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

Two of my previous posts  (and this one) 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 fast circulating local money 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 every year.

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 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 (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 or councils. Christs College in Christchurch once owned land under 2000 homes there.

Most online references to leasehold land mention that 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. So you are paying land rent to the owner and also to the Council. Not fair. What a mess!

So guess why the banks are loath to lend on leasehold land?  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 really 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.  Church groups that lease out land with houses on them include St Johns Trust in Auckland. They used to own more, and most of their properties are in Tamaki Drive. But this rent is really not theirs. They didn’t cause an increase in land value. The rent should belong to the whole of 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.

I summarised their book in another post.

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 their recommendation 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 the 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 government 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.

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 most of the 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 ultra-rich we won’t be able to control climate change. Oxfam in a 2015 study found that it is this group of ultra-rich (10%) that emits half of our total emissions. And with an unliveable climate billions will die. That is not being too melodramatic.