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.



Councils should have power to create rates vouchers

Councils should have the power to create rates vouchers

Recently we heard from Auckland Council about their dire financial situation. The Herald reported 23 May 2020 that they had “put together a $65 million hardship package for people struggling to pay rates as a result of the Covid-19 pandemic. They were also looking at reducing some services temporarily and selling or leasing more non-core assets.”

Mayor Phil Goff “has firmed up a Herald report this week that council stands to lose $500m in the next financial year”, saying the council expects to have $550m less cash and it is conducting a review of jobs with redundancies likely.

Frankly this is not on. As citizens we rely on councils for potable water, sewage disposal, community halls, swimming pools, libraries. Without functioning wastewater systems we would have floods every time there was a downpour. After the 2001 earthquake Christchurch citizens told us how important it was to have water and it was more basic than having electricity.

In January Hutt City Councillors held initial discussions about what’s been recognised as a national challenge facing local government – funding the renewal of water infrastructure, with some estimating the investment required across the country to top $17.2 billion over the next decade.

And then there are the wastewater and stormwater systems to maintain and upgrade. The ‘three waters’ deliver public health, economic and quality of life benefits for communities.

So we solve one health crisis and are threatened with another.

For years Councils have been telling central government that they can’t continue to require higher standards for the purity of water and other legislative requirements without the matching funds to do this. The burden of climate adaptation falls mostly on councils as they struggle to get their wastewater systems upgraded to cope with more severe floods. They are faced with having to retreat from the coast after coastal erosion has made sea walls impossible to keep rebuilding.

The Fox River landfill disaster after a downfall in southern Westland was the first of many.  Almost 20 historic landfill sites in the Tasman district are at risk of being exposed by storm surges and sea level rise. Auckland has 89 of the 112 landfills nationwide at risk from just half a metre of sea level rise, and dealing with them may come down to excavating and completely moving them.

In summary Councils have too little money for too much responsibility and that includes keeping residents safe from big weather events and from health hazards of declining water standards, rising sea levels, waste pollution.

The Covid 19 situation means that local authorities now face rates defaults and deferrals, especially from business. We are now in a situation where, no matter how much we all want to support local businesses, in reality after our first burst of enthusiasm we are more reluctant to part with our dollars and just walk past the cafe. Just hold on to the money, you might need it in the future, says our lockdown brain. The problem is we have a currency that is trying to be a currency for saving and a currency for spending at the same time, and these functions clash, particularly in deflationary times.Councils need another superpower

Now we come to the suggestion. Various schemes have arisen  in communities since the lockdown. was set up in March by David Downs following the announcement. Through the site people can buy vouchers or gift cards for their local cafe and restaurant, which can be redeemed at a later date, ‘when this is all over’.

This morphed into You can now buy vouchers for businesses in 28 regions of New Zealand online. Garden centres, local hardware stores, cafes, greengrocers, hairdressers and dressmakers are all in. Everyone is asking the question: How do I support my local businesses? What can I do for my community economy? The only trouble is that to date the councils haven’t considered themselves part of the action. And of course the single store vouchers have a very limited life. A voucher is bought then redeemed at the issuer’s store and then it is all over. It doesn’t circulate any more than this.

This proposal is that only when it is redeemed at the council for rates it is cancelled because you only need one issuer, the Council. When it comes back to Council in the form of rates it is cancelled. The rest of the time it circulates as a currency in the community. Unless this local voucher is redeemable for the payment of something essential like rates  it will not circulate properly. That is what gives it its value.

Time for a New Superpower for Councils

Unprecedented times means we consider what was previously unthinkable. Local Councils have legislative power to levy rates on homeowners, but they do not have the power to issue money. As Reserve Bank Chief Economist Yuong Ha told broadcaster John Campbell on Tuesday May 19th, the Reserve Bank has this power to create money . “It’s our superpower”, he said. “Just as the Government’s superpower is to levy taxes and change them.”

So if we gave Councils the power to issue money, what would that look like? It could be in the form of a rates voucher, good for the payment of rates to that Council. The former leader of the Social Credit Party Bruce Beetham when he was Mayor of Hamilton in 1976 proposed financing municipal projects with “rates vouchers”, but the council’s lawyer advised it was illegal and it never got any further.

