hi all. sorry been away. but good news ive found the answer to the rampant inflation question. bad news, its long.
here it is
How to make BI inflation-proof
while also raising wages
by Jeffery J. Smith
President, Forum on Geonomics
Presented at the 2008 US BIG track
within the Eastern Economic Association annual conference
in Boston at the Park Plaza Hotel, March 7-9
Abstract
When an advocate promotes a Basic Income Grant (BIG or BI) to thoughtful people, they inevitably point out that increasing people's purchasing power could be inflationary. And indeed, they could be right, at least for one sector ? housing. In the past, when government gave money to the poor or students or pensioners, then their landlords raised what they charged for tenements, dormitories, and trailer parks.
Yet there is a way to put landlords in competition for tenants. It's a way to also raise funds for paying a BI or a CD (Citizens Dividend). That is, where government has taxed land, it has discouraged land speculators and encouraged landowners to keep their improvements affordable. The raised revenue could fund an income supplement, somewhat like what. Aspen CO does.
Additionally, where government recovers rent, they keep down price. Since the value of the location is an immense part of the price of real estate, when land costs little, land plus buildings cost much less, so that buyers borrow much less. With less debt in society, there is less debt-backed new notes. With the supply of money in better balance with the output of new goods and services, the means to inflate prices is lacking. Government could swell the BI or CD to a quite comfortable size and still not worry about inflation as long as it recovers rent.
Historically, where government taxed land, there wages were higher, since affordable land provided more opportunity to work for oneself, besides more employment opportunity. Plus, if a worker's income were augmented by a share of rent, that too would enable workers to negotiate better wages. And if the complete geonomic tax shift were ushered in ? tax pollution, not income; tax extraction, not sales; tax location, not buildings ? there the average resident would pay land dues but nothing else. Hence the average citizen would enjoy lower taxes, lower prices, higher wages, plus a Citizens Dividend. On balance, the average citizen ? people who must support the extra income proposal in order for it to pass ? would come out way ahead.
Finally, if there are no excess new notes to inflate prices, and as long as technology keeps advancing, then progress would show up as a lower cost of living. Rather than inflate prices, a BI or CD would lower them, as long as its funding source were society?s surplus, all the money people spend on the land, resources, and government-granted privileges that they use. Better than packaging an income supplement as a necessary salve for inflation is to show how it can be part of a holistic policy to transform the economy into working right for everyone.
Introduction
Thoughtful people, upon hearing the proposal of a Basic Income or Citizens? Dividend (the BI is a set amount, enough to cover basic needs, the CD is a share of public revenue surplus, which could be much higher than a BI), often raise the same questions.
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First, how could people ever deserve something for nothing? By that implied logic, we should of course pay for another manna from heaven, the air we breathe ? which, given current environmental trends, may not be too far in the future; in Calcutta, traffic cops take breathing breaks to inhale from bottled oxygen..
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Second, thoughtful people want to know, where?s the money going to come from? Most people, including most BIGists, are not aware of society?s surplus, of the flow of income generated not by one?s labor or capital but by the advantages inherent in a region?s land.
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And third, the topic of this paper, wouldn?t spending money for nothing be inflationary? The simple answer is ?no?, since no new money is created and issued over and beyond the amount of goods and services produced. Further, the income supplement does not increase the amount of spending in society but merely redirects it from those who now get too much income to those who now get too little.
Have some income supplements inflated prices?
Eventho? an extra income for everyone would not necessarily inflate prices economy-wide, it could inflate the price of a certain sector, depending on the source of the funds for the universal payment. That is, the basic necessity that often requires poor people to pony up first ? even before spending on food ? is housing. When government gives people money, landlords generally raise what they charge to absorb as much of that gift as they can.
A century ago in England when Winston Churchill campaigned for economic justice, he would tell the story of a London bridge that claimed so much of the meager income of the poor residents of London who lived on one side of the Thames and worked on the other. Feeling sorry for them, reformers organized to legislate a lower toll for the bridge. Within weeks, rents in the impoverished jurisdiction went up by the same amount.
