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The "other side" of my interest in Land Value Tax is the role of land values in the money supply. Remember the money supply? We kept a close eye on it through most of the eighties, thanks to the notion that the inflationary pressures of the seventies were caused by government creating too much "base money" - the cash created, at virtually nil cost, by the Bank of England.

It became the prime target of the monetarists - control the money supply and you control inflation - that song again comes to mind from the 1979 General election campaign - "We'll count our blessings if we apply/Tight control to our money supply".

So who do we think creates the money in our economy? The crinkly stuff we increasingly rarely keep in our pocket or wallet of course is created by the Bank of England. Nowadays it doesn't have any backing in gold. But still, it's in quite short supply. In fact, there's only about £45bn of it in existence. It's the "M0" figure in this table.

So, how do we maintain an economy that turns over nearly 27 times this in GDP? Where is the money, the units of account that actually account for all this economic activity? Well, they're a fiction, existing merely as data in one or other of our banks' computers and pixels on a screen. In fact, there is nearly £1.5 trillions (thousand billions or million millions) of this debt money in the system at any one time. How did it come about? It's all borrowed into existence. All except that M0 figure of about £45 billion.

So only about 3% of the money, the units of account, at any one time existing in bank accounts is this base money. Who creates the rest? Even though you expect it to be converted, if you will, on demand into real green and crinkly stuff, it is actually simply created when someone borrows money from a commercial bank.

So there's the first anomaly. We may believe that the money in the economy is created for us, for nothing but the administrative cost of doing so, by the Bank of England, actually 97% of it is created by private commercial bodies. Banks. And for the privilege of having them create our money instead of the Bank of England, we pay anywhere between about 4% and 20%+ for it each year, in interest. And even though it is created effectively in our name (because it's convertible, seamlessly, with the real stuff), we have virtually no control and certainly no accountability over who it is created for or for what purpose.

Ah, many people cry, but surely the banks' balance sheets balance - they have as much in deposits as they have in loans don't they? Well, on paper they might, but there has to be at least 97% of those deposits themselves that came in turn from someone, somewhere, borrowing. Well, all that tells us is that most of that money supply is in fact permanent. You may borrow it for a few months or years, you may repay it at the end of that period, but in order to maintain the required number of units of account to oil the economy, someone somewhere has to go on borrowing it.

And this is where the speculative value of land comes in. Most of that borrowing is down to us, individuals, and in particular those with mortgages. Mortgage debt makes up about two thirds of this total money supply. And, the sharp eyed amongst you will realize that in order for us to maintain that level of borrowing, over time land values must increase so that we end up being paid more than we have borrowed when we sell our homes. Otherwise we'd all soon be bankrupt. Because vendors have, even if they don't appreciate it, a monopoly on the location they want to sell, the purchasers can be induced into bidding it up - basically in order that the levels of borrowing meet the demand for money in the system.

Yes, you are right, it is a house of cards. More than that, it is a confidence trick. We believe our money is created by the Bank of England, against the "full faith and credit" of the people and economic activity of the UK. In fact, the price we pay for housing, being mostly land value, is talked up in order to ensure there is enough borrowed money in the system. There was a seventeenth century Scotsman, John Law, who was outlawed across half the known world, for trying to pull the same confidence trick on the people of France who needed a new way of backing money in a financial crisis - it was ultimately all tied up in the foundation of New Orleans, incidentally - Law's land based money was used to develop Louisiana.

Why mention this now? Well, in today's Times there's a report that the Bank of England is now a little concerned about the amount of this lending in the economy. That it is likely to fuel inflationary pressures - more money, based on land rather than production, chasing the same amount of production, is inflationary. The requirement to repay that money stock over and over again with interest means that ever more has to be created.

Debt money is more inflationary than base money. Base money used, in the sixties, to account for more than 20% of our money supply. Now its just 3%. All the complaints in the seventies and eighties about money supply growth were focussed on the nasty Labour government creating base money not for funding more production, but for funding more demand by paying workers, mostly public sector ones, higher wages to cope with existing inflation. But the real problem is that creating more base money, in this devil may care world where the commercial banks use that effectively as margin to lend however much they like, means that exponentially more debt money can be created. Which is the real threat to inflation and stability? The debt money of course. There's vastly more of it. It grows faster, both in percentage terms and in absolute terms, and it costs much much more to service. Because base money only costs what it costs to produce - a half a percent for printing if notes, even less for administration if it could be done, as the commercial banks do it, electronically. As opposed to the annual 4% and more for commercially created money.

