No-one saw this coming?” Balderdash!

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The widely believed proposition that this financial crisis was "a tsunami that no-one saw coming", and that could not have been predicted, has been given the lie to by an excellent survey of economic models by Dirk Bezemer, a Professor of Economics at the University of Groningen in the Netherlands.

Bezemer did an extensive survey of research by economists or financial market commentators, looking for papers that met four criteria:

“Only analysts were included who:

  1. provide some account on how they arrived at their conclusions.
  2. went beyond predicting a real estate crisis, also making the link to real-sector recessionary implications, including an analytical account of those links.
  3. the actual prediction must have been made by the analyst and available in the public domain, rather than being asserted by others.
  4. the prediction had to have some timing attached to it.”

On that basis, Bezemer found eleven researchers who qualified:

Researcher Role Forecast Date
Dean Baker, US Co-director, Center for Economic and Policy Research 2006
Wynne Godley, US Distinguished Scholar, Levy Economics Institute of Bard College 2007
Fred Harrison, UK Economic Commentator 2005
Michael Hudson, US Professor, University of Missouri 2006
Eric Janszen, US Investor & iTulip commentator 2007
Stephen Keen, Australia Associate Professor, University of Western Sydney 2006
Jakob Brøchner Madsen & Jens Kjaer Sørensen, Denmark Professor and Graduate Student, Copenhagen University 2006
Kurt Richebächer, US Private consultant and investment newsletter writer 2006
Nouriel Roubini, US Professor, New York University 2006
Peter Schiff, US Stock Broker, investment adviser and commentator 2007
Robert Shiller, US Professor, Yale University 2006

Having identified eleven researchers who did “see it coming”, Bezemer then looked for the common elements in the way that these researchers analysed the economy. He argued that if there were common elements—and if these differed from the approach taken by the overwhelming majority of economists, who didn’t have a clue that a crisis was approaching—then the only useful economic models would be ones that included these common elements.

He identified four common elements:

  1. “a concern with financial assets as distinct from real-sector assets,
  2. with the credit flows that finance both forms of wealth,
  3. with the debt growth accompanying growth in financial wealth, and
  4. with the accounting relation between the financial and real economy.”

A non-economist might look at these elements in puzzlement: surely all economic models include these factors?

Actually, no. Most macroeconomic models lack these features. Bezemer gives the topical example of the OECD’s “small global forecasting” model, which makes forecasts for the global economy that are then disaggregated to generate predictions for individual countries—like the ones touted recently as indicating that Australia will avoid a serious recession.

He notes that this OECD model includes monetary and financial variables, however these are not taken from data, but are instead derived from theoretical assumptions about the relationship between “real” variables—such as “the gap between actual output and potential output”—and financial variables. As Bezemer notes, in the OECD’s model:

“There are no credit flows, asset prices or increasing net worth driving a borrowing boom, nor interest payment indicating growing debt burdens, and no balance sheet stock and flow variables that would reflect all this.”

How come? Because standard “neoclassical” economic models assume that the financial system is like lubricating oil in an engine—it enables the “real economy” to work smoothly, but has no driving effect—and that the real economy is a miracle machine that always returns to a state of steady growth, and never generates any pollution—like a car engine that, once you take your foot off the accelerator or brake, always returns to a steady 3,000 revs per minute, and simply pumps pure water into the atmosphere.

The common elements in the models developed by the Gang of Eleven that Bezemer identified are that they see finance as more akin to petrol than oil—without it, your “real economy” engine revs not at 3,000 rpm, but zero—which can contain large doses of impurities as well as hydrocarbons. The engine itself is seen as a rather more typical gas-guzzler that pumps not merely water and carbon dioxide, but sometimes unhealthy amounts of carbon monoxide as well.

That’s encapsulated in the flowchart that Bezemer copied from a paper by Michael Hudson, shown below. Without credit from the Finance sector, producer/employers don’t get the finance needed to run their factories and hire workers; but with credit they accumulate debt that has to be serviced from the cash flows those businesses generate.

The component left out of the above flowchart—but incorporated in all the models praised by Bezemer for seeing the crisis coming—is that the finance system can fund not merely “good” real economy action but “bad” speculation on financial assets and real estate as well. This also leads to debt, but unlike the lending to finance production, it doesn’t add to the economy’s capacity to service that debt.

The growth in thus unproductive debt was the common element identified by Bezemer’s “Gang of Eleven”, which was why we most definitely did see “It” coming.

I’ll finish this analogy-laden article with a sideswipe at an inappropriate one—that this crisis is “like a tsunami”. Though that image captures the suddenness and devastating nature of the crisis, it is wrong not merely once but twice in characterizing how it came about.

