onsdag 30 april 2008

Food shortage

Give us this day..., originally uploaded by Mr. Kris.

Sharply rising food prices are making politicians sit up and do something. But what?

Pegging prices is one option but this alone does nothing to address the underlying problem. On the contrary, it is a disincentive to produce food and bring it to where it is most needed. But when people are poor and have insufficient purchasing power, what else can be done.

It is said that third world farmers are too poor to purchase seeds. On the face of things, this is strange. Presumably they have got a good price for selling the crops they have just harvested, especially if food is in short supply, as is claimed. Or perhaps the farmers have got a bad price and someone else is cashing in. The temptation is to blame greedy middlemen, but they make nothing unless they both buy and sell, and in selling where they will get the best price, they are channelling the food to where there is most demand. Which may not be the same thing as where is it most needed, but if people are poor they cannot demand.

So there are two question. First, who owns the land on which the farmers are growing the crops? Could it be that landowners are charging too much rent and leaving farmers with insufficient to buy seeds? Second, why are there all these poor people? It is not a natural state of affairs. I suspect they are being prevented from earning a livelihood through exclusion from the means of production. Again, it is an issue of land tenure. But none of the commentators or politicians seems to have noticed.

Keeping Britain's tax regime competitive

WPP, the British media group, is considering moving its tax domicile to the Republic of Ireland, which has a much friendlier corporate tax regime. Sir Martin Sorrell, WPP’s founder and chief executive, said that the move could cut the group’s £200 million tax bill by tens of millions of pounds a year.

In an attempt to prevent more of this kind of thing, the Chancellor, Alistair Darling, has announced the creation of a task force, with executives from the private sector, aimed at keeping the UK’s corporate tax regime competitive.

The move comes after the introduction of tax measures that, critics claimed, detracted from London’s place as the pre-eminent location for business. Darling said that the working group would have a remit to ensure that competitiveness remained at the heart of any future reforms to the tax system.

“I am determined that we do what is necessary to remain one of the world’s best places to do business, and, critically, to ensure that we maintain our strong and resilient economy and our position as the world’s leading financial centre,” he said at a conference at Chatham House in London.

This is another problem which can only get worse. By creative accounting, multi-national companies can easily shift their profits and losses around from one country to another to minimise their tax liabilities. But there is no need for companies as such to be taxed at all, any more than it is necessary to tax individuals as such. Allow companies and individuals to operate tax-free and levy the tax on land holdings, with payment of the tax being a condition of the right to the holding of land title. Compliance is then easily ensured, whilst companies and individuals are free to get on with their business once the land tax has been paid. It could all be very simple. The government would get more than enough revenue, and Britain would be an attractive place to do business. Any other countries that decided to follow suit would enjoy the same advantages, and in this way, tax competition would give governments the incentive to eradicate rotten and outmoded tax systems.

This would tackle the problem at its roots. But it is not going to happen.

Sisters fail in bid for inheritance tax exemption

I was disappointed, though not surprised, to read that the European Court of Human rights had turned down the bid by two sisters living together, for equal inheritance tax treatment as a same-sex couple living together.

Since their property was said to be worth about £800,000 the one sister who outlives the other is not going to be in penury. But that is beside the point. There are aspects of Inheritance Tax which are unjust. Apart from the fact that the seriously wealthy can avoid paying, through the use of various financial and legal devices, the tax fails to distinguish between that part of an estate which has been built up through hard work and that which is merely a growth in land value.

A work of art, for instance, may not even have been valuable when first acquired. It may have been created by the deceased. If, subsequently, it becomes valuable, its possession does not enable the owner to earn any revenue from it, unless, perhaps, by charging people to look at it. And so a tax on ownership of objects of art can only be paid if those who inherit sell them off to raise the money. A business, too, is something whose value has been created by the work of the deceased, and whilst in this case there is a revenue stream, the tax is levied on its capital value. Here is the injustice of Inheritance Tax.

On the other hand, much of the value of an estate tends to consist of land value, and Inheritance Tax functions as a crude form of land value tax, based on capital values (selling prices). There is a certain justice here, since land value is created by the presence and activities of the community. But it is the wrong sort of land value tax. If the right sort of land value tax was in place - one based on annual rental values, and at a high rate - then there would be no need for Inheritance Tax at all, and inter-generational justice would be achieved much more efficiently.

When the idea of Civil Partnerships - so-called Gay Marriage - was first introduced, the conservative elements of the church got all upset about it. Nobody seems to have pointed out that its principal purpose was to get round the effects of legislation affecting property rights. It is a pity that they did not channel their energies instead towards attacking the unjust legislation built in to the whole concept of Inheritance Tax, the unfairness and inconsistency of which has now been brought to light by the present case.

Mervyn King and the greedy bankers

Mervyn King, Governor of the Bank of England, has criticised banks for having caused the present credit problems, blaming it on a culture of greed and recklessness. He in turn has been criticised for letting down the City with these comments, which were described as "unhelpful".

First and foremost, it is better for the City of London's reputation if mistakes are acknowledged. But whilst the conduct of the bankers is the immediate cause of the current problems, underlying these is the set of circumstances in which such conduct is seemingly worthwhile, at least in the short term.

In an electrical or engineering system, positive feedback loops lead to runaway conditions and consequent instability. The banking system interacts with the land market in precisely the same cyclic way, but on the rising phase of the cycle, all seems to be going well and there is nothing to indicate that there could be trouble ahead. In other words, there is no feedback other than the occasional warnings by commentators who get branded as prophets of doom.

To deal with the root cause of the problem it would be necessary to collect, as public revenue, a substantial proportion of the rental value of land through a system of land value taxation. If this was in place, bankers would not be tempted imagine that the capital value of land would just go on rising and rising, and that it was safe to keep on lending to purchasers on the security of the puffed-up selling prices of land.

King should do more than just blame the bankers. The underlying circumstances that put the temptation in their way must also be addressed.

måndag 28 april 2008

What's it worth? Wealth and Value

I sold my old Apple Mac yesterday. I was sorry to see it go as it is likely to become a classic collectors' piece, but I had stopped using it and havn't got the space. I had only a vague idea what it was worth. When they were new they were around £1,200. I got it for £300 and must have spent another £150 on memory and things, so at £190, I was only getting back less than half my money back. In a few years' time it could be worth a lot more. So what was it really worth? That is easily answered. At the time and place it was sold for, its value was the price at which the exchange actually took place.

Now this has an important bearing on the study of economics in a broader context, since the concepts of wealth and value are key. Yet, seemingly, there are no set and agreed definitions, which could explain why economic problems are seemingly intractable. The other day I turned up a book which examined the matter, and included a summary of what the nineteenth century American economist Henrry George had to say on the subject. I will have a look at this and try to summarise what was said.

Little difference between party policies

A radio programme this morning mentioned how much interest in politics has shifted onto personalities. And it was suggested that the reason is that the political parties have policies that are very similar.

This is probably true. It is shocking. Considering the range of problems we are faced with and the fact that we are entering a period of economic and social instability, there is a desperate need for penetrating and original thinking if the country is to survive in good shape.

Perverse Incentive

There is another crop of letters in the newspapers today, complaining about the loss of the 10p income tax band. Of course most of them miss the point, which is that the 0p band should be extended so that nobody earning less than the mininum wage has to pay income tax at all.

