Reply to Grace Blakeley’s Post-Brexit UK measures

by Serban V.C. Enache

In this article, Grace Blakeley outlines the economic and financial plights of the United Kingdom, how Globalization failed the working class and her proposed solutions for a post-Brexit UK.

I do not agree with some of her assumptions, nor with her policy prescriptions.

For starters, though Blakeley mentions the ‘rentier share’ that rose from 5 percent in 1970 to 15 percent in 2007, she makes no mention of actually capturing economic rent. She makes no mention of the land-value tax.

Nonetheless, she talks about financial speculation contributing to rising house prices, to the appreciation of the currency, and the negative impact these two things had and have on domestic manufacturing and on the exports sector.

In this post of hers, Blakeley argues that “the Bank of England should have a house price inflation target, implemented by limiting the amount of credit that banks are able to issue for house purchases.”

Further on she states the desire to levy a tax on all financial transactions and the desire to tax the shadow banking sector and banks in general at higher rates. She stresses that the revenue from these taxes should go toward ‘an industrial strategy to promote’ the exports sector.

I will begin my criticism as follows…

Firstly, contrary to her claim, the UK’s Current Account Deficit doesn’t mean the country is running on borrowed money. Accounting-wise, it means the Foreign sector net saves in British pounds. In turn, the Foreign sector sends net output to the UK. So in truth, UK consumers are financing Foreign sector exporters (aka, they create demand).

The composition of the trade balance and its impact on domestic employment and domestic wages is what matters. The physical threat is unemployment, skill erosion, and plants working with high excess capacity or closing down, the equipment being transported abroad or sold for scrap. Blakeley insists that British manufacturers have lost their competitive edge due to rentierism and speculation. Yet, again I point out, she makes no mention of the need to capture (tax) economic rent; the rental value of land in particular.

I suspect the BoE doesn’t have the capacity to do this under the current financial legislation (i.e. limit the amount of loans banks give for house purchases). And even if it could cap composition of bank portfolios, the banks would simply use intermediaries and subsidiaries to bypass the rule. For example… In 2016, in the US, 50% of mortgages were originated by non-banks.

Now then, let’s get something straight. Buildings are man-made, they are capital (capital is the produce of spent labor). Land, in contrast, has no cost of production. It is a natural monopoly. It’s important to distinguish between the two. Of the entire value of property in the UK, land makes up 51%. Landowners and homeowners didn’t create that 51% value. That is simply unearned increment / windfall gain.

I also find it strange that since she wishes to combat speculative financial flows and the rentier share of GDP, she makes no mention of ZIRP (Zero Interest Rate Policy) – which the BoE could easily do tomorrow and maintain in perpetuity. Blakeley isn’t calling for an end to interest on the national debt (a subsidy to the holders of Government bonds).

In 1921, Thomas Edison spoke publicly against usury in an interview with The New York Times. He called for Government to invest in public works without increasing existing taxes, levying new ones, or fattening bankers with interest. Since this spending would be aimed at expanding the productive powers of the nation, it would carry no inflation risk.

“The people must pay anyway; why should they be compelled to pay twice, as the bond system compels them to pay? The people of the United States always accept their Government’s currency. If the United States Government will adopt this policy of increasing its national wealth without contributing to the interest collect – for the whole national debt is made up of interest charges – then you will see an era of progress and prosperity in this country such as could never have come otherwise.”

As for a ‘financial transaction tax,’ this will get rolled down onto consumers – and being a regressive tax, it affects both speculative and non-speculative transactions. Taxing shadow banks? Yeah, good luck with that so long as the banking sector remains unregulated on the asset side. Consumption taxes don’t punish firms, they punish consumers. It’s the consumers who pay the wages, not the firm. The firm simply intermediates the money. Henry Ford was honest enough to say so too.

A full land-value tax would fix most if not all of the problems Blakeley identifies for the country. As for the foreign owners… they would have to either put the land to good use, or sell it off; and under a 100% LVT, their profits will be closer to zero instead of farther from zero as it stands today.

