PRACTICAL POLITICS April 2008 Issue No. 164

DENIAL, BELITTLEMENT, BEWILDERMENT, PAIN

In our Issue No. 159, in July 2002, we forecast the next slump would arrive
in around seven years' time. When the early signs were noted last year, they
were widely overlooked or seen as little local difficulties. Next came
awareness that matters were indeed going awry, but it was all confined
comfortably to sub-prime housing mortgages and a few banks, mostly in the
U.S.A. Then it became obvious that it was spreading ­ geographically, more
deeply into housing markets, and indeed into the wider reaches of world
economic activity. There are still those in denial, believing, in public at
least, that it is really a little blip that will be over by the autumn. For
most, though, the pain has yet to come; but come it will, next year.

In our own country, RBS and HBOS have announced steps to repair
("strengthen" is the polite term) damaged balance sheets by means of rights
issues. The Bank of England has devised a neat scheme to provide succour to
banks that have liquidity problems but still have quality assets they can
pledge. Will this £50 thousand million arrangement be big enough, though?
What happens when supplicants run out of AAA assets? When does a haircut
become a scalping?

How does it come about?

The depression the U.K. is on the verge of entering, may be part of a
general trend amongst nations with developed economies, but it is not
something imported from foreigners. In essence, it is home grown. Ripples
from overseas trading partners who had brought about their own collapses
would inevitably have had some repercussions here; but that is no
justification for us to have engineered a disaster of our own. Erroneous
economic analysis translated into poor politics, lies behind our ills.

The cardinal mistake is to fail to distinguish land from wealth. In
political economy, land is not wealth. Land is defined as the whole of the
material universe apart from man and his products. Land is not man-made.
Wealth, by contrast, is made by man, working on land and fashioning the
Earth's natural resources to produce goods, both consumer goods and capital
goods. It is of course true that land can be bought and sold, like a
man-made commodity, but that does not make it wealth in the sense given to
the term in economics. Land is fixed in both quantity and location. Each
location, each parcel, site, or piece of land, is unique ­ a natural
monopoly, in fact. When there is a shortage of a man-made commodity, more
can be rushed in from elsewhere or manufactured locally. Land, however, is
not reproducible, nor can it be moved from where it has little value to
where it is in great demand. The market simply does not work with land in
the way it does with manufactured goods. When land in a particular location
is rising rapidly in value, all it can do is go on rising, because that is
the only response of which it is capable.

The land value of a site reflects the natural and social advantages which it
enjoys in relation to all other sites. This is expressed in an income
stream, called its annual rental value or, simply, rent. Rent is the value
of the land in current conditions. When land is bought, the buyer is paying
a price which is greater than the mere capitalisation of that rent, however.
He is being asked to anticipate future increases in rental value, paying
to-day for the right to to-morrow's rent. More than that, he is speculating,
buying "hope" value ­ increased land value resulting from population growth
and movement, from economic progress and development, and, often supremely,
from acts of public policy, infrastructure developments, and possible
reallocation of land to higher planning use. Thus the capital
(buying/selling) value of land is way out of line with the much more stable
rental value, and is self-evidently prone to violent swings. Yet it is the
unreliable, swollen capital value of land which banks and similar
institutional lenders are accepting as collateral for loans (including
mortgages, of course) and it is those same bloated capital values that
borrowers are relying on for retirement savings and a free-and-easy current
life style.

Land is the key factor behind it all. It is consistently ignored by
academics, commentators, business economists, and politicians, who insist on
covering it up by writing and talking of housing when they must know they
mean housing land, or by use of generalised terms such as property, assets,
and equity. Land is not man-made, but the free gift of Nature or the
Creator. It does not behave in the same way as man-made goods do. Its
capitalised value (price) is a trap, a moving illusion at the core of the
boom/bust cycle [please see Uncoloured Supplement No. 2, distributed with
Issue No. 161].

Some recent developments

"As a share of their total loan book, [U.K.] banks' lending secured on
commercial property is at record levels" [a]. "Office lettings in central
London fell by almost a third over the past six months as companies scaled
down staffing needs and froze office searches because of economic
uncertainty" [b]. "The retail sector has been hit hard, and this year will
offer mixed fortunes for investors in the nation's shops... The pain has
been sharp, deep and felt on every high street" [c]. "The services sector...
is also facing a major slowdown ... The outlook for the construction sector
is the worst in over a decade" [d]. "Housebuilders Taylor Wimpey and Barratt
admitted halting much of their land-buying operations" [e].