And looking more deeply into the subject, it is necessary to understand that income tax is nothing more than a system of perverse incentives - a structure of penalties for working rather than doing nothing. This results in an ongoing annual loss to the UK economy of over £140 billion, to which must be added the running cost of £25 billion. We cannot afford this kind of nonsense, especially since government spending actually needs to rise to pay for people's increasing expectations of public service.

Public debate on tax is almost always confined to how much. Attention needs to shift to a consideration of what is taxed and how.

söndag 27 april 2008

Marxism Lives

I was talking to a young man after Mass this morning, Catholic, who astonished me with his statement that Marx had things right.

Marx certainly had insights which remain of value, but his economics in particular was completely screwy, which has a considerable bearing on why Marxist economies never worked. The theory is fatally flawed in its fundamentals.

Most seriously, it regards land as a species of capital. But Land is sui generis. Both land and capital need to be carefully defined before attempting to analyse economic concepts and trying to form a coherent theory of economic relationships. Amongst the mischief done here is that it diverts attention away from the peculiarly privileged position of land owners in the economy through the mechanism of land monopoly.

The second fatal flaw is Marx's Theory of Value. This says that value comes from labour, and that value is a kind of "congealed labour", representing the sum total of the labour that has gone into the production of the item concerned. On a moment's reflection it is obvious that this does not accord even with everyday experience. This led to the development of a body of economic theory which firmly denied that value and labour were related at all. This is not so. Value and labour are indeed related, in that the value of an item is the labour that someone is prepared to give in order to aquire it - in other words, it is labour SAVED.

The third flaw, which arises from the previous two, is the false idea that equal amounts of labour result in creation of the same value. This is to ignore the value of location, which means that labour can be vastly more productive in one location than another. This observation gives rise to Ricardo's Law of Rent. To be fair, Marx seems to identify this with what he terms "surplus value", but because Marx conflates land and capital, "surplus value" is not the same thing as "economic rent". From this notion have arisen all sorts of destructive assumptions such as that the amount of tax people pay should be proportionate to people's incomes, without regard to whether or how those incomes were earned.

Marx has nothing useful to contribute towards social justice and those who are seeking to make the world a better place need to probe more deeply in their quest for a remedy for their cause of concern.

fredag 25 april 2008

Laissez Faire economics

The term laissez faire was first used in relation to economics by the French Phyiocrats Quesnay and Turgot in the eighteenth century, when they used the motto "laissez faire, laissez allez" to describe the principles they advocated.

This is said to have come from the cry used in medieval tournaments to give the signal for combat; the equivalent in English is "a fair field and no favours".

The Physiocrats believed in freedom of opinion, freedom of the individual and freedom of exchange, and the last of these freedoms, they argued, could only be achieved in the absence of government intervention.

Physiocrats, however, also pointed out the need to abolish all taxes except a tax on the value of land; this is implicit in the concept of freedom of exchange. It is unfortunate that this aspect of laissez faire has been almost totally ignored by both its advocates and its attackers. The tax on the value of land was the "impôt unique" or single tax. Without it, laissez faire is one-legged and cannot work. But, as Chesterton said of Christianity, laissez faire hasn't failed - it has never been tried.

Getting rid of welfare dependency

In a recent report, Nima Sanandaji of the Captus think tank suggests that Sweden should look to the United States as an example in order to cut welfare dependency.

In the UK, attempts to combat welfare dependency have consistently failed. It is an inevitable consequence of the arithmetic of the system. However, the muddle over the 10p tax band suggests that the arithmetical competence of British politicians is shaky. Perhaps it is better in Sweden but who knows?

In Britain, the principle is that benefits are targeted. Consequently, people who fall into the target area, for example through sickness or loss of job, will tend to stay there. The difficulty is that benefits have to be set high enough to enable people to survive at at least a minimal standard, but to receive that same amount in take-home pay incurs an employer in a substantially higher total labour cost. It is simple arithmetic. Typically, every £1 an employee receives in real net purchasing power costs an employer over £1.80. The difference is made up of Employer's and Employee's National Insurance contributions, PAYE income tax and the VAT levied on what the employee spends. VAT levels (at 17.5% in the UK on non-food items) also mean that benefit levels themselves have to be about 10% higher that would otherwise be the case. This is money that is just churned in the system, being paid out with one hand and taken back with the other.

The effect of all these taxes on labour, goods, and services, is that it just is not worth employing anyone unless they are capable of adding a certain minimum level of value through their work. Anyone who is poorly qualified or in bad health will be excluded from the labour market.

And there is another side to this coin. There is a whole raft of low level jobs - mostly service activities like cleaning, which either do not get done at all or are mechanised and done badly, or are sent abroad to so-called Low Labour Cost countries.

So what is the solution? The answer is to look at the arithmetic. Taxes on labour should be reduced, and ultimately abolished, but not by reducing rates of tax. Tax cuts should take the form of increased in tax allowances so that low earners are taken out of the tax system altogether. And it needs to be recognised that taxes on basic goods and services mean that benefit levels have to be high enough to cover these costs, and so these costs need to be cut or abolished entirely. Third, benefit levels should, so far as possible, not be targeted but distributed to everyone, rich and poor alike - a kind of reverse poll tax. This is the so-called Basic Income.

How could such a fiscal system operate in practice? If existing taxes are to be phased out, they need to be replaced by something less damaging, of which the only realistic option is a tax on the assessed rental value of land, known as land value taxation (LVT). Since there are no deadweight losses from LVT, the reform would result in a substantial increase in the GNP; this deadweight loss to the UK economy due to the tax system is about 15% of GDP, suggesting that there is huge scope for replacing child benefits, jobseeker's allowance, incapacity benefit, retirement pensions and the like with a non-targeted scheme - which, apart from anything else would be vastly less costly to administer.

In round figures, there are 29 million in work, 700,000 vacancies, 800,000 jobseekers and 2.6 million on Incapacity Benefit - a high proportion of whom could do some kind of job if it was available worthwhile taking, which tends to bear out the the same point of an ongoing and avoidable loss to the economy in the order of 15%.

Obviously these reforms could not happen quickly but given the will, things could be moving in the right direction in ten years's time.

Mark 3 stock for sale

Intercity, originally uploaded by kpmarek.

Irish Railways has put up 120 of these mark 3 coaches for sale. They are not quite identical to the British ones. The Irish gauge is wider than that in the UK, 5ft 3in instead of 4ft 8 1/2 in, which means that the bogies would need to be re-gauged or possibly replaced. The carriages also have the advantage of plug doors as fitted to the Bournemouth line class 442 stock.

The electrical system is different from the British vehicles, being supplied from generator vehicles which are included in each train set.

This latter feature could prove useful as it would enable any form of traction to be used, such as, for instance, class 66 freight locomotives, without loss of the air conditioning and other on-train services; the vehicles could even operate with steam haulage and for this reason could be of interest to charter companies.

Provided that too many seats are not crammed in (not more than about 70), these are pleasant and comfortable vehicles and someone could end up with a bargain.

In addition to the 120 mark 3 vehicles, also included in the sale are a further 10 vehicles originally built by BREL in 1986 as part of the International Train. These have an improved bodyshell design with larger windows and 9 bays instead of 8 in the mark 3 stock, making them ideal for scenic routes.

torsdag 24 april 2008

St George's Day

England flag at Fan Fest Berlin, originally uploaded by WorldCupBlog.org.

