Why poverty? that would be Ricardo's Law

Someone told me that poverty exists as wages are too low to pay for rents and house prices are too high. This chap was right, but did not understand the connection between wages, rents and house prices. Once you understand Ricardo's Law then everything else in economics makes sense:

A recent history of why rents and house prices are always too high:

1. ·         Since the 50’s the euro-dollar and offshore banking system has been able to magic up endless credit to any western financial player or developer free of tax and regulation. This is the key economic change along with the abandonment of post war controls on the movement of capital
2. ·         Political changes since the thatcher/Reagan era, which were facilitated by my point above, and the triumph of the ‘neo-classical' economic cover story paraded by the dangerous buffoons from the ‘Chicago school’ of economic policy have effectively hidden real economic thinking. This has kept wages down while allowing a ‘free market’ to allow the full force of what is known as ‘Ricardo’s law of rent’ to capture most of our economic production and pass it into the hands of unproductive monopolists, of which landowners, owners of natural resource rights and banking are the biggest.
3. ·         By understanding ‘Ricardo’s law of rent’ further and better explained by Henry George in the 1870’s in a ‘free market’ rent and land prices will increase to match the surplus of production and therefore capture our growing national wealth and all the money created by loose lending policies and the dodgy international shadow banking system.

Therefore most people are no better off, and will never be better off as long as we allow the monopoly value of land(and all the other monopolies  that operate in the world) to be captured by rents and inflated property values. It is immaterial what wages are, real wages could double and all that would happen is that rents and property values would expand to capture the higher level of disposable income.

In the UK the continued reduction in house building plays into the hands of all the little monopolists who bought houses in the Thatcher false boom. Then in the ultimate act of class betrayal New Labour found it much easier to continue the policies of credit expansion, reduced house building and neo-classical economics.  This way they kept floating voters in key marginal constituencies happy as the increase in value of their houses made them feel rich, while at the same time keeping the ‘plutocratic’ forces  happy as their wealth expanded enormously. Tax credits and housing benefit allowed the poor to feel a little richer but in the end the economic processes I explained means that this money really just filters through to enrich landowners and bankers. The banks have taken their slice of economic rent through ‘Buy to Let’ private landlords and people taking out mortgages they cannot really afford to pay back (just look at how many people have interest only mortgages or have lied to obtain a mortgage they cannot afford). House prices are a function of what banks are prepared to lend and have little relation to any intrinsic factor so they will rise and rise until people cannot afford to pay back the debt incurred to buy them, famously known as the 'Minsky Moment' after the great economist  Hyman Minsky. 

http://en.wikipedia.org/wiki/Minsky_moment. 

This was of course unsustainable and we now face at least 10 years of recession as debt deflation consumes the over borrowed. By bailing out the banks and enacting policies that keep asset prices high at the expense of the  average taxpayer, Government policy will extend the advantage of our plutocrats while furthering  poverty and wealth divide. The bank bailouts have effectively privatised a sizable portion of the next 15 years or so of taxpayer money.

The privatisation of future taxes will see a large drop in Government funding on nature conservation as we have seen in the last year and will continue to see in the foreseeable future. Lower incomes will mean even less money for wildlife charities from private donors, low interest rates will mean much less income from grant making trusts and artificially high land prices will allow less land to be acquired for nature conservation purposes. My nightmare is that wildlife charities will be forced back to their roots where they are apologists for land owners managing postage stamp  areas of marginal farmland donated by a kind soul but without the resources to make a real difference to wildlife and habit protection.

This policy has accelerated since Thatcher, no matter which political party has been in power and I do not see the Liberal Democrats doing anything about it apart from Vince Cable’s heroic efforts to extend a property tax and reform capital gains tax. I have grave doubts Miliband will do anything to change it too. Although there are some in in all 3 political parties who understand real economics, most have no idea of the forces at play in our economy and/or are just vain puppets.

So far Vince’s polices have not come to the fore and the only real change enacted by the coalition government has been the extension of VAT to 20% which is the most regressive of all the main taxes and the tax that has the least effect of the ability of monopolists and landlords to extract economic rent out of the general population. Vince agreed to this in the hope capital gains tax would rise and a property tax would be enacted. I fear this was an empty promise by the Tory coalition partners and we will never see an increase in these taxes as they will directly affect the rent seeking “plutocratic” forces that have so much power.

Our political system seems unable to do anything to counteract this trend, with policy formation being a squabble between the most powerful rent seeking forces, even organisations such as the CBI are now controlled by businesses that are more interested in monopolies and rent seeking than real productive industry. Even the house building industry seems far more interested in the untaxed capital gains they can make from their land banks and its interaction with offshore tax dodging shenanigans than on getting on with the business of making a profit from building and selling houses, and their lobbying of Government is reflected by this in the way they wish to relax planning laws..

But let Fred Harrison explain Ricardo's Law of Rent, he is far better at it than I and has a much better line in suits and ties.