This debt money erodes our futures. It is why we have to relentlessly pursue growth. And finally, the Bank of England is showing some sort of concern about it - it's grown four times faster than the economy this year alone. But what could they do? This is where Land Value Tax comes into it for me.

If you tax land values, if instead of expecting people to pay 100% of the value of land up front to the previous owner, who did nothing to create that value as a landowner, which creates a need for this vast borrowing just to give us the basics of shelter, and instead collect that value annually over the lifetime of someone's occupancy of that land in the form of land value tax, you would deflate land values, vastly reduce the amount of debt money that has to be created to finance it, and leave a gaping hole in the money supply. A gaping hole that the Bank of England could fill with cheaper base money.

It already does all the sums required to make sure that it doesn't create too much. What does it do with those calculations at the moment? Well, it tries to moderate the amount of money in the system by tinkering with the interest rates at which it is borrowed into existence - the base rates. It is tackling a symptom and not the cause. And in doing so it acts against the economy - just when the economy needs a bit more liquidity in the system to finance "good borrowing" to prepare for the next phase of growth in real economic production, it has to tighten the supply - so companies and others investing before they make new wealth from the results of that investment have to pay more for it. It's quite bonkers really. But it makes a lot of people rich and creates a lot of vested interests. So it goes unchallenged. But it is us that pay for it ultimately, in higher goods prices, in higher land prices, and in all the interest that this debt mountain accumulates.

They could instead use those sums to actually inject real base money into the system, if they would only have the balls to set limits on the commercial banks so that they did not simply take that new money and create 30 times the amount in debt money. None of this would harm the commercial banks particularly. They would have to shift from being creators of money, our money, to being brokers of money, moving it from people who had it to people who needed to borrow it. All stuff they used to do much more of before we set them free to write their own pay-cheques at our expense.

Land Value Tax could be used then to fine tune that system, since any excess would likely find its way into uplifts in land values.

It's a multi-step process:

1. Bank of England works out, as it does now, the total amount of money required for the economy to function, to reflect the liquid wealth of the nation as a whole.

2. Instead of letting the commercial banks do it all, the Bank of England creates that money, and allows the government to spend it into existence. Either as infrastructure or supply side spending, or perhaps as a citizens' dividend - a lump sum entitlement each year to every citizen or resident in the country to spend as they want. Of course one would likely want them to do simple things like pay off the national debt first.

3. Bank of England uses interest rates as now and bankers' reserves as previously to moderate how much of that base money can be used to create more debt money by commercial lenders. All their other lending business has to be financed by matching savers against borrowers, as the building societies had to do until 20 years ago.

Result - we have a more stable monetary base, better controlled, and less speculative land value growth. Putting publicly created money and land value tax side by side, we could probably whittle away at the requirement for taking our earnings off us in the form of tax, such that we could probably quarter, in the end, the overall tax take.

Now, with that on offer, why does nobody want to listen?

Mortgages fuel surge in supply of money - Business - Times Online:

Mortgages fuel surge in supply of money
By Graham Searjeant, Financial Editor

BRITAIN’S money supply is growing at its fastest rate for 16 years, the Bank of England revealed, as mortgage approvals return to boom levels and consumers start to borrow more on credit cards again.
Annual growth in M4, the broad money measure that includes bank lending, reached 14.5 per cent in September, up from 13.7 per cent three months earlier. The surge comes only a week before the Bank’s Monetary Policy Committee (MPC) meets to consider a new Inflation Report and decide whether to raise interest rates for the first time since August.

The MPC ignored money supply for the first eight years of its existence. In recent months, however, some members seem to have become anxious that the relationship between money growth and inflation will reassert itself.

As our Lib Dem Tax Commission prepares to promote its policy paper in advance of Conference, where members will have to debate and vote on adopting what are really quite complex policy issues, and the Tories are getting the evidence together for their own tax policy group, William Norton helpfully outlined a "ten point briefing on tax policy" at ConservativeHome today.