With the increase in Scottish and Welsh autonomy, it is inevitable that there will be stronger assertions of English identity, manifested, for instance, in the flying of the flag. I have difficulties with this. I was not born in England but in Scotland, and spent some of my formative years there. I have no English ancestry. Not being interested in spectator sports, I do not identify with English nationalism as it is exhibited by football fans and the like. I don't feel it is anything whatsoever to do with me. It leaves me feeling negative. It is unfortunate too, that English emblems have been hijacked by the political right.

There are many values I regard as British that I feel able to take a pride in, but I have never thought of these as peculiarly English. Whether the best of English values can be reclaimed remains to be seen but the task has to be done if many of the country's inhabitants are not to feel excluded, and, indeed, foreign. If I am going to be a foreigner, there are better places to do it than England, and the sight of all these flags is one of the things has makes me feel footloose.

onsdag 23 april 2008

Chancellor should resign over 10p tax Balls-up

It would be astonishing if the then Chancellor, Gordon Brown, actually intended that low paid workers should end up paying more as the result of abolishing the 10p tax band. And his successor, Alistair Darling should have picked up the potential problem as soon as he took over. Which makes things all the worse.

It would have been the simplest matter to test out the effects of the change on a spreadsheet. The Chancellor presumably did not think of asking his Treasury advisers to do so, and, probably that those advisers failed to suggest that the figures be checked out - unless Darling routinely ignores them.

However this has come about, there is gross incompetence at the highest levels and the Chancellor, and possibly some of the Senior Treasury staff, should be sacked. The most important financial decisions affection the country cannot be left in the hands of people who are numerically illiterate.

10p tax rate Balls-up

Aren't those who are criticising the Chancellor for abolishing the 10p tax rate attacking the wrong target?

The 10p tax rate never did make sense - it is probably more trouble than the amount collected is worth. Tax allowances should at least equate to what someone on the statutory minimum wage can earn in a 40 hour week. This might mean a higher tax basic rate once the new threshold was reached, but very low earners would end up paying no income tax at all, and the majority would pay about the same in total.

But the underlying problem is that Income Tax in practice is a soak-the-poor system. It is also a very expensive one, with annual running costs of around £25 billion and causing a astonishing annual deadweight loss to the UK economy estimated at £138 billion - this being the value of production that would otherwise occur were it not for the disincentive effect of the tax system itself.

The present tax system evolved 60 years ago when most people were in stable employment, often for large organisations. In these days of "labour market flexibility", globalisation, tax havens and electronic transfer of funds, it is unfit for purpose, obsolete and unable to raise the amount of revenue needed to satisfy present-day expectations of what government should provide. Reform is overdue.

Forecast housing bust nine years ago.

I found this letter of mine by accident - it was published in the Observer on Sunday September 12 1999.

"The article on property prices (News, last week) talks about a house price boom. It is, of course, a land price boom. The value of the bricks and mortar hardly changes. Nobody has been asked to increase the value of their fire insurance cover as a result of this boom, which is purely a feature of the current phase of the land market. Like every previous land price boom, this one will end in a crash."

It took nine years in the end, but until a few months ago all the pundits were forecasting a "soft landing".

måndag 21 april 2008

The £50 billion bank bail-out

The Bank of England's £50 billion bail out has been made to sound as if the tax payers will be protected from loss since the value of the mortgage debts will be discounted in the exchange for government bonds - the so-called haircut.

But the aim remains that of pumping more money into the banking system so that mortgage lending can get going again. But it is an excessive supply of money which has pumped up housing [housing land] prices in the first place. These prices need to be allowed to come down to realistic figures.

But what is a realistic figure? Something like the market rental value divided by the market rate of interest, expressed as a fraction.

Since market interest rates are around 6%, capital values should be about 17 times annual rentals. On that basis, a house let for say, £1500 a month should be worth about £310,000, but at the top of the market such a house would have been sold for about £380,000. This indicates that house prices need to fall by something like 20%.

All that the Bank of England is doing by making money available for lending is to keep the bubble pumped up for longer. But it is still bound to burst. Only, like a volcano that has not erupted for a very long time, the effects will now be much worse and the damage greater.

There are two likely events to follow. The first is inflation, probably at 1970s levels. The second will be recession. When the land market has progressed to such a stage of unreality, such a recession is inevitable. The bail-out is just putting off what is unavoidable.

With the coming inflation, if you have savings in sterling, then they are not safe. I used to be against the Euro in principle but warned those who were keen on keeping the £ that it was not in safe hands. The first major crisis has unfortunately proved me right on the latter count. But trouble with the Euro could still happen as the problems in Spain, Italy and elsewhere take their toll. Seemingly, however, the European bankers are, so far, prepared to take a tougher stance to protect the value of the currency. But when the £1 drops to the same value as the Euro, the UK will not be allowed to join as they will not want to absorb the UKs losses by taking on the devalued currency.

10p tax rate row

The government is now coming under attack for abolishing the 10p income tax rate. It turns out that a significant number of low paid workers will end up worse off under the change. How the proposal get this far? I wonder if it is no more than an effect of mathematical illiteracy. Did nobody test the effects of the suggested changes on a spreadsheet?

Really, the 10p tax rate never did make sense - it is probably more trouble than the amount collected is worth. Tax allowances should equate to what someone on the statutory minimum wage can earn in a 40 hour week. But this would mean higher tax rates once the threshold was reached. Most low paid workers would still end up with about the same, but middle England would be annoyed and the focus groups must be heeded.

The underlying problem, however, is that, from any point of view, the taxation of wages is a thoroughly bad method of raising public revenue.

Incapacity benefit scroungers?

This is one of those subjects the right-wing tabloids like to run. "People pretending to be sick living at the expense of hard-working families" is the line taken.

But as an article in the FT magazine explained, the figures will not stack up. Many, possibly most, of the people on Incapacity Benefit are capable of doing some kind of work. But most of them are genuinely in ill health, sometimes intermittently, and the the whole structure of the benefits system makes them reluctant to look for work because if their health deteriorated, they would have to go through the whole business of having to apply for the benefit again.

Scrutiny of those on Incapacity Benefit may well result in getting the claimants onto the Jobseekers' Allowance instead, especially if, as has apparently happened, people capable of turning up on time for their medical examination are deemed fit for work!

But what happens then? There were 678,000 job vacancies in Britain in February and 795,000 on the Jobseekers' Allowance. If many of the 2.6 million on Incapacity Benefit are forced onto Jobseekers' Allowance, look forward to a huge sudden rise in the unemployment statistics. That will be embarrassing for the government.

söndag 20 april 2008

Dolphin nonsense

, originally uploaded by MuhammadSarwar.

What became of common sense? I read yesterday about two men being prosecuted for teasing a dophin in Folkestone harbour.

Personally, I think the men were being stupid, but if the dolphin did not like it, the animal would either have given the men a hard and painful shove with its beak or else swum off. The dolphin was in charge of the situation and must have thought it was a bit of fun and gone along with the game.

Who was it in the Crown Prosecution Service that decided this was a case worth pursuing? Is there a shortage of genuine crimes to be dealt with?

fredag 18 april 2008

Swedes like their welfare system

National differences count. A new survey shows that people in Sweden are willing to accept higher taxes to finance it. According to a study commissioned by the Swedish Association of Local Authorities and Regions (SALAR), 90 percent of Swedes prefer high-quality social welfare over lower taxes. And nearly as many Swedes, around 80 percent, are willing to pay higher taxes for better healthcare, schools, and care for the elderly.

