Sunday, 13 September 2015

All these economic 'theories' are not mutually exclusive.

In the surprisingly lengthy comments thread to Yes, banking really is that simple, I somehow get the impression that a lot of people think that there is one answer to the exclusion of all others. A bit like the argument between Intelligent Design and evolution. IMHO there is plenty of evidence for the latter, it can be observed and it stacks up in theory; the former is blind faith, but hey.

The point is that banks 'split the zero' and create debts/financial assets out of thin air.

This is fine if all banks are doing is acting as debt collectors for producers of new goods and services. So if I want to buy a new car from Ford, I could pay £20,000 cash or take out a personal loan of £20,000, in which case. Ford are given a credit with the bank (just the same as if they had paid in my £20,000 cash) and I am given a debit which I pay off over four years. This is not really any different to me buying the car from Ford and agreeing that I will pay them £5,000 a year for four years, with the bank factoring that debt, doing the administration and chasing etc.

The mischief we want to prevent is credit/land price/share price bubbles. The full reserve banking idea not only misses the point but contains a loophole a mile wide, so would achieve nothing unless you heap more and more rules on top.

Let's do the easiest one first, Modern Monetary Theory, which keeps cropping up, despite the fact that they have no strong opinions on bank reform one way or another. To my mind, the basic tenet is is a statement of the bleedin' obvious:

An ongoing tax obligation, in concert with private confidence and acceptance of the currency, maintains its value. Because the government can issue its own currency at will, MMT maintains that the level of taxation relative to government spending (the government's deficit spending or budget surplus) is in reality a policy tool that regulates inflation and unemployment, and not a means of funding the government's activities per se.

So you have to have some taxes, or else the currency is meaningless: you can consider rationing vouchers to be a kind of citizen's income (spending), but they only have value because you have to hand them over when you buy something that is rationed (pay a tax). The vouchers also have value, because different people have different preferences, so somebody who doesn't smoke can sell his tobacco vouchers to a smoker etc. If the government then goes a bit mad and prints more vouchers than food or petrol is available, the vouchers fall in value (= inflation). If the government abandons rationing (stops taxing) then the vouchers are just so much waste paper.

However, most MMTers don't commit themselves to what kind of tax is best, they seem to consider them as interchangeable. It is only if you apply logic that you can divine which kind of tax sits best with the theory.

Clearly, if the government wants to minimise unemployment, taxing employment (or 'wealth creation' or whatever you want to call it) is a no-no in good times or in bad. So minimising inflation must be key, in which case, look at what sort of inflation you are getting and then tax the thing whose price is being inflated.

There is no natural tendency of wages or prices in a free-trade economy without currency controls to increase in nominal terms; so most of the 'inflation' is in the price of land/location (and other monopoly rights). Seeing as the initial cost of these was precisely zero, every single penny of land/location values is pure inflation, so it seems consistent with MMT to have taxes on land/location values.

Next, The Austrian School. Some of the underlying stuff is pretty waffly, but you can't really argue with the subjective theory of value, the concept of opportunity costs or consumer sovereignty.

The interesting bit is their views on the business cycle and bank regulation. They missed the point a bit here, very little bank lending is to business, the best and primary source of finance is realised and reinvested profits. They seem to think that over-lending during credit bubbles all goes into business mal-investment and this leads to crashes. There is some element of this, but most of the over-lending just inflates the price of land, shares and other monopoly/non-productive assets/rights.

Mises said it is central banks which encourage over-lending (observably true) but Hayek countered that if left to their own devices, banks would behave just as badly (also observably true) and that therefore central bank control was necessary. We can complete the circle by pointing out that even if a central bank's initial clear instructions are to prevent credit bubbles, in the end they suffer regulatory capture and if not, politicians will ride the wave of Home-Owner-Ism and the central bank ends up encouraging banks to over-lend (with low interest rates, deposit protection guarantees, too big to fail mentality etc).

So again, if we had a tax system which kept land prices low, and either broke up or regulated monopolies (with a special tax or with price caps), much less lending would be diverted into these.

The Chicago School is worth a mention, if only to point out that a couple of them such as Frank Knight were shills for the landowners and oil and mining companies and tried to trash LVT by pretending that these things are 'capital' in the same way as machines or know-how. Milton Friedman on the other hand said that LVT was the least bad tax and supported simplification of the welfare system down to something akin to a Citizen's Dividend. He called it negative income tax, but it's the same thing, really.

Many MMTers seem to recommend policies which we could call "Keynesian". The general idea is that the government should spend counter-cyclically, so it runs deficits during a recession and surpluses when things are going well (although most people and politicians ignore the second bit). If you look at J M Keynes' theories in a bit more detail, they are in fact nonsense - stuff like the fiscal multiplier and so on. But the general idea is fair enough, the Hoover Dam is a concrete example.

