Tax reform or monetary reform? Which is most important?

The meshing together of Georgism with monetary reform remains a challenge, especially for ardent individuals who claim their cause to be the most critical. I have heard monetary reformers say Georgism is irrelevant and I have even heard a Georgist describe monetary reform as “Georgist heresy” and declare it must be “exorcised” at all costs. Then there are the moderates who say Georgism is more important than monetary reform but willingly acknowledge monetary reform is needed. Critics come in many varieties. However there is a tendency for advocates from both sides tend to overpromise wonderful results from their reform.

Recently I heard a Georgist argue that if you transfer land into community ownership then the money issue disappears.

So let’s tease this one out. To some extent he is right, but he misses several vital factors. For instance he doesn’t appear to understand the growth imperative will still be present, so he needs to work out where the excess money will go and follow the results to their logical conclusion.

Take the important book Money and Sustainability, The Missing Link, a Club of Rome Report by Bernard Lietaer, Christian Arnsperger, Sally Goerner and Stefan Brunnhuber. The authors say there are four results of creating money as interest-bearing debt – instability, growing debt, widening gap between rich and poor and ..

Here is another example of monetary reformers overpromising. While we can’t tell is she believes it herself, monetary reformer Amanda Vickers lists their extravagant promises too. writes in the Otaki Mail, “Sovereign money advocates extrapolate further that the outcome would also be far-reaching throughout our economy and our lives. They say it could also improve: the inequality gap, child poverty, housing bubble control, student debt, state asset sales, job security, local businesses performance (due to the 10% higher output gains), budgets for local community projects and facilities, health care and education.”

Positive Money in their little video says money is created every time someone takes out a mortgage. The money doesn’t come from someone else’s saving but is new money just created. The bank enters your debt as an asset on their accounts then enters the same amount in the liabilities column of their books, your deposit. The entire money supply is on loan from the banking system. When they charge interest on this money creation £200 billion a year is transferred from the public to the financial sector every year in UK. Since money is created as interest bearing debt, if we all pay off our debts the current economic system would collapse. There would be no money in the system.The debt can never be repaid. The money creating power needs to be transferred to some democratic accountable body and spent into existence instead. He mentioned it has been pumped into property bubbles and financial markets.

They claim it would reduce inflation and that you would also be able to move towards a low carbon society this way.

dscn1459So what I take out of this is that Positive Money people, by not addressing tax reform, may think that if you create money by spending it into existence you will avoid rising land prices. By creating a monetary authority they somehow give their monetary authority magic power to stop money going into a land bubble. It can’t happen this way.

So let’s go back to the Georgist’s claim that when you have land in community ownership the money issue disappears. Not so. If you continue to create money as interest bearing debt, then money still moves from the public to the financial sector. The paradox is there is always the personal imperative to pay off your debt yet the money supply would disappear if everyone did this. Moreover, there is always the imperative for the money supply to grow. It is a mathematical fact that the money supply has to keep increasing in order to pay off the debt with interest. That is what we don’t want on a finite planet.

It is absolutely true that when there is either no cost or little cost on the holding of land AND money is created without interest or with low interest, you get money pouring into land inflation. Anyone who has paid a mortgage knows that when interest rates decline, there is what they call a housing bubble (it is really a land price bubble). This is undesirable. And if you take land out of the market entirely money will not go into any land bubble.

When Karl Fitzgerald of Prosper Australia did his 2013 study Total Resource Rents of Australia, he subtitled it “Harnessing the Power of Monopoly.” The list includes Land Residential, Land Commercial, Land rural, Land other, Subsoil Minerals, Oil and Gas, Water Rights, Taxi Licences, Airports, Utilities, Fishing, Forestry, Gambling, EMS, Satellite Orbit Rights, Internet Infrastructure, Domain Name Registration licence, Banking Licences, Corporate Commons Fee, Patents, Parking fees, Public Transport, Liquor Licences, Vehicle Rego Licences, Sin Taxes on Tobacco and Alcohol, Carbon Taxes, Non Tax Revenue (sale of goods). That’s quite a list of the things you can claim a monopoly right on. “Land” in its widest sense is actually a list this long and longer.

So if we just deal to land by taking it out of the market place, you could put your money into monopolising another part of the commons. You could buy a much desired personalised number plate. The plate “F1″ fetched £14 m and the number plate with the number 1 was bought by an Emirati businessman for £7.25m in 2008. Perhaps you could buy a domain name? Sex.com sold in Nov 2014 for $10m and insurance.com in 2010 for $35.6m.

Or the extra money could go into the financial sector including securities, commodities, venture capital, private equity, hedge funds, trusts, and other investment activities like investment banking). Nothing productive here. Yale economics professor Robert Schiller says, “The classic example of rent-seeking is that of a feudal lord who installs a chain across a river that flows through his land and then hires a collector to charge passing boats a fee (or rent of the section of the river for a few minutes) to lower the chain. There is nothing productive about the chain or the collector. The lord has made no improvements to the river and is helping nobody in any way, directly or indirectly, except himself. All he is doing is finding a way to make money from something that used to be free. If enough lords along the river follow suit, its use may be severely curtailed.” Yet that is where a lot of money and activity is going.

