Professor Frank Convery believes that Irish people will never accept land value taxation even though it is the best kind of property tax:  and Frank knows it is because he participated in the EEA conference of environmental taxation in Dublin 2010 which showcased site value tax as an ‘environmental tax’.  Maybe he thinks Irish people are too thick to get the message of what is in their interest.  It might help if they were actually given the information and offered the choice, don’t you think?.  But Frank and his fellow professionals in his new organ  www.public policy.ie funded by philanthropist Chuck Feeney, did not think it is worth bothering even to explore the merits and demerits of site value tax in their submission to the Expert Group on property tax.  They relied instead on the now well-out-of-date Commission on Taxation Report.  “Despite a site value tax having these advantages as a resource tax, the Commission recommended against it; in particular their view that it would be very difficult to gain public acceptance for this basis is persuasive  (See P 158).   Can you believe that PublicPolicy.ie’s byline is “Independant Thinking”!   Why Chuck would fund such a status-quo defending, pro-more-mortgage-debt policy defeats us.  We will post a critique of the submission when we have calmed down enough.  Here meanwhile is an article, the kind that we should be seeing in the Irish media about the value of a site or land tax in Philadelphia,US.  Americans are obviously smarter than us then…

From Keystone Politics. “We Have to Shift …to Taxing What Does Not Move” 

Via Miriam Hill, Center City District director Paul Levy is making great points about the need for pro-growth tax reform in Philly:

“We have to shift from taxing what is mobile to taxing what does not move,” he said at a news conference about the report. Mayor Nutter had started reducing the wage tax, but then held it steady when the recession reduced city revenue. His administration plans to restart those reductions in the middle of next year, but the Center City District wants that to happen more quickly.

“The simple argument, it seems to me, is that taxes and wages depress demand. It’s not that we have weak office demand,” Levy said. “It’s that we have a tax structure that deflects office demand to the suburbs. It causes the higher-wage jobs to move to the suburbs … and that, I think, weakens one of the major sources of demand for retail.”

That’s exactly right, although I would draw a clearer distinction between taxing property improvements and taxing land. Property improvements are capital, and capital and labor are elastic – if you tax them, you will get less of them at the margins.

Land, however, is not elastic. The supply of land is always the same. If you tax land values, nobody will make less land. Landowners can’t take Philly’s land out of Philly.

Funding more public services with a land value tax on unimproved land would be a good idea, because land value is just the value added by the community.

Think about it: land values only increase in a neighborhood when a bunch of properties in the neighborhood improve. That raises the value of the nice buildings, as well as the price of vacant lots in the neighborhood. Taxing only the unimproved land would recapture that value for the public, instead of giving vacant lot owners and speculators a windfall. Plus, the land value tax can’t be passed along to tenants – it’s borne entirely by the land owner.

Speculation’s not the entire problem with vacant land in Philly, but it’s definitely a big part of the problem. Bills like this one from Maria Quinones-Sanchez that raise the cost of owning vacant buildings and vacant land are generally a good idea, since they tend to drive out people who aren’t really serious about doing anything to develop the parcel.

But for exactly the same reason, it’s a good idea to tax unimproved land as a way to raise general revenue.

This would also be a good way to bring some relief to property tax payers in high-demand neighborhoods. If you tax vacant lots and surface parking lots and other unimproved land at the same rate as multi-family condos and office buildings,  speculators and others wasting expensive land on low value uses will pick up the tab for a greater share of the city’s budget, and responsible property owners will pay less.

Mayor Nutter’s Actual Value Initiative (AVI) would work well with a land value tax, since it would put greater development pressure on vacant lot owners in expensive areas to add more housing quickly, or sell to somebody else who will add more housing. Currently, speculators like to hold out on building until rents are too high. But with AVI, the land tax bill would start to bite speculators as soon as rents started rising, pushing them to build more housing faster.

Site-value tax easier to implement and better for economy

RONAN LYONS

OPINION: A good property tax is about getting land used well and financing local services and amenities

A RESIDENTIAL property tax in Ireland is a key part of fixing the gap between public spending and public revenues. Last week, as part of the ESRI’s Renewal series, Claire Keane, John Walsh, Tim Callan and Michael Savage published Property Tax in Ireland: Key Choices, outlining how a property tax might work and the effect it might have.

