The Precariat , Trump and cheap-to-extract Energy

When job figures in the US came out in early November 2016 the unemployment rate was 4.9 percent and hardly anyone worried. For economists a 5% unemployment rate is a really good figure. But remember the new definition of who is employed? Employment in most developed nations these days is "at least one hour of work done in the past week by a person aged 16 or older". So the "employed" includes all those who lack job security, and those with intermittent employment or underemployment and the resultant precarious existence.

This is what the Democrats missed. There is many a commentator who has observed that the urban privileged are completely out of touch with those who experience the worry of a day to day precarious existence, always uncertain whether they can pay their bills. This is the precariat. Professor Guy Standing, in a book published well before Brexit and Trump's election warned that the rapid growth of the precariat is producing instabilities in society. He warns it is a dangerous class because it is internally divided, leading to the villainisation of migrants and other vulnerable groups. And, lacking agency, its members may be susceptible to the siren calls of political extremism.

Something familiar there? While they might not call it the precariat, Bernie Sanders, Donald Trump and Nigel Farage all appeal to this group. So while the question is legitimate, the solutions of Trump and Farage are wrong, wrong, wrong.

The tragedy is that just as politicians miss the precariat, economists miss energy. And strangely they are related. Here is how:

Oil is a remarkably dense energy source with one barrel of oil supplanting eleven years of human labour. Graph its use with the rise in GDP and they are in complete lockstep. The economy as it is currently structured is utterly dependent on growing supplies of cheap to extract energy. Only a fool would deny it is extremely unwise to build an economic system that relies on ever growing expansion in oil supply. In real terms energy supply is already on the decline due to the expanding internal energy requirements of the oil industry.

??????????????????????????????

The cost of oil exploration and extraction is rising and with it debt

Actuary Gail Tverberg writes that peak oil didn’t play out as expected because we didn’t factor in the financing of the oil industry. As the cheap-to-extract oil ran low, the cost of extracting non-conventional oil grew higher. This meant the firms had to go into more debt in the form of bank debt, bonds and derivatives. Eventually the debt overwhelms the oil companies and the layoffs begin. In order to pay interest on all their debt, indebted firms have had to keep wages low. The same happens for all firms that extract commodities, because they all require cheap-to-extract energy. The last step is that these low wages reduce the general demand for goods.

Nicole Foss points out that if demand collapses, the money supply declines and a deflationary spiral begins that few notice. 18 months after the decline in oil prices started, by February 2016 Bloomberg Business reported there had been 250,000 oil jobs lost and apparently each of these jobs supports over three basic wage jobs.

Tverberg says, "Why is the price of oil so low now? In fact, why are all commodity prices so low? I see the problem as being an affordability issue that has been hidden by a growing debt bubble. As this debt bubble has expanded, it has kept the sales prices of commodities up with the cost of extraction, even though wages have not been rising as fast as commodity prices since about the year 2000. Now many countries are cutting back on the rate of debt growth because debt/GDP ratios are becoming unreasonably high, and because the productivity of additional debt is falling."

So the drop in oil prices leads us to an underlying problem. The world is reaching the limit of its debt expansion. This is what is called Debt Deflation.

So even though we are living in a time of energy constraints, our blinkers don't allow us to see that. Risk analyst David Korowicz wryly observes,"The irony is that people may rarely notice they are living under energy constraints. Energy retraction from the global economy can be achieved by production declines or collapses in demand, though as we have seen, they are deeply inter-related. We may experience energy use collapse not as an energy constraint, but as a systemic banking collapse and vanished purchasing power."

So here is the source of the vanished purchasing power of the precariat. In a post election blog energy analyst Richard Heinberg observes that the problems won't go away when Trump is elected. In the face of the door being closed to national action on climate change, build community resilience is his message. "The most promising responses to our twenty-first century crises are showing up at the community level anyway. It’s in towns and cities across the nation, and across the world, where practical people are being forced to grapple with weird weather, rising seas, an unstable economy, and a fraying national political fabric."