Firstly, unlike a tsunami, this crisis was predictable by economists who take what Bezemer characterized as a “Flow-of-fund or accounting” approach. Secondly, a tsunami is actually caused by a huge shift in the planet’s tectonic plates, and the shift itself relieves the tension that caused the tsunami in the first place: in a sense, the tsunami resets the system to a tranquil state.

This financial tsunami was caused by the bursting of asset price bubbles driven by excessive levels of debt, but the bursting of those asset bubbles hasn’t eliminated the debt—far from it. Instead, economic performance for the next decade or more will be driven by the private sector’s attempts to reduce its debt levels, and this will depress economic activity for years. Unlike a tsunami, a debt crisis is a wave of destruction that keeps on rolling unless the debt is deliberately eliminated.

Everything that is being done by policy makers around the world is instead trying to restart private borrowing. A better analogy is therefore not a tsunami but a drug overdose—and our “neoclassical” economic doctors are attempting to bring the patient back to health by administering more of the same drug.

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253 Responses to No-one saw this coming?” Balderdash!

  1. dojufitz says:

    we_have_kangaroos

    i agree with you.

  2. Philip says:

    I see that a LVT should be seen as sim­i­lar to the cap­i­tal gains tax on equi­ties: doesn’t pre­vent stock mar­ket bub­bles and doesn’t replace the income tax but pro­vides a use­ful rev­enue stream to the gov­ern­ment. If com­bined with Steve’s mort­gage idea, it could become viable.

  3. evokadevo says:

    Steve, con­grat­u­la­tions on qual­i­fy­ing for Pro­fes­sor Bezemer’s list. That is an achieve­ment to be proud of.
    First:-I believed that the rea­son Hong Kong has a high LVT and low income tax was because over the cen­turies the Chi­nese have per­fected the art of run­ning appar­ently suc­cess­ful busi­nesses that pro­duce no tax­able income. On the other hand, you can’t avoid a prop­erty or land tax.
    Sec­ond. With regard to LVT in Australia.I just received my annual rates from the Hills Shire Coun­cil. My 285.5 sq meter plot in this shire is val­ued by the NSW Val­uer Gen­eral at $195,000.00 ie $683.00 per sq metre. The total are of the Hills Shire is 380 sq km. If you extrap­o­late it out, say only ten per­cent of the area at this “median” val­u­a­tion, the Hills Shire would be val­ued at approx. $25,954,000,000,000.00 dollars.i.e twenty five tril­lion nine hun­dred and fifty four bil­lion dollars.The entire USA national debt is less than that! I have heard of Enron Account­ing and Alan Bond val­u­a­tions! Is this sim­ply a Gov­ern­ment ini­ti­ated and under­writ­ten Ponzi scheme to keep local rates, all land val­ues and real estate prices HIGH? I know there are multi-variant analy­ses and other fac­tors, but this is what is under-pinning prop­erty prices in Aus­tralia. If it col­lapses the whole local and State Goven­ment finances col­lapse. That is why the Fed­eral Gov­ern­ment is doing “what­ever it takes” to prop up the whole prop­erty house of cards for as long as pos­si­ble. This is also prob­a­bly why Steve’s pre­dic­tion of a 40% drop in real estate pices is tak­ing so long to even­tu­ate, as per other rea­son­ings above, which I agree are con­tribut­ing factors.

  4. spadijer89 says:

    Rea­son,

    Agreed, cul­ture is very impor­tant. I don’t think there was any dis­agree­ment about that? Indeed, I was not sim­ply refer­ring to the British ten­dency to treat a rent own­ing class with rev­er­ence, but the entire Anglo-American cul­ture of wor­ship­ping rev­enues from rent, rather than from labour or cap­i­tal. Anglo-American cul­tures are asso­ci­ated with com­mon sense, patience, do not like rapid change, and like hard facts (i.e. pragmatism).

    Hence, pilot schemes are the only way to legit­imise a LVT: the old virtues of prag­ma­tism live on. If I can say “look, unem­ploy­ment is low in these areas is VERY low, home own­er­ship is VERY high, higher edu­ca­tion rates, higher income lev­els etc, we should imple­ment this every­where”. Oth­er­wise, how can you EXPLAIN this to peo­ple? You get pro­pa­ganda from the prop­erty lobby which would claim oth­er­wise– if you have clear EVIDENCE then that cuts off any such arguments.

