Land Value Tax – Where are we as a party?

ALTER will address this question in our conference fringe at Southport next month to be held on Friday, 9th March at the Ramada Plaza, from 20:15 to 21:30 in the Promenade room.

Leading the discussion will be two LVT experts and experienced Liberal Democrat campaigners – Michael Meadowcroft and Tony Vickers.

All mainstream parties are now beginning to address the Land problem in the context of an ever worsening housing crisis. The Chancellor announced a raft of measures in the last budget including the Letwin review that is to be informed by a number of consultations.

Among these consultations, the Communities and Local Government Committee (CLG) are conducting an inquiry into the effectiveness of current land value capture methods and the need for new ways of capturing any uplift in the value of land associated with the granting of planning permission or nearby infrastructure improvements and other factors . ALTER’s submission will argue that attempts to capture uplifts in land values by one-off levies have largely been unsuccessful and that an alternative is to go for annual levies as with a site value rating.

Last month, John Healey, Labour’s shadow housing secretary, proposed changes to the 1961 Land Compensation Act so the state could compulsorily purchase land at a price that excluded the potential for future planning consent .

This comes on top of pressure from City Mayors that the APPG on Land Value Capture chaired by Sir Vince Cable, will be taking evidence on from next month.

When ‘an idea whose time has come’ is on the table (as is now the case with Land Value Capture and LVT), it will be important to have answers to the more difficult questions and credible costed solutions ready to roll out as and when needed.

Among these preliminary solutions will be key research initiated by the party into Business rate reform and being overseen by a Co-Chair of the Party’s Entrepreneur’s Network.

The Scottish Land Commission is not letting the heather grow under its feet and has commissioned research to investigate international experience in land value taxes to identify policy options for Scotland and to assess the potential of land value taxation to drive increased economic, social and cultural value from land in Scotland.

ALTER members in Scotland will be bringing proposals to the Scottish conference to establish a Cross Party Group at Holyrood to investigate the implementation of land value tax in Scotland, in conjunction with the Scottish Land Commission.

Making the party’s support for land value capture solutions widely known within both the UK Parliament and devolved assemblies as well as with the general public requires a team of engaged members across the regions and nations of the UK.

Please do join ALTER and help us ensure that Liberal Democrats continue to lead the way in lobbying for radical social reforms in wealth and property taxation and sustainable local government finance across the UK.

* Joe is a Vice-Chair of Hounslow Liberal Democrats, Chair of ALTER and PPC for Brentford and Isleworth

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90 Comments

  • Barnaby,

    I think you may be right bout the legal challenges. Cornerstone barristers have commented “The CIL reforms will be controversial, especially the attempt to capture land value uplift where green field sites go from agriculture to residential, and there will be Article 1 First Protocol challenges in putting such a regime in place in areas that are already ‘ripe for development’.”

    Civitas have recently published an extensive report on this issue http://www.civitas.org.uk/content/files/thelandquestion.pdf in which they open with a quote from that great Poitical economist and Liberal Philosopher John Stuart Mill:

    “Land is limited in quantity while the demand for it, in a prosperous country, is constantly increasing. The rent, therefore, and the price, which depends on the rent, progressively rises, not through the exertion or expenditure of the owner, to which we should not object, but by the mere growth of wealth and population. The incomes of landowners are rising while they are sleeping, through the general prosperity produced by the labour and outlay of other people”. John Stuart Mill, 1871

    The APPG on Land Value Capture will be taking evidence on reform of the 1961 Land Compensation Act this summer.

  • Sue Sutherland 10th Feb '18 - 2:10pm

    Is the answer to Barnaby’s point to either require any profits from the sale of land to be used for social housing or to require that the land be only used for social housing and community projects?

  • Peter Martin 10th Feb '18 - 2:22pm

    Not yet another article on LVT!

    Sure LVT can have a place in a sensible mix of taxes but it isn’t magic cure-all tax that can replace all other taxes and fix all our economic problems at the same time.

  • It’s great that we now have MPs and a leader who seem to be really trying drive this long overdue reform forward.
    Regarding Barnaby’s comments it would be preferable for public revenues to benefit from the “daylight robbery” than landowners who have done nothing to improve the land.
    Of the many beneficial effects that collecting land rent as it is generated rather than as one off charges on sales is that genuine developers who are primarily interested in building, rather than recycling increases in land values into company balance sheets for subsequent extraction in the most tax efficient way, will be able to engage in addressing the housing shortage assisted by significantly lower costs. This is because the purchase cost of land will be reduced by the fact that it will be subject to the collection of ongoing land rent for public revenue and the land banks that house builders hold will logically be reduced to what they need for genuine operational reasons.
    When Wilsons community land tax was introduced it was very damaging virtually killing off development until it was repealed.

  • Peter Martin,

    as an economist, I would have expected that you would have some appreciation of the underlying economic benefits that a general shift from taxation of earned income to community generated wealth can produce.

    The Institute of economic affairs sets out the case here https://iea.org.uk/blog/the-case-for-a-land-value-tax-0 and Dr Frank Cowley writes about How a Land Value Tax could solve many economic headaches https://www.rte.ie/eile/brainstorm/2017/1017/912913-how-a-land-value-tax-could-solve-many-economic-headaches/

    You often argue on this site that governments are feee to run deficits ad infinitum but at the same you recognise the inflation constraint on government spending.

    The economic reform promoted by LVT campaigners is that the vast sums of interest payments expended on loans for inflated residential and commercial land, together with the portion of rent payments attributable to residential land paid by an ever-increassing % of the working population, should justly form the principal tax base for public spending. This kind of shift has the potential for alleviatring the significant deadweight drag of taxes on productive activity in the economy and reducing the ever-increasing proportion of tax collections that is going towards meeting the balloning public debt (currently around 43 billion of interest payments per year).

  • Sue,

    there are some proposals of this nature being put forward. James Palmer, The Mayor of Cambridgeshire and Peterborough has written inn Conservative Home about the situation in his part of the country https://www.conservativehome.com/platform/2017/07/james-palmer-the-land-value-cap-offers-the-chance-of-more-affordable-infrastructure.html.

    Palmer writes “The Cambridgeshire and Peterborough Combined Authority does not have the legal authority to introduce a Land Value Cap, so parliamentary legislation would be required. Clearly, as Conservatives, intervening in the market in this way is not something that is easy to justify. However, on specific occasions, when the need is great and the results could be transformative, I believe it should be an option. Government action would bring about a large increase in land values and enable house builders to build in areas not previously available. The Government would therefore be justified in using part of this increased value to fund the road scheme which enables landowners and developers to make significant financial gains.”

    This is the sort of initiative that the cross-party APPG on Land Value Capture, chaired by Vince Cable, will be looking at in the coming months.

  • Barnaby,

    we are slipping into the realms of political philosophy now, perhaps inevitably. The french political philospher Pierre-Joseph Proudhon in his 1840 book What is Property? Or, an Inquiry into the Principle of Right and of Government, wrote:

    “If I were asked to answer the following question: What is slavery? and I should answer in one word, It is murder!, my meaning would be understood at once. No extended argument would be required to show that the power to remove a man’s mind, will, and personality, is the power of life and death, and that it makes a man a slave. It is murder. Why, then, to this other question: What is property? may I not likewise answer, It is robbery!, without the certainty of being misunderstood; the second proposition being no other than a transformation of the first? — Pierre-Joseph Proudhon, What is Property?”

    Jean-Jacques Rousseau made the same general point when he wrote: “The first man who, having enclosed a piece of ground, bethought himself of saying ‘This is mine,’ and found people simple enough to believe him, was the real founder of civil society. From how many crimes, wars, and murders, from how many horrors and misfortunes might not any one have saved mankind, by pulling up the stakes, or filling up the ditch, and crying to his fellows: Beware of listening to this impostor; you are undone if you once forget that the fruits of the earth belong to us all, and the earth itself to nobody.”

    The right to occupy land has always come with obligations to the community in which we dwell. This was well understood throughout much of history. As more and more people are denied this right in modern society, it is a lesson we will have to relearn. When the majority are forced to pay the bulk of their wage earnings in rent to Landowners, mortgage payments to the financial sector on inflated land values and higher taxes to pay for the economic infrastructure that drives up land values, you have a social revolution in the making.

  • David Cooper 10th Feb '18 - 4:06pm

    @Barnaby
    The idea of the “community land auction” would overcomes your objection. In this, councils invite large local landowners to tender rural land for development (which does not already have planning permission). The council buys the best value acerage and then grants it planning permission, before selling on to be built by a developer. Since at the time of auction the land has no planning permission, the council is able to buy at a lower price, thus recovering the price uplift that arises from the grant of planning permission.

    While I agree that the “hope value” of undeveloped land should not be nationalized without compensation, I see no reason that it should be protected from market competition.

    For details see Centre Forum description:
    http://www.centreforum.org/assets/pubs/community-land-auctions.pdf

  • Peter Martin 10th Feb '18 - 4:17pm

    @ Joe B,

    “…..reducing the ever-increasing proportion of tax collections that is going towards meeting the balloning public debt (currently around 43 billion of interest payments per year)”.

    Firstly these interest payments aren’t financed from tax collections. They are financed from the issue of new debt and are currently negative when inflation is taken into account. The yield on all Govt bonds is very low so we shouldn’t begrudge what little interest is paid.

    There may be good reasons for a a LVT but debt reduction isn’t one of them. The level of interest paid out is at relatively low levels by historic standards. The graph does need bringing up to date but I doubt things have changed much in the last few years.

    https://en.wikipedia.org/wiki/United_Kingdom_national_debt#/media/File:UK_National_Debt_interest.png

  • Might be going a bit off topic here, but has the party looked into something as radical as replacing labour and corporate income taxes with extending VAT to become a really progressive consumption tax and with a land value tax?