As for banks lending to bid up & profit from increases in land values, they wouldn’t be able to do that – because such collateral would be slapped with a 100% LVT. Lending of this type would not only be discouraged, it would yield next to zero profit. And, of course, assessing the value of land and taxing land is a much easier task than chasing paper or electronic balance sheet statements across the globe, running through a complicated bureaucratic maze.

Let’s take Taiwan for instance. Its land value increment tax is levied at progressive rates between 20 percent to 40 percent, based on the increase in land value. Japan, during the 19th century Meiji Restoration period, took steps toward becoming a Great Power. One key measure was the change in its taxation system by levying a money tax calculated on the land’s potential, not on its actual yield. If I own 1000 acres of land, and only work one tenth of it without being penalized by the Government’s tax code, the public is in fact subsidizing idle land (inefficiency) and my unearned increment – which I derive from the public and private enterprise of the community around me.

For the banking sector, the following asset side rules would suffice in curtailing speculation and dropping down rates on loans to firms and consumers.

Doing away with the inter-bank market, as it serves no public purpose. Make the BoE lend directly to member banks. Make it illegal for banks to mark their assets to market prices, to have subsidiaries, to accept financial assets as collateral for loans, and to sell assets to 3rd parties. The only collateral banks would be allowed to accept is the credit analysis they themselves made for the would-be debtor customer. Banks would only be allowed to service and keep those loans on their own balance sheet. They would be prohibited from engaging in any other profit making venture outside basic lending.

Most advocates of public banking or of complete nationalization of the banking sector fail to address the issue of behavior. The Government for instance owned RBS, but RBS still gave LOBO loans to Local Councils. It doesn’t matter who the rent-seeker is, a Government or Private agent. Rent-seeking is rent-seeking.

Now, then, the issue of British exports… Government doesn’t have to reinvent the wheel, nor does it have to devalue its currency to ensure demand for British export firms.

Like I argued in this article on Trump’s Trade Wars, the UK Government can simply loan British pounds to partner countries, with the requirement that those funds can only be used by the debtor states to purchase output manufactured in the UK. The UK is a developed nation, albeit in drastic need of public investment in things like public utilities, skill development, and the like… It doesn’t need tariffs or currency devaluation for it to secure demand for its exports sector. The African markets are growing; the UK once had colonies on that continent. Why not try and repair the bad blood between them through fair bilateral agreements on trade? After WW2, the US did the same thing to rebuild Western Europe; they loaned them US dollars, so they could absorb US exports. It was a win-win for both camps.

Also, the Government could have a ‘nationalistic’ call for tenders clause, in which firms competing for those Government contracts would have to use first and foremost domestic resources, and foreign ones only in case there’s a domestic shortage.

In the last part of her article, Blakeley mentions the need to find new schemes to enhance the lives of workers and pensioners. I wrote on this subject, particularly on the plight of the 1950s women, in my last article. There I stressed the need for a 100% land-value tax, a lower retirement age for both men and women, a living pension for all, the abolition of mandatory contributions (regressive taxes on labor that don’t finance anything) and a complete refund of all contributions paid prior to their abolition date.

Conclusion

People can paint themselves in whichever political colour they want. So long as they don’t have the correct premise in mind and the logical means to handle things stemming from that correct premise – they’re just giving false hope to people. That’s my view. I’m not being paid to research or write any of this stuff. I am doing it purely on my own time and dime as a hobby.

This narrative that focuses solely on foreign funded speculation, tobin tax proposals and transaction taxes while ignoring LVT is a case of: we don’t like foreign rent seekers, but we’re ok with domestic ones.

Serban V.C. Enache is a Romanian journalist and indie author. Though interested in history, politics, and economics, his true passion is for medieval fantasy fiction. https://www.amazon.com/Serban-Valentin-Constantin-Enache/e/B00N2SJD6O/ He can be reached over Twitter. https://twitter.com/SerbanVCEnache

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