photo credit: Ravages

by Gavin R. Putland

If the Australian economy has come through the Global Financial Crisis in such fine shape, why do we have an official unemployment rate over 5%, and a real unemployment rate two or three times higher? Why aren’t there enough opportunities to go around?

Conservatives tell us that we have to make our own opportunities. Well, we can make some of them if we work hard enough. But there are other essential opportunities that we can’t make for ourselves and can’t even be born with. The most important is access to land.

Think about it. If you want a job, you need a place to live within commuting distance of the job. But you can’t make that place. Even if you can build your own house, you can’t make the land that it occupies; you have to pay someone else for it. The better the job opportunities surrounding that land, the more competition you will have for access to that land, so the more you will have to pay — and this is before anyone pays you for working! If the rival bidders for that land expect to make more money than you, then you won’t be able to compete with them and therefore won’t be able to get a job in that area. Your prospective employers will then complain of a lack of willing workers when the real problem is a lack of living space that willing workers can afford.

But don’t blame the employers. If you want to employ people, you need a place to run your business within commuting distance of the workers’ homes. But you can’t make that place. Even if you can build your own business premises, you can’t make the land that they occupy; you have to pay someone for it. The better the business opportunities surrounding that land, the more competition you will have for access to that land, so the more you will have to pay — and this is before you make any money from your business! If the rival bidders for that land expect to make more money than you, then you won’t be able to compete with them and therefore won’t be able to employ people in that area.

So employers are in the same mess that workers are in. Both bosses and workers need an opportunity that they aren’t born with and can’t make for themselves — that is, access to land. But both bosses and workers are born into a world in which all the land has been claimed, and those who have claimed it demand to be paid for permission to use it.

The classical economists — the ones who developed the science of economics in the 18th and 19th centuries — needed a category for opportunities that people aren’t born with and can’t create for themselves. Funnily enough, they called that category land. Henry George, in his book Progress and Poverty, defined “land” as “all natural materials, forces, and opportunities“.

The classical economists also recognized opportunities that people can make for themselves. These included buildings, machines and stock-in-trade, which were called capital. Producing these things may be difficult, but it’s not impossible — provided that you have access to land. Even if you can’t produce capital yourself, you can work for someone who can produce it or who already has it — provided that both you and your employer have access to land. Equal opportunity means equal access to land.

But the modern “neo-classical” economists — the ones who failed to predict the Global Financial Crisis — treat land as a form of capital. In other words, they treat the opportunities that we can’t make for ourselves as if we can make them for ourselves. This of course if very useful if you want to blame landless people for their lack of opportunities!

Socialists make the same mistake from the opposite direction. They think equal opportunity means equal access to what they call the means of production, which include both land and capital. They forget that true capital, unlike land, can be produced by private effort. Hence they forget that the profits of true capital, just like the wages of labour, are beaten down by competition. They acknowledge these facts in passing, but forget about them when drawing conclusions.

Neo-classical economics and socialist economics are opposite sides of the same coin. Neo-classicals want to privatize both land and capital. Socialists want to socialize both. But on the crucial issue of lumping land and capital together, the neo-classical economists — the self-appointed arch-enemies of socialism — are in perfect agreement with the socialists!

Look at all the wasted land in your suburb: vacant lots that aren’t for sale, and boarded-up buildings are aren’t for sale or “to let”. When land owners waste land, they waste your opportunities.

Why do they do it? Because of tax. As long as they leave the land vacant, they pay hardly any tax. But as soon as they build something, they pay GST and payroll tax buried in the builders’ prices. And as soon as they start a business on the property or let it to a tenant, they pay income tax. If you buy land to build on it, you pay stamp duty on the price. In most places, the local council welcomes a new building by increasing the rates bill because the property has increased in value. In Queensland and NSW, where State legislation puts general rates on land values alone to avoid penalizing construction, councils get around it by charging for various services that are needed as soon as a building appears, and State politicians let them get away with it. In the City of Monash in Victoria, property owners pay rates on the land value only, with no service charges, and there are remarkably few wasted lots. But from 2010/11, Monash will tax values of buildings as well as land. Governments don’t like opportunities.

If land owners paid tax in proportion the value of the land that they own — whether they use it or not — then they would have to cover their tax bills by using the land or letting it to a tenant, or avoid the tax by selling the land. In other words, if they paid tax in proportion to the value of the opportunities that they control, they would have to make sure those opportunities are not wasted. Pure land speculation — wasting the land while waiting for the price to rise, then reselling it — would be uneconomic because it would cost money to own land while leaving it unused or underused.

At present, the failure to levy a sufficient charge on land values encourages speculation. This not only wastes your opportunities but also diverts bank-lending away from productive activities, and periodically inflates a property bubble which prices young people out of the housing market — until the bubble bursts, causing a financial crisis and a recession so that people lose their jobs! Furthermore, because the government needs a certain amount of revenue, whatever part of that revenue does not come from a charge on land values must come from taxes that penalize productive activities, causing a permanent loss of employment. That’s called the deadweight loss. Even neo-classical economists know about deadweight. They also know that taxes on productive activities feed into prices, causing inflationary pressure. The Reserve Bank responds by keeping interest rates high enough to cause enough unemployment to cause enough downward pressure on wages to give stable inflation. Neoclassical economists describe the resulting unemployment rate as the “natural rate“. They think it’s good for us! In all these ways, a lack of land opportunities turns into a lack of job opportunities.

If governments want to give everyone access to land, they don’t have to divide up the land itself. All they have to do is stop taxing productive uses of the land, and replace the revenue with a charge on the value of the land. This would even up access to land, not only because the value of that access would be distributed through government services, but also because people who need land for housing and business accommodation would no longer have to compete with speculators.

If the charge on the land value were equal to the entire rental value of the land, access to land would be completely equalized. And because the rental value of the land would be the source of public revenue, there would be no need for the existing taxes. That means no tax-related paperwork, no invasions of privacy in the name of taxation, no risk of being prosecuted for making a mistake with tax, and no tax penalty for unlocking the opportunities that come with land.