Compass gives no direction

If you were to ask us what we would do in the present state of the economy, our reply would be that we would not have got into this mess in the first place. In the early 1990s, when the Labour Party was developing its policies, we urged its policymakers to implement the system of land value taxation which the Campaign was set up to promote.

Let us suppose that Labour had pursued our policies with vigour when it was elected in 1997. By around 2005, the government’s finances would have been in a healthy state, debt would have been falling, and the welfare bill would have been shrinking as unemployment and benefits-dependency dwindled to the levels last experienced in the 1950s. The banking crisis would have largely passed Britain by, since there would have been no land price bubble-and-bust. Any impact from abroad, such as a drop in demand for exports, could have been taken care of by catching up on the country’s backlog of repairs to its infrastructure, and by bringing forward new projects. Of course, those in the banking, insurance, and financial services businesses who had wanted to continue in the old ways, could still have invested and dealt in foreign government and corporate bonds and in dodgy derivatives. They might have caught a cold in the process, but the consequences would have been for them to bear.

By 2005, the main economic target would have been not growth as such, but the country’s aggregate land value. Amongst the benefits would have been that vanity projects would have been seen for what they were, as giving rise to little or no additional land value, and that environmentally damaging schemes would have been seen to have a price tag.

But we are where we are. The government is committed to its plan of retrenchment, in the belief that this will in due course put the country on the path to prosperity. There is, we have been told, no Plan B.

We are not the only people who are unconvinced by this display of faith that things will somehow just correct themselves. Earlier this week, Compass, a socialist think tank, published its own “Plan B” for an alternative economic strategy. It calls for an emergency programme for growth, cuts to be reversed, a new round of quantitative easing, the cancellation of private finance initiatives, the introduction of a financial transaction tax, more efforts to close the tax gap, land value taxation, a green initiative and a tranche of infrastructure projects.

Policy rag-bag

With contributions from a couple of dozen individuals, the document embraces a wide range of issues. Unfortunately, because Compass is working from deficient theory, it amounts to a rag bag of disconnected policies, some good, some positively harmful and some plain barmy.

Thus, land value taxation gets a mention and then the authors move on. The socialist instinct for control is in full flood. There is a call for more intervention in the economy, both nationally and globally, with “the creation of a powerful global financial supervision authority”. Plan B also has ambitious plans for Europe, with proposals for giving direct powers of taxation to the EU through the currently fashionable financial transaction tax, together with stronger institutional integration and cooperation inside the Eurozone. The Keynesian assumptions are evident with talk of  “global demand deficiency”, and again, the assertion that “if demand could be restored and the employment rate increased, in combination with growing the UK’s productive capacity, a significant proportion of the structural deficit would disappear…”

The vagueness of the good intentions is revealed in the expression of the wish to “prioritise fairness over greed”, whilst the shakiness of the economics itself shows in the use of the terms “productive capital” and “finance capital”; we are told that the needs of the former should be prioritised over the latter.

It notes, correctly, that there is unused capacity in the economy, with “spare office space, equipment and labour readily available”. The authors refer, quite rightly, to the failure of the banking system, where lending by the commercial banks “created unsustainable asset price inflation, in housing notably, whilst poorly serving ‘useful’ economic activity. But – and this is where the lack of a coherent model of the economy shows – there is nothing to suggest that the authors of Plan B understood the mechanism that has brought the economy to its present pass. The banks alone were not to blame. It takes two to tango, and the role of the equally reckless borrowers is ignored. Thus, the relationship between borrowers and lenders is never explained. What did the damage was reckless borrowing to buy land at prices made artificially frothy through speculation, combined with reckless lending on the strength of those artificially frothy land prices, used as collateral for the loans. This reckless lending in turn helped to fuel the price bubble, unsustainably, propelling events towards the inevitable bust. Had land value taxation been in place by around 2002, it would have prevented the growth in the bubble. The failure in understanding is also the reason why Plan B fails to observe that were LVT in place now, it would help both to bring back into use the unused capacity, referred to earlier, and prevent the growth of land price bubbles in the future.

Wretched litany

The wretched litany of tired and failed old policies continues. To reduce income inequalities, it proposes strengthening of the collective bargaining system, as though the absence of such a system was the underlying reason for the development of inequalities in the first place, which of course it is not.

Needless to say, carbon emissions come in for attention, with proposals for a “Green New Deal” to “kick start the economy by training a ‘carbon army’ to implement a multi-billion pound, carefully costed programme to fit energy efficiency (sic) and appropriate renewable generation equipment to all UK buildings, thus generating thousands of jobs…”

This is probably the low point in the jumble of policies that make up Plan B. Apart from simple, obvious and inexpensive measures, it takes decades before most energy-saving proposals have paid for themselves, which then raises the question whether they save more energy than goes into making them? But also revealing is the phrase “generating thousands of jobs”, which places Compass firmly in the job creationism camp.

A discussion on the tax and benefits system indicates that there is at least a glimmer of appreciation of the harm done by taxes on wages, goods and services, and how the shape of the benefits system locks people into unemployment. But calls for a closing of the tax gap and a crack-down on tax havens miss the point that under the tax system as presently conceived, avoidance and evasion on a large scale are inevitable. Thus, in our view, the solution is not, as proposed, “making the income tax system more progressive”, nor is it putting “many more people on the task of correctly assessing and collecting tax.” We suggest that present taxes need to be phased out and replaced by LVT, if only because, not only do they have heavy deadweight cost to the economy, but, alarmingly, “the ratio of tax collected to the cost of overheads is around 10: 1” – in other words, collection costs are 10% of the yield.

Probably the most useful thing in the document is a well-informed section on transport, presumably written by the experienced commentator Christian Wolmar, which asserts the need for a focus on local and relatively small-scale projects rather than flagship schemes.

Conclusions add up to nothing

So this Compass gives no direction. Due to the lack of anything like a coherent model of the economy and the economic process, the conclusions add up to nothing. Were the authors working from the same model as those of us within the Campaign, the relationship between seemingly disparate problems and issues would become apparent. It would also be seen that the substantial replacement of existing taxes by land value taxation would largely suffice to realise most of their aspirations, without the need for heavy-handed intervention.