  • Peter Martin,

    in the real world critical budget decisiions are made on the basis of deficits and debt. This is from the OBR
    DEFICITS AND SURPLUSES
    “WHEN total spending in a year is higher than total receipts, the Government needs to borrow to cover the difference. This gap is known as the budget deficit or ‘public sector net borrowing’. When receipts are higher than spending, the government runs a surplus. Deficits and surpluses are similar to losses or profits for a company.

    In 2017-18, we expect a deficit of £49.9 billion or 2.4 per cent of national income – down from its post-war peak of £152.5 billion or 9.9 per cent of national income in 2009-10. We expect receipts to rise faster than spending in the coming years, so we forecast that the deficit will get smaller each year. But we do not expect the budget to be in surplus at any point in the next five years. By 2022-23, we expect the deficit to have fallen to £25.6 billion, by when receipts would be 36.7 per cent of national income and spending 37.7 per cent.

    Swings into deficit have become steadily more pronounced over the post-war period. And budget surpluses have been achieved in only 12 years since 1948 and only five years since 1971-72.

    Movements in the budget deficit are in part the result of the ups and downs of the economy. When the economy is strong, the deficit will be lower as taxes flow in and welfare spending costs are reduced. The opposite is true when the economy is weak.”

    As debts are rolled over and interest rates increase you have both a larger coupon rate to pay and a compunding level of debt on which to pay higher rates of interest. Debt to GDP ratios have been rising since the financial crisis and is among the main reasons why interest rates have not risen from their unpredented low levels.

    This level of interest payments has real effects on public spending whether it is the NHS, Adult social care, Education, Welfare benefits, local authority grants, defence and policing or the myriad of other public services we all rely on.

    More importantly as interest rates rise, debt service costs for households rise exponentially. These debt service costs are largely attributable to loans for the acqusition of land at inflated values.

  • David Cooper

    “Since at the time of auction the land has no planning permission, the council is able to buy at a lower price, thus recovering the price uplift that arises from the grant of planning permission.”

    I recall watching a film using that exact same technique. Here’s how it pans out.

    ‘An unscrupulous land owner at the head of a river builds a dam to curtail the flow of water flowing downstream. All the cattle ranches downstream dry up and become destitute and their cattle die due to lack of water. The unscrupulous land owner, then cynically offers to buy all their dust-bowl ranches for cents on the dollar. Once he gets title deeds and sees the broken cattle farmers off their [now his], land, he then demolishes the dam, to let his newly acquired land downstream flourish once more.’

    If you replace ‘water’ with ‘planning permission’, and ‘unscrupulous land owner’ with ‘the council’, it’s the exact same form of deceitful theft. And you seriously believe that’s liberal?

  • It is worth reading the summary from the Civitas report http://www.civitas.org.uk/content/files/thelandquestion.pdf
    to get a better idea to the background to the 1961 Land Compensation Act

    “…while there are various factors at play in the housing crisis, the root of these problems lies in the trade in land.
    … the pursuit by landowners of the highest-value developments for their sites is frequently at odds with the delivery of more affordable homes and speedier construction. It also leads them to withhold sites from the development process, possibly for many years, while they wait for prices to rise and more profitable schemes to emerge.
    ….simply releasing more land for development in the highest-demand areas will not on its own overcome the problems that the housing market
    currently faces. Landowners, in possession of a geographical monopoly, have a power of constraint over the development priorities of the community. In high-value areas and rising markets they are especially incentivised to drip-feed new residential land over an extended period of time. This feature of the land market is of long-standing, having been observed in many different housing markets and at many different
    points in history. It predates the 1947 planning system and the introduction of the green belt. Reform of planning to ensure more land is made available for development is important, but it must be accompanied by new incentives for landowners to part with sites sooner and at lower prices that are compatible with planning objectives.
    The key to this lies in reform of the Land Compensation Act of 1961, which enshrines in law the right of landowners – in the case of compulsory purchase by the state – to be
    reimbursed not only for the value of their site in its current use but for any prospective use to which it might be put in the future. Their entitlement to this ‘hope value’ means
    public authorities are powerless to enforce development priorities that are in the interests of the community.
    This is not just a simple change in the law… it requires policymakers to accept what the classical economists argued but which is largely forgotten today:
    that increases in locational land values are an ‘unearned increment’, generated not by the owner of the land but by the labour and the investments of the community.

  • Lorenzo Cherin 11th Feb '18 - 12:00am

    I do not think Joe dealt well at all with the point made by Barnaby.

    He is firstly showing objection to compulsory purchasing.

    Then to it when it is agriculture to housing and the state is profiting but the owner is not.

    Joe you should be less convinced you and all concerned with these issues have all the answers.

    You also should cease this phrase, value the community has created, the concept does not understand markets, the community is not one local thing, loathe markets by all means but do not talk of market developments leading to the price or worth of something, as if only, the so called community , responsible. Land goes up in value if strong private sector development lifts areas too, music venues, cinemas, shops, cafes, restaurants. Battersea when I started school was pronounced Baasee, when I left, was described , more like, Batterseeah !

    We need to build much more social housing. We need to criticise and stop the hoarding of residential property, especially in central areas like the capital.

    The solution may be LVT in part, but the legal and moral case needs to be better than sounding like know alls.

  • Katharine Pindar 11th Feb '18 - 12:59am

    On a lighter note –
    The land, the land, ’twas God who made the land,
    The land, the land, the ground on which we stand,
    Why should we be beggars with the ballot in our hand?
    God gave the land to the people!
    – and there won’t be any Alteration in the way we sing our Land song again at Southport!
    Peace be with you, Lorenzo! (and Joe too, of course!) Goodnight.

  • Lorenzo,

    the point of the APPG is to gather evidence from experts in the field, consider the evidence on a cross-party basis and present recommendations for policy development to Parliament and governmental institutions.

    My reply to Barnaby acknowledges the potential for legal disputes and references this with comments from the legal profession, while also referencing the Civitas report which is a summation of the case made for reform of the 1961 Land Compensation Act.

    On whether taxation of wealth and income by the state is theft – that is a natural justice point that has been considered by political philosophers like Proudhon and Rousseau over the centuries. Some will say tax is the price we pay for a civilised society, others of more Libertarian bent will argue that tax is theft or daylight robbery. That is the nature of politics – there is no right or wrong position, just a political consensus that develops over time or what is sometimes referred to as the social contract. When income tax was first introduced during the Napoleonic wars there was a general outcry against the invasion of individual privacy in the state requiring details of personal income. It was abolished after Waterloo, but reinstated in 1842 and has been with us ever since.

    As to my position, I advocate the views as set out in the Alter website https://www.libdems.org.uk/alter.

  • Peter Martin 11th Feb '18 - 4:41am

    @Katharine,
    Sometimes I think you sound, as with your “God made the land” song, far too left wing for the LibDems! 🙂

    @ JoeB,

    The govt’s surplus or deficit is NOT the same as a company’s profit or loss. Profits can be spent. Surpluses can’t. Otherwise they aren’t surpluses.

    All advanced countries have a National debt. Add up all th NDs in the world and they total some $70bn. We don’t owe that to Mars. We owe that to ourselves. They are our savings.

  • Peter Martin 11th Feb '18 - 4:44am

    Sorry that should be $70 trillion, above!

  • @ Sheila Gee.

    There was a more recent example of the same thing in the very last episode of Foyles War called Sunflower, rather sadly identifying that despite the sacrifices of 6 years war, the political establishment was as immoral as ever.

    The sub plot was about land that was acquired for war use is part of the pet project of a senior government minster who wanted to use the land for housing. He conspired to have a high valuation put on the land by a correupt land agent land agent, nudge, nudge, wink, wink, which made it too prohibitive for the farmer to buy back the land.

    The farmer rightly felt robbed and defrauded, and after excellent sleuthing the fraud was exposed and the minster forced to resign. Unapologetic the minster felt the needs of the many, were more important than the needs of the few.

    Perhaps I am a cynic, but I wonder how long before corruption would raise its ugly head, or how long it would be before a council abused it powers by stealing somebodies smallholding or 2 acre pasture for their pony next to their home. I have a very good friend who effectively had their home blighted under the Pathfinder project in Middlesbrough under the claim of the greater good. They have now lived amongst boarded up houses for nearly 10 years, unable to sell their house, whilst the politicians have moved on.

  • Lorenzo Cherin 11th Feb '18 - 12:55pm

    Joe

    Appreciated a very good response, thanks.

    I think there is a debate on the natural justice of it that worries me less than our commentator Barnaby, yet needs to be considered.

    You are expert in this area and I welcome, and do not decry expertise. But we must take people with us who are not, and are not convinced.

    This needs humility not only expertise.

  • Peter Martin

    “The govt’s surplus or deficit is NOT the same as a company’s profit or loss.” I agree, but as you can see from the OBR website they are likened to the operations of a business by vitally important government institutions “Deficits and surpluses are similar to losses or profits for a company.”

    Crucially, it is on the basis of deficits and debts that public spending decisions are made. We need to be able to engage with the debate on the basis of the institutional framework that exists to manage the allocation of real resources, and develop credible answers to the real and present issue of funding problems in public services.

  • Jane Ann Liston 11th Feb '18 - 2:31pm

    LVT as a replacement for business rates was passed at the Scottish conference 6 or 7 years ago.

