Proposed new local spending currency can only work with a full land rent

Council owned land Manukau. The other property owners get unearned capital gains from rise in land value.

Two of my previous posts have advocated local authorities get authority from Government to issue a new currency which decays like ordinary goods decay. It would exist alongside the national currency. Because it decays, it will circulate much faster than the national currency, the rate being dependant on the rate of decay.

The previous idea was to do what the Mayor of Wōrgl, Austria did during the Great Depression in 1932, to spend it into existence by paying part of the wages of council employees in that currency. In the case of Wōrgl that was a Work Certificate that had to be stamped every month. Owners of the certificates would have to buy a stamp every month worth 1% of the note’s face value. That means over 12% a year of decay, or a -12% interest rate. Well that turned out to be big because the certificates circulated so fast that the town had to withdraw a large percentage of the notes from circulation.

Unemployment dropped and a great deal of infrastructure was built all within the space of the 15 months that they currency existed. Wōrgl was the centre of attention and many local towns wanted to do the same.

The locking down of countries including of borders during the pandemic has left us facing a worldwide depression worse than the Great Depression. In New Zealand we will always be partly dependent on the rest of the world, no matter how successfully we manage our borders to keep out the virus. Interdependence is a fact of life.

But there has always been another elephant in the room. If you could buy property with this new local money that circulates so much faster than the national currency it would fuel a property boom. You would just blow up land prices. And, as anyone familiar with leasehold properties knows,  you can only keep land prices down by extracting the proper land rent from them.

It is possible, even probable, that Wōrgl in 1932 will have had their rates struck on unimproved land values and their rates might have been relatively high compared with 21st century New Zealand. I don’t really know.

To stop speculation land rent is needed

The elephant in the room is about the need to have a full land rental on land. What is that, you say? It should be about 5 or 6% of the unimproved land value, according to valuers I know. And this should go to the public purse because it is the public that has built the infrastructure to give the landowners the windfall and it is the public that has set up businesses and organisations and clubs and facilities in the district. And we know the main cause of wealth disparity is the privilege given to property owners.

Well, think of Auckland which has had leasehold land for years and the land owners reap that windfall which rightly belongs to the public (read Central Government or Local Government).

In 2108 Core Logic estimated there to be roughly 17,000 leasehold properties currently in New Zealand. A lot are in Auckland and 15% of central city apartments are on leasehold land. Land is usually owned by churches, councils. Christs College in Christchurch once owned land under 2000 homes there. Most online references to leasehold land mention the banks are  averse to lending on leasehold land. Many tell you that investors  won’t get any capital gain and some talk about the sudden jumps in yearly ground rent, especially when the land rent rises if the land is sold. Most ridiculous of all you still have to pay rates. What a mess!

The banks are loath to lend on them. Guess why? Because when land increases in value due to community activity around it, and the land is sold, the banks will be able to lend out more money. Or I should say they will be able to create more brand new money and get the interest on it. As a group banks want their share of the eventual capital gain. But with leasehold properties, they would be lending only on the value of the house and that doesn’t have any capital gain. In fact it usually declines.

Obviously the owners of  land are the ones to gain from a tax system that turns a blind eye to their unearned gains.  Groups that lease out land with houses on them include St Johns Trust in Auckland that used to own more, but still owns properties in Tamaki Drive. The rent they enjoy should be reaped by society.

If you buy a house on leasehold land you pay a ground rent. This can be enormous and it means that the price of leasehold properties is extraordinarily low. Add in the sudden jumps of the seven year lease reviews and you get more problems.

Let’s look on Trademe Property. One house advertised now called On the Park is in Campbell Road, One Tree Hill costing $170k with a rental of $27,500 a year, fixed to 2017. The agent says the big house would cost $2 million if it were on freehold land. At a 5.5% rent ratio I work out that the land value would be around $500,000.

Ngati Whatua owns some properties on leasehold land and Napier Port used to. There will be many more owners in Raglan, New Plymouth and Lake Rotoma who are reaping the full land rental.

Land owners, industrialists and bankers still hold power

So let’s get back to  the process of colonisation because this may shed some light. When colonists arrived they  were steeped in Western economic belief that land could be owned, whereas this was a completely foreign concept to Māori. Moreover our colonist ancestors had commercial banks and within decades had a national currency. Tax had to be paid in that currency. It’s all tied up. Britain had of course previously discovered that land ownership led to a huge growth of banking and industry. But they had to subvert the economics departments of universities to prevent them from telling it how it was. As Mason Gaffney and Fred Harrison wrote, the land barons, industrialists and bankers were the ones originally to corrupt the economics departments of American universities by conflating land with capital and omitting mention of banks and money.