The way things were is the way things still are. Today, when government grants money to poor people or students or pensioners, their landlords raise what they charge for tenements or dormitories or trailer parks. The extra money from the government increased demand for housing by its recipients but not supply of locations by owners; it enhanced competition among people seeking housing but not among people producing housing, raising the cost of housing.
What BI source is anti-inflationary per sector?
As long as landlords can keep raising what they charge, then income supplements like Basic Income are spinning their wheels, are mere exercises in futility. However, there is a way to (a) put landlords in competition for tenants. And it?s a way that (b) precludes the possibility of an extra income causing inflation. Plus, it?s a way that also (c) raises funds for paying a BI or a CD (Citizens Dividend). Furthermore, this way (d) conveys a justification of why receiving money for nothing is fair.
This four-way solution is for society to recover the rent for land and natural resources and for government-granted privileges, such as utility franchises, which behave like land in the economic arena. Society, through its agent, government, could levy a tax on the value of locations or charge owners land dues or a land use fee but by some mechanism redirect all the money we spend on the nature we use from owners and lenders to the public treasury (thence to everyone in general). Plus, government could charge full-market value for the little pieces of paper it grants, including corporate charters, bank charters, utility franchises, broadcast licenses, medical licenses, etc.
Where government has done so, which is not often, it has lowered land price. When Pittsburgh taxed urban land more than buildings, it had the most affordable housing (on home sites, of course) of any major city in America. When Denmark, California, Australia, New Zealand, and Taiwan taxed rural land, they drove down its price and broke up large estates into family farms.
Whatever the effect on price (yet to be studied elsewhere), a few governments even paid dividends.
- Aspen CO pays housing assistance from site rent, recovered via a tax on sales of property (whose value in that pricey resort is mostly land, that is, location). Others use other rents.
- Alaska pays dividends from (invested) oil rent.
Other jurisdictions share rent to help with a basic and universal cost:
- Alberta Canada has used oil rent to pay energy bill rebates.
- British Columbia rebates a fixed dividend from a carbon tax (atmospheric rent).
Public recovery of rents works to dampen prices by reversing the incentives for the holders of privilege. Consider the classic example of owning land. When owners must pay over (some or all) rent rather than keep it, landowners typically cannot afford to let their properties become empty, so they do not raise what they charge tenants, many of whom would move on to more affordable buildings, but instead accept a smaller profit.
Moreover, owners who had been underutilizing their locations tend to no longer speculate but put and keep their sites at highest and best use, in order to generate revenue for paying the land dues or land tax; landowners are spurred to erect new buildings. The increased supply of structures for both residence and business (a) puts landlords into competition among themselves for buyers and tenants. Just the opposite of inflating prices in the housing sector, this rebalance actually lowers how much owners can charge tenants and buyers.
The drop in the price for buildings is paralleled by a fall in the cost of land, again helping the poor the most since they do not typically deal in land except occasionally to buy a sub-prime parcel with a small old house on top. Public recovery of rent works to lower land price because the less rent that the public leaves on the table, the less price an owner can charge. Buyers cannot afford to pay both a high land price and a high land tax; as long as government keeps its land dues high, owners must bring their land prices down. Put abstractly, since land price is capitalized land rent, when government socializes rent into public revenue, then owners cannot capitalize rent into price; the more rent that society recovers, the less they leave for seller to convert into price.
What?s the source of inflation in general?
Members of society pay a huge amount of their income for real estate. Indeed FIRE ? Finance, Insurance, & Real Estate ? is by far the single biggest sector of the economy, constituting well over 40% of the GDP (at the US Government?s official website of the BEA). Within FIRE, it is for locations, not for buildings, that people spend the most money.
Compare two homes of identical size on identical-sized lots, the same distance from downtown, a major traffic artery, a school, a park, but one in Boston and the other in Cleveland. The former would typically cost three times as much as the latter ($400k vs. $130k, National Assoc. of Realtors). The cost of construction and materials are roughly the same. It?s the value of the location that costs so much more in places like Boston, New York, San Francisco, and San Diego (eventho? official assessments do not reflect this fact).