None of these arguments will be known to the incoming president, though some advisors may try to educate him.Good luck to them. He is an anti-science president. If he slaps tarriffs on as he has promised, purchasing power will decline still further and accelerate the already active deflationary spiral.

trump-digs-coal

Trump's attitude to women seems the same as his attitude to the environment – if it's there, it is there for my use. Coal stocks soared on his election and renewables dropped. However, oil stocks didn't rise much, possibly a sign that reality of constraints are already priced into the market. 

An interesting question with Trump is how committed he actually is to his own ideas, from the potentially sensible to the crazy.   He is a “top of the head” sort of a guy, who changes position and contradicts himself on exposure to new things (or simply because he finds himself in a new context). Is the Presidency just a vanity project for him, in which he will blow with any policy wind he encounters? His victory speech, and his abandonment of the “Lock her up” approach, suggested that.

At the worst, if his “vision” as expressed during the campaign carries through, the US (and to a lesser extent the world) are in for an appalling time – racist, misogynist, anti-environment, pro-individualist, pro-violence and so on. And if the Republican Party as a whole gets the bit between its teeth, the US Government will be gutted and corporates will simply finish their take over. At the best, there’s no doubt he has created more space for these sorts of behaviours at the fringes in the short term. In between, as seems more likely, the direction as a whole will probably be negative, but it’ll be muddled and maybe not so fast moving.

There are a few bright spots, less likelihood of a war with Russia and above all, an increased energy and commitment of climate change activists. Our lives depend on it. He has focussed our minds. There is no spare planet. Somehow we must find a way.

Adapting to Geophysical Reality

No species survives unless it is good at adapting to its environment. And environments can change very fast. This article addresses the adaptations we must make to a rapidly warming world, to living with a low carbon economy and to major collapse of the global economy.

Getting to a low fossil fuel economy fast
climate_0Climate change has been humanity’s wake up call. Energy is at the heart of everything we do. For centuries we have used the energy of the sun in one form or another. It was only when we discovered oil, a form of stored sunlight compacted for millions of years, that economic growth really took off.

How dense is oil? Richard Heinberg explains that to push your car for 30 miles would take 6-8 weeks of hard labour, but you can put a gallon of petrol in your car and get there quickly for a few dollars .

We use fossil fuel energy not just to power our cars and tractors, but power our assembly lines, make our cement, plastic, pharmaceuticals and paints. As the low hanging fruit becomes exhausted, the cost of digging out fossil fuels rises and the unconventional oil, gas and coal is of not such high quality. Despite the financial challenges, oil companies continue to forecast increases in extraction.

When climate scientist Bill McKibben first wrote in 1989 on the coming climate challenge, he didn’t foresee the pace of change. He continues to be astonished at the rapidity of loss of Arctic ice, increasingly devastation cyclones and other extreme weather events. In a talk to the Oberlin College and Conservatory conference in Ohio, After Fossil Fuels: the Next Economy, he said we now have a very limited timeframe.

Founder of the Carbon Tracker, Mark Campanale, reminded listeners that economist Nicholas Stern had estimated that to get to two degrees of warming the world needed to spend $90 trillion in infrastructure for a low carbon economy. Campanale had calculated that there is only a 50% chance of getting there in the time estimated by major governments signing the Paris Agreement using their scenarios. There is so much unburnable carbon in the reserves of oil, gas and coal companies, that even if there was no further digging or mining activity than there is now, we would still overshoot the 2 degrees.

To put this $90 trillion in investment needed in perspective, the world GDP is $70 trillion and the total value of the stock of all the companies in the world is only $60 trillion. Campanale, a sustainable investment analyst, noted that some investors are saying it will all blow over and it is cyclical. So they keep their shares in fossil fuel companies until this happens. All the oil companies and OPEC forecast continual growth of fossil fuel extraction.

Two weeks before this conference Bill McKibben had post an article Recalculating the Climate Math, in which he wrote that scientists now think that 2 degrees is too much; moreover, the amount of fossil fuels in the currently operating plants worldwide would actually bring us above 2 degrees. So the amount of CO2 we can burn has to be reduced from 943 to 800 gigatons. And if we are going to get to 1.5 degrees, a goal set in Paris, we will need to close all the coal mines and some of the gas fields we're currency operating long before they are exhausted. He finishes by saying ‘And if we don’t get it right, then all of us—along with our 10,000-year-old experiment in human civilization—will fail.’

