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. reason says:

    And in decid­ing such tax arbi­trage is a good thing, you are decid­ing low tax is in essence a good thing (I thought you guys were the Left Lib­er­tar­i­ans) rather than a polit­i­cal decision.

  2. Bill says:

    More heart­en­ing dis­cus­sion from the MSM: John Kay, using a quite enlight­ened anal­ogy of ‘mod­u­lar­ity’ from a really use­ful empir­i­cal field — engi­neer­ing — to accuse neo­clas­si­cal eco­nom­ics of ‘lunacy’ http://www.businessspectator.com.au/bs.nsf/Article/Economic-lunacy-pd20090722-U7CQ9?OpenDocument&src=sph

  3. whereisthetruth says:

    Philip,

    Your dis­cus­sion of the dif­fer­ences between ‘State Cap­i­tal­ism’ and ‘State Social­ism’ is inter­est­ing and thought provoking.

    Not being an econ­o­mist, I am endeav­our­ing to think through the under­ly­ing causes for us being in the mess we are in now, and (for the first time in my life) chal­leng­ing my beliefs about the dog­mas of cap­i­tal­ism that I have adhered to for most of my life. Thanks to peo­ple like Steve Keen and oth­ers such as your­self for assist­ing me.

    I guess that one per­sis­tant thought that keeps com­ing to me is that ‘in the­ory’ any eco­nomic sys­tem can be employed to ben­e­fit soci­ety. What is required is a near uni­ver­sal sense of good will toward oth­ers as a pri­or­ity over self inter­est and it doesn’t mat­ter whether you have a social­ist, com­mu­nist, cap­i­tal­ist, feu­dal­ist or any other kind of sys­tem. If peo­ple in gen­eral sought the best for oth­ers as for them­selves, dis­tri­b­u­tion of what ever wealth was cre­ated would hap­pen as a mat­ter of course. If the essen­tial moti­va­tion of mankind was the com­mon good, then there really wouldn’t need to be any reg­u­lat­ing gov­ern­ment at all. Wher­ever there was a need, effort would be employed to sup­ply a solu­tion, and so it would go.

    But in the ‘real world’ we are faced with a sit­u­a­tion where the sense of good will to oth­ers is sub­or­di­nate to self-interest. And in a world where threats exist and scarcity dom­i­nates, there is a nat­ural ten­dency to try to shore up one’s advan­tages as a hedge against these. It is how one man­ages the bal­ance between the uni­ver­sally recog­nised impor­tance of social good will and the ten­dency (and right) of indi­vid­u­als and col­le­cive groups to look after their own inter­ests that is the dilemma. Bot­tom line — isn’t this what gov­ern­ment is sup­posed to do?

    It seems to me that a sys­tem that dis­perses the polit­i­cal power and eco­nomic free­dom as broadly as pos­si­ble rather than cen­tral­is­ing it, in spite of the appar­ent the­o­ret­i­cal ben­e­fits of effi­ciency afforded by the lat­ter, is a more effec­tive method of lim­it­ing the dan­gers asso­ci­ated with ‘self-interest first’. Yet, as you rightly point out, even­tu­ally — regard­less of the ‘sys­tem’, inge­nu­ity is employed by some indi­vid­u­als to find ways to ‘stack the deck’ in their favour. I tend to think that it is this real­ity that is the great­est eco­nomic threat, not the ‘sys­tem’ itself.

    So, it would seem that, as his­tory seems to show, any polit­i­cal or eco­nomic sys­tem has a finite life-cycle, regard­less of it’s nature. To be sure, some seem to last longer than oth­ers (eg. the Soviet sys­tem lasted a mere 70 years), but even­tu­ally the sys­tem is over­whelmed by a build up of cor­rupt­ing influ­ences to the point of col­lapse. Then, after vary­ing degrees of social and eco­nomic upheaval, peo­ple are reduced to such mis­ery that they are forced to think col­lec­tively again in order to sur­vive, and a new sys­tem emerges. And so it goes.

    Per­haps that is where West­ern civ­i­liza­tion is at, and the con­se­quences are pretty much innevitable. Unfor­tu­nately, because the ‘west­ern’ sys­tem is so huge in size and reach, and the lead-up to this cri­sis is so great, the fall­out may be stag­ger­ingly enor­mous also.

    Do I make sense, or am I just wast­ing everyone’s time think­ing this all through ‘out loud’? I know I am think­ing more philo­soph­i­cally than ‘economically’.