They recommended an annual tax on owner-occupied residences (but not rented properties) based on the full value of the property, with exemptions for those below certain income thresholds.

There are a number of concerns with this proposal.

Firstly, there should be no ongoing exemptions from a property tax, only deferrals. For those who are property-wealthy but income-poor (such as older couples) the State can wait until they ultimately sell the property and then take the fair amount.

It’s also possible to ease the burden on those who bought at the peak through a transitional arrangement such as tax credits against their property tax bills that must be used by 2020.

The problem with income- based exemptions is that they turn a property tax into something suspiciously like an income tax. Income tax and VAT are indiscriminate revenue raisers, which is why people care about whether they are progressive (Ireland’s income tax system is among the most progressive in the world, with the top 10 per cent of earners paying 40 per cent of income tax) or regressive (Ireland’s VAT system is very regressive, hitting poorest households the hardest).

Every other form of tax or public charge, from cigarette duties to water charges, is designed to help society use its scarce resources well. A good property tax is a cross between a wealth tax, a means of funding local services and a tool for making sure land is used well.

The ESRI researchers opted for a tax on the full value of each property, rather than just the site value, even though a site-value tax – specified in the last two programmes for government

and the memorandum of understanding with the EU and IMF – would both be easier to implement and better for Ireland’s economic recovery.

A full-value tax punishes people for making their homes more energy-efficient, for building an extension or, indeed, improving their property in any way that would increase its value.

A site-value tax encourages you to use your plot of land in socially beneficial ways.

Another major drawback of a full-value tax is that it would encourage people to sit on land rather than use it. Conversely, a site-value tax encourages owners of derelict or vacant sites to use them, sell them or else pay the rest of society for the privilege of wasting valuable land.

Perhaps most crucially, given parlous public finances, it is far easier to estimate site values than full property values. Indeed, I’ve already estimated the contours of land value in Ireland, a dataset and model I’m happy to share with any government body. Put at its simplest, the value of the site you live on depends on just two factors: the site size (known from the Land Registry) and the value of land in your area, which can be measured easily through what economists call “fixed effects”.

On the other hand the full value of the property you live in depends not just on site size and land values, but also on dozens of other factors such as the number and size of bedrooms, bathrooms, other rooms and outhouses, all the way down to whether the attic is converted.

The forthcoming register of house prices will give none of the information needed to estimate the value of these attributes.

The country will be depending on people like me to estimate hundreds of things like the effect of double-glazing on the value of terraced properties in Connacht-Ulster since 2009.

We are in the paradoxically lucky position of being able to design a property tax from scratch. Thus, we need to bear

in mind “cause and effect”. In other words, why do we want a property tax and what effect will it have? Clearly the “why” is in part about revenue – but if that’s all it is we could just increase income tax. A well designed property tax is about getting land used well and financing local services and amenities, which ultimately drives differences in land values around the country.

A full-value property tax with income exemptions is just income tax in another form, an indiscriminate form of revenue raising that will damage Ireland’s competitiveness and punish useful activities like building on a derelict site.

A site-value tax, with deferrals for those who have the wealth, but don’t have the income, will generate the same revenue but also encourage Irish households to use land, a scarce commodity, in socially beneficial ways.

Ronan Lyons is an urban economist based at Balliol College, Oxford

Here’s my Sunday Times article from April 22, 2012 (unedited version, as usual):

Just when you thought the taxpayers can breath easier when it comes to the banks, the latest data from the Irish, Spanish and Italian authorities shows that the banks of the European ‘periphery’ have dramatically ramped up their holdings of their countries’ Government bonds. In 3 months through February 2012, Irish banks increased their holdings of Government bonds by 21%, Spanish – by 26%, Italian – by 31%. Back in late 2008 I warned that the banking crisis will go from the stage where sovereign debt increases will be required to sustain zombified banking systems, to the stage when the banks will be used as tools for financing over-indebted sovereigns, to the final stage when the weak nations’ sovereign debt will become fully concentrated within the banking systems they have nationalized. Sadly, this prediction is now becoming a reality. As GIPS’ banks increased their risk exposures to the Governments that underwrite them, German and French banks have been aggressively deleveraging out of the riskiest sovereign bonds. In Q1 2012, Portugal ranked as the second most risky Sovereign debtor in the world in CMA Global Sovereign Credit Risk Report, Ireland ranked seventh and Spain ranked tenth, with Greece de-listed from the ratings due to its recent default. This concentration of risk on already sick balancesheets of the largely insolvent banks is a problem that can reignite the Eurozone banking crisis.

