The Bank of England now admits that the UK government failed to provide it with the tools needed to deal with boom/bust, according to an interview tonight on BBC’s Panorama programme. The missing tool was tax policy.
“That’s why we can say that the global recession did not originate in the US and was not caused by bankers or sub-prime lending” says Fernando Scornik Gerstein – heading up an international organisation of leading economic reformers. The group argues government policy in this global economic crisis is barking up the wrong tree.
“The real culprit”, says Scornik Gerstein, “is how our property rules deliver windfall gains to property owners and encourage a culture of speculation on our homes and resources”. Scornik Gerstein is president of the IU, an international union of organisations that advocate a radically different approach to the current economic crisis.
The IU is concerned that current strategies for addressing the systemic crisis – far from placing a floor on the downturn – will exacerbate the instabilities that characterise markets around the world and set the scene for the next major recession.
In a BBC interview tonight, deputy governor of the Bank of England, Sir John Gieve, tells Robert Peston: “We need to develop something which… directly addresses the financial cycle and prevents the financial cycle and the credit cycle getting out of hand.” (1)
“There’s only one way to do that” says Scornik Gerstein. “A strategy does exist that could moderate the downturn while laying the foundations for sustained growth in the future. But that policy is not being applied. Instead” – he says – “governments are applying shallow bail-out/pump priming measures that are futile at best, and dangerous at worst.”
The IU argues it is property markets, in particular land markets, that cause boom/bust and that brought the financial sector to its knees in 2008 and will bring the real economy to its knees in 2009. The heart of the problem, it argues, is a system where homeowners, in a flourishing economy, are able to cash in on the increasing value of their locations. “The problem is now the same all over the world”, says Scornik Gerstein: “gambling on house prices has gone global.”
The remedy advocated by the IU is a radical review of how governments raise their taxes. “The right way to raise public revenue is to collect the values actually created by society and nature” says Scornik Gerstein – “that’s much preferable to taxing work, savings and enterprise”. The new green tax agenda like pollution charging is an example of the approach, he says: “it’s the idea of taxing bads, not goods”. But above all the IU advocates the abandoning – or at least the reducing – of traditional taxes like income tax, and the introduction of land value taxation. “LVT takes out the speculative element from the housing market” says Scornik Gerstein: “and it’s now, with values collapsing, that’s the time to act. Land value taxation is the single policy move capable of rescuing the global economy from what will otherwise be the worst recession since the Depression of the 1930s”.
This is the first thoughtful public comment on the financial collapse I’ve seen coming out of Europe! There may be hope for us yet. Well said, Mr Scornik Gerstein! The BOE should definitely follow up on your insights!