Countries like Ireland and Spain are slashing public spending, to reduce sovereign debt. Britain’s coalition government, however, is providing the most transparent disclosure of the social consequences of the property boom/bust. The UK’s social system is being re-sculpted. Strip away the reassuring language, and we find that this nation is being sent back to the Depression of the 1930s.
Prime Minister David Cameron is convincing, as someone who wants to protect vulnerable members of society while requiring everyone to accept the personal responsibilities that were stripped away by the Nanny State. So far, so good. But without realising it (one has to give him the benefit of the doubt) he is rendering the population vulnerable to the grotesque injustices that prevailed in the 19th century.
The Welfare State was created by socialists in an attempt to neutralise the pathological characteristics of capitalism. That model had to be given a fair chance of working. It failed the test of time. Poverty was not abolished. Yes, many people benefited. The postwar baby boomers, for example, enjoyed free access to university education. This enhanced their lives beyond the imagination of their parents. But all that is now coming to an end.
The Philosophical Fraud
Sovereign debts do have to be brought under control: no argument about that. But there are two ways to deal with the crippling legacy of the last property boom.
Austerity measures are favoured by European governments. But by shrinking public spending, economies are locked deeper into the downward spiral that was triggered when property prices became so unaffordable that housing markets seized up.
With the brutal cut-back in money spent on public services, unemployment is set to suffer the next upward spiral. The private sector will now cut back investment, sending economies into a faster tailspin.
I call this so-called rescue operation a fraud because the politicians disallow the second strategy. This would increase spending to build our way out of the debt trap. That spending would be driven by a tax reform that generates the value that would fund the spending programme and place the economy on a sustainable path to growth.
The Self-funding Strategy
In the economic tool kit, there is one policy only that could deliver growth that does not rely on yet more debt.
Taxes are a terrible burden on productivity. Governments should scrap taxes on people’s earned incomes. That would protect current living standards and reduce the costs of production. Put another way, prices could be cut without slashing take-home pay, making exports competitive in foreign markets.
But how would government then pay for public services? It wouldn’t. The users of those services would pay. They would do so by agreeing to defray the services they access at the locations where they live and work, through a mixture of user charges and a general payment into the public purse based on the rental value of their land.
Anaemic versions of the land value-based tax operate in Denmark and Australia. I mention this so that readers need not be distracted by problems allegedly connected with the implementation of this policy. The real issue is political. Do we want to finally place our economy on a foundation of justice as well as economic efficiency? If so, it is up to each and every citizen to make it her business to get acquainted with this policy, and then confront politicians. Because governments will not even discuss this option until driven to do so by the demands of their voters.
Twist in the Tail
The reason why governments won’t adopt a fundamental reform of taxation is that this would remove the incentives to speculate in house prices. Discuss.