To buy land ? actually, a location ? plus whatever?s on it, most people don?t pay cash for more than a ten percent down payment and borrow the rest. In today?s developed world, banks meet the demand for credit in part by creating new money that never existed before and issue that into circulation via loans. Since banks lend so much for the purchase of real estate, when land costs more, banks lend more. Since land is not produced, much of the new money for mortgages does not represent any newly produced goods and services. When land sellers and mortgage lenders spend their excess new notes on the same old amount of goods and services, they bid up their price, which is another way to say ?inflation?.
Presently in the US, inflation is rising, following years of rising debt, both public (for war) and private (for land, which war is also for). For years, many of those excess dollars were drained out of the domestic economy by foreigners buying dollars and stockpiling them. But lately, foreigners increasingly buy euros, pounds (and other rising currencies), and gold with their dollars. So those dollars must come home not to roost but to flood the domestic economy. As those never-backed dollars circulate throughout the economy, consumers unavoidably use them to bid up the prices of basic essentials, such as energy, food, and medical care. As long as Americans keep deficit spending and foreigners keep dollar dumping, we can expect inflation to rise even faster.
It may seem that a necessity like oil causes inflation but its rising price is inflation. The cause is excess currency, which a necessity like land has the power to absorb. If there were no excess of new money, then the price of oil or land could rise, but it?d have to be offset by people spending less on something else, whose price would fall. The price of new clothes has fallen (in constant dollars), largely due to automation and globalization, but low as it is, it still drives some shoppers to secondhand stores whose popularity has mushroomed (?Secondhand Stores Moving Into the Retail Mainstream? by Leslie Kaufman, The New York Times, April 26, 2000). Their forgoing the purchase of new clothes is another factor for why the price of new clothes has fallen.
What BI source is anti-inflationary in general?
Even if government does not reduce its own borrowing and deficit spending, it can still reduce total debt in the economy ? the private borrowing of homebuyers and deficit spending of homeowners. Government can tax land, thereby reducing land price; thus buyers need borrow less and owners can?t borrow more (to take ?equity?, the land value, out of their property). Less borrowing of course means less lending, fewer new notes unmatched by new production, and thus less inflation.
Besides lowering the price of housing, less expensive land also lowers the total price or lease of shops, offices, and factories. Thus, expanding businesses looking to purchase or lease commercial sites need borrow less, too. While commercial banking does not generate as much debt as does lending to homebuyers or government, it is still a sizeable amount and shrinking it would slow inflation.
Where people need spend less on land, they have more wherewithal to spend on the things that humans do produce, enabling producers to prosper. Where people prosper, they both need government services less and can afford to pay more. Hence their government could increase its income and decrease its outgo, and be in a position where it need not borrow so much. Were its politicians to take that enlightened path, it would reduce the amount of un-backed, excess notes.
Shrinking the borrowing of government, business, and residents, the amount of debt could then equal the amount of actual, physical economic expansion. New money would be in balance with new output. Inflation would drop to zero; it?d disappear.
An economy of zero inflation depends upon full recovery of rents; flush with all those rents, then government could pay a cash income supplement to the poor or everyone, an amount large or small, and (b) still not trigger inflation. Landlords and land sellers would still have to compete for business. None could inflate the price of land, nor the amount of borrowing; keeping down debt precludes economy-wide inflation.
What BI source raises wages and lowers taxes?
Public recovery of rent ? whether for funding an income supplement or social services or both ? not only cuts consumer costs (the inflated price of goods and services) but also raises workers? wages. Historically, where government taxed land or otherwise recovered rent, it discouraged speculation so that owners did not hoard land or keep it idle awaiting a future lift in rent or price. That left lots of land available to others at prices they could afford. Thereby newcomers or young adults could turn to farming if one did not like the wages offered for working in factories. Not everyone had to refuse city work but where a critical mass did ? e.g., in the American colonies vs. in Europe, then later on the Eastern Seaboard vs. the continental interior ? wages were higher.