“It shows that there is great confidence in our sector’s work,” said Anette Åkesson of SALAR’s welfare financing committee, in a statement.

“At the same time, we’re facing a situation where fewer are paying for more services, and where expectations for welfare services continue to increase steadily. That means that we must raise taxes by an excessive amount if we don’t find alternative and complimentary financing options,” she added.

SALAR expects Sweden’s population to add 870,000 residents by 2030, of which only 75,000 will be active in the workforce. With higher demand and rising costs for social services, combined with fewer paying into the system, SALAR estimates that a 10 percent increase in Sweden’s already high tax burden is needed to finance the country’s welfare state in 2030. And English language article on the subject can be read here
Swedes willing to pay higher taxes

If the country's welfare system is to continue, alternative sources of revenue are required. Taxes in Sweden fall primarily on wages, goods and services, as elsewhere in the developed world. The fundamental problem with such taxes is that they are self-destructive: the taxes consume their own base and overall levels of more than about 50% of GNP are not sustainable with present forms of taxation. This is particularly true of a country like Sweden, where there are huge variations in the geographical advantages and disadvantages of different parts of the country. In the south, and around Stockholm and Göteborg, this is reflected in high land values and consequently high house prices and commercial rents, and long waiting lists. But much of the rest of the country is only just above the margin - in other words, economic activity is only just viable. If taxes are shifted from labour onto land, this increases the geographical area in which business can flourish, as businesses in marginal locations are relieved of tax.

Although Sweden does not have the pressures of concentration that are found in the UK, Germany and France, such a switch would still be beneficial, as it would reduce pressures on the three conurbations of Malmö, Göteborg and Stockholm. It would also release a significant number of people at present engaged in running the system, as a land value tax system is easy to operate and makes use of the cadastral information which, in Sweden, is already routinely collected.

The ability to work without having to pay tax would also get rid of the perverse incentive built-in to income tax, which discourages people from working. At the bottom end of the income range, this would reduce welfare dependency and improve integration of immigrant communities where people are inevitably able to earn only low wages, at least initially. Without the need for them to pay tax, they would be more likely to work and contribute to the economy. The same tax shift would also discourage entrepreneurs and other high earners from moving abroad to avoid their tax liabilities.

Read about land value taxation here

torsdag 17 april 2008

It gets worse

Gordon Brown may not be to blame for all that has gone wrong with the economy over the past nine months, because things would have been little different, whoever was in power and the same problem has occurred in many countries.

But the government's handling of the situation is certainly going to make matters worse. The latest proposal is to swap mortgage debt for government bonds. This will leave the taxpayer with the losses if things go wrong. But they definitely will go wrong, because the economy is slowing, defaults will increase, the bottom will fall out of the housing (in reality, land) market and the collateral for this mortgage debt will not be worth its present book value. Which will mean that the government will end up having to print money to cover it all - in other words, we will get severe inflation, on top of the inevitable severe recession.

If the government leaves the private sector to suffer the consequences of its own stupidity, at least the inflation can be avoided.

The least painful way out is to go "cold turkey" and get things over as quickly as possible.

onsdag 16 april 2008

Should Brown be blamed for all the trouble?

Yesterday's Daily Express ran its front page on the idea that Gordon Brown was to blame for the unfolding financial disaster. It is convenient to look for a scapegoat, but the crash of 1992l took place under the Conservatives and there is no reason to believe that things would have been different under any conceivable UK government. So in a sense it is stupid to blame the former Chancellor. He just happened to be occupying 11 Downing Street during the period in question.

At the root of the problem is the defective economic theory which guides politicians and their advisors and gives them no plausible means of accounting for economic cycles. Accepted economic theory has no room for the idea that these cycles might be due to the interaction between the land market and the banking system. So the danger was never forecast. Since there was no explanatory mechanism, nobody had the foggiest idea how the collapse might be forestalled.

There is also the role played by a lot of other people. Those who borrowed money on the equity of their houses in order to pay for foreign holidays or imported consumer goods - which resulted in large outflows of sterling and ultimately the inflationary drop in the exchange rate now taking place. And of course those who lent money to people, when there was a significant chance that they would not pay it back, have also helped to bring about the situation. And not least, journalists are to blame for not helping their readers to understand how the system works. Presumably, they, like the government's advisors, are just regurgitating the economics they learned at university.

There is good information available on the workings of the economy, available to those that can be bothered to keep on asking questions until they receive convincing answers that are capable of standing up to scrutiny. But intellectual laziness means that most people are satisfied with the same old dubious explanations.

Following in the intellectual tradition of the physiocrats will deliver both explanations and means of preventing the problems we are now experiencing, but they have long been regarded as interesting but of no consequence today.

The failure is a national one and has taken place at all levels of society. And so it is not unjust that the pain should be equally widespread.

A bit of light relief

This LMS class 5 seems to be getting away from a stop at Nuneaton station with remarkable acceleration, and with 8 mark 2 coaches - around 280 tons - and in the rain as well, so the track would have been slippery.

I wonder if the driver is usually on Voyagers, thought he would try the same thing with the steam locomotive, and found that he could. These machines can deliver much more than their rated power for short periods which is why they can get a train away from a station so quickly. The boiler serves as an energy reservoir.

Bearing in mind that a steam locomotive can be run on anything that will burn, isn't the time approaching when they should be bringing them back into service?

måndag 14 april 2008

Conservative economic folly

The Conservative shadow chancellor, George Osborne, has proposed that the banking crisis should be solved by swapping the bad debt for government bonds. This leaves the taxpayer with the risk.

I would have thought that ideas like this would have emanated from the interventionist left. It does not give any confidence in anyone's ability to sort things out.

If that is the best that opposition politicians can come up with, my advice is to flee the country and take all your money with you. It is not safe in the hands of idiots who do not know what they are doing.

Faith in Gordon Brown

Faith in Gordon Brown, on the other hand, has slumped, according to the figures. Why the man wanted to become Prime Minister after ten years living next door as Chancellor of the Exchequer is a mystery. Now he has got the coveted fruit it has turned bitter for him.

It is strange that as Chancellor, he did not see the storm clouds brewing and make a dash for the House of Lords. That at least would have been a way of ducking the opprobrium which he has deserved and is now heaped upon him.

For most of his term as Chancellor he was in the lucky phase of the economic cycle and could quite unjustly take the credit. Now he is being made to take the blame. But at this stage of the cycle there is bound to be pain and no Chancellor could do better - the only question is how to manage the pain - a task which they look as if they will do in a way so as to spread it around as much as possible.

The boom and bust were indeed avoidable but the time to have taken action would have been within a couple of years of taking office, no later. The action would have been to reconstruct the tax system so that it fell primarily on the rental value of land. If correctly implemented this would have prevented the land price bubble which was the precursor to the bust.

However, Brown's bright young advisor, Ed Balls, having learnt economics at Oxford, would not have known the theory that underpins this measure. From the perspective of economics as currently taught within academia, there is no rationale for such a reconstruction of the tax system.


Hocus Pocus, originally uploaded by seadipper.

Tony Blair, newly received into the Catholic Church, is considered a great catch by some. He has set up an organisation called the "Faith Foundation" and gave a talk about it recently in Westminster Cathedral. The idea is that people of all faiths should be able to get along nicely together.