  4. spadijer89 says:

    Firstly, on the issue of “a busi­nesses via­bil­ity depends on the peo­ple who runs it” con­vinc­ing. The point here is that in any busi­ness there is a head – for that head to remain there, or rather for the busi­ness to be viable, the right deci­sions have to be made. You argue “you can hire peo­ple to run it – many for­tunes are now dis­trib­uted own­er­ship of many busi­nesses”. This is my pre­cise point: the right peo­ple have to be hired to ensure that via­bil­ity. It involves a deci­sion, which may affect the con­ti­nu­ity and via­bil­ity of that busi­ness, which involves PRODUCTION or out­put (whether that should be a skill is irrel­e­vant to our dis­cus­sion: it pro­vides employ­ment and a deci­sion). The right deci­sion was (prob­a­bly) made. Iden­ti­fy­ing peo­ple skills is, well, a skill. Nev­er­the­less, the point stands: often these peo­ple (like the Don­ald) own lots of land in the first place and have a monop­oly (due to the sites he or she owns) which enables him to take the back seat. Busi­ness and land monop­oly are closely cor­re­lated (just ask the agrifarmers).

    Sec­ondly, “plant and machin­ery are also inherited”.…well, they gen­er­ally depre­ci­ate (imply­ing you have to ACTUALLY put them into use or sell them, before they become utterly worth­less). Land does not (just as Harry Hyams). Land inflates as pop­u­la­tion growth and pro­duc­tion occurs. The dif­fer­ence is the patents and machin­ery do not, gen­er­ally, vio­late the quid pro quo rule: they are doing things for peo­ple (although the patents less so). Nev­er­the­less, the point remains: most inher­i­tances is LAND related and there is a clear dif­fer­ence between land and cap­i­tal (one is mobile the other isn’t, one appre­ci­ate, the other doesn’t, one can­not be with­hold from the pro­duc­tion, the other rarely so).

    Thirdly, erm, I thought that tax­ing THE ENTIRE INCREASE in land value, was obvi­ous that it would not be passed on to oth­ers. Espe­cially, if you adopt the approach where the is a 100% land tax *at the point of sale*. My evi­dence is stated above: Var­i­ous Ger­man colonies, logic etc. Any­ways, I rec­om­mend Win­ston Churchill’s speech on this topic: http://www.progress.org/banneker/chur.html
    What is to note here is this: land monop­oly is a big­ger prob­lem than other forms of monop­oly, which at least pro­vide goods and services.

    Fourthly, yes, I do not see the prob­lem if peo­ple out­side the zones work or put things inside the zone area. I would regard that as a qual­i­fied suc­cess – peo­ple want eco­nomic free­dom. Although the leg­is­la­tion with drafts the zone would need to be spe­cific (as it did in the UK and US) that peo­ple who work AND live in the zones are exempt from tax­ing these taxes, but must pay X. Although areas out­side the zones gen­er­ally do suf­fer a mild decline as activ­ity is diverted into the zone: again this would not be the case in the NT or ACT (the outer regions in these areas are not densely occu­pied). Sim­ply make the zone big­ger. Heh. Plus, that is the point of enter­prise zones — they are started in POORER areas — so the areas around the poor areas are not very rich — thank god they are evad­ing pay­ing crip­pling taxes.

    Finally, yes, you should not gen­er­alise on people’s ide­ol­ogy – suf­fice, yes I do think low taxes (actu­ally, no taxes) which penalise hard work and sav­ings are good. I rec­om­mend Fred Harrison’s “Ricardo’s Law” – it shows how taxes on pro­duc­tion (e.g. income taxes) are diverted into build­ing infra­struc­ture and gov­ern­ment ser­vices which enrich the asset rich (through wind­fall gains). Thus, Har­ri­son calls the UK the divided King­dom between Lon­don and Scot­land, leav­ing the rich richer but the poor poorer. And, of course, most (all?) poor peo­ple do not own land.

  5. Lyonwiss says:

    Com­pare sci­ence which gave us the Apollo 11 moon land­ing 40 years ago with eco­nom­ics which is giv­ing us the global finance cri­sis 40 years later. Yet no one wants to do sci­ence (with low uni­ver­sity entrance scores) and every­one wants to do law or finance (much higher uni­ver­sity entrance scores). Go fig­ure that out!

  6. reason says:

    Sorry Steve (spadijer89),
    no sale. Your atti­tude to my prob­lems is to ignore them, or hope they go away (with­out any evi­dence as far as I can see), and your atti­tude to inher­ited power stinks as far as I am concerned.

    I know that the Chicago boys did some stud­ies sug­gest­ing that inher­ited wealth dis­ap­pated in a cou­ple of gen­er­a­tions — but that was when top mar­ginal rates were MUCH higher. Recent evi­dence sug­gests that inequal­ity is increas­ing, and inter­gen­er­a­tional mobil­ity is decreasing.

    It goes back to what I was say­ing about doing the seri­ous work to work out a care­ful tran­si­tion path, address­ing pos­si­ble prob­lems and allow­ing the polit­i­cal process to put peo­ple in control.

    You may not think you are the tool of the plu­toc­racy, but you may well be.

  7. reason says:

    P.S.
    Just to clar­ify, that doesn’t mean I don’t think LVT is a good idea — I do, and for lots of the rea­sons you do. It is just that
    a. I think it is hard to intro­duce (local con­vex­ity if you like)
    b. It is not a panacea.

