What John Kay & Citizen's Income Trust agree on about basic income

Professor Kay thinks basic income for all (not means-tested / tax-free / regular) is unaffordable. His article  (Intereconomics 2017/2) carefully analyses several international proposals, but it does not take full account of the work of the UK's leading advocate for basic income the Citizen's Income Trust. CIT is confident that their revenue-neutral scheme would make a positive start on the road to a larger regular income than their initial scheme allows for. As they say in their critique of John Kay's investigation: 'What matters is the direction of travel'. CIT's scheme retains many existing welfare benefits - essential due the the low level of basic income needed to be revenue-neutral, but it is only a start. John Kay seems to assume a full 'living wage' basic income must be affordable immediately or he won't consider it relevant: 'basic income is a distraction from sensible, feasible and necessary reforms'. Both he and CIT acknowledge there could be sources of revenue yet untapped for a full basic income, but whereas Kay shies away from the political difficulties of that, CIT sees the start of an evolutionary reform away from the complexities of current welfare and its disincentives to work.           
One effect of a citizen's income is that some will use it to pay for better housing with rents and house prices likely to be pushed up. It is fairly clear that the incentives given out by recent governments to first-time buyers are a factor in rising house prices. A new source of income from a regular basic income would enable buyers to afford larger mortgages thus adding to the price hike. For every new £100 per month available at 2% interest another £20,000 of mortgage is freed up, driving straight through to rising prices and rents.

This blog has always advocated an holistic approach to citizens income to prevent bad side effects. After all if the housing market is encouraged to let rip even more through a basic income aimed to alleviate poverty, what help is that to the poor?

This is not the state planning for citizens
but citizens planning for themselves, 

empowered through a basic income.

To block that perverse effect of such a benign thing as basic income, what is needed is the levying of land value tax. This to be charged annually on the underlying land value of the building + land plot. It would have a braking effect on house prices as property owners who could not afford the levy would sell. Mortgage providers whilst assessing the added basic income would have to consider the expense of a regular land tax levy and this would reduce the potential of greater credit, which would lead to price restraint, and not, like the government help-to-buy schemes, a price bubble. 

The levying of LVT would raise a fresh source of government revenue concentrated at the higher property value end (see below). It would address the acknowledgement by both John Kay and the CIT that more revenue is needed to make a basic income more effective against poverty. The national pot to run a comprehensive welfare system founded mostly on basic income is currently limited. But the time is approaching when the the huge shift of younger people excluded from property ownership through unaffordability, will translate into a ballot box revolt in their favour. If we are to continue to believe in a fair society, the haves - the larger property owners - sitting on the accumulating nest-egg gains in their land values, will eventually have to release some of these sooner than at their demise through estate duties.

Land values, as clearly spelt out in The Free Lunch - Fairness with Freedom arise from the efforts of us all and are a common resource to be shared. A good start to implementing LVT would be to make a regular charge on a percentage (say 25% representing the land) of the property's value. For political acceptability the overall charge per household would need to be cost neutral for the bulk of hometypes: thus whatever was paid in LVT would be an allowance against a homeowner's income tax. Those in high priced properties having lower earnings would need to consider selling up which would bring a downward pressure on the market and help alleviate the housing shortage. The net LVT raised would go towards increasing the basic income for all. As well as estate duty, transaction taxes such as Stamp Duty could also be abolished and bring a new liquidity to the housing market to the benefit of those needing larger accommodation but prevented by the existence of many under-occupied homes. The Annual Tax on Enveloped Dwellings owned by companies is legislation that taxes total property value and would need modifying to catch land value only, to adapt it for LVT purposes.   

For the hard case of property-rich / income-poor homeowners with a liability for LVT greater than their income tax liability a deferment scheme should be allowed so that the accumulated  LVT would be a registered charge against the property, payable on the next sale.  

Whilst we must be grateful to John Kay for crunching the numbers, the philosophical and moral case should be addressed. The Free Lunch - Fairness with Freedom  makes the case for putting the citizen at the focus of politics. This implies the acknowledgement of particular rights for people and the expectation of particular responsibilities from them.  A basic income is essential if this concept of  a new 'citizen focus' is to have real meaning. This is not the state planning for citizens but citizens planning for themselves, empowered through a basic income. It is a combination of increased fairness and increased freedom for everyone.

Posted by Charles Bazlinton. Author: The Free Lunch - Fairness with Freedom  

8 June 2017 Election Surprises?

Party manifestos, according to Free Lunch principles, should tackle the monopolistic tendencies arising in society.  The moral basis for this is from common threads found in biblical, enlightenment and liberal values and concern human rights, equality and freedom. As the political parties ply for our votes in June how do they measure up to the implied 'fairness with freedom' ? 

The core aim of The Free Lunch - Fairness with Freedom is the common good. The book suggests ways to move towards a society where each citizen is a beneficiary of the resources of nature and those arising from community-inspired schemes. The book is anti-monopoly and what is termed rent-seeking: meaning the hunt for gain sought by monopolists. Extreme disparities of wealth and poverty are the outcome in a society where control of monopolies is lax. Enlightened politics will reduce rent-seeking outcomes. 

• How are the current political parties matching up with the aims of reformers who desire the sharing of monopoly resources via a universal income for all?  
• What do they prescribe to redress the unfairness of the land monopoly: For example what about the land value gains of home owners compared with none for renters?
• What about the resource of further education now being charged for through student fees when it used to be provided free as a common provision from the public purse?
• What about the huge credit-creating monopoly of banking which neglects small business loans as too small and unprofitable to bother with? 
• What about the ability of government to create its own money to fund public expenses for public services, safely and without inflation?
• What about extending the voting franchise to younger people?

It is natural to want monopoly rights. It makes for an easy life. Owners of homes share in the land monopoly through the valuable nest-egg that builds up over the decades associated with the underlying land value of their home.  Fred Harrison points out that:

'... owners of high-value homes are able to recoup what they pay in taxes through rising property prices. ...enjoy tax-free use of schools and hospitals... Low income earners and families that rent their homes...carry the cost of the infrastructure investments and public services that enhance the value of the homes of the rich.' 

How fair is that? What do our political gurus recommend about this particular inequality which creates a constant welfare burden?  

Universal Basic Income (Citizen's Income / Citizen's Royalty)

• The only party wanting to introduce this is the Green Party.  They would create a pilot to test the idea. 

