Change or suffer
Australian land prices are falling. They will continue to fall until their fundamental economic link to incomes and rents are fully restored. Many with large mortgages will be crushed by these towering liabilities when their equity is erased.
This claim is bitterly resisted by the politico-housing complex and most homeowners, who see the exponential land price rises of recent years as proof of their skill and judgement. In truth, all boats were lifted by that king tide of optimism.
Economic growth based on debt expansion is exhausted and can go no further – consumers have outrun their capacity and willingness to borrow. Australians have flipped into energetically paying down old debt and are not taking out new loans.
The contraction of credit – also known as saving – is shrinking aggregate demand. Retailers are struggling as spending on discretionary items is deferred, and deferred again.
A sudden big rise in unemployment is imminent, as housing construction has effectively stopped. Construction employs over 8 per cent of the workforce. With few new housing starts, those jobs are simply gone.
The retreat from debt-fuelled consumption is a long hard journey. This is the rocky path taken by Japan for the past 20 years, and the US and most of Europe for the last five.
Japan lost two decades, propped up by government borrowings of staggering size that prevented collapse yet gained only the cold comfort of stagnation, with an ageing population and rigid economic settings.
The US spent billions – actually trillions – saving their banks. Those banks merely continued their vicious and greedy rent-seeking, now reinforced by a very dangerous sense of entitlement. Meanwhile, unemployment, poverty and economic misery have reached levels not seen since the 1930’s as each month’s statistics show no end to America’s funk.
If Australia continues as it is, this will be our fate too.
We cannot stop land prices falling, but we can limit the damage imposed on those with hefty mortgages. They are your neighbours, your family, your friends.
Adults injured in the depression of the 1930’s spent the rest of their lives collecting string and brown paper, terrified of risk and avoiding debt on any terms. The scars were life-long, crippling their thinking and behavior. Most are dead now. Their example and the lesson died with them.
How may we help?
By lifting the burden of taxation from labor and business, so citizens have money to spend or to clear their debts as quickly as possible. Dr Ken Henry in Australia’s Future Tax System wants to eliminate 125 energy-sapping expensive-to-collect taxes. To pay for this bonanza, he suggested many minor adjustments and two new taxes: a Resource Super Profits Tax and a federal Land Value Tax.
Both measures capture what are known as economic rents – the bounty of nature or the community. These gifts are so valuable they could replace all those 125 repulsive taxes, and more.
Productivity cascades from quality tax reform. Our economy could flourish even through the massive deleveraging ahead.
We now have a weak version of the mining tax in place, which sadly will not deliver the revenue that would enable big tax cuts elsewhere.
There is no sign of a federal LVT – despite the clear benefits and the advocacy of Treasury. The Gillard government lacks the intestinal fortitude to stare down the rent-seekers, even though this failure commits us to become one of the defeated nations we see around us.
Fitch Ratings have just upgraded its ranking of Australia’s federal government debt to AAA. They cited our high value-added economy, strong political, civil and social institutions and flexible policy framework.
Do not doubt Treasury and the Reserve Bank are massively engaged in addressing how to maintain aggregate demand while households refuse to spend and grimly pay down their debts. The first broadside was the Henry Review. Expect to see the bureaucracy push government very hard indeed to implement major structural and tax changes to fight these bitter enemies of prosperity.
Now is the time to use these great national strengths for some heavy lifting, to undertake this tax reform. It would save us from the harsh experience of Japan and the US. And we would protect two generations of our citizens from a lifetime saving string and brown paper.
Richard Koo of the Nomura Research Institute, Tokyo explains the dilemma of ‘balance sheet’ recessions in this paper, which I commend to all.