  8. reason says:

    And your sug­ges­tion of ACT & NT as test cases, as I under­stand it, sounds like a local ver­sion of Bemuda and the Cay­men Islands.

  9. reason says:

    And as a last point -
    in my case you started with some­one who was favourably dis­posed, and couldn’t con­vince him. So how did you do with neu­trals and sceptics?

  10. Philip says:

    whereis­thetruth,

    I think that the vast major­ity of peo­ple in any soci­ety are inter­ested in engag­ing in good will towards each other. The prob­lems lie, not with indi­vid­ual peo­ple, but col­lec­tively at the insti­tu­tional level.

    In Aus­tralia (state cap­i­tal­ism), our econ­omy is mostly run by utterly psy­cho­pathic and unac­count­able insti­tu­tions (cap­i­tal­ist firms). There are essen­tially two prob­lems with them: (1) they are not demo­c­ra­tic, that is, they are not account­able inter­nally (to work­ers) or exter­nally (to soci­ety) and lack any bottom-up for­mal demo­c­ra­tic mech­a­nisms like vot­ing and (2) don’t func­tion accord­ing to mar­ket principles.

    Enter the util­ity of neo­clas­si­cal econ­o­mists. While they preach the con­cepts of equi­lib­rium, ratio­nal expec­ta­tions, cost inter­nal­iza­tion, com­pe­ti­tion, etc within the uni­ver­sity class­room, the econ­omy func­tions in a state of dis­e­qui­lib­rium, irra­tional expec­ta­tions, cost exter­nal­iza­tion, oli­gop­oly for­ma­tion backed by monop­o­lis­tic intel­lec­tual prop­erty rights, etc.

    You’re cer­tainly right about the lack of need for gov­ern­ment if the econ­omy was self-regulating and sus­tain­able. Cap­i­tal­ism results in ‘big’ gov­ern­ment for two pri­mary rea­sons: (1) to pro­tect the minor­ity of the opu­lent against the major­ity and (2) to pro­tect the rest of soci­ety from the rich through the use of reg­u­la­tions and social wel­fare. Under cap­i­tal­ism, rights are never given — they are always won and have to be main­tained by com­mon strug­gle lest they be taken away.

    If we actu­ally had a demo­c­ra­t­i­cally account­able and sus­tain­able econ­omy that could be run in the com­mon inter­est, then gov­ern­ment could be made ‘smaller’ and less inva­sive which I think is an end in itself.

    We are taught that cap­i­tal­ism is a good econ­omy because it either is in equi­lib­rium or is very close to it — this is the core con­cept of neo­clas­si­cal eco­nomic the­ory. This means that sup­ply and demand equal each other and thus both par­ties to a con­tract ben­e­fit equally.

    Unfor­tu­nately there is an over­whelm­ing weak­ness with the idea of equi­lib­rium and its asso­ci­ated con­cepts. It can only exist in an econ­omy where time does not exist, all con­sumers have exactly the same pref­er­ence (every­one are clones) and can know the future per­fectly like gods, the econ­omy is in a state of per­fect com­pe­ti­tion, all costs are inter­nal­ized, zero trans­ac­tion costs, and so on.

    Clearly no econ­omy con­forms to the above con­di­tions, and thus a sta­tic state of equi­lib­rium is non-existent. In real­ity, cap­i­tal­ist economies are in a con­stant process of dis­e­qui­lib­rium and thus quite unsta­ble (bub­bles and GFC). This is where the great con in eco­nomic the­ory is brought in: assump­tions don’t mat­ter.

    Econ­o­mists need to utter this phrase con­stantly because it is ovbi­ous that the con­di­tions that is needed for equi­l­brium don’t exist (per­haps on some alien world in another dimen­sion). Oth­er­wise, it imme­di­ately becomes obvi­ous that cap­i­tal­ism can’t pos­si­bly be an effi­cient eco­nomic system.

    The result of all this is that the out­comes under cap­i­tal­ism of income and wealth are totally dis­torted (this needs no expla­na­tion), all assets and com­modi­ties are mis­priced, no two par­ties to a con­tract gain equally, bub­bles con­tin­u­ally form and burst, and so on.

    This, in a nut­shell, is why neo­clas­si­cal eco­nomic the­ory needs to die a quick death.

    Ralph Nader sums it up well: the only rea­son why cap­i­tal­ism is still around is because social­ism is always around to bail it out when it self-destructs.

    MMitchell,

    Can you pro­vide a short sum­mary of what Prout eco­nom­ics is? If it’s inter­est­ing, per­haps I could read some more on it.

    Lyon­wiss,

    I think (though I could be wrong) that there has been a grad­ual flight from the arts and sci­ences into busi­ness and finance over the last cou­ple of decades due to stu­dents see­ing edu­ca­tion not as an end in itself but rather a means to get richer.