The land monopoly: home owning or renting

• Labour and the Liberal Democrats both mention land value tax as a tax reform measure. This would retrieve the gains accruing to the land values in property prices for the public purse and allow lower taxes on income and goods or as a substitute for council tax.  
• The Greens and Labour would introduce rent controls. This would be a protection for renters as a useful half-way measure until a full land value taxation scheme was implemented payable by landlords.
• The Tory manifesto policy for care in later life was to be paid from a home sale without limit above a £100k house value. The enforced U-turn, in days, shows the political danger of taking land value gains. Whilst not having the universality of land value tax for all land, the idea that property gains should fund the care is a reasonable quid pro quo, but to have to individually account for each care package and each property is probably a bureaucratic path best not travelled, besides introducing a variable charge/cost (aka 'taxation') for every case.      
• Bedroom tax aboliton (now a liablity of council house renters)  is proposed by the Greens, Labour, the Lib-Dems and UKIP.

Student tuition fees  

• The Greens, Labour and UKIP plan to abolish student tuition fees and would introduce maintenance grants (UKIP for poor students). 
• The Lib-Dems, the original champions of the abolition of tuition fees who reneged to their great downfall after being in coalition, propose bursaries for nurses and grants for poor students.
• The Tory proposal is: forgive loan repayments for teachers; provide access to grants for technology students & 'financial support that offers value for money'. This one looks 'interesting' with the news that student debt interest rates will rise from 4.6% to 6.1% this year. Andrew Greenwood (FT letter 19 April) wonders why the Swedish model is not followed with the cost of student loans as per the cost of government borrowing at 0.34%?     

Voting age to 16 

• The Green Party, Labour, the Lib-Dems and UKIP all want this. 

Local Banks 

• Labour will get the Post Office to establish a Post Bank with full banking services in every community. They also propose regional development banks. 
• The Lib-Dems will 'Require the major banks to fund the creation of a local banking sector dedicated to meeting the needs of local SMEs'. 
• The Tories propose British Business Bank branches in several major cities for SME lending needs.

Monetary reform  No parties make any suggestion about using government money creation powers to fund some public expenses. Instead the arguments are about balancing the books for borrowing, taxing and spending. Labour suggests borrowing for extra infrastructure investment because interest rates are so low - it is bound to pay off. But no one makes the case for creating the money as an extension of the QE creation process to pay for such expense without debt or interest to repay to banks. 

Lord Turner is an exponent of this e.g. deficit financing (Book: Between Debt and The Devil) as is Prof Richard Werner e.g. broadband investment.  There is no reason why just as quantitative easing is used to create money to buy back government debt or to buy commercial bonds, that it could not be used to nationalise the water companies (a Labour Party idea but bought through bonds) or to fund general government spending. The Monetary Policy Committee of the Bank of England would need to take note of any money supply implications and outcomes and act as necessary to prevent adverse economic effects - as they do now with QE. Student education could be a modern case for debt free, interest free government money creation. No more student tuition fees.  This would be a monetary reform which only hurt the big banks.  Where are the far sighted politicians to start controlling this monopoly power? 

With the early solid Tory lead appearing to slip the contest may be more open than we ever thought. World wide electors surprise us. Will June 2017 UK be yet another one? 

Posted by Charles Bazlinton author The Free Lunch - Fairness with Freedom. Director of Local First CIC 'Promoting Local Banks' 

Mark Wadsworth exposes Margaret Thatcher's Great British Property Brake Off

The need for wider media coverage on a drastically fairer tax system grows. The start of this was Henry George's seminal work on how to fund the services needed by the community using the community's self-generated land values.  It would involve charging freeholders/landowners an annual levy (LVTax) on land value only, quite apart from the value of a building built on the land. (* 'Annual Ground Rent'). Modern developments of his ideas involve making counterbalancing reductions in income tax and other such counterproductive burdens on creative work. 

Mark Wadsworth has written a short and comprehensive article on UK property market history which shows how political moves over the last 30-40 years have warped the market in favour of those Baby-Boomers who were fortunate enough to have been buying their homes since about 1970. Before then several regulations kept the lid on wild property booms.

In an unfettered property market the location value of a building plot rises to what Wadsworth calls 'unregulated' high values. A monthly or yearly manifestation of land value is rent. Now rent controls imposed since 1918 meant that rents were kept lower than otherwise for decades. The knock-on effect was that freehold prices were also kept lower enabling potential home-owners to compete with private landlords, leading  to owner-occupation rising from 30% to 60%  (1945-1980s). Also governments, pre-1970s, by building were adding to the affordable rent social housing supply which meant less call on the taxpayer through little need of the rent subsidy known as housing benefit.   Mortgage restrictions on borrowers (loan/income ratios) were about half current levels so there was reduced ability for buyers to bid up prices. Higher value homes were taxed though Schedule A taxation (to 1964) and Domestic Rates (to 1989).  

But these benign conditions did not last. The regulatory brakes started being let off the property market when Mrs Thatcher and Messrs Blair and Brown dismantled the above restraining forces and property prices rose high and higher to their unregulated values. Low earners, even mid-earners, are excluded from buying for themselves and this has reversed the decline in private renting - down from 50% to 9% (1945-1990) up now to 18% (2014).  Wadsworth does not mention the additional London effect of more recent years whereby new foreign/company freeholders have increasingly been bidding up property to park their wealth in a safe haven - then to add insult to the priced-out ordinary Londoners leaving many such properties unoccupied for long periods.  

Wadsworth's article is a succinct summary of historical politico/real estate wisdom, and the recent meddling. The meddling has had an expensive effect on everyone's taxes as welfare support is needed by people who are being priced out of affordable housing by the 'Baby Boomers...[who] genuinely believe that they are somehow morally superior because they 'rolled up their sleeves and paid off their mortgage' '. This is a huge social issue. It is coming home to roost for the growing number of renters who may need tax funded housing benefit to survive - despite themselves having to roll up their sleeves but still unable to pay the rent. Maybe the tide is turning with prices of London properties declining - partly due to specific property tax charges by Chancellors desperately needing funds to counteract the hugely expensive welfare effects flowing from the flawed housing system. 

