Cooperative Individualism

Edward J. Dodson

[Posted to the website www.onlinethinker.org
(Daneshyaran of Humanities); 17 August, 2011]

Responding to the invitation by Reshad Hakim to suggest different perspectives, I offer that of cooperative individualism as a set of principles upon which societies ought to be formed in order to achieve equality of opportunity.

The American philosopher Mortimer J. Adler wrote that a society can be judged on the degree to which justice exists by whether its members enjoy the goods of a decent human existence. Included in this definition is not only adequate food, clothing and shelter but access to education, to medical care, to participate in civic affairs, and to practice one's faith or not practice any faith without intervention by the state. Our world is, unfortunately, dominated by pressures of moral and cultural relativism, artificially divided into nation-states that are exclusive rather than inclusive. We are failing in our call to be wise stewards of the earth and its resources, with the result that our footprint on this planet is extremely heavy. Countless other species are becoming extinct for are threatened with extinction because of our behavior. And, still we continue to behave as our ancestors did in eras when the struggle over the control of territory was one of the primary reasons for collective action. Is it not sad that with the capacity to improve the lives of all so much of our energy is wasted on conflict, death and destruction. We are running out of time to come to our senses by demanding from our leaders a new commitment to universal human rights.

The measures being proposed to stabilize our financial system and the global economy reflect the sad state of discourse on substantive economic and societal challenges. Conventional wisdoms that conflict with reality continue to exert great power over the decision-making of our elected officials and those who serve as policy advisers. This circumstance is not new. Back in 1955, an economics professor in the United States named Harry Gunnison Brown expressed his frustration with many of his professional colleagues:

"Economics is concerned with the problem of 'getting a living'. It deals, therefore, with an important phase of the 'struggle for existence'. Unfortunately, this fact operates to prevent unprejudiced investigation of its laws and of the effects of various economic policies. An examination that would show the effects of various policies from which a part of the public was benefiting, to be injurious to the remainder, might not be an examination which those who were profiting by the policies in question would desire to have made. And if such an examination were made, acceptance of its inevitable logical conclusions would probably be vigorously opposed."

Over time, the search for solutions to the periodic tendencies of our economic system to implode have given way to mitigation by modest technical interventions using defined fiscal and monetary tools.

Our very understanding of the health of our economy is obscured by the meaningless language of mainstream economics that is repeated regularly by journalists and news reporters. Let me begin with one prime example: the use of Gross Domestic Product (GDP) as a commonly-accepted measurement of economic health and growth. I doubt that any of the media commentators know that GDP includes (with minor exceptions) every dollar spent by government for any purpose, whether obtained by taxation or borrowed. GDP is calculated as follows: consumption + gross investment + government spending + (exports ? imports). Thus, a rising GDP is hardly an indicator that the economy is expanding. Goods production can be falling, unemployment rising, crime rising, environmental disasters occurring with increasing frequency, with government spending on the military and the servicing of debt causing GDP to be reported as increasing.

Another fundamental problem with how economics has evolved as a discipline is the extent to which theorists have embraced the notion that markets for locations in our cities and towns, for agricultural land, for natural resource laden lands, for the broadcast spectrum and all of nature, generally, respond to changes in price and demand in the same manner as goods we produce from nature. Generations of political economists who preceded economists treated nature (i.e., what they termed land) as the first factor of production; that is, as the source of wealth but not as wealth itself. Nature was (and still is) the passive factor of production, acted on by labor without and without the use of capital goods.

The first lesson confirmed in the real world is that the price mechanism does not work for land. Price effectively clears markets for for labor, for capital goods and (to a great extent) for credit. However, as we have seen during this last land market cycle, as prices are rising speculation intensifies. Land is acquired to be held off the market for speculative gain rather than for development. This occurs even when locations are improved by various types of structures. Throughout much of the world where private property in land is the norm, investors ignore vacancy rates and even negative cash flows on the gamble that rising land prices will allow them to flip the property to someone else within a few short years. The same mentality spills over into the residential property markets, exacerbated by low- and no-down payment mortgage financing that allowed for interest-only payments or even negative amortization.

