Re: Mexico is in love with me but I am not gay!
From: Fabrizio J. Bonsignore (fbonsignore_at_beethoven.com)
Date: 10/07/04
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Date: 7 Oct 2004 06:56:49 -0700
For Countries Under Development
"I HEREBY, BY THE POWERS CONFERRED UPON ME BY THE PEOPLE'S WILL, AND
IN THE INTEREST OF THE WELL BEING OF THE MAJORITY, I DECREE:
AS OF TODAY, ALL FAMILIES DWELLING IN A LEASED HOUSE OR APARTMENT
BECOME THE PROPRIETORS OF SAID HOUSE OR APARTMENT. PEOPLE DWELLING IN
A HOUSE OR APARTMENT OF THEIR OWN REMAIN THE PROPRIETORS OF SAID HOUSE
OR APARTMENT. THE GOVERNMENT WILL COMPENSATE PREVIOUS OWNERS FOR THEIR
PROPERTIES."
Economics is the dismal science, the Queen of Social Sciences. And
what a Queen! Cold, proud, unapproachable by the masses that crave for
her favors while she remains unattainable but for a few fortunate...
This popular view of economics is shared by many people who can but
compare the achievements other sciences have brought upon through the
application of technology, and yet see that most economic problems
remain unsolved. Poverty, wealth accumulation, income gap between rich
and poor countries, unemployment, are phenomena that impinge upon
individual's life and they cannot comprehend to the full why such a
state of things is 'allowed' to prevail. Not knowing the intricate
working of transmission mechanisms, the tangled web of economic
relationships in a globalized (tele-networked) world, the proverbial
man in the street, used to assimilate gross quantities of newspaper
economics, may feel at a loss trying to comprehend how a government
controls income and employment, interest rates and inflation,
It is true that the 'recipes' of academic economists seem to have
little effect on the performance of underdeveloped countries when it
comes to be measured by actual levels of welfare as experienced by the
masses, but then it is true also that Economics is still a young
science and many venues of research, though enjoying of a highly
elaborated and formal language are nothing but first pebbles in a sea
of possibilities we are learning to navigate. Important results have
been found, but there are more results and insights yet to be found,
unless we want to consider Economics not as the dismal science but as
the dismayed science. The author refuses to assume such view and
therefore attempts to bring into discussion this proposal for a very
non-standard, and perhaps extreme, welfare policy tool to help solving
one of the icons of poverty in poor economies: the lack of housing
property.
A sudden massive condemnation of leased properties favoring tenants,
leaving aside people who own the place they live in, is an optimum
wealth redistribution policy (in the Rybszinsky sense), that brings an
increase in general welfare and an instantaneous impulse to the
development of the country implementing this policy.
People living in their own houses won't be affected, only will be
affected negatively owners receiving rents from their housing
properties. People living in a rented property experiment a net
immediate benefit by not having to pay the rents they were paying.
Since previous landlords would see their rents diminished, they must
receive compensation to avoid experimenting a net loss.
This compensation is given by the government from taxes. Since most
rented property os already amortized, the compensation price not
necessarily
the open market value (inefficient market), but it can be fixed as a
recovery cost. Strictly it is necessary that the discounted cash flow
of rents equals the discounted flow of rents after investing the
compensation monies in an equivalent low risk investment, like
treasury bonds. However, the government is free to set the
compensation price according to budget considerations.
Families that were paying rent now experiment a greater disposable
income for consumption and saving. These monies might generate
inflation in the short run, but since the increase in consumption
(demand) is permanent and it can be assumed that tenants will buy non
commerciable goods mainly, firms would have an incentive to increase
their level of output, which in turn implies an increase in the demand
for labor, reducing unemployment. Since in the short run the supply of
labor is fixed, it can be expected an increase in wages once
unemployment is reduced to the full employment level and available
hands enter the labor market. This also would reduce underground
(legal) economies and underemployment.
