Two recent interviews
I had a couple of impromptu interviews with overseas internet media groups this week--Dominic Frisby interviewed me on my expectations for 2011 on his "Frisby’s Bulls and Bears” program, and Michael Surkan interviewed me for the internet radio/podcast progam The Optimistic Bear. I’ve excerpted the introductions from the two websites below; to hear the interviews themselves, click on the main links below.
The Frisby interview
In part VIII of our of shows looking at 2011, Dominic Frisby talks to Australian economist Steve Keen of Debtdeflation.com.
Steve is Associate Professor of Economics & Finance at the University of Western Sydney, and author of the popular book Debunking Economics (Zed Books UK, 2001).
Steve predicted the financial crisis as long ago as December 2005, and warned that back in 1995 that a period of apparent stability could merely be “the calm before the storm”. His leading role as one of the tiny minority of economists to both foresee the crisis and warn of it was recognised by his peers when he received the Revere Award from the Real World Economics Review for being the economist who most cogently warned of the crisis, and whose work is most likely to prevent future crises.
He has over 50 academic publications on topics as diverse as financial instability, the money creation process, mathematical flaws in the conventional model of supply and demand, flaws in Marxian economics, the application of physics to economics, Islamic finance, and the role of chaos and complexity theory in economics. His work has been translated into Chinese, German and Russian.
Click here to read Steve’s essay of December 2009 on the global debt crisis, Debtwatch No 41, December 2009: 4 Years of Calling the GFC.
Click here for more on the book, Debunking Economics.
This Week on Bear radio: A moment of Minsky
In this episode Steve Keen shares his knowledge of economics to not only debunk the reverence paid to economists by policy makers but to explain that the titans of the economic theory are misunderstood. Keynes wasn’t the advocate for stimulus spending as many assume and Karl Marx actually had a lot of great insights that are conveniently swept under the carpet. Steve goes on to provide a tutorial on the life and ideas of his hero Hyman Minsky, explaining how this was one of the few who understood the sheer unpredictability that underlies all economics. We also discuss the how there is nothing special about the Australian, Canadian, or Chinese economies other than the fact that they have been able to breathe new life into their economies by blowing bigger bubbles. The end result is inevitable: global deflation.
Excellent work Steve, love the way you’re willing to speak up about debt and the unsustainability of the rapid expansion in Australian credit even though you may be a voice in the wilderness now, your day will come! Recent RBA financial aggregate data (see chart below…)
Real Inflation — RBA Financial Aggregates Chart
… shows how out of control debt is growing, especially housing debt, growing well above the RBA 2–3% inflation target, meaning we should really have much higher interest rates, and wouldn’t that pop the bubble and bring house prices back to sensible levels! This can’t go on defying gravity forever!
Peak Debt
Australian Property Crash Blogs
Steve,
On the land tax question. You seem to deviate from the question asked and start conflating land tax with stamp duty, capital gains tax and the like. Sorry, if I sound somewhat blunt but that’s dodging the issue – and doesn’t answer the question. You were asked about land tax specifically and not fringe taxes. Are you seriously suggesting there still would be property bubbles with a 100% land tax, as Georgeist advocate? Of course you aren’t. You should have made that crystal clear.
*Ultimately, therefore, your point is political, not economic*: state governments which, unlike the Federal government, are financially constrained and thus need a low level land tax so they don’t get kicked out of office (by bursting the bubble when they increased the land tax, like they did in Japan in 1989) on one hand, but still have a revenue base, on the other. But that’s precisely because a) they lack political courage to explain why land taxes are better than any other tax base and b) academics like yourself focus on politics rather than just reporting the data. YES, we should not separate the politics from the economics (in feasibility terms), BUT the two are separate in factual terms: a high land tax would prevent bubbles. It requires a cultural and political shift. But the same applies to your ideas of redefining capital assets (which several legal loopholes would arise, it’s more difficult to evade paying a land tax – you can’t hide it in a Swiss bank account!).
I also note in passing in the 1840s the U.S. government defaulted on its loans precisely because it refused to raise its property tax — which highlights your point of courage. Moreover, if (state) governments want “revenue” what prevents the government from abolishing stamp duty and capital gains and increasing their land taxes? Surely, they could do that in theory after the bubble bursts, but no, politically — most MPs themselves also own homes – I mean representative democracy, after all, consisted of landlords for several centuries! So there is an economic argument there, but acknowledges institutional limitations – too many people seriously believe credit bubbles are the way to get wealthy.
We all agree we need to end “property bubbles” – whether its land tax or legally redefining capital assets, either way it requires a cultural shift. In its purest form, land tax, unlike your plan, cannot be dodged (assuming no exemptions) by lawyers and has numerous other benefits (see William Vickery’s and Joseph Stiglitz’s paper on the ‘Henry George Theorem’).
Personally, in future, I’d like to hear you respond to questions of land tax the way Michael Hudson does: “absolutely, we need one. Putting politics aside, morally and economically it has numerous advantages – whether policy makers will adopt it is a different issue”.
Anyways, I’ve always maintained the first place where land tax will be implemented in countries that actually produce stuff: Singapore (government plans to increase land tax to cool property prices), Hong Kong (derives 40% of its revenue from land and has a relatively stable property market) or Switzerland (due to low home ownership rate of merely 33%), both of which have the tax in various forms.
* all of which (rather than both of which). Sorry, typo. Also notice countries that have land tax tend to also export *manufactured* goods — unlike Ponzi economies without high land taxes.