  11. tommyt says:

    Hi Phillip, thanks for your ‘post’ it is very enlightening!What reaslly con­cerns me though is Australia’s own brand of ‘cap­i­tal­ism’!
    As Aus­tralians are loathe to change any­thing polit­i­cally and due to their col­lec­tive lack of ‘true polic­ti­cal (ideological)perspective’,what may yet come into the fore here is (to me)quite ugly for all!other nations have by and large had their cleans­ing moment in his­tory french revolution;russian revolution;Fascism in ger­many and italy impe­ri­al­ism in Africa;BUT Aus­tralia! noth­ing but an his­tor­i­cal void of colo­nial­ism and com­plete lack of national awak­en­ing and with, as you describe,the cap­i­tal­ist econ­omy ‘dis– equilibrium-ates’I won­der how this nation might ‘explode’! No not ‘han­son ism’! (joke)BUT social melt down Argentina like melt down!This sce­nario is what fright­ens me more(socially).Your word “psy­co­pathic” is very apt!the shower scene from “PSYCHO“comes to mind for ‘oz’!! NO EQUILIBRIUM, SOCIALLY OR ECONOMICALLY!Cheers

  12. Bullturnedbear says:

    Hi Tom­myt,

    The two party pre­ferred sys­tem in Aus­tralia pro­vides polit­i­cal sta­bil­ity that doesn’t exist in most other countries.

    As such a rev­o­lu­tion would need to fol­low a very severe set of circumstances.

    Given that I believe we are head­ing for a very severe eco­nomic col­lapse. I will not rule out a revolution.

    On bal­ance though, I’d bet that Australia’s
    1. Easy going atti­tude.
    2. Large land area.
    3. Access to (free) nat­ural beauty.
    4. Abil­ity to grow our own food.
    Will mean that we are bet­ter off than most and will avoid a rev­o­lu­tion dur­ing this cycle.

    Who can say though?

  13. MMitchell says:

    Philip,

    I am not con­vinced of your belief that every­one is com­mu­nity minded with good will towards each other. This might be pos­si­ble, but I think our cul­ture does not engen­der these traits. They might appear to be super­fi­cially, but as the old say­ing goes, judge a man by his actions not his words, and the actions of many today do not sug­gest com­mu­nity mind­ed­ness except as the min­i­mum needed for social accep­tance (I do not want to sin­gle any­one out to demon­strate this). In an ear­lier post I listed a set of authors, most of whom believe that our insti­tu­tions have been co-opted for the ends of a pow­er­ful minor­ity. In this sense I tend to agree with Whereis­thetruth, that over time this type of manip­u­la­tion is inevitable. How­ever, I believe it might be able to be some­what con­strained by cul­tural val­ues. A cul­ture based on self-interest such as ours has increas­ing become over the past 100 years or so is the anti-thesis of this. When peo­ple get no, or very lit­tle, recog­ni­tion for act­ing morally and eth­i­cally (among their peers and social insti­tu­tions), while oth­ers are lauded for dubi­ous, but osten­ta­tious, achieve­ments which serve mainly them­selves, but are build on com­mu­nity sup­port and resources then I think there is some­thing seri­ously, patho­log­i­cally wrong.

    In regard to Prout I am still learn­ing myself. Aspects which appeal to me are local deci­sion mak­ing and restric­tions on the size of pri­vate organ­i­sa­tions which are deter­mined by the com­mu­ni­ties they serve. I am a mem­ber of some com­mu­nity organ­i­sa­tions, and believe the suc­cess of these and many other exam­ples, such as the CWA, the CFA, SES etc are a tes­ti­ment that these types of organ­i­sa­tions can work, although I think they would work bet­ter if local funds were pro­vided to them directly with mostly local con­trol, rather than going to gov­ern­ments as tax­a­tion and then them being run by remote bureaucrats.

    One aspect I def­i­nitely dis­agree with is their sup­port for a world gov­ern­ment. I have yet to see any con­vinc­ing argu­ments that such gov­ern­ments can be demo­c­ra­tic, and even if they were, should a world major­ity be able to dic­tate to tribes in the Ama­zon or else­where what their laws will be? I think the whole idea of world gov­ern­ment is fraught with dan­ger. Look at the cor­rup­tion in our rep­re­sen­ta­tive sys­tems just at state and national levels.

    There is a dis­cus­sion of Prout at the link below (another thing that both­ers me is that lit­tle infor­ma­tion is avail­able for free — you have to buy their books)

    http://www.ru.org/economics/some-features-of-prout-s-economic-system.html

    Bull­Turned­Bear:

    One risk we do face in Aus­tralia is our depen­dence on oil. Given the vast dis­tances between com­mu­ni­ties and the low fer­til­ity of our soil our trans­port needs are much greater than most of Europe and Asia, yet we emu­late their sys­tems and lifestyles.

