Unfortunately, we can’t do much about the recession. It would have happened without the lockdown; it may well have happened without the pandemic. Thanks to the virus, however, it’s going to be worse than anything we’ve seen in peacetime.

A common definition of a recession is two consecutive quarters of negative economic growth. The last time that happened in the UK was in 2008 and 2009, when the economy shrank over five consecutive quarters. It was the deepest recession since the war. The Covid recession will be much, much deeper. GDP will fall (is falling) by percentages never previously recorded. It’s hard to put an exact number on it. But if you look up the figures for previous recessions, they’ll give you a rough idea — as long as you add a nought on the end.

Suggested reading

Our government must learn to fail

By Peter Franklin

This may be the least of our concerns right now, but the economic historians of the future are going to have a real problem with their graphs. Whether it’s the long-term trend for GDP, productivity, unemployment, debt, bankruptcies, and so on, the figures for 2020 will be so extreme as to flatten all the peaks and troughs in the rest of the series. It’ll be like painting a watercolour of the Chilterns, then dropping in Mount Everest by way of contrast.

I’d imagine the charts drawn up for the 21st century will just leave a gap for what we’re going through right now. Instead of a straightforward reference to the year “2020” it’ll be “2020*” — the asterisk referring to some apologetic footnote. (*Sorry, we do have figures for this year, but they’d completely mess up the y-axis — and, quite frankly, you wouldn’t believe us anyway.)

Whether or not there’s also a 2021*, a 2022* and a 2023* depends on two things: firstly, beating the disease and getting out of lockdown, of which I’ll say no more; and secondly, stopping the recession from turning into a depression.

*

A depression is more than a long recession. If a recession is like a hangover, then a depression is like alcohol poisoning. Both have the same cause — but the latter involves an altogether more serious level of risk and requires active intervention to prevent serious harm or even death. In a depression it’s not just a case of one or more vital parts of the economy slowing down, but shutting down altogether.

Think about the last recession. A build-up of unsustainable debt could have caused the global financial system to collapse (together with everything that depends on it), but governments around the world intervened to bailout key institutions, deal with bad debts and provide emergency stimulus programmes. The global economy was kept conscious, had its stomach pumped and was gradually nursed back to a semblance of normality. Despite the depth of the recession, most countries avoided a depression (Greece being a notable exception).

Suggested reading

The permanent punishment of the Greek people

By Peter Franklin

So what should governments do now? For a start, they need to realise that this time is not like last time. There are no precedents to go on — we’ve never locked down the global economy before. And there’s lots that we still don’t know about the long-term economic consequences of doing that.

Most fundamentally, we don’t know whether the biggest hit will be to supply or demand. Both have been knocked flat, but a huge amount depends on which recovers fastest. The conventional wisdom is that the supply-side of the economy will be be the first to get off the ground. After all, we’re not actually at war. Our towns and cities haven’t been bombed, our transport infrastructure is intact, the factories are still standing, and the working age population is largely untouched. So, in theory, the productive capacity of the economy is still there — much of it forced into inactivity, but ready and waiting to roar back into life.

The demand-side of the economy appears to be in worse shape. Yes, there’s a degree of pent-up demand waiting to burst forth — shaggy-haired mobs will lay siege to every hairdresser as soon as they re-open. But on the other hand, household finances will be seriously depleted — which will have long-lasting consequences for consumer confidence. Add in the return of mass unemployment, the impact on business investment plans and, perhaps, a cultural shift against frivolous consumption, and we can expect demand to be deeply affected for years to come.

In such circumstances the job of government is to provide substitute demand — either directly through its own spending or indirectly by acting to put more money in our pockets (for instance, through tax cuts or by unconventional measures like helicopter money).

Suggested reading

Could free cash fix the economy?

By Peter Franklin

Managing to find the funds to provide this demand is going to be a challenge in itself — but that could be the least of our problems if it turns out that the supply-side of the economy isn’t, in fact, ready-and-waiting to bounce back.

In the wake of the last recession, government used very low rates of interest and measures like quantitative easing (QE) to defibrillate the economy. There were fears that they’d overdo it — unleashing inflation. In the event, those fears went unrealised — in part because of a globalised, just-in-time economy that’s really good at ramping up supply to meet the level of demand, while continually squeezing out costs. All governments had to do was restore the flow of cheap credit (which got disrupted in 2008) and those hyper-efficient supply chains did the rest. 

