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.
…
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?
(more…)

Leading financial economist and historian Professor Michael Hudson will be touring Australia October 12 – 27. Download the tour flyer

See the Hudson Tour Multimedia Highlights

Professor Hudson was one of twelve economists recognised for predicting the GFC. He is a government advisor to many nations, and is fast gaining a reputation in policy circles as the go-to man in GFC hotspots. This has seen him visit Iceland and Latvia this year to assist policy developments. From Mexico to China to the depths of Wall St, Hudson is an insider to the latest global policy trends.

Prof Hudson was the Chief Economic Advisor to Dennis Kucinich in the recent US Presidential Campaign.

On Monday evening (Oct 12th) make sure you tune into Phillip Adams – Late Night Live on Radio National at 10pm.

Hudson will also be interviewed on SKY News TV (7pm Monday). Our own Renegade Economists radio show will have an in depth interview on the Wed Oct 14th show. A raft of other interviews are lined up.

Read his bio outlining his extensive history in economic policy circles and his prominent position in the global media marketplace. Few can sum up a media sound bite like he can. Hear him on the Renegade Economists discussing Latvia. Check many of his recent pieces here, here or here.

Presentations:

Numbers are building rapidly – RSVP now to assure your place to these free events.

• Wed Oct 14th – Lifting the Lid on the GFC, 6.30pm, Melbourne Town Hall, with Steve Keen and Bryan Kavanagh, RSVP
• Thurs Oct 15th – Economic Policy & Asset Bubbles: The Implications for a Sustainable Society, Melbourne Uni, Centre for Public Policy, 5.30pm, RSVP
• Fri Oct 16th – The Earth vs the Neoliberal Paradigm — the Baltic Experience, Prosper Australia, Frank Halkyard Library, 1/27 Hardware Lane, 7pm, RSVP
• Wednesday Oct 21st – Economics for a Future, CSIRO Discovery Centre, Canberra, 7.30pm, RSVP
• Friday Oct 23rd – Forever Blowing Bubbles: Asset bubbles, economic policy and sustainability, Sydney, Customs House, 6pm, BOOKED OUT

Professor Hudson will also be lecturing at the Federal Parliament’s Vital Issues seminar, presenting to government officials at the Victorian ALP Economics conference and meeting with the Reserve Bank.

Hudson is someone who makes economics imperative to our understanding of freedom. As a testament to his skill, the Polish union movement called a snap strike when he visited earlier this year, demanding all members visit their trades hall to study Hudson’s work so that GFC-like events do not occur again. We are lucky to have this high profile speaker on our shores.

Subscribe to the Renegade Economists podcast, broadcasting weekly interviews on economic issues with experts like Hudson.

photo credit: Dystopos

The Brumby government’s haphazard manner in dealing with Melbourne’s ‘urban sprawl forever’ attitude is straining government revenues. The desperate actions following from this with the $95,000 Growth Areas Infrastructure Contribution (GAIC) are the result of the ignorance of more efficient and equitable revenue raising systems. The GAIC has been called a Land Infrastructure Tax.

Such lump sum charges are a disaster waiting to happen. Similar to Sydney’s ‘Developer Charges’, lump sum taxes will be passed on. There is no doubt about it. Reports are coming through such as:

One caller to ABC Radio said his parents would be left with only a couple of hundred thousand dollars on a large property they had owned for more than 20 years.

Other landowners fear the proposed levy will dramatically reduce their property’s resale value.

These farmers will simply withhold this land until it’s price increases by at least $95,000 per hectare.

A fairer way to ensure that landowners pay for the benefits of a new rail link would be to charge a percentage on all land values. A Land Value Capture system would ensure that prime locations could not be speculated upon with reckless abandon. Nor could they be withheld until the landowner’s asking price is met. This would ensure that successive landowners over the life of the infrastructure contribute something back to the government in respect for this new service.

One generation of buyers is not hit with the full bill.

The above quote qualifies our addiction to windfall gains. Why should a handful of families benefit at the expense of people battling for a basic human right – for the right to a roof over their head? Who prefers being taxed for working but yet rewarded for owning large valuable tracts of land? At the same time we are sympathetic to the above landowners – Brumby is asking for trouble with this sort of slapstick charge.

The 2030 boundary is a farce. It forces up land prices inside the boundary, and forces them down outside the boundary – that is until lobbyists manage to bribe Brumby to extend certain sections. Why were land tracts bought prior to 2005 exempted from this new charge? One can only imagine…

This issue highlights the need for an educative process on the importance of Land Tax – especially with the Bailleu family lining up to storm into public office at the next election.

# 2 12 December 2008

Ineffective demand: a picture of a tax-induced economic depression

In the 2nd of this most important series of commentaries warning of the looming depression, Bryan Kavanagh interprets one of his most important graphs. Mr Kavanagh lists the reasons why the GFC has occurred via an overview of recent tax trends. Essential reading.

What’s wrong with this picture?  

There’s nothing wrong with it – except for what it portrays. It depicts Australia’s gross domestic product descending into an economic depression because a badly-designed tax system has finally choked off effective demand - almost completely. This unique portrayal separates earned incomes from unearned incomes and closely approximates what has taken place in other economies.