    More­over, just because “most par­tic­i­pants incomes will be effected” is not a rea­son not to imple­ment them (actu­ally, what on earth do you mean by that: peo­ple IN the zones or peo­ple OUTSIDE the zones?). If you mean peo­ple in the zones, Geor­gist the­ory actu­ally pre­dicts, that incomes in these ZONES will rise: of course, they will rise– rents would plum­met (mean­ing more can go into cap­i­tal and labour) and if ALL other taxes are abol­ished, well that speaks for itself as pro­duc­tiv­ity would spurt and invest­ment would be diverted away from the land mar­ket and into the labour and cap­i­tal mar­kets (as it has EVERYWHERE a LVT has been the pre­dom­i­nate source of rev­enue). Peo­ple out­side the zones would be some­what dis­ad­van­taged: actual pro­duc­tion, the tax incen­tives would shift to the sin­gle tax zones (another rea­son to EXTEND the zone). I am also unclear what you mean by “gamed”.

    Plus, the rea­son I said the ACT and the NT would be the place to begin these schemes is because: (A) the state de facto owns the land and is some­what reg­u­lated, (B) there are no con­sti­tu­tional restric­tions, © debt per capita in these areas tends to be lower, (D) I rec­om­mend Fred Harrison’s “Ricardo’s Law”, which shows peo­ple in poor areas (i.e. West­ern sub­urbs) are essen­tially billed twice: first through the ser­vices they pay in nor­mal taxes, and sec­ond through higher land val­ues and rents. We use the lat­ter to fund the for­mer.
    Fur­ther­more, my ref­er­ence to the squat­toc­racy was more emblem­atic of what we should become: I think in our cul­tural evo­lu­tion we should free our­selves from the atti­tudes of the old world, of feu­dal­ist spec­u­la­tors in asset prices, and be cre­ators of our own des­ti­na­tions, of wor­ship­ping enter­prise and hard work over speculation.

    Also, rea­son, on inher­i­tance tax, recall that most goods that are “inher­ited” tend to be land related (houses, property’s etc). I do not see any prob­lems with inher­it­ing a busi­ness: no doubt a monop­oly, which I would argue was formed due to the strate­gic own­er­ship of land, sites etc as well as invest­ment in assets which allow peo­ple to assert their monop­oly in the mar­ket place. Per­haps, the word “cen­tral tax” rather than “sin­gle tax” is a bet­ter phrase, although the lat­ter com­mu­ni­cates the ideals of Geor­gism: tar­get­ing rents and inflated assets, not wages or prof­its. This is a moot point in your dis­cus­sion, though.

    Also, no one was equat­ing landown­ers with squat­toc­racy, but merely point­ing out the cul­tural ten­dency to wor­ship rents. Thus, your Switzer­land point is pre­cisely my point: they have a dif­fer­ent cul­ture, my pre­cise point is just that: they have a polit­i­cal sys­tem, which nur­tures crit­i­cal think­ing, and hence the cul­ture (that is, my implicit point is that the con­sti­tu­tional sys­tem impacts on the cul­ture and direc­tion of a nation). So, my response to that is, yes, I know these insti­tu­tional cir­cum­stances are just as impor­tant as cul­ture, and in fact, influ­ence one another. The Swiss peo­ple do not have cor­ro­sive real estate bub­bles, but one of the best economies in the world (as does Hong Kong). Per­haps, if Aus­tralia, if it ever becomes a Repub­lic, adopts a decen­tralised sys­tem of gov­ern­ment like Switzer­land and cit­i­zen ini­ti­ated ref­er­enda, some seri­ous pol­icy changes may occur… NB: The Swiss pro­duce, the Amer­i­cans con­sume – both eco­nom­i­cally and cul­tur­ally (that is, they have no crit­i­cal think­ing skills). Hence, Goman’s com­ment about his friend say­ing Prop. 13 allowed him to buy his home: if they had intro­duced a higher tax, it might actu­ally be more affordable!

    Evokadevo, Hong Kong also adopted it because the Chinese(formerly Ger­man) colony near it which had a 6% sin­gle tax on land, and man­aged to fund all its ser­vices and still remain in sur­plus. It worked so well that Hong Kong adopted it as well. Also, the answer is yes, rates are delay­ing the down­turn – if these val­u­a­tions did not occur not only would rev­enues col­lapse, so too would the entire finan­cial sec­tor. Low rates and land taxes, can, actu­ally inflated land val­ues (small land own­ers may sell their land to big ones). Sin­gle tax­ers just want a 100% tax.