I have been undertaking some research recently on Land Value Taxation for the Scottish Green Party MSPs and the following are some useful references on the topic.

THE REPORT – A Land Value Tax for Scotland. Fair, Efficient, Sustainable.

FIRST, some key ones

Connellan, Owen, 2004. Land value taxation in Britain: experience and opportunities. Lincoln Institute of Land Policy, Cambridge, Massachusetts

Harrison, Fred, 2006. Wheels of Fortune. Institute for Economic Affairs

Jones, Jerry, 2008. Land Value for Public Benefit. Labour Land Campaign, London

Lloyd, Toby, 2009. Bon’t Bet the house on it. No turning back to housing boom and bust. Compass, London

Maxwell, Dominic & Vigor, Anthony, 2005. Time for Land Value tax? IPPR, London

AND the Mirrlees Review Tax by Design Chapter 16 on land and property (draft)

See all links

OECD to Northern Europe: Raise Your Property Taxes!

By Stephen Smith   of International Business Times

February 16, 2012 5:45 PM EST

The Organization for Economic Co-operation and Development released a report on Tuesday calling on Germany to raise its property taxes dramatically and reduce taxes on labor. The group, whose membership is made up of 34 of the world’s leading market economies, also made similar recommendations for Denmark, Norway and the UK over the past month.

For Germany, the organization recommended tripling its property taxes, while reducing its wage taxes and social security contributions, which currently make up 64 percent of total tax revenue, compared with the OECD average of 52 percent, according to the German language Immobilien Zeitung. Property taxes, meanwhile, amount to only 1 percent of total revenue collected, against an OECD average of 3 percent. The group also called on Germany to reform its assessment mechanisms, as many properties are valued far below their true market worth.

On Wednesday the OECD also called on Norway to raise its property taxes and eliminate its mortgage interest deduction, Dow Jones reported on Wednesday. It advised the Scandinavian nation to reconsider its “implicit tax subsidy on owner-occupied housing,” which “imposes distortions on savings,” with taxation on owner-occupied housing going as low as 0 percent in some cases.

The International Monetary Fund also made a similar recommendation to Norway this month (.pdf):

One structural factor behind high mortgage debt in Norway is the very favorable tax treatment provided to owner-occupied housing: mortgage interest is tax-deductible, the tax on imputed rent was abolished in 2005, and effective rates of property taxation are amongst the lowest in the OECD. Gradually reducing the implicit tax subsidy for owner-occupied housing-perhaps by introducing a fixed nominal cap on the amount of a mortgage that is eligible for interest deduction and by bringing property tax valuations closer to market valuations-could free resources for productivity-enhancing tax cuts, improve progressivity, and bolster financial stability by reducing risks associated with excessive mortgage debt.

The two groups’ advice, however, was rebuffed by Norway’s minister of finance, Sigbjorn Johnsen, who said at the press conference on Wednesday: “I have no plans to increase housing taxes.”

Denmark was subject to the same advice last month, with the Nordic Labour Journal reporting that the OECD advised the country to cut income taxes and increase property taxes. The Danish government plans to incorporate some of the OECD’s recommendations into its 2012 tax reform, but a property tax hike will not be on the table. As the NLJ writes, “[t]his is because property taxes were ring-fenced in the coalition agreement covering this parliamentary term.”

Britain also got the same advice from the OECD in January, when it suggested an overhaul of the nation’s property and council tax systems, according to the Guardian:

[OECD economist Romain] Duval said Britain’s council tax regime was “highly regressive” and needed reform. “In England, the tax liability for properties over £320,000 is only twice the liability for properties of £70,000 and three times the liability for houses under £40,000. Low-income households are entitled to a council tax benefit. However, the takeup is only around 65%.”

Duval said the OECD advocated a replacement with “a property tax based on current market values or a land tax”.

The OECD has been a strong proponent recently of land value taxes, which date back to Adam Smith but were most vigorously promoted by 19th century economist Henry George. He promoted a land value tax—which is assessed on the unimproved value of underlying land, not penalizing intensive development like many property taxes today—as a replacement for all tariffs and levies, however the OECD has settled on a more moderate position, instead advocating a shift in emphasis away from other taxes and towards the land value tax.