  14. spadijer89 says:

    Rea­son,

    I did not ignore your prob­lem – that is, that LVT is dif­fi­cult to intro­duce and that it is a panacea – both which are gross rep­re­sen­ta­tions of what I said. So let me spell it out to you once and for all: FIRSTLY AND FOREMOSTLY I am *more* con­cerned with the major source of inequal­ity, even poverty – land — which LVT would address: home­less­ness due to sky rock­et­ing rents, a mort­gage which takes a life­time to repay and the fact most Australian’s are bur­dened with debt, despite the fact in one small sub­urb of Mel­bourne there are over 1000 vacant prop­er­ties (hardly a hol­i­day home) and almost 10 mil­lion vacant homes in Aus­tralia. Of course, a 100% tax would mean most, if not all, these vacant homes will go onto the mar­ket place, depress­ing our grossly unaf­ford­able land val­ues. We do not dis­agree on this issue, but I see this as a major pri­or­ity than steal­ing from peo­ple who inherit a busi­ness which pro­vides the com­mu­nity with goods and services.

    Thus, rea­son, you actu­ally do not have an . In con­trast, my argu­ment is based on urgency (I see a lack of afford­able hous­ing as a seri­ous prob­lem, more seri­ous than the pur­ported inequal­ity of James Packer inher­it­ing a fam­ily busi­ness – I am more con­cerned about the thou­sands of acres he inher­ited which could pro­vide hous­ing – at least the busi­ness he has is pro­vid­ing a SERVICE, a quid pro quo), and effi­ciency (LVT does not cre­ate grave dis­tor­tions as other taxes) and eco­nomic the­ory (there you go again, want­ing to tax cap­i­tal and labour, over land – I noticed you com­pletely ignored by point that there is a DIFFERENCE between land and cap­i­tal – my argu­ment was that cap­i­tal needs to be replen­ished to sur­vive, land merely rises as labour and cap­i­tal advance themselves).

    So, no, rea­son, it is you who has ignored the fun­da­men­tal dif­fer­ence between (1) a busi­ness, which pro­vides exchange and PRODUCTION, i.e. a quid pro quo and an unearned incre­ment: as I said, busi­nesses, owned by a fam­ily or not, will sur­vive as long as the right busi­ness deci­sions are made in the first place (whether that is hir­ing the right peo­ple pro­vid­ing employ­ment, mak­ing the right deci­sions, pro­vid­ing qual­ity goods and ser­vices etc). (2) You also ignored the fact that most monop­oly busi­nesses are backed on assets, which are under­pinned by loca­tion, loca­tion loca­tion, i.e. land val­ues. I mean, for pete’s sake, Telsco has all the right prop­er­ties in the right busi­ness loca­tions (even hold­ing land idle to squeeze out com­peti­tors) and Telstra’s assets are mostly land: See Terry Dwyer, “Land Val­ues and Rents in Aus­tralia”, as well as Telstra’s bal­ance sheets and annual reports.
    In con­trast, you are advo­cat­ing inef­fi­ciency (that is, you tax things which also pro­vide a ser­vice). You have not shown me how a per­son inher­it­ing a busi­ness is inequitable. On paper of course it is – if I have a huge busi­ness worth alot and you don’t, well yes, its inequitable but jus­ti­fied: because, well, DUH, THE BUSINESS PERSON IS THE PERSON WHO PRODUCES THE FOOD FOR MILLIONS OF PEOPLE TO EAT, WHO MARKET THE GENIUSES AND SHOES WE WANT ETC. Let’s all TAX KELLOGS TO DEATH! Nev­er­the­less, what enables them to have this power, which cre­ates OUTPUT, is access to assets and abil­ity to make the RIGHT deci­sions INTO THE FUTURE. LVT makes sure that the land mar­ket can be accessed by the labour and cap­i­tal mar­kets (in case these assets are with­drawn from sup­ply for com­pet­i­tive pur­poses, as with Telsco). You tar­get the side effects, not the cause of inequal­ity. Worse things have beset soci­ety than peo­ple inher­it­ing cap­i­tal goods.

    Thirdly, you say that:
    “I know that the Chicago boys did some stud­ies sug­gest­ing that inher­ited wealth dis­ap­pated in a cou­ple of gen­er­a­tions – but that was when top mar­ginal rates were MUCH higher. Recent evi­dence sug­gests that inequal­ity is increas­ing, and inter­gen­er­a­tional mobil­ity is decreasing.

    There you go again: pit­ting equal­ity and effi­ciency. Nev­er­the­less, (1) name the papers you refer to – give me a link to them and (2) explain to me how they avoid cor­re­la­tion equals cau­sa­tion argu­ments: what if there was a prop­erty tax, or a cap­i­tal gains tax which influ­enced their finding?

    Thus, rea­son, it is you who the plu­toc­ract as you do not what gives rise to the most extreme form of inequal­ity; land. I did give you evi­dence (of why other taxes are inequitable), but let me start again then by NAMING books which pay be of inter­est to you and I rec­om­mend you read:

    Still­well, Frank “Who Gets What?: Analysing Eco­nomic Inequal­ity in Australia”.