  5. spadijer89 says:

    Steve, I agree that a pure LVT will not elim­i­nate bub­bles alto­gether, but can you actu­ally name me a bub­ble which gen­er­ated a depres­sion that was not pre­ceded by a land boom? I think you’re answer will be no. All major US Depres­sions were pre­ceded by land booms, most finan­cial cri­sises involved real estate mal­in­vest­ments (1955, 1970) and the South Sea Bub­ble and even the Tulip bub­bles also had land spec­u­la­tion present (indeed, recent research sug­gests the lat­ter may have been more a tulip land buy­ing bub­ble, rather than tulip bub­ble itself). And even these down­turns were quite sharp, acute even. The prop­erty sec­tor absorbs most of the finan­cial, build­ing, human cap­i­tal more than any other sec­tor and there­fore under­pins the entire finan­cial sys­tem and econ­omy itselfg.

    Stock prices etc always go up and down, but they do not gen­er­ate a depres­sion (at best a mild down­turn, if that). Indeed, con­sider the stock mar­ket. Did the 1996 stock mar­ket down­turn gen­er­ate a depres­sion? No. 1987? No. 1929? No (as the econ­omy was already in reces­sion). 1890? No. I recall that you said the 1987 down­turn could of caused a depres­sion had the cen­tral bank not inter­vened. While I agree with your analy­sis of debt, I dis­agree with you over­look­ing ini­tial shocks which may cause a down­turn (to the cap­i­tal struc­ture of the econ­omy) and inabil­ity to pay the debt – the stock mar­ket is never pow­er­ful enough to cor­rode the entire econ­omy, but the land mar­ket is (e.g. dur­ing the great depres­sion the first shock came in con­struc­tion sec­tor, which was 25% of GNP in the 1920s and most bank fail­ures were the result of falling land prices)- most real resources fall mercy and orbit the land mar­ket (not many real resources really get locked up in the stock mar­ket, e.g. construction).I doubt a stock mar­ket bub­ble will force con­struc­tion AND man­u­fac­tur­ing AND ser­vices sec­tor AND min­ing to orbit it in the same way as the land mar­ket (or accu­mu­late such debt). So, sure, there will be debt, per­haps, at most, a mild down­turn, but not a depres­sion (most of the busi­ness errors are con­fined to the stock mar­ket, but not through­out the econ­omy). Thus, your views on bub­bles can be main­tained, but are his­tor­i­cally incon­sis­tent with the data: land, not other spec­u­la­tive bub­bles, hurts the econ­omy more deeply.

    Nev­er­the­less, I do agree the solu­tion is two-fold: LVT (fis­cal pol­icy) *and* a return to the REAL DOCTRINES BILLS of the 1850s (i.e. busi­nesses lend not on prop­erty or stocks, but only busi­ness related issues).

  6. spadijer89 says:

    When it burst we would then have a debt-driven bank­rupt pri­vate sec­tor and a gov­ern­ment sec­tor devoid of revenue…”

    – Sim­ple case stud­ies refute this hypotheis: Hong Kong dur­ing the Asian Finan­cial Cri­sis, Pitts­burgh dur­ing the cur­rent down­turn and any down­turn in the last 100 years and the Ger­man colony of Kiauchau (for rea­sons I out­lined above: no “bub­ble” can absorb that many resources as land, par­tic­u­larly if there is a real doc­trines bill around and peo­ple become occu­pied with hard­work, not the unearned incre­ment of the land mar­ket; no other taxes means the econ­omy can adjust more quickly, busi­nesses can get back on work; indeed, Fred Har­ri­son would even say the prop­erty mar­ket dri­ves the busi­ness cycle, not the other way around). More­over, even dur­ing the Tul­lip bub­ble, parts of Hol­land ran sur­plus with land rates (although not the parts which expe­ri­enced the land and tul­lip bubble).

    And even if this is wrong, the above argu­ment also excludes the fact that if we are do adopt Key­ne­sian pub­lic works dur­ing this pur­ported down­turn, the infra­struc­ture built is desposited into higher land val­ues (in the areas pur­port­edly suf­fer­ing from unem­plomy­ment). So, projects fund them­selves as the econ­omy turns back up.

    http://query.nytimes.com/gst/abstract.html?res=9A06E6DD1530E233A25752C0A9639C946196D6CF

  7. MACCA says:

    There is gen­er­a­tional change in the US. Spend­ing is not only dying, it is start­ing to be per­ceived as a sec­u­lar trend.

    http://www.bloomberg.com/apps/news?pid=20601213&sid=arUgjalkdR2g

    For the first time since Harry S. Tru­man was in the White House, Amer­i­cans are pay­ing back their debts,.…..”