Land value taxes can be tricky because of practical difficulties in estimating a plot’s value, especially if it is a unique piece of land, or if land parcels like it do not change hands very often. Newer computer-assisted methods of land appraisal have made this job easier, though, and many countries around the world have adopted the tax. The OECD has been a strong proponent recently of land value taxes, which date back to Adam Smith but were most vigorously promoted by 19th century economist Henry George. He promoted a land value tax—which is assessed on the unimproved value of underlying land, not penalizing intensive development like many property taxes today—as a replacement for all tariffs and levies, however the OECD has settled on a more moderate position, instead advocating a shift in emphasis away from other taxes and towards the land value tax.

Land value taxes can be tricky because of practical difficulties in estimating a plot’s value, especially if it is a unique piece of land, or if land parcels like it do not change hands very often. Newer computer-assisted methods of land appraisal have made this job easier, though, and many countries around the world have adopted the tax.

in the Kilkenny People

Jill Kerby: Preparing for the real property tax

Published on Sunday 22 April 2012 14:45

Next year we are expected to have a full-blown property tax – of some kind – that will replace the controversial €100 household charge and the second-property charge of €200.

The suggestion is that the government expects to raise at least twice as much – at least around €3.2 billion – than the €1.6 billion they will collect if every property owner signs up and pays the household charge.

The argument in favour of a property tax is that taxing property is a more sustainable source of exchequer funds than taxing labour (via income tax), which can de-incentivise workers and affect employment levels. It is claimed that it is also a fairer form of taxation, especially if the tax pertains to the site value or productive value of the land on which the dwelling exists, and not just the market value of the dwelling.

If the government adopts a site tax next year – and not everyone is singing off the same hymn sheet after junior minister Jan O’Sullivan implied on RTÉ recently that house values would determine what tax is paid – they will have to ensure that the complex will have to be both fair and transparent.

If you are interested to know how a site tax will work and how much you might have to pay, you should consider downloading a study that was done by the Daft.ie economist Ronan Lyons last December for the Smart Taxes Network. (See http://smarttaxes.org/2012/01/30/ronan-lyons-report-on-site-value-tax-now-available/)

In the study Lyons presents a very convincing argument in favour of taxing residential – and commercial land for that matter – on the grounds that “the supply of land… is fixed and thus a parcel of land cannot be ‘withdrawn from supply’; it can merely lie idle. Thus, SVT cannot affect economic outcomes: it is not distortionary.”

Furthermore, says Lyons, “land values vary. Much of the value of a site is created purely by its designation as residential, not agricultural land, i.e. at the stroke of a pen. More generally, land values vary with the value of surrounding amenities. These amenities are typically public goods, either directly, i.e. provided by the Government with taxpayers’ money or indirectly i.e. amenities created by the populations living there, such as social capital, or a rich market for jobs, services or cultural activities. All these amenities incur costs of maintenance or costs of opportunity. Therefore, if public goods create private value, the fairest way of paying for their maintenance is to recoup some of that value from those who benefit.”

He argues that a site value tax “is not a tax in the conventional sense. It is better thought of as a maintenance charge for the value of amenities enjoyed by landowners and residents.”

A site tax also discourages land being left idle or underdeveloped for speculative purposes, and derelict land zoned residential is taxed at the same rate as residential land with houses on it.

In the ideal site value tax world – and Lyons goes into great detail about how site values could be calculated, which households might be exempt or at least be able to postpone their payment (such as low-income pensioners living on high-value sites – their payments would be collected from their estate) and how previous costs to homeowners, such as high stamp-duty payments during the boom years, could be offset by tax credits. He also notes that a proper system of income distribution will have to take place between high-site-value areas and low-value ones if there are to be any services provided to people who live in more remote or poorer areas.

One thing is very apparent from this study, and that is that owners of even modest homes in busy, high-amenity towns and cities will pay a great deal more than €100 if such a tax is introduced. If a 2% equivalent SVT is introduced, top-ranked sites – where the land is valued at, say, €2 million an acre, could result in annual tax bills of €1,200; a €10 million an acre valuation would see an owner paying as much as €4,960 a year. (Incidentally, these are not untypical UK council tax values or property/site taxes for homeowners in Canadian and American cities where many readers may have family members residing right now.)

