OVERHEATING   OF   THE   ECONOMY

Published by THE GEORGIST EDUCATION ASSOCIATION, INC., at: http://www.multiline.com.au/~georgist
10 Broome Street, South Perth, Western Australia, 6151; Telephone (08) 9367 5386 (international +61 8 9367 5386); Fax (08) 9367 4547 (phone first); E-mail: georgist@multiline.com.au or write your COMMENTS on our  VISITORS' PAGE.

OVERHEATING OF THE ECONOMY..THE REAL CAUSE; by Cecil Stowasser

Many economists assert that 6 per cent unemployment is necessary for a healthy economy.   On the contrary, any amount of unemployment is unhealthy.   Certainly, is is not good for the mental and physical health of those unemployed, including economists!   Further, it is bad for the community, since production is not maximised, working people can easily be exploited because they are competing for jobs, and extra taxes have to be imposed to pay unemployment benefits.

Most economists appear to believe that full employment would overheat the economy because higher employment levels would lead to higher wages and, consequently, excessive spending in relation to limited supply and higher production costs.   Hence, inflation would follow.

I believe that these contentions are fallacious.   Certainly, there would be more spending.   However, higher employment is followed by higher production.   Thus, the extra money in the economy is balanced by extra goods and, therefore, there is no reason why prices should rise.   In fact, increased employment and production should lead to lower prices because of the economies of large-scale production and sale in relation to fixed overheads, the increased division of labour, mass production, lower unit costs, etc.

When actual data is examined, it is found that, in the past few decades, wage increase have been slightly ahead of the increase in the cost of goods and services, but the increase in the price and rent of land has shot well ahead of both.

Overheating of the Economy_The Real Cause; by Cecil Stowasser

This brings us to the core of the problem.   In times of expanding production, that is, boom times, an ever-increasing amount of money goes into land prices and locational rents, rather than into buildings and machinery.   In other words, there is more money in the economy without a proportionate increase in goods.   Thus, the production expectations are not fulfilled, and the huge loans given by the banks fuel land speculation, leading to the so-called "Overheated economy."

The ever-increasing land prices and location rents of boom times are directly due to a pernicious tax system that punishes producers in every possible way and, at the same time, exempts land values from contribution to revenue, despite the fact that the community creates land values through the presence of people and their productive activities.   Therefore, the tax system directly encourages people to hold land out of use, and the artificial land scarcity thus created forces would-be producers to pay an ever-increasing rent or price for the right of access to land.

There is only one remedy, namely, to eliminate all taxes that stifle production and raise prices and, instead, to collect for the community the full yearly rental value of all marketable land, whether used or not, so that land prices and private locational rents cease to exist.   Land prices are the reflections of the total yearly surplus profit, discounted over the years, that can be made from a marketable site as compared to a marginal site of the same size.   If, yearly, this rental surplus is taken for the community, no-one would be prepared to pay a price for land.   Landowners, however, would either be obliged to put their land to use so as to pay the communal rent, or relinquish title, selling any assets on the land, such as buildings and machinery.   In the former case they could either rent to others, passing on locational rent to the government and keeping the rents from their buildings, or they could run their own enterprises on the land.

Some empirical data to justify the above follows:

From 1978 to 1988 the price of commercial land in Victoria increased by 550%.   Melbourne home sites increased by 270%.   In the same time, wages increased by 150%, the C.P.I. by 140%, and productivity by 180%.   (7) In 1968 the average price of a vacant Melbourne homesite was $3659 and the average after-tax earnings $2825.   In 1988 the figures were $46,050 and %19,959 respectively!   Thus, land prices had shot well ahead of ability to pay for them.   As land prices rise, greater loans have to be taken out and the total of interest payments increases geometrically.   A loan of $90,000 involved a total interest repayment of $216,227.   A loan of $70,000 reduced the interest repayment to $59,497. (4)

In 1987 the total value of all Australian real estate was $639 billion [$639,000,000,000].   The total national income was $210 billion.   In 1989 the respective figures were $1,021 billion and $273 billion! And in 1992 $715 billion and $310 billion.   Thus it can be seen that monstrous land speculation led to a subsequent collapse. (1)

In the U.S.A. from 1950 to 1990 construction workers’ wages increased by 350% in monetary terms, building costs by 330%, the C.P.I. by 340% and land prices by 2,000%! (12)

In 1907 an English agricultural labourer’s wage was 15 shillings per week.   It is now 140 pounds per week, that, is, a monetary increase of 148 times.   A typical farm site of 120 foot frontage and 180 foot depth was bought in 1907 for 90 pounds.   This plot was sold in 1995 for 95,000 points! That is, a monetary increase of 1000 times. (8)

In Japan, from 1960 to 1990 the land price inex increased from 200 to 13,400.   In the same period, the wage index increased from 100 to 1600, that is, land prices increased four times more than wages. (3)

Land price increases as compared to building cost increases

In real terms, building costs have reduced dramatically over the past fifty years because of labour-saving technology such as nail guns, concrete mixers, prefabricated materials, bulldozers, etc., etc.   Yet, the average cost of housing, in real terms, has become more and more prohibitive because building cost reductions have been more than counterbalanced by rising land prices.