But he misses the point - why not try and have a system which eliminates or at least minimises recessions in the first place? At least the Austrians went back a step and looked at ways of doing this rather than working out how to patch things up afterwards (the Austrians were very much in favour of small government and non-intervention).

Again, avoiding credit/land price/share price bubbles is key to this. There is no perfect correlation, but by and large, the bigger the land price boom in a country, the worse the ensuing recession. So the worst affected countries in Europe were Ireland, Spain, Greece, Iceland and the UK (the effects have been mitigated by keeping the land price bubble going at enormous cost to the taxpayer, chickens which will all come home to roost eventually). Germany, Austria and Switzerland had much less land price inflation and they suffered the least.

So taxes which depress the productive economy (VAT, income tax, NIC, corporation tax) should be kept to a minimum and as much tax as possible or necessary collected from land values - see Singapore and Hong Kong, who barely had a recession at all. Then you won't have such bad recessions and we won't need to try Keynesian patching up after the event, bearing in mind that a lot of the extra government spending is either on complete crap/white elephants or just goes into keeping the land price bubble going - Hoover Dam aside.

You'll see the general theme here.

All these schools of thought are just looking at different things, they are not mutually exclusive. The only economic theory, which works in practice and which sits comfortably with all of them is replacing as many taxes as possible with Land Value Tax, i.e. Georgism.

Henry George was suitably vague on how LVT receipts should be 'spent'. It's like MMT in reverse; the government should prevent land price inflation by taxing land values; how it is spent is a separate topic. So arguments about whether to replace Trident; give money to third world dictators; provide 'free' healthcare and education; who should get welfare and how much; are separate arguments. LVT would lead to a massive improvement (boost to the economy and more equality) if it were simply a replacement tax and what the government spends money on left entirely unchanged.

Until you realise that there is a virtuous circle. If spending is focussed more on things which help the economy and which boost the rental value of land; then the government makes a 'profit' just like any good landlord, which can be ploughed back in, and so on and so forth, until we reach a level where there is nothing more worth spending it on and the surplus is dished out as a Citizen's Dividend.

The notion of the Citizen's Dividend neatly closes the circle with the MMTers again, who seem to support the idea of the Job Guarantee. Apart from the administration involved, if we can reduce unemployment to its bare minimum by getting rid of taxes on employment, then trying reducing it further is a futile exercise and leads to malinvestment i.e. government sponsored job creation schemes.

It is better to just give somebody £100 a week and gamble on him topping this up with a private sector job which creates extra wealth, however little, than giving him £100 a week to dig holes and somebody else £100 a week to fill them in again, leaving them no spare time to create real new wealth.

58 comments:

Lola said...

...Which erudite exposition explains precisely why I am an Austrian with Georgist tendencies....

Lola said...

To be fair to Austrians they do not restrict their 'misallocation of capital / business cycle argument' to the unwarranted expansion of credit to lending to business. They do consider the effect on the expansion of land development and stock prices. I think the point they are making is that such credit expansion encourages credit away from production and to consumption. Sort of.

Mark Wadsworth said...

L I always try to be fair but it is them who yap on about the business cycle instead of the land price cycle. Business is good, even if it cycles. Land prices are never good.

Random said...

"So minimising inflation must be key, in which case, look at what sort of inflation you are getting and then tax the thing whose price is being inflated.

There is no natural tendency of wages or prices in a free-trade economy without currency controls to increase in nominal terms; so most of the 'inflation' is in the price of land/location (and other monopoly rights). Seeing as the initial selling price of these was precisely zero, every single penny of land/location values is pure inflation, so it seems consistent with MMT to have taxes on land/location values."
IMHO, it depends on what you mean by "inflation."
I will do posts on my blog on LVT and MMT so as to avoid clogging teh comments.

Ben Jamin' said...

@mw

Since Communism failed, it's all been Indian bicycle marketing, including MMT and Austrian economics. A bit of a tweak here and there that treat symptoms rather than root causes.

People are unbelievably conservative. OK Corbyn is the odd spasm we get now and again, but he is old school, wrong and will be buried (unless he turns out to be a genius at PMQ, which I hope he is).

Here's what someone commented today upon being confronted with the Wadsworth Plan for the first time.

"No-one believes that they will be better off under LVT. That's why it's referred to in political circles as the 'Losing Votes Tax'.
Think about it. If everyone believed what you are telling them then the pressure to introduce it would be so great that every political party in the country would have it as No.1 on their manifesto. No-one believes you - deal with it."

Which, actually makes me quite optimistic:) There's never any criticism, just "I haven't heard/thought about it, ergo you must be wrong".

Critical mass is all it needs.