Ireland is very unusual in not having a formal property tax, but the old rates system was incorporated into our income and consumption tax system in the 1970s. Consumption taxes are high here and the marginal income tax/PRSI/USC is now around 52% and as high as 56% for higher earners.

Is it fair to burden already stretched middle earners, many of whom are mortgage holders in negative equity and arrears with a potential site value tax of a few thousand euro without reforming and reducing income and consumption taxes? (The Commission on Taxation said absolutely not in its last property tax report.)

As you read this, a new state body is compiling all property prices achieved since 2010. A new property registration authority will report to the government soon on the type of property tax that should be introduced, and everyone who has registered for the household charge will be on that property tax list.

The Smart Taxes Network report (which includes a number of property case studies at the end) could be the framework on which the new tax is based.

Read it and then act: Open a savings account called “Site Tax” at your local bank or credit union and start making contributions.

And get used to the idea that you are no longer just the King of your Castle: you’re now a tenant of the state and the tax you will pay is rent.

jill@jillkerby.ie

..The paper by Claire Keane, John R. Walsh, Tim Callan & Michael Savage [hereinafter KWCS] of the ESRI recommends an annual tax based on the value of the property, with exemptions for those below certain income thresholds. To me, this is definitely not the way the Government should be going. I have no issue with KWCS’s claim that their system would be fairer than the current household charge – to me, that is a very low benchmark. But aside from that, there is little I could recommend about KWCS’s system. In fact, there are three main flaws in relation to their proposal.

Firstly, there should be no exemptions from a property tax, only deferrals. If you are land-wealthy (and remember real estate made up three quarters of wealth in Ireland last time we checked) but income-poor, the State can wait until you ultimately sell it and then, through a lien or charge on the property, take the fair amount.

Secondly, a property tax should most certainly not be related back to income. If you want to punish people for having an income, then do that through an income tax. A property tax is somewhere between a wealth tax and a tool for making sure land is used efficiently. It is not supposed to be an indiscriminate revenue-raiser, as income and consumption taxes are – if you look internationally, property taxes are used to fund local services

Thirdly, as an expert of sorts in this area, I have to take issue with the following claim (as reported in the Independent):

Basing the tax on site size would be complicated because there is no database on site values. In contrast, a national register of property prices is being compiled.

It is most unfortunate that this appears to be what KWCS believe. In fact, particularly in a market as illiquid as the one we now have, the opposite is the case. I have already estimated the contours of land value in Ireland – see the map below, which is based on 1.5 million property listings from 2006 to 2011, and which controls for market conditions over time and for the fact that property types differ by location [more here]. (As before, I’m happy to share for free this and the underlying data with any Government body and to apply the model to any dataset they may have.)

The Tim Callan of the ESRI responded on the Irish Economy blog with a short reposte defending their proposal.  It is truly wonderful to see a public intelligent debate on this issue.

A conference paper  provides evidence relevant to some key choices in the design of a new property tax.  While the paper does not recommend a specific blueprint, it draws on evidence from other countries as to “what works” and analyses the impact of different forms of property tax on a nationally representative sample of households.

Ronan Lyons post yesterday contained three main comments on the paper.  Because some of these appear to have drawn primarily on an Irish Independent report that contained inaccuracies, rather than on the paper itself, it seemed best to issue this as a new post.

1.  The first comment is that “there should be no exemptions from a property tax, only deferrals”.  The  SWITCH model is set up to analyse policy choices.  As I see it, the level of an income exemption limit is a choice variable, and in this context, zero would be Ronan’s preferred option.  Our research found a range of positive values in evidence in many countries. For example, the UK Council Tax Benefit effectively exempts those with incomes close to minimum social security levels. In Northern Ireland, they have set a higher income limit than in the rest of the UK. In our analysis we report income distribution impacts for the zero case, and also for levels at the State Contributory Pension and State Pension+25%. Our work points out the implications of the different choices. Making such a choice is a matter for public debate and government decision. Our paper aims to inform that choice.
2. The second comment is that “a property tax should most certainly not be related back to income”.  I’m not sure what he has in mind here but it is important not to misunderstand our analysis. Apart from income exemption limits and some marginal relief above this (necessary to prevent 100%+ tax  rates), the property tax bill we consider is simply a flat percentage of market value. We analyse what the outcome is in terms of how the burden is spread across the income distribution – this depends on how, in practice, property values and incomes are related, as well as on the effects of exemption limit provisions. These are questions of legitimate interest for research and policy.
3. Thirdly, it is stated that our paper asserts that Ireland has “no database on site values”: This is not what we said – it reflects an inaccuracy in the Irish Independent’s report. What we said is that “to our knowledge, there is no data source which combines information on site characteristics (location and size) and household incomes, so that it is not possible to provide a clear picture of how a Site Value Tax relates to ability to pay or its impact on the distribution of income”. If there is such a source, we would be glad to hear of it.