Today that power is ever present. Efforts to bring in a full land tax or land rent at central Government level will prove fruitless. The 2010 Tax Working Group report concluded a land tax was needed but it was completely ignored by the then government. Our Prime Minister stated in 2019 that while she leads the Labour Party there will be no capital gains tax. And both of these reports recommended that only a small proportion of the unearned gains be recouped by Government not the full land rent. They belong to Government.

So how do we find a solution?

Somehow, somewhere, someone is going to finally understand that working for reform at central level is not going to have results. We don’t need to waste all that time fruitless badgering central government when their hands are actually tied. The banks, the land owners and the industrialists, even of New Zealand Aotearoa, are between them far too powerful to allow a full land rent nationally and what’s more they will resist any monetary reform at central level.

It’s how the world works.

Could the other way of issuing new money be by buying up land using partly the new local money that decays? And if so, what land should be bought? Can the Council like the NZTA force the sale of property? At local level land at least some land is Council owned now.

It’s usually parks, cemeteries, and golf courses that are owned by council now. Auckland

And could local government collect the full land rent? Councils are bound by the laws governing them. They can only strike their rates as Central Government dictates and rates have never captured the full land rent. Landowners still reap some unearned capital gain.

There is one thing that is currently hard to get our heads around. Councils at some time are going to have to defy or disobey the Central Government. The political challenges of combining a full land rent with monetary reform are considerable, but not insuperable if we put our collective minds to it.

If we don’t, the wealth gap will continue to widen and when we have so many ultrarich we won’t be able to control climate change. Oxfam in a 2015 study found that it is this group of ultrarich (10%) that emits half of our total emissions. And with an unliveable climate billions will die. That is not being too melodramatic.

 

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Rebooting the Economy for Justice and Sustainability

Here is my recipe for what Government must do to revive the economy after the coronavirus.

  1. Have a Debt Jubilee. Our private debt has been growing steadily, fuelled mostly by the housing bubble. It has been going up since the GFC in 2008 and recently flattened out. So how does private debt get relieved? By a one- off handout to all citizens. Australia after the GFC was the only country to not to go into a recession after the GFC, largely because it gave $1000 to all who had paid tax. The handout was reduced for those receiving higher salaries and those receiving $100,000 or more didn’t get one. In addition they doubled the handout to first home buyers. Those receiving it must pay off their debt with it as a first action. Of course this should go to everyone with a bank account not everyone who had paid tax the previous year as it clearly omits those who care for children without pay or who care for elderly.
  2. Because the virus has exposed the huge poverty and homelessness in New Zealand, it is critical to address the housing issue. So far we have had the wrong approach. The large gap between rich and poor is largely the result of “the getting on the housing ladder” phenomenon. Those who own houses have seen their net wealth increase because the price of houses rises. Recently the best way to invest money is to buy property. The price of houses rises due to a. The building of government infrastructure like railway, hospitals or schools. b. Local government infrastructure like roads, buses, sewage, water, underground rail. c. Natural features like rivers, elevation, lakes, climate. d. Commercial activity in the area. e. Neighbours building. In other words society as a whole is responsible for rises in house prices. The capital gains belong to society not the individual land owner. Of course the building value doesn’t increase it is actually the land value that increases. Land Value Tax is the obvious solution but the nearest thing we have now is the rates let’s look at that. Unfortunately if we have got into the practice of striking rates on the capital value of the house so we disincentivise building. So one of my first actions would be to legislate to require all councils to strike rates on land value alone (or unimproved value). This would also stop urban sprawl. I also think rates should be levied as a percentage of land value, and this should be raised at the same time as income tax and GST are phased out. GST is regressive and income tax is plain illogical. And you could reduce the cost of resource consents which would make it cheaper to build. While talk of a wealth tax is easily understood, it should be for using land and other natural resources not that acquired through entrepreneurship or hard work. This action would also divert investment towards useful businesses. Most investments in NZ now are property because our tax settings have encouraged it.
  3. The third thing I would do would be immediately would be to establish a public bank like the Bank of Dakota to fund infrastructure. Alternatively the Social Credit leader and many economists have talked about the Reserve Bank buying Government Bonds at zero interest from the Treasury. I am not sure which of these would be better.
  4. You may have thought that a UBI should have been first on my list. No, it’s not because if it is funded the wrong way it is disastrous. For example by putting up GST or income tax – wrong. UBI should be thought of as “sharing the rents”. People are getting back what they are entitled to. In other words our real wealth is our land, our water, our fisheries, our forests, the air. Those who monopolise more than their share should compensate the rest of society. Carbon taxes and pollution taxes fall into this category as well as land, which is the big one. But also tax on natural monopolies, like the monopoly to create the country’s money which the banks have.
  5. Legislate to allow councils to create a local currency with a circulation incentive. The law would also require the more well-off local people to back the currency with national currency and a committee to ensure there was no inflation. This currency is strictly for spending and is not a saving currency. It may be that government itself could issue this currency, since it would be simpler to alter all EFTPOS machines to accept two currencies and we are a small country.
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Democracy is not enough

For a society to move forward and to be fair, improving democracy is not enough.