It hasn't generated as much interest as the Bow Group suggestions from yesterday but it's equally important for the questions it seems to ask of policy movers and shakers when they are considering tax direction and what can be sold to the electorate. It charts the history of Tory tax pledges since the mid-seventies and the sort of promises that have been successful and the circumstances in which they can be successfully delivered.

For the Lib Dems, I think the most pertinent section lists the various Tory manifesto pledges during Mrs Thatcher's period in office. What surprised me was that when we think of that Tory government we have been conditioned to think of cuts, in tax and spending, in "selling off the silver" and yet the specific promises in those manifestos are so short, so light on detail that they're worth quoting here:

• 1979 Conservative Manifesto: “We shall cut income tax at all levels …and reduce tax bureaucracy. It is especially important to cut the absurdly high marginal rates of tax both at the bottom and top of the income scale….Raising tax thresholds will let the low-paid out of the tax net altogether…The top rate of income tax should be cut to the European average and the higher tax bands widened.” It was made quite clear that this would be paid for by an extension to VAT. More space was devoted to trade union reform.
• 1983 Conservative Manifesto: “Further improvements in allowances and lower rates of income tax remain a high priority, together with measures to reduce the poverty and unemployment traps.”
• 1987 Conservative Manifesto: “In the next Parliament: We aim to reduce the burden of taxation. In particular, we will cut income tax still further and reduce the basic rate to 25p in the £ as soon as we prudently can. We will continue the process of tax reform”.
• There was more detail in the 1992 Manifesto, which was only to be expected since the Election immediately followed Norman Lamont’s Budget and it repeated what he had said. For the longer term it promised: “We will make further progress towards a basic Income Tax rate of 20p. We will reduce the share of national income taken by the public sector. We will see the budget return towards balance as the economy recovers.”

Now sure, we all know that there must have been much work done behind the scenes, many figures checked and double-checked and the feasibility of different methods and time-scales for doing each of these studied in depth. But if it were today, someone like the Institute for Fiscal Studies would be straight on the story at the first whiff of a policy popping out to check whether the sums add up, seemingly to the penny.

Indeed we often deride politicians who suggest that they want to see the "books" properly when coming to power before risking making specific proposals for implementing such ideas. But it's common sense isn't it. Opposition parties do not have access to the whole of the Whitehall machine. Why should they be expected to know in advance whether their policies are absolutely solid? Gordon Brown is in power and changes the rules every so often to magic up some adjusted statistic, what chance those who cannot change the rules unilaterally?

And remember, in 1979 the Tories were also promoting what to many seemed a fanciful but far reaching shift in economic focus - from Keynesian state support for the economy to concentration at all costs on tight money supply control (I seem to remember even as a teenager at the time that their various Chancellors also changed the rules to suit them in this period - changing which monetary aggregates to monitor and the targets that should be applied).

And the public is skeptical too; perhaps - I don't know - more-so now than twenty-odd years ago, or maybe it's just more demanding, more prepared to believe Evan Davies than any politician. Rightly or wrongly we policy wonks seem to think they want all the detail before they can be convinced. And perhaps more crucially that more detail makes it all sound more convincing. And I'm not entirely sure that it does.

Direction rather than detail

So, when we get stuck into our debates up to and at Conference in a few weeks' time we should be thinking about very broad direction and not necessarily the detail of individual measures we might use if in power to get there. It might even help to be that much clearer about direction if we find ourselves having to choose one of the other parties to support after the next election. Parties traveling in the same direction on tax would find it easier to agree on different steps.

Yes, all the wonk work is necessary to give conference in particular and more widely the media and public some sense of how we would implement that direction but is far less important than we wonks would make out. The detail will change for a start, almost every day, every month from the day it is set in stone as "policy" as the economic environment changes. It will change dependent on the successes of implementing other policies should the opportunity arise. And direction, tax philosophy call it, is easier to convey to people than hypothetical examples of what we would have done in the particular circumstances of 17th September 2006.

A concentration on the detail as if it sells itself is what troubled Charles Kennedy that day during the 2005 election when he couldn't quite remember one specific set of variables that in the end really didn't mean much to real people I suspect.

And so...