And as for living with less oil, gas and coal, that is huge too. There are so many challenges, from how to power industrial machinery to how to transition from kerosene as aviation fuel, it hardly bears thinking about. There is no doubt however that we will have to grow our food more locally, to travel less and to have more localised economies. The permaculture movement can teach us how to build houses with less cement. There will be stranded assets like oil tankers and bankruptcies galore in the huge fossil fuel industry, let alone the huge losses on high-risk energy bonds in the fracking industry.

All the more reason why we have to think up the new economic system fast. Innovation to transition to a low carbon economy can only happen if investment is directed there and new companies have no deadweight taxes, only resource taxes.

We also need to adapt to an economy that will collapse.
Actuary Gail Tverberg, who through the years has predicted many changes that have come to pass, says the global economy can’t grow fast because the cheap-to-extract energy is depleting. She describes a situation where growth is slowing, global trade isn’t growing and central bankers can’t solve it even with historically low interest rates. More energy is needed now to extract energy, it takes energy to make and transport goods, and it takes an increasing amount of energy to create a growing amount of goods and services. Less cheap to extract energy produces less productivity growth and this translates into stagnant wages which no longer allow non elite workers to buy big ticket items like cars and houses. So the economy declines further.

She maintains this means commodity prices can’t hold up, so producing them eventually becomes uneconomical. And we are on a downward spiral. ‘This situation could lead to catastrophe because metals, agriculture and energy are all essential to the economy’. The rate of return on investment falls, new debt goes into buying assets and eventually, when commodity prices fall, asset prices fall. The price of agricultural land will fall. This leads to debt defaults and bank failures, affecting banks, insurance companies and pension plans. The lack of new loans will depress demand further. She predicts oil may fall below $20 a barrel.

Most investors and financial advisors are unaware that the price of commodities (in New Zealand it has largely been about the price of whole milk powder) is cyclical so it will turn around. But they haven’t factored in energy.

At the end of this long article in October, 2016 she concludes there is no way out of the problem over the long term. We will have reached our ‘Minsky Moment’.

Adapting to sudden financial collapse will be humanity’s biggest challenge.

Continuing War
1024_wepost3While most societies have lived with war, we now have the added factor that there is a scramble for the last remaining fossil fuel reserves. Investigative journalist and international security scholar Nafeez Ahmed has explained the conflict in Syria in those terms, saying that there is competition for the offshore oil and natural gas reserves between the world’s biggest oil companies and that is why they court Assad. When civil war broke out the plans of Shell and oil majors were unexpectedly suspended. When it is resolved they will be able to continue. American firm, Genie Oil and Gas has been granted exploration rights in the Golan Heights. Among Genie’s board members are Rupert Murdoch, Larry Summers, Dick Cheney.

American Shale Oil, a subsidiary of Genie candidly admits on its website: ‘The peaking of world oil production presents the US and the world with an enormous challenge, Aggressive action must be taken to avoid unprecedented economic, social and political costs.’

In addition there are two proposed gas pipelines to get gas for Europe that are on hold. One is from Iran through Iraq, Syria and Lebanon to Europe. This was signed by Assad and backed by Russia. The other is from Qatar’s North Field through Saudi Arabia, Syria and Turkey.

A Russian oil and gas company began oil prospecting operations in September 2015, the same area scoped by French firm CGGVeritas.

Lessons from Singapore’s political economy

Marina Bay Financial Centre, Singapore

Marina Bay Financial Centre, Singapore

In his excellent TED talk, renowned inequality researcher Richard Wilkinson showed that of all OECD countries, Singapore had the worst inequality, ahead of Portugal, US, New Zealand, UK. Gini coefficients are the standard measure of income inequality. A score of 1 is the worst and 0 is the best. Because it is taken on the average not the median income, extremes of wealth will raise it.