All these effects are multiplied by the income spills from the
increased consumption levels. It can be expected an increase in
consumption particularly from families under the equilibrium income
and since the increase is permanent it can also be expected an
increase in saving from families above the equilibrium point.
On the other hand, owners who lived from their rents would have an
(forced) incentive to diversify their portfolio and channel the
compensation flows to productive investments not necessarily related
to land. Given the new income and demand levels opportunities for
investment would multiply. There would be incentives both for
established firms to increase their output levels as for new firms to
be founded, generating jobs and increasing the country's product.
A fiscal policy based on indirect (sales) taxes would see an increase
in tax collection, while income taxes would experiment an increase
given lower unemplyment levels and better wages, thus alleviating the
problem of compensating the landlords. Since this policy favors low
income households, programs for the poor and those for housing can be
rechanneled to pay the compensations, though the particular
arrangement of the budget would depend on the particular conditions pf
the country implementing this policy.
It is also to be expected that this policy would favor the country's
main commercial partners by incrementing the demand for imports, both
final and intermediate goods. It is assumed a floating exchange rate
to allow the market to adjust the external effects of this policy,
though the exchange rate would improve given the new oportunities to
investment. Strictly there shouldn't be fugues of capital since the
permanent increase in demand would make profitable previously
unprofitable investments. Also, there can be expected better social
conditions because of the better wages and diminished criminality.
Interest rates would function as adjustment variables. To palliate the
short run inflationary effects a restrictive monetary policy should be
followed moderating or even reducing the money supply growth until it
can be kept growing at a constant rate.
For this policy to be effective, financial and real estate markets
must be relatively inefficient. Access to credit should be difficult
(for the majority), and the mortgages market must be small compared to
the mass of tenants, otherwise this policy becomes unjust to those who
have commerical credits to buy or build their houses, and the
condonation of the mortgages would affect negatively banks and other
financial agents. It is equally assumed that rents are paid to
individuals and not to firms that have invested in property and base
their income on the rent of those properties. Also it is important
that only rented housing be affected so that empty properties and
temporal housing facilities be spared. Incidentally, some landlords
that rent properties in better zones than those of the properties they
rent would get an additional benefot.
Since families don't remain static and new families are formed
continuously, there would be incentives to recondition properties not
in the market and to build new housing. It can be expected that the
new rent levels will be lower that before the condemnation since most
families would have had their housing problem solved. It is also
expected that properties in bad conditions due to frozen rents would
be revamped by their new owners.
This policy besides has the effect of avoiding the defects of
dictatorial policies with respect to preferences, since people have
already chosen according to their budget. It is assumed this policy is
implemented in a democratic country where private property is
respected de facto.
If the condemnation is not sudden but it is expected, landlords may
have an incentive to convert leasing contracts into mortgage
contracts, so that tenants would become owners instead of being
condemned to pay a perpetuity or "living tax".
This proposal shouldn't be construed as being a marxist policy; its
intention is to empower governments to realize one of their reasons to
be: to palliate the defects of the market by redistributing wealth in
a free economy.
This is not meant as a permanent solution to housing or wealth
accumulation, but as a one time move to solve historic inequalities.
Taxation schemes are inefficient in countries like Mexico, where
taxation can only be assured through *imposition* for lack of fiscal
morality, widespread corruption and underground/informal economies. It
wouldn't work in America or Europe.
Should this policy generate violence? I think not, there is no need
for it. Who would engage in violence? People who owned their homes
wouldn't go violent for they wouldn't have a reason for it. People who
were renting become owners, so they wouldn't go violent either. Rich
people? The most affected are those who don't have a well balanced
portfolio, but at any moment they would be compensated. Rich people
with a well balanced portfolio wouldn't notice a diminution in their
rents' revenue, though it would depend on the compensation scheme.
Disregarding the financing problem, if they receive governmental bonds
yielding interest and that interest equals the previous revenue from
rents, they remain the same, only with more bonds in their portfolio,
so they have no reason to generate violence, unless they attach an
emotional content to the fact of owning properties and having tenants.
