Land Value Taxation Campaign

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Paul Krugman wins Nobel Prize for economics

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Paul Krugman, New York Times columnist and University of Princeton professor, has been awarded this year's Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. His speciality is spatial economics, and one might have thought that he would be strong on Ricardo's Law of Rent and possibly even an advocate of land value taxation. But whilst, unusually amongst economists, he puts an emphasis on the influence of geography on economics - which is why he has been awarded his prize - he has come at the subject from what appears to be a Keynesian direction and seems not to have picked up on the concepts presented by this campaign and similar bodies. You can read about his ideas here and follow his blog here - you may feel inclined to engage with him by responding with comments.

British bank rescue

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The latest £50 billion bail out of the British banks may be unavoidable. But to judge by the stock market reactions and the comments made on press and radio, few seem convinced, even after several days. There seems to be no real understanding of what is going on and what the effect of any particular policy will be. We make no claims either in this regard, but making credit more readily available is pointless if businesses have no confidence that there will be a market for their products and services. It is also the case that governments are going to be short of cash. There will be increasing demands on that cash to pay not only for these bail-outs and rescues of people's savings, but also to cover the cost of index-linked state benefits such as pensions, and a growing bill for unemployment benefit. These are the first steps in setting up the positive feedback loop which leads to hyperinflation, yet nobody has warned of the danger in public. Perhaps they have been asked not to spread panic, but silence is not going to prevent it. It is not inevitable, but is more likely to creep up on us through a refusal to contemplate the possibility. More positively, there seems to be a growing understanding that the problem was related to the housing market or "property", but the recognition that it is a land issue is one step too far to grasp.


Western world will become significantly less wealthy

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Western world will become significantly less wealthy - so says the Daily Telegraph economics editor in this article. This is true. But it has not happened yet. Billions dollars and pounds have been lost in paper values, but that is not a loss in wealth.

The loss in wealth will occur because land prices had advanced well beyond the actual earning capacity of land, based on the capitalisation of the rent at a realistic rate. But because the price of land is sticky downwards and does not fall to market-clearing levels, the wealth creation process, which depends on the application of labour to land, will be throttled. That will make people less wealthy. Millions will be out of work for several years. Productive capacity will stand idle. It does not have to be like that. If land value taxation were in place, it would act as a holding cost. Unwanted land would be promptly brought onto the market and recycled for new uses, with a quick recovery.

Underlying the present difficulties is the mistaken notion that land is wealth. It is not. A land title is a claim on the stream of income known as Rent. How the Rent of Land arises was explained by David Ricardo when he formulated his Law of Rent. Pity everyone seems to have forgotten about it. For a simple and amusing explanation, look here.

Arguments against LVT

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Some comments from somebody who had a look at What is LVT? What can one say?

It's because of their red braces

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The dissection of the economic crises gathers pace with a flood of articles on the web sites of the press. It is, apparently, all caused by greedy traders in the City and Wall Street. The ones with red braces. Nice idea to blame these unlovely people and easy to do but...


Millennium goals being missed

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The world's leaders are gathering at the UN in New York this week to review progress towards the millennium development goals set in 2000. New figures released by the World Bank reveal that 1.4 billion people are now living in _blank"extreme poverty, or a quarter of the entire population of the developing world. UN secretary general Ban Ki-moon has singled out rich countries for failing to raise aid levels as promised. If only things were that simple.

Interest rates and the threat of mass unemployment

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David Blanchflower of the Bank of England's Monetary Policy Committee has repeatedly argued for a cut of interest rates to fend off mass unemployment. But the underlying assumptions are wrong because they are based on defective economic theory. It is not possible to get an economy to function properly just by adjusting interest rates.

A low interest rate will cause a fall in the value of the currency in foreign exchanges, making imports expensive, and this will be reflected in prices of foods and raw materials. On the other hand, a low exchange rate is favourable for exporters and also encourages foreign ownership of land and capital, and may attract inwards investment in productive capacity. But it will also drive up property prices, in reality land values as cheap money encourages borrowing for land purchase.

A high interest rate will attract foreign deposits and have a favourable effect on the exchange rate, making imports cheap but exports relatively expensive. But it will tend to cause unemployment and will also put a check on land values.

It must therefore be obvious that there is never a "right" interest rate in the present dispensation, and to attempt to run an economy by adjusting them is doomed to failure. But what is the real cause of unemployment? "Lack of effective demand" is the usual answer, but that is a circular one because people who are not working cannot exercise demand as they have nothing to offer in the marketplace. At this point it is worth looking at what the process of production consists. There are three factors. Labour, of which there is no shortage. Capital, that is, real physical capital - machines, ships, aircraft, factory, shop and office buildings, etc, which can always be produced. But there is a third factor, one which modern economic theory hardly mentions. Land. Somewhere to conduct the productive activity. Every Big Issue seller and street busker knows the importance of picking the right pitch, but the experts ignore this vital factor.

Recession means a fall in demand. Shops and factories close. Usually, it is the marginal areas that are worst affected - places remote from the main centres of population or with poor access. Some parts of Britain will become industrial wastelands in the next couple of years, just as they did in the early 1980s, with vacant sites, derelict factories and boarded-up shops.

If the land market behaved like markets in, say, perishable foods, the price would drop to market-clearing levels and the sites would quickly be recycled to new uses, for example by redevopment or refubishment. The recession would be no more than a blip, paving the way for a fresh and vigorous new round of economic activity.

But that is not what happens. Because land is permanent and there is no holding cost other than rent foregone, its price does not fall in response to reduced demand. Owners hold it off the market, awaiting the upturn. Which of course prolongs the recession. By the time the vacant sites are brought back into use, buddleias will have grown into sturdy shrubs.

This is why land value taxation is needed - that is, an ad valorem tax on the annual rental value of the land alone. Come a recession and the tax still has to be paid, whether the buildings are in use, vacant or demolished. Owners are under financial pressure to find occupants who will pay the rent, so that they can pay the land value tax charge. If land value taxation is in place, recession is mild and short - the economy quickly bounces back.

So anyone concerned about unemployment needs to be advocating not cuts in interest rates but the prompt implementation of land value taxation.

Swedish budget - skattesänkning

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The Swedish budget was announced yesterday. The theme is "skattesänkning" - tax cuts and credits designed to stimulate employment as well as a reduction in taxes on business. The tax cuts mainly benefit those on higher incomes. There are also small tax cuts for pensioners. The Social Democrat's economics spokesman, Thomas Östros has criticised the finance minister, Anders Borg, for experimenting with the country's economy; Borg, in turn, criticises the Social Democrats for standing for sky-high taxes and welfare programmes.

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