William Norton finishes by reminding us that "perhaps the most important policy before either stability or tax cuts are sought is to decide how much public spending the country can afford, the items on which you want to spend it, and why."

As Liberal Democrats this is more apt even that for Tories. If we see economic and fiscal policy more as means to particularly desirable public or social ends then we ought to be ready, as we have shown in the past, to change our tax policies and outlooks in response to other policy desirables and external circumstances. Such was the case, for example, with the penny extra for education - we get criticism for dropping it, but dropping it was the right thing to do in acknowledgment that the right amount was now being spent, if not wisely or efficiently, in education, and that we no longer needed to raise more to fund it.

So here's my pitch - we already have a stated direction, from our mini manifesto of 1998 that we should reaffirm:

"[to] create a more sustainable and fairer tax system by shifting taxation onto pollution and resource usage and off people"

And for the detail, decide merely that this will mean:

• progressively lower taxation on incomes, profit and capital, replacing them with
• progressively higher taxes on scarce or depleting natural resources such as land, non-renewable energy, water, clean air of which the abuse hurts us all and of which the stewardship is ultimately a strategic function of us all expressed through the state.

If you believe us land taxers, we would have you believe that this will over time lead to a lower share of national income needing to be taken in taxes (even allowing for the current apparent consensus on higher spending on public services), as they will help stimulate efficiencies in an ever more uncertain market and raise economic prosperity more equally around the country and reduce the need for the massive intra-regional transfers that happen to prop up less prosperous regions.

Paying for what we take and use, not for what we make and save.

Technorati Tags: land value tax, lib dems, tax shifting, taxation, tories

It is an article of faith that I do not read the Daily Mail much. It's sort of on the "Index". But I do subscribe to Hitchens' blog on there as I like occasionally being wound up by him, knowing he's probably just round the corner from me somewhere in a house that positively glows with the inner anger one feels permeates his entire being.

So it is unusual to find something with which I agree whole heartedly:

Thud! Sorry, but can't you look where you're going?

In overcrowded Britain, walking along a crowded city pavement has become a test of alertness, social skill, forbearance, and patience. Even if you constantly adjust your course and speed to allow for the movements of other people, which I always thought was the thing to do, the others are often not doing the same. Read the rest of it here.

It's partly why I cannot stand being on Lib Dem policy working parties - the thought of trying to walk the "wrong way" down Victoria Street at the evening rush hour fills me with utter dread. But it happens wherever you go - corridors in my place of work where people (and not always students it has to be said) think that it's okay to walk four abreast engaged in their little conversation...."where the f*** do you expect me to disappear to so you can get past without moving?"

Being utterly unable to melt into a wall for such people I do now take a robust view, which is probably equally unsociable but necessary to preserve one's rights against people that are, basically, bullies, and stand full square to them (and I'm no stick-insect me of course!) and if they don't move I ready my shoulder for the inevitable bump (it's better if I am returning to my desk from the canteen with a full mug of hot tea of course!) and utter one of Peter's "sorries" as they go past:

I also say 'sorry' quite a lot, in the British sense of the word that means 'You moron. Why can't you look where you're going?' but which people often take for a genuine apology from me after they have trodden on my foot or hacked my shin.

When I started this blogging lark, I chose Blogger mainly as a way of getting a blog up quickly with as little effort and learning as possible in order to support Chris Huhne for Lib Dem party leader. I'd always intended when possible to move my blog to my own URL here at www.jockcoats.org.uk and my own server and software I could play with.

Since I went and bought another server, and set up a personal site using www.jockcoats.org.uk when I was running for election as university governor (which I've won, by the way thank you for asking, but more on that later no doubt) and since my Blogspot address got hijcaked rather embarrassingly by someone redirecting to a pretty explicit gay porn website at the weekend, I've decided to carry out that move now.

So I grabbed back my Blogspot address and redirect it to here, but if you are reading this and link to my blog at http://jockcoats.blogspot.com/ in your blogrolls and so on, maybe you could change that over to http://www.jockcoats.org.uk/ as soon as you can be bothered. I'm still getting used to the software, so things will probably change quite a lot over the next few days. For information, I'm using Drupal, and its blogapi module to allow me to continue posting through ecto.

Technorati Tags: blogging