I like this idea of abstract faith. It is completely inclusive. You can have faith in bags of stones and feathers, trolls, chicken's entrails, Wicca, the Man in the Moon, the Duke of Edinburgh, lumps of stone, the US $. The possibilities are endless. What diversity shall we enjoy and how well shall we all get along together in a spirit of mutual understanding!

Only somehow I think the main beneficiary will be the one depicted with horns and a spiked tail.

söndag 13 april 2008

Rising food prices

The reasons for rising food prices need to be clarified. One cause is that land which could be used to grow food is being used to grow crops for conversion into transport fuels. The other is that food that people could eat is being fed to animals for meat production.

Put plainly, to move around by sitting in a vehicle that weighs the best part of a ton is an evolutionary dead end. The only viable and sustainable form of individual personal transport is human powered. Now that people in India and China are getting into cars, this plain fact will quickly become apparent. If we want to travel at more than bicycle speeds, it can only be done by collective transport such as bus, train, tram or boat. And even then, speeds will have to be limited to an optimum figure. High speed trains will be out of the question and unnecessary anyway, as the competition from cars and aircraft will have largely dropped out.

Seeing that Adolf Hitler was a strict vegetarian, I am suspicious of over-zealous advocacy of meat free living. Personally I have nothing against meat eating in principle, provided that the animals have had a natural life and slaughtered as humanely as possible. But when food is fed to animals for meat production, between 60% and 90% is wasted due to the poor conversion figure. Some land cannot be used for crop production, or is used for things like forestry. Grazing animals is an efficient way of utilising such land. That is good farming practice. Pigs, for example, used to be allowed to roam free in forests and would be rounded up once a year. Chickens used to be fed with kitchen waste and would produce eggs now and again. This is very different from keeping the animals indoors and feeding them with sacks of goodness knows what. That is not farming. In good farming practice, there are no more animals that the land can normally sustain. If food has to be bought in other than occasionally, there is something seriously wrong.

For the consumer, it means that meat and dairy produce should be a small part of the diet. Which in any case makes for a healthy balance.

fredag 11 april 2008

The Scandinavian Model

A letter from a US academic published in the FT a few days ago suggested that the Scandinavian model of the economy had features worth emulating, in particular, the greater participation by the governments in those countries.

People often look to Scandinavia as a social, political and economic exemplar and argue that Scandinavian practices should be adopted elsewhere. This suggests a lack of knowledge and understanding of that part of the world, by which, presumably, they mean Norway, Denmark, Sweden and Finland.

In the first place, the four countries are very different, having had different histories. The whole region is insignificant in terms of population; to put this in perspective, there are probably nearly as many people living inside the M25. All of the countries were late to industrialise, at the end of the nineteenth century, and effectively avoided the age of coal and steam power, going direct into manufacturing of products based on electrical and internal combustion technologies.

Finland has a different language and culture from the other three. It was long occupied by Sweden and from 1809 it was a Grand Duchy of Russia. Sweden, the largest, with a population of around 9 million, was a major colonial power until the beginning of the eighteenth century, after which it had to re-invent itself and has not been involved in a major war for about 200 years. There was major emigration due to famine in the 1880s to the United States, but for the past 40 years Sweden has seen successive waves of immigration, to the point that immigrants and their children now make up around 15% of the population. There is a strong tradition of neutrality and mere talk of joining NATO will bring people on to the streets. Norway was first part of Denmark and, after the Napoleonic wars, of Sweden. Norway did not become independent until 1906. It, and Denmark, were occupied during World War 2. Norway is strongly supportive member of NATO, with troops in Afghanistan. The small population enjoys the benefits of the substantial oil revenues which go to the government. Denmark is closely aligned to Germany in its economy and culture, though being a "small" language has particular effects due to the widespread use of English.

The reasons why these societies appear to work well are complex, but perhaps the most important is simply that there are relatively few people with a lot of space to move around in. This means that, for example, outside the three main cities, land values are very low, making housing inexpensive, so that people are not paying out a huge proportion of their earnings in mortgages to cover the amounts paid to the previous owners for plots of land - what, in the UK, is complacently referred to as the "housing ladder". Without this relentless pressure, first, there are fewer fat cats living off property deals and second, life is just easier as people can afford to be relaxed.

But because of these fundamental differences, there is virtually nothing that can be translated from Scandinavia to, for example, Britain, in the expectation that it will work. There is no harm in looking at what happens in other countries, but people need to realise that individual countries need to analyse their own situations and work out their own solutions.

More on the so-called housing bubble

The housing bubble is essentially a land price bubble, since the value of buildings is relatively constant and depends on construction costs. The purchase of a piece of land is the purchase of the future rental income stream, which is the value of the advantages of the particular location. From this point of view, it is in principle much like the purchase of an annuity.

if that were all there was to it, land prices would settle at a level such that the ratio between rental value and the the land price was much the same as the general interest rate, which is usually around 5%. There would be no cyclic bubbles. But rental values have a tendency to rise, and so the expectation of future rentals is factored in to land prices. Thus yields from land tend to be lower than yields from other investments.

At the bottom of an economic cycle expectations are low. But as the economy pulls out of recession, expectations of rental income growth start to rise and land prices with them, as could be seen about ten years ago. As time goes on, speculators, seeing land prices on a fast-rising trend, pile into the market and push them up further, thereby depressing yields well below the general interest rate.

A positive feedback loop then takes hold. Lenders, who see land as solid collateral for their loans, become increasingly willing to lend money for land purchase (usually property purchase, but it is the land element of the property that is behaving according to this description). This drives up land values still higher and depresses the yields still further.

Eventually, yield rates become so low that loans become increasingly difficult to repay out of the earnings from the land investment. Things are then on the point of bursting and the slightest disturbance will prick the bubble. In the latest instance, the initiator was the sub-prime loan crisis last year.

The land price bubble would be of little more signficance than the seventeenth century tulip price bubble or the dot-com bubble if it were not that land is one of the factors of production. A few speculators would be left nursing their losses but that would be all.

But because everyone's home, and all productive capital, stands on plots of land, any disturbance to the land market will have deep and prolonged effects as resources are held off the market. This is why the consequences will, as with all previous land-based bubbles, continue for several years.

The system can be compared to like an electrical circuit with a positive feedback loop. Such configurations are liable to oscillation. Data going back to the start of the nineteenth century points to a periodicity of around 18 years due to this interaction between the banking system and the land market.

As with electrical systems, the way to prevent unstable oscillations is to introduce an element of negative feedback. One way to achieve this would be for governments to collect the rental value of land and use it as their principal source of revenue, instead of existing taxes on labour and capital. Speculative trading in land would then be pointless as there could be no expectations of higher rental income streams. Moreover, banks, unable to employ land as collateral for their loans, would have to devise other means of operating profitably. They might, for instance, charge directly for more of their services. Loans would have to be made primarily on an assessment of the likelihood or otherwise of their being repaid.

But as this is one tax reform that is not going to happen, it would be prudent to pencil in the date of the next crash, around 2026.

torsdag 10 april 2008

Stand-by for a wave of inflation

The Monetary Policy Committee's decision to drop the interest rate to 5% will give another shove to inflation, as the £ drops further in the foreign exchange markets. The £ stood at over €1.40 less than a year ago. Now it is down to €1.25 in a slide which has mostly occurred in the past four months and looks set to continue.