  • Sheila/Barnaby,
    compulsory purchase in the United States is referred to as the law of eminent domain and has been used extensively to protect communal water rights in the Western United States as well as for roads and railways. US Law requires that Landowners be compensated when land is acquired by the state under eminent domain provisions on the basis of market value of land in its current or best use i.e. not factoring in potential planning consents.
    In the UK, the 1961 Land Compensation Act requires state authorities with compulsory purchase powers to factor in the intended grant of planning permission.
    This was not always the case: the new towns that were initiated before the 1961 Act, and much of the local-authority output of the late 1940s and 1950s, was underpinned by a land values policy that meant landowners were compensated at values reflecting the existing use of the site. This meant land for new homes could be acquired at or close to its much lower agricultural or industrial use values. It also doused speculation and prevented the withholding of land.
    During this period, Harold Macmillan as housing minister was able to oversee the construction of 300,000 homes per year.
    There are a number of proposals being put forward – from alignment with US eminent domain laws, to community land auctions a referred to by David Cooper in his comments above, or the capping of Land Values and sharing of gains between landowners, local authorities and housing developers as proposed by the Mayor of Cambridgeshire and Peterborough.
    I think we can expect a change in the law here. In what form is yet to be seen.

  • JoeB
    “compulsory purchase in the United States is referred to as the law of eminent domain and has been used extensively to protect communal water rights in the Western United States as well as for roads and railways.”

    Yes, and the good ole USA also made it illegal to own gold, and told its citizens that it would gladly take their ‘illegally held gold’, off their hands, for $35 per ounce, and we’ll put you in jail if you refuse!!.

    I’m not disagreeing that land ownership and their values are a stumbling block to cheap affordable housing, but I’m questioning the bent morality of supposed ‘liberals’, who’s gut reaction is to fabricate some intricate form of state theft under the guise of a pubic good?

    Case in point:
    The State of Russia took compulsory ownership of a piece of land called Crimea. They say it was in the best interests of Crimean’s.
    We say that they thieved it.

    So in the Kafkaesque debate around ‘public good’ and ‘outright state theft’ I guess it depends on which State is doing the ‘compulsory acquisition’?

  • David Cooper 11th Feb '18 - 3:47pm

    @Sheila Gee
    Your comparison with the “‘unscrupulous land owner who builds a dam to curtail the flow of water flowing downstream”, thus bankrupting the farmers below, is utterly flawed. The river is a natural benefit that existed before the land was purchased by the farmers, whose value will have been factored into the original purchase price of their land. By contrast planning permission for housebuilding is a windfall artfact of the planning system that the landowner does nothing to earn, but makes a huge windfall profit. Any payment made he has made for “hope value” is pure speculation. Open competition for planning permission is liberal and would give some transparency to the murky and sometimes corrupt operation of the planning system as it now exists.

  • Peter Martin 11th Feb '18 - 5:08pm

    @JoeB,

    I don’t care where you’ve got it from or who’s said it. A Government’s Surplus or Deficit cannot be likened to a company’s profit or loss. Period. As the Americans like to say. A company can make a profit and spend that profit, and maybe a little bit more besides, if it borrows some extra, on new plant and equipment. That spending and that extra borrowing doesn’t change the fact the company is profitable.

    If the Government did the same thing by spending on infrastructure, and maybe borrowing a bit extra, it could transform its surplus into a deficit.

    For an economy like the UK which runs a trade deficit, the Government has to either act to lower that deficit by manipulating its currency downwards, or it has to deliberately deficit spend to compensate for the outward loss of currency required to pay the net import bill. The other factor to consider is the level of saving in the domestic population. An overall desire to net save is the same thing as a desire to lend to someone. Ultimately it has to be the Govt who does the borrowing.

    So if you want to correctly address the ” issue of funding problems in public services”, you also “need to be able to engage with the debate on the basis” of the way the economy actually works and not on some fairy tale that is put about for nefarious purposes.

  • Peter Hirst 11th Feb '18 - 5:08pm

    Anything that restores the balance towards communities and away from property developers must be a good thing.

  • @ Joe Bourke

    Your post of 6.20 pm on Saturday is interesting.

    The OBR state that our deficit will reduce over time. However this is not really relevant to your point about interest payments on the National Debt. It was over 200% of GDP after the Napoleonic Wars and the Second World War but has always been reduced afterwards, so historically we should conclude that over time the national debt is not a problem (https://www.ukpublicspending.co.uk/spending_chart_1692_2017UKp_17c1li111tcn_G0t_Three_Centuries_of_UK_National_Debt). I am sure you know why this is – economic growth.

    You say that the OBR state “budget surpluses have been achieved in only 12 years since 1948 and only five years since 1971-72”. (There have only been 29 years of budget surpluses in the twentieth century. So surpluses are hardly normal or even achieved half the time).

    If the government manages to achieve full employment then there is a higher likelihood that there will be a budget surplus. The failure of governments since 1974 to achieve many years of budget surplus is likely because no UK has achieved full employment since then.

  • Peter Martin 11th Feb '18 - 10:53pm

    @ Micheal BG,

    If the government manages to achieve full employment then there is a higher likelihood that there will be a budget surplus.

    No. This isn’t true. For the government to run a surplus, everyone else (including our overseas trading partners) will have to run a deficit.

    That’s possible if the private sector is net borrowing like crazy. But that’s not desirable. Or it would be possible if somehow the government managed to turn the trade deficit into a trade surplus. That not likely any time soon -with or without full employment.

    Look, just forget about the bloody deficit! If the economy is running well and everyone is confident enough to save in UK pounds then the deficit is just another parameter, like the exchange rate, which will take care of itself.

  • Lorenzo Cherin 11th Feb '18 - 11:58pm

    Tony

    I get what Joe and your post means but think we must be careful to not put all activity in a box labelled good and inactivity bad.

    There is a Mill virtue in open minded thinking. Yes he was for consideration of land taxes. He was also in favour of the seeing a stationary economy as sometimes a good thing. Green and pleasant land, Jerusalem, for Liberals , is one with considerable autonomy on individual pursuits that do no harm, Mill in first principles. We must not be against the territory of the retired homesteader who has a plot of land of a few acres and is neither going to sell it or build on it but is enjoying walking his old dog on it and it is not your, my or Joe’s business or the “community !”

  • @ Peter Martin

    In theory we could have 3.5 million not being employed and the government pays them £5,000 a year (to keep the maths simple) and the budget deficit is £17,500 million. Now if the next year these 3.5 million are working in the private sector earning £20,000 a year each then there is a budget surplus of £9,926.91 million (each person pays £1420.32 NI [12% on £11,836] £1415.94 Income Tax [20%] on £7,079.68 of income).

    However the question arises where does the £70,000 million come from to pay them? It is theoretically possible that £17,500 million has been borrowed by the private sector so keeping the level of total debt in the economy the same.

    Of course it would not happen like this but the principles still apply. The government could stimulate the economy with £7,500 million and this creates 1 million jobs which produces £2,836.26 million of extra revenue and reduces welfare spending by £5,000 million. The deficit is reduced by £336.26 million. Keynesian economic theory states that this reduction in the deficit should result in either private borrowing to increase or the balance of trade deficit to decrease or a mixture of both.

  • Lorenzo Cherin 12th Feb '18 - 12:01am

    And the idea that Casinos, plural, on land now sitting there , are better than it just sitting there, is fine if that landowner wants to trade it, but to force the owner to sell it , better be for something more , shall we say, community spirited or minded!

  • Peter Martin,

    you mix budget deficits with trade or balance of payments deficits and put forward the proposition that if the government is borrowing heavily to fund public services and transfer payments that is all well and good on the basis that the rest us – the non-government sector is saving all this state deficit spending – even though the great majority of the population has less than £1000 in savings http://www.thisismoney.co.uk/money/saving/article-2769290/Majority-Brits-1-000-saved-surprise-cash-Isa-rates-record-low-1-17.html and the average pension fund is less than £30,000 http://www.pensionspolicyinstitute.org.uk/pension-facts/pension-facts-tables. Having done so you then go on to describe mainstream economics as a fairy tale that is put about for nefarious purposes. Can you not see the problem with this kind of analysis? There is no doubt that substantial areas of economic theory built around ‘efficient financial markets’ have had to be ditched in the wake of the financial crisis, but that does not mean we should adopt heterodox economic theories without question.
    Vince Cable, as he often does, provides a refreshingly pragmatic review when he writes in After the Storm “In practice, no single unified theory forged by the crisis has emerged. Governments, notably in the USA, the UK and Japan, have followed a somewhat eclectic approach to economic policy, drawing on three different strands of thinking; the Austrian approach, which emphasises deep structural problems around private and public debt, insolvent or malfunctioning banks and corporate profitability; the Friedmanite monetarist school which based on experience of the Great Depression in the 1930s, emphasizes adequate money supply and unorthodox monetary policyto support demand; and the Keynesians, also based on experience of the 1930s, arguing for flexible and expansive fiscal policy to support demand.

  • Peter Martin 12th Feb '18 - 8:18am

    @Michael BG,

    You aren’t looking at things the right way. Having nearly everyone employed in well paid jobs, on at least a living wage, is what we all want. However, in a free society that then means they are likely to spend quite a bit of their income on imported goods which will affect the macroeconomic situation. A higher trade deficit will likely translate into a higher budget deficit. The Government can’t collect the same amount of taxes on imported goods and services. German car manufacturers and workers don’t pay taxes to the UK govt. I’ll try once again to explain to JoeB below, so it is important we understand what’s going on if and when this starts to happen. We shouldn’t then panic and slam on the economic brakes.

  • Peter Martin 12th Feb '18 - 8:19am

    JoeB,

    This is such basic stuff that I just can’t believe people like Vince Cable are unaware of it. So why don’t they go along with it? I don’t have a good answer to that question. But once again this is how it works:

    The Govt’s Deficit = Everyone Else’s Savings.

    ‘Everyone Else’ includes our overseas trading partners and, of course, their central banks. They are the big savers. The Bundesbank will have somewhat more than £1000 of gilts in its coffers. So if we divide everyone else up according to location and adjust the terminology slightly we get:

    Government Budget Deficit = Savings of Private Dom. Sector + Current Account Deficit (Trade)

    If the Government wants to reduce its deficit it can encourage us all to borrow more by lowering interest rates. Borrowings can be regarded as negative savings. It has done exactly that since the GFC. But that could just give everyone more spending money for imports too. So what causes what? Does a higher Government deficit cause a higher trade deficit and/or more savings or vice versa?