Derek said...

Yup. Pic'n'mix. That's my approach too. There are a lot of people out there with a part of the answer and it's worthwhile forgetting the left/right/centre side of the things and just looking at it all to see what makes sense and what doesn't.

It's a bit like trying to assemble a jigsaw puzzle where the pieces have been stored in boxes with other puzzles and you need to search through the boxes for the pieces that make up the picture that you are trying to assemble. One "box" that you didn't mention was the Minsky box. I've found a lot of good pieces there.

On the Job Guarantee thing. As far as I can see, the reason that MMTers are so adamant about it, is that they need something to tie MMT to the non-financial world because otherwise MMT is a purely financial theory. They've chosen the Job Guarantee because it ties money to the Labour factor. However there is no reason why they couldn't tie money to the Land factor via LVT/CI instead. It's just that having made the decision some of them have put their blinkers on. If you look at MMT more dispassionately, you can agree that, yes, the JG would work. But LVT/CI would work too. And of course Georgists argue that it would work even better than JG for all the usual reasons which I won't bore you by repeating.

Mike W said...

No Random, do them (split them) here, I for one wish to read them.

Really interesting post MW.I will comment of the MMT PM LVT link later.For now:

I really appreciate the Keynes MMT point. I found Keynes General Theory very difficult.To my shame, I understand him from the secondary sources. But, I will stand corrected if necessary, Keynes did understand MMT in its early form (chartalism)and states this at the beginning of the GT.So I think you are correct about their DNA.I take your point that he is producing a solution to a problem that LVT strikes at before the crisis hits. Very good.
Moreover,
I have never read/found anything that showed Keynes rated LVT.The great merit of MMT though, unlike the GT, is that it can readily be understood and the reader can get a long way into the basics with a little work. Perhaps that nice MR Skidelsey can help?

Lola said...

To be fair to Austrianism it isn't 'economics' (IMHO) as such. It tries to look at what happens and apply some logical thinking to these observations.

The big plus for it from my point of view is its 'very small state' theme. It prefers people just doing stuff to people doing stuff as directed by some bureaucrat or other. And, self evidently, bureaucracies in the aggregate (Keynes'd love that) are useless.

MikeW. Me too. Keynesianism was hammered into me in my yoof and I tried his GT but it just made me cross. Whereas Mises Human Action, although equally a struggle, did actually entertain me. I fundamentally disagree with all Keynes Demand Pull Supply Push Embedded inflation cobblers.

Nevertheless it's all been useful to study.

But as MW points out, ad nauseum, the real problem is the only natural monopoly, land, and its owners habit of sucking rent out of production, aka wealth creation.

Derek said...

It's widely agreed that Keynes had some good ideas but was really bad at putting them over with the result that the GT is just about unreadable. If you're interested in what he had to say, here is a link to Brad deLongs list of some of his writing where he was a bit easier to follow.

http://delong.typepad.com/sdj/2008/12/things-to-read.html

And, no, he didn't rate Henry George. But he did have some kind things to say about Silvio Gesell, a Georgist socialist who extended HG's work to include money and banking, who is also worth reading.

Lola said...

D I had forgotten about Gesell. The problem I have with Freigeld is that it requires a 'monetary authority', which gets us back to bureaucrats again, which is where it will all go wrong.

Otherwise, sound chap-ish.

DBC Reed said...

Gesell spends half his magnum opus describing how to prevent land values becoming inflated as his Stamp money starts whizzing round his monetary system ( which it actually did in Worgl during the inter-war depression). There is a new Gesellian experiment in that Tyrolean part of the world called the Chiemgauer: it is administered by schoolchildren as a class project. They have got the circulation of this parallel currency up to 5.41; the Euro circulates at 1.65

Derek said...

Wow, 5.41! That's impressive. Good old Canadian Tire money is nowhere near that. Maybe Canadian Tire needs to apply a little of that Gesell magic.

Mark Wadsworth said...

R, in that case "it depends what you mean by unemployment".

BJ, fair play, the Homeys have pumped out their propaganda and most people believe them. We knew that already.

D, I think JG is a lovely idea, but then when I think about all the admin and hassle and distortions, I don't think it's worth the bother.

MW, thanks and no, I bet he didn't rate LVT.

DBC, actually, DBC Reedonomics is somewhere between MMT and Georgism. But you knew that.

Pablo said...

Intelligent Design [...] is blind faith, but hey.

I wouldn't be so sure!
See here: http://tinyurl.com/odssjo9

DBC Reed said...

@MW
The Shadow Chancellor is a member of Labour Land Campaign and also believes in nationalising the banks so I no longer feel isolated.
The Shadow Home Secretary and Corbyn also have Land Tax views.
So with all these propitious signs, let's see how we can fuck it up this time. First off the Young People's Party should offer Labour a Coalition deal.