    Stil­well FJB and Jor­dan K 2005, ‘Land Tax in Aus­tralia: Prin­ci­ples, Prob­lems and Poli­cies’ in Henry Georges Legacy in Eco­nomic Thought, ed. John Lau­rent, Edward Elgar, UK pp. 216242.

    Har­ri­son, Fred “The Sil­ver Bullet”

    – Clearly links land monop­oly and inequal­ity in Africa and parts of Russia.

    Har­ri­son, Fred “Ricardo’s Law”.

    – Shows how income tax is in fact a regres­sive tax, as I pointed out ear­lier – it makes the rich richer – tax­ing labour and cap­i­tal to fund gov­ern­ment ser­vices, which merely increase the assets of the asset rich, through wind­fall gains (higher rents, bet­ter ser­vices etc).Uhuh, rea­son your “income redis­tri­b­u­tion” basi­cally bills the poor thrice (first through higher rents or mort­gages due to the wind­falls of gov­ern­ment ser­vices, sec­ond through higher direct and indi­rect taxes and higher wages due to higher rents will so pro­duce equality).

    I am not judg­ing your inten­tions, but I am cer­tainly ques­tion­ing the out­comes of the theft-like poli­cies you are advocating.

    Finally, as for the tran­si­tion path, I told you – sin­gle tax enter­prise zones (the best argu­ment against them was peo­ple OUTSIDE the zones would want to take part in them – wow, no kid­ding – that is the idea – resources come into the poorer areas). Test the idea and see how it works. The best way to intro­duce a scheme is to see how suc­cess­fully it works in prac­tice. If you have any under­stand­ing of Aus­tralian con­sti­tu­tional arrange­ments, you would know that the ter­ri­to­ries, while hav­ing self-government, can be over­ride Fed­eral gov­ern­ment laws. You will also know that the Fed­eral gov­ern­ment is the de facto landowner of the ter­ri­to­ries: there can­not be any polit­i­cal oppo­si­tion to the idea, par­tic­u­larly if it also replaces all ter­ri­tory taxes , includ­ing coun­cil rates, and the fact Canberra’s tenure arrange­ments. And, of course, run down areas in Syd­ney can only ben­e­fits from a sin­gle tax zone, pro­vided they are big and plen­ti­ful through­out the country.

  15. MMitchell says:

    Some­one just sent me this link. At first glance it doesn’t seem rel­e­vant to eco­nom­ics, but apart form high­light­ing prob­lems far more seri­ous than GFCs it fin­ishes with ref­er­ences to Malthus and Adam Smith. It seems we can blame some of this prob­lem on econ­o­mists and their belief in never end­ing growth.

    http://ngm.nationalgeographic.com/2009/06/cheap-food/bourne-text/1

  16. Glenn Condell says:

    Steve

    very inter­est­ing work from Dirk Beze­mer. Sev­eral I’d not heard of, but but I think he has missed a few. Sorry if oth­ers above have already noted this, but I haven’t time to read 190 comments!

    If the select GFC Hall of Fame is open to all rea­son­able pre­dic­tions — ie, not just lim­ited to the pro­fes­sion of eco­nom­ics and includ­ing analy­ses which empha­sise aspects other than the hous­ing bub­ble, such as the dan­gers of deriv­a­tives or the fail­ure of reg­u­la­tion — then it should include many if not most of the following :

    Gillian Tett

    http://www.guardian.co.uk/business/2008/oct/31/creditcrunch-gillian-tett-financial-times

    Janet Tavakoli

    http://www.tavakolistructuredfinance.com/biography.html

    Michael Lewitt

    http://www.gold-eagle.com/editorials_05/mauldin022806.html

    Doug Noland

    http://www.safehaven.com/archive-2.htm

    Steve, he has a ‘Min­sky column’ —

    http://www.safehaven.com/article-3322.htm

    John Huss­man

    http://hussmanfunds.com/weeklyMarketComment.html

    Huss­man too has a Min­sky moment in this ‘to do’ list for address­ing the crisis:

    http://marketoracle.org/Article4177.html

    Kevin Phillips

    pub­lished ‘Arro­gant Cap­i­tal’ 13 years ago. Many pre­dic­tions came true:

    http://counterecon.com/2009/01/08/kevin-philips-on-the-financial-crisis/

    William White

    http://www.spiegel.de/international/business/0,1518,635051,00.html

    I also seem to recall peo­ple like Stephen Roach (Mor­gan Stan­ley Asia) , Max Keiser and Karl Den­ninger (traders and blog­gers) pub­licly express­ing some queasi­ness at the tra­jec­tory of events well before they spi­ralled out of control.

    And what about poor old F. William Eng­dahl, whose mut­ter­ings in July 2004 seem to me ear­lier than most:

    http://www.studien-von-zeitfragen.net/Zeitfragen/Collapse_in_2005_/collapse_in_2005_.html

    I wrote this com­ment on a thread here (‘I do not know any­one who pre­dicted this course of events’ Dec 10/08):

    the ear­li­est I remem­ber see­ing was from F William Eng­dahl. I have a piece of his dated July 2004 – it’s called ‘Is a USA Eco­nomic col­lapse due in 2005?’ His tim­ing was a lit­tle out, but still.