    To answer that question we need to look at how countries manage their currencies. It’s easy enough to keep your currency slightly lower than it should be. But it’s just about impossible to keep it higher. The Tories tried that in the early nineties with the pound and came unstuck on Black Wednesday. The big net exporters all have ways of ‘managing’ ( I would call it manipulating) their currencies to keep their trade in the black. Germany uses the euro which is by common agreement is too weak for its economy. Denmark pegs to the euro. Singapore openly admits to managing its $ to support its own industry and maintain export competitiveness.

    So what about countries like the USA, Canada, the UK, Australia, and NZ who genuinely let their currencies float? They’ll almost certainly, apart from in exceptional circumstances, end up with a current account deficit in their trade. That has to happen as one country’s export surplus is another’s import surplus.

    If we admit that a genuinely floating pound is almost certain to lead to an current account deficit we also have to accept that our govt budget inevitably is going to be in deficit too. If we try and reduce it by raising taxes and/or cutting spending we are going to do ourselves damage by depressing our economy unnecessarily. We should only do that to cool an overheating economy.

  • Joe, do you reject the Keynesian model that leakages (government revenue, imports and “savings” i.e. money not spent, saved or invested or paid into a pension fund plus debt repayment) equal injections (government spending, exports and private borrowing)?

    It is my understanding that companies and banks didn’t spend after the 2008 crash, even people pay off some of their debts and that was why large government deficits were needed. Nothing to do with consumer savings.

    I think this chart shows the relationship well – http://static2.businessinsider.com/image/4d4ae81349e2aeaa13090000/sector.jpg.

    Therefore the amount of total savings is not relevant, what is relevant is what people and companies and banks are doing with their income.

    Peter, I do accept the Keynesian theory as you know. I also accept that the UK has a high propensity for leakage and the main way money leaks is via imports (and because of the crash recently into “savings” (see above). This leave the possibility open that if a government achieved full employment then the deficit could be reduced and the government budget go into surplus. Whether it does reach surplus depends on private borrowing and the balance of payments. If we had full employment this should encourage investment by companies to improve productivity because they couldn’t increase production by employing more people, this should then reduce the amount “saved” and could mean more is borrowed than saved by the private sector.

  • Peter Martin,

    I think the answer to your first question lies in the fact that Vince Cable having worked as an economist in international development, academia and with an multi-national oil company,as well as serving as Business minister, brings a broad range of real world experience to the table and a deep understanding of how economies actually work.

    Almost all the big trading surplus counties – China, Japan, Saudi Arabia (and Germany until recently) consistently run budget deficits. The budget deficit is simply the excess of public spending over tax receipts. While a budget deficit may have an impact on the balance of payments capital account to the extent the deficit is financed with overseas borrowing, it is not a cause or effect of and is not dependent on the balance of payments current account (trade deficit).

    The Accounting equation developed by Luca Pacioli (a mathematician in renaissance Italy) simply states that Assets = liabilities + capital. Any individual or entity can increase Assets by increasing liabilities but this does not result in increased capital. This is the source of the double-entry formulas developed for national accounts in the 20th Century

    When a government borrows it is borrowing on behalf of tax papers. If it borrows to acquire tangible assets, a government/taxpayers liability of equal amount is created, there is no increase in taxpayers capital. It is swapping one asset for another. When it borrows for current spending it is drawing on the value to be produced by future taxpayers. There is a limit to how much a government may deficit spend without inducing excess inflation and eroding taxpayers net worth (standard of living). This is the economic reality of the real world. Economic models that bear no relation to actual outcomes in the real world (such as the fact that big trade surplus countries typically run budget deficits at the same time) can have no practical application.

  • Peter Martin 12th Feb '18 - 5:23pm

    JoeB,

    You might like to read up on the concept of sectoral balances. Sure, a net exporting country can have a Govt budget deficit if the Savings of the Private Domestic Sector are greater than its current account surplus. But it is just about impossible for a significiant net importing country to do run a Govt surplus for anything but the shortest period of time. Then it can only only be because the Govt creates an unsustainable credit bubble in the economy.

    https://en.wikipedia.org/wiki/Sectoral_balances

  • Peter Martin 12th Feb '18 - 5:27pm

    @ Michael BG,

    I might make the same suggestion of looking up the idea of sectoral balances to you as I did to JoeB.

  • Peter Martin,

    the balance of payments is an accounting identiy that is a component of sectoral balances and similarly will always sum to zero. Where uses of funds (such as paying for imported goods and paying for foreign bonds purchased) exceeds sources of funds (such as export goods sold and bonds sold) there is said to be a balance of payments deficit. The resulting deficit or surplus is counter-balanced by changes in the market value of foreign exchange reserves held by the central bank and by purchases or sales of foreign currency reserves by the bank.

    Just as borrowing may be domestic or international , so too may savings be invested domestically or overseas by investment funds, multi-national companies and individuals buying property and other assets overseas.

    Hence, if domestic business does not absorb the pool of savings created by UK residents then invesors can and do look to International Investment opportunities with the prospect of higher returns.

    The balancing or residual factor in the sectoral balance equation is the accumulation or decumulation of foreign exchange reserves by the cental bank. These are not savings of the general population they are monetary operations that impact the value of the currency on the foreign exchange markets.

    Sectoral balance analysis is a useful tool for studying the flow of funds within an economy, just as cash flow statements are an important element of corporate financial statements. It does not give you the full picture, however, anymore than a cash flow statement does without relating the information to a company’s balance sheet and statement of income.

    The government deficit ballooned in the aftermath of the financial crisis because tax receipts from the financial sector collapsed i.e the goverments statement of income showed a large deterioation. The governments liabilities increased as debt was issued to finance the deficit and this debt absorbed the excess savings of households and firms. Deleveraging was accommodated by monetary expansion including quantitative easing i.e the goverment balance sheet was impacted but not it’s deficit.

  • Peter Martin 12th Feb '18 - 7:25pm

    @ Joe B,

    OK but your mention of foreign exchange reserves is a bit or a red herring. Leaving them aside, the sectoral balances still have to balance. A deficit in the current account will always be cancelled by a surplus in the capital account.

    Sure the sectoral balances don’t explain everything. They don’t inform us of the meaning of life. However, and as Prof Wray says in his talk, they do explain why Governments, such as we have in the UK and USA, “must run deficits”.

  • Peter Martin,

    “it is just about impossible for a significiant net importing country to do run a Govt surplus for anything but the shortest period of time.”

    Hong Kong has been running a trade deficit for most years since the handover in 1997 while running budget surplus throughout most of the same period.

    The reason – ever growing receipts form Land Value Tax premiums.

    It is not the methodology of sectoral balance analysis I have an issue with, it is the interpreatations put on conglomerated variables that concern me.

  • Peter Martin 12th Feb '18 - 9:45pm

    @ JoeB,

    According to this reference HK runs a trade surplus. So budget surplus could be possible depending on the level of domestic savings.
    https://tradingeconomics.com/hong-kong/current-account

  • @ Joe Bourke

    I am disappointed you didn’t answer my questions of yesterday afternoon (3.14 pm).

    If you expand the graph at Trading Economic that Peter Martin gave the link for, you can discover that Hong Kong has had a Current Account surplus all the way to before 2001 with 4 very short periods in deficit.

    @ Peter Martin

    Did you not see my comment to Joe which included a link to a chart showing sectoral balances?

    In your clip Larry Randall Wray states it is possible to have a budget surplus when the private sector is in deficit. He just thinks having the private sector in deficit is a bad thing and resulted in the financial crashes of 1929 and 2008.

  • Peter Martin,

    you wrote “it is just about impossible for a significiant net importing country to run a Govt surplus for anything but the shortest period of time.”

    Definition of trade deficit – the amount by which the cost of a country’s imports exceeds the value of its exports.

    Definition of current account – sum of the balance of trade (goods and services exports less imports), net income from abroad and net current transfers.

    Hong Kong’s balance of trade (imports – exports), as used in the sectoral balance GDP accounting analysis https://tradingeconomics.com/hong-kong/balance-of-trade shows a trend from relative balance up to mid 1990s to mostly trading deficits since then with imports exceeding exports by n ever- wider margin as the budget surplus has grown. Balance of trade activity excludes dividends etc., from overseas investments.

  • Peter Martin 13th Feb '18 - 7:13pm

    @JoeB,

    I think you should be using the Current account rather than just the balance of trade figures. The CAD does include what used to be called the ‘invisibles’.

    Bill Mitchell who first introduced me to this concept gives this equation, (6) in his nomenclature:

    (S – I) – (G – T) – CAD = 0

    Its true that that CAD, or the external deficit, is often just represented as the difference between exports and imports but it really ought to be more precisely defined as Bill explains here.

    http://bilbo.economicoutlook.net/blog/?p=32396

    The point is that if an economy is net losing money to fund both a government surplus and to cover the deficit in all trade and currency flows, it will very quickly run out, and the economy will be plunged into recession.

  • Peter Martin 13th Feb '18 - 7:30pm

    @ MichaelBG,

    Sorry but I might have missed your link to JoeB. Prof Wray is quite right that the private sector should generally be in surplus. If it’s in deficit then the economy is going to be subject to deflationary pressures.

    JoeB seems to think Hong Kong is somehow an exception to this rule. We’d have to take a closer look at just what was happening there but my guess is that rich mainland Chinese people are, by hook or by crook, using HK as a way of stashing their ill gotten gains, possibly in high price real estate, to avoid the scrutiny of the mainland authorities. Therefore there’s a lot more money going into HK than the official figures might suggest.

    The HK economy is quite buoyant. The money to make it tick has to be coming from somewhere.