This time, however, it’s the supply chains themselves that have been disrupted. It’s not just that borders have been closed and national economies locked down: when the borders re-open and the lockdowns are lifted, we’ll find that the supply chains are missing essential links — key companies gone bankrupt, essential personnel laid-off. And so if a fractured supply-side turns out to be the main constraint, then the default recovery mechanism (i.e. stimulating demand) could do more harm than good by adding runaway inflation to our woes.

Governments can’t stimulate supply as easily as they can stimulate demand. But there are some temporary measures that can help — like the furlough scheme to enable companies to hold on to their employees. Not pushing businesses into bankruptcy through impatient tax demands is also a good idea.

On the international level, I’d recommend not starting a trade war with China — and definitely not a real war. Don’t get me wrong, there will need to be a reckoning — and we should avoid getting any more wrapped-up in the corporate tentacles of the Chinese state. But the longer-term aim of strategic de-globalisation, though necessary, is a dish best served cold.

In the immediate aftermath of the pandemic the last thing we need is to precipitate a global supply crunch. Avoid that, and the task of preventing a depression remains merely gargantuan instead of just plain impossible.

*

So assuming that we are in a position to take a mainly demand-side approach, how should we go about it? There is, of course, the question of where the money’s coming from. That’s something I wrote about last month — in particular, the idea of getting central banks to buy government debt so that the state can spend more. Yes, this is tantamount to turning on the printing presses, but as a one-off response to what we must hope is a one-off crisis, it’s the least worst option. It does, however, require international co-ordination. If, say, Britain goes it alone with the funny-money, then Sterling would collapse in value and then it’s hello hyper-inflation.

Suggested reading

Who will pay for this Covid catastrophe?

By Peter Franklin

In 2008, Britain played an important role on the international stage — catalysing a coherent global response to the financial crisis. It was the one thing that redeemed Gordon Brown’s otherwise miserable premiership. With America embroiled in its turbo-Trumped electoral politics and the EU wracked by another existential crisis, the UK needs to step up once again.

That, however, requires Boris Johnson to field a ministerial team capable of commanding national and international respect. And, right now, he’s not. This is how Tim Montgomerie (formerly of  UnHerd), a stalwart supporter of Boris Johnson, put it in a series of tweets last week:

“I’ve rarely had so much feedback from Tory MPs to a Tweet but my concern at the >>UNNECESSARY<< weakness of the govt frontbench and of the No10 operation seems to be widely shared…

” …while there is recognition that the PM has been ill and that the enormity of events would test event [sic] the most experienced of administrations, Boris should not mistake this goodwill and patience for satisfaction with govt performance…

“…the immediate crisis is only the start. The economic fallout will have greater consequences. Boris can’t continue to surround himself with yes men & women. An A-team of Brexiteers AND Remainers is needed to steer UK away from the rocks. TICK-TOCK, TICK-TOCK! Act soon Boris!”

The current Cabinet is a product of a recent, yet now defunct, era of British politics. Its purpose was to make a political point (i.e. get Brexit done), but the task before us now is to steer this country — and, to a non-negligible extent, the world — away from the rocks of depression.

There seems to be little appetite for a government of national unity, but at least we could have a government of the most experienced and capable people available in the Conservative ranks. Former Cabinet ministers like Penny Mordaunt, Greg Clark and Sajid Javid should not be on the backbenches. Indeed, we should bring back former Prime Ministers — specifically Theresa May and David Cameron — into government. If these individuals aren’t in Parliament, then ennoble them. If others, like David Gauke, aren’t now in the Conservative Party, then let bygones be bygones and readmit them.

Of course, the A-team would, for their part, have to toe the government line on Brexit. They’d also have to put aside any ideological hang-ups about government intervention; because, make no mistake, government will have to intervene left, right and centre — doing whatever it takes not only to beat the pandemic, but to save the economy.

*

There will be bail-outs again — and not just in the financial sector (though expect the build-up of bankruptcy and bad debt to have consequences there too). Government needs to be ready to own (and manage) more of the economy than it has done for decades. At this stage, we don’t know which industries are going to topple over — obviously it’s looking grim for the airlines, things can’t be good for the train companies, and, of course, it’s a calamity for the leisure and retail sectors.