"Swiss bank UBS is planning a £8bn rights issue... America's Lehman Brothers
has also announced a rights issue. Other lenders have had capital injections
from sovereign wealth funds" [f]. "International banks are scrambling to
sell their holdings of Spanish mortgage debt at deep discount, fearing that
the country may be sliding into the worst economic downturn in its modern
history... Developers owe 290bn to the banks and lenders, known as cajas"
[g]. "Many small and medium-sized builders and real estate groups are going
bust... Some of Spain's biggest real estate groups... have been locked in
negotiations with creditors to stave off bankruptcy" [h]. "Confidence at
major Japanese manufacturers fell to its lowest in more than four years...
Many companies are looking to scale down spending on new equipment and
factories" [i].

[a] Roger Bootle, "Daily Telegraph", 25th. February [b] Lucy Killgren,
"Financial Times", 12th. April [c] Chris Bourke, "Estates Gazette", 1st.
March [d] Edmund Conway, "Daily Telegraph", 1st. April [e] Lucy Barnard,
"Estates Gazette", 5th. April [f] Katherine Griffiths and others, "Daily
Telegraph", 18th. April [g] Ambrose Evans-Pritchard, "Daily Telegraph", 4th.
April [h] Leslie Crawford, "Financial Times", 29th. March [i] "Daily
Telegraph", 2nd. April

LAND LICENSED IN THE RADIO SPECTRUM

In our Issues Nos. 70, 97, 100, and 123, we have reported and discussed
developments in the U.K. and in Germany in respect of the use of the radio
spectrum. In particular, we have stressed that the air is, in political
economy, classed as land, being part of the material universe distinct from
man and his products. Now we learn that, "In the US, the coveted 700MHz
spectrum will become available in mid 2009 when TV broadcasters switch from
analogue to digital transmissions. The auction of the spectrum raised
$19.6bn for the US treasury" (Paul Taylor, "Financial Times", 5th. April).
"AT&T and Verizon Wireless won the bulk of the new licences, spending a
combined $16bn. Other winners included Qualcomm, the mobile chip maker,
which paid $554.6m for five licences". Both companies intend to use the band
to build new 4G networks "based on... the favoured next generation
technology... The new US networks will start to be built in 2010 ­ about the
same time that operators in Europe and Asia... plan similar initiatives."

This is a further interesting development of the way in which the benefits
of the air above can be devoted to the common good. The Crown Estate owns
the rights to the seabed. Why not bring the concept to terra firma as well
and treat it too as common property? Can LVT be far behind?

TAXING TIME FOR TAXES

The Government is not having a good time with taxes and budgets at present.
The "non doms" are starting to walk away. The rate of corporation tax has
already induced some companies to base themselves in the Republic of
Ireland. The row over the 10% income tax band showed unpreparedness and lack
of dexterity in reacting. The changes to capital gains tax had not been
thought through, either, and the law of unintended consequences rose up
again: indeed, for the forgotten ordinary investor, the abolition of
indexing and tapering, coupled with the inflationary outlook, will soon more
than negate the lower percentage levy and make this measure, in effect, one
of retrospective taxation. Meanwhile the Treasury profits from its massive
ad valorem tax takes from petroleum production and petroleum products ­ a
fact of which, at last, the public is beginning to take notice. A great
nation can assuredly do better than this: the sooner LVT is adopted, the
better.

TOUGHER TIMES FOR MORTGAGE FRAUDSTERS

The bursting land bubble is putting one set of undesirables out of business.
The Financial Services Authority has "hundreds of cases... in its sights"
(Daniel Thomas, "Financial Times", 23rd. February). Criminals used false,
high valuations to obtain mortgages, paid the true price to obtain the
properties, and disappeared with the profits, typically "£45,000 per
property". With full LVT there is no bubble, and only the man-made house to
buy.

HISTORY IN A NUTSHELL

"Millions of immigrants fled from Europe, where land was expensive and wages
were low, to America, where land was cheap and wages were high. As land
prices rose and wages fell in the East, settlers underwent great hardship to
find affordable land in the West... Now that the frontier is long gone and
land has become more and more expensive, how will ordinary people find the
American dream?" (Council of Georgist Organizations, Evanston, Illinois,
April 2008).

http://www.landvaluetax.org/downloads/