If the compensation is by means of lump sums, their periodic revenue
would suffer, but their wealth would remain (approximately) the same.
Small landowners wouldn't have the power or the will to go violent.
Governement, by definition and as an abstract entity, would be
neutral, for it wouldn't be affected either (a democratic government
doesn't rent properties to individuals). The homeless remain
unaffected too, though they might see this policy as unfair. Would
they bring in generalized violence? They might be stirred by rich
people, but that would and should be considered as a crime. In the
end, there shouldn't be more than a few mobs, easily controlled, and
although I assume this policy is implemented unexpectedly, some
preparation would be needed to convince the people. I believe they
would be convinced easily.
The implemetation of this policy shouldn't generate violence. Yet
there are cases where non generalized violence can surface: when
governments and political power depend on the ownership of land, like
the cacicazgos in Mexico. In that case it may be possible to expect
State terrorism against the promoters of this policy. To a State wit h
apopulation in the millions, it is easy to supress even a few
thousands, say, all the people that know a certain person, without
most of the population or other countries noticing. Like the night of
the Hugenots. This is particularly true when human rights issues are
still pending. Given centuries of experience in secret service
operations and the availability of advanced technologies, this kind of
State-against-individual war can be easily concealed and would only be
noticed by someone knowing the affair and comparing against actuarial
tables. In this sense Home for All is a dangerous policy even to read
or know about. Yet, under the right conditions, it is certain that it
will bring excedents to the country implementing it. It depends on the
amount of rented property and the price at which properties are taken.
When real state markets are inefficient, prices won't reflect true
values and there is certain leeway to fix prices in order to balance
the financing of this policy. Each country or region would be
responsible of calculating the appropriate figures.
As a somewhat stretched analogy, Home for All is like fission
economics. You disintegrate an industry and use the resultant energy
to fuel the rest of the economy. Subproducts are in this case
stable... though there would be `external radiation`. Mortgages act as
controling rods preventing the fission...
As a parenthesis, capital fugues shouldn`t be expected for fully
rational economic actors, but politically there might be a rush out of
the country due to political pressure from land owning interests,
though it must be understood that previous landowers would be
compensated, wouldn`t lose their unrented properties nor non-housing
propertiesand would have excellent opportunities to reinvest the new
revenue stream or the lump sums received. Capital controls might be
needed in practice.
This policy, due to external debts, may need to be implemented on a
worldwide basis, with help from major financial institutions. It would
lead to the Krugman paradigm of lights being turned on... A lovely
scene from outer space, indeed...
(8)>
A thought I should have had before and made explicit. This policy is
meant to be performed by NATIONAL STATES, by the government proper and
specifically as a presidential edict. It doesn`t mean people ought to
stop paying rents, though political action to convince the government
is permisible, of course. It may also be used as leverage to convince
landlords to sell their properties as mortgages, maybe with a payment
at the end of the period instead of a downpayment... Its effectivity
however comes from the fact that the way it is formulated meets the
requirements for an optimum of Pareto, provided increases in wages and
labor compensate any increases in taxes. Due to income multipliers and
increased economic activity, national excedents should be expected.
Certain concerns may be expressed in case properties are owned by
foreigners. It should bring about a massive outflow of capital. Rents
are de facto turned into mortgages and the flux of money should be
spent in almost the same way as before, except that, according to the
financing scheme chosen, payments may vary in amount as per the new
schedule.
As for inflation, it must be taken into account that poor and rich
people experience different rates of inflation. Price increases are to
be expected in basic goods, and basic goods are an increasingly
smaller amount of consumption as per the Engels Law. Luxury items
shouldn`t show price increases. Rich`s inflation would remain
approximately the same; poor`s inflation would be expected, but it
should be compensated by increased disposable income and increases in
wages. It is assumed that tax are mainly sales taxes.
This is a link to the original paper proposal I submitted to the JPE
in july 2003.
http://ghamac.org/documenti/economicrevolution.htm
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