I had always believed that Singapore was a model where there was little poverty and not much inequality. It is commonly cited as one of the more ‘georgist’ places in the world in terms of them shifting burdens on land, socialising its value and untaxing labour and capital.

But there are myths about the “Singaporean miracle”. In the absence of any constraint on the movement of global capital, any billionaire can set up residence and tap into the low tax regime. And they do. High net individuals and multinational corporations hide their wealth there. The tax benefits include a 20% top income tax, and a 17% top company tax. Even New Zealand has a billionaire living there – Richard Chandler.

We have insisted that both the land issue and money issue need to be addressed together, not separately, and Singapore is a clear example of what happens when you do one but not the other. The late Adrian Wrigley of the Systemic Fiscal Reform in Cambridge said, ‘If we just have resource taxes including land tax, where people pay for the privilege of monopolising their part of the commons, but have no monetary reform then money will concentrate with banks. Banks will row the economy between easy money and tight money causing booms and busts. They will put up interest rates for ‘riskier’ loans. They buy patents, radio spectrums, copyrights and trademarks.’ They bribe governments.

Whether Singapore, a country of 5.5 million, has done all this I don’t know, but it is a low tax regime and it certainly featured in the Panama Papers. It has even been labelled as a tax haven. For example, companies like TrustNet, now headquartered in Singapore, has branch offices in 16 other locations. It describes itself as a ‘one-stop shop,’ employing lawyers and accountants who help “high net worth” clients manage their money and business activities. The main product it sells is secrecy. It is easy to set up a company because only one shareholder and one director is needed. There is no need to disclose the beneficial owners of Singapore corporations to the authorities. Hopefully the international crackdown on tax sheltering will do something to change it, but given the nature of the tax regime in most countries, I can’t see much hope. They haven’t yet understood it is better to rely on land as a source of income, as land will not get up and walk away.

Big Australian mining companies have large workforces in Singapore. BHP has more staff there than its Melbourne headquarters. There are about 600 employees and 400 contractors in Singapore. Apart from being a marketing hub, it also has its business information systems based there. Rio Tinto employs more than 300 staff in Singapore. Companies such as Google, Apple, Microsoft, BHP Billiton and Rio Tinto have all admitted in hearings as part of the Senate inquiry into corporate tax avoidance that they are under audit by the ATO for their use of Singapore ‘marketing’ and ‘service’ hubs, where they route hundreds of millions of dollars of income.

So I wonder about Singapore. Could it be a perfect example of what Adrian warned? While 90% of the land is now government owned, the banks have too much power.

Singapore is not just banking hub, it is shadow banking hub. There are about 125 commercial banks in Singapore, only five of which are local. Although banks lend a lot of money into existence in Singapore and their loans go towards construction of capital, rather than simply bidding up the price of land (as we see in Auckland, for example), that is not all that banks do. They sell derivative contracts over the counter – bets on interest rates or other securities. Derivatives leverage up money creation up to 100 or more times. Trading in derivatives contracts happens round the clock. Singapore is a leading global commodities hub with 14,000 people employed and annual turnover of some US $1 trillion in the commodities sector.

The majority of people who live there find Singapore is an extremely attractive place to live and operate from. It is safe, clean, and green with superb infrastructure. The unemployment rate in Singapore is just 1.9% (June 2016), down from 6% in 1986. Bear in mind though, the definition ‘employed’ includes those employed part time, probably as little as an hour a week.

Unlike New Zealand they don’t have a Universal Superannuation. Many of Singapore’s elderly didn’t save enough while working, but they live longer. Some were born when there was no access to education. What’s more, the Singapore language policy marginalised many of them only able to speak languages other than Mandarin and English. While the cultural norm of caring for the elderly seems to have almost vanished, the government still argues that children should take care of their parents. Many elderly are on the government allowance of $450 a month, reliant on charity for food and health care. Living in tiny apartments as small as 30 square metres, they clean tables at hawker centres, collect cardboard for money, scrub apartment blocks or slog in the hot sun as security guards. Security guards and cleaners are among the worst paid.