Not only do ministers need to make extremely rapid, strategically sound decisions about what to save and what not to save — they must also act for the common good. Justice, not just efficiency, must be served. Corporate big-hitters who used share buy-backs and use other tricks to engineer their way to short-term financial gain should pay a heavy price. Private equity firms that bled their holdings dry should expect to lose everything. Landlords should be treated with as much — or as little — mercy as they’ve shown to their tenants. Oh, and companies registered in tax havens can be bailed out by those tax havens.

But, beware, not every corporate malefactor is on its knees. Look up, and you’ll see the vulture capitalists circling in the sky — hoping to gorge themselves on distressed assets. The recovery will be impeded if we allow the wealth extractors of the rentier class to eat themselves sick. National and local government must be primed to buy up property — especially high street property — before the scavengers swoop down. The Chancellor should take forward plans to shift the tax burden onto land speculation — that should put the vultures off their dinner. Tory Georgism, your time has come!

The Covid crisis is a shattering experience. Even if we avoid a depression, we’ll be living in its shadow for a generation. Yet it’s also a once-in-a-lifetime opportunity.

In the wake of the 2008 crisis, government just wanted to get things back to normal. They succeeded all too well — restoring good things like job creation, but also preserving the worst features of neoliberalism.

The effect of QE on asset prices gifted unearned wealth to speculators. Fat, lazy companies got even fatter and lazier thanks to the dynamics of market concentration — leaving the economy starved of the investment and competition on which real growth depends. The tech giants were allowed to privatise our data while turning tax avoidance into an art form. And, of course, the biggest corporate scam on the planet — China’s debt-generating, export-led economy — was all but unchallenged (as was the boutique version of much the same thing, i.e. Germany).

This time, the new normal needs to be different from the old normal. Right now, the economy’s on the operating table awaiting life-saving surgery — and, obviously, saving the patient’s life is the priority. But while we’re at it, let’s take the chance to remove buried shrapnel, reset badly-healed fractures and cut out the cancers that were slowly killing us anyway.

*

Of course, any doctor would tell you that elective surgery is generally best delayed until the recipient has recovered from the emergency operation. But this is an economic, not a medical, intervention. An economy doesn’t just run on things like money supply and investment (the equivalents of blood pressure and vital nutrients), it also depends on intangibles like hope and optimism.

After the crisis of 2008, which was the consequence of a self-inflicted debt-fuelled binge, people wanted a return to discipline (even if the worst offenders did get off too lightly). The current crisis, though, is of very different kind. We did not bring the catastrophe upon ourselves. This is something that was done to us — our economy broken and traumatised by an external cause.

Suggested reading

The things we do for growth

By Peter Franklin

Perhaps we did need to wake up to the multiplicative risks of our hyper-connected world. But now that we know that we can’t take stability for granted, we need something more than materialistic complacency to keep us going.

We need purpose and vision, and though these are things that should be drawn from many sources, government policy must play its part, including economic policy. As during the Second World War and in the immediate post-war period, we need a sense of mission — of building a better, fairer, safer world.

In short, to avoid depression we need inspiration. But one thing’s for sure: it won’t come from a second decade of austerity.

If you Google the words “gentrification” and “excrement” (though mind how you go), news stories about the Golden City predominate. For instance, Forbes has an informative briefing on the issue by Adam Andrzejewski, CEO of OpenTheBooks.com. We learn that “since 2011 there have been at least 118,352 reported incidences of human fecal matter on [San Francisco] city streets”. A tastefully brown-coloured bar chart of “human feces incidents” shows that this is a growing problem – the bars get longer every year.

Last year, the San Francisco mayor created a “poop patrol” to literally clean up the city. Using payroll information, Open The Books estimate that each “human waste case” costs the taxpayer $32.75, not including “sunk costs” for steam cleaning equipment, etc.

Suggested reading

Down and out in the Golden State

By Peter Franklin

The fact that this, and the associated epidemics of homelessness, drug use and crime, is happening in one the most economically advanced and politically liberal cities in the world is an irony lost on no one.