But the property market bandwagon will continue to career dangerously on unless we adopt Henry George's insight of taxing land values. The need for an affordable home for everyone is too important to be tied up with the inevitable involuntary land speculation that every home owner is party to when they start to purchase.  For the sake of a more equitable society, everyone needs to feel the effects of some or all of these: rent controls; land value tax with lower income tax; property lending restrictions and increased house building. Whether the effects will be seen as benign or not will depend on how favoured we already are.    

*Annual Ground Rent  
Fred Harrison and Mason Gaffney have written a book Beyond Brexit: The Blueprint  which uses the term Annual Ground Rent to describe land value tax. AGR neatly describes LVT as the regular charge morally due from all landowners/homeowners to contribute to public services.  The book has been enthusiastically reviewed by The Georgist Journal ( March 2017 print copy) which also contains Mark Wadsworth's article.  
POSTED BY Charles Bazlinton. Author THE FREE LUNCH - Fairness with Freedom

A Citizen's Income for all would fairly address immigration too

The Occupy movement of 2011: ''we are the 99%'', fingered the top 1% in terms of income and wealth (25%/40%). Economist Joseph Stiglitz had published a paper in May saying these 1% are typical of the wealthy though history who whilst taking to themselves the best of education, doctors, houses and lifestyles, do not realise until too late that their fate is tied up with how the other 99% live.

Slow forward to 2017. Are lessons being learnt? Not if the Prospect magazine February 2017 article 'Voting out' by Tom Clark is a guide. Clark reviews a couple of books Against Elections (David Van Reybrouck) and Against Democracy (Jason Brennan). Apparently in the future we may need to be either a liberal or a democrat: 'The educated bourgeoise will put its own liberty ahead of other people votes'. Already in the US it seems that these trends have form, witness the deliberate disenfranchisement of black voters taking place. In late 2016 a court struck down laws having  'discriminatory intent'. Onerous regulations around voting can prevent or dissuade electors to enter their vote. Beware. Clark quotes a Daily Telegraph article by Ian Cowie who in 2011 proposed limiting the vote to those who pay tax. The recent Brexit and Trump votes may bring more such ideas aimed at those who didn't get the vote 'right'. The time is ripe for the issue of 'citizenisation' to be taken seriously - a central issue of the book The Free Lunch - Fairness with Freedom.

If the powerful really are so concerned about loss of their economic status quo that they will resist popular moves to level the playing field a little, what should we do? Justin Welby Archbishop of Canterbury  in The Times (11 Feb) when launching his book Dethroning Mammon, says that the trickle down effect of letting the rich make wealth in the hope that some gets to poor, has been shown not to work and thus the rich should pay more tax. Fair enough as far as it goes but how do you get permanent poverty alleviation?

One part of the solution is a Basic Income for all   (also known as Citizen's Income or Citizen's Royalty). This involves a regular, non-means-tested payment for everyone. The New Statesman quotes a scheme for the UK having an age-graded payment from £56 to £142 per week to all, even children, (leaving in place housing benefit and disability allowance). This payment would be instead of child benefit, income support, jobseeker's allowance, national insurance and state pensions.  It would be nearly revenue and cost neutral and would massivley cut bureaucracy. Most importantly it would remove the current disincentive to work for those on benefits currently who face swingeing losses through tax should they get a job. An additional benefit from this, with immigration being a worldwide issue, the payment of a basic income to all citizens - having a valid national identity - should allay fears of  'welfare immigration' at least.

However, whilst this is the obvious and simple solution to poverty, an adverse effect would be that in giving cash to all, some of those who receive it as an addition to an already sufficient income may use it in the housing market. A basic income for many such will enable them to do a property upgrade and thus fuel house price rises. Law of unintended consequences: those people who now rent and are just below the property buying level will find their hope of having their own roof over their heads rather than a rented one, pulled away from them.  And the irony would be this was caused by a measure that set out to help the poorest who are overwhelmingly renters of their homes!  We are increasingly a divided nation of home owners and home renters.    

The answer to this to levy land value tax on all freeholds. This would cover the land value of the plot and not the building value - a tax on say 30% of the 'house price' seen on property websites. There could be a basic tax free 'homestead allowance' allowance before tax is due to cover houses below the average value. The next step is to set the land value tax liability against any income tax paid so that the net, after-tax, income of most individuals and households would be unaffected. For property rich / income poor people the payment could be deferred until eventual property sale. Inheritance tax might be reformed at the same time. It should be possible for the general mass of taxpayers to be relatively unaffected. Taxing land would also bring land forward for building homes which would solve another problem.

As the Archbishop says the richest should indeed cover the bulk of the cost. A problem in making a real difference to poverty and maintaining freedom for all is, of course, human selfishness. If I am to be stung with just a little extra tax because I am fortunate enough to own a freehold property, should I vote for that as one of the 99%? Archbishop - what would you advise?

For a discussion of basic income, land value tax, and general issues of citizenisation, see The Free Lunch - Fairness and  Freedom.  A basic income is currently being tested in Finland.

EU Referendum: Fairness & Freedom - that would really make a difference

George Osborne thinks house prices may drop from 10-18% in the two years after a referendum vote to Leave the EU on 23 June. Private Eye (16 May) had Cameron saying:
'There could be a World War'. Osborne: 'Or even worse, house prices might fall!' 

What is fascinating is the importance of soaring house prices to him. For his recent efforts in boosting them with the Help to Buy scheme, see this blog March 6 'The Idolatry of our House Prices' . If his views as to what strikes terror into the hearts of home-owners are politically accurate it says little of voters' feelings for aspiring buyers for whom dropping prices would help. Come on George aren't we 'all in this together'? Raise our sights and help us to think of other's needs!  But meanwhile let's nominate him as High Priest of the religion of house prices. No salvation for the renters - the good times and the 'free lunch' asset gains are not for you. 

Another person trying to scare us into voting Remain is the President of the European Commission Jean Claude Juncker. The Times reports  (May 21) that after a Brexit vote 'the UK...won't be handled gently'. At the same time he urged France to demand deeper EU integration. So in a double revelation he exposed his threatening attitude to Leavers in the UK and his aim for closer union in the EU, which David Cameron allegedly has had an 'opt out' from. Will Mr Juncker suddenly turn very accommodating on this if we vote Remain?

A word doing the rounds in the media describing a political trend is 'populism'. Philip Stephens in the FT 27 May 'The myth of Brussels (mis)rule'  writes a very reasonable account of how (thus far) the UK has run it own affairs in its own sweet way, so pay attention Leavers. And Remainers shouldn't exaggerate about 'war and pestilence' after Brexit. 