In response, there is now a plethora of government assistance, making for growing administrative costs of welfare, when it would have been so much better to have shared their land rents with all their citizens in the first place.

So Singapore can only stop its own rent from being stolen by the global elite; it can't stop the global elite from setting up shop there and stealing the rent of other places. Local rent-sharing can only raise the local floor. But Singapore doesn’t do enough rent-sharing, hasn’t controlled its banking industry and doesn’t exist in isolation from the global capitalist economy. Hence its inequality.

So maybe we’ve seen only part of the equation. Taking land into public ownership stops private landowners from pocketing land rent, but it doesn't restore the universal individual right to share the land value. The Singapore government has built great infrastructure and housed almost all its people, but it could easily share the remaining public money with its citizens. The Citizens Dividend enables everyone to collect rent, rather than just landowners. But without democratising the budgeting process, ordinary people are not receiving their fair share.

Singapore has the highest per capita of millionaires of any country. One in six households are millionaire households. The mobility of capital and people across borders means that the borders of the country are constantly being crossed. So it is no good just having one country in the world with land owned by the government while billions of dollars slosh around the globe every hour.

Billionaires can sit in Singapore and draw rent from land in the rest of the world. Aetas Global Markets provides funds for commodities projects. Many international firms are sited in Singapore. Global Capital firms like Knight Frank invest on behalf of what they call Ultra High Net Worth Individuals (UHNWI) in property round the world. Genesis Global Capital appears to choose cities in the early stage of a property boom in Brazil and Germany. The Strait Times reports in March 2016 that the financial services sector is a key driver of Singapore’s growth.

Henry George defined poverty as the ‘fear of want’, the ‘relentless hell waiting beneath civilized society’. He believed that removing this fear would not only help the poor, but transform our culture and society.

Former Singapore resident Zbigniew Dumienski said, ‘The only group that I would consider as poor are the old people with no children. When they worked they didn't have to contribute towards any retirement scheme (CPF) and might not have accumulated enough money to enjoy a peaceful retirement. This is why you often see old people selling tissues or cleaning tables in Singapore. They do receive some support from the state though, plus many of them own their apartments. In fact, I've met income-poor people who would choose to live in a tent/on the streets so that they can live off renting their apartment to other people.’

The situation of the 870,000 foreign workers (Feb 2016) in Singapore is contentious. Many immigrants like the safety and enjoy the food. While it is good if your employer is fair, it is not so good if you are exploited. There are construction workers from India, Bangladesh, China and Nepal and maids from the Philippines, Myanmar and Indonesia who earn much less than an average Singaporean. Some live in dormitory ghettos provided by the government. Migrant workers are not given basic protections such as a minimum wage, standardised working hours and a right to unionise, so this puts a downward pressure on wages, raising inequality. There are reports of maids being ripped off by recruiters, and sometimes being beaten or raped. Live-in nannies are often on 24/7 standby and earn $5 an hour. If they have their passports stolen by their employers they can’t go home. However many eventually earn enough to take back home and live a life with more choices. With 40% of Singapore's inhabitants being foreigners by 2013, immigration is increasingly becoming a big political issue.

So despite the hope of eliminating poverty, the ugly side of global capitalism is becoming increasingly apparent.

Climate change do the math

Status

Portrait of Bill McKibben, author and activist. photo ©Nancie Battaglia

Portrait of Bill McKibben, author and activist. photo ©Nancie Battaglia

No species survives unless it is good at adapting to its environment. And environments can change very fast.

Climate change has been humanity’s wake up call. Energy is at the heart of everything we do. For centuries we have used the energy of the sun in one form or another. It was only when oil was discovered, a form of stored sunlight energy compacted for millions of years, economic growth really took off.

How dense is oil? Richard Heinberg explains that to push your car for 30 miles would take 6-8 weeks of hard labour, but you can put a gallon of petrol in your car and get there quickly for a few dollars .

We use fossil fuel energy not just to power our cars and tractors, but power our assembly lines, make our cement, plastic, pharmaceuticals and paints. As the low hanging fruit becomes exhausted, the cost of digging out fossil fuels rises and the unconventional oil, gas and coal is of not such high quality. Despite massive financial challenges, oil companies continue to forecast increases in extraction.