It is time to make these vouchers legal. In order that they facilitate as many transactions as possible and do as much good as possible they should be designed to circulate fast within the council’s area. So they should decay in the same way as ordinary goods decay. Manufacturer Silvio Gesell in the late 19th century’s Long Depression had unusable goods in Argentina warehouse, while he noticed those with money just hoarded it or increased their money due to interest. He argued that money if it is to represent goods must have the same undesirable qualities. He wrote,  “Only money that goes out of date like a newspaper, rots like potatoes, rusts like iron, evaporates like ether, is capable of standing the test as an instrument for the exchange of potatoes, newspapers, iron and ether.”

The Miracle of Wōrgl

After decades of attracting loyal followers, during the 1930’s Great Depression, Silvio Gesell’s ideas were put into practice.  In the small town of Wōrgl, Austria 1932 the Mayor put aside 20,000 schillings and used them as backing for notes called Work Certificates. They paid their employees partly in Work Certificates. Each note had 12 spaces on the back and a stamp had to be stuck on every month to validate the note. To avoid paying for the stamp people spent the Work Certificates quickly. Locals paid their taxes early to avoid the penalty. The city paved roads, built a bridge, a reservoir and a ski jump. Unemployment declined dramatically in the area – in stark contrast to the ongoing unemployment in the rest of the country. The currency was so successful that people came from miles around to witness what they called “the Miracle of Wōrgl”. But within 15 months, after pressure from commercial banks, the government made it illegal and Wōrgl went back to unemployment.

Of course nowadays  we don’t need actual notes. Paying in local vouchers can be done electronically and this would probably require the Eftpos terminals to accept two different currencies, one local and one national. I’m sure this challenge can be met. And in these extraordinary times Government must contemplate changing the laws to make these local rates vouchers legal tender. Otherwise any venture would be short lived. They will be victims of the same bank tactics as in 1933 Austria. We must learn from history.

Safeguards needed

Of course built into the legislation there must be a provision to control for inflation. The Reserve Bank has very limited ways of controlling the money supply these days. They can keep interest rates down to stimulate lending from commercial banks and force banks in other small ways. Fortunately with rates vouchers there are two methods of controlling inflation. One is to limit the number of vouchers spent on labour. Wōrgl found that after a very short while they had to withdraw about a third of their notes because they were circulating so fast they were causing prices to rise. The second is to adjust the rate of decay. Like your Flybuy points they drop off if you don’t use them. This rate is not just -1%  a year. Wōrgl started off with a -12% rate, which was obviously too strong. So there will have to be  local currency control committees everywhere for this job, perhaps elected.

This would save councils, ratepayers, businesses, and customers precious national dollars. It would provide councils additional funding for necessary local  projects, and be especially useful for paying labour. When our very health is at risk Government can’t go on watching Councils suffer. Nobody wants libraries or pools to close or sewage to flow down the rivers. Nobody wants decaying infrastructure or broken roads.

The second safeguard is this. The late Jeanette Fitzsimons, when asked her opinion on this currency, said she would worry that the last trees would be cut down, the fish would all disappear and all the  rivers would be dammed. So it will throw up the urgent need for strong and effective resource taxes to prevent this.

“Buy local” on steroids

Public discussion so far has largely focussed largely on the huge Quantitative Easing programme of the Reserve Bank  to buy Government bonds to stimulate the economy.  Yes we need more money in the economy. But the velocity of circulation has been a neglected factor in kickstarting the economy. This can be achieved by having a well designed new currency working alongside the national currency. When vouchers have a circulation incentive they itch in your mobile phone, asking to be spent. The voucher’s design changes the consumer’s mindset. It is a spending currency. The national currency is our saving currency and is used for buying imports like petrol, machinery, spices, coffee and cars.

A voucher designed this way would stimulate the community economy like nothing else. Here is how it might circulate within the local economy. A clerk at the Council receives rates vouchers as part of her pay. She spends some of them at the dressmaker who spends it at the wine shop. The wine shop owner spends it on fruit trees at the garden centre. That owner spends some of it at the dairy. The dairy couple, who have accumulated a lot of vouchers that week, decide to pay their rates in rates vouchers early before the penalty happens.

If we want now to implement the “buy local” mantra and have thriving local economies, we have to learn from experiences in the Great Depression and step out boldly. Given the appropriate safeguards the Reserve Bank could well agree with the idea. If the Reserve Bank was happy, the politicians would hastily amend the various laws to lift us out of this awful economic crisis.

Deirdre Kent is the author of Healthy Money Healthy Planet – Developing Sustainability through New Money Systems, 2005 and The Big Shift – Redesigning Money, Tax, Welfare and Governance for the Next Economic System, 2017. She lives in Waikanae. She is involved in the Living Economies Educational Trust.