Global Financial Crisis, Land Problem and New Economics Public Policy
Friday, September 18, 2009 (16:43:42)

Posted by maheshvarananda

The Global Financial Crisis, the Land Problem and New Economics Public Finance Policy

by Alanna Hartzok, Co-Director of Earth Rights Institute and author of The Earth Belongs to Everyone, recipient of the 2008 Radical Middle Book Award. A United Nations NGO representative and former board member of United for a Fair Economy, she serves on the Advisory Counsel of the Prout Research Institute of Venezuela. Under contract with UN HABITAT’s Global Land Tool Network she developed an online course and program on Land Rights and Land Value Capture. Websites: www.earthrights.net and www.course.earthrights.net

The global financial crisis, with the first domino falling in the United States, has demonstrated the deep systemic failure of the prevailing economic paradigm. Thus far efforts to remedy the situation are not addressing the root causes of the melt-down and are digging the American people deeper into the hole of massive public debt.

In his April 1, 2009 op-ed in The New York Times titled “Obama’s Ersatz Capitalism” Joseph Stiglitz said that the bailout of banks by taxpayers is a “partnership in which one partner robs the other.” Considering that the top 1% of the population of the US has upwards of two trillion dollars more wealth than the bottom 90%, and with about 350 multi-billionaires now holding more wealth than nearly half of humanity, or three billion people, we have surely arrived at the end of the capitalist monopoly game.

Alternative economic analysts have traced the severe wealth gap problem to the ability of the so-called FIRE sector – Finance, Insurance, and Real Estate – to concentrate massive amounts of money, resources and power into ever fewer hands via a variety of “rent-seeking” behaviors. “Rent” in this framework connotes “unearned income.” The alternative analysis considers economic rent to be a socially generated surplus that is being privately captured. This essay will focus primarily on the finance and real estate dimensions of the FIRE sector... [Use the Read more... button below]

As an economy generates wealth – in both public and private tangible goods as well as services and information – the price of land sites and other natural resources increases. Because the gifts of nature cannot be produced by human effort and thus supply cannot be increased to meet demand, holders of land and natural resources are in a position to capture the surplus – “economic rent” - generated by both labor and productive capital.

While economic rent is essentially a measure of the social surplus it is not regarded as such under neoliberal economics, which treats this value as a market commodity for private profiteering. This fundamental flaw in market economics has created a highly inequitable global economic system. Lack of knowledge as to how to correct this flaw, and therefore retain the benefits, efficiencies and individual freedoms of the market, was the impetus for the emergence of centrally managed and controlled state socialism. An economic restructuring based on a full understanding of the role of economic rent is essential for a new economic framework beyond both the old right and the old left,

While many subprime mortgage lenders cheated, lied and are guilty of criminal activities, the hooligans played their shenanigans within the perfectly legal game of real estate “investment.” The highest income people do not take out loans for their own housing needs - they live off interest and rent. So to make more money/loans, under the guise of fulfilling the American dream of home ownership for more of America’s workers, and at a time when capacity to purchase a house from wages had been decreasing, the new rules made it easier for lower income people to acquire mortgages.

During the expansion stage of the economic cycle, when land values were rising, banks and others invested in real estate. And banks loaned money to people to play the real estate speculation game. This behavior further drove up land values. We know that 20 - 25% of all homes bought in this last up-cycle were on expectation of profits from asset inflation (read land value increase).

This ponzi scheme - the fast flipping of houses and other real estate - brought the cycle to a frenzied roller coaster peak – a short pause - and then the total big bust crash, demon derivatives and all. Land rent economists understood and predicted the entire scenario, based on detailed analyses of 18 year real estate cycles traced back as far as the 1840s.

So the big picture is this: the land problem, meaning the treatment of the gifts of nature and of socially generated land rent as commodities for speculation and profiteering, lies underneath the money and banking problem. The land problem is thus the ultimate genesis of the global financial crisis.

A key solution is to publicly capture the full value of socially generated rents to curb land speculation and stabilize land and therefore housing prices. This can be done by a land value only type of property tax. Socially generated land rent is an enormous sum, estimated to be as much as one third of GDP in developed countries. This is more than sufficient to pay for all bona fide social needs including education and healthcare for all.

With full land rent capture by the public and for the common good, there would be no surplus rent from land to pledge to banks as interest - essentially, there would be no more land-backed borrowing. Financial capital would find no profit in land and natural resource rent seeking; substantially more funding would thus be available to invest in productive goods and services.

A necessary corollary policy entails the elimination of taxes on wages in order to secure the full return to labor. Untaxing wages will of course immediately increase the purchasing capacity of all who work for a living. The highest incomes are generated not from wages but primarily from economic rent (unearned income). Maintaining a tax on people at this level would be another important way that the social surplus can be captured back to society as a whole.

A third key solution concerns the treatment of money as a mechanism of wealth exchange. Money needs to be viewed as a social technology, issued into circulation directly by government as direct spending on public goods rather than as government (taxpayer) and private debt - what some call “seignorage” reform. Siegnorage reform would enable large-scale government projects which would benefit large numbers of people. For example, public transportation infrastructure could be funded as a way of also issuing money into the economy. Since infrastructure improvements increase land values, capturing land rent would pay for the ongoing maintenance of public works. Thus with seignorage reform, the money system can begin to function like a public trust.