As Karen Heller puts it in the Washington Post “everyone agrees that something has rotted in San Francisco”:

“Conservatives have long loathed it as the axis of liberal politics and political correctness, but now progressives are carping, too. They mourn it for what has been lost, a city that long welcomed everyone and has been altered by an earthquake of wealth.”

Erica Sandberg for the City Journal says that “many in law enforcement blame the crime wave on Proposition 47, which in 2014 downgraded possession of illegal narcotics for personal use and theft of anything under $950 in value from felonies to misdemeanors”. But clearly the impact of an out-of-control property market cannot be ignored. Farhad Manjoo quotes the key stats in a piece for the New York Times:

“One of every 11,600 residents is a billionaire, and the annual household income necessary to buy a median-priced home now tops $320,000.”

It’s not just the obvious consequences this has on homelessness, it’s also that runaway rental values are driving out the workers and businesses that a city needs to function as a community and flourish as a culture – especially a place like San Francisco whose character depends upon its diversity.

Karen Heller mentions the case of Lucca Ravioli – an Italian delicatessen that has closed its doors after 94 years; the land it stood on was sold off for millions to a developer.

Worse is yet to come. According to Alexis C Madrigal of The Atlantic “eight major tech companies” are expected to hold initial public offerings this year – all but one headquartered in San Francisco. That means a huge pay-out for the industry elite – who will, if the established pattern holds, pump a lot of that money into the local property market, driving prices even higher.

No wonder property turnover is so low in the city (“only 5,471 properties changed hands last year out of almost 400,000 units,” says Madrigal). Who wouldn’t hold on to an asset sat astride a river of gold?

Suggested reading

The cost of property may slowly kill Silicon Valley - but a Land Value Tax might give it new life

By Peter Franklin

Needless to say, San Francisco’s supposedly progressive politics is rotten with nimbyism. Farhad Manjoo points out the hypocrisy:

“Not-in-my-backyardism is a bipartisan sentiment, but because the largest American cities are populated and run by Democrats — many in states under complete Democratic control — this sort of nakedly exclusionary urban restrictionism is a particular shame of the left.”

Not that we can expect the Republicans to do much about the problem either – after all, there is a property developer in the White House. But perhaps the biggest failure is that of the tech industry. In one sense, they are the victims too – with landlords creaming off the value created by genuine entrepreneurs. One response is to join the landlord class. But those who still believe in generating wealth as opposed to extracting it should get up and leave.

Yes, there are reasons why particular industries cluster together in particular places. Proximity enables interaction and therefore creativity. But might there be a law of diminishing returns at work here? A point at which different perspectives become so bled into one another that they become indistinguishable?

Heller describes the “homogeneity” of the San Francisco knowledge class:

“Too expensive. Too tech. Too millennial. Too white. Too elite. Too bro.

“To take a midday tour downtown is to be enveloped by a jeaned and athleisured army of young workers, mostly white and Asian, and predominantly male. The presence of a boomer or toddler is akin to spotting an endangered species.”

There’s an argument that the tech industry, having changed the world is previous decades, is stagnating. Perhaps in hollowing out the things that made San Francisco special, big tech has done the same to itself.

Suggested reading

Is it all over for the big tech companies?

By Peter Franklin

America was built by pioneers who left over-crowded places to start afresh somewhere new. The tech ‘bros’ should get their get their shit together and do likewise.

But this year it kept on popping up in conversation. For instance, here is the Dutch historian and Davos panelist Rutger Bregman, delivering a few home truths. It was Bregman’s first visit to the conference, it’ll be interesting to see if it’s also his last.

Suggested reading

It’s time to tax the super rich

By Richard Godwin

There was an interesting exchange at another Davos event – this time featuring Michael Dell, the founder and CEO of Dell Technologies. Reporting for the Washington Post, Hamza Shaban writes that Dell was asked about the Alexandria Ocasio-Cortez plan to tax incomes exceeding $10 million at a rate of 70%:

“[He] first responded by saying he’s more comfortable allocating significant resources through his private foundation than handing over that money to the government. But then he answered more directly.

“‘No, I am not supportive of that, and I don’t think it would help the growth of the U.S. economy,’ he said in response to questions from The Washington Post.

“When Dell was asked to explain why he thinks that, he said, ‘Name a country where that’s worked — ever.'”