Steve Keen aided and abetted by Constantin Gurdgiev on TV3 outlines what it will take to solve the current debt crisis – nothing less than a distribution of trillions of euro to people – NOT to the banks. Richard Douthwaite dubbed it ‘deficit easing’. Some of our MMT friends proposed the same solution. Steve also gave the nod to a secondary currency for Ireland to circulate along side the euro as a unilateral measure Ireland could adopt. This was identical to another idea generated within Feasta that was dismissed as infeasible. Dan O’Brien looked quite discomfited but Vincent Brown was in his element. No more the dismal science!

MMP Blog #46: The Job Guarantee – Program Manageability

Posted on April 15, 2012 by Mitch Green

By L. Randall Wray

As mentioned earlier, critics have argued that the program could become so large that it would be unmanageable. The central government would have difficulty keeping track of all the program participants, ensuring that they are kept busy working on useful projects. Worse, corruption could become a problem, with project managers embezzling funds. We will briefly look at some methods that can be used to enhance manageability.

First, it is not necessary for the national government to formulate and run the program. It can be highly decentralized—to local government, local not-for-profit community service organization, parks and recreation agencies, school districts, and worker cooperatives. Local communities could propose projects, with local agencies or governments running them. National government involvement might be limited to providing funding and—perhaps—project approval. That is the way that Argentina’s program, as well as the new program in India to some extent, is run.

To be clear, the level of decentralization will vary across countries and even across regions within countries. In some developing countries there may be no alternative to the central government–there may be few indigenous not-for-profits, and local government might be too ineffectual (for a variety of reasons). In some developed nations, the central government might be sufficiently competent and respected to run the whole program. However, in a place like the US, there is probably too much distrust of the central government—but, fortunately, the US has hundreds of thousands of local alternatives in the form of community service organizations and local governments.

In order to reduce the likelihood that funds are embezzled, the national government could pay wages directly to program participants. This can be facilitated by using something like a social security number—and paying directly into a bank account much as social security programs pay retirement. If project managers never get their hands on government funds, it will be difficult to embezzle them. To be sure, there will be some cases of fraud, such as paying to a social security of someone who is not working, or who is dead. Transparency is one way to fight corruption—public recording of all participants and all payments, through use of the internet, for example, with rewards for whistle-blowers. Argentina used the internet in this manner.

While there are privacy issues surrounding participation and income received, that is probably outweighed by public interest concerns. Even in the US it is common to make the wages and salaries of public employees available. Further, since our formulation of the JG includes uniform wages and benefits, there are no distinctions—all full-time employees receive the same amount—so there is less potential for embarrassment. Further, unlike welfare payments, the program is not means tested. As mentioned in an earlier blog, to the extent that participation in the JG becomes something of a “rite of passage” for young people (and, indeed, for people of all ages) the program won’t necessarily taint workers.

To cover management and materials costs, the national government might provide some non-wage funding to projects. In direct job creation programs, an amount equal to 25% of the wage bill has been common. The greater the payment, the greater the adverse incentive for project managers—who might create projects simply to get funding. For this reason, non-wage funding should be kept small, and the national government should require matching funds to cover non-wage expenses. And, again, all such payments should be transparent and publicly available—published on the internet.

While it is tempting to include private for-profit employers in such a program, adverse incentives are even greater. A private employer might replace employees with JG/ELR employees to reduce the wage bill. Worker cooperatives might work better. A group of workers could propose a project designed to produce output for sale in markets. The JG/ELR program could pay a portion of their wages for a specific period of time (say, for one year) after which time the cooperative would have to become self-supporting. If it could not stand on its own, the workers would have to move into regular JG/ELR projects. (Again, Argentina provides a useful example of successful co-ops included as part of the Jefes program.)