He blames demagogues like leading EU Leavers, Donald Trump and Marine Le Pen for using 'Take Back Control' as a 'marketing meme' because: 'it speaks to the populists' contempt for reason' . So Mr Stephens, anyone getting a little edgy that future closer union in the EU might lose UK sovereignty a little too much even with David Cameron's 'opt out', is guilty of 'contempt for reason'?  The extremism he accuses some Leavers of, is at least matched in this 'contempt'. I suppose even the best of us can show fleeting irrationality at times. 

The 'Fairness with Freedom' sought through this blog asks now of the EU debate : Will a vote for Leave or a vote for Remain, better bring fairness and freedom for the the individual, their family and their grouping? A Basic Income (aka: 'Citizen's Royalty') for every  citizen as of right is likely to be the best way to achieve this. The FT 27 May 'Money for nothing'  has a full page spread on the topic and nations looking seriously into it include Finland and Switzerland. Matthew Taylor of the UK's RSA is excited by the idea ('Universal Basic Income') see this report  by Anthony Painter and Chris Thoung. 

Let Leavers and Remainers become populists for Basic Income and maximise their causes for fairness and freedom which is at the heart of it all. Bring it on! 
Posted by Charles Bazlinton. Author THE FREE LUNCH - FAIRNESS WITH FREEDOM. 
.

The Idolatry of our House Prices

How long will the UK housing bubble last? Max Keiser and Stacy Herbert host a world-ranging video discussion of current housing bubbles and related economic news (particularly Australia and UK/London) with Prof Steve Keen and Ross Ashcroft [KR883] Keiser Report: Global Housing Bubbles .  

In London the Cameron/Osborne government has added credit fuel to the housing mortgage market. What started out as Help to Buy (2013) has just become London Help to Buy and 200,000 first-time buyers under the age of 40 will qualify for an initially interest-free loan (after 5 years you pay a 1.75% fee i.e. interest) for a newly built home. This is a government guarantee to the mortgage provider that the extra deposit money is safe, but not a guarantee for the buyer if they fail to pay back [NB. Beware a lifetime debt millstone and no house if you default]. Steve Keen says that this scheme to boost an obvious asset bubble is being launched by people 'who don't understand the system...they have power, not control' Max K. asked why, when the global macroeconomic tendency is deflationary would a government encourage investment which is based on inflation? Ross Ashcroft thinks they are 'terribly deluded'.  

So are we in the UK  due for a re-run of the Japanese housing boom/crash from the peak around 1989/90? With (27 years later) the Japanese index showing an 80% drop from peak prices. Steve Keen thinks the current UK government has some scope for 'dragging people into this market for a while' because the UK proportion of mortgage debt to GDP is 70% and falling, but Australia is more dangerous as the figure is 95% and rising. 

Another bubble detector by way of a contrarian indicator was suggested from Japan at the time of the 1989/90 peak. Then, 9 out of the world top 10 banks were Japanese; now, with Australia having 3 of the top banks OZ may be at a similar danger point, with the New Zealand financial and banking system also dangerously exposed. Prof Keen says the cause of the bubble is the banks creating credit which feeds the property price rise. He says it is a myth that government spending caused the 2007/8 credit crisis, the cause was a private credit bubble which burst. The current government has it that the previous Labour administration's need to raise government spending to compensate for the crisis was the cause of the crisis! So now the cut-back in government spending and the ensuing austerity makes the problem worse - as more people become unemployed with less spending power.  

'There is free lunch in the housing market' said Stacy, and Max agreed: 'many, many free sandwiches in housing in the UK!'. Phrases chiming in step with the book The Free Lunch - Fairness with Freedom .  Brian Wakelin at Christ Church, Winchester on 21 Feb 2016 (Our Response to World Mission: Isaiah & Matthew) called the widespread attitude to the phenomenon 'the idolatry of our house prices' [audio: at min. 2m 00s.]. But young people are unable to buy or even to rent locally. 

As Stacy pointed out (agreeing with Brian Wakelin's sermon point without the theological terms), the general population is indeed complicit and likes the chance of a gain through government subsidy such as London Help to Buy, even though only a few get it - 1 in 10 among 2 million renters. 

So where are we in the bubble cycle? Fred Harrison for years has warned of the 18 year peak-to-peak property price index. He told the New Labour government when they took power in 1997 about a coming 2007 peak (which happened); that a financial crisis would be caused by the housing market breakdown (it was)  and that a recession would ensue (it did). The Max Keiser panel last week reminded us that Mark Carney now Governor of the Bank of England oversaw a house price boost when running banking in Canada and that the same is happening now in the UK. So with the power of the Bank of England behind Chancellor George Osborne's encouragement of property speculation it would be brave to say the price peak has already been reached and the bubble is about to burst. Albeit any temporary slowdowns which may happen to confuse. 

George Osborne is raising his tax take from high value property with new taxes which is suppressing those prices but not making the houses more affordable, because of the high tax charge. Offshore-owned homes are to be subject to an annual tax which is really the most sensible property tax, but it should be on the land value of all the real estate and apply whoever owns the underlying land. This would moderate the housing market making homes more affordable. 

We await a Chancellor and a Bank of England Governor who could extend home ownership by lowering prices through land value tax without crashing the system. Is anyone clever enough? Making an annual land value tax charge an allowable deduction against annual income tax would probably be an essential start.
Posted by Charles Bazlinton. Author The Free Lunch - Fairness with Freedom

QE: easy for the rich. Kaletsky's QE: easier for the poor. Corbynomics? Bank of England independence.

Last week's blog had Natalie Bennett at Making Money Work, asking: Could monetary policy do anything about inequality? Steve Keen said that dealing with private debt would address inequality and it was his suggestion that one-off payments to everyone could tackle this, on the condition that debts be repaid first. Lord Turner didn't think there is a 'magic...costless way' of addressing inequality - the way to do this is progressive taxation.

Philip Aldrick (The Times 19 Sept) QE spared Britain a recession...  is particularly clear that monetary policy increased inequality by creating asset price bubbles such as in gilts, bonds and house prices. Inflation is rocketing in these assets, leading, for example, to fading hopes for first-time homeowners.  Low interest rate funding and high demand from UK and non-UK owners buying to let inflates this bubble. [ Private Eye has a searchable map of such overseas owned properties using Land Registry data. Check your area! Whole streets in London are foreign owned].