Happily, an expert was on hand:

“Co-panelist and MIT professor Erik Brynjolfsson jumped in to offer an answer: ‘the United States.'”

In America’s post-war golden age (a time of rapid economic growth), the top rate of income tax was considerably higher than 70%, around the 90% mark in fact.

But did the rich actually pay tax at anything like this rate?

Not according to Scott Greenberg of the Tax Foundation:

“The data shows that, between 1950 and 1959, the top 1 percent of taxpayers paid an average of 42.0 percent of their income in federal, state, and local taxes. Since then, the average effective tax rate of the top 1 percent has declined slightly overall. In 2014, the top 1 percent of taxpayers paid an average tax rate of 36.4 percent.”

The Tax Foundation, though not as rabidly anti-tax as some free market think tanks, obviously has its agenda. However, the data in Greenberg’s article comes from a paper by Thomas Piketty (and colleagues) which, one can safely assume, was not concocted in the service of radical libertarianism.

The figures are for all taxes, not just income taxes, and for the whole of the top 1%, not the sub-fraction that constitutes the super-rich. Nevertheless, they do indicate that very high marginal income tax rates, of the kind favoured by Ocasio-Cortez, don’t make that much of a difference to what the rich actually pay. There are various reasons for that, says Greenberg, but here’s the most pertinent:

“…it is very likely that the existence of a 91 percent bracket led to significant tax avoidance and lower reported income. There are many studies that show that, as marginal tax rates rise, income reported by taxpayers goes down.”

Under communism, the people of the Soviet Union used to joke ‘the bosses pretend to pay us and we pretend to work.’ Under capitalism, the bosses of the West can joke ‘the people pretend to tax us and we pretend to pay.’

Suggested reading

Could America's Democrats be 'Corbynised'?

By Ruy Teixeira

As Warren Buffet reminded us in 2011, the super-rich aren’t even paying today’s much lower top rates. This presents a problem for the fantasy socialism of the populist left – if you can’t tax the super rich at 35% then how do get them to pay 70%?

But it’s also a problem for the equal and opposite extreme: if the slashing of top tax rates in the neoliberal era was so transformative, why are the tax havens still in business? And if tax cuts for the rich are so enlivening of enterprise, why is GDP and productivity growth slower now than in the decades when top tax rates were much higher?

Of course, it suits both sides to regress the tax debate to the 1970s – with simplistic ‘tax and spend’ slogans from the Left and equally simplistic ‘cut taxes and grow’ rhetoric from the Right. It also suits the media to focus on headline-friendly tax rates, rather than ask more penetrating questions about how income and wealth are generated in the first place. Whether tax policy distinguishes between income derived from genuinely productive entrepreneurship and the ill-gotten gains of rent-seeking speculation is much more important than where one sets the theoretical top rate.

Admittedly, there are those on both the radical Left and the free-market Right who do delve deeper into underlying problems like the rentier economy and who do explore novel solutions such as land value taxation. Yet this is complicated stuff that not only requires an effort of thought and explanation, but also blurs established ideological battle lines. For the old warhorses of the outdated Left-Right spectrum this a threat – indeed a prospect leading to the knackers’ yard.

Braindead statism needs unrepentant capitalism to stay relevant and vice versa.

Suggested reading

Test article

By Charlotte Pickles

Office blocks need office workers, hence the multi-billion pound upgrades to London’s dense rail network. Once down-at-heel termini, such as London Bridge and St Pancras, look more like international airports now – and poor old Euston, devastated by 1960s redevelopment, is set to follow (as part of the HS2 mega-project).

But amid all that activity Gwyn Topham reports for the Guardian on a possible counter-trend :

“Rail passenger numbers in the UK fell last year to 1.7bn in the biggest decrease since privatisation in the 1990s, casting fresh doubt on the viability of struggling franchises.

“According to figures published by the Office of Rail and Road, usage fell by 1.4% in the 2017-18 financial year, the first annual fall since 2009-10 and the biggest since 1993-4.”

What could be going on? It’s certainly not due to rising unemployment, which in the UK is at multi-decade lows. Nor has London property become so cheap that people can suddenly afford to live in town.