Yesterday I attended a talk by Max Rashbrooke in Wellington. He had put out a new book – Government for the Public Good published by Bridget Williams books and costing above average. The talk was good and the matters he raised in it were important and oh so well articulated. I loved hearing the stories of Citizen Assemblies in Ireland on abortion, Iceland on their constitution, and in Taiwan on Uber and how they worked so well that they solved potential clashes and resulted in legislation that stuck. All good. (Especially as in one case people started to respect politicians more after the long process).

He talked about general dissatisfaction with government, the research on the privatisation of prisons, on charter schools and the importance of teaching people to argue for government ownership (not “intervention” as this language implies the market has the right). He talked about the ‘level of taxes’, assuming of course that the main taxes are taxes on income.

Better methods of decision making are always interesting and important.

But where was the deep thinking on taxing land and other natural monopolies? Absent. This is a man who has written so well on inequality so I understand he believes that to have a functioning society we need only a narrow gap in wealth between the groups in society.

So on the train home I turned my attention to what he had missed.

To obtain social justice we need a concept of the commons and a mechanism to ensure the commons is shared. The big one is land. Not all people can have the exclusive rights to the same site at the same time. So we need to charge regular rent for monopolising the use of land sites and other parts of the commons or natural monopolies.

Charging a rent for monopolising any part of the commons, including natural monopolies like ports and airports is the way to share our commons.

What we already do towards this goal, sometimes totally inadequately
Charge rates on land or property value which includes land. So minimal at the moment it should be in the second category. Each site is unique and a natural monopoly.

Commercial land in downtown Auckland is most valuable land and owners need to pay full land rent. Currently this is minimal. Rates are not a burden for them.

Charge taxi licences.
Charge yearly for registering our cars This is effectively a small road user charge.
Charge road user charges. Drivers of light diesel vehicles and heavy vehicles pay levies through road user charges. No doubt far too small as it by no means pays for road damage they cause.
Fishing licences for freshwater fishing, none needed for sea fishing.
Fisheries are a public resource and so sea fishing is regulated through selling fishing quotas. But not annual payments
Railways in New Zealand had mostly been owned and operated by the Government. Never meant to be profit making business. Privatisation in 1993 failed.
Broadcast licences for monopolising a certain bandwidth.
Royalties for gas and oil are charged.

What we are not charging for
Power retailers
Water use for irrigation no rent charged. Water rights are on a first come, first served basis and cost nothing.
Water use for water bottling. No charges yet.
Airports. Most big airports have shares held privately as well as some held by the local council. So rent should be charged proportionately. Private airports pay a tiny nominal rent to local government in the form of rates.

Paraparaumu airport is privately owned. It should be paying a rent for monopolising special land

Wellington Airport is two thirds owned by Infratil and one third by Wellington City Council. So Infratil should pay a substantial rent for the monopoly privilege.

Ports.
Health services
Prisons
Schools
Forestry
Banking. Since private banks have the monopoly of creating 98.5% of New Zealand’s money supply and money is part of the commons, they should pay a high rent for the privilege. (Their method of creating money as interest bearing debt should be regulated by government too)

Underground pipes and fibres. Chorus should be charged rent for the privilege of having a monopoly over using land for this purpose.
Subsoil minerals.
Patents
Satellite Orbit Rights

And then there are the rents not paid yet for the monopolising of soil, rivers, lakes, sea, biosphere for dumping waste. This includes all climate change issues and all pollution of waterways and soils.

There are two people I know who have done studies on these resource rents and how much they can raise. Karl Fitzgerald for Prosper Australia in The Total Resource Rents of Australia report finds monopoly rents are capable of replacing taxation at all levels of government.

Earlier Gary Flomenhoft while a lecturer at the Gund Institute in Vermont, got his students to work on a study to estimate the potential of resource rents on common assets for public revenue and put it together in a report.

In both these studies the potential revenue from land rent dwarfs all others.

Yes Max democracy is fine but you also need to democratise wealth. Democratising resource use, understanding that rent must be paid for use of the commons is a concept we all need to grasp. There is very little argument for taxing what is good, like work!

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Time to halt privatisation of high country

Although about a fifth of the South Island high country is owned by Government and leased out to runholders, this is changing. Since 1992 the Government has allowed the privatisation of leasehold land. Called “tenure review” it involves an unusual deal and the government loses. The runholders because of their input into the farm claim the improvements belong to them. They end up getting part of the farm for a song. No I am wrong – they sometimes make money on the deal by a strange mechanism. And then they flip it on, making millions in the process. The less valuable land is kept for conservation. There is something strange about the land valuation process.

