Trickle-Up Economics

John Maynard Keynes is a name you might know. If not, then let me tell you. He was a renowned economist from last century.

His theories shaped the economic world. And still shape government policy today.

Anyway, back in 1930, he made a bit of a forecast. And it was this…

He predicted we’d all end up only working a 15-hour week.

Keynes was born in 1883. And passed away in 1946 aged 62. He thought his was an era of great technological advance.

The modern production line produced huge gains in productivity. And I guess, he thought those gains would trickle down. Creating an easier life for all.

But just think of all the technology invented after his passing. They’ve truly been staggering.

Especially since 1990, the internet, personal computers and mobile connectivity.

The factory or office of today, is just far more productive. And I hazard a guess, far more than even Keynes could have imagined.

Five-lane freeways and fast trains. Cheaper, faster air travel. Satellite technology, robotics, artificial intelligence. You could just go on and on.

The productivity gains have been massive.

But, despite those productivity gains, Keynes’ prediction never came to pass.

We still work 40 hours a week on average. And toil harder than ever before.

Those gains in productivity are real. But where did they go?

Why isn’t everyone rich and enjoying the leisured life?

And if most of us are not receiving those gains, then who is?

Well, this is my guess…

Those gains have been soaked up by the land value. To those that already own a bit of it. And to the banks, who profit from the debt on ever-increasing mortgage loans.

Both of which play no part in the production process. And create zero wealth.

We’re all working longer. Just to keep a roof over their heads.

If you’re under 50 you mightn’t remember this…

Back in the day of black and white TV, dad went off to work and mum stayed home to look after the kids. Those days are long gone.

It’s great that women have more status nowadays. And have greater participation in the workforce. However, the point is this…

One income used to be enough. One income kept a roof over the family. Now it takes two.

See how it happens? [openx slug=inpost]

Perhaps two incomes have made things harder

You’d think two incomes would make life easier. But it doesn’t.

It just means house prices can be bid up more. And that people can borrow more for real estate.

Perhaps two incomes have even made things harder. There’s the pressure of trying to find affordable childcare. And two working parents, trying to balance time for work and family.

Same goes for tax cuts…

It just allows people to pay more in rent and bid more for real estate. And it’s foregone revenue. Instead of going to social benefits, it now goes to the banks and those who already own property.

Many talk about the free market. But it’s not really free…

The economy seems to be held hostage to periodic boom/busts. The GFC, was only one of many busts throughout history. Which happen with clockwork regularity.

Those who lean to the right side of politics, say we need to keep wages low. This will keep our economy more competitive.

But that’s just a race to the bottom.

Maybe there are better answers? A better way to keep our labour and industries competitive.

For example…

Things like payroll taxes, only adds to the cost of labour. Things like a goods and services tax only adds to the cost of goods. They hurt the productive economy.

Because of those higher costs, transactions that could occur, don’t. It’s called the ‘deadweight loss’ effect.

Perhaps there’s another way. We could maximise the competitive power of labour and productive enterprise by getting rid of these taxes.

But where could this lost revenue be made up?

Well, not all taxes are bad. The classical economists like Adam Smith thought that taxes on land rent and natural resources were the least damaging to the economy.

And the more that governments could start to shift the tax burden onto land and natural resources, the lower house prices would be.

In fact, if government collected the full annual rent on land for revenue, it would cease to have a selling price at all.

Can you imagine, how different your mortgage might look then? And how easier life might be?

I know, sounds like a wacky idea. But it may surprise you to know that our nation’s capital, Canberra, was founded on this very idea.

The politicians were definitely smarter back then!

Your take away

Progress of any kind, or improvements in productivity, produce very real and great gains.

Picture new technologies saving us time and making us more productive. Think of the new freeways or train lines to be built, halving travel times. Or, the better facilities and amenities built, like local parks, concert halls, or new hospitals.

That’s great progress, but will most likely only increase land price and rents.

The gains in productivity don’t trickle down. They trickle up, enriching those who already own.

That’s why you could consider owning some land as part of an overall wealth strategy.

That’s the system. Progress increases land price. Then people start to speculate in that rising price.

The key is to know that, whilst land has a price, we must get a repeat of the real estate cycle.

And there’s just so much innovation and progress going on at the moment. So much infrastructure building. US unemployment is at 50-year lows, for Pete’s sake! And what if it goes lower into the next decade?

That’s why I think this could be the biggest real estate cycle, ever. Maybe, just maybe, the biggest boom/bust we’ve ever seen is still ahead of us.

If so, it’ll be exciting to watch.

Regards,

Terence Duffy


Terence Duffy is an analyst and chartist, specialising in researching economic trends and cycles.  His primary focus is housing and land affordability. But you can also depend on him to offer his unique analysis of stock market charts. As Terence will show you, the charts often forecast, well in advance, the good or bad news to come.


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