Clearly monetary policy as carried out since QE in 2009 has increased inequality in housing. But Anatole Kaletsky in Prospect Magazine: How Corbynomics could work  has a neat solution. Instead of QE's £375bn spent to prop up financial markets ('making the rich richer') he proposes that this could have been spent by being given via a weekly £20 payment, to every 'man, woman and child in the UK' until UK growth returned to pre-crisis levels. He proposed this back in 2012. The Free Lunch Blog mentions it here.

So monetary policy could reduce inequality - since equal payments to all inevitably raises living standards proportionally more for the less well off. As long as conditions are strictly adhered to as to the eventual termination of the payment no harm would be done.

That would be a temporary remedy for a sluggish economy. (NB: temporary QE has lasted 6 years so far). But politicians would be wary of the dangers of launching such a citizen-based policy because it would be difficult to stop politically when the monetary need was over. What would be needed to take over would be a similar payment to all but funded by reform of the welfare/tax balanced budget. Such a Citizen's Dividend / Basic Income would need to be established by the end of the monetary booster to avoid the pressure on politicians to extend the  monetary policy dangerously beyond its period of monetary need. Basic Income UK and Citizen's Income Trust have the details of an unconditional non-withdrawable payment to all, as of right.and it is broadly affordable within current budgets. That is the policy that would establish a new citizen's right, like voting, education and a health service.

Another use of monetary policy to promote sustainable growth is suggested by Prof Richard Werner: that credit creating institutions could provide monetary incentives for education purposes '$100,000 for each child born...such a policy would not be inflationary: among all inputs into the production function, human resources are by far the most important.' (New Paradigm in Macroeconomics p340).
To ensure good education for all must be among the most effective ways of poverty reduction and thereby inequality.

Inequality reduction by monetary means would not be magic - merely an effective policy against poverty and as a means of growing the economy.

But QE is magic - for wealthy people. From early 2009 when QE started the UK FTSE 100 share index to date has gained over 60% & UK house prices have risen 67%.

Strange how central bankers and governments fail to take easy steps to help the poor but so easily open doors for the rich to garner greater riches. The Monetary Policy Committee at the Bank of England has met dozens of times since QE started and resolved every time to keep interest rates at 0.5%. Their learned deliberations have now blown up another asset price bubble. Is the BoE really so partisan that it cannot think beyond top layer wealth creation as the sole answer to the crisis? Is it really there for the good of all - as might expected in a democracy? Presumably our government in meekly acquiescing to a measure that has achieved so little for so long, wholly agrees with it.

Bank of England independence is strongly defended. The question to be put is: How dependent on central bank policies ought the government to be?        

Making Money Work: Lord Turner, Steve Keen, Chris Giles & Richard Spencer on Corbynonmics and money creation.

Lord Adair Turner has learnt a bit on the practicalities of speechmaking since we last reported (see ECOBATE 2014, 11 Nov 2014). In Winchester his PowerPoint slides were lost en route and but he did a brilliant job improvising. At the Positive Money event Making Money Work at Central Hall, Westminster on Monday 7th Sept he safely had 2 paper copies of his slides for each of the 200 or so attendees. His talk developed his ECOBATE 2014 theme and gave much detail as to how he thinks government economic and monetary policy technically could, and politically should, develop. 

He said that he did not agree with the extreme radical Positive Money view for the abolition of fractional reserve banking and its replacement with 100% reserve banking. But the 2008 crisis and slow recovery since cannot be understood without a clear understanding of the nature of debt, money and credit. Pre-crisis and for many decades we were far too relaxed about the private credit creation by banks. Post-crisis we are too terrified of the potential of what he termed 'overt money finance' (OMF) of government deficits -another name for this is 'helicopter money'. 

Lord T said there is no reason whatsoever against helicopter money, it was all a question of how much you do. A small amount will stimulate a little with no excessive inflation. He thought it would however be excessive to fund 10% of the fiscal deficit this way as it would bring hyperinflation and destroy the economy. 

In discussion  - Chair: Fran Boait (Positive Money) ; Prof Steve Keen (Univ of Kingston) & Chris Giles (Financial Times) - the matter of the doubtful effectiveness of Quantitative Easing (QE) so far was discussed in contrast to OMF. Chris Giles thought that whilst he would never rule any new idea out (e.g. Jeremy Corbyn's 'Peoples QE') he was sceptical that it is seen as a sort of magic solution which has no cost. He was cautious of using OMF as a monetary tool.  If it was used simply to put new money in everyone's bank account, good, but to use it to spend on infrastructure was fraught with problems - you might have to halt the construction of the HS2 railway unfinished, due to monetary rules.  Money is not the only driver of the economy, in addition there is housing and planning policy and new macroeconomic tools as to how banks should lend; however in the future QE might be seen to have been OMF.  Here Lord T agreed that QE, as started in 2009, might become post-facto OMF. He illustrated this with his view that with the Bank of Japan owning 60% of GDP in Japanese Government Bonds he thought it highly improbable that these would be repaid or sold off by the BoJ. He thinks it will become helicopter money and be shown to be a permanent monetisation of government debt. ''That is going to happen and I would place a bet on it'.

He thinks that we should consider a 2009 UK scenario where a 4% of GDP fiscal deficit was planned and £350bn 'reversible' QE issued. He put it that it might have been announced that 5% would be planned with the extra 1% being OMF money creation and non-reversible. He said that this would send an important signal and be much clearer than the current scenario of whether QE really is reversible.   

Currently the Bank of England is apparently doing two things: 1.Managing interest rates and QE for inflation targeting. 2. Managing bank lending through loan requirements and bank capital requirements, for economic safety and stability all without managing demand.  What he sees as actually happening is that the BoE is starting to manage the allocation capital as seen in the Funding for Lending Scheme to be directed to SME loans.  Five years ago such government allocation of capital was unthinkable! 

The cause of the crisis had been the mis-allocation of capital through private credit creation by banks.  Too much credit chased existing assets rather than to finance productive investment, which Richard Werner calls 'credit for GDP transactions'.   This caused a debt overhang with the danger of deflation.  Beyond the supply of consumer goods to most households,  housing becomes another way to compete between members of society to gain a more attractive home or stay at a hotel. As locations offer varying benefits this competition encourages more debt. Banks encourage this, being biased towards property lending due to the collateral available. Steve Keen pointed out the reverse case of lending to entrepreneurs where, maybe,  four out of five loans might fail with loss of principal. This shows the difficulties that banks can have in lending to productive ventures. 