What caused the current land market crash to spread so deeply and broadly around the world was bank-provided credit, allowing land speculators to pass on most of the risk to those same financial institutions (or investors in various types of collateralized mortgage obligations). The absence of effective regulation and law enforcement also deepened the crash by overloading the credit markets with poorly underwritten subprime mortgage loans, hundreds of billions of dollars in predatory loans made to low income, elderly and otherwise marginal borrowers, and outright fraud (e.g., the sale of nonexistent or extensively falsified loans by mortgage brokers).

One immediate measure that ought to be passed into law is to prohibit any financial entity that accepts government insured deposits from taking land as collateral. This would remove a good deal of the accelerant from the next upsurge in land prices. Speculators would have to commit their own funds or find other investors willing to share the downside risk of speculation near or at the top of the land market cycle. Consistently imprudent bankers would be protected from their own inclination to book high-yielding assets without an objective assessment of the risks involved.

There is nothing governments can really do at this point to bring us out of the economic depression. Government spending on infrastructure will stimulate a degree of private job creation and (combined with extended unemployment benefits and other social welfare measures) prevent widespread homelessness and social unrest.

The time is long past for continued reliance on fine-tuning of the economy. When much of the world suffered thru stagflation in the 1970s, critics on the right called for business deregulation and supply-side stimulation of investment based on dramatically lower marginal rates of taxation on so-called capital gains and ordinary income. These measures largely provided the atmosphere for an economy driven by speculation rather than goods production or the development of new technologies and services. I believe there are four main shifts in public policy required to start the dominoes falling in the right direction (i.e., in the direction of full employment without inflation). These proposals are applicable in every society, as every society suffers from the same inequities, differing on in the degree to which they exist.

First, make the individual income tax system truly progressive and at the same remove its complexity. Wages and salaries are, for most people, the largest portion of their incomes, and are "earned" producing goods and services. This level of income should be exempted from taxation, or taxed at very low rates. We should begin by exempting all individual incomes up to a far higher amount than is now the case (eliminating all other exemptions and deductions). The national median could be a good starting point. Above the national median, increasing rates of taxation would be applied to higher ranges of individual income (which, as incomes increase, are derived from what economists describe as "rent-seeking" investment activities).

Second, establish the mechanism for gradual repayment of the national debt by issuing fully amortizing bonds to replace existing government bonds as they mature. The amount required to service the debt (both interest and principal being retired) would be incorporated as an integral expense of the government budgeting process. The tax rates on individual incomes at the highest ranges would be set to raise sufficient revenue to achieve a balanced budget.

Third, we need to replace the business profits tax with a graduated tax on gross revenue, exempting small businesses (which create the overwhelming number of jobs in the economy). Some analysis is required to determine what the exemption level should be, but the idea is to benefit those companies most that have a stake in their communities and where profits are circulated locally rather than routed to a distant (or overseas) corporate headquarters and senior executives rewarded by compliant boards of directors for cutting the number of employees. This measure would also end the practice of companies being able to expense the huge compensation packages to executives and thereby reduce taxable income.

And, finally, national governments must urge every community across the nation to restructure the long-destructive ways they have raised revenue for public goods and services. What communities create by investment in infrastructure and public amenities is land value. Thus, this community-created value ought to be the primary source of public revenue. Every parcel of land in a community has a potential annual rental value. This rental value is the amount that ought to be paid to the community in return for the services brought to a location. This means exempting property improvements (i.e., buildings of all types) from the property tax base. Moving to a land-only tax base will not only stimulate new construction and rehabilitation of existing structures, landowners will find it far more profitable to bring the land they hold to "highest, best use" as dictated by market forces (or sell to someone who will) than to hold onto land for speculation. Sufficient revenue might be generated by the taxation of location rental values to lower or eliminate taxes on wages and commerce.

I hope the above ideas provide both food for thought and for thoughtful discussion. The fate of the entire world is hanging in the balance.