Even today, affordable land lets workers negotiate healthier wages. People refusing the offers of bosses need not turn to farming. They could use an available location to launch whatever enterprise. As long as they turn a profit and stay in business, they need not compete for jobs and instead keep employers competing for employees, which keeps wages high. In the 1920s when New York taxed land, construction workers enjoyed higher wages. In the late 1950s when Denmark taxed land, workers got the biggest jump in wages in Danish history. Plus, if entrepreneurs and workers were to receive a BI or CD, that too would act as free land and further empower people to negotiate higher wages.
Are wage increases inflationary (not of a basic necessity but of goods and services in general)? Whether biased or backward, the mainstream media say higher wages do cause inflation. Whether biased or backward, the mainstream media do not blame easier credit bestowed upon investors for inflating the prices of stocks and real estate. Yet, ironically, neither more income for labor or for capital is the culprit; it?s the over-issuance of new notes via loans, mainly for real estate, but also for corporate welfare. If government were to recover the rents for privilege, then capital, even with fatter earned profits, couldn?t bid up the price of stocks. If government were to recover the rents for land, then labor, even with higher new wages, couldn?t bid up the price of housing. Absent excessive new notes, higher wages or profits cannot inflate prices in general.
As a society, people spend immense sums for privilege, for land titles, resource leases, EM spectrum licenses, emission permits, congestion charges, corporate charters and other liability limits, patents and copyrights, utility franchises, medical licenses and other professional gateways, banking charters, etc. The annual market values of those pieces of paper constitute a prodigious portion of any economy, at least a third of GDP, perhaps a half or even more. Any government that recovers this immense flow of rent would be wallowing in wealth.
Such a geonomic government would (c) have so much revenue it could not only fund whatever social services a democratic majority desires, and use the surplus to share among the members of society, government could also abolish other taxes. Doing so would not cost government any revenue. Where taxes on income, sales, and buildings are low or non-existent, people want to live and work. So there they bid up the value of land. By recovering that rent, government raises as much revenue as before, if not more. Not having to pay counterproductive taxes, people do more business, which pumps up site values, which the geonomic government would recover.
Guns vs. butter or Spending vs. dividends?
Even without cutting public budgets, governments could operate without borrowing, since recoverable rent is so immense, and still pay a modicum of BI or CD. But if government were to curb its discretionary spending, then the surplus of public revenue would be stupendous, making possible a staggering income supplement. Choosing between spending by legislatures vs. disbursing to citizens is something the populace could participate in by putting the budget on the ballot, as do many towns in southern Brazil.
Citizens could do without social programs if they received an income supplement to make up the difference. Rather than have citizens pay taxes to politicians to pay budgets to bureaucrats to pay salaries to providers to serve citizens, governments would pay dividends to citizens directly, drastically reducing the overhead of bureaucracy. What they receive now as public schooling and socialized medicine, citizens would receive as a straight cash payment, then recipients would select their own providers.
While government would save, citizens would not lose; indeed, they would likely gain. Recoverable rent is immense and a share of rent ? minus the cost of bureaucratic overhead ? would tend to be greater than the value of a subsidized service. Plus the citizen receiving it could spend the money anyway they want, finding suppliers of education and health care that more precisely meet their individual needs, and who could save them money.
If citizens were to get a share of recovered rent, they could do with less government, especially the state?s original raison d?etre, the military, which consumes so much of so many public budgets. The military recruits civilians with offers of money, money for college or housing, or free medical attention. If people got their monetary needs met without enlisting, then the military would become smaller, less threatening, and by necessity the government would become less belligerent. Note how much smaller the militaries are and less adventurous the governments are of Western Europe, which are social democracies spending most of their sizeable budgets on welfare. By paying an income supplement, government could spend less on guns and butter both, slowing inflation.