The elimination of land hoarding and land speculation combined with the capacity of workers to keep all their earnings will enable vastly more people to have affordable land access for housing and productive purposes. The trend would be to incentivize worker ownership of capital via the formation of small business enterprises and cooperatives. As this form of economy advances, more and more people will gain autonomy from monopoly capital. We can then more readily build movements to eliminate other forms of monopoly and rent-seeking.

This approach to public finance policy enhances both private sector economic activity and public sector goods and services. Taxes would function as user fees for what is essentially common heritage resources. Economic rent based public funds can finance (1) public education and health care for all; (2) capitalization and maintenance of needed community infrastructure - water, sewage, transport, public safety, and education; and additionally (3) very low interest loan funds for housing construction and the development of small and/or cooperative business activities.

Combining the land rent for public revenue policy with environmental taxation - “polluter pays” - yields an integrated approach to public finance. The resulting benefits would include:

Fair distribution of wealth

Environmental protection

Basic needs production

Provision of adequate government services

Peaceful resolution of territorial conflicts .

Regarding the last point above, by curbing profiteering – rent seeking – in the various common heritage domains, a root cause of war and territorial conflict can thereby be eliminated. Humanity will have found a way to fairly share the planet.

To sum up the approach, the new economics CUTS taxes on:

Wages and earned income

Productive and sustainable capital

Sales, especially for basic necessities

Homes and other buildings

and INCREASES taxes and user fees on:

Land sites according to land value

Lands used for timber, grazing, mining

Emissions into air, water, or soil

Ocean and freshwater resources

Electromagnetic spectrum

Satellite orbital zones

Oil and minerals

while ELIMINATING subsidies that are environmentally or socially harmful, unnecessary, or inequitable, such as current subsidies for:

Energy production and resource extraction, especially petroleum and non-renewables

Commerce and industry

Agriculture and forestry

Military-industrial-financial complex.

We envision the shape of the emerging world as a pyramid with three basic levels: a tier at the top for global institutions, a second band of regional (state/national) governments, and a vast sturdy base of local governance.

Rent based public revenue policy can readily mesh with such a three-tier system of local-to-global governance. Appropriate tax bases to fund cities, regions, states and global levels can be delineated as follows:

LOCAL:

Surface land values, such as sites for homes, businesses and industrial activities, are well-suited to finance cities and towns. Progressively shifting taxes OFF OF productive efforts such as building homes, working and organizing businesses, and ON TO land site values prevents land speculation and monopoly, thus keeping land affordable while at the same time enabling workers to keep what they have earned. Surface land rent capture yields more walkable, liveable cities with more efficient and affordable public transportation and other infrastructure. This tax policy is a key to “smart growth” and infill development.

Applied to rural areas rent based public revenue would promote non-coercive land reform that can underpin the transition to organic farming and a revitalized rural culture, yielding these benefits:

1.Discourage speculation in land

2.Reduce the price of land to equate with its value for production

3.Enable new entrants to more easily obtain land

4.Limit farm sizes to those of the most productive units

5.Enable the reduction of taxation on earnings and capital

6.Reduce interest rates as land became more affordable

7.Prevent rural depopulation

8.Discourage urban sprawl on farm land

9.Encourage owner-occupation rather than absentee ownership

10.Promote more responsible use of land.

REGIONAL:

State, regional, or national bodies may be best constituted to collect user fees for forestry, mineral, oil and water resources, and to distribute a percentage of surface land rent where there are regional imbalances. Precise configurations for the allocation of resource rents would vary according to the situation of particular nations.

GLOBAL:

These public finance principles apply at the global level, too. The Commission on Global Governance recognized that global taxation is needed "to service the needs of the global neighborhood." Urgently needed is the establishment of a Global Resource Agency to collect user fees for the use of transnational commons.

The Global Resource Agency could be mandated to distribute resource revenues equitably throughout the world as calculated by formulas based on population, development criteria and currency purchasing capacity.

A Global Resource Agency with this mandate would:

encourage sustainable development worldwide;

provide substantial financial transfers to developing countries by right and without strings, as payments by the rich countries for their disproportionate

use of world resources;

help to liberate developing countries from their present dependence on aid, foreign loans and financial institutions which are dominated by the rich countries;

reduce the risk of another Third World debt crisis; and

reduce the risk of resource wars by recognizing the status of all human beings as citizens of the world.

CONCLUSION

The land ethic and public finance policy described in this article has deep roots in both classical economic theory and the history of economic justice, such as the “clean slate” periods of antiquity. This is the kind of "structural adjustment" that the people of the world really need.

Taxes administered along the proposed lines would do much to level the economic playing field worldwide, both within and among nations. A coherent and integrated local-to-global rent-based public finance system would fundamentally alter the status quo and give every person a stake in the planet as a birthright. With basic needs securely met for all, humankind would be free to advance to higher dimensions of expression and realization of mind and spirit.