Obviously, there are many more management issues that must be explored. There are many real world examples of direct job creation programs funded by government. We can learn from mistakes made. Programs must be adapted to the specific conditions of each nation. There will be many trial-and-error experiments. One of the advantage of decentralization is that the whole program is not tainted by the failure of some experiments.

Look at it this way. We know that most new for-profit businesses do not make it. Firms fail every day. Yet, the “market system” is not tarnished by these unsuccessful experiments. Indeed, that is said to be the beauty of the “competitive system”—losers get punished. We should, and do, hold our government to a higher standard. We will never accept a failure rate of 50% or 75% by government, even though we accept—even welcome—such dismal results in the private sector. We readily overlook all the social costs generated by business failures (including those imposed on workers who lose their jobs because of management’s mistakes) on the belief that the relatively few successes compensate.

We should have the same attitude about JG projects—albeit with an expectation of much lower failure rates. We know the ideological opponents will seize on every single mistake, so we need to have many, many successes to counter them.

Still, some JG projects will not be successful—in terms of providing useful jobs that produce socially useful output. Some will have low rates of transition by workers out of the program. The project managers must be held accountable. Just as projects must be approved before they can receive government funding of JG workers, they must show results to continue to participate in the JG program. Constituencies (workers and communities served) must be part of the evaluation process. JG workers must be free to quit work at poorly managed projects to seek more fulfilling work at other JG projects.

There is a bias in societies like the US that the “market test” is the best way to distinguish successful from unsuccessful firms. Yet, as all economists know, the market does not work well in many important areas: public goods and other cases where social benefits and costs are not reflected in market prices. Even in the most favourable circumstances, “market efficiency” does not equate to “social efficiency”.

There are wide open areas in any economy where social costs can be reduced and social benefits improved by “extra-market” provisioning—by purposeful and organized action. Some of this is the proper role of government, some can be funded by government, and some can be done without government. But there is no justification for believing that the market can “do everything” and that the market test is the only test of value.

I will have more to say about this in a few weeks. In truth, every successful business required help. There is no such thing as a “self-made man” (or woman). And every failed business squandered the help provided by government and society more generally, at least to some degree.

So, yes, problems will be encountered in any real world JG program; some of these can be foreseen and others will surprise us. There will be failures. There will be some waste. The program design will need to be adjusted. There will be an element of trial and error.

But what must always be kept in mind is that the alternative—unemployment—is, arguably, far more socially wasteful.

Responses to Comments on MMP Blog 45: The JG and Developing Nations

MMP Blog #45: The JG and Affordability Issues with Special Considerations for Developing Nations

MMP Blog #44: The Job Guarantee and Macro Stability

Responses to Blog #43: Job Guarantee Basic Design

MMP Blog #43: Job Guarantee Basics: Design and Advantages

Responses to Blog #42: Intro to the Job Guarantee

MMP Blog #42: Introduction to the Job Guarantee or Employer of Last Resort

 

”The member states have transferred their seignorage rights to the ECB, and the ECB is currently earning about €25 billion ($32.7 billion) annually. The seignorage rights have been estimated by Willem Buiter of Citibank and Huw Pill of Goldman Sachs, working independently, to be worth between €2-3 trillion, because they will yield more as the economy grows and interest rates return to normal. A Special Purpose Vehicle (SPV) owning the rights could use the ECB to finance the cost of acquiring the bonds without violating Article 123 of the Lisbon Treaty.

Should a country violate the fiscal compact, it would wholly or partly forfeit its reward and be obliged to pay interest on the debt owned by the SPV. That would impose tough fiscal discipline, indeed.

By rewarding good behavior, the fiscal compact would no longer constitute a deflationary debt trap, and the outlook would radically improve. In addition, to narrow the competitiveness gap, all members should be able to refinance their existing debt at the same interest rate. But that would require greater fiscal integration, so it would have to be phased in gradually.

The Bundesbank will never accept these proposals, but the European authorities ought to take them seriously. The future of Europe is a political issue, and thus is beyond the Bundesbank’s competence to decide.  Link to full article