When climate scientist Bill McKibben first wrote in 1989 on the coming climate challenge, he didn’t foresee the pace of change. He continues to be astonished at the rapidity of loss of Arctic ice, increasingly devastation cyclones and other extreme weather events. In a talk to the Oberlin College and Conservatory conference in Ohio, After Fossil Fuels: the Next Economy, he said we now have a very limited timeframe.

Founder of the Carbon Tracker, Mark Campanale, reminded listeners that economist Nicholas Stern had estimated that to get to two degrees of warming the world needed to spend $90 trillion in infrastructure for a low carbon economy. Campanale had calculated that there is only a 50% chance of getting there in the time estimated by major governments signing the Paris Agreement using their scenarios. There is so much unburnable carbon in the reserves of oil, gas and coal companies, that even if there was no further digging or mining activity than there is now, we would still overshoot the 2 degrees.

To put this $90 trillion in investment needed in perspective, the world GDP is $70 trillion and the total value of the stock of all the companies in the world is only $60 trillion. Campanale, a sustainable investment analyst, noted that some investors are saying it will all blow over and it is cyclical. So they keep their shares in fossil fuel companies until this happens. All the oil companies and OPEC forecast continual growth of fossil fuel extraction.

Two weeks before this particular conference Bill McKibben had posted an article Recalculating the Climate Math, in which he wrote that scientists now think that 2 degrees is too much warming. Moreover burning the fossil fuels in the currently operating plants worldwide would actually bring us above 2 degrees. So the amount we can burn has to be reduced from 943 to 800 gigatons of CO2. And if we are going to get to 1.5 degrees, a goal set in Paris, we will need to close all the coal mines and some of the gas fields we're currency operating long before they are exhausted. He finishes by saying ‘And if we don’t get it right, then all of us—along with our 10,000-year-old experiment in human civilization—will fail.’

The conference also had wonderful contributions from those involved with the divestment movement.

I have watched a considerable amount of this conference on youtube. While it is great as far as it goes, it would be even greater if this movement was linked to the very exciting currency design movement and the movement to reform the tax system so that taxes come from largely from ground rents. Imagine if they knew that dual currencies can lead to innovation and prosperity if the domestic currency  is designed to decay naturally. Yes imagine them knowing that the design of the currency actually affects whether you think long term or short term. Imagine them realising that it is critical to neutralise those who oppose carbon taxes because they fear job losses and there is finally a way of getting a basic income through rent sharing and this gives them safety from redundancy. Imagine if they asked and really understood what caused the economic growth imperative and how to fix this. Imagine if they realised the political impossibility of centralised solutions to  many issues. But insofar as it goes, it has contributed heaps. And it is very exciting that the critical topic is being discussed – how to design the next economy. This is what the New Economics Movement has been doing now for a considerable time.

Deirdre Kent
Please respond on our Facebook site

Why not put Council owned land into a Community Land Trust?

It's local body election time.

I was privileged to speak with Emer O'Siochru of FEASTA recently. Twenty years ago she was a cofounder of the Irish Foundation for the Economics of Sustainability. She has campaigned for proportional representation. For three years she worked for a Site Value Tax but it was not successful. She is now working on Community Land Trusts.

We spoke about the challenge of connecting Community Land Trusts with local government so that local government could receive income from land rents. Suddenly there it was. She said in Dublin local government and central government owned a third of the land and so why couldn't that land all go into a Community Land Trust?

Imagine all of us trying that campaign together so that local government all over our countries would be lobbied to do this. Oh yes there would be obstacles. There will only be a few people you know, for instance, in your local Community Board area who understand that allowing property owners to profit from the rising value of their land is depriving society of its rightful income. So for a start there will only be a few to work with. But you only need three or four keen people.