It is a desperate attempt to keep the property bubble inflated, in order to keep the credit-fuelled consumer boom running. As the most, it will put off the collapse for a little while, but the decision means that the UK will probably suffer 1970s levels in addition to the inevitable recession. The immorality of the policy is that the burden will now be pushed onto the thrifty and prudent people who had no part in bringing about this state of affairs and gained nothing from it.

A few firms will benefit from the export opportunities but the main effect will be inflationary, so expect industrial trouble as people find the real value of their pay packets shrinking.

It is interesting that the Daily Express has just noticed in its headlines today that the fall in the £ will push up the price of foreign holidays. Strange they did not pick it up months ago.

The inflation policy, for that is what we are being given, will only delay the inevitable recession, but will just push the burden on to those who built up savings.

onsdag 9 april 2008

The end of the free market paradigm

Marxism was discredited by the end of the 1980s. The so-called ”Capitalist system” seems as if it will not outlast its former rival by more than twenty years or so. It is interesting how those who were arguing hardest for leaving things to the market have mostly gone silent in the face of desperate attempts by the US and British governments to prop up the private banking system now that it has gone to the bad.

How long will it take for the realisation to dawn that neither system works in people’s interests? And what happens after that?

Sustained economic growth

One concern that is surfacing as a result of the credit crisis is that growth will slow. I have always wondered what it was that we were going to grow into? The reality seems to be more pollution, more waste, and an increase in traffic to the point that it is difficult to walk round many towns, so clogged with cars have the streets become.

By “growth” is meant the Gross National Product, a figure which has replaced the balance of payements as the target to which government economic policy is aligned. But GNP has nothing whatsoever to do with people’s well being; indeed, the opposite is true, as it encourages policies which lead to all sorts of developments which damage the environment and lead to a decline in real wealth. Unfortunately, good environments do not carry a price tag that is measured by the statistics, and so it is deemed to be of no value and ignored, or fought over by what are seen as marginal pressure groups.

In reality, people do put a price tag on the environment: it is measured in land values. A view of wild nature, or an urban park, or a clean river, or a quiet location, have values which turn up as enhanced land values. Conversely, a rubbish dump, or a noisy or polluting factory, or a motorway, will depress land values. This is not the whole story, of course, because a noisy polluting airport or a motorway junction will enhance land values in and around the areas served, and these things are necessary if we are not content to live in rustic simplicity. And so land value also measures the summation of benefits and disbenefits of things that are both good and bad, and in this way, if they were measured systematically, the data would help politicians to make decisions when conflicting requirements had to be balanced.

Speaking with forked tongues

Politicians, journalists and other experts have go on for the last dozen years about the need for “affordable housing”; in other words, they think housing is too expensive. Now there is another need – to support house prices to prevent a collapse. Often, the same individuals are arguing for both things at the same time. Obviously this just isn’t possible, so why do they do it?

But why is there this anxiety to keep house prices up? Now, the talk in the newspapers is about the need to drop interest rates in order to prop up the present inflated house prices – really, the price of the land that houses stand on. To put it more bluntly, they do not want to see the present land price bubble deflating. I thought the terms of reference of the Monetary Policy Committee were to contain inflation within set limits, not to keep speculative bubbles pumped up, but the economy, we are told, depends on it? How so? The house price bubble has helped to boost demand by enabling people to run up debts by borrowing against the equity in their houses. In reality, it is the equity in the land their houses stand on, but in any case it is, or was, a bubble value created by the willingness of lenders to hand out money to people without asking too many questions. Isn’t there something fundamentally wrong with an economy which relies on ever-increasing bubble values to survive?


I came across a nasty antisemitic video about usury recently, claiming at it was all because of the Jews and blaming them for causing the present economic troubles. It included a list of major banks which it claimed were mostly run by Jews.

The churches used to inveigh against usury but seem to have forgotten its significance. But the market in money is like a market in anything else, and if it is in short supply then people will pay to borrow it. There is something else going on underneath which creates the environment in which usury can flourish. If the conditions are present, then the thing will happen. Somebody will inevitably cash in on the opportunity.

The most important condition for usury is, I would suggest, the monopolisation of land through land enclosure, combined with the failure on the part of governments to collect the rent of land as public revenue. This causes the stock of money to flow towards landowners. It’s no use blaming any particular group of people. Even if they were all “disposed of”, which is probably what the makers of the video would want, the usury would continue. Perhaps putting blame on others could be a useful tactic to adopt by those who create and really benefit from the conditions in which usury can flourish.

Swedish welfare system under threat

This is a translation of the blog below, which applies to tax and welfare systems around the world.

The Swedish welfare system is under threat because tax levels are already too high and it is becoming increasingly difficult to fund. It is a good system, but a costly one. Many people cannot earn as much as they receive in benefit. People who work may end up worse off. Every year the cost to the government goes on rising. If people on benefit go to work, they can end up worse off. Why work, they ask themselves? They should not be blamed if they will not work. It is said that 20% of Swedes are out of work, but the official figure is only 5%.

It is the same in the UK. Many people on sickness benefit could work. Some people who receive benefit work at the same time. Fraudulently. They do jobs like painting, carpentry, cleaning, and so on. Or sell drugs. Or go in for crime. The government tries to prevent the fraud but it is an impossible task.

There are bigger swindles that are legal. And worse crime, for example financial crimes that the police can hardly understand. In Germany, rich people send their money to Lichtenstein to avoid tax. In the UK, people deposit their money in Jersey or the Cayman Islands and pay almost nothing. People can live in Monte Carlo and commute to their work in London three times a week. Then they are exempt from tax. But women who work as cleaners and make only £100 a week will be sent to prison if they do not declare it. And if they do, they will get less then their benefit payments. It is unjust. The system is completely stupid.

Really, the main problem is the tax system. It is defective. My uncle is an accountant. He knows all about how to dodge tax and pay almost nothing. In his office there is an entire wall with shelves of books about how to avoid tax. But his clients are very wealthy. They are not cleaners. They are obliged to pay everything. They avoid nothing. or get sent to prison. Why do we have such a crazy system?

The richest men in Sweden is Ingvar Kamprad, founder of IKEA. But he does not live in Sweden because of the Swedish tax system. He lives in Switzerland instead. My neighbour's sister also lives in Switzerland. She is seriously rich. She owns a large farm in the West of England. And woods. And large flats in Central London. And a flat in Switzerland. She and her husband go hunting in their woods and skiing in Switzerland. I expect they pay almost nothing in tax to the UK government. Their office cleaner probably pays more.

What can be done? Nothing. Because the tax system is a boring thing to talk about. So people will not think about it. It causes many great problems. Such as the present financial crisis.

måndag 7 april 2008

Sveriges välfärdssamhället hotas

Sveriges välfärdssamhället hotas därför att skatterna redan är för höga och pengarna räcker inte. Systemet är bra men det kostar för mycket. Många personer kan inte tjäna så mycket som de får a-kassa. Varje år kostar det regeringen mer. Om de arbetslösa arbetar, blir de ofta fattigare. Varför arbeta, frågar de? Man kan inte lägga skulden på dem om de inte vill arbeta. De lär vara så att 20% av svenskarna är arbetslösa men enligt regeringen är det bara 5%.

