Sunday, September 19, 2010

The Solution to the Housing Problem

Henry George (September 2, 1839 – October 29, 1897) was an American writer, politician and political economist, who was the most influential proponent of the land value tax, also known as the "single tax" on land. He inspired the philosophy and economic ideology known as Georgism, which is that everyone owns what he or she creates, but that everything found in nature, most importantly land, belongs equally to all humanity. His most famous work is Progress and Poverty written during 1879; it is a treatise on inequality, the cyclic nature of industrial economies and possible remedies.”  (Ref: Wikipedia)

This was a good idea that could never be implemented because all the property was in private hands.

Instead of pouring taxpayer money into banks to keep them from imploding from the devalued loans on their books, why not use the money to buy the land under their homes from the property owners. The homeowner could then use the money to buy down the value of their mortgage to the value of the structure, giving them a monthly payment they could afford, thus enabling them to keep their home. The bank balance sheet problems would be relieved by these buyouts. When the economy recovers and home owners are able to afford a higher monthly payment, the government could then start charging them for the lease of the land. In this way, government revenue will increase to pay off the debts incurred to make the purchase of the land.

If this practice is continued, eventually the government will own enough revenue producing land to pay off the government debt and begin to reduce other taxes. In this way, the Henry George land based economy could be implemented over time.

The program would have a side benefit in that it would allow government to prevent or offset future recessions by reducing rents instead of increasing spending, when private spending wanes in a recession. In boom times, rents could be increased to take some steam out of asset bubbles that were developing.

The program would also limit speculation in land by banks, hedge funds, and other investors, thus slowing the development of asset bubbles and the attendant crises when they burst.

The housing and real estate markets would be stimulated because the cost of a home would only be the cost of the structure, requiring less funding on credit.

The main entities that would suffer would be banks and speculators. Now isn’t that a shame!

The Henry George economy is discussed fully in the link cited above.

Friday, September 10, 2010

The Oil Boom in North Dakota

North Dakota family and friends know all this, but it might be of interest to others. As most of you know, North Dakota is the state that has been least affected by the financial crisis, and it is in no small part due to the oil boom going on there. And, the area where I grew up is right in the center of it.  The first well drilled in North Dakota by Murex Corporation, a company started by two North Dakota residents who became petroleum engineers at North Dakota State University, was drilled right on the farm where I grew up. It was one of the first horizontal wells drilled in the Bakken formation, one of two major new formations being tapped by new oil drilling technology. The Tioga Tribune, the newspaper of the small town where I went to high school has published a pamphlet called, "The Oil Can Extra" that documents the history of Murex and presents other information on oil development in the area. There is a picture of the first Murex well in the document. The Fargo Forum, the newspaper of the largest city in North Dakota, has done a wider ranging project on the state oil industry called, “Running with Oil”.

If you have further interest, click on the links in the text.

Thursday, September 09, 2010

What is driving the stock market these days?

I’ve noticed a strong correlation between the daily changes in the Dow Jones Industrial Average (DJIA) and and the changes (against the dollar)  in high yielding currencies used in the carry trade. (The carry trade is the practice of borrowing money in a low yielding currency like the US dollar or Japanese yen and investing it in a high yielding currency.)

The correlation is not true for low yielding currencies like the Japanese yen. To see the correlations visit the following links.

Australian Dollar

New Zealand Dollar

Japanese Yen

The first two are often used on the high side of the carry trade. When these currencies follow the market up it means the dollar is depreciating against these currencies, countering a portion of the dollar gains on the stocks.

The reason this is at all of interest to investors is that, if the correlation is strong, it suggests that the market is being driven largely by very large investors like big banks, hedge funds, institutions, etc, because the great mass of small investors seldom use the carry trade. It raises a further question regarding whether the coordination of these large investors is a form of market manipulation. It would be possible for large investors with real time trading and front running tools and acting a coordinated way to move the stock market and currency market up and down to continuously skim profits from investors not so equipped. A low correlation between the carry trade currency changes and the DJIA would suggest that this is not happening.

Sunday, September 05, 2010

Eliminating Welfare and Developing a Mixed Economy

It’s been fairly well proven that both totally state controlled or totally free market economies don’t work. Why don’t we just admit it and define what roles government and free enterprise should play in the economy?

People have lost track of what the depression era programs really were. I won’t go through all the details here because they are spelled out in the government document,  Job Creation Programs of the Great Depression.  But, they were carefully thought out programs that were designed not to compete with private enterprise and had control over worker behavior far beyond just the work environment. At the beginning of the depression there was no safety net to speak of so the CCC, WPA, and PWA became the safety net. When workers can’t get work in the private sector, they are willing to settle for less freedom in their lives and lower wages to make a basic living. Conversely, if private sector jobs are available that pay higher wages and give them more freedom they will gravitate toward them. This insures that the private sector will always have a pool of available workers.

What I am proposing is that welfare and unemployment compensation be replaced with permanent versions of the depression era workfare programs and others like them. These programs would be limited to paying the minimum wage and would include government supplied health care similar to Medicare and pensions for retirees similar to Social Security. They would involve closer control over people’s lives, as was the case in the depression era workfare programs. With such a safety net, regulations on business could be relaxed, and businesses that are too big to fail now because they would jeopardize the welfare of the citizenry, could be allowed to fail. The incentive to return to the private sector would always be there due to the higher wages and greater freedom.

In prior posts here I have shown how periodic failures of our economic system, manifested by recessions, depressions, and asset and debt bubbles which collapse, are due to the imbalance of wealth and income between investors and wage earners. The broad middle class creates the demand for products and services which is needed for business to create jobs. Since business and capital sit atop the economic pyramid and decide how the fruits of productivity are allocated they periodically succeed in diverting more and more of the fruits of productivity to investors and managers and less to wage earners. This happened in the late nineteenth century, again in the first half of the twentieth century, and has now happened again in the first part of the twentyfirst century. This happens because the wealth accumulation results in a takeover of government by a wealthy oligarchy. Unless wage earners rebel, there is not much they can do about it.

If a safety net of the type I propose is put in place, any attempt to short change workers, as wealth is transferred to investors and managers, will result in more people ending up on the workfare programs and higher taxes for business and people in the private sector. The workfare workers will still be earning an income to sustain demand, but the private sector will soon see a shortage of workers. They will realize that they will need to pay their workers more to get them off  the workfare rolls and reduce their taxes. This will cause wages to rise again in the private sector allowing taxes to be cut, and rebalancing the income and wealth that is necessary for a healthy economy that is less subject to cyclical crises.

If you have further question about the workfare programs or the interaction of inequality and economic instability read the government document cited above and my prior posts on the subject.