Homey-in-Chief on top form

The HIC continues to tie himself in knots in City AM:

IMAGINE, dear reader, that grocery prices had increased at the same rate as house prices since 1971, a frightening thought for a Friday morning. A  pint of milk would cost £2.61 (compared with 49p today); a chicken would cost £51.18; a bunch of six bananas would cost £8.47; a box of six eggs would cost £5.01; a loaf of sliced white bread would cost £4.36; and a leg of lamb would cost £53.18. These figures, compiled by Shelter, are shocking; Britain would face catastrophe were these today's prices...

Agreed so far.

But there is a difference between consumer goods and food and homes. The latter are assets, and these naturally tend to rise over time, not fall.

Nope, that all depends on what you class as an asset.

Nearly all physical "assets" - cars, buildings, roads, power stations - depreciate over time and need to be constantly repaired or replaced, and newer, better, cheaper alternatives are always coming onto the market. The occasional antique or collector's item are the exception to this, but again, it is not the value of the wood or the canvas which increases, it is the scarcity value.

Only "assets" whose value (i.e. market price) is dictated by the net present value of a future income stream tend to increase in value over time. The current value is the expected income you can derive from them in future, if that income is expected to increase, then the value of the "asset" increases.

So this basically means a) shares in companies with a reasonable amount of monopoly power or b) land, and you can argue over whether the income from land is monopoly income or whether it increases because of its scarcity value or a mixture of both. And clearly, if the value of something depends purely on future monopoly income and that income has not been earned yet, it is truly "unearned" and "speculative" in any sense of those words.

Rising food prices are entirely bad, yet rising asset prices boost owners' wealth.

Aargh! All things being equal, rising food prices are good for farmers and food retailers, and thus for good for people who own farmland (or manufacture things which enable more food to be grown) and people who own land suitable for retail premises (thus defeating his own argument).

Having established that it is not the value of the physical building which increases, purely the value of the land i.e. the estimated amount of unearned income from that land, all this means is that rising house prices (or rents) simply mean that in future, one group of people (today's non-landowners) will be paying larger sums of money to another group (current landowners).

The money which those tenants and purchasers have to pay is out of earned income (from where else?) and so to sum up, rising land prices mean that in future, there will be bigger transfers from the productive sector to the unproductive sector. In general, how can that make us wealthier? That reduces the size of the economy - it is a negative sum game.

And in specific, the only people who benefit from this are the bankers (who cream off their bit of the land rents as mortgage interest), large landowners (who can fund a very comfortable lifestyle by selling off tiny bits of land at inflated prices) and existing landlords. Which in turn must mean that everybody else is a bit worse off.

The apparent rising wealth of owner-occupiers is an illusion, as it assumes they all want to cash in. The real reason they are wealthier is because they are probably earning more. So the land price is merely a measurement of the earnings capacity/potential of people living in that area and meaningless in itself (if you already count the increased earnings as extra wealth - which they are - it would be double-counting to include the land price increases as extra wealth as well).
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He then compounds his inherent contradictions by concluding that the solution is to allow more homes to be built, which would depress prices slightly in the very short term and be good for the economy anyway, however the gains are shared, but...
The second - and more interesting - part of his editorial debunks the Malthusian/Home-Owner-Ist myth that there is a shortage of land and that poverty arises because of over-population (both Ricardo and Henry George railed again this, the argument neither stacks up logically nor is it based on observation of what actually happens in the real world):

PEOPLE, not commodities, land or even capital, are the ultimate resource of an economy, as the US academic Julian Simon famously put it. Without talented, motivated, skilled and educated individuals, nothing is possible; capital itself is a product of labour...

Correct, obviously.

This is always a lesson that nations suffering from shrinking populations relearn at great cost: all the productivity growth in the world is rarely enough to compensate for the psychological and actual effect of a declining population, perhaps because there are hidden economies of scale in denser populations.

The economies of scale are not in any way "hidden", they are blindingly obvious and easily measurable, there is a famous meta-study that says all things being equal, average wages/output per person are five per cent higher if the town they live in has twice the population.

And the other way of looking at it is to look at land prices/rents. The bigger a town, the higher the rental values in the middle and the higher the average rental value per person, because the bulk of all those extra five per cents goes into higher rents.

So that debunks his solution - more construction in places with higher land prices will increase the population size/density and hence increase output and hence increase land prices/rents even further (however slightly).

Even worse, (for him), having incorrectly described rising land values as representing increased "wealth" he then merrily goes on to explain what the one and only true source of that "wealth" is - people in general and population size/density in particular.

So why not let people in general keep this extra value?

Killer Arguments Against LVT, Not (134)

I must admit, I blather on about the rental value of land being created by 'society' or 'the community'; the notion that if the government spends taxpayers' money wisely, it channels the gains in the direction of landowners; and the assumption that the value of your particular plot of land is largely influenced by what the occupants of surrounding plots do and not what you do, etc, but as a fair minded sort of chap, let's have a look at what the hard core Home-Owner-Ists have to say about it...

According to Channel 4 - who broadcast a lot of Kirstie Allsop's programmes, and she should know - if you want your 'investment to show capital growth', here is what you should look for when deciding where to buy:

1: What's The Area Like?
If you're worried about whether or not you'll feel at home with your new neighbours, fear not. Discovering everything, from your neighbours' incomes to what paper they read, is a cinch with a neighbourhood profile from www.upmystreet.com. Similar concerns about crime? This site will also provide the latest statistics.

2: High Street Hints
It's true that newly opened coffee shops, delicatessens and especially estate agents suggest an upward shift in an area. Unfortunately, shops tend to follow shoppers, so you may have missed your chance to get in early and snap up a bargain. However, it's still an encouraging sign that the times (and area) are changing.