I Storbritannien också. Det finns många som är sjuka men kan arbeta. Och många som får a-kassa och arbetar också. De fuskar. De arbetar som målare eller snickare, städerskor och så vidare. Eller säljer knark. Eller går in för brott. Regeringen försöker att hindra fusket men verkligen är det omöjligt.

Det finns större fusk men det är legalt. Och större brott, till exempel finansiell brott som polisen knappt kan förstå. I Tyskland skickar rika människor sina pengar till Lichtenstein för att slippa skatt. I Storbritannien skickar man pengar till Jersey eller Caymanöarna och betalar nästan ingenting. Man kan bo i Monte Carlo och pendla till sitt arbete i London tre gånger i veckan. Sedan är man skattbefriad. Men kvinnor som arbetar som städerskor och bara tjänar ett hundra pounds i veckan skickas till fängelse om de inte deklarerar. Och om de gör det, för dem mindre än sin a-kassa. Det är inte rättvist. Systemet är helt dumt.

Egentligen, det största problemet är skattsystemet. Det är felaktigt. Min farbror är revisor. Han vet allt om hur man kan slippa skatt och betalar nästan ingenting. I sitt kontor det finns en hel vägg med bokhyllar fylldes av böcker om hur man kan slippa skatt. Men hans klienter är mycket rika. Inga är städerskor. De tvingas att betala allt. De slipper ingenting. Eller de skickas till fängelse. Varför har vi ett sådant dumt system?

Den rikaste manen i Sverige är Ingvar Kamprad. Men han bor inte i Sverige på grund av Sveriges skattsystem. Han bor i Schweiz istället. Min grannes syster bor också i Schweiz. Hon är väldig rik. Hon äger en stor gård i Västra England. Och skogar. Och stora lägenheter i Londons centrum. Och en lägenhet i Schweiz. Hon och hennes man jagar i sina skogar och åker skidor i Schweiz. Jag tror att de betalar nästan ingen skatt till brittiska regeringen. Och det är helt legalt. Kvinnan som städar deras kontor betalar mer, kanske.

Vad kan man göra?

Man kan inte göra någonting. Därför att skattsystemet är tråkigt att prata om. Därför att människor vill inte tänka på det. Men det är viktigt. Det förorsakar många stora problem. Till exempel den nuvarande finansiella krisen.


Pity the Monetary Policy Committee

The Monetary Policy Committee is primarily charged with the task of keeping inflation within strict limits. It has done this by adjusting interest rates. In fact, that is all it can do. This apparently worked well until recently because the economic climate was benign. I say "apparently" because house prices have been rising way beyond the rate of inflation, fuelled by easy lending to people whose ability to repay their loans has not always been all that solid.

Eventually and inevitably the bubble burst and now the system is being put to the test. If the interest rate is reduced this week it will cause the UK pound to continue to weaken, which will bring further inflation in its wake. If the MPC puts it up, this will help to contain inflation but accelerate the recessionary trend.

Whatever the MPC does will be wrong. What can one conclude? That interest rates alone are not an effective means of regulating both the economy and the stability of the currency. This points yet again to the inadequacy of present economic theory, which gives policymakes no effective means of understanding what is going on and leaves them unable to deal with things when they go wrong.

Creating jobs

In support of the proposed programme of new nuclear power stations is the claim that it will create 100,000 new jobs.

Now there are all sorts of reasons why the UK should, or possibly should not, go ahead with building new nuclear power stations, but job creation is not one of them. The an argument is often used in support of new projects of all sorts. People need to be able to earn a livelihood for themselves and their families. But you and I normally seek to get what we need with the minimum of effort. Work is something that represents energy expended - time and energy consumed. It could be argued that, for instance, an oil spill creates jobs for those who have to clear it up. This is obviously nonsensensical, but it is the same job creation argument based on the same logic. And so when politicians claiming that some project will create jobs, it should be remembered that these are human resources consumed. Beware of the argument. Underneath it is the false "lump of labour" theory, that there is only a fixed amount of work to go round. In reality, since human desires are unlimited, the amount of work that needs to be done is unlimited. If there are jobs to be done and people available to do them, whilst at the same time there are people sitting around doing nothing and living on benefit, in poverty, it is time to look at the underlying causes of this absurd state of affairs.

10p tax rate abolition row

The Chancellor's decision to abolish the 10p tax band has provoked a rearguard action from MPs who have noticed that the changes will leave people on low earnings paying more. Their criticism, while justified, is missing the point.

Income tax is a bad way to raise public revenue.

Apart from being expensive and vulnerable to avoidance and evasion, it involves collecting information about individuals and their families and is an invasion of a fundamental right to privacy. Built into the system are perverse incentives, since it is effectively a fine on employing people to do work, because it forms part of the cost of employment. It was never intended to be the principal source of government revenue and thresholds were once high enough to ensure that only those with high incomes were liable for the tax. But because those thresholds were not increased to take account of inflation, even the poorest eventually became liable for income tax, which thus forms part of the so-called poverty trap.

But income tax is obviously not going to be abolished overnight, even if the goverment accepted that it needs to be replaced. As a basic principle, however, thresholds should be set so that no-one receiving the statutory minimum wage on a 40-hour week should pay either tax or national insurance. At a stroke, this would get rid of a major component of the poverty trap, and so make it easier to get unemployed people back to work. For earnings above that threshold, it is inevitable that tax rates will have to be substantially higher than they are at the moment, and possibly more than 30%. It would also be advantageous if the higher rate was set so that not more than 10 or 15% of people paid it, which again might mean it needed to be higher.

None of the above suggestions are of course any more than tinkering with a bad system but they would at least reduce some of its worst effects whilst a better alternative was worked out and put in place.

lördag 5 april 2008

Proposed new town at Ford - exciting opportunity or recipe for an environmental disaster?

Missing link, originally uploaded by seadipper.

This is Ford, Sussex, the site of one of the proposed new towns. It lies at the junction between the railway lines from Brighton to Portsmouth and from Horsham to Littlehampton; the view is looking roughly to the north-east. The dotted red line is the missing link which would allow trains to go from Brighton to Horsham without going into Littlehampton and reversing, which would be useful when the main London to Brighton line is closed for engineering works. To the left is the River Arun, which is tidal at this point.

The site obviously well provided with rail connections and it is also close to the A27 coast road. But it is low-lying and on a flood plain. However, as long as the liability to flooding is taken into account in the design, it could be an exciting new development, perhaps with canals and other water areas both ornamental, recreational and with moorings for boats. But it will not work if it is filled up with affordable houses built down to cost limits - that will quickly degrade into a slum.

fredag 4 april 2008

Capital Gains Tax rise avoided

This morning's news was full of indignation about the fat cats who have taken action to avoid the increases in Capital Gains Tax, which start with the new financial year after 5 April.

But if people have worked hard and built up the value of their businesses, what right does the government have to any of the fruits of their hard work? No right at all, I would suggest.

If, on the other hand, the increased value is primarily an increase in the land value element of their business assets, then that growth has come about not through any effort by the entrepreneur but through the presence and activities of the community. By rights, that value does indeed belong to the community that has created it.

However, without a competent system of land value taxation in place, that unearned value stays with the owner, leaving the government short of funds, and because politicians and their advisors seem unable to understand what is going on here, they resort to grabbing the products of people's initiative, intelligence and hard work.

