are kept at levels that reflect the earning capacity of that location rather than the capital gains one can extort from the human right to a roof over our head? It also deals with the tax evasion and avoidance issues mentioned.

It is time for two dimensional economics to step aside in the need for an all-encompassing three dimensional model that moves beyond wage and capital costs, to include the one thing we all can’t avoid – some land upon which to stand!

The tragedy of present bailout economics is that governments have lost faith in how to get out of this recession – they seem hell-bent on kicking the next bubble into gear as a way to ensure their short-term re-election. Do voters retain a sense of history?

Of note, the term ‘land’ or ‘economic rent’ was not mentioned once in the IMF report.

photo credit: Don Solo

Gavin Putland

Check Dr Putland’s latest piece on interstate issues with CIV

Question: Who will be the big winners if CIV rating is introduced in the City of Monash?
Answer: Owners of vacant lots and derelict buildings.

The site value (SV) is the value of the land alone. The capital-improved value (CIV) is the value of the land plus buildings.

For a vacant lot, these two values are the same. With the “rates in the dollar” quoted in the council’s brochure on rates reform, the owner of any vacant lot would pay 37% less under “simple” CIV than under SV. And under “CIV with differentials”, the owner of a vacant residential lot would pay 43% less than under SV, while the owner of a commercial or industrial “bombsite” would pay 6% less than under SV.

It is curious that the 4-part “example” in the brochure does not include a vacant lot with the same site value as the other cases. If it did, the owner of the vacant lot would pay the same as the owner of the 3-bedroom house under SV, but would pay 29% less under CIV.

Owners of derelict buildings, which are worth almost nothing in addition to the site values, would fare similarly to owners of vacant lots.

In a nutshell, CIV punishes the owners of well-maintained buildings in order to reward the owners of bombsites and eyesores. If I were a Monash ratepayer, I’d be screaming “Not in my back yard!”

photo credit: orvaratli

Why Iceland and Latvia Won’t (and Can’t) Pay the EU for the Kleptocrats’ Ripoffs

Michael Hudson

Prof Hudson will be touring Australia Oct 12 – 27 on behalf of Prosper Australia. A shorter version of this article was published in the weekend’s Financial Times.

Can Iceland and Latvia pay the foreign debts run up by a fairly narrow layer of their population? The European Union and International Monetary Fund have told them to replace private debts with public obligations, and to pay by raising taxes, slashing public spending and obliging citizens to deplete their savings. Resentment is growing not only toward those who ran up these debts – Iceland’s bankrupt Kaupthing and Landsbanki with its Icesave accounts, and heavily debt-leveraged property owners and privatizers in the Baltics and Central Europe – but also toward the neoliberal foreign advisors and creditors who pressured these governments to sell off the banks and public infrastructure to insiders. Support in Iceland for joining the EU has fallen to just over a third of the population, while Latvia’s Harmony Center party, the first since independence to include a large segment of the Russian-speaking population, has gained a majority in Riga and is becoming the most popular national party. Popular protests in both countries have triggered rising political pressure to limit the debt burden to a reasonable ability to pay.

This political pressure came to a head over the weekend in Reykjavik’s Parliament. The Althing agreed a deal, expected to be formalized today, which would severely restrict payments to the UK and Netherlands in compensation for their cost in bailing out their domestic Icesave depositors.

This agreement is, so far as I am aware, the first since the 1920s to subordinate foreign debt to the country’s ability to pay. Iceland’s payments will be limited to 6 per cent of growth in gross domestic product as of 2008. If creditors take actions that stifle the Icelandic economy with austerity and if emigration continues at current rates to escape from the debt-ridden economy, there will be no growth and they will not get paid.

A similar problem was debated eighty years ago over Germany’s World War I reparations. But policy makers are still confused over the distinction between squeezing out a domestic fiscal surplus and the ability to pay foreign debts. No matter how much a government may tax its economy, there is a problem of turning the money into foreign currency. As John Maynard Keynes explained, unless debtor countries can export more, they must pay either by borrowing (German states and municipalities borrowed dollars in New York and cashed them in for domestic currency with the Reichsbank, which paid the dollars to the Allies) or by selling off domestic assets. Iceland has rejected these self-destructive policies.

There is a limit to how much foreign payment an economy can make. Higher domestic taxes do not mean that a government can turn this revenue into foreign exchange. This reality is reflected in Iceland’s insistence that payments on its Icesave debts, and related obligations stemming from the failed privatization of its banking system, be limited to some percentage (say, 3 percent) of growth in gross domestic product (GDP). There is assumption that part of this growth can be reflected in exports, but if that is not the case, Iceland is insisting on “conditionalities” of its own to take its actual balance-of-payments position into account.
(more…)

118th Henry George Commemoration Address
Tuesday Sept 1st

Speaker: Mr J Kennedy Bennett, Coordinator of Site Rating Defence

A rates analyst for 19 years with valuation work across 12 councils, his current project is uniting the Monash ratepayers behind a full economic disclosure model. We get to hear it first.

Enjoy the welcoming atmosphere of the Pumphouse, just across the road from the Exhibition Building where Henry George gave his 1890 speech to a packed audience.

Meals will be available via the popular “pay as you go” method, starting at around $15.00. We will begin to gather around 6pm. Meals to be ordered by 6.45.

Venue: The Conservatory room, the Pumphouse Hotel, 128 Nicholson St, Fitzroy
RSVP: Friday 28th August if you will be attending.

Download the flyer (right-click)/ have a closer look

photo credit: tonx

The Other-Wordly Philosophers: an interesting series of articles from The Economist, though the ignorance of Ricardo’s Law of Rent is again present. Read this article on Southern California Real Estate Still Has a Long Way to Fall. Then ask yourself why such destructive issues are ignored and current policy prescriptions do all they can to re-inflate the real estate bubble that got us into this trouble….

With all the talk of economic recovery — even in these pages — we think it’s a good idea to keep things in perspective. Yes, nationwide, things are getting less bad. But the aftermath of the property bust will be with us for quite some time, particularly in Southern California, where there was overbuilding of practically everything — houses, retails, offices, you name it.

This WSJ headline pretty well sums up the situation: “Vacancies Suppress Southern California Recovery.”

The Other-Wordly Philosophers:

These internal critics argue that economists missed the origins of the crisis; failed to appreciate its worst symptoms; and cannot now agree about the cure. In other words, economists misread the economy on the way up, misread it on the way down and now mistake the right way out.

On the way up, macroeconomists were not wholly complacent. Many of them thought the housing bubble would pop or the dollar would fall. But they did not expect the financial system to break. Even after the seizure in interbank markets in August 2007, macroeconomists misread the danger. Most were quite sanguine about the prospect of Lehman Brothers going bust in September 2008.

Nor can economists now agree on the best way to resolve the crisis. They mostly overestimated the power of routine monetary policy (ie, central-bank purchases of government bills) to restore prosperity. Some now dismiss the power of fiscal policy (ie, government sales of its securities) to do the same. Others advocate it with passionate intensity.

Read more

Check this Media Watch report on the misinformation plague besetting upon inexperienced home buyers. Some elements of the property industry continue to let their industry down.

Click here to watch this short piece

A genuine highlight of the Council of Georgist Organisations conference (Ohio) so far has been seeing two young high school students present this video. Many other stories to come.