I also note that US states or counties with high land/property taxes are all the one’s who suffered the lowest fall in prices — and in fact are growing — cities like The housing market is relatively stable despite a national subprime mortgage crisis, and Pittsburgh added jobs in 2008/9 even as the national economy entered a significant jobs recession. The housing market is relatively stable despite a national subprime mortgage crisis, and Pittsburgh added jobs in 2008 even as the national economy entered a significant jobs recession. It also tried the Pittsburgh experiment: whether half the city was divided up with effectively capital gains tax (i.e. land AND buildings) and the other half just land — the 4000 vacant commercial properties on the latter fell to merely 160 (remember Steve all those idle and vacant houses — a land tax fixes this!) and obviously, the latter also grew thrice as much.
“cities like Pittsburgh”. Haha, sentence lapse. My bad.
Excellent interview with Dominic — he often asks some of the questions us lay folks would. Keep up the good work!
Steve,
I understand the debt deflation/deleveraging which would lead to depressed asset prices in homes and perhaps in equity (like we have seen in Japan).
I’m trying to reconcile this asset deflation with inflation (which we may need to agree on a definition) on many commodities such as crude oil and food. Some of the inflation can be argued as speculation (with foods for example) and from the continued currency depreciation from monetary expansion. And oil which has seen increased demand and may have diminishing supply (peak oil). I’m not sure what will happen to labor inflation though I expect labor wages to deflate (real wages to decrease).
In this case very much like Japan the US can face asset and wage deflation and commodity inflation.
1 Do economist account for a situation both deflation/inflation? (I find the economist view deflation/inflation to be both macro and therefore binary by definition). In some regards this is an undesireable model from a private balance sheet perspective with assets deflating, real wages deflating and daily expenses inflating.
2. From the view of preserving personal purchasing power than cash would be ideal in a deflating economy. Yet with commodity inflation, from increased global demand, monetary induced currency depreciation ( and perhaps speculation) is not commodity a smart way to preserve purchasing power. Or does your model call for deflation of commodity markets as well?
Hi Jeffca,
Deflation in assets normally goes hand in hand with deflation in commodity prices too–as we saw severely in the Great Depression and lightly in Japan. The commodity inflation we’re seeing now is partly a speculative phenomenon (with the US Fed funding a lot of it!) and partly the wildcard that this deflationary experience coincides with Peak Oil and biosphere breakdown as predicted in the Limits to Growth Report almost 40 years ago. It’s why I lean towards expecting deflation, but am willing to admit it’s a gamble this time.
Hi Spadijer,
I’m not opposed to a land tax–I just don’t see it as a panacea. If it were implemented as a range of measures designed to stop speculative bubbles being debt funded, then I’d support one. But I think it’s valid to be aware of the political issues, and also to consider what the root cause of the problem is as well. I see that as debt being used to fud speculative bubbles rather than enterprise, so my own reform proposals are directed at that.
Well done Steve for putting out the message, but that second interviewer was a little strange. He seems a very nice fellow, but a little paranoid, the idea that academic economists have a unified agenda their pumping out to support their jobs doesn’t ring true. It doesn’t correspond to how academia works. Economists are motivated by their reputations, which are built on getting published in journals. As for their employment in the bureaucracy, that works on two levels, the mid-levels of are staffed by people chosen by employment boards composed of clueless people from HR who did liberal arts degrees, and select candidates on the number articles published regardless of the quality. The high levels are staffed by who-you-know, not what-you-know, and then you create jobs within your organisation for the mates who are willing to publish articles declaring that your articles are genius.
This characterisation may be very crude, but seeing academics as fixated on securing their place in the history-books, sorry I meant, place in the text-books. It’s a lot closer than the over-mind paranoia. It’s a little frightening to realize there are people who think that’s how bureaucracies work. It must be hell being a bureaucrat, half the time people think you don’t know what your doing, the other half they think your deviously omnipotent. It’s the only group that’s ritually portrayed as both not-joined-up and utterly homogeneous; as chronically unable to take risks or to ‘think outside the box’ and simultaneously always frivolously wasting money on bizarre projects that defy ‘common sense’. In the public imagination a bureaucrat is some kind of anal-schizophrenic.
Brilliantly put William! I did try to disavow my interviewer of those views, but it’s amazing how often people imagine conspiracies being conducted by people who at other times they are willing to regard as clueless.
Thanks Steve. I know that you don’t mind land tax, but I think that land tax has numerous advantageous beyond stopping speculative orgies in land, assuming its set at a sufficiently high rate before the bubble itself, of course. I ask you: what could help enterprise more than cheap land (as idle land comes onto the market, to be used by productive capitalist rather than speculators) and abolishing taxes on labour and capital? I know of no better system to encourage enterprise. Curiously, Schumpeter was a big fan of Henry George for precisely this reason, and described him as one of the most original economists around. Likewise, Hayek only entered economics after reading Progress and Poverty.
But I note in passing all the major Depressions/recessions were preceded by land speculation, or more precisely, natural resources: 1840s, 1870s, 90s, Panic of 1907, the Great Depression, 1973–75 REITS etc. So really the issue is rent, not debt per se (debt, for the most part, just being one kind of rent). It would seem to me the debt is the excess or after path of a cultural propensity to get something for nothing. First land values go up (good infrastructure, population growth, media reports i.e. stability is destabilising), THEN the debt comes it that fuels the fire. A vicious spiral that your models capture then takes place. This implies targeting the rent/speculation. A limitation of your system is that external source of funds aside, lawyers and other wordsmith and financial innovators can dodge the regulation or have the courts read down certain Acts of provisions (so I’d have to see draft legislation of what you are proposing precisely, before I can comment). Bit harder to dodge a flat, high land tax with no exceptions – although either way both our proposals will face stiff opposition and only feasible when the entire system melts down.