Lord Turner questioned how widely we might be able to spread a new understanding of the monetary issues being discussed.  In confessional mode, in his new book 'Between Debt and the Devil' he has a chapter 'The crisis I did not see coming'. He had to embark on an intellectual journey to understand themes ignored in his earlier economics education - a frank admission in mid-career from a very high-flying player. He said the very essence of the insight of macroeconomics is that governments and states are not the sum of households. In the personal household economy, books have to be balanced, but the state economy is different. Steve Keen said whilst he was impressed by the new openness at the Bank of England but in contrast the political class think the government should be running a surplus. 'They vie with each other: 'My surplus is bigger than your surplus' ' which is the equivalent of banks believing they should be receiving more loan repayments than they put out in loans. Governments ought to be running a deficit with money creation financing a large part of that.  Clearly from the view of the panel, economics education should be transformed so that these things are understood in universities, but beyond that how easily can the ordinary voter understand it? As to conventional economics theory, the efficient market theory is clearly wrong as no financial trader would get up in the morning if it was, since they would not be able to make any money! But the public needs to know that economics will never give as clear answers in its field as for instance an engineer can give in designing a bridge.

In Q&A I said I was involved in helping to establish a local community bank - Hampshire Community Bank which would lend locally and give its profits to local good causes. Was this a good foil to the problems being discussed that had arisen through centralised, international banks?  By their strong applause the audience clearly appreciated the idea.
Steve Keen thought it was an excellent idea as local knowledge would inform bank decisions on loans. Centralised banking is essentially 'collateral banking' which is dangerous, but as Richard Werner emphasises local banks are the strength of German banking. 

Chris Giles said local banks are obviously good, but that a weakness might be that local firms gain loans merely by being local and not through normal due diligence and good banking practice. (Note: If I had been able to respond a comment could have been that this danger is just as likely with non-local banks! Just look at what happened leading up to the 2008 crisis. Where was careful banking practice by national /international banks then?)  

Richard Spencer, an economist whom Jeremy Corbyn uses to inform his People's QE, said that 5 weeks ago he hadn't heard of Corbynomics but since then he has been credited with writing it!  Jeremy Corbyn asks what does the economy need?  He thinks we need investment in public infrastructure and this needs money and if needed a deficit, and this if fine because people want to buy bonds. However he thinks the banking system is too powerful and People's QE would mean that the bond route would not always be wholly used and banks not needed for some fraction of the money. Corbyn has said that if the economy is booming People's QE would not be needed as the bond route might be wholly enough.  He (RS) largely agrees with Lord Turner's views apart from central bank independence. He said that for politicians to be told by the central bank the amount of OMF needed is not democracy, it would be rather like being told by bankers how much tax is needed. Politician should listen to able technocrats, such as at the Bank of England. But let's not have bankers in charge, let's have democracy in charge. Strong applause.

From the panel: When politicians had control of interest-rate-setting, public opinion (or party opinion) was often targeted very obviously and the high inflation of the 1970's might be seen as a warning that sole political control was dangerous.  'Commitment devices' (e.g. Committee on Climate Change/ Bank of England) agreed by politicians in order to keep a steady course over time ahead even when it hurts, are useful.  However the ECB has been given far too much control as it defines its own terms for price stability, for instance.      

Natalie Bennett the Green MP asked what the money system would look like if consideration for the environment and for addressing inequality (where everyone has enough) were both addressed. Chris Giles thought a monetary system could not create a better society. Lord Turner thinks that money systems are not an appropriate answer to carbon issues - there are enough devices around already.  Progressive taxation is the device to address inequality, not OMF. Steve Keen thinks that money creation is needed to redirect spending to carbon reduction, no-one will do this for a profit.    

Barb Jacobson for the Basic Income Trust asked about the idea of using money creation for cash payments to everyone?  

The panel agreed with the idea: There should be no problem with ensuring a single payment to each person through NI numbers and tax numbers / It should be directed to paying off personal debt first for those who have it / Alastair Darling tried to do it in 2009 but was told it would take 9 months, so he reduced VAT instead / Australia did the same thing in 2 weeks.

Note: 

Chancellor George Osborne understands the subject of the Making Money Work event, as reported in  this blog   Nov 13 2013:
 ' It is theoretically possible for monetary authorities to finance fiscal deficits through the creation of money. This would allow governments to increase spending or reduce taxation without raising corresponding finance from the private sector.'   See Treasury document quoted para 3.34:  Here 

See the Positive Money official post for the event Making Money Work: HERE

Posted by Charles Bazlinton. Author: The Free Lunch - Fairness with Freedom      

Lord Turner: The Honourable Maverick for Credit Creation

Gillian Tett last week popped Lord Turner into a new category FT20Sept2013 because he is now saying things that 'maverick far-right and far-left economists have been saying for years'. The reference was to a paper delivered at a Swedish conference 'Credit, Money and Leverage: What Wicksell, Hayek and Fischer knew and Modern Macroeconomics forgot' to the Stockholm School of Economics, 12 Sept 2013 the slides are HERE. Turner's aim was to bring attention to the 'strange amnesia in modern  macroeconomics' about the role of credit creation in the economy which are highly pertinent to the 2007/8 crisis and its recurrence.

Turner shows how Sweden's Knut Wicksell (1851 - 1926) brought the insight that credit created by banks is a fundamental force in the economy, but that this was ignored in recent times to bring an orthodoxy that failed.

'Our new approach needs to be based on a return to fundamental analysis of the role which credit creation and resulting debt contracts play in our economies, an analysis which was central to the work of Wicksell, Hayek, Fischer and more recently Minsky, but largely ignored by much of modern macroeconomics'.

Lord Turner's paper can also be accessed from: The Institute for New Economics Thinking . He cites Richard Werner on his findings that explained the 'enigma' of Japan which showed that what is important is the uses to which the created credit is put. Turner suggests that only 15% of the UK's new credit creation goes to productive investment which is what affects productivity and general wealth. Much goes into asset price inflation (such as house prices) which results in wealth inequality. Besides causing economic crashes.