  • Peter,

    I think the accounting methodology behind sectoral balance analysis is academically sound. It is the inferences that you are making that I question.
    To infer that that surplus countries cannot run budget deficits for extended periods of times clearly does not match with real world observations of China, Japan, Saudi etc. Similarly, net importers can and do run trade deficits while accumulating significant budget surpluses like Hong Kong, or both trade deficits and current account deficits while maintaining budget surpluses as for example New Zealand has done for decades (with the exception of the five years following the financial crisis).

    Private sector financial assets (savings) may increase because corporations and high net worth individuals (not households) are accumulating cash or government bonds and underinvesting domestically; or banks are accumulating government bonds in preference to maintaining or increasing lending to the private sector. Lack of lending and investment can lead to falling aggregate demand (Keynes liquidity preference) and stalled productivity growth.

    The last point you make “that if an economy is net losing money to fund both a government surplus and to cover the deficit in all trade and currency flows, it will very quickly run out, and the economy will be plunged into recession.” An economy with a free floating currency can never run out of money. Germany has run both budget deficits and trade surpluses for 40 years using the Dmark and the Euro up to 2015 without plunging into recession.

    An economic model has to adequately explain real world observations to be useful to policy makers. This was a major problem with the pre-crisis paradigm.

  • Peter Martin 14th Feb '18 - 9:18am

    @ JoeB,

    “To infer that that surplus countries cannot run budget deficits for extended periods of times clearly does not match with real world observations of China, Japan, Saudi etc”

    It’s OK this way around. If an economy is growing and/or the Private Domestic Sector is increasing its net savings, (S-I) in the algebra, then, even if the external account is in surplus, the Government is safe to run a deficit providing inflation is kept under control.

    You’ve thrown in a claim about New Zealand without any references so it’s difficult to check that. But NZ can’t be any exception. Prof Wray is saying that the normal situation for the PDS in any country is that it should be in surplus. In the USA, whenever it has dipped into deficit, it has been followed by recession or depression. And a floating currency, though helpful, isn’t a complete defence against that as we saw after the 2008 GFC.

    In the event of a severe recession, the Government has to pump money back into the economy to prevent that economy falling into depression. After the GFC, we saw a variety of measures to achieve this: ‘cash for clunkers’ deals, VAT reduced to 15%, government bringing forward spending plans etc. The Australian Govt even handed out $1000 cheques to taxpayers and told them to spend it. The money has to come from somewhere. Of course if the Govt had been smarter then the recession wouldn’t have happened to begin with. Instead of just looking at their own deficit and surplus, they should have been looking more closely at the deficits and surpluses of other sectors too.

    Germany and Denmark both manipulate their currencies to ensure that their trade is in the black. So they run large surpluses in their current account. Typ around 8% of GDP in recent years. So there is naturally money coming into both their economies to keep their PDS in surplus. Any deficits run by Govt would only need to be small. Often, even, they’d be in surplus. But we can’t all be like Denmark and Germany. We can’t all run trade surpluses. Someone has to run the deficits. Trade has to sum to zero on a world scale.

    The sectoral balances aren’t the maroeconomic be all and end all. But they are useful to understand. They do explain, as Prof Wray does explain, why the USA has to run a Govt deficit to keep their private sector in surplus. It’s the same argument for the UK.

  • Peter,

    your comment above on sectoral balances is eminently logical and I do understand the point that one or more of the sectors must be in surplus if one or more of the of the other sectors is in deficit. It is not the mathematical logic that is the problem, it is the policy adjustments that are sometimes inferred that rely on theoretical propositions not accounting identities that are in question. The external sector is a combination of foreign governments sectors and overseas private sector. Domestic Net investment spending is netted from domestic net savings.

    If a UK pension fund buys gilts this is a transfer of domestic savings from the private sector and borrowing by the domestic government sector. If the fund buys US treasuries this is a transaction within the private sector. The offsetting double-entry is the change in Central bank reserves which is treated as a change in net financial assets between the government sector and external sector in sectoral balance stock flows.

    An increase in net financial assets in the private sector may or may not be a beneficial outcome. If the majority of the working population are net borrowing and a small proportion of the private sector are accumulating net financial assets that are not invested in productive investments, but rather in Land or intangible assets then workers savings are not being recycled into productive investments that generate the employment and the wages needed to maintain spending.

    The policy inference does not have to be that the government sector needs to keep increasing its deficit to make up this shortfall or leakage in aggregate demand, but rather that the economic rents derived from these assets should be recovered by taxation and recycled into the economy as spending on public services that will in turn flow through as spending of wages in the private sector by public sector employees and the staff of contractors providing public services.

  • Peter Martin 14th Feb '18 - 2:36pm

    @ JoeB,

    Your last paragraph is where we disagree. If you buy some government bonds, or National Savings certificates then that’s entirely within your right to do that. If Government disagreed they needn’t encourage everyone to buy them in the first place! They can be regarded as a form of temporary taxation.

    So there is no need to try to recover the money from the economy by imposing extra taxation. If they do they probably won’t succeed anyway. Whatever happens the sectoral balances will still balance. All that will happen is that the economy will be pushed into recession and the deficit won’t end up being any different.

  • Peter Martin,

    I think we do disagree. I belive what pushes the economy into recession is the cumulative effect of the extraction of economic rents in the form of land rents, mortgage interest on land and patent rights that erode the disposable income of consumers to a point where a correction is required to reset the equilibrium of the economy for a time.

    The accumulation of financial assets by a rentier class extracts value from the economy that is not recycled into production and wages i.e. savings from income are not being reinvested in the creation of physical plant and inventories that require labour input, but rather in existing non-produced assets like land or intangible assets like brand values or patents.

    Increasing government spending to increase the level of financial assets accumulating in the private sector would be the wrong response in these circumstances. These economic rents should be collected by the government while simultaneously reducing other forms of taxation on productive activity, therby restoring the disposable incomes of consumers and the capacity of the economy to maintain its equilibrium.

  • Peter Martin 14th Feb '18 - 6:27pm

    OK but the idea of savings being a temporary tax goes back at least to Keynes in WW2. In his pamphlet “How to Pay for the War” he admits that high levels of income and other taxes would be counterproductive and would lead to widespread discontent amongst working people. So he suggested that it was better that a scheme for compulsory saving be introduced. In the short term they would have exactly the same effect as a high tax and the problem of how to repay could wait until after the war ended.

  • Joe, have you now accepted that leakages equal injections?

    If I have understood your last post you think that rent is a leakage. I can see mortgage payments as a leakage because the consumer is paying off some of their debt. Rents are a price and the money does not end up in the banking system. For the owner it is income, I suppose just like dividends on capital.

    Therefore rent is not a leakage, it can become a leakage depending on what the owner does with it. If they are living on it then it isn’t a leakage. If you tax the rent then that tax is a leakage because it is government revenue.

    If you reduce taxation on capital then you are not really doing anything to increase consumer spending you are just moving money from one form of capital to another.

    I think it would be possible to state that if rent was taxed like profit then this is just another form of taxation on capital and as such a perfectly legitimate form of government revenue or leakage. If Income Tax was reduced and so the effect on government revenue was neutral then we could expect an increase in aggregate demand because we would expect Income Tax payers to spend more of the money that the owners of property on consumer goods. Of course instead of cutting Income Tax the government could use the revenue to finance a Basic Citizens Income which would increase aggregate demand even more.

  • Peter,
    sure during the war all material and human resources were deployed in the war effort and the government could impose rationing as well as price, wage and rent contols as necesary or as keynes suggested introduce compulsory saving i.e. effectively a planned economy.
    Keynes’s advocated using the taxation system to redistribute income, writing “since an increase in the habitual tendency to consume will in general [i.e, except in conditions of full employment] serve to increase the inducement to invest’
    The rationale for this is that the poor spend a higher proportion of their incomes than do the rich.
    Marriner Eccles, chairman of the US Federal Reserve Board from 1934–1948, spelt out the logic of this position
    ” a mass production economy has to be accompanied by mass consumption. Mass consumption in turn implies a distribution of wealth to provide men with buying power. Instead of achieving that kind of distribution, a giant suction pump had by 1929 drawn into a few hands an increasing proportion of currently produced wealth. This served them as a capital accumulation. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game when the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.”

    The same ‘suction pump’ was in operation in Britain and the USA in the run up to the 2007 crisis, access to credit compensating for the growing inequality of wealth and incomes.

    Tax policies based on collection of economic rents for the public benefit can address this core issue by proportionally shifting the incidence of taxation from productive to non-productive activity. Such policies are consistent with Keynes insights into the central importance of maintaining effective aggregate demand in the economy.

  • Peter Martin 14th Feb '18 - 8:20pm

    @ Joe B,

    There’s several reasons for taxation. The most important is to establish a value for the currency by creating a demand for it in order to pay those taxes. Other reasons would include: to ensure that levels of inequality are reduced, to prevent people harming themselves such as by smoking and drinking too much, or to dissuade everyone from undesirable activities such as polluting the atmosphere or the waterways.

    Generally it’s a mistake to mix these up which I’d say you are with your advocacy of a LVT and/or other wealth based taxes. We don’t need to to ‘raise revenue’. Money doesn’t grow on rich people.

    If they, or anyone else, aren’t spending their money, it is economically inert. If they buy bonds either directly or, indirectly via their deposits in a commercial bank or pension or trust funds or whatever, that ‘money’ isn’t doing anything. It may as well not exist. It has zero effect on the economy. Therefore, if they aren’t spending it the Govt can spend it to exactly the same effect as if they were.

    So Govt should apply LVTs, and other wealth based taxes, because we want to redistribute that wealth. Not because Govt needs the money. It doesn’t matter in the slightest in the short term unless it would otherwise have been spent on goods and services in the economy.