Lola said...

@ DBCR Point of Information. The Banks are already nationalised. They have been for years but almost absolutely from 2001 - the advent of FSMA2000, which proto nationalised financial services generally by massive regulatory interventions.

And we all know how that worked out...

Mark Wadsworth said...

Dbc, we will see.

L, the profits are privatised and the losses nationalised.

Random said...

MW, that is not exactly defined either.
Anyone who wants a job can have one, basically.
It depends if you include asset prices (they are not included in most "inflation" measures.)

Mark Wadsworth said...

R: "It depends if you include asset prices (they are not included in most "inflation" measures."

Did I not make myself clear:

"Seeing as the initial cost of [land etc] was precisely zero, every single penny of land/location values is pure inflation [caused by government spending and the actions of society in general], so it seems consistent with MMT to have taxes on land/location values."

So applying MMT logic, land etc is the first thing you tax.

To the extent that a single business is struggling or a single person is unemployed, you cut taxes on business and employment and reduce regulations and barriers to entry etc.

If you do all that and there are still businesses failing and people being unemployed, well tough, that is the way the cookie crumbles. That is why we have a welfare system (be it as at present, a Citizen's Income or the politician's favourite, the Jobs Guarantee).

Random said...

I tend to see land rent as redistribution, similar to interest.
"Inflation" as the real goods and service you can buy with your money.
"That's the way the cookie crumbles"
But what if we have a different type of cookie.
As to the second bit, there will always be people unemployed because of the matching problem inherent in the standard labour market. I will do a post on this later.
Most employers want people who go to work on time, etc basic stuff like that.
It will cost less for them to hire from the JG pool. This allows greater private sector employment for a given level of inflation.

Lola said...

MW Yes. (My first comment had IT issues and failed to post, and I forgot to add that bit to the second attempt. Bums.)

Bayard said...

"or the politician's favourite, the Jobs Guarantee"

I've looked up JG in Wikipedia and my immediate thought was "what would all these people do that isn't being done already?" ISTM that JG is Citizen's Income for the Envious.

It's a sad reflection on the British character that we appear to mind more when the government spends a few pounds a week of our hard-earned cash paid over as taxes on someone who is not working for it than we do when the same government spends billions of pounds a year of the same cash on completely pointless white elephants.

Ed said...

Hello, folks. I struggle with economics like most of the population. I discovered Ricardo's Law of Rent and LVT a year or so ago and I've tried to educate myself, but there's one thing I just don't understand and I would be grateful if anyone could help me. I have emailed the LVT campaign, thinking they might publish my question on their FAQs page but I got no reply. I cannot proselytise for LVT until I understand this point.

If LVT is introduced and other taxes are reduced, people will have more money to spend. As the landowners take the surplus created by the rest of society, this extra money in the pockets of the people will soon find its way back into the pockets of the landowners. So, for instance, if the government levies LVT on my landlord and uses the money to reduce my income tax, I can now afford to pay more rent so my landlord will ask me for more rent. Aren't we then back to square one? Or if the government abolishes all other taxes and introduces a Citizen's Dividend, won't that Citizen's Dividend end up in the pockets of the landowners? Would the government have to increase LVT and increase the Citizen's Dividend every five minutes?

Any help appreciated.

Derek said...

That's a fair point, Ed. And to some extent it will happen. However there are limits.

One is that people need food even more than they need shelter. As a result people will not pay more than a certain percentage of their wages on accommodation. It's quite a high percentage but it's not 100% or even 70%. Once it gets up there people start to do flat shares and so on (as you can see in London at the moment). So even if a CD is paid out it won't all end up in the landlords' pockets.

A second effect is that a high enough LVT reduces the price of housing because it reduces the percentage return on a landlord's investment by increasing the ongoing costs of ownership. As a result landlords can find better investments outside housing and will tend to sell up. Tenants on the other hand will tend to become owner-occupiers because they find that the ongoing cost of ownership is high but less than the cost of paying rent and that the upfront price of a house is much lower than it used to be so the overall effect is to boost home-ownership and to reduce rentals.

These two effects combine to ensure that there is a new stable point for LVT and the CD. It won't have to be raised every five minutes.

Mark Wadsworth said...

Ed, as Derek says, it will reach an equilibrium.

It is easier to start off with the equilibrium and ask what happens then.

So the government gets 100% of the land rent (however high it is) and that land rent is as high as it is because there are no other taxes and people get a CD.

The rent can't go any higher than that equilibrium, can it? And housing is not the only thing that people spend money on. The equilibrium is on average one-third of your income on rent. Rents can't go up more than that because people would then rather spend their money on cars or holidays or whatever.

