A Novel Bipartisan Solution to the Economic Crisis

re-solving economic puzzle

Re-Solving the Economic Puzzle

Walter Rybeck 2011

Book Review

What if there were a single, simple solution to the current credit/debt crisis? What if mere tax reform could end the recession, repay public debt, and reverse growing income inequality? What if this tax could also end real estate bubbles and speculation and reverse urban decay and sprawl? What if it could also make cities and states more financially self-reliant, thus reducing their reliance on federal subsidies and the size of federal government?

It all sounds highly improbable, doesn’t it? But Walter Rybeck, a former urban affairs official in the Johnson, Nixon and Carter administration, claims that widespread adoption of a  Land Value Tax (LVT) would accomplish all these objectives. What’s more, political thinkers across the political spectrum (e.g. Patrick Buchanan, Milton Friedman, Michael Hudson, Martin Luther King, Paul Krugman and Joseph Stigliz) have all spoken in favor of this type of tax reform.The LVT, which taxes unimproved land, dates from pre-revolutionary times. Prior to the enactment of the Federal Income tax in 1913, most public services were financed locally via an LVT. Progressives like it because it shifts the tax burden from small business and low and moderate income families to real estate developers and speculators. Conservatives like it because it shrinks the size and role of federal government, as well as leading to a reduction in company and income tax.

Here is what conservative free market economist Milton Friedman had to say about Land Value Tax (The Times Herald, Norristown, Pennsylvania; Friday, 1 December, 1978): “We need taxes. So the question is, which are the least bad taxes? In my opinion the least bad tax is the property tax on the unimproved value of land, the Henry George argument of many, many years ago.”

Ending the Monopoly on Land Ownership

Like Henry George, author of the 1879 Progress and Poverty, Rybeck proposes to end the ruling elite’s monopoly on land and natural resources through tax reform – by gradually replacing income, company, sales, and property taxes with a tax on unimproved land and resources. As he explains in Re-Solving the Economic Puzzle, land is the ultimate source of all wealth. In the US 3% of the population own 95% of private land. Ted Turner alone owns two million acres, equivalent to nearly two Rhode Islands. In many cities, a few wealthy families own all the prime downtown sites.

Rybeck’s definition of land includes all the natural resources accompanying it – soil, forests, game, grazing rights, water, oil, gas, minerals and the electromagnetic waves (broadcast, cellphone, and wi-fi spectrum) above it. Like Henry George and modern Georgists, he argues that land and resources should be public property. Because no one produced any of this stuff, no one has a right to claim an exclusive monopoly over it.

According to Rybeck, our current system of taxing labor and productivity is grossly unfair to all but the top 1% of Americans. Besides being more equitable, the LVT also ends curbs the real estate speculation that leaves vast areas of American cities vacant. Setting land taxes too low inadvertently rewards landowners for keeping land vacant or turning it into parking lots.

High land vacancy rates were already a major problem during the Nixon administration. In 1970, cities with a population of 100,000 had a 22% vacancy rate, and those over 250,000 a 13% vacancy rate. Thanks to the 2008 economic crisis, an epidemic of vacant foreclosed homes has massively increased this urban blight. Worse still, low land taxes reward middle class families for moving to the suburbs. In doing so, they abandon expensive infrastructure (water, sewage, lighting, schools, etc) that was created to accommodate them. As they spread out into sprawling suburbs, taxpayers must fund new infrastructure.   

Cities and Countries Successfully Adopting an LVT

The final third of Re-Solving the Economic Puzzle relates the success stories of the 25 cities and five countries that have spared themselves economic disaster by adopting an LVT. The communities Rybeck singles out include

  • California Irrigation Districts (1887)
  • Fairhope Alabama (1894)
  • Arden Delaware (1890)
  • Cleveland (1901)
  • Pittsburgh (1913, 1979)
  • New York City (1918)
  • Miami (Ohio) Conservancy (1929)
  • Rosslyn Virginia (1950)
  • Southfield Michigan (1960)\Harrisburg and 15 other Pennsylvania cities (1980-1990)

Sadly many of these communities subsequently caved in to special interests and began taxing capital improvements, rather than land values. Those who did so are confronting a major debt crisis, as well as decaying schools and infrastructure.