So why on earth does the public purse lose? To retire the pastoral rights, the Crown paid runholders $36 million (or $656/hectare). That is ridiculous. It is all explained by Dr Brower in April 2107 here and the Environment Court at that stage made a case for stopping freeholding of land in the McKenzie Basin.

The picture above from Stuff shows this week’s protest by Greenpeace about a farm near Twizel where the farmer wants to run 15,000 cows. Many local farmers and even Fonterra joined Greenpeace in opposing this dairy conversion.

All the figures and stories are given in her post and she ends by saying “The best, easiest, and cheapest thing New Zealand could do for the land and water of the South Island is to stop high country tenure review. Better late than never.”

As Charlie Mitchell from Stuff points out, the best land stays in pastoral use and the deal is skewed towards the wrong side. “You might assume that ownership rights to valuable land would be worth more than occupation rights to less valuable land. But the Crown believes the opposite, so it has purposely lost money through these deals.”

More recently we saw the headline “Flipped. From zero to $17.5 million.” This involved a lakeside property on Lake Hawea. Previously under tenure review the farmer had been paid $2.2 million by the crown and had paid nothing in return. Then he onsold it for $17.5million. Flipped from zero to $17.5 million by Charlie Mitchell. An earlier article is one on McKenzie country

Of course after privatisation the owner can subdivide so by April 2017 what used to be about 120 leaseholds is nearly 4000 parcels of freehold land.

The Minister of Lands Hon Eugenie Sage has her work cut out to change this situation.

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Which do you fancy – Economic Growth or Financial Collapse?

I have now watched a TED talk on this topic twice and can’t help but respond. Ecological economist Marjan Van Den Belt is right when she says “we are mindlessly addicted to economic growth, we are growth junkies.” She advocates reciprocity in economies and says that is the key to a circular, sharing, regenerative economy. So far so good.

She urges listeners to take “a small step in the right direction”.  She points out that goal 8 of the UN Sustainable Development Goals is “meaningful jobs and economic growth”. What a shame they the UN doesn’t appear to understand that growth measures both good and the bad and doesn’t distinguish between them. So every time someone gets lung cancer that is good for growth, and when there is an accident the same. But when a mother cares for her preschoolers well or a family member cares for a frail older relative, the GDP doesn’t budge. Family work, voluntary work are not counted.

She also says neoclassical economic theory describes people as homo economicus – rational, self-centred and suggests trying to put that on your profile for a singles site. Yes.

So why do I want to respond? Because we are trapped. We have designed the money system and the land tenure system and together they are leading us by the nose to the growth imperative. And what happens if the economy doesn’t grow? Why it collapses of course. So is this economics professor really suggesting we crash the money system by allowing economic growth to grind to a halt? Does she really want us to have no money in the system, to have ATM machines that don’t work, to have plummeting house prices with negative equity and all the ensuing misery of foreclosures and bankruptcies? I doubt it.

Yes she wants a new paradigm and quotes Buckminster Fuller’s exhortation to build a new model. Good.

That is exactly what I have done in my new book The Big Shift. Although there may be other possible ways to get there, together in our little new economics think tank we designed this new model and believe once it is built and once it flourishes it will provide not only appropriate jobs, but where jobs are not possible, it will give a basic income so that parenting, inventing, producing needed sustainable energy and products will also flourish.

You see we need to get back to community owned land and community created and designed money systems. I know it is a huge leap for our thinking to get to community owned land and we can only do this fairly by adequately compensating landowners for their land. We can only do this by creating new money because there isn’t enough in the system of the conventional debt-based money created by banks.

Today I had a lovely email from a Green Party activist who said, “I have spent the weekend reading your book, couldn’t put it down. All amazing and well outlined ways to change our world small sections at a time. However, are there enough of us who are willing to take that last step?” And she wanted to buy a second copy to lend out to friends. Nice.

And she wanted to buy a second copy to lend out to friends. Nice.

For those wanting to read more about how neoclassical economics started and why, I suggest reading The Corruption of Economics by Mason Gaffney and Fred Harrison. It outlines how neoclassical economics started as a reaction to the influence of Henry George. Land barons, industrialists and bankers paid scholars to corrupt the discipline. After two decades they had succeeded in getting any mention of land, banks, money or credit in the mainstream texts. They had subsumed land under capital so successfully that even forward thinking economists like Gareth Morgan fail to mention land as a separate factor of production. Moreoever he also fails to mention money creation.

This emphasis on pointing out the fallacies of measuring the economy as the growth in GDP has gone on since the 1970s so it is great that more know about it But they don’t know what causes the growth imperative, which, as Steve Keen has pointed out, is the combination of the tax system that fails to address rises in land value (and other assets) and the faulty money system.

 

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