These findings will not be a surprise to anyone familiar with Richard Werner's work as often featured on this blog. His short interviews start with Banking and the Economy. See the series on The Free Lunch website.  Lord Turner's reference to the standard, false view of what banks do as per 'standard undergraduate textbook discussion' is the very theme that opens the above interview. Lord Turner was the keynote speaker at the first ECOBATE 2011 conference which was reported on this blog and the link to what seems Lord Turner's first mention in a speech of credit creation at ECOBATE 2011 is within this report . 

Let's take 'maverick' as a badge of honour.

Posted by Charles Bazlinton, maverick author of The Free Lunch with discussion on how credit creation could be used to provide direct wealth to each citizen.

Transforming Finance -1. Bennett, Philopponnat, Griffith-Jones, Werner, Keidal

Boom and bust is bad for the economy and environment said Craig Bennett of Friends of the Earth, introduced the Transforming Finance conference in the City of London on 10th May. He said the banks over a 5 year period paid £203 bn in tax but that the bail out cost £1 trn. One theme of the day was that the 2007/08 financial crisis showed that deregulation resulting in banks having unfettered freedom over the creation of credit resulted in privatising the gains (for banks - whilst they made them) and socialising losses (payout by taxpayers - after the system broke). Chairing the first session was FT's Pauline Skypala. 

Thierry Philopponnat (Finance Watch)   said that with an unlimited stock of money spent on a limited stock of assets,  bubbles are inevitable. Sensible productive spending gets hardly a look-in. Derivative markets amount to 12x world GDP and are obviously mostly a pure speculation play and not a hedging device. 

Stephany Griffith-Jones (University of Columbia) wanted new financial instruments to be approved as new drugs are tested before use. She said that the Glass-Steagall regulations had kept the world relatively free of crises for 40 years. Strict loan to value ratios were said to be too political - but look what happened at Northern Rock with 120% LTV ratios.  

Richard Werner (University of Southampton) said we could not ban speculation (which he defined as anything dealing in transactions not included in GDP calculations), but we could ban credit creation of the money used for speculation.  He agreed that in the UK in the 1950s & 60s credit had been directed by the Bank of England and said decades of productive growth in Japan, Korea, Taiwan and China had occurred under a credit guidance regime. QE money created by the Bank of England or the FED, stays in the central bank and does not add to circulating money unless it causes credit creation by banks. One way to end the recession, a situation arising due to shrinking credit (-1.4% currently) is for the government to borrow directly from banks.  
[This is explained in his book, New Paradigm in Macroeconomics p 302:
'halting all bond issuance by the government and shifting fundraising  for the entire public sector borrowing requirement to direct borrowing from banks in the form of standard bank loan agreements. By shifting public sector borrowing from bond issuance to borrowing from banks, crowding out of private sector activity is minimised....selling bonds to the non-bank private sector amounts to a zero-sum game, while borrowing from banks results in credit creation (a positive-sum game), that is, the increase in purchasing power in the economy...and increased economic activity. ]

Thomas Keidal (Sparkassen)   said the German locally autonomous savings banks provided for all sectors of the population bringing employment and investment and recycling profits to their own reserves and to local good causes. The resilience of the German economy largely grows from the dispersed local banks. They are not state- or municipality- owned. They thrive due to relationships between customer and bank. Not a single savings bank has needed to be bailed out - the association of savings banks does what is needed for its own if trouble comes.  He was told pre-2007 that he was in an old fashioned dying institution and he would be 'the last communist in Europe'. Now people are following the Sparkassen guidelines such as a 60% limit loan to value ratios. He warned about the bad example of the  Spanish Caja banks which copied the local idea but then were allowed to compete with each outside their areas which resulted in financial disaster.    
posted by Charles Bazlinton

Homeowning - A Brilliant Wheeze

The democratic struggle moves towards respect for the rights of all. Reform follows when the rights of some are seen to blatantly burden others involving a denial of their rights. In the UK a new regulation is coming into force that will criminalise the squatting of someone else's home. Up until now it was usually a civil offence if someone moved in uninvited. Now it will go like this: You are out. Squatters are in. Police are in. Squatters are out (cops leading). You are in. Quickly.

Squatting usually happens after buildings have been left empty and the hard cases such as someone having a long hospital stay and finding squatters in when they get back home are quite rare. Besides there are apparently criminal remedies for such squatting already before this new law . 

Squatting is one symptom of our divided nation. We inordinately favour home owners to the detriment of the propertyless. See this YouTube video where Fred Harrison uses researches from his book  Richardo's Law, House Prices and The Great Tax Clawback Scam . He shows that the nest egg that accrues to many homeowners in the equity stake over a lifetime, effectively refunds a huge amount of income and other taxes that the homeowner has paid over the years. This, whilst being a brilliant wheeze for homeowners, blights the lives and social opportunities of renters and tenants. Poverty. A huge imbalance is perpetuated in our society through our failure to face up to this unfairness. We unfairly burden renters with the tax for the services we all use and unfairly allow a protected nest egg (i.e. tax refund) to homeowners. Horrendous for any democrat worthy of the name. We don't even have adequate rent controls - see this UK/Germany.   

Howard Davies, a one-time deputy governor of the Bank of  England in a article in the Financial Times A wealth tax may work once but don't make it a habit   advocates taxing all land values rather than the wealth taxes mentioned by Lib-Dem Nick Clegg. A levy on the location value of all land would address the land utilisation problem that is one root of the squatting problem. If you had a property that you were keeping empty but had to pay a levy on its land value every year you would soon let the building out and the rent payments would cover the new levy. Hey! With every landlord having to rethink about their empty properties, rents might drop so that even poor potential squatters could pay them.

Trouble is there are more homeowner-voters than renter-voters. Homeowners-voters must be given a promise of  a drop in income tax to match a new land value tax. It is called a tax shift. It will be the only way.

McCarthy & Stone: Bad timing in property deals

McCarthy & Stone is a privately owned company which builds retirement homes. A news item in the FT today McCarthy back to profit after housing crash   tells another interesting story of mis-timing in the property market (see this blog for April 5th, 2011 about Taylor Wimpey). 

Dorset Business (March 2009) reported that in 2005, the business traded at a value of under £600m on the stock market when during that “boom time” it was selling 2,000 units a year. It was taken into private ownership for £1.1bn in 2006 by a consortium led by HBOS which included property investors Simon and David Reuben and Sir Tom Hunter (Josephine Moulds, Daily Telegraph  29 Jan 2007).