  • Michael BG,

    Savings are represented as a leakage in the Keynesian circular flow model. Keynes also criticized the idea of excessive saving unless it was for a specific purpose such as retirement or education. He saw it as dangerous for the economy because the more money sitting stagnant, the less money in the economy stimulating growth. This was another of Keynes’ theories geared toward preventing deep economic depressions (Liquidity preference).

    Economic rents arise from non-produced inputs. This is why it important to distinguish them from contract rents. Contract rents include both a payment for produced inputs (the buildings) and non-produced inputs, the land. Mortgage interest payments need to be similarly apportioned between loans for the purchase of non-produced inputs (land) and cost of finaning the construction of buildings.

    Intellectual property can have the same dual features of produced and non-produced inputs. Exclusive rights to exploit the radio spectrum or hold landing slots at airports are another case in point.

    These economic rents combine to absorb a high proprtion of the value produced in the economy and the resultant capital accumulation leads to the situation as described by Marriner Eccles in my reply to Peter of 7.50pm above.

    I think the concept of a Universal Basic Income is a good one, with the caveat that it is fiunded via the collection of economic rents so that the benefit is retained by those who need ot most and not absorbed in the payment of higher levels of rent.

  • Peter Martin 14th Feb '18 - 8:38pm

    @JoeB,

    On the question of your poker game: Yes the tendency will be for the concentration of chips to be concentrated in ever fewer hands. However there’s no ‘banker’ in game of poker as there is in a game of Monopoly. The banker is like the government. He can never run out of money. It’s in the rules! Of course it wouldn’t be any fun to play if it went on forever. But, there the parallel with our economy ends. We do want that to keep rolling along.

    So the Banker/Govt can change the rules as he sees fit to make that happen. If we need more money the we get £500 rather than £200 for passing Go! If the rich need to be taken down a few pegs, then those Hotels on Mayfair can be Nationalised without compensation 🙂

  • nvelope2003 14th Feb '18 - 8:42pm

    Peter Martin: If banks etc can just create money by pressing a button on a computer why did they used to offer reasonably attractive interest rates to depositors until the Government stepped in with Funding for Lending or whatever it is called now and caused interest rates to savers to collapse ?

  • nvelope2003 14th Feb '18 - 8:45pm

    If those Hotels on Mayfair can be nationalised without compensation – ah now we know why the Conservatives are so keen to get out of the EU.

  • Peter Martin 14th Feb '18 - 8:52pm

    @nvelope2003,

    There’s a fair bit of nonsense talked about commercial banks ‘creating money’. If they could in the way many suggest they’d never go bust. The only bank that can really do that is the Govt/BoE. They really can’t go bust.

    So it makes perfect sense for them to borrow money at a lower rate of interest and lend it out at a higher rate. They are in business to make money like anyone else. They do make money is a sense. They create electronic credits which can function as money. But they have a liability too. They have to meet those liabilities otherwise they really are insolvent.

  • Peter Martin,

    a goverment has to tax and borrow to preserve the purchasing power of the currency, keeping inflation in check. It also has to pay interest on the bonds it issues to domestic and overseas investors to maintain the currency as a store of value.

    In developing fiscal budgets, the government has to consider the impact of public sector spending (net of tax collections) and bond issuance on the currency in International markets.

    The instutional framework developed for the management of public finances Internationally is what creates the necessary conditions of confidence that allow for cross-border trade and investment.
    Global free trade was interrupted by the outbreak of World War 1 and took 75 years until the collapse of the Soviet Union for world trade to return to similiar levels.. Holders of Czarist era bonds were still largely stiffed under the compensation arrangemens agreed with Russia. Nonetheless, globalisation has lifted hundreds of millions out of abject poverty.
    International trade is dependent on a rules based system that all participants can rely on.

  • Peter Martin 14th Feb '18 - 10:52pm

    @Joe B,

    I might just direct you to Prof Wray again. See about the 3:20 mark. “Bond sales are not a borrowing operation.”

  • Peter,

    I think we can agree that bond issuance is a monetary operation by the government referred to in the UK as the public sector borrowing requirement (PBSR). A bond is typically repayable to the lender after a fixed term and constitutes both a debt security and a negotiable instrument i.e ownership can be transferred in the secondary market. As far as the lender is concerned the government is borrowing money from him.
    As Professor Wray notes a government can be resource constrained (e.g. at close to full employment levels) and crucially government spending is inflation constrained. Hence the need to manage money supply with taxation, bond issuance, open market operations (including quantitative easing) and interest rate targets.

  • Joe, in the quote you give from Marriner Eccles I can’t see the word “economic rent”. Classical economics meant that once the depression came the standard way out was to reduce wages and the number of people employed, nothing to do with a small number of people accumulating capital. It was this reduction in aggregate demand that made the recession worse. Larry Randall Wray states that the cause of the crashes of 1929 and 2008 were the amount of private sector borrowing and I think this led on to the failure of the banking system.

    Economic rent seems to be part of the price which results from outside of the normal free market forces, such as the extra rent that can be obtained because of the position of a house, the extra price which can be obtained because of there being only one supplier because of a patent. For the patent holder they would say that they need the extra revenue to cover their research costs. A worker can also earn economic rent. Perhaps therefore we should consider Income Tax as a tax on economic rents. It could be stated that a doctor’s income includes a large amount of economic rent.

    Another definition of economic rent is the amount earned minus how much could be earned in the next-best opportunity.

    It does not seem sensible to have a tax which tries to tax all economic rents in the UK.

    Economic rent is not a leakage it is still income. If a person has an income of £1 million it makes no difference how much of it is economic rent. The important thing is how much is either spent in the economy or invested to increase productivity.

  • Peter Martin 15th Feb '18 - 12:29am

    “As far as the lender is concerned the government is borrowing money from him.”

    This is how the neo-libs portray Govt borrowing. But the lenders don’t see it this way at all. My wife has just bought a lot of Premium bonds. She’s not an economist and doesn’t think in terms of assets and liabilities. Her eyes glaze over at the mention of double entry bookkeeping. If we ask her if the Government has borrowed the money from her she would say no. If she’d received a letter from Philip Hammond saying the Govt was running short of money and could she buy some Premium Bonds to help them out then she would say the Govt had borrowed the money.

    If she’d spent that money into the economy it would have increased the Govts taxation revenue as it was spent and respent in several transactions. The so-called multiplier effect. As it is the Govt needs to spend it on her behalf to keep the economy moving.

  • Peter,

    you can make the same argument about the government deficit and PSBR. Transfers – pensions, welfare payments etc at not spending on real resources. The government taxes one party – the taxpayer- and distributes funds to another party – the pensioner of welfare recipient. This is a channel for redistribution of money. Until the money is exchanged for goods and services by recipients it is not spending in the economy.
    Net financial Assets in sectoral balance analysis are an accounting construct. The Central bank will increase/decrease its reserves via open market operations as necessary to manage its target interest rate. These reserves are created/destroyed without any economic exchange occurring. Real assets – tangible goods and services- are produced by real people in in the public and private sectors.

  • Michael BG,

    this a link to Vince Cable’s speecg to the Resolution foundation a few months ago https://www.libdems.org.uk/cable-inequality-full-speech-060915

    Some pertient extracts:

    Studies suggest that higher levels of inequality are associated with unproductive, ‘rent-seeking’, activity; contribute to financial instability; feed ‘asset bubbles’ rather than productive investment; weaken demand leading to a growing dependence on personal debt to sustain consumption; and lead to underinvestment in human resources through education and health.
    … many of the inequalities of wealth and opportunities are embedded in a highly dysfunctional market for property and land. Britain is a country where wealth accumulation is achieved by acquiring property (or land) and watching the price go up rather than by technological innovation and developing overseas markets. Bank financing is heavily skewed to reinforce that bias. For the fortunate segment of the population which owns their own home property isn’t just a home but an investment, a pension, a mark of status. Tackling inequality in this context is, therefore, fraught with political difficulty.
    If Britain is to become a more equal society, a serious review is needed of the set of taxes which are there to mitigate the sharp, jarring, differences brought about by asset inflation and unearned income. We must tax wealth effectively.

    The present system is a patchwork of different taxes, all flawed in different ways and full of loopholes. Inheritance tax allowances have grown more generous reflecting house price inflation and there is considerable scope for avoidance through gift before death. Capital gains tax too has a plethora of reliefs. Britain has no tax on property values as such and council tax serves as a very unsatisfactory substitute based on ancient property values and not proportional to property or land values. One could add various wealth related charges like stamp duty. Together these taxes raise around £50 bn a year of which half is council tax: representing, overall, half of one percent of household net wealth.
    I have no doubt that tackling the inequality of wealth, and particularly property, is deeply uncomfortable in a country where property ownership has almost religious significance. But, unless we are willing to do so, rhetoric about unfairness will become a rapidly devaluing currency.

  • Michael BG,

    Economic rent is any payment to a factor of production in excess of the cost needed to bring that factor into production. In classical economics, economic rent is any payment made or benefit received for non-produced inputs such as location and for assets formed by creating official privilege over natural opportunities.

    Economic rent should not be confused with producer surplus, or normal profit, both of which involve productive human action. Economic rent is also independent of opportunity cost, unlike economic profit, where opportunity cost is an essential component. Economic rent should be viewed as unearned revenue whereas economic profit is a narrower term describing surplus income greater than the next best risk-adjusted alternative. Unlike economic profit, economic rent cannot be eliminated by competition, since all value from natural resources and locations yields economic rent.
    Economic rent can be thought of as non-productive payments that don’t increase the overall size of the “economic pie”. Instead, they just reallocate that “pie”.
    Conventional economic theory is based on the hypothesis that in equilibrium, the price of something is equal to its marginal cost of production. However, unlike the accounting definition of cost, the economic definition includes all the actual (accounting) costs as well as cost of capital. Cost of capital can be thought of as another term for base-level of profit. Economic rent is the so-called supernormal profit over and above the cost of capital (the base level profit).