OVERHEATING OF THE ECONOMY_THE REAL CAUSE; by Cecil Stowasser

Residential land values increased by 333% from 1980 to 1992 in the Perth region of Western Australia.   They increased by 700% during the same period in the Margaret River area.   In 1992, in the latter region, homesite prices ranged from $85,000 to $180,000.   The average cost of actual house-building was $50,000. (2)   The land price component of Australian real estate sales went up from 8% of the national income in 1972 to 22% of the national income in 1989.   Land price formed 70 of the total value of real estate in 1989. (1)

In that property boom year, real estate sales totalled $87 billion of which the land component was $61 billion. (11)   In 1979 on the Australian Gold Coast, $300 million was spent on land purchase, and only $80 million on actual building.   In real value terms, building costs have roughly halved over the past twenty years, because of technology.   At the same time. Land prices have, on the average, roughly quadrupled. (7)

Land speculation as cause of booms and slumps

The sequence of -- booms leading to land price rises, leading to slumps -- is well illustrated in the following Australian data:
1971-73:   Land boom.   Real estate sales (R.E.S.) reach $12 billion.   Inflation.
1974-75:   Slump (Recession). R.E.S. drop to $6 billion.
1981:   R.E.S. reach $8 billion.   Recession follows in 1982-83 and R.E.S. drop to $6.5 billion.
1984:   Another land boom commences and reaches its peak in 1989 with R.E.S. OF $18 billion!   High rises in prices follow, and R.E.S. drop to $10 billion by 1992. (1)

1989:   Real estate values totalled $87 billion.   Equity transactions only totalled $68 billion.   The total of national income was $280 billion.   The total of land values was $750 billion. (10)

In Tokyo, the Land Price Index rose from 100 in 1984 to 230 in 1992. (13)   The consequent slump is well known, and led the government to consider a substantial increase in revenue from land values.

Australian real estate values totalled $40 billion in 1986, $87 billion in 1989, and $64 b in 1993.   There was abnormally high inflation between 1986 to 1989.   Land prices reached their peaks in 1973, 1981, 1989, and 1994.   Each peak was followed by substantial recession. (10)

Connection between Taxation and land speculation

Speculation in land is closely tied to high taxation of production.   In 1972 taxation took 28% of national income, and the land component of mortgage repayments was 30% of the national income.   By 1990 taxation took 40% of the national income, and the land component of mortgage repayments stood at 50%; that is, taxation of production was forcing people into land speculation rather than investment in to productive enterprises. (10)

It can be concluded from the above data that real wages have seriously declined over the past twenty years, mainly because of the vast increase in the locational cost element of the price or rent of a house or flat.   Fifty years ago it took the average wage-earner about half a year’s work to afford a home site.   Now it takes about two years’ work.   Fifty years ago the average price of a home site was about one quarter the cost of a house.   Now it is half the cost of a house. (7)

REAL WAGES HAVE DECLINED BY ABOUT TWENTY PER CENT OVER THE PAST TWENTY YEARS. (7)   HOW THEN CAN ECONOMISTS MAINTAIN THAT OVERHEATING IS DUE TO WAGE INCREASES?

(1) Anatomy of Depression.   Land Values Research Group, Tax Reform Australia, GPO Box 2688 X, Melbourne, Victoria, 3000.
(2) Real estate sales handout.   Denmark, W.A.; 1995.
(3) Hasegawa Tokunosuke.   Recent Data on Land Prices in Japan, Institute of Economic Research and Construction, Tokyo, 1990.
(4) Australian Year Book.   Property sales statistics; various years.
(5) Australian Financial Review.   5 Nov 1996.
(6) News Chronicle.   Perth WA and suburbs, 8 Nov 1996.
(7) L.Hemingway.   Rent as Revenue.   1990, ISBN 0 959836047.
(8) Land and Liberty.   July 1995.   United Committee for Taxation of Land Values, 177 Vauxhall Bridge Road, London EC4, England.
(9) Progress.   August 1983.   Tax Reform Australia, Melbourne.
(10) Bryan Kavanagh.   The Recovery Myth.   1994.   ISBN 0 909 9460 27.
(11) Progress.   August 1993.
(12) Center for Public Dialogue.   10615 Brunswick Ave, MD, 20859, U.S.A.
(13) Land and Liberty.   May/June 1992.

Overheating of the Economy_The Real Cause; by Cecil Stowasser

ACKNOWLEDGEMENTS:  Some of the music is from an overseas Priory!   For some other acknowledgements, see other documents on this Website.
Copyright© reserved to the author/s and/or owner/s of all original material.   The Association disclaims all damages from alleged problems arising from this Website or the Internet in total; no legal responsibility taken.   Any Copyright material or Trade Marks used, whether marked or unmarked as such, are declared to belong to their owner/s.   For all these details see   Disclaimer, Copyright and Trade Mark Statements

Have you considered helping AMNESTY INTERNATIONAL for Prisoners of Conscience and Free Speech?

For a quick jump to LIST of documents on this website, click  
52 54
Spellchecked on Word, made on HTML Assistant Pro3, to WWW 22 July 1997, last revised 25 November1997
DOC. 53:   URL= http://www.multiline.com.au/~georgist/heating.htm
For electoral purposes, all documents on this Website authorised by John Charles Massam, 10 Broome St.,
South Perth, 6151, Western Australia