So at a guess, about one-third of GDP would be land rent/LVT.

DBC Reed said...

Ed,
The thing is all a bit macro economic.LVT aims to stop the mass of investment going into landed property , where it goes at the moment as a hedge against inflation and a sure fire winner.With more money about through general savings on rents and mortgages,it is not likely to be clawed back by landowners because they will be taxed really heavily .In the LVT system I favour,the JS Mill from here-on version, supported by Martin Wolf and Merryn Somerset Webb ALL the land price inflation over the tax year could be scalped leaving land owners with the original value of the property but no unearned capital gains from inflation.
Unfortunately there are other (actually later) versions of LVT including the sensationalist Henry George version which are not so effective but better known..

Random said...

I am highly skeptical of equilibrium theory. It is static.
Taxes on income and sales (VAT) rise pretty much immediately with increasing income and real activity.
An annually adjusted LVT will not adjust quickly enough.
Also how do "market" prices work with 100% LVT? Govt will have to respond and judge by themselves.
However I think it is possible to have just LVT if you have very strong auto stabilisers on the spending side.
Could you do a KLN post on this Mark?
This is my beef with it and a serious issue I feel, unlike other "arguments."

Mark Wadsworth said...

R, getting the equilibrium right from the government's point of view is dead easy, because you know in advance how much you are going to collect in LVT and how much you are going to spend. That is your auto stabilisers on both sides of the equation. Do you think is easier running a government when receipts fluctuate by a few per cent every year in an unpredictable fashion?

If the LVT is not 100% because market rents have increased well so what? Landowners get a windfall for a year or two until the LVT is adjusted up again. If market rents fall and LVT doesn't get adjusted down quickly enough, then they suffer a penalty for a year or two.

But the Citizens Dividend is just a balancing figure, it is total receipts minus necessary spending divided between the population. It's like the government is a property management company that pays its overheads first and then pays dividends. Some tenants will be locked into favourable old tenancy agreements where they are paying less than current market rents on new leases. So what?

And there is nothing to stop a government running surpluses or deficits, that is a separate issue i.e. if you want to have means tested benefits where the expense rises during a recession - but with LVT you get far fewer and milder recessions, that is an observable fact.

So as KKLN's go, that was pretty weak even by the standards of KLNs.

Derek said...

Random, I'm with Mark on this. When we're talking about equilibrium here, it's not the General Equilibrium of the neoclassical economists, it's just the sort of mathematical equilibrium that you get even in some dynamic situations.

To really get a good handle on it would probably need some modelling using something like Steve Keen's Minsky simulation software.

DBC Reed said...

Equilibrium? Operated in a very simple way, the from here-on LVT system would stop land prices going up for ever.Isn't that equilibrium enough? The system would have to be decentralised so that different towns ensured equilibrium in their manors by different rates of LVT.

Random said...

"But the Citizens Dividend is just a balancing figure, it is total receipts minus necessary spending divided between the population. It's like the government is a property management company that pays its overheads first and then pays dividends. Some tenants will be locked into favourable old tenancy agreements where they are paying less than current market rents on new leases. So what?"
I thought the LVT would be used to abolish existing taxes. That would weaken auto stabilisers.
The point is if there is a recession the LVT will remain fixed (at least for a while.)
"To really get a good handle on it would probably need some modelling using something like Steve Keen's Minsky simulation software."
Agreed. That is what I am looking for.

Random said...

"Do you think is easier running a government when receipts fluctuate by a few per cent every year in an unpredictable fashion?"
It is just as easy to run. But harder for households and businesses who now have more unpredictable conditions as the govt will not absorb shocks as easily.
The problem is the govt does not then react as fast to non-govt actions.
Taxes are irrelevant to spending, govt needs to react to changing non-govt conditions to ensure high amounts of output but not so much it reaches full capacity resulting in generalised inflation.
I am not arguing against LVT, I am asking where the auto stabilisers are. You need to have them. With mine it is the Job Guarantee and on the spending side generally.

Mark Wadsworth said...

R, bloody hell, I have been quite consistent about this and there is no need to ask the same questions agains and again.

"I thought the LVT would be used to abolish existing taxes."

Yes of course. But there is still necessary spending, isn't there? Please don't confuse the taxation side with the spending side it is most infuriating.

"That would weaken auto stabilisers.'`

If by 'auto-stablisilisers you mean taxes which depress and destabilise the economy and hence exacerbate recessions like VAT, NIC, income tax etc, then yes, having LVT instead would significantly weaken them.

Do you not understand that with LVT, low and stable land prices and no credit bubbles, the impact of recessions would be so mild as to be not worth worrying about? And that the economy would grow much more steadily?