Along with national governments, constituent governments also waste public revenue. Governments misspend huge sums ? as a nation to wage war qua war, as a state to wage war on drugs including building more prisons than schools or hospitals, and as a locality to pick up the tab for sprawl by expanding infrastructure into the suburbs. If governments quit the waste, they could shrink their bureaucracies and balance their budgets. Governments would no longer have a rationale for borrowing to fund their operations. They could still sell bonds to fund desired expansion ? new infrastructure such as bike paths and water recycling plants. But those real physical goods would pay for themselves and might merit an increase in the money supply and not trigger inflation.
By reducing the debt of government, business, and households, so that the remaining debt is for actually adding to the output of real goods and services, then debt would not be inflationary. Instead, inflation would halt. Even better, it would likely reverse.
Better yet, is a CD anti-inflationary?
When calculated in constant dollars, the prices of goods that are supplied without having to pass through bottlenecks are actually falling. In arenas where there is technological progress and some competition ? manufacture of clothes, cars, and computers ? one finds prices dropping (in constant dollars). In arenas where technology is hoarded by patent protection and suppliers have formed cartels to lobby for legal exclusion of competitors ? doctoring, teaching, lawyering, just like the guilds of old ? one finds prices skyrocketing through the stratosphere.
Were government to permit capable people to compete with credentialed people, and to charge full market value for credentials like a medical license, then doctors and the rest could not charge nearly so much. Were government to charge full market value for patents and copyrights, then corporations who get a leg up and try to corral all the inventive talent and new ideas could not afford to be dogs-in-the-manger. New ideas and devices would spread to even less endowed consumers, driving down the cost of living faster.
Imagine living in a geonomy where society?s agent, government, recovers then disburses all rents for land, nature, and privilege. The average person would not suffer the consequences of unwanted unemployment, so wages would rise across the board. The average person would own only a homesite of average value, but no commercial or industrial or mineral or agricultural or spectral or environmental sites, so they?d pay land dues of an amount far less than the taxes they now pay. The average person would get the same hefty rent share as other citizens. And meanwhile, thanks to accelerating techno-progress and decelerating debt, the cost of living would nigh daily be dropping. Soon, one?s rent share would be bigger than one?s wages! Living off the automatic and irrepressible bounty of nature and society, not off arduous labor or clever capital, imagine how that would change the worldview and values of the average person.
Sharing is not inflating but transforming
Americans live by the business model. We all know the slogans, ?buy low, sell high?, and ?run government like a business?. Rather than condemn such mottos, the left should employ them. Have government charge full value for its permits ? everything from deeds to charters. Americans could not fault government but would salute it for charging, as would any rational businessman, as much as the market would bear; ?what?s good for the goose is good for the gander.?
Since we citizens are the stakeholders, and since the market value of public privilege belongs to all of us, then most of us (d) could clearly see that we?re entitled to an equitable share of surplus revenue. Places where residents do receive a dividend, such as in Alaska, people do more than admire rent recovery ? they celebrate it. If we citizens were made beneficiaries of such sound business practice, the thoughtful citizen would easily see that the public recovery of rent is a necessary ? and fair ? prelude to the disbursement of shares into their own pockets.
Realizing a venerable ideal, this geonomic practice would align self-interest with social interest. The self is served by not paying taxes on efforts while getting a dividend. Society is served by recovering rents while losing subsidies for special interests.
The secondary effects would be transformational. Recovering all rents would drive efficient use of resources and claw back the economic and political clout of the elite. Fattening the dividend would spread prosperity and shrink the oppressive power of the state.
This big picture, long term vision fulfills a promise greater than a way to pay everyone an extra income without generating inflation. Yet the grander world follows from the same reform ? sharing rents in lieu of taxing efforts ? as does the single benefit of avoiding inflation. While the thoughtful person would appreciate knowing that a Basic Income or Citizens Dividend would not merely raise prices by a like amount, thoughtful people might be inspired to meld into a movement upon realizing that we need not serve the economy, we can straight away make the economy serve us.