    “We’ve never seen a pull­back like this,” Goldman’s chief U.S. econ­o­mist, Jan Hatz­ius, said in an inter­view from his New York office. “We are see­ing an adjust­ment, and it’s very painful and there’s a lot of col­lat­eral dam­age.”
    ”“If you look at var­i­ous mea­sures of debt in the sys­tem, they sug­gest what we’re doing is get­ting started on this adjust­ment; we still have sev­eral years to go,” Goldman’s Hatz­ius said. “We’re going to be at sav­ing lev­els that are much, much higher than they were in 2006 and, in many cases, permanently.’

  8. whereisthetruth says:

    Philip

    Thank you for your com­ments. While I agree that cap­i­tal­ism has some seri­ous down­sides, ie. that com­pe­ti­tion and the pure profit ethic almost guar­an­tees oscene wastage of nat­ural resources, and the poten­tial for mas­sive cor­rup­tion of the polit­i­cal sphere.

    How­ever, it is obvi­ous that social­ism has had lit­tle to boast of either. The biggest exam­ples of the cen­tral plan­ning model have all demon­strated the propen­sity for an equal or greater wastage because of gross ine­fi­ciency, along with a ten­dency to treat their pop­u­la­tions with con­tempt in the name of the ‘big picture’.

    In the­ory the best model should be a benign cen­trally con­trolled econ­omy that can effi­ciently mar­tial pro­duc­tiv­ity with min­i­mum waste toward eco­nomic activ­i­ties that enhance, not endan­ger, the populace.

    Unfor­tu­nately, I think that eco­nom­ics is a bit like pol­i­tics, to para­phrase Win­ston Churchill’s famous proverb ‘free-enterprise cap­i­tal­ism is the worst eco­nomic sys­tem ever devised, except for all the others’.

    Doesn’t make one all warm and fuzzy think­ing about that though, does it?

  9. Philip says:

    whereis­thetruth,

    I find the con­trast between state cap­i­tal­ism (cor­po­rate cap­i­tal­ism) and state social­ism (com­mu­nism) to be a bad joke. Under state social­ism, unelected unac­count­able state cen­tral plan­ners dic­tate eco­nomic deci­sions to the rest of soci­ety. Under state cap­i­tal­ism, unelected unac­count­able cor­po­rate cen­tral plan­ners dic­tate eco­nomic deci­sions to the rest of society.

    Under state cap­i­tal­ism, power is slightly more dis­persed within the econ­omy as there are mul­ti­ple com­pet­ing firms. How­ever, at least in the­ory, state social­ist cen­tral plan­ners were to make deci­sions that directly ben­e­fited the cit­i­zens. Under state cap­i­tal­ism, the only ones who ben­e­fit are share­hold­ers and managers.

    State cap­i­tal­ism is an awful eco­nomic sys­tem. The usual knee-jerk reac­tion of those who defend this sys­tem is to imme­di­ately com­pare it to state social­ism and to say that noth­ing could be worse. Of course any sys­tem could look good com­pared to the 20th cen­tury com­mu­nist societies.

    I think that both sys­tems have appro­pri­ated the pres­tige afforded to mar­kets and social­ism. What we live under are the state vari­ants of both and its effects upon soci­ety are clearly demonstrated.

    Mar­ket cap­i­tal­ist and lib­er­tar­ian social­ist economies have more in com­mon with each other than they do with their state vari­ants. Both offer a vision of a decen­tral­ized, account­able, demo­c­ra­tic, and equi­table economy.

    In Aus­tralia, we do not have a mar­ket cap­i­tal­ist econ­omy. We have a state cap­i­tal­ist econ­omy, with increas­ing free-market dis­ci­pline for work­ers and the mid­dle class. As our econ­omy is increas­ingly strength­ened in favor of the rich, this neces­si­tates even more social wel­fare inter­ven­tion for those who fall behind. The United States is the prime exam­ple of this.

    The only way the cor­po­rate sec­tor can even con­tinue to func­tion is that no econ­o­mist has both­ered to aggre­gate the costs that it imposes upon soci­ety. The only exam­ple I have come across was a fairly con­ser­v­a­tive (lim­ited) analy­sis by a CPA in a book called Tyranny of the Bot­tom Line.

    In the year of 1994, the US cor­po­rate sec­tor made $US530 bil­lion in profit (going to the top 10% who own the vast major­ity of debt and equity) while it imposed $US2.68 tril­lion of costs upon soci­ety (the vast major­ity of peo­ple being mid­dle & work­ing class). Thus costs were 506% greater than benefits.

    Fast for­ward to today in the US. Just the bailout of the bank­ing and finan­cial sec­tor may reach $US23.7 tril­lion. Add on to this all other neg­a­tive exter­nal­i­ties, state pro­tec­tion and crimes com­mit­ted by the cor­po­rate sec­tor. Its costs may well reach over $US30 tril­lion a year.