Further reading

How to introduce a Land Value Tax tactfully

By Peter Franklin

It’s true that there was disruption to rail services in the first quarter of this year as a result of ‘severe weather conditions’ (Brit-speak for a bit of snow); but there’s evidence to suggest that something deeper is afoot:

“Season ticket sales have plummeted 9.2%, suggesting commuters no longer place the same faith in the rail network, when fares have risen inexorably while services are beset by strikes and overcrowding…

“An industry source said: ‘There were four or five franchise agreements which relied on massive growth rates … instead of which we are seeing them in decline. There is a structural problem here which could dwarf the timetabling issues, because it is more widespread.’”

The train operating companies, particularly those serving the London commuter lines, have long relied on a captive market. All the while that it continues to prosper as a global city, and as long as sky-high property prices force workers to live outside of the capital, the assumption is that commuters have no choice but to buy season tickets – no matter how steep the fare increases or how unreliable the train services or how lousy the customer experience.

But when you bet your whole business plan on a key assumption, there’s one vital question that must be asked: how could it possibly be wrong? That’s an open question, by the way, not a rhetorical one.

In the case of train companies, the flaw in the assumption is that commuters have no alternative. That’s not because the internet has turned us all into telecommuters. Indeed, one of the ironies of the digital age is that physical proximity to colleagues, clients, and suppliers is often at a higher premium than ever before – hence the growing importance of global cities. And yet, what people are also realising is that proximity isn’t needed all of the time. Indeed, there’s a point at which face-to-face becomes in-your-face and you need to get away just to get some work done.

Working from home for at least part of the week isn’t just something that employers increasingly allow, but increasingly require – because it enables them to reduce desk-to-employee ratios and hence the eye-watering cost of renting office space in London.

Topham quotes a representative of the train companies:

“‘While technology may mean fewer people are travelling into work every day, anyone taking the train into our major cities will know that investment to run more trains is essential.’”

If commuters don’t have to come in everyday, then, often, there’s also no reason for them to arrive first thing on the days when they are in, meaning they don’t need to travel peak time or buy a season ticket.

While this enables commuters to substantially reduce their travel costs, it has the makings of a revenue crisis for the train companies – and indeed for those other rent-seeking monopolists, London’s landlords.

And what a shame that would be.

Further reading

You wait ages for an electric bus, and then three hundred thousand turn up

By Peter Franklin

The basic argument is that when land prices – and, therefore rental values – soar (largely as a result of other people’s efforts), the returns to the landowner shouldn’t just be taxed, but taxed in preference to most other forms of income or wealth generation.

Suggested reading

The cost of property may slowly kill Silicon Valley - but a Land Value Tax might give it new life

By Peter Franklin

Of course, you can’t tax the value of a piece of land if you don’t know what it is. In their new book Radical Markets: Uprooting Capitalism and Democracy, Glen Weyl and Eric Posner propose an ingenious means of valuing not just land, but all other taxable assets. In a critique of the book for CapX, Sam Bowman summarises its big idea:

“Weyl and Posner suggest a system of taxation where, in principle, everything is available to buy, all the time. A homeowner or patent holder, for example, must declare the price they would sell their house or patent for – and if someone comes along and offers them that, they will have to sell. Assets are taxed annually on that valuation – they suggest a rate of 7 per cent – with the proceeds distributed evenly among a country’s citizens via a cash ‘dividend’.”

Bowman points out that the impact of such a measure would be ‘dramatic’:

“Asset prices would fall by between a third and two-thirds of their current level, since the taxes that will be owed in the future would be priced in today. The large 7 per cent tax proposed by Weyl and Posner would raise roughly 20 per cent of national income – enough to eliminate other taxes on wealth and capital, and in the US pay for a $5,300 per person ‘dividend’ as well.”

In reality, no responsible government would engineer such a precipitous drop in asset prices – which would bring the banking system crashing down too. Any shift in taxation to land and other asset values would need to be introduced gradually — with the aim of calming not breaking the property market.

Taking that as read – and focusing solely on its application to land – are there any other objections to the Weyl-Posner proposal?

Bowman argues that you don’t need a Land Value Tax to deal with land owners who use their holdings to obstruct or ‘ransom’ much needed development – compulsory purchase powers could do the job instead. A less restrictive planning system would also help, he adds.

