Liberate labor and enterprise

Feeding Frenzy
Creative Commons License photo credit: mtsofan

Panics do not destroy capital – they merely reveal the extent to which it has previously been destroyed by its betrayal in hopelessly unproductive works.”
– John Mills* “Credit Cycles and the Origins of Commercial Panics”, 1867.

Around the western world, land prices have collapsed. Australia’s day of reckoning is yet to arrive – this great economic force is merely delayed, not defeated.

Meanwhile, we remain aloft. The ground looks uncomfortably distant from our speculative bubble filled with hot air.

On the one hand, landowners are sitting on enormous capital gains. But for homeowners to realize these profits means selling, and then where would they live? For rentiers considering selling down, the dilemma is where to safely and profitably deploy their capital?

Then, the landless: young adults creating households need a large deposit AND a large mortgage to buy a modest home in a poor location. This ‘starter home’ is to trade up from ahead of starting a family, doubling up on Stamp Duty costs.

For any of these groups, putting a foot wrong in these economic circumstances is financial suicide.

Our banks are on all sides of these trades. Banks lent freely to builders and developers, boosting supply. On the demand side, they lent to rentiers to finance speculation and they lent to homebuyers on long mortgages.

Bank credit has been used to accelerate production and consumption simultaneously. The banks are exquisitely exposed to collapsing land prices.

Almost every bank in the world has been savaged by the financial crisis. The big four Aussie banks held their AA ratings as they have excellent collateral. That collateral is land.

The problem is, more building and buying of houses has been financed than can be paid for from our incomes, from our production.

As Michael Hudson says: “Debts that can’t be paid, won’t be paid.”

More housing has been created than builders can sell at a profit. More mortgage debt has been issued than can be repaid from wages. Borrowers gambling on rising prices are trapped when prices turn down.

US house prices have been falling for 41 months. They look about half-way back to their long term trend line, so their painful adjustment will go on for around six years in total.

The collapse in Australian land prices hasn’t even started.

The banks know. The government knows. International (and Australian) speculators are just waiting for the right moment to administer a left hook and a haymaker. When land prices are definitely sliding, immediate payment on the $150 billion our banks have borrowed will be demanded. And they will short sell our banks.

Nothing personal, mind you.

Why do I labor my predictions of gloom? Why am I so upset, so fearful of the future?

Simply, we have denied ourselves the tools to prevent this speculative orgy. Because land is untaxed and most other economic choke points are surrounded by tax collectors – like vultures around a weak lamb – capital has been steered down a path of waste and decay.

Land Tax would have deterred speculators from bidding up the price of land. Land Tax would have put a price on withholding land from the market. Land Tax would have cautioned homebuyers from sticking their necks in the noose. Land Tax would have slowed the banks from lending like drunks.

And Land Tax would have meant much lower taxes on labor and enterprise.

The reform challenge for our beloved country is to discard the taxes that weigh on effort and creativity, and to put them instead on economic rents, like land and mining. See: Australia’s Future Tax System.

* Not to be confused with John Stuart Mill.

1 Comment

  1. Paul Meleng09-03-2011

    I completely agree. But let us stop talking tax. Let us talk about ending all tax on effort and enterprise and running the country on the rent of country. Pay to use the land, to have it defended, its environment protected, its beauty enjoyed and for the space you take up instead of others. Pay for its minerals and water and fertility and for the use of its air waves and air space. Get the language the right way around.
    I am just trying to imagine it. Australia wouild be a haven for the most high intelligence industries and cyber services that take up the least valuable space but make pots of money and pay high wages. Australian global enterprises would suck money in from all over the world. There would be huge incentive to repair damaged land and reclaim deserts and to recycle water etc so as to be able to operate in low value areas.
    The mind boggles.

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