SA60. How to Restore Economic Growth, by Fred Foldvary, Ph.D.

None of the candidates for office are discussing what would really make the economy grow.|

The candidates for office in 2016 have been discussing ideas about promoting economic growth, as the US economy has had a sluggish recovery since the recession ended in 2009. The Federal Reserve has pushed interest rates down to historically low levels, and that policy may have prevented even worse outcomes, but artificially low interest rates fueled previous asset bubbles and has fueled an artificial rise of land values and stock market prices. What has been missing is an analysis of what causes economic growth.

Growth and development originates in the desire of individuals to improve their condition. That desire induces people to work and to invest in capital goods and skills. The incentive to engage in this progress gets blocked by the artificial costs imposed by government. Moreover, where government artificially boosts growth from subsidies, the result is often a waste of resources. We can witness this happening now in China, where years of promoting construction has resulted in excessive real estate malinvestments, which, as this has stopped, the downturn in China now infects the global economy.

The economy can be effectively regulated with a liberty amendment thats removes all restrictions on actions which do not coercively harm others. The liberty amendment would also abolish laws prohibiting drugs, replaced by stronger laws that inspect and punish fraud and provide better disclosure.

The first step towards restoring economic growth is to stop the waste of resources that comes from subsidies such as mandating ethanol fuel from corn. Second, eliminate laws and regulations that impose unnecessary costs and restrictions on enterprise, such as the prohibition of trade with Cuba. The economy can be effectively regulated with a liberty amendment thats removes all restrictions on actions which do not coercively harm others. The liberty amendment would also abolish laws prohibiting drugs, replaced by stronger laws that inspect and punish fraud and provide better disclosure.

Growth is also hampered with immigration laws that prevent persons already in the USA and Europe from working and connecting with the legal economy. Enable persons already here to legally work without fear of getting deported, and open immigration to all who seek peace and employment.

Replace government funding of schools with vouchers that enable parents to choose the educational opportunities of their children, including, if they wish, schools that have a federal standard. College and vocational students can be made free of much of their student-loan debt if they have better opportunities for part-time work, and can keep all of their wage.

The US already invests much in education, but there are badly performing schools. Replace government funding of schools with vouchers that enable parents to choose the educational opportunities of their children, including, if they wish, schools that have a federal standard. College and vocational students can be made free of much of their student-loan debt if they have better opportunities for part-time work, and can keep all of their wage.

Taxes and mandates on labor have priced US labor out of the world market and have resulted in both unemployment (including discouraged workers not counted) and an increasingly lower labor participation. Replace minimum-wage laws with a bigger earned-income tax credit, so that the burden of raising the income of the poor is not concentrated on their employers but is put on the economy as a whole. Again, the key issue is where the funds come from.

Given the large amount of current taxation and borrowing, the most important policy change governments can do is to reduce the marginal tax rates, replacing them with higher fixed taxes. There is one area where high marginal tax rates make sense, and that is a charge for creating more pollution and other environmental destruction. Strangely, few candidates are calling for higher pollution taxes, especially to replace costly regulations. The way to have a fixed tax rate is to tap the value of income that exists independently of any transactions. That income is the implicit rent of land, the value that a highest-bidding tenant would bid.

Economics and common sense tells us that human action weighs marginal benefits, the gain from doing more of something, with marginal costs, the cost of additional amounts. Taxes today have high marginal costs. There is an income tax on extra labor and investment, a sales or excise tax on extra purchases, a higher property tax with more construction, and some candidates seek a tax on extra business revenues.

There is one area where high marginal tax rates make sense, and that is a charge for creating more pollution and other environmental destruction. Strangely, few candidates are calling for higher pollution taxes, especially to replace costly regulations.

Otherwise, the way to have a fixed tax rate is to tap the value of income that exists independently of any transactions. That income is the implicit rent of land, the value that a highest-bidding tenant would bid.

There is a concept in economics called Kaldor-Hicks efficiency, in which a policy change is an overall improvement when those who gain may compensate those who lose and still be ahead. This also provides equity when those with losses are actually compensated. Therefore a tax shift that replaces marginal-cost taxation with fixed-cost revenue would compensate landowners for any net loss. To do this, compute the annualized cost of the present value of a person’s future tax payments. Compare that with the annual land-rent payment. Most persons and enterprises would have a net gain. Those with net losses would be compensated with bonds.

The problem is how to achieve a more efficient and equitable source of government revenue with the least shock to the existing system. There is a concept in economics called Kaldor-Hicks efficiency, in which a policy change is an overall improvement when those who gain may compensate those who lose and still be ahead. This also provides equity when those with losses are actually compensated. Therefore a tax shift that replaces marginal-cost taxation with fixed-cost revenue would compensate landowners for any net loss.

To do this, compute the annualized cost of the present value of a person’s future tax payments. Compare that with the annual land-rent payment. Most persons and enterprises would have a net gain. Those with net losses would be compensated with bonds.

With this prosperity tax shift, the economy would grow so fast that rent would also rise and be sufficient to gradually buy back the bonds. The greater employment would also reduce welfare costs. Economists recognize the efficiency of fixed-cost taxes, but are not promoting public revenue from land rent because they have been led to believe, from misleading national income accounts, that land rent is a tiny portion of national income rather than the third of total income that studies have found in Australia.

It is not Wall Street, but the growling ground beneath all our streets that will cause the next global disaster. Nature’s land is offering to pay all our public revenues, but people reject her offer, and insist on inflicting one another with punitive taxes.

Even the challenger green and libertarian party candidates are not promoting an efficiency tax shift. We need to keep warning people that we are once again on a river streaming to another financial waterfall, and it is not Wall Street but the growling ground beneath all our streets that will cause the next global disaster. Nature’s land is offering to pay all our public revenues, but people reject her offer, and insist on inflicting one another with punitive taxes. Perhaps in this next economic cycle people will realize that financial reforms were not sufficient, and treating the symptoms didn’t work, and finally try the effective remedy.

© Text Copyright 2016 Fred Foldvary, Ph.D. All rights reserved.

FRED E. FOLDVARY, Ph.D., is an economist and has been writing weekly editorials for Progress.org since 1997. Foldvary’s commentaries are well respected for their currency, sound logic, wit, and consistent devotion to human freedom. He received his B.A. in economics from the University of California at Berkeley, and his M.A. and Ph.D. in economics from George Mason University. He has taught economics at Virginia Tech, John F. Kennedy University, Santa Clara University, and currently teaches at San Jose State University.

Foldvary is the author of The Soul of Liberty, Public Goods and Private Communities, and Dictionary of Free Market Economics. He edited and contributed to Beyond Neoclassical Economics and, with Dan Klein, The Half-Life of Policy Rationales. Foldvary’s areas of research include public finance, governance, ethical philosophy, and land economics.

Foldvary is notably known for going on record in the American Journal of Economics and Sociology in 1997 to predict the exact timing of the 2008 economic depression—eleven years before the event occurred. He was able to do so due to his extensive knowledge of the real-estate cycle.