What would you rather have, an economy running at 65% of capacity, constantly hit by strong recessions but with auto-stabilisers or an economy running at 100% capacity, occasionally hit by mild recessions but with no auto-stabliisers?

BTW, if you want to dream up some auto-stabilisers which work in tandem with LVT then feel free, but that is the easy bit.

Random said...

"Please don't confuse the taxation side with the spending side it is most infuriating."
If you have less auto stabilisers on the tax side then you need more on the spending side. I would have thoughts this was obvious. Cutting taxes and raising spending both have similar impacts on aggregate demand.
"What would you rather have, an economy running at 65% of capacity, constantly hit by strong recessions but with auto-stabilisers or an economy running at 100% capacity, occasionally hit by mild recessions but with no auto-stabliisers?"
I would rather have both. Which is why I support LVT/JG.
"'auto-stablisilisers you mean taxes which depress and destabilise the economy and hence exacerbate recessions like VAT, NIC, income tax etc, then yes, having LVT instead would significantly weaken them."
But considering the whole purpose of taxation is to free up real resources for the government to spend and you are ideologically against the govt banning things, how will the government
Would not an introduce of LVT depress the economy just like any other tax? If we introduced 100% LVT overnight would economic activity go up or down? A tax is just a tool for taking money out of the economy.
I agree with introducing LVT and other monopoly taxation but if that happens you need to introduce strong auto stabilisers on the spending side. Can't work. Won't work.

Random said...

It doesn't free up resources because rentiers tend to be very rich and don't spend everything. So simply reducing their savings doesn't do anything other than reduce the deficit a little bit.

Nothing new is freed up because you haven't actually stopped a flow from happening.

Taxing saving is a form of jealousy rather than a form of production management.


But then you will say...

"why should some people have money and the power over others it brings because of land 'ownership.' It is completely unfair."

It is, but that is a political assessment. I agree with you on this, but the power issue aside, what MMT shows is that financial savings are irrelevant economically. They are just 'voluntary taxation' that simultaneously give a feeling of wealth (and therefore generate a wealth effect). Let people count their coins if they want and it makes them happy.

You need to do a lot more than a mere LVT to sort out the wealth and power inequality issues, although it is a good start.

Mark Wadsworth said...

R, you only need auto-stablisisers if you worry about recessions.

LVT is infinitely better than taxes on output, employment and profits because…

a) It has no deadweight costs, so economy grows faster. It does not depress the economy one bit. Why would it? Compare - a private landlord collects the rent and spends it on his own consumption (or on buying more land) vs the government collects the rent and spends it on stuff which benefits everybody and the economy. If anything, LVT stimulates economic activity (easily explained and widely observed).

b) It depresses land prices and hence credit bubbles and hence mitigates recessions. So with faster growth and milder recessions, after a couple of decades you are miles ahead of where you would have been and mass unemployment is a thing of the past.

c) Instead of £200 billion a year being transferred from the productive economy to the unproductive economy, the producers get to keep all they earn, and the land rent is ploughed back into the economy or dished out as welfare.

d) So there won't be any rentiers who just consume without producing. We will produce more and there will be less inequality, which all things being equal also is good for the economy (the lower your income the more wisely you spend your money, especially if that is money you earned the hard way).

e) Let's not bicker about CD vs JG, that is a minor issue. As it happens, introducing a CD has been shown to encourage work. The explanation is murky, but the facts are observable.

e) Surely you can think up some 'auto stabilisers' which are not taxes which themselves depress the economy? I can't be bothered, so you have a go.

Random said...

"Instead of £200 billion a year being transferred from the productive economy to the unproductive economy, the producers get to keep all they earn, and the land rent is ploughed back into the economy or dished out as welfare."
My point you haven't magically created more capacity, this is the same as any other injection of money
"vs the government collects the rent and spends it on stuff which benefits everybody and the economy."
That's tax and spend. True. I was just talking about tax. Taxes even LVT depress the economy. That is the whole purpose of tax.
LVT or high progressive income taxes may mainly tax savings, not resulting in much of anything happening.

Random said...

"It has no deadweight costs, so economy grows faster"
No it doesn't. There is the same amount of potential output. This is the same as a "progressive" "tax shift" or more spending or just plain tax cuts.
Tax is there to stop flows (e.g. VAT.)
It does, but you have to raise taxes or cut spending if you reach high levels of utilisation leading to inflation.
There is no magic boost to the economy.

"As it happens, introducing a CD has been shown to encourage work. The explanation is murky, but the facts are observable."
All of the experiments (Mincome, etc) have been in one small area, where they are in a fixed exchange rate with those without the privilege slaving away producing goods and services for them ;)
The problem with the CD is more what the people who don't have free time think of the people who do.
"Surely you can think up some 'auto stabilisers' which are not taxes which themselves depress the economy? I can't be bothered, so you have a go."
If the govt cuts a £6000 CD or introduces a £6000 poll tax it has the same goddang effect.
Yes, spending that is cut in booms and raised in busts. Guess what? It has the same effect as the "depress" taxes.

