Prosper Australia

photo credit: Stuck in Customs

On the first anniversary of the collapse of Lehman Brothers, this piece sums up the cause to the GFC, as predicted by 5 economists who subscribe to the line of economic thinking we promote: land rent theory.

Dirk Bezener, the academic who collated the 12 economists who predicted the GFC, wrote in the Financial Times Why Some Economists Could See the Financial Crisis :

Glenn Stevens, governor of the Reserve Bank of Australia, said: “I do not know anyone who predicted this course of events. But it has occurred, it has implications, and so we must reflect on it.” We must indeed.
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I undertook a study of the models used by those who did see it coming.* They include Kurt Richebächer, an investment newsletter writer, who wrote in 2001 that “the new housing bubble – together with the bond and stock bubbles – will [inevitably] implode in the foreseeable future, plunging the US economy into a protracted, deep recession”; and in 2006, when the housing market turned, that “all remaining questions pertain solely to [the] speed, depth and duration of the economy’s downturn”. Wynne Godley of the Levy Economics Institute wrote in 2006 that “the small slowdown in the rate at which US household debt levels are rising resulting from the house price decline, will immediately lead to a sustained growth recession before 2010”.

Michael Hudson of the University of Missouri wrote in 2006 that “debt deflation will shrink the ‘real’ economy, drive down real wages, and push our debt-ridden economy into Japan-style stagnation or worse”. Importantly, these and other analysts not only foresaw and timed the end of the credit boom, but also perceived this would inevitably produce recession in the US. How did they do it?

Central to the contrarians’ thinking is an accounting of financial flows (of credit, interest, profit and wages) and stocks (debt and wealth) in the economy, as well as a sharp distinction between the real economy and the financial sector (including property). In these “flow-of-funds” models, liquidity generated in the financial sector flows to companies, households and the government as they borrow. This may facilitate fixed-capital investment, production and consumption, but also asset-price inflation and debt growth. Liquidity returns to the financial sector as investment or in debt service and fees.

Neo-classical economists only focus on two factors of production – capital and labour. Bezener misses the big one in his flow-of-funds analogy. The imperative question is – what was the money was borrowed for?

Land – predominantly. Land values in Australia are twice as big as the ASX.

Fred Harrison wrote in his 1997 analysis – The Chaos Makers

By 2007 Britain and most of the other industrially advanced economies will be in the throes of frenzied activity in the land market equal to what happened in 1988/9. Land prices will be near their 18-year peak, driven by an exponential growth rate, on the verge of collapse that will presage the global depression of 2010. The two events will not be coincidental: the peak in land prices not merely signalling the looming recession but being the primary cause of it.

Fred should be given his due respect, especially as his Power in the Land (1984) also predicted the 1987/8 downturn using the 18 year land cycle. See one of his best videos on the GFC.

Who else used the role of land in their interpretation of business cycles to do what the most high profile economists in the world failed to do?
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photo credit: Torley

David Smiley

All countries save about 25 percent of what they produce, their Gross Domestic Product or GDP, for investment as capital in future production. In national accounts these “savings” include environmental damage and natural resource depletion incurred in the process of production. This does not seem a very good measure of sustainable development, and the World Bank has come up with a better one. The Bank subtracted from Gross Domestic Savings, the cost of carbon dioxide damage, and the values of energy depletion, mineral depletion, and net forest depletions. The result of these subtractions the Bank called Genuine Domestic Saving, or GDS, and they are astonishing.

World average GDS was about 13 percent. Both World Bank regional and country data were tabulated in World Bank World Development Indicators report of 2001, pages 180-183. For East Asia and Pacific, a region dominated by the land reform countries of China and South Korea, GDS was 25 percent. Moving to areas of political turbulence, GDS for Sub Saharan Africa was 3.9 and for Middle east and North Africa minus 1.3 percent.
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A grasp of economic rent is vital to understanding geoism and the path to social justice and environmental sanity.

Short definitions are helpful but limited – the return to privilege; a free ride at society’s expense; unearned increment; excess profits that monopolists reap in the absence of competition; income derived from assets that cannot be freely produced by private economic agents; income (real or imputed) that cannot be justified as an incentive for private economic agents; or even the natural source of revenue for the community.