Why is it ‘unique’? Because it at last assesses the extent of rent within the economy. In economic terms, rent is the annual value of a nation’s land. It’s literally a natural source for revenue, because no individuals have created it. It’s the value that the public and community infrastructure gives to the land as we work away at our jobs each year. Although it is a surplus value (because it’s community-generated, not a production cost), we capture only 12% of it to the public purse (less than $40 billion of $325 billion) in Australia. The graph shows that rent is now sufficient to replace taxation at all levels of government. i.e. If we were to collect it all, there would be no need to tax (or fine) labour and capital for working!  

Although it would do away with the taxation of labour and capital were we to capture our land rent rent for necessary government, we’ve permitted landowners to retain 88% of it, even though they’ve done nothing to earn it. And, of course, those who get the greater part of our rent are those who own not only the most land, but also the most valuable land. People who rent their homes receive no rent from society at all, although their presence did help to create it (not as individuals, but as a group). So, it is unfair in the extreme that rent – being generated by everyone – is collected only by the wealthier segments of society.
(more…)

Saturday’s Age article on Melbourne’s rental growth outstripping all other states is reflective of current government policy at all levels – local, State and Federal. When combined with record immigration levels, property flipping will continue unabated.

Prosper Australia spokesman Karl Fitzgerald was quoted in another Age article on Home Buyers Lose out in Tax Change. We would have preferred a longer commentary covering the topic from this perspective:

The fillip to demand prevalent in Swan’s housing budget of $2.3bn will more than compensate for the comparatively small tightening on GST that the property lobby faces. The half a billion earmarked for infrastructure under the Housing Affordability Fund will result in higher land prices that alone will dwarf the closing of this GST loophole. The lack of supply side policies is the real criticism of this budget. Swan has failed economics 101 with the First Home Savers Accounts, creating additional buying capacity for first home owners with the $1.178 billion proposed. This capacity will be capitalised into higher land prices.
(more…)

The Swan Federal budget was limited in its’ vision, giving with one hand in the old welfare game but taking away with the other by providing further subsidy to propertied interests. Whilst it is widely reported that the wealthy were hit by means testing, fellow Georgists were busy joining the dots between the $40billion worth of major projects and its’ effect on land values.

It must be remembered that your tax dollars will finance infrastructure that increases land values, making it harder for renters to get into the property market. The government is investing your money but giving the return on the investment (the higher land values) to people with the most land. Its about time the government start collecting the return on its investment by collecting the site rental on land. Then it wouldn’t need to tax our income as much.

The largest migrant intake in 60 years added to the smiles of those in the know. More people means more demand. With the government only promising 50,000 new homes, the excess demand will curtail the effects of the global credit crunch.
(more…)

March 08 figures reveal that loans for first home owners dropped to just 16.4% of owner-occupied approvals. Yes 16.4%! The Great Australian Dream is being dominated by baby boomers and/ or speculators. Those that most need a roof over their heads are the last in the queue. Why is this so?

Loans for new dwellings dropped a massive 11.5%. The building industry must be extremely worried with this trend. Job losses come next. Interest rates are hurting.

Negative gearing on all second investment homes must be addressed in the first Swan budget. If this policy was designed to improve the supply of housing, at the very least it could be limited to only new housing. Best of all would be to abolish it and the First Home Owners Grant.

If a Site Rental on all land was implemented, we wouldn’t have the ridiculous situation we have today where small business owners and first home owners, traditionally the Messengers for future opportunity, are penalised, whilst speculators in the fruits of the earth are subsidised by the productive sector’s tax funded infrastructure.

Today’s report on the Melbourne 2030 urban growth boundary cries out for a comment from Prosper Australia members. Melbourne University academic Rob Moodie rolled out the usual suspects in recommending that dwellings per hectare improve on the urban fringe, that there be a smaller, more intense concentration of transport hubs and lastly, the latest bureaucratic decree, that all new developments have a set percentage of housing set aside for low income people.

What is needed is an analysis on council rating systems and how this has contributed to today’s problems. CIV rating penalises home building and encourages the waste of land, in effect subsidising the land banking speculators that have held ‘doughnut’ suburbs like Braybrook and Sunshine to ransom. That’s the real supply issue. If 20% of all new developments are restrained for low income earners, what will stop the developer upping the price for the other 80% to cover this profit shortfall?
(more…)

Wednesday’s release of the much anticipated Eddington report has seen many questions asked on the viability of the road tunnel. Analysis of the cost-benefits report show that whilst the rail tunnel will return 1.20 for every dollar spent, the road tunnel will barely come out ahead. $18 billion is required to cover the Eddington plan. Struggles are expected to fund the East-West road link with the lack of exit ramps in the city. Kenneth Davidson commented on Wednesday’s Renegade Economists radio show that this is a typical ’salami strategy’ to diffuse criticism of the plan and then include the on/off ramps later.

Nowhere in the report was a discussion covered on the economic benefits infrastructure provides to land values. Those lucky enough to own land near an on/ off ramp (or a new train station/ improved services) will be delivered a windfall gain in land values. With the massive infrastructure deficit Victoria, Australia and the world are facing, one wonders how high tolls are to be an effective funding tool with examples such as Sydney’s Cross-City tunnel rendering new services unusable. As this letter by Gavin Putland points out, infrastructure models promoted by Macquarie Bank based on tolls must be reformed to include land value capture funding.

Check this extensive list compiled by the Scottish Government on how land value capture can in fact totally fund infrastructure provision. Minnesota has also recently announced a land value capture study. Make sure you read the Minnesota piece – top investigative journalism.
(more…)