    As long as the ben­e­fits of state cap­i­tal­ism are trum­peted by its reli­gious defend­ers whilst lit­tle to noth­ing is said about the mas­sive costs it imposes upon soci­ety, very lit­tle will change.

  10. reason says:

    Steven (spadijer89)

    Thanks for your long reply.

    I think you have mis­un­der­stood my point about enter­prise zones — “only part of most peo­ples income will be affected”. The prob­lem is that these zones are not coun­tries — peo­ple can eas­ily use account­ing tricks to just use the zones to avoid tax. I think it will be dif­fi­cult to stop this sort of distortion.

    As for inher­i­tance tax, we have to dis­agree. I also think it is not right for busi­ness own­er­ship to become too con­cen­trated over gen­er­a­tions. I’m cer­tain that peo­ple have done sim­u­la­tions where rel­a­tive small ran­dom dif­fer­ences can be mul­ti­plied over time — because money makes money (there are other rents — not just land rents). A new guilded age is a dan­ger — with or with­out LVT. Money brings with it power, and dis­torts the whole fab­ric of soci­ety. I’ve got noth­ing against indi­vid­u­als who make extra­or­di­nary con­tri­bu­tions, receiv­ing extraoar­d­i­nary rewards, but I don’t think they should give extra­or­di­nary advan­tages to all their descendents.

  11. reason says:

    Philip,
    I don’t under­stand what you mean by “state cap­i­tal­ism” or what the alter­na­tive “free enter­prise” would in real­ity look like. I think you need to explain your terms care­fully. I’m scep­ti­cal of peo­ple using jar­gon with­out being able to point to spe­cific exam­ples to show that what they are talk­ing about is in fact feasable.

    I’m inclined to think that if there is one thing guar­an­teed to be worse than the sta­tus quo, it is a utopia. As whereinthetruthsaid.

    That said, I’m opti­mistic that intel­li­gent reform can bring progress. His­tory bears that out.

  12. reason says:

    Steven (spadijer89)

    I think you mis­un­der­stood Steve Keen. He was dis­put­ing that a LVT is suf­fi­cient to stop land price bub­bles. And I think Hong Kong is an exam­ple he might point to.

  13. reason says:

    While I think of it,
    in Ger­many there is a sort of prop­erty title, where peo­ple get to own the house, but don’t own the land (usu­ally the land is owned by Church or some sim­i­lar sort of trust). It reduces the price of the prop­erty, but you don’t get cap­i­tal gains. They aren’t very pop­u­lar, partly because of poten­tial dis­putes when the lease get renewed, but partly because you poten­tially are priced out of the mar­ket if you want to move. Poten­tially your spe­cial enter­prise zones could have the same problem.

  14. reason says:

    Every­body — to cor­rect a mis­un­der­stand­ing, it was Steven (spadijer89) who brought up cul­ture not me. I said I thought insti­tu­tional fac­tors were at least as impor­tant as cul­ture (and I live in Ger­many, and have an uncle who lives in Switzer­land — but I’m a born and bred Aussie — edu­cated in the same place and almost same time as Steve Keen).

  15. reason says:

    Steve Keen,
    reg­u­lat­ing the size of loans, tends to go a bit against the flow of a free enter­prise sys­tem. But I think hav­ing penal­ties that kick in at the appro­pri­ate place would acchieve the same thing with­out the heavy hand.

  16. reason says:

    Steve Keen,
    nice story about Cas­sander — peo­ple were won­der­ing. Maybe there is a Word­Press expert amongst the com­menters here?

  17. reason says:

    Steve Keen,
    I was just think­ing about your sug­ges­tion on lim­it­ing mort­gages. Isn’t the answer to look hard at the rights of the mort­gager to the prop­erty and put the lim­its in there. Then it is not mar­ket inter­fer­ence at all, but prop­erty rights that are being adjusted.

  18. reason says:

    Just a com­ment on the Geor­gians here — with­out being per­sonal I hope. There is an argu­ment to be made (and I think John Quig­gin made it about “Aus­tri­ans”) that the prob­lem with Aus­trian or Geor­gian eco­nom­ics, is not Aus­trian or Geor­gian eco­nom­ics, but the true believ­ers. I haven’t yet been con­vinced that that is not the case. There is a ten­dency to sweep poten­tial prob­lems under the car­pet and ignore refuse to con­sider alter­na­tive views appear­ing that is a bit disheartening.

