TP15. Why the Crash of 2008?

The problem –
Signs of trouble. – Around the turn of 2007 and 2008, there were signs that serious economic trouble was brewing. In Britain, and also in the United States, the housing market, which had been buoyant for several years, began to wobble. Businesses which were concerned directly or indirectly with house sales and mortgages – including banks, building societies and financial institutions – began to run into difficulties. By the second half of 2008 it was clear that this trouble was affecting a great many other folk too. Not only were people who were seeking to buy or sell houses experiencing unexpected problems, but unemployment and inflation were rising too. All kinds of businesses, including those with no obvious links with the housing market, were running into trouble.

The housing market

As the first signs of trouble which the general public noticed were concerned with housing, it is useful to look at housing first, and then at other matters. What we call a “house” is really two entirely different things, which behave in economics in very different ways. There is the building, and there is the land on which it sits. Building materials follow the ordinary laws of supply and demand. If there is a demand for more of them, then the price goes up. Resources are deflected from other places, and the demand is met by increased production.

But land is completely different. The amount in existence cannot be changed. As Mark Twain put it long ago, “They ain’t making it no more.” So increased demand cannot lead to increased production. What it does generate, however, is rising prices for what already exists.

In the prosperous years of the early 2000s, there was growing demand for houses. The price of “houses” – really the price of the land on which the buildings sat – began to soar. People guessed that prices would continue to soar, which pushed the demand further. Eventually, around the beginning of 2008, prices peaked and soon began to drop.

Wider problems

People noticed these developments with house prices because so many folk are – or want to be – householders. But similar developments were taking place elsewhere in the economy. They affected farm prices, prices of industrial land and shop prices. This had a big, and ultimately disastrous, effect on the economy in general.

An astonishing thing about all this is that people who might be expected to be experts in such matters were just as badly misled as were ordinary folk who have never studied economics. As we have just seen, banks, building societies and the like have been in grave trouble. Clearly, they didn’t anticipate the present crisis, and loaned a great deal of money without proper security, anticipating an indefinite rise in prices which would enable them to recover the loans they made. Many lenders burnt their fingers badly. Nor did either the Government or the Opposition foresee it, and make provision in good time.

Why? Read newspaper articles on economic questions, or official documents, and you will see. Nearlv all of them fail to make that absolutelv vital distinction between land and other things.

At the time of writing, in the autumn of 2008, the experts seem to agree in forecasts which – this time – are likely to prove correct. Jobs will be lost. Firms will collapse. Some people will lose their life savings. Mortgages will be foreclosed and people will lose their homes. No doubt there will be spectacular “rescue operations” by both governments and private bodies, which mayor may not moderate the disaster; but the general picture is bad for a considerable time to come.

As with most disasters, this slump or depression or whatever we care to call it is not entirely attributable to a single cause. Other factors – like the rise in oil prices, developments in the United States, faults in corporation law, some shady speculation by people seeking to fish in troubled waters and the short-sighted selfishness of a few individuals – have had an effect and have made matters worse than they would otherwise have been – but this should not fog our understanding that fluctuations in land prices were of immense importance.

Eventually, no doubt, things will begin to recover. When prices seem to be at rock-bottom, people will start to buy goods, to invest money and to develop productive industry. The process will then escalate. Everything will creep up to another boom. That boom will present its own problems. To give but one example, would-be first-time buyers will be priced out of the housing market. Then, in a few years, things will peak again, and suddenly there will be another slump. Unless we find ways of smoothing out land prices, the boom-slump cycle will continue indefinitely.

Preventing a recurrence

An essential measure in dealing with the boom-slump problem in the future is a big change in our taxation system. Everybody knows how arbitrary much of it is, and realises that a large part of the money collected from the taxpayer never goes to the social need which it is supposed to serve, but is swallowed in collection and administration costs. It is equally apparent that a large proportion of the tax burden is eventually passed on to the consumer, and production is impeded in the process.

Suppose that we try a different kind of tax, based on an understanding of the unique way in which land behaves in economics. This is known as Land Value Taxation, or L VT for short. All land in the country – housing land, agricultural land, industrial land, commercial land – would first be valued. The valuation would ignore the value of buildings, crops or other things which human effort has put on the land. Expert valuers assure us that this would be a relatively cheap job, provided that lots of unnecessary questions were not asked as well. The valuation would automatically take into account any planning rules which affect value. As land values fluctuate, it would need to be revised from time to time. When the valuation is complete, a tax would be imposed, based on that valuation. The LVT would be low at first, but would be increased as time went on. Meanwhile, other taxes would be reduced.

This would greatly reduce the boom-slump cycle. When boom conditions were beginning to develop, and land prices began to rise in consequence, the LVT would rise too. This would stop the economy becoming “overheated”. In times of relative recession, less money would be collected in LVT, and therefore more money would be left for spending, investment and providing jobs, thereby averting a disastrous slump.

Other benefits

But L VT would do many other useful things, as well as smoothing out the boom-­slump cycle. It would, for example, bring idle land on to the market, for the owner of land which was unused, or inadequately used, would no longer find it profitable to hold it out of use in anticipation of future price rises. The land would pay the same LVT whether it was used or not, and to hold on to idle land would merely mean holding on to a tax burden. This would clear many eyesores from the middle of towns. By bringing that idle land into use, it would reduce the pressure for developers to move on to greenfield land, and would therefore benefit the environment.

LVT would provide an excellent way of financing public works. At present, the taxpayer frequently pays for works from which he derives no benefit. With LVT, people who benefited from public works would pay more tax, while anybody who actually lost from those works would find his tax reduced.

By bringing land into its best use, LVT would greatly reduce poverty and unemployment. It would provide a much fairer form of taxation than the taxes which exist today. At present, governments tax people for the useful things they do through (for example) Income Tax and Corporation Tax. They tax people on the things they buy through VAT and import duties. By contrast, L VT merely collects revenue from people who wish to occupy natural resources which nobody has created.

A fuller study of the workings of trade cycles is provided in Crash Course, obtainable from the Land Value Taxation Campaign, clo 54 Woodway, Hutton, Brentwood, Essex CM13 2JR. There are many publications dealing with other merits of LVT obtainable from the Land Value Taxation Campaign, from LANDISFREE, clo 73 Fairfax Road, Teddington TW11 90A, and from the Henry George Foundation of Great Britain Ltd, 212, Piccadilly, London W1J 9HG

FOR FURTHER INFORMATION PLEASE CONTACT:
Land Value Taxation Campaign, at http://www.landvaluetax.org