In 2007 Building.co.uk reported that HBOS was looking to sell most of its stake in McCarthy & Stone just five months after the above £1.1bn deal. HBOS needed the cash to buy housebuilder Crest Nicholson in early 2007. This was at about the peak of the property boom and whilst good timing for the sellers of McC & S and CN shows that some of the big shots on the buying side had not read or heeded what Fred Harrison with his analysis of the 18-year property cycle had written: such as The Power in the Land 1983; Boom & Bust 2005; Ricardo's Law 2006. 


McC & S was lumbered with massive debt taken on at the time of the 2006 deal.  They had to stop construction for a year from mid-2008. Michael Ball who in 2009 was McC&S's Chief Financial Officer is reported in the FT as saying at the time: 'in 2006 the group had not expected such a severe housing crisis' . Click on the link for a review on Fred Harrison's later book 2010 The Inquest . Essential reading for politicians and property people. 
    
posted by Charles Bazlinton. The Free Lunch - Fairness with Freedom which deals with land and property issues 

Could Taylor Wimpey's Pete Redfern have done better?

When a property chief executive says about the house price crash of 2007 ' No one could have seen what was coming...' (FT 5 April 2011: Taylor Wimpey back at the crease) you do puzzle just a little. Mr Pete Redfern  joined George Wimpey in about 2001 and sorted out the McAlpine Homes bit of that before becoming Chief Executive of the combined Taylor Wimpey which is now No.2 UK builder. Obviously a capable operator, to an extent.  

The Taylor Wimpey deal was done in January 2007.  Another UK developer / housebuilder, Linden Homes was sold to Galliford Try in February 2007 (Building). This was particularly neat timing by the owners of  Linden as they sold the outfit within a whisker of the top of the house price market. This rose from £184,143 in Jan 2007 to £189,316 in July 2007 and then crashed down 20% in Jan 2009 (see chart). Did Linden's  owners know something? Had they read Fred Harrison's books on the repeating 18 year land / business / house price cycle? In 1997 he predicted that the house market would peak in 2007 (2010 The Inquest read my review).

Redfern in the FT today is refreshingly candid, but it is all very well. The TW share price was about 430p in Jan 2007 and is about 40p now (9% of its value).  I wonder if chief executives ever read in-depth about every aspect of their industry? Fred Harrison has been publishing regularly on 18-year price cycles since his book The Power in The Land in 1983. OK, Pete Redfern was 12 at the time but since then his property industry experience never seems to have prepared him for 2007, despite Harrison's insights. 

Some homework: find out who sold Linden Homes in 2007, ask was it fluke timimg? If not and they are still in property, invest in their firms. But, a caution, watch this blog because land value tax might come into the equation, judging by recent Coalition Government tax policy ideas. This new factor in property development ought to be considered even for those who get the timing right.

posted by Charles Bazlinton.

The Free Lunch - Fairness with Freedom and on Amazon

Genuine localism in planning and housing

The mystery deepens over the meaning of 'Localism' a term coined by the UK's Coalition government. So far in planning terms it means that top-down housing targets from Whitehall have been abandoned in favour of local decisions as to where homes are to be built. So the new homes that are estimated to be needed annually, especially in the south-east of England, are not being built. Local opposition to large scale housing developments on green fields is powerful. Local authority councillors who decide these things will not approve unpopular schemes for fear of being thrown out of office. But how can communities grow in a way acceptable to those communuities? 

In The Free Lunch- Fairness with Freedom (p85) the case is made for the needed housing to be spread around more, so that all communites would grow a little. The increase per annum needed, using 2002 figures, was deeemd to be 1% growth in housing stock.  For a small town of 3000 people this would mean about 10 new houses/flats each year. Such small scale development, maybe even on green field sites at the edges of towns and villages, would probably be more acceptable than suddenly throwing up a 300 homes over 2/3 years. 

The Financial Times today  Property levies to fund top rate cut and also the leader Planning to grow has two Coalition ideas.  1. A council tax /stamp duty claw-back on the value of £2m plus homes and 2. Land auctions of planning permission. First: To merely rely on stamp duty inhibits property sales and there are reports of avoidance schemes. The council tax option is by far the most effective way to capture for the public purse the publicly-generated value of land from existing publicly-granted planning permissions. It would be regular, will not distort market supply and hopefully is less avoidable. Second: Land auctions would capture the large one off gain generated from new planning permissions.  

Suggestions from The Free Lunch thinking: 
1. Set a growth factor. Consult the residents of each city, town & village for an acceptable housing growth factor. Starting with 1% as a minimum growth in new homes per year, would a higher figure be acceptable? 1.2%? 1.7%? 2%? This figure to be cumulative, or not, by their choice.
2. Value your new planning permission. All landowners for planning applications involving new dwellings would be asked what price thay would be prepared to bid for the grant of permission. This would be an extension of the current levy already charged (Section 106 agreements) for development. An annual sale might be held to compare values. 
3. Gain in local authority's funds.  New revenue would be achieved as owners valued their gain. Part of what currently is taken by private landowners from a public grant of permission, would be fairly given to the public purse. Public grant = public benefit.  Quid pro quo.  
4. Planning - where would these homes be built? Take as a starting point the current tightly drawn town and village settlement boundaries. The local authority would receive all bids at their auction and be able to choose between offers, taking into account not only price offered, but conformity to existing planning policy. The option to build beyond the existing boundary could be considered and might be subject to lower density building perhaps, or other restrictions. 
5. Council tax adjustments  
The idea of a levy only on £2m + value properties each year on their existing value should be extended to all properties. This would need to be matched with a reduction in income tax, et al. 

6. Summary.
a) Public gain for publicly granted privilege. At the point of development and annually.
b) Improved ability to meet market needs generally. Also, in particular: with perhaps some low-density family-appropriate homes beyond settlement edges.
c) The provision of more new housing.  
d) Volume house builders would need to adjust their business model to the new small development scenario.
e) A new presumption of appropriate development, responsive to market needs and local feelings would be the guide. Housebuilding would be encouraged and bring more land on the market, with land values moderating. Rather than value going into land prices, value would go into better built and better designed homes.

 Buy the book: The Free Lunch - Fairness with Freedom
 posted by Charles Bazlinton .