  19. MMitchell says:

    Whereis­thetruth and Philip,

    I have still not heard any con­vinc­ing argu­ments against Prout eco­nom­ics. Ak did crit­i­cise them on the basis of their use of co-operatives, but it seems he was bas­ing his assess­ment largely on social­ist exper­i­ments, and other mod­els are prob­a­bly pos­si­ble (I can think of some). One ques­tion I do have is how it deals with land own­er­ship. I don’t know if any­one here can enlighten me on that? Maybe Prout doesn’t help with regard to LVT?

  20. Philip says:

    Inter­est­ing news arti­cle from Bloomberg: “Bernanke Gets Top Marks as Investors Say Econ­omy Is Past Worst”

    http://www.bloomberg.com/apps/news?pid=20601103&sid=ayUz0vNR2XGc

    Global investors give Fed­eral Reserve Chair­man Ben S. Bernanke top marks for com­bat­ing the worst finan­cial cri­sis since the Great Depres­sion and over­whelm­ingly favor his reap­point­ment amid opti­mism that the world econ­omy is on the mend.”

    No won­der global ‘investors’ favor Bernanke. He is one of the fore­most cor­po­rate social­ists in his­tory. Fed action became so twisted that it involved fis­cal pol­icy by extend­ing mas­sive sub­si­dized loans to unnamed corporations.

  21. reason says:

    Hong Kong prop­erty bust

    http://www.ln.edu.hk/econ/staff/costbursting.PDF

    David Brin’s address to the Lib­er­tar­ian Party (warn­ing about being too doc­tri­naire)
    http://www.davidbrin.com/libertarianarticle1.html

  22. spadijer89 says:

    Dear rea­son,

    These zones are not coun­tries – peo­ple can eas­ily use account­ing tricks to just use the zones to avoid tax. I think it will be dif­fi­cult to stop this sort of distortion”

    Firstly, oh, SORRYWAIT I see you MEAN…people over­seas. Ah. Well, if peo­ple use the zones as tax havens, good on them. That’s the idea: I sup­port eco­nomic free­dom. Curi­ously, I do not recall this prob­lem occur­ring in too much in any US enter­prise zones or those in the UK. But if that’s the best argu­ment you have against sin­gle tax zones, I do not think that is par­tic­u­larly com­pelling: in fact, it may even be desir­able. Quasi Switzer­land and Liecht­en­stein seem ok to me. If their own coun­tries do not sup­port free­dom, (parts) of my coun­try will. It may not be good per se for the coun­try whose citizen’s avoid the tax, but I don’t think it will hurt the peo­ple in the zones. Also, the “priced out of the mar­ket” I think is a good thing: a per­son who wants the piece of land REALY REALLY badly, imply­ing they will use it pro­duc­tively, will go for it – curi­ously, in Syd­ney the areas where gov­ern­ment owns water­front sites (so the state gov­ern­ment leases out to eat outs, cafes etc) make the largest prof­its in the North­ern beaches and are very pro­duc­tive (this is where I partly got the enter­prise zone idea from). It makes peo­ple ques­tion whether this is the area for their busi­ness (so it pro­motes sim­i­lar busi­nesses in sim­i­lar areas: chemists oper­ate near chemists, lawyers near more viable lands etc). So, again, your claims are eas­ily refuted when one looks at the empir­i­cal data.

    Sec­ondly, you’ve missed my point com­pletely. Most of these busi­nesses, which are inher­ited, ENTAIL large LAND BASED assets: farms, prop­er­ties, homes, cool apart­ments etc. To main­tain these assets under LVT, the per­son run­ning the busi­ness have to CONTINUE mak­ing the busi­ness viable and use these assets appro­pri­ately (or move over for some­one who will). Fur­ther­more, Frank Still­well finds that most inher­ited wealth (82%) is backed on some sort of land value (and in that report it EXCLUDES busi­ness loca­tions, which them­selves are based on land value). Frankly, there aren’t too many busi­ness which are inher­ited which are not quid pro quo: a business’s via­bil­ity depends on the indi­vid­u­als who run it. You can ask James Packer that (includ­ing all the man­sions he owns). Again, rea­son, I would appre­ci­ate an RATHER than an . My argu­ment here is I think you have a point that LVT is not the WHOLE solu­tion, but it cer­tainly deals with the MOST SERIOUS parts of the prob­lem. Indeed, 1) most inher­i­tance some­how relates to land value assets and 2) busi­ness suc­cess, inher­ited or not, depend on a quid pro quo rule: to remain viable the peo­ple who inherit it must pos­sess some degree of com­pe­tence and exchange goods which ben­e­fit the peo­ple who buy that good.