  • Joe, I don’t understand why you think I should value Vince’s opinion over yours.

    You have presented no argument that economic rent is any different from any other form of income. There is no reason why economic rent or even normal rent creates asset bubbles more than dividends or excessive incomes.

    I have no problem with taxing wealth effectively which is why I support LVT on commercial property and the abolition of the 7 year gift rule by which the wealthy avoid paying inheritance tax. I even support like Vince the “reform (of) council tax by creating more bands and making the tax rate proportional to property value”. Vince even states that income redistribution is a part of the liberal tradition.

    You have stated your idea of what economic rent is. You might even quote Henry George but you are not using the term in the way it is used within main stream economics.

    Investopedia define it as “is an excess payment made to or for a factor of production over the amount required by the property owner to proceed with the deal (https://www.investopedia.com/terms/e/economicrent.asp#ixzz57D5XIvNo) and this includes economic rent being earned by workers.

    Economic help define it as “is the extra income a worker receives – above the minimum level they need in order to work” (https://www.economicshelp.org/microessays/economic-rent/).

    The student room define it as “a payment received by a factor of production over and above what would be needed to keep it in its present value. I.e. it is the amount which someone can earn which is in excess of their transfer earnings (what they could earn elsewhere)” (https://www.thestudentroom.co.uk/revision/economics/a-level/a2-economic-rent-and-transfer-earnings).

  • Michael,
    see link http://www.credoeconomics.com/georgist-macro-economics-and-the-land-value-tax/ for discussion of macroeconomic impact of rent seeking activity.

    “Economic cycles tend to end in “bubbles”. The rising price of particular classes of assets like land or property creates a collective euphoria or mania. People borrow to buy this asset, or invest all their savings in it on the anticipation that they will make more money as its price continues to rise. Their credit inflated purchases chase up the price until the price of the asset and the servicing of debt become unsustainable. Confidence falters and the crash occurs…Banks are left with debtors who have lost money and cannot pay up who then have the collateral seized from them.
    None of this would happen if the original idea of the Physiocrats, Smith, Ricardo and George had come to pass – that the landowners forfeit the rising land values (capitalised rental values) through a tax. A land value tax would remove the incentive for land price speculation pumped up by bank credit creation. There would be no point in speculation because gains would go to the taxpayer. There would be no
    point in buying and hoarding land and then leaving it unused, on the anticipation that its value will rise. Hoarded land would have to pay tax, and if it was unused, it would still pay a tax, thus, speculative holding of idle land would lead to loss. A site value tax would release land onto the market and actually bring down land prices.”

  • Joe, I don’t understand why you think I should value Brian Davey’s opinion over yours. He produces no evidence that land prices collapse every 14 years when the bubbles bursts. I don’t recall a banking crisis in 1994 or 1980, do you? This link (https://www.nationwide.co.uk/-/media/…/house-price…/uk-house-price-since-1952.xls) to a spreadsheet of UK house prices doesn’t show any collapse in house prices in those years either. All I could find was a steady decline in house prices from 1989 to 1993 caused by the ending of the double mortgage tax relief and the world-wide recession of the early 1990’s. There was a decline in house prices from 2007 which was recovered by 2014 which was caused by the financial crash of 2008 which according to Larry Randall Wray was caused by a private sector deficit, i.e. was caused by too much private sector borrowing.

    Your position on the effects of economic rents on the economy is not generally supported and as I have pointed out you don’t accept the generally accept definition of what economic rent is. However, I do agree with Brian Davey that if we had LVT on undeveloped land and it was taxed on its economic value this would reduce land hoarding and reduce land speculation. It might even increase the number of homes being built each year.

  • Michael BG,

    I think we should value all reasoned contributions and in particular those where there is significant evidence in support of such opinion, whether it be Vince Cable’s writings and speeches or those of Brian Davey writing in an economics blog. This is how human progrss is made – by examing old beliefs in the light of new evidence and improving on what has gone before.
    There is plenty of information on economic rents available via a google search. Mirrlees in his tax review focused on two areas where economic rents arise. Firstly, with respect to corporation tax he suggested that a cost of capital tax deduction be created to align the tax treatment of companies using debt (and therefore incurring deductible interest ( as the principal source of capital; and companies using share capital (and therefore paying non-deductible dividends as a return on capital). Economic rent is the surplus arising over and above economic profit (defined as accounting profit as reported in a Profit and Loss statement less the cost of capital, being the normal return required by shareholders).
    In the case of property, Mirrlees has recommened reform of Business rates to an LVT basis and consideration of a housing services tax to replace council tax on residential housing. Mirrlees also discusses the impact of economic rents in the land and property markets.

  • Michael BG,

    Joseph Stiglitz is a nobel prize winning economist who has served as Chief Economist of the World Bank and as an economic adviser to numerous countries around the world.

    He deals with the issue of economic rents in a four-part series of research papers http://www.nber.org/papers/w21189. Some of conclusions:
    “We have, for instance, considered land as a positional good—the value of beach front property in the Riviera or in Southampton increases with wealth and wealth inequality. Indeed, the effects are reinforcing.

    We have explained too why land bubbles are a natural part of market economies (in the absence of futures markets extending infinity far into the future); and even when there are “corrections,” there is no assurance that the market will not once again go off on a bubble path. On such bubble paths, wealth, as conventionally measured, may increase, even as the real wealth of the economy diminishes.

    But, most importantly, we have explored the connections between land, collateral, and the financial system. There is increasing recognition that the increase in the wealth income ratio and inequality is related to the increase in rents, and in particular the value of land, and to our financial system. Indeed, as Galbraith has suggested, our financial system is at the heart of the creation of inequality in our modern economy. This paper has suggested that these two phenomena are in fact linked with each other; that the increase in the value of land and the distribution of ownership claims may be related to the provision of credit by our financial system—and that changes in the rules governing that sector and the conduct of monetary policy may have played an important role in the increase in inequality.”

    “…a tax on land, reducing the value of land, it reduces wealth inequality, for the workers’ savings is given by their wage plus transfers, and with wages unchanged, transfers increased, and interest rate unchanged, their savings increases, and their wealth-holdings crowd out those of the capitalists. Thus, as Henry George argued long ago, land taxes can be an important instrument for increasing equality. He explained how such a tax was non-distortionary. But in many of the models presented here, we obtain a stronger result: a land tax actually leads to higher wages and a higher level of national output.”

  • Joe, your appeal to others does not convince me. Only presenting the evidence would convince me. As I have stated I don’t disagree with everything either Vince or Brian says. When I quote Larry Randall Wray are you convinced to agree with his opinions?

    Economic rent is “a payment received by a factor of production over and above what would be needed to keep it in its present value. I.e. it is the amount which someone can earn which is in excess of their transfer earnings (what they could earn elsewhere)”.

    Therefore lots of workers also earn economic rent as part of their income, but you have failed to accept this. I have no problem with accepting that economic rent can be part of a company’s profit.

    With regard to land economic rent is the amount which is earned above what would be earned on the next valuable piece of land. I particularly found Wikipedia’s explanation of Ricardo’s “law of rent” (https://en.wikipedia.org/wiki/Law_of_rent) useful. Where I think we can conclude that when the price is £3, for ordinary land the economic rent is £1 10s.

    I don’t think your definition of economic profit is correct!

    I was not convinced by Mirrlees that a “Housing Services Tax” is the way forward. However I was impressed by the idea of replacing Council Tax with a fixed tax on the value of homes, which Mirrlees suggests should be set at 0.6% to equal the then current Council Tax take (see page 384).

    You have not quoted Stiglitz using the term “economic rent”. I agree that a land bubble is a bad thing. I just don’t accept it is caused by only economic rents from the renting of land. I also don’t accept that they have caused banking crises every 14 years. Quantitative easing has assisted in the rise of land prices as it has with other assets which Stiglitz refers to as “the conduct of monetary policy”. As I keep saying I support LVT on commercial land and I hope it would reduce the increase in the price of land, but I support it because it encourages bringing undeveloped land into use.

  • Michael BG,

    when Isaac Newton said “If I have seen further it is by standing on the shoulders of Giants.” he is using a metaphor for discovering truth by building on previous discoveries”. The evidence is in the writings and studies of economists over the past two centuries from Adam Smith to David Ricardo, Henry George and up until the present day and in the experience of Jurisdictions that have applied taxes on economic rents from Land such as Australia and American cities like Pittsburgh.
    There is much in MMT that is self-evident. It is primarily a description of how money is created and transmitted to the economy.
    Ultimately, economic theory has to be utilised to produce practical policies that can be deployed by governments. MMT advocates job guarantee programs ( a practical policy) but fails to take into account the practicalities of short-term fiscal programs (a serious weakness).
    Economic profit is defined in Investopedia https://www.investopedia.com/ask/answers/033015/what-difference-between-economic-profit-and-accounting-profit.asp
    Economic profit is determined by economic principles, not GAAP. Just like accounting profit, costs are deducted from revenues. Economic profit uses implicit costs, not just explicit costs. Implicit costs are considered opportunity costs and are normally the company’s own resources. Examples of implicit costs include company-owned buildings, equipment and self-employment resources. Economic profit computations are not normally limited to time periods like accounting profit computations are. Economic profit is used more to judge total value of the company somewhat like the performance metric economic value added (EVA) would and is helpful in calculating total production costs.
    For example, if a company had $150,000 in revenues and $50,000 in explicit costs, its accounting profit would be $100,000. The same company also had $25,000 in implicit, or opportunity costs. Its economic profit would be $75,000.
    Economic rent is the surplus over and above economic profit excluding any input costs for non-produced factors of production e.g. land and intellectual property rights. Workers receiving the market rate will not earn economic rents in a competitive labour market and neither will most companies. Rent-seeking in commercial enterprises is prevalent in market dominant firms that can drive out smaller competitors. Rent-seeking can arise in executive remuneration,but this is typically related to the Agency problem rather than exploitation of legal privileges granted by the state.