Random said...

"Instead of £200 billion a year being transferred from the productive economy to the unproductive economy,"
It dosen't go the "unproductive economy." It goes to savings. Which can be offset with deficit spending.

Mark Wadsworth said...

R, you are tapping into another Home-Owner-Ist meme here, one which equates "housing" with "savings" and denies that collecting land rent is an entirely unproductive activity.

Rather magically, even taking out a mortgage counts as "saving" in their world. No. A mortgage is NEGATIVE saving.

Seeing as you have obviously completely ignored my bullet points a) to e) above I will have one last go, and invite your agreement to the following chain of logic.

1. By and large, it is good if savings (i.e. deferred consumption) are channelled into productive investment (be that by businesses or the government) than into merely being lent to other people to buy land at ever higher prices.

2. With taxes on production etc reduced/abolished, there will be more economic activity so more new investment. This might be funded out of retained profits or household saving, doesn't really matter.

3. Under Home-Owner-Ism, actual savings are lower - because younger people need to borrow more and hence spend more money paying it off and can save less. Older people will do mortgage equity withdrawal. This is easily observable and is true.

4. Under Home-Owner-Ism, if business profits are taxed at a high rate, there is less for reinvesting. Land profits are taxed at a low rate so there is more for landlords to reinvest, but all they do is buy more land. So business activity is dampened and land ownership becomes more concentrated.

5. Therefore under LVT, there is more saving and more investing, less inequality, stronger economy etc. Hence fewer and milder recessions and hence less need for government deficit spending in the first place.

If you can't follow that simple chain of logic, all of which I have backed up with actual observed facts over the years (search my blog, I can't be bothered) then all hope is lost and I can stop taking you seriously in future.

Bayard said...

"By and large, it is good if savings are channelled into productive investment than into merely being lent to other people to buy land at ever higher prices."

[conspiracy] Of course it is far better for the banks that it is so. Instead of businesses being funded by people investing their savings directly, all those savings are tied up in land and businesses are forced to borrow money from the banks. [/conspiracy]

Random said...

MW, what the hell are you talking about?
"it is good if savings (i.e. deferred consumption)"
Savings is not deferred consumption.
Investment creates savings. You have the causality wrong.
Rich rentiers save the rent they collect from us. What is so controversial about this statement I don't understand.

Random said...

"you are tapping into another Home-Owner-Ist meme here, one which equates "housing" with "savings" and denies that collecting land rent is an entirely unproductive activity.

Rather magically, even taking out a mortgage counts as "saving" in their world. No. A mortgage is NEGATIVE saving."
No I am not. Read my comment again.

Random said...

"if business profits are taxed at a high rate, there is less for reinvesting."
Business profits that are "reinvested" are not taxed to my knowledge!
"Under Home-Owner-Ism, actual savings are lower - because younger people need to borrow more and hence spend more money paying it off and can save less"
Yes and that borrowing reduces the "deficit."
The point I was making is that rich rentiers save more than then forcing them to pay tax on savings does little in and of itself.
Won't young people have to borrow to pay LVT though? You are still paying rent, just to govt not to rich rentiers.
One is saving by govt, one is saving by rich rentiers.
Rent controls might be preferable, or rent controls + LVT on the "uncapped" part?

Random said...

MW, where is this massive increase in business investment going to come from?
Businesses invest when swamped with demand.
That is the flaw.

Bayard said...

"Investment creates savings. You have the causality wrong."

It does? So I work hard and spend less than I earn and I put the excess of earnings over expenditure into the bank or under the mattress. I have savings; where is the investment?

""if business profits are taxed at a high rate, there is less for reinvesting."
Business profits that are "reinvested" are not taxed to my knowledge!"

OK, so a business makes £1M profit in the year. The directors know that if they reinvest the entire £1M in the business,, they will not be taxed, but if they do that the shareholders will not be happy. So they have to set aside, say £750K, after tax for the shareholders (shareholders not giving a monkey's how much was set aside before tax). So the higher the tax, the higher the amount the business has to set aside to give the shareholders their £750K and the lef is left over to reinvest.

"Won't young people have to borrow to pay LVT though? You are still paying rent, just to govt not to rich rentiers."

If you have to borrow money to pay the rent, you are on a one-way street to bankruptcy. Mark was talking about borrowing to buy a house.

In carpentry, there is a saying, "measure twice, cut once". In blog commenting, I think it should be "read twice, comment once".

Bayard said...

"Businesses invest when swamped with demand."