There is something wrong here, is there not? And surely it is not the fat cats who should be blamed but those who argue for and perpetuate the present tax system?

torsdag 3 april 2008

Negative Equity panic

The newspapers today are full of talk about negative equity. But interestingly, there was a warning of a major house price fall in 2003.

Writing in The Guardian in February 2003, we read that "Andrew Oswald, professor of economics specialising in the housing market at Warwick University, has predicted that negative equity will start in London and spread out across the country, just as the boom in house prices started in the capital and eventually reached the provinces...

"Prof Oswald has said he expects house prices to fall by 30% between the middle of this year and the end of 2005. This would leave at least 500,000 people with negative equity."

He was right in principle, but as we now know, the boom had four more years to run, which seems to give credence to the notion of an 18 year cycle. Whether there is any truth in that is another matter, but the bust will be far deeper than it would have been had the collapse occurred in 2005. Yet until less than a year ago most "experts" were talking about coming out of the boom with a "soft landing". It now looks as if the worst recession since 1929 is on its way.

onsdag 2 april 2008

Protests at empty building tax

The property industry is making a final attempt to get the government to abandon the tax on empty commercial buildings, claiming it could prevent development and lead to urban wastelands.

The tax, which begins today, will force owners to pay business rates on unoccupied buildings. The threatened "constructive vandalism" would lead to a repeat of the de-roofing epidemic which occurred during the last recession. Whether property owners would get away with it this time is another matter, because of the recent anti-tax-avoidance legislation, which, logically, constructive vandalism should fall foul of. We shall see.

The British Property Federation has issued a statement which, strangely, claims that properties are empty because there is no demand for them at a particular time or place... extra tax burdens will do nothing to change that.

One must hope that nobody will be fooled. Unless the location is sub-marginal there is ALWAYS a price at which a property can be let to a tenant. It might not be as much as the owner is hoping for but that is another matter. And if the legislation works as intended, not only will it raise useful additional revenue, but also property owners will let quickly at a lower rent rather than hold out to get the best the market can offer. As this means that businesses can move into premises that would otherwise be standing empty, it must be a good thing.

It is a pity, however, that the government refuses to enact the most necessary property tax reform of all - to base assessments on the annual values of sites alone and exempt buildings and developments. In that situation there would be no need to legislate specifically on vacant buildings or to look to anti-avoidance legislation as the same tax would be payable regardless of whether there was a building on the site or not. The tax liability could not be avoided by knocking down buildings.

Eleven years of New Labour economics - should anyone be blamed?

We shall soon be celebrating eleven years of New Labour. There was a long honeymoon period as the government was seen as a huge improvement on the sleazy old Conservatives. And being on the upwards side of the economic cycle, it looked as if Labour's policies were doing a good job, a success which Labour was not slow to claim as its own. And so, without any checks put in place to deal with it, the cycle moved on to its path of boom-to-bust, the point we have now reached, pretty much on schedule.

Is the government to blame? Had there been a Conservative or Liberal Democrat government in power, things would have turned out much the same. Moreover, any measures to prevent the boom-and-bust would have had to be put in place by 2003.

When Labour was elected, Gordon Brown became Chancellor of the Exchequer, and followed policies framed by his advisor, Ed Balls. Those policies, and the assumptions underlying them, were set out by Ed Balls in an article published in the Observer around 1995. But it was evident then that he had little real understanding of the forces that drove the economy. So should Balls be blamed?

I suggest not. He was an an academic high-flyer, educated at the independent Nottingham High School and Keble College, Oxford where he studied PPE, and later as a Kennedy Scholar at Harvard University. While at Oxford, Balls joined all the main political societies so that he could "hear all the speeches at all the political clubs." His career began as economic leader writer at the Financial Times (1990–94) followed by appointment as an economic adviser to the then shadow chancellor Gordon Brown (1994–97). In 1995, in a speech written for Gordon Brown to give to an economics conference, he managed to insert the jargon phrase "post neoclassical endogenous growth theory"Wikipedia entry

Thus, the British government has had the benefit of the best that academia has to offer in the way of contemporary understanding of economics. If, despite this, things can go so badly wrong, surely the blame must lie with those who shape the thinking in the academic world? Or is that unfair?

Of course there are many parallel streams of economic thought, but this surely is part of the problem? In the physical sciences, by contrast, whilst there is contention at the frontiers of knowledge, there is a hinterland of agreed principles and theory. It was a actually an economics professor, Wynne Godley, at Cambridge University, who, writing in the Financial Times some time in the 1980s, described economics as a subject in a state of great confusion, with no settled and accepted body of theory. Not having been through the system myself, I observe critically from the outside and it seems to me that not only that some of the fundamental concepts in modern economic theory are nonsensical and not in accord with what can be readily observed in practice, but that important insights from the economists of earlier times, notably the French Physiocrats, David Ricardo and Henry George, are dismissed as interesting historical notions of no importance now. This is strange because they systematise what every shopkeeper, every street busker, every Big Issue seller even, understands instinctively. In other words, economics as studied in the academic world has become so abstracted as to be useless as a means of guiding governments wishing to achieve their objectives, whatever those may be.

And so if there is any blame to be laid, it must be on complacent academics whose studies have got out of touch with the real world away from the dreaming spires. Or is this an unduly harsh judgement on people who one must assume are doing the best by their lights?

Banking crisis - whose fault?

It is tempting to blame the banking crisis on the regulators. But no amount of regulation can contain forces that encourage people to lend money to people who cannot afford to pay it back, on the security of bubble values that have been largely created by the same free lending policy. Regulation would be skirted round, somehow or other.

Is the economy past the worst?

New England development, originally uploaded by seadipper.

Some people, including most commentators, seem to be under the impression that the present difficulties, that began with Northern Rock, will soon be resolved and things will be on the up again.

I suggest not. The recession will go on for at least another two or three years and is set to get much worse before it starts to get better. House prices - in reality, land prices - have hugely overshot, due to the over-free lending policy which has allowed people to borrow far more than they can really afford, and in doing so fuel a boom which is nothing more than a bubble.

The tightening of lending conditions means, firstly, that houses new and old will be more difficult to sell. Then there will be a reduction in construction activity as the housebuilders cut down on new starts, and people will find it harder to get work. And because most refurbishment and re-furnishing occurs when houses have just been bought, there will be a further decline in the construction industry due to the reduced volume of house sales, and the retail furnishing industry will be hit too. I would not like to put a figure on the likely number of unemployed, but it will be large. There are also the large-scale layoffs in the financial services industry to consider; although the numbers affected are relatively small, a lot of purchasing power will disappear - this affecting the luxury end of the market - expensive restaurants and the like. The only counter-effect will be an increase in construction of home extensions and the like due to people deciding to stay put.

This misery is unavoidable, but governments and bankers seem to think they can avoid it by making money freely available. But its main effects will be to defer the collapse and to spread the misery to the thrifty and prudent, who will find the value of their savings eroded by inflation, which will probably be as bad as that in the 1970s.

One factor which will make the forthcoming recession particularly difficult, and recovery particularly slow, are the growing shortages of food and commodities, especially energy.

There are no grounds for optimism about the economy. However, this does not mean that nobody will do well out of the changed conditions. There should be opportunities for British exporters, although because the European central bankers are also making money available, the value of the Euro, in terms of goods and services, is likely to follow the pound on its way down.

Guardian Takkiya

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