Sydney’s David Smiley continues his series wherein he fleshes out the meaning of rent through a string of vivid historical examples.

David Smiley

writes:
Most history books attempt to explain progress, poverty and conflict in terms of charismatic actors and political events, seldom in terms of fundamental causes. It is therefore refreshing to find, in A Traveller’s History of Italy (Lintner, V. 1989, Gloucestershire, Windrush Press), explanations in terms of land ownership.
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With the growing pressure to find affordable accommodation and our excitement at the Canberra Land rent proposal, we thought it high time we showed you a growing trend through the northern hemisphere – Community Land Trusts

by Prosper Tasmania’s Leo Foley

(Based on material from the Institute of Community Economics, Massachusetts)

A Community Land Trust (CLT) is a democratically controlled nonprofit organization that owns real estate in order to provide benefits to its local community – and in particular to make land and housing available to residents who cannot otherwise afford them.

CLT’s recognise that land is a finite resource and will naturally appreciate in time due to social progress and population growth. This natural appreciation in land values is recycled back into the Community Land Trust to ensure that future home owners can afford to enter the CLT.
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Yesterday’s Federal budget surplus of $21.7 billion raises the spectre of a global trend tied to the principles represented on this website. Take the foreign reserves of Singapore (US$176bn), Hong Kong (US$160bn) and Russia (US$563 bn). Singapore and Hong Kong have raised a significant proportion of their revenue via the capturing of economic rent from land. Russia is a new boom entrant with the capturing of oil rents.

However, the returns on foreign reserves from government bonds are dropping, especially when denominated in the falling US currency. This has seen a diversification away from countries holding their budget surpluses in foreign reserves and towards what is called sovereign funds.

Fifteen of the top 20 sovereign funds in the world are dominated by revenue raised from the resource rents that nature’s resources provide. Australia has benefited greatly from China’s resource boom. Hong Kong and Singapore have maintained their growing funds by ensuring the public share in the real estate bonanza of the last decade. (Remember, land appreciates, housing depreciates.)

We propose a balance of the two strategies, capturing money from both land and the resources below and above it. Then small business can be freed from the shackles of the compliance required in meeting the 56 taxes Australian businesses face.
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by Karl Fitzgerald

as published in Arena Magazine, Feb-March, 2008, Edition 93

In a period where the twin crises of global warming and the wealth gap are attacking society from both sides, policy makers are continually limited in their effectiveness by a two dimensional approach to economics.

Land prices have increased at 4 times the rate of GDP and dwarfed wages growth by 1000 to 1 since WW2 (The Poverty Inquiry to end all Inquiries, Tony O’Brien, Figure 1, p5) . Such damning statistics beckon the ALP to take a hard look at the economic fundamentals undermining union wage demands. For Julia Gillard’s ‘War on Poverty’ to be successful, policymakers must look outside the square.

2008 marks the half way point in our promise to halve world poverty with the Millennium Development Goal’s 2015 deadline. With the wealth gap accelerating in both Developed and Developing countries, a serious flaw is evident in modern economics.
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With the recent passing of our number 1 ticket holder, Clyde Cameron, we were pleased to hear the ABC’s Phillip Adams replay the 1999 Late Night Live interview he held with the Honorable Clyde Cameron. It is a fascinating discussion with Clyde covering the foundation to his Georgist beliefs, involvement in the Henry George League of S.A and his disappointment at the ALP’s drift from its original intention to capture the community generated economic rent in lieu of all other taxes. Insights on ALP history and the Whitlam era abound in this fireside chat.

Download and listen to this essential piece of Australian Georgist history.

Price of housing outstrips rent (12/03/07).

Remember that whilst rents haven’t kept pace with house prices , neither have wages. Landlords have many other advantages such as negative gearing (at around $2.4billion dollars p.a in subsidy to the property lobby, mainly coming from lower & middle class citizens who could never dream to afford a ‘Tax Minimising lawyer/ accountant’).

Landlords also have the ability to increase their borrowing capacity on an appreciating property. A 154% increase over 15 years and still they aren’t happy?

Don’t forget to see this MUST SEE videocast from the ABC’s MediaWatch on “Who is really raising the rent?”.