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Occasional commentary # 9

27 March 2009

Bryan Kavanagh

Let’s say labour joins with capital to produce wealth. The locational rent of land arises as a by-product, simply from the existence of the community.

Say, for some reason or other, you wanted to create an economic depression. How would you go about it? OK, then let’s tax labour and capital to reduce their wages and interest. But don’t collect the land rent for government, because we’re trying to get a depression happening, remember?

So you fine labour and capital for working, but you don’t capture the land rent, is that it? Yes, but that’s only the beginning. It’s what happens next with the rent you’ve left in private hands that’s the most important consideration. That’s because if you’re really trying to create economic depression, you’ve got to set up a vast disparity in wealth, and to squeeze the middle class and the poor. You choke off what they call ‘effective demand’ by putting them into impossible debt.

Now, as the wealthy own the most valuable properties, and usually more than one property, they also control much of the land rent. That means that every red cent they pay in taxation is clawed back by the increases in land rent which is then capitalised back into the value of their properties. They may pay more tax than the poor, but they’ll certainly get it all back via their escalating land values. They simply translate it into their asset values by privatising rent.

But renters can’t do this, because they get no land rent, see? They actually pay the land rent to their landlords. They also pay taxation, so they’re whacked doubly. Similarly, the owners of only one home have control of very little land rent, so they can’t claw back much of their taxation at all.

So, what will homeowners, maybe even some renters, try to do? The middle class will look at what’s happening and realise that they need to get off this taxpaying treadmill and become asset rich, too. They must become landlords. So they invest in properties on which they will not only get the rent for the improvements, but the rent of land that goes uncollected by government. Not only that, but if they can ‘negatively gear’ their properties, such that the income they receive is less than the interest they’ll pay, the tax system will help them buy these properties! What does it matter if they get deeply into debt? Ever-increasing asset values will fix that. Er, it will … won’t it?

Enter the FIRE sector of the economy, this is, finance, insurance and real estate. It doesn’t create wealth, it takes it. Whilst this segment can sometimes serve the productive side of the economy, it actually prefers to serve the destructive side, to create recession or economic depression. In the latter mode, it becomes a parasite. Not only does it take over its host’s body, but it sinks probes deeply into its brain, to control the brain, convincing it that the FIRE sector is the most important part of the economy, and that the property speculator plays an heroic part. Just listen to the rent-seeker bleat about his own importance! Why, he provides housing accommodation for renters, doesn’t he?

So, now that we have everyone but the poor engaged in pumping up real estate and sending productive industry offshore to where land prices, taxation and labour are all much lower, the depression is well under way. Now we simply wait for the bubble to burst. The ship, as they say, will hit the span.

The final tool in our kit is the politician. People will look to him to remedy the depression, but we have this one covered, too. Being an ‘investor’ himself, he has come under the spell of the FIRE parasite and is busy singing its praise. For the sake of keeping personalities out of things, let’s call him, Kevin Obama. We must bail out the FIRE sector, proclaims Kev to his fellows. It’s only a temporary thing! In fact, we must do everything we can to look after the FIRE sector, because it is much more important than people or the economy! We must not, repeat not – under any circumstances – free up labour and capital by greater land value capture to get the economy back to work! What sort of an idiot would want to suggest that?

This is just a fairy story. Economic depressions couldn’t possibly happen that way. It’s way too simple. The FIRE sector tells me ‘nothing is simple and there are no silver bullets’.