The idea is that instead of Council selling off their land to developers, the council would continue to own the land but the lessee would be able to build a house on it. This is leasehold land. But every year the rent should be reassessed. This could be done by setting up a Land Rental Index to adjust the rent according to the change over that year. Our land is valued every three years anyway. All it means is that a sample of properties would be assessed for their annual rent. You start with an index of 100 and next year it might go up to 102 if there had been development in the district. Or if you live in Westport of Wairoa where land values are declining, the rental would drop.

The main obstacle the Council would raise in New Zealand would be that Council wouldn't know how to levy rates because it wouldn't know how much to charge. You see in the Kapiti Coast District Council where I live, rates are on Capital Value plus several Fixed Annual Charges for services. They wouldn't be able to separate out land from improvements. The rating system on Capital Value discourages building because the more you spend on building the bigger your rates bill. So some campaigner will stop at this point and work to change the rating system. Rating should be based on land value only or Unimproved Value. And fixed annual charges are regressive because the poor pay as much as the rich, which means it is a larger proportion of their income.

The advantage for lessees is that you only need to pay for the house not for the land. Since land comprises more than 60% of the property value in Auckland and usually over 40% in smaller areas, houses themselves become vastly more affordable. The lease would also have to be fair and it would be best for a 75 year period, a lifetime. It is just that the rent must be adjusted yearly to avoid any crazy leaps as in Auckland.

Of course this would all work better if the people who pay rent on their land are also able to escape income tax and GST. They go together. But this problem is for another day.

But somewhere someone will be successful. One day.

Deirdre Kent 

Please go to Facebook for discussion

Auckland home owners are “richer” than last year by $64 billion

The average price for an  Auckland home is now just over $1 million. The media focuses, as they usually do, on how impossible it is nowadays for young people to buy a house, with a side mention of how difficult it is for nurses, service workers and teachers to buy a house, and how the Auckland problem is spilling over to the entire country. There has also been a great deal of publicity in the last six months about homelessness, with a marae in Auckland shaming the Government into action by opening its doors to the homeless for the winter.

But there is another big issue that is almost never mentioned – the lost potential public revenue from land rent. Land rent is what the occupier would pay to the public if the public owned the land. Many have explained that the rise in value of homes is really the accumulated land rent over that period. It is also called the capital gain or unearned windfall.

QV HOUSE PRICE INDEX AUG16

Recent figures from Quotable Values New Zealand allow us to work out the on-paper profit for our country's homeowners and for Auckland's homeowners. This of course is just on-paper, but because it represents their realisable assets it does allow homeowners to do other things e.g. borrow more for other purposes. This calculation acknowledges that the figures are the houses that are sold only. Houses sold in that period were more like one tenth of the housing stock. But if my neighbour's house sells for $1million and ours is similar we know ours could sell for a similar price. Our house value is what a valuer would estimate or better still what the market would pay. Valuers value by looking at what did sell in the district and making comparisons. The bank recognises this as the value of our asset.

And the fact that I had a huge mortgage didn't really make any difference. Supposing I only have $200k and buy a $900k house, selling it a year later for $1 million. I make a profit of $100k because my deposit of $200k was turned into $300k.

Let's first take Auckland where the figures are the most dramatic. 

House prices rose nearly 16% last year. The average uplift in Auckland house prices in that period was $138,781.

Since land values are created by the community around them, by the governments and communities that serve that site, the uplift belongs to the public purse. Rise in property prices are virtually all attributable to the rise in land prices. Schools, hospitals, infrastructure are built by government, central and local, and the private land owner reaps the profit. Businesses arrive, clubs start. Without a community around it, land has little value. (Even agriculture requires transport infrastructure. Land for conservation is usually publicly owned). 

The total uplift for Auckland properties was 461,669 (the number of residential properties in Auckland Council) multiplied by $138,781, or $64 billion.

Sold Home For Sale Sign and House

Now supposing this uplift was publicly captured month by month in the form of a full land rent, as it should be. What would the council do with it?

1. They could give half to the government straight away, leaving $32 billion.

2. They could put aside about $20 billion for infrastructure building and upgrading including rapid transit, and debt relief, leaving $12 billion still to be shared.