  • Joe, of course we should study the opinions and theories of the past which we find helpful but economics is not a science and like any art subject each individual should be persuaded by the argument and the evidence not the list of famous people who advocated that opinion. (This is why I could use Ricardo in support of my view, but I am presenting my view not his.)

    Do you accept that as economic profit is determined by “economic principles” rather than accepted accounting and therefore it cannot be accurately calculated?

    Do you accept that opportunity costs and transfer costs are similar?

    I don’t see any real difference between economic rents and economic profit. Even when I looked up the difference – the only differences seem to be words.

    You wrote that Mirrlees stated that economic rent can be part of a company’s profit distinction from economic rent on land.

    An example of economic rent for a worker is:
    A worker is willing to earn £15 per hour, but because there are union rates the worker is paid £18 per hour for the work. The difference £3 is the workers economic rent.

    I am not sure your focus on economic rents is helpful when trying to persuade people there should be a LVT.

  • Peter Martin 17th Feb '18 - 4:13pm

    We should perhaps be wary of people Ricardo. The idea of Ricardian equivalence holds that consumers are so forward looking that they act exactly opposite to what us awful Keynesians might expect when making their consumption decisions. So if Govt runs a budget deficit, these Ricardian consumers say “ah ah, that means I need to save more to pay my future taxes”. This nonsense is still used as an argument against tax cuts and spending increases aimed to boost aggregate demand.

    For example, Robert Barro tells us, in his wisdom (not), that peo­ple leave bequests to enable their dis­tant rel­a­tives to pay taxes:

    “A net­work of inter­-gen­er­a­tional trans­fers makes the typ­i­cal per­son a part of an extended fam­ily that goes on indef­i­nitely. In this set­ting, house­holds cap­i­talise the entire array of expected future taxes, and thereby plan effec­tively with an infi­nite hori­zon…”

    If this sounds like BS then I’d suggest that’s because it is!

  • Michael,

    Rent-seeking is an attempt to obtain economic rent (i.e., the portion of income paid to a factor of production in excess of what is needed to keep it employed in its current use) by manipulating the social or political environment in which economic activities occur, rather than by creating new wealth.
    It is defind in Investopedia https://www.investopedia.com/terms/r/rentseeking.asp as use of the resources of a company, an organization or an individual to obtain economic gain from others without reciprocating any benefits to society through wealth creation.
    Rent-seeking is distinguished in theory from profit-seeking, in which entities seek to extract value by engaging in mutually beneficial transactions. Profit-seeking in this sense is the creation of wealth, while rent-seeking is “profiteering” by using social institutions, such as the power of the state, to redistribute wealth among different groups without creating new wealth. In a practical context, income obtained through rent-seeking may contribute to profits in the standard, accounting sense of the word.
    Stiglitz breaks down rents into three categories – Monopoly rents, exploitation rents and land rents. Explotation rents being the exploitation of bargaining or information assymetries by the more powerful groups in society.
    Economic profit is defined at https://www.investopedia.com/university/eva/eva4.asp. The cost of equity capital is most oftern determined by use of the Capital Asset Pricing Model and therefore economic profit or Economic Value Added (EVA) is readily ascetainable and made available to maket investors.
    If an investment generates a normal return on capital, economic profit or economic value added is zero after deducting the required return on capital. Economic rent represents excess profits over and above the normal required return on productive assets.
    If a Landlord rents a property or an Industrial builds a factory and the normal return expected on the capital invested in buildings and equioment is 5%; any profits they make (including capital gains) in excess of an annualised return of 5% represent economic rent. The Landlords economic rent is attributable to land rents, the Industrialist may enjoy a combination of land rents, exploitation rents and potentially monopoly rents if he commands a market dominant position.

  • Peter,

    much as I admire Ricardo’s work on comparative advantage in trade theory and the Law of Rents, when it comes to Ricardian equivalence, I have to agree with the conclusion in the last sentence of your comment.

  • Peter Martin 17th Feb '18 - 8:40pm

    @JoeB,

    To be fair to Ricardo, he did float the idea of Ricardian equivalence, he later backed away from the idea. His entry in Wiki says:

    “Ricardo notes that the proposition is theoretically implied in the presence of intertemporal optimisation by rational tax-payers: but that since tax-payers do not act so rationally, the proposition fails to be true in practice. Thus, while the proposition bears his name, he does not seem to have believed it. Economist Robert Barro is responsible for its modern prominence.”

    This probably needs some reference. But certainly Barro is guilty as charged! Incredibly Barro isn’t some fringe theorist. He’s a professor at Harvard which does make me wonder !

  • Joe

    According to Investopedia Adam Smith saw ‘Rent-seeking’ as just the use of resources by lending them to others. And that ‘rent-seeking’ only becomes “a problem when entities engage in the practice to increase their share of the economic pie without increasing the size of the economic pie”.

    I think when you state, “exploitation rents being the exploitation of bargaining … by the more powerful groups in society” you are referring to economic rent as in my example above when there are union rates. Have you now accepted that economic rent can be earned by workers?

    You have changed you definition of ‘economic profit’? Gone are the opportunity costs! The Investopedia calculation seems based on assumptions and can include inaccuracies. So while they are ‘calculating’ it, the end figure is a best estimate.

    However, to define economic rent as a payment which is “excess profits over and above the normal required” is very close to the definition used in my example above. Have we now reached agreement on what economic rent is and that a worker can earn it too?

    Perhaps we should look at an example of economic rent on land. Assume that a landowner owns two pieces of identical land one valued at £1,000 and the other at £9,000 but they are the same size and have an identical house built on them that costed £20,000 to build. If we assume rents are 20% then he charges £4,200 on the first property and £5,800 on the second. We can agree that the economic rent is £1,600 because it is the extra income earned by the house because of its location. Nothing to do with economic profit.

  • Michael,

    The Union worker has improved his wage as a result of collective bargaining and mitigated the stronger bargaining power of the employer. The non-union worker accepts a lower wage because he is in a weaker position to negotiate the rate for his worker. The economic rent in this case is the surplus amount retained by the employer over and above the rate the employer would have to pay if rents. Economists studying the causes of inequality often point to the weakening of Unions as one of the key factors holding down wage income as a share of the economic surplus.
    The cost of capital is derived from the concept of opportunity cost. The rate of return required is calculated on the basis of next best investment available in the market for an investment with similar levels of risk. The risk/return trade-off is quantified in this way.
    The rent of land is purely economic rent i.e. income derived from non-produced factors. A Landlord who invests in real estate will derive an income from rents and capital gains. If the Landlords cost of capital on his own equity invested is 5% the combined return he makes in excess of 5% is economic profit i.e. the surplus in excess of his expected return. The economic rent is the amount he earns (rent and capital gains) from non-produced land only. This is equivalent to the total return from the property less economic profit derived from produced factors i.e. the building and the cost of capital invested in the building.

  • Joe, I agree that collective bargain is likely to have been the cause of the person being paid the higher wage or as economists call it receiving some economic rent. I have provided a link to this economic view. If you reject this then you are rejecting part of the standard definition of economic rent. You are at liberty to do so. However whenever you use the term “economic rent” I think you should state what your definition is and imply it is different from the standard one.

    Land is a factor of production. Investopedia defines economic rent as “an excess payment made to or for a factor of production …” (see above for link).

    Let us return to my example. Are you disputing that the £1,600 is economic rent? Do you consider the £200 rent on the land worth £1000 economic rent? I think you can only do so if you have your own non-standard definition of economic rent.

    If there was a LVT of 50% of the land rent I don’t think it would be raised only on economic rent. The owner would pay £100 on his first house and land and £900 on his second (which is built on the more valuable land).

    I am quite happy with this. I don’t understand why you wish to complicate things and talk of economic rents.

  • Michael,

    in your link to Wikipedia above, economic rent is defined as “any payment to an owner or factor of production in excess of the costs needed to bring that factor into production. In classical economics, economic rent is any payment made (including imputed value) or benefit received for non-produced inputs such as location (land) and for assets formed by creating official privilege over natural opportunities (e.g., patents ). In the moral economy of neoclassical economics, economic rent includes income gained by labor or state beneficiaries of other “contrived” (assuming the market is natural, and does not come about by state and social contrivance) exclusivity, such as labor guilds and unofficial corruption.”
    In New York, Yellow cab medallions can trade for upwards of $1m. These are economic rents created as a consequence of official privilege (New York City’s restriction on the issue of cab licenses). These rents accrue to the benefit of owners of the licenses not the cab drivers that lease the taxis. A similar trade exists in liquor licenses.
    Land is a non-produced factor of production unlike physical capital. Land rents and the interest income arising from the financialisation of land is the predominant source of economic rents in the modern economy.
    The difference in wages earned as consequence of union membership is described in Neoliberal economics as economic rent arising as a consequence of exclusivity. However, this would only likely arise where closed shop arrangements are in place. if union membership is open to all workers then no exclusivity or privilege exists and no economic rents arise. Wages are determined purely by competitive market forces.
    In exceptional cases, where economic rents do arise in the wage economy as a consequence of closed shop agreements, the benefit of economic rents is captured by employers able to exclude labour unions and collective bargaining arrangements from their operations.

  • Joe, it is good that you have clearly stated that economic rent can be earned by workers.

    I am not sure if you have recognised that land if a factor of production.

    However, I agree it is not usual for land to be created.

    I think it would be difficult to actually prove that most economic rent comes from land because determining economic rent is so difficult because it is judged against another item which is very changeable – such as transfer income. As it is so difficult to determine economic rent it should not be used when discussing land taxes.

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