    Finally, if I was being dog­matic, rea­son, I would not have come out and said we need a real doc­trines bill in bank­ing, now would I? Fur­ther­more, a dif­fer­ence between Aus­trian true believ­ers and Geor­gists is we are hard­core empiri­cists – we use the facts, not just logic, to back up our argu­ments. So we have some­thing to be dog­matic about; nev­er­the­less, that is not the case here. You weren’t being per­sonal, just silly.

    Ps Yes, we know I brought up cul­ture, and it seems to me you’ve con­ceded the point that con­sti­tu­tional arrange­ments influ­ence the out­comes of one’s cul­ture and vica versa.

  23. spadijer89 says:

    Steve,
    Rea­son may be right I may have mis­un­der­stood you. I got the impres­sion you were talk­ing about bub­bles in gen­eral, and hence, OTHER debt bub­bles (say in stocks or tul­lips) might lift up land val­ues owned by banks or farm­ers: “but I expect that think­ing a LVT would elim­i­nate bub­bles is mis­guided”. When such bub­ble burst, so do land val­ues and the government’s rev­enue base. Then again, you do talk about it in the con­text of house prices, so I sup­pose reason’s inter­pre­ta­tion is also valid. The rea­son I assumed this was because I thought it was obvi­ous a 100% tax on land would elim­i­nate land bub­bles, and hence, I assumed Keen was talk­ing about OTHER types of bubbles.

    Either way, I dis­agree with the premise for rea­sons out­lined pre­vi­ously and because, I don’t think Steve Keen (albeit I can­not speak for him), would seri­ously argue that a 100% tax on land wouldn’t stop land spec­u­la­tion. True, maybe a 5%, even a 15% tax would not stop a spec­u­la­tive bub­ble (AGREED!), but a 100% tax cer­tainly would – why invest some­thing you will be taxed in? Indeed, it just hap­pens to be the case that in all the places in the US with a high prop­erty tax, e.g. New Hamp­sire, are the areas with the least fore­clo­sures and con­tinue to be the states’ best eco­nomic per­form­ers, some­thing Karl Case pointed out when he was in Aus­tralia, which Steve him­self as in the audi­ence. Hong Kong was hardly hit by the Asian Finan­cial Cri­sis, due to its LVT, and most of the spec­u­la­tion that does occur because of exemp­tions and crony-ism, both of which can be reme­died quite eas­ily. Curi­ously, remem­ber that 1910 arti­cle from the New York Times? Well, they had a 6% sin­gle tax and had no land bub­bles (instead invest­ment was diverted in busi­ness expan­sion and pro­duc­tion). Like­wise, in Pitts­burgh, a LVT tax­ing city in the US, and its most pro­duc­tive city, while land val­ues across the US were ris­ing by 30%, there they only rose 6%. This is cer­tainly the case if you com­bine LVT and the real doc­trines bill. As if you would invest in land when all your cap­i­tal gains (actu­ally, cap­i­tal does not gain) goes to the state lol. So the empir­i­cal data and eco­nomic the­ory eas­ily refutes those views. My con­clu­sion remains.

    pps Rea­son, your Hong Kong point is invalid as dur­ing that period the gov­ern­ment actu­ally relaxed LVT, and put it higher in the advent of the Asian Finan­cial Cri­sis. Notice that the arti­cle says ‘in Hong Kong we do not have many home­less fam­i­lies’ — see Geor­gism pro­motes equal­ity, too. Fur­ther­more, Hong Kong derives its rev­enues from land sales (some of which are spec­u­la­tive), rather than land taxes per se. I pre­fer Switzer­land and the US as case stud­ies as they involve land taxes, not quasi crony state owned sales (I used Hong Kong as an exam­ple of the fact land derived rev­enues can fund gov­ern­ment services).

  24. reason says:

    I don’t find the argu­ment about “a busi­nesses via­bil­ity depends on the peo­ple who run it” con­vinc­ing, as
    1. you can hire peo­ple to run it — many for­tunes are now dis­trib­uted own­er­ship of many busi­nesses
    2. there is plenty of plant and machin­ery in inher­i­tances (not to men­tion good will and knowhow and patents) that gives con­cen­trated unearned returns.
    And the point that inher­i­tances (NOW) con­tain lots of land val­ues — well (doo!) you are argu­ing that in present cir­cum­stances sur­plus value accu­mu­lates in land. To claim that sur­plus value won’t be passed on in some other way if LVT decreases land val­ues is assum­ing some­thing you don’t know. Evi­dence please!

  25. reason says:

    P.S.
    For­eign­ers? No just peo­ple who run busi­nesses or live and work inside and out­side the spe­cial eco­nomic zones.

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