    He said then ‘The rise in home prices has been dri­ven by cheap inter­est rates and banks rush­ing to lend with aban­don. Because two semi-government agen­cies, the Fed­eral National Mort­gage Asso­ci­a­tion, known as Fan­nieMae, and the Gov­ern­ment National Mort­gage Asso­ci­a­tion, or Gin­nieMae buy up the bank‘s mort­gage con­tracts, tak­ing the risk from the local banks, so the local lend­ing bank has less pres­sure to guar­an­tee that he lends to low-risk credit-worthy fam­i­lies likely to repay the loan.

    The US Con­gress has passed new laws mak­ing it even eas­ier for fam­i­lies to buy homes with no penny of their own money required ini­tially as ‘down pay­ment’ This has meant a huge rise in mort­gage loans to eco­nom­i­cally mar­ginal or risky fam­i­lies. The num­ber of such risky or „sub-prime“ mort­gage loans has risen by 70% this year alone, and now makes up 18% of all US mortgages.’

    I would also men­tion Nas­sim Taleb of Black Swan fame. He warned about Fanny Mae explic­itly in mid-2006, pos­si­bly hav­ing read Mr Engdahl.

    A bit dis­turb­ing that an utterly non-economic per­son such as myself could have emailed one of my broth­ers in late 06 about the con­cerns I had after read­ing all these things, but Glenn Stevens was appar­ently inno­cent of any such knowledge.”

    And prob­a­bly still is.

    Nice to be able to add a few females to the list. It’s still a select lit­tle band you belong to Steve, but where you had a cricket team, you now have an AFL side (with reserves bench).

    Under­stand­able that Mr Beze­mer uses the things that unite you lot to draw con­clu­sions, but what’s more inter­st­ing to me is what divides you. For exam­ple I was introd­cued to both your­self and Peter Schiff on George Negus’s show a while ago. You were on the same page on many things but read­ing you both ever since it seems to me that while you’ve both been cor­rect, you’ve reached your posi­tions from oppos­ing direc­tions and in fact have quite dif­fer­ent expec­ta­tions for the future (defla­tion vs inflataion basi­cally). He also has a pecu­liarly Amer­i­can style of laissez-faire approach to labour rela­tions, role of govt (health care etc) which I’m fairly sure would be at odds with your ideas.

    I’d love to win Lotto and invite all Hall of Famers to a big, tele­vised chin­wag on the cri­sis (it’s my impres­sion most of the econ pun­di­toc­racy is still drawn from the swelling ranks of the GFC Hall of Infamy) — how we got here sure, but more impor­tantly how we get out. Talk­ing thru those dif­fer­ences that would I’m sure prove most inter­est­ing, and useful.

  17. reason says:

    spadijer89

    Now you have totally lost it. You come across as a fanatic.

    Tax­a­tion is not theft, and inher­ited wealth is some­thing com­pletely dif­fer­ent from earned income. Putting it to work should log­i­cally reward the cre­ater but not obvi­ously the lucky owner. Yes it depre­ci­ates, but if it pro­duces more than cost to replace then it accumulates.

    I agree with you 100% about the value of LVT but it seems to me, you are are more keen on the sin­gle tax the­ory than on the desire­able outcomes.

  18. reason says:

    spadijer89

    Just a point — why are you attack­ing me, I was just point­ing out your POLITICAL irrel­e­vance, if you don’t address the issues I raised. Read the David Brin piece.

  19. spadijer89 says:

    Dear Rea­son,

    You got to do alot bet­ter than that, let’s exam­ine your premises one by one.

    Premise 1: “Now you have totally lost it. You come across as a fanatic”.

    By “fanatic” you mean pro­duced an ? The “fanatic” label only applies if I were churn­ing out blind meta­physics, which I did not do. Rather, I acknowl­edged there are alter­na­tives and used empir­i­cal data in order to chal­lenge your rather triv­ial views (ffs, I ever quoted aca­d­e­mic papers on the topic); I said I look at land FIRST AND FOREMOST, but not entirely in my eco­nomic analy­sis (e.g. I said I sup­port the real doc­trines approach toward bank­ing). I’d think after the GFC that would be the con­ven­tional view. (I also noticed you failed to answer my request relat­ing to list­ing out the papers and sources where you argued higher mar­ginal tax rates pro­duce reduce inequal­ity, which ques­tions your aca­d­e­mic integrity alto­gether). Thus, it seems to me you are the fanatic who is con­cerned with egal­i­tar­ian inten­tions and not out­comes. Your first premise must there­fore be dismissed.