Suggested reading

Singapore shows there’s more than one way of doing capitalism

By Peter Franklin

However, as he says himself, “we have to tax something”. That being the case, taxing land is just about the least bad option. Putting up taxes on production means less production; putting up taxes on consumption means less consumption; but putting up taxes on land makes no difference to the amount of land, which, for obvious reasons, remains constant. The only thing a land tax disincentivises is property speculation – which is economically unproductive and socially useless.

The real problem with the Weyl-Posner proposal is the same thing that makes it brilliant – i.e. getting land owners to value their own land. The brilliant bit is giving the state the right to buy the land at the self-assessed value, which incentivises land owners not to under-value it. The problem is that this is manifestly unfair. Householders and small businesses are unlikely to have the expertise required to value their land accurately. Erring on the side of caution, they’d most likely over-value – and thus end up paying more in tax than professional speculators and major landowners. Alternatively, a few might naively under-value their land and thus face the compulsory purchase of a home or a workplace at a knockdown price.

However, there is an obvious solution, which is to turn the proposal on its head. Instead of owners valuing each piece of land, the state would do it; and instead of the state having a right to buy it at that price, the owner would have a right to sell – thus incentivising the state not to over-value (and thus over-tax) the land. This would be less oppressive, putting the onus of accurate valuation on the state and without placing ordinary property owners under a general threat of compulsory purchase. 

I’ve come to believe that some form of Land Value Tax is not only feasible, but necessary. However, new taxes are always controversial. To introduce them requires not just cleverness and courage, but also wisdom and tact. 

For instance, here he is in conversation at an event hosted by the Economic Club of New York. The interview lasts about 50 minutes and is fascinating throughout.

Reporting on the event for Yahoo Finance, Julia La Roche leads with his most striking comment:

“One thing I’ve been thinking about as a venture capitalist in Silicon Valley is the vast majority of the capital I give to the companies is just going to landlords. It’s going to commercial real estate and even more to urban slumlords of one sort or another. And that’s an odd thing to be doing as a venture capitalist. That’s so disproportionate…”

Thiel is a free market libertarian – he’s got no problem with people getting rich through their own efforts. Indeed, he’s not exactly poor himself.

However, the landlords of Silicon Valley and its environs aren’t primarily benefiting from their own efforts. Land values in and around San Francisco haven’t reached ridiculous levels because of what landowners have done, but because of what others have done – above all the innovators and entrepreneurs of the tech industry.

It is the geographical concentration of talent, knowledge, investors and supporting infrastructure that makes particular locations so attractive to incomers – the San Francisco area being a classic example:

“Back in 2005, Thiel was asked during a panel discussion at Stanford University where the next Google (GOOGL) might emerge.

“At the time, Thiel answered that he thought there was a 50% chance that the next Google would be within a 5-mile radius of that room. Unbeknownst to him, that company was Facebook (FB), which was just 1.8 miles away and a company he had invested in early.”

Now, Thiel thinks that the high cost of living is helping to drive innovators and entrepreneurs out of the area – therefore making it less likely that the next big thing will happen locally. Rent extraction doesn’t just suck value out of what local economies have already achieved, it also inhibits the ability of those economies to reinvent themselves – i.e. it is a force for stagnation.

But is there anything to be done about it? Like any limited resource, space in a sought-after location needs to be allocated somehow. Assuming we don’t want a centrally-planned state system in which the state gets to decide who works where, there seems little alternative to the property price mechanism.

What can be done however, is to levy a windfall tax on surging rental values. Properly structured, a Land Value Tax would automatically fulfil this function.

Recommended reading

Could a Land Value Tax tame unscrupulous landowners?

By Liam Halligan

Such a tax would be paid by the landlord not the tenant. It couldn’t be ‘passed on’ to the tenant in the form of higher rent, because rent levels would already be at whatever the market can bear. The tax would therefore he paid out of the landlord’s income and by making land ownership less profitable should have a calming effect on property prices – and ultimately rent levels.

Furthermore, the revenue from the tax could be used to fund the regeneration of other parts of the country (or even the same city) – thus increasing the supply of suitable space for business.

Alternatively, the revenue could simply be used to cut other business taxes, in particular employment taxes – thereby shifting the burden of taxation from job creators and on to rentiers.

Recommended listening

Test article

By Charlie Pickles and Tom Copley