You might like to talk to someone who runs a business: business invest in a variety of circumstances and for a variety of reasons, but mainly when they have some spare cash to invest, same as individuals. Not all business investment is by businesses.

If land prices are high, like they are at the moment, most people's spare cash is going to pay off loans taken out to buy overpriced land and there is little left over to invest in business, or anything. The industrial revolution wasn't financed from borrowing from banks, it was financed from individuals buying shares in companies, that is investing. All that money is now being used to pay mortgage interest.

Random said...

"It does? So I work hard and spend less than I earn and I put the excess of earnings over expenditure into the bank or under the mattress. I have savings; where is the investment?"
That is microeconomy. Where did the money you earn come from?
This will explain it much better than I can:
http://www.nakedcapitalism.com/2011/08/philip-pilkington-profits-in-a-capitalist-economy-%E2%80%93-where-do-they-come-from-where-do-they-go.html

Random said...

"Mark was talking about borrowing to buy a house."
Yeah. My point is LVT can be seen as renting from the govt. The govt collects the rent, not private entities.

Derek said...
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Derek said...
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Derek said...

Wish you could edit typos without deleting and reposting. Ah well, third times the charm.

Phil Pilkington created a nice little example there, Random. But it supports Bayard's point, not yours. Kalecki's equation clearly shows that the bigger the workers' savings (aka under-the-mattress money) the smaller the profit. And it treats savings separately from investments because under-the-mattress savings are unrelated to investment.

The other elements show that aggregate profit comes from export surplus, capitalist withdrawals from under their mattresses, investment and from government deficits (but those don't have to be as a result of government investment. The government could have just given those builders the same amount of cash as unemployment benefit and it would have had the same effect on the capitalist's profits as getting them to build that road).

Also that particular version of Kalecki's equation assumes exogenous money created by the government. If it were assuming endogenous money the investment variable would have to be split into new money created by bank loans and old money destroyed by loan repayments. So Pn = (L - R) + (G – T) + (X - M) + (Cp – Sw). Of course it's also a two-factor model which lumps landlords, bankers and entrepreneurs under the single heading "capitalists". But that's fair enough for the point Phil P was trying to make.

So profits do not actually come from investment, ultimately they come from bank deficits and government deficits. Those deficits may have been used to fund improvements like roads or factories but monetary profits will be made even if improvements were not.

Bayard said...

"Wish you could edit typos without deleting and reposting."

Me, too. How about it, Mark?

Random said...

Derek,
My point is as long as you have a "greater fool" investor it generates profits and savings. And this can go on for a long time. Until it doesn't ;)
And I don't think it disproves my point that investment creates savings, just that they are held by separate firms. The old "split the zero."
That investment creates profits for the other firms, not all of it "washes through" as in Phil's example.
Savings is not required to fund investment, you can get a bank loan. The MMT proposals mean to have capital development lending offered at a low price.

Mark Wadsworth said...

This is an old template and you can't edit comments. Just copy and paste, amend and repost is what i do.

As to the debate in hand, this is getting silly. Random clearly subscribes to the Home-Owner-Ist or Keynesian view that taxes on production are necessary and that the government can sort out the resulting damage by tinkering with the money supply.

Fair enough, a lot of people believe that and I can't take on the world.

Random said...

"Keynesian view that taxes on production are necessary"
I support LVT/JG. 100% LVT and very strong auto stabilisers on the spending side. That is my view.

Bayard said...

"And I don't think it disproves my point that investment creates savings,"

You weren't saying that investment created savings, i.e. all investment creates some savings, but that all savings are created by investment, as a counter argument to Mark's point that savings are deferred consumption. If you can't see that some savings are not created by investment, then there is really no point in any of us arguing anything with you.

Mark Wadsworth said...

R, ah, good, in which case, imagine an LVT only world, or my suggested system of flat 20% income/corporation tax and an equal amount of LVT (and no other taxes). Can you suggest some sensible 'auto stabilisers' please? I find it quicker evaluating and nicking other people's ideas than dreaming up my own.

As to government spending and auto-stablisilsers, there are some things which are worthwhile (make a profit for society as a whole) and things which are a waste of money (white elephants, quangos, third world aid etc). If the balance changes slightly during a recession, then the mix of what the government spends money on will change (and might indeed increase).

B, I covered that topic here.

To cut a long story short, households save and businesses invest.

The oldest form of 'saving' is successful hunters sharing meat with other hunters who were unsuccessful that day, the agreement being that good days and bad days even out. That is deferred and accelerated consumption and mutual indebtedness without investment. (household saving).

Conversely, a hunter might whittle himself a vastly superior bow and arrow, or the group of hunters might dig animal traps in the forest. That is investment of their spare time which increases output, without there being any particular reciprocal obligation on others (business investment).