In June 2015 the Guardian reported that “Adair Turner, the former chair of the Financial Services Authority, gave a memorable critique of the UK financial services industry in the wake of the credit crisis when he said that some of the activities carried out by the City’s finance firms were “socially useless”.”

So there are multiple places where the excess money will go if there is tax reform but no monetary reform. And we haven’t even touched on fishing quotas, art investments, oil and gas, utilities, or forestry. Leaving the growth imperative firmly in place byn leaving money created as interest bearing debt will invite trouble and plenty of it.

However there is no doubt that land price inflation would disappear if all land was owned communally and leased from a public entity instead. While the boom-bust cycles would exist for other parts of the commons that remain in the market place, these cycles would no longer be present for land prices. 225px-C_H_Douglash-g


Social bonds an experiment that can’t work because…

This morning during a Q and A current affairs programme I tweeted the following tweet. “#nzqanda Social bonds experiment risky. Can’t solve social problems separate from wages, jobs, tax, governance issues @NZQandA” Six people retweeted it and many marked it as favourite, showing it resonated with others watching the programme.

Quite frankly the Minister of Social Development, Anne Tolley, is bound to fail with this experiment. And it is not just that you can’t privatise social welfare and expect good results. It is because the whole political system is one system so you can’t put welfare in a silo, treat it separately and expect good outcomes.

Yesterday I heard Kim Hill in a Radio NZ interview with UK Renegade Economist Ross Ashcroft utter this telling remark: “It seems nothing you can do in an economy isn’t going to cause some bad effects somewhere else.” Well Kim you hit the nail on the head there! Everything is connected. And it is not just within the economic system. It is the tax system, the welfare system, jobs, governance, the credit system and wages structures that are all tied up together. Change the paradigms of a few of these and the whole system gets tweaked for the better.

So how do we get a healthy economic system that results in good social outcomes? Looking at the range of social problems from truancy, mental health problems, crime, family dysfunction, stress, educational issues, loneliness, health where does it all stop and where is the best place to intervene? Try education of young mothers? Oh no, they are victims of domestic violence and poverty. Try wages alone? Oh dear the businesses shed jobs. Try crime alone? Nothing changes. Poverty persists, the wealth gap keeps widening. Try housing without changing the tax and rating systems? Oh dear, you get urban sprawl and an inability of councils to build essential infrastructure so you get more social problems. Fix the money system by itself with zero interest rates but fail to address the tax system? You just exaceberate the housing bubble and widen the wealth gap further.

Whanau Ora , a cross-government system, an approach that places families/whānau at the centre of service delivery, requiring the integration of health, education and social services, gets it right as far as it goes. This system treats the family as a whole system and refuses to accept that ten state agencies must enter the home that has a social problem. Everything affects everything else. The presenting problem of the misbehaving adolescent may reveal a range of other issues – domestic violence, poverty, educational failure and health problems, housing problems, job insecurity and so on.

But even the integrated Whanau Ora programme can’t solve the fundamental issues of a structurally faulty currency system, tax system, welfare system and governance system. A currency must circulate at an optimal pace, businesses must create well paid and satisfying jobs and be constrained by a tax system that protects exploitation of the habitat.

One of the more interesting admissions from the Minister of Social Welfare was that a lot of problems can be solved locally rather than centrally. Panel member Josie Pagani agreed. Yet devolving functions in the way we have previously understood it isn’t going to work either. Why not? Because the state can still intervene, give councils less money, legislate to put further financial burden on councils and so on.

The only way to restructure an economy is to change four major paradigms. Instead of central devolving functions and finance try the other way round. Instead of banks creating the country’s credit as interest bearing debt, let the people create their means of exchange interest free. Instead of taxing work and spending and enterprise, let’s put a rental on the exclusive use of the commons like land, minerals and so on. Instead of a welfare system that is asset and income tested, let’s give a basic income derived from the land rents that were previously privately captured.

There is a great deal of thinking to do. When the global financial system’s huge credit bubble finally bursts let’s make sure we start again, but start properly. The New Economics movement is a vehicle for this new thinking. We can and we must develop a new economic system that works for nearly all life. Otherwise we are going to repeat the same failed experiment. And it is not just the social bonds experiment.


Productivity Commission recommends change to land value rating system

You won’t find this headline in the NZ Herald or the Dominion Post because it is all but ignored in their reports. Admittedly the Dominion Post gives the rating system a mention in paragraphs 16 and 17 of its report, but its headline was “User pays seem as vital for housing”.

If we look at the actual report, Using Land for Housing, it argues logically that a return to land value rating system is going to incentivise building. After several pages of evidence it concludes very moderately that “A good case appears to exist for setting general rates on the basis of land value rather than capital value, to encourage the development and efficient use of land. Arguments used to prefer capital value rating are not strong.”

It says:
“A number of policy settings would influence a landowner’s incentive to develop land, at the margin. This
section considers four:
 the valuation basis of councils’ general rates;
 land taxes;
 tax breaks for development; and
 charging rates on Crown-owned land.”

The media of course will focus on on the last of these.

Go to P258 of the report and read the subsequent pages. Submissions on the draft report are due on 4 August