    Premise 2: “Tax­a­tion is not theft”
    Um, prove to me that tax­a­tion is not theft – that is, some­one tak­ing away what I cre­ate with my flesh and bones. Did I con­sent INDIVIDUALLY (not through the bal­lot box) to pay­ing the tax from the value I directly cre­ated (e.g. my labour, my work)? No. Thus, its theft through force: if I do not pay a tax, I get sent to prison. Land val­ues (as opposed to home and prop­erty val­ues), in con­trast, is derived from the value from the broader com­mu­nity (pop­u­la­tion growth and loca­tional access). Premise 2 must also be dismissed.

    Premise 3: “inher­ited wealth is some­thing com­pletely dif­fer­ent from earned income”
    Not in all instances. James Packer, for exam­ple, still has to make the right deci­sions as his father did to main­tain the via­bil­ity of the busi­ness. My con­cern, once again, is the fac­tor of pro­duc­tion which is inher­ited: I do not have many qualms about inher­ited cap­i­tal (e.g. the casi­nos), but I do have many qualms about land (and other land based assets) and the monop­oly priv­i­lege and loca­tion that entails.

    Premise 4: “Putting it to work should log­i­cally reward the cre­ater but not obvi­ously the lucky owner”
    Most, albeit not all, peo­ple who inherit a busi­ness often have seen their par­ent work the busi­ness, cre­ate the busi­ness and even in their youth work for a busi­ness. Don­ald Trump, for exam­ple, did not cre­ate his mul­ti­mil­lion dol­lar empire. His grand­fa­ther did. As a child he worked with his father, devel­oped the skills of the trade and then went off applied them and cre­ated a bil­lion dol­lar empire. Own­ers still make deci­sions. They still have to hire the right peo­ple, pro­vid­ing employment.

    Premise 5: “I agree with you 100% about the value of LVT but it seems to me, you are are more keen on the sin­gle tax the­ory than on the desire­able outcomes”

    Yes and no. Site rental taxes, I believe, have deliv­ered desir­able out­comes than the sta­tus quo in all instances it has been imple­mented. And yes, TRUE, I do am not con­cerned with good inten­tions as you are, but with good OUTCOMES. For too long peo­ple from the left have judged poli­cies based on inten­tions and not out­comes. Hence, your erro­neously and igno­rant views on income tax and other redis­tri­b­u­tion mea­sures, which you for­get are deposited in higher land val­ues for the rich (roads are built, schools and facil­i­ties ser­viced, all while land­lords get rich in their sleep, due to the wind­fall gains they get).

    Premise 6: “Why are you attack­ing me…I was just point­ing out your POLITICAL irrelevance”

    I am attack­ing you pre­cisely because you do not have an — I listed dozens of approaches that can be taken (focus­ing on who, what, where and why). In par­tic­u­lar, I responded by say­ing that the Lib­eral Party, which has more Geor­gists than the Labour Party (aka. the Oz Land­lord Party), would imple­ment LVT, as it has his­tor­i­cally. If you look at British Pol­i­tics (dur­ing the 1980s with enter­prise zones), or Ger­man Pol­i­tics (the New York Times link I gave you which dis­cusses how Ger­man colonies and coun­cils adopted a sin­gle tax of 6%), or Rogerism (which required swift rad­i­cal reform) it was the quasi-conservatives, per­haps clas­si­cal libs, who imple­mented LVT. Thus, I told you what gets results: HARD PROOFS AND EMPIRICAL EVIDENCE by com­mit­ted par­ties, not dom­i­nated by land­lords. If the zones work they will be adopted. First­hand expe­ri­ence pre­vails (remem­ber con­ser­vatism is about WHAT WORKS AND HAS BEEN PROVED TO WORK), and hence why var­i­ous con­ser­v­a­tive par­ties in Ger­man colonies also adopted the idea there­after. I said in Aus­tralia the first place to imple­ment the idea would be in the ACT *Aus­tralian Cap­i­tal Ter­ri­tory*, right next to Par­lia­ment itself.

    So I addressed the issues you raised, if you got other ideas feel free to post them.

    Frankly, Rea­son, I think you are being unrea­son­able and ignor­ing what has been said on the topic on some detail.

    Premise 7: “Read the David Brin piece”
    I have to go cut my toe nails.

  20. spadijer89 says:

    Opps -

    *By “fanatic” you mean pro­duced an actual ?

  21. gaday says:

    Spdijer89 and rea­son.
    The point scor­ing between you under­mines the con­tent of what you are both pre­sent­ing!
    Nei­ther of you are “right” you both have a per­spec­tive and if this is not so, then nei­ther of you are the intel­lec­tu­als that you claim.

    Let’s get back to mean­ing­ful dis­cus­sion ..please!

  22. reason says:

    Hence, your erro­neously and igno­rant views on income tax and other redis­tri­b­u­tion measures”

    Your an arro­gant ponce. That is no way to win polit­i­cal support.

  23. reason says:

    gaday
    I agree — but I was not try­ing to score, I was ask­ing him to con­vince me. But he just ignored or belit­tled my points.

  24. reason says:

    And he doesn’t EVEN know what my views on income tax and redis­tri­b­u­tion are.

  25. Philip says:

    Ok, time for both of you to log off.

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