3. Sharing the rents is important. So the $12 billion could be given out as a Citizens Dividend to every man, woman and child in Auckland. The population of Auckland is about 1.58 million, making about $7,600 per person. For a family of five that would be $38,000.

That should help a few homeless families!

New Zealand homeowners are $138 billion richer than last year 

There are at least 1,771,2000 residential homes in NZ (2013 census). The average uplift in NZ house prices was the difference between the Aug 2016 price and the August 2015 price, which as $78,196.

So multiplying these two, New Zealand homeowners on paper have assets worth about $138 billion more than last year. The tax take last year was $66.6 billion. So it is more than double the tax take. All this is privately captured when it really should be going to the state. In comparison to the $138 billion uplift for NZ, the GDP last year was about $170 billion.

However there are several political obstacles stopping us from applying these solutions in our current context:

• Aucklanders pay rates. However Auckland Council was introduced by legislation when amalgamation took place. This mandated that the rates were levied on capital values, thus requiring legislation for a change to rating system on land values. There is only miniscule awareness of this as a political issue.

• The viability these days of a centrally imposed land tax is not good, given the fact there are at least three bank lobbyists for every legislator and neoclassical economics is in full bloom. Nowadays the power of the landed and moneyed elite is so much greater in relation to the 99% than it has ever been.

• It has been legally impossible to impose land tax in NZ since 1992, though the PM seems not to know this because it was he that suggested putting a land tax on property bought by foreigners earlier in 2016. The idea died within a day or two. However this law could easily be reversed.

• No politician wanting to be re-elected would advocate a measure that was going to bring down house prices and leave homebuyers with negative equity. A 5-6% land tax would actually be for politicians and doing it gradually wouldn’t work either.

• Imposing a land value tax must go hand in hand with dropping of income tax so this has to be incorporated into the solution.

But all is not lost! The obstacles are not insuperable. Think about the untenable current situation of housing prices and its destructive consequences of widening the wealth gap. We have to start on other ground breaking solutions. Let’s be pioneering here.

A little history might give hope. New Zealand had a Liberal Government in the 1890s that imposed a land tax to break up big land holdings. Then it extended, but unfortunately it was at a higher rate per acre for large landholdings than for smaller ones, which was essentially unfair. This resulted in a new political party dominated by larger farmers. But land tax never reached more than 20% of the tax take, and income tax was gradually increased and extended. The same Liberal Government did however enact legislation to empower local government to hold a referendum where ratepayers could choose between land value rating systems and capital value. This was in place for 80 years and always resulted in the more equitable the public choosing land value rating systems. Cities like Wellington and Napier built on this rating system are compact.

If money buys lobbying power, then we have to be more strategic and try different tactics. This might point to governance reform giving much more power to local authorities and to even smaller governance units. Given that the banks have a vested interest in profiting from the buying and selling of land and from the private ownership of natural resources and infrastructure, a host of local innovative actions may be the surprise option. And this would require huge resistance from local communities that are determined to share land values and preserve natural resource values.

Maybe the old system should be left alone to collapse and die, and the new paradigm system reinvented at local level. We need to ask how land trusts can connect with localised governance units whose revenue is derived land and resource rents. But where would the money come from to buy the land? Maybe we need to create a local currency designed to circulate at an optimal speed. Maybe when there is surplus locally it can be steered from the periphery to the centre of government.

Certainly clever, innovative thinking is called for and it should be all hands on deck for that task!

A currency for Christchurch taken seriously

John Campbell introduced the piece on RNZ's Checkpoint with the remark, "A separate currency for Christchurch could be real. Is the city serious about it? Are they for real?". He said he had done his own research and found the Bristol Pound in UK. And the Totnes Pound and the Brixton Pound.

Chair of the council's Finance Committee Raf Manji explained there were 2,500 community currencies operating round the world, talked of his preference for the Bristol Pound because of its convertibility. Treasury and RBNZ need to be involved. Our plan is to launch it at the 2017 Social Enterprise World Forum. http://www.radionz.co.nz/national/programmes/checkpoint/audio/201795721/christchurch-could-soon-have-its-own-currency