Pittsburgh, one of the backsliders, saw the error of their ways in 1979 and instituted a gradual return to what Rybeck refers to as a two-tier land tax. At present, Pittsburgh taxes unimproved land six times as heavily as improvements. The resulting revival of their central city is referred to as Renaissance II. Thanks to their Land Value Tax, Pittsburgh didn’t experience the same real estate bubble as other US cities. Thus their housing market didn’t collapse in 2008. In addition, their current foreclosure rate is the lowest in the country.

Countries which have adopted an LVT include Hong Kong (1843), New Zealand (1878), Denmark (1912), South Africa (1916) and Taiwan (1949).

To learn more about Land Value Tax, check out the LVT Facebook page.

Reprinted from Veterans Today

An Australian Looks at the US Economy

dollars

How Private Banks (Not Government) Create Money

Australian economist Steve Keen (author of Debunking Economics) has an excellent 2009 article on his Debtwatch site explaining how Fractional Reserving Banking (FSB) supposedly works. The major premise of the article is that true FSB only exists in the minds of academic economists. Keen begins with a quote from Karl Marx (and a prominent photo) that was featured in a January 2009 article Investors Shortchanged  in the Sydney Morning Herald:  

karl marx

Talk about centralisation! The credit system, which has its focus in the so-called national banks and the big money-lenders and usurers surrounding them, constitutes enormous centralisation, and gives this class of parasites the fabulous power, not only to periodically despoil industrial capitalists, but also to interfere in actual production in a most dangerous manner— and this gang knows nothing about production and has nothing to do with it.” (Das Kapital, Volume 3, chapter 33).

Although Marx was totally off base in predicting the imminent downfall of capitalism, he sure got it right about banks.

 The Fiction of Fractional Reserve Banking

In the academic model of Fractional Reserve Banking, a retail bank establishes reserves (with depositors’ money and funds borrowed from the Federal Reserve). They then create $90 in new money for every $10 they hold in reserve. Only it never works this way in real life. The Reserve Bank of Australia totally eliminated the reserve requirement in the 1990s.The Federal Reserve has no reserve requirement for business loans and the 10% reserve requirement for personal loans is full of loopholes.

Keen’s article goes on to present M0/M1 and M2 data showing that what academic economists are calling Fractional Reserve Banking is actually a Pure Credit Monetary System. In other words, private banks are totally free to issue as much money, in the form of new loans, as they choose. They also have total control of both the money created by the commercial system and the money created by government.

M0 (sometimes called M1) refers to the Base Money or fiat money created by the Federal Reserve. M2 refers to M0 plus new money created by banks as loans. The ratio of M2/M0 is called the “money multiplier” ratio.

What his graphs show is that credit money (M2) is created first and M0 or fiat money (the reserves to cover it) is created up to a year later. In a true FRB system, M0 or Base Money would increase first, and M2 would follow as banks issue new money based on their reserves. The other major problem is that combined public and private debt greatly exceeds M2. Under a true FRB system, total debt could never exceed the amount of fiat and bank money created.

Why Quantitative Easing Won’t Work

Keen’s paper also includes an interesting prediction that the Federal Reserve’s quantitative easing (increasing M0 by electronically “printing” $85 billion in new fiat money every month) will be vastly insufficient to bring about economic recovery. He gives four reasons for this:

  1. Instead of using the money the Fed loans them to lend to borrowers, private banks are allowing inactive reserves to rise.
  2. Consumers are too far in debt to take out new loans.
  3. Deflation will continue because retailers and wholesalers must deeply discount their products to keep from going bankrupt.
  4. “Deleveraging” (paying off debt) is massively suppressing consumer demand.

Keen predicts that quantitative easing will have little effect unless Federal Reserve Chairman Ben Bernanke pumps enough money into the economy to make a dent in the $42 trillion US debt. Deducting compound interest, he reckons $20 trillion would reduce it by about a quarter.

Ironically such a massive increase in government-issued Base Money (M0 ) would effectively replace our bank-controlled credit money system with a publicly controlled fiat money system. In other words it effectively restores the ability of the federal government to issue money, as Lincoln did (see The Role of Foreign Banks in US History).

Makes you wonder if this is Obama’s and Bernanke’s true agenda with all the electronic money they’re printing – to quietly nationalize America’s monetary system through the backdoor.

For more background on how private banks create the vast majority of US dollars (out of thin air), check out the free video The Secret of Oz:

Photo credits:  youkaine via photopin cc and photo credit: wolfgangfoto via photopin cc