Wednesday, May 12, 2010

Werner meets Harrison - Monetary Reform & LVT. No:4 Interaction

In answer to a question from Richard Werner (International Banking Professor) as to what about land did Keynes not understand? Fred Harrison suggested that even in a stable monetary system such as Dr.Werner advocates, unless there is a fiscal system to tax away the gains on land from private gain towards public purposes, it is generally banks which gain those rents that accrue. He said there is an inevitability about it - a 'law'. Due to the fixed amount of land, a shift in favour of rents occurs so that income arising thus goes to those so placed to receive it. This will continue to happen unless rents from land are specifically directed for the common good. Public services should be funded from these rents, as alternative taxes, such as we now have, mean that the rich get richer and the poor get poorer. Harrison also said of the monetary approach - that it would not eliminate land originated economic failures.

Werner asked why it is that in Germany land prices are stable?  Harrison said after German experiences following WW1 and the 1930s, there had developed a different ethic of economics.  However, he said that despite Werner's suggestion that rules for banking about property speculation would be sufficient, monetary policy was not enough - more needs to be considered. He suggested that James Robertson** is important in the finding of a synthesis and integration between the two.   David Triggs said that Henry George believed both in the full recovery of rents for the public good and also that the public control of credit through the government was vital for economic justice.

Werner said that property prices are a function of the increase in credit, with most of the value being in the land. For a while all goes well as the rising amount of credit feeds into a rising property market. His researches show that credit cycles explain property price cycles - when the credit supply slows, prices drop. In Japan prices fell 80% and broke banks. He sees  the repayment of debt, with its background of charging of interest, as unsustainable for an economy as a whole. (See Blog May 2nd - Babylon). Whilst one individual bank could assess a borrower's ability to pay, no one bank could assess what was happening to the whole economy - as other banks lent out, unknown to each other. Thus is the case for the government or the central bank to control credit allocation. To a questioner, he said that interest rates do not control growth or the money supply. Low interest rates  stimulate growth and interest rates follow growth.

**Five years ago James Roberston  drew the work of Werner and Harrison together.
Click on this and go his summary & items 3 & 7:
“At Item 3 the books by Fred Harrison and Richard Werner complement each other wonderfully .
Harrison’s is about how the pathology of a perverse tax system encourages fluctuating land values and house prices which cause booms and busts. Werner’s is about the pathology of the present perverse way of creating new money which, by encouraging lending for the purchase of assets like land and housing instead of investment in productive activities, also contributes to booms and busts. Together they show that serious study is needed of the links and interactions between tax reform and monetary reform. Item 7 is about that”.
With the extraordinary events of the last view days resulting in a coalition government with Clegg, Huhne and Cable (leading lights in ALTER) at the very top tables who knows what  could lie ahead?

Posted by Charles Bazlinton   click to see the cartoon

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