3: Smartening Up
Many post-war town centres have become concrete wastelands, but planners are realising that braving the urban jungle is not what we want. Some quick enquiries at the local council may reveal if there are plans afoot to redevelop a town centre, which will make the area a more pleasant place to be.

4: Architectural Delights
Sought-after building styles - Victorian terraces or well-proportioned 1930s semis, for example - can push one area to the fore if surrounding neighbourhoods are less architecturally strong.

5: Mapping It Out
You're not the only refugee from gorgeous but unaffordable areas. Take solace in the 'ripple effect' - places on the boundaries of good areas often become desirable, so the best advice is to get out the map and look for likely candidates around your dream location.

6: Look To The Future
Thinking ahead is a must when buying, so don't just consider what you want from your house now - factor in what future buyers might want, too. Even if you don't have kids, your future buyers might, so try to pick an area with good schools. And it doesn't matter if you're a gym-dodger - potential purchasers may want one locally. No car? No matter - inadequate parking in an area will discourage car owners, so remember to bear this in mind too.

7: Home Improvements
Look out for any new developments and skips outside private homes, as they're signs of new blood moving in. Large disused buildings are also prime candidates for refurbishing into flats for professionals.

8: What Are Local Schools Like?
Check performance tables at the Department for Education and Skills and Ofsted inspection reports to see how schools are performing - marked improvements are a good sign. Also, see if there are universities in the area, giving you the option of future rental income, either for the whole property or just a room.

9: Quiet Life Or Night Spot?
An area that is peaceful during the day can turn into a swinging hotspot by night, so it's always a good idea to visit at different times, both during the day and week. Gangs of unsupervised kids hanging around are not a good sign of an area on the up.

10: Are Transport Links Decent?
New transport links signal investment, so investigate planned improvements on roads with the Highways Agency. To find out about existing travel links, contact National Rail Enquiries for trains, or Travel Line for buses.

Maybe I've missed something, but isn't that exactly what I've been saying all along?

It's just that I think this through to one logical conclusion - that it is better to tax community-created land values than to tax incomes; and the Homeys and Faux Libs draw the opposite conclusion - that skimming off the profits resulting from the efforts of others is a good way of making money. I don't think there is any disagreement on the actual facts, is there?

The VAT: Menace to Free Trade

For all those who've fallen for the line that "VAT is a harmless tax because it is borne by the consumer", here's a fine article by Jerome Corsi (from a US standpoint), written three years ago to the day, which explains that VAT is in fact a subsidy to exporters, and hence a barrier to international trade. Which ties in with my overall suspicion that the French and Germans cooked up this particular tax to suit their own economies/prejudices - the French farmers made sure that agricultural produce is liable at lower rates than manufactured goods; and the mercantilist Germans made sure that it allowed them to subsidise the export of manufactured goods to outside the EU.

But let's ignore these concepts of "importing" and "exporting"; and ignore the distinction between "producers" and "consumers" - ultimately, individuals trade with individuals, and ultimately everything is produced by and consumed by individuals, and look at income tax and VAT in the context of Ricardo's Law Of Comparative Advantage.

1. Clearly, people will trade with each other if it is to their mutual benefit. Specialisation brings benefits, therefore the more people specialise the more it is in their interests to trade with others, and the greater the surplus that can be generated. For example, if you can produce £100 of haircuts in a day but are rubbish at repairing your own car, then you are happy to cut hair all day and pay a mechanic £100 to repair your car. The mechanic on the other hand is rubbish at cutting hair so he comes to your salon, and so on.

2. So if you can produce something at a cost to yourself (in terms of hours worked) of £100 which is worth £150 to somebody else (and for which he is prepared to pay £150 in terms of his own output), you will be happy to trade with him; if you can trade your own output for something worth £140 you will do so; the same with £130, £120, £110 or even £101.

3. If we only had income tax (and all its variants, like National Insurance and corporation tax) at a current average rate of 40%, then it is still to your advantage to trade £100 for £101; after tax, you have improved your income/consumption by 60p.

4. VAT works the other way round - it creates an entirely arbitrary cut-off point at £117.50. If you produce something at a cost of £100 to yourself, you can only gain an advantage by trading it for something that is worth more than £117.50 to you personally. It is no longer to your advantage to trade £100 for £101; after tax, you would end up £16.50 worse off.

5. We know that most businesses have relatively small net profit margins of about 5% - 10% (which is blindingly obvious - any profit margin in excess of this gets competed away - any less than this and it is not worth entering the market), which in reality are profit margins of about 25%, three-quarters of which is swallowed up by VAT in the case of VATable businesses.

6. Think it through, and then try and work out by how much wealthier we would be without VAT (your guess is as good as mine, but the answer must be "a lot"), even if the price of scrapping VAT were higher income tax (which I am not recommending, by the way).

Early 19th Century British “Environmentalism”

Lengthy but well worth a read, especially the section on David Ricardo: "The interest of the landlord is always opposed to that of the consumer and the manufacturer." (1821).

From the introduction: Environmentalism is the social movement of the "landed interest" – an interest parallel to that of neither business nor labour. "Environmentalism" is readily identifiable in early 19th century Britain. This essay draws from the best-known writings of the era’s three most influential intellectuals for a portrait of an anti-democratic, anti-liberal social movement based in the aristocracy but claiming to represent the masses; a movement permeated with the ideas of over-population theorist T. Malthus; a movement benefitting from restricting land supply and suffering from advancing agricultural technology; that fought a cultural civil war using literary Romanticism and monkish asceticism; that was militantly protectionist regarding agriculture; that constrained industrial progress and spread fear of catastrophe.

Via Peter Risdon: