Project Syndicate, May 13, 2013
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The last month has seen a virtual earthquake in the framework for economic policy following the 2008 collapse. The conclusions of Reinhart-Rogoff paper, which has been widely cited as the basis for austerity, were shown to be driven by spreadsheet errors. The corrected calculations provide no evidence for the dreaded debt cliff. Furthermore, subsequent analysis has shown that whatever link exists between debt and slow growth is almost exclusively the result of causation running from slow growth to high debt.
This new evidence should be sufficient to prompt a serious rethinking of the austerity agenda, especially in the euro zone countries where it has caused the most damage. Unfortunately, no change of course seems likely with top officials in the European Central Bank and the European Union remaining determined to pursue their austerity agenda regardless of what the evidence shows.
This agenda implies enormous pain for the crisis countries. The most hard hit countries, like Greece, Spain, and Portugal, would almost certainly be better off leaving the euro at this point. However, their leaders lack the political will to take this step, which means that they can look forward to a prolonged period of recession or stagnation and double digit unemployment.
The goal of this policy is to force down wages to the point where the crisis countries are again competitive with Germany and northern Europe. This may be doable, but the process could well require a decade or more. It should be clear to everyone by now that wages do not fall easily. If Germany refuses to allow more rapid inflation in the northern countries then the process of falling wages and prices in southern Europe will be a long slow grind.
No one should ever accept such viciously misguided policy as an unavoidable fact, but as long as the policy is in place the crisis countries must try their best to adjust to it. In this respect, they are missing an opportunity to place downward pressure on the other major immobile factor of production: land.
Much of the story of the boom and the resulting imbalances created in the last cycle was an unprecedented run-up in house prices. While prices have fallen considerably from their bubble peaks, they still have a long way to go to get to their pre-bubble levels.
Governments can help this adjustment process through the mechanism of a vacant property tax. The logic is simple, property that is vacant for a substantial period of time (e.g. 3-6 months) will face an additional tax (e.g. 1.0 percent of assessed value) in addition to whatever normal tax the property would face. The tax would give owners of vacant land, houses, and businesses a strong incentive to lower prices in order to have the property used.
The administration of the tax should be straightforward. In almost all cases property will already have an assessed value on public records, so this will require no new work from the tax authorities. In the case of commercial or rental property, property owners will have to show an income from the property or pay the tax. If they choose to lie about a vacancy, they will end up paying tax on income they are not receiving.
In the case of purely residential property, for example a homeowner who has moved or a developer who is holding out for a high price, property owners may lie about the status, but the risk of detection should cause many to pay the tax. (Part-year vacancies may have the delicious result that German property owners will have to pay a substantial tax on summer homes in Greece or Spain.) An almost inescapable outcome is that the government will collect additional revenue and reduce vacancies, putting downward pressure on property prices and rents.
This will have a hugely positive economic effect. Rent typically accounts for 30-40 percent of the consumption basket of ordinary workers and often more than 50 percent for low-income workers. If this tax could lower average rents by 10 percent it would effectively raise real wages by 3-4 percent. This would make the process of internal devaluation far more palatable to workers. Falling rents on commercial properties should also be a boon to business.
While many of the people who will be hit by falling land prices are not wealthy, property owners as a whole are certainly much better off than those without property. And the people who will pay the most tax will be holders of highly valued vacant properties.
It is also important to realize that the tax would primarily be accelerating a process of market adjustment that would take place in any case. If the leadership of the European Union persists in its policy of internal devaluation, then prices and wages in the crisis countries will have to decline to restore trade balances. The only question is the pace of the adjustment.
By hastening the adjustment this tax will bring forward the date when these countries can resume normal growth. Furthermore, by pushing down land prices sooner rather than later, the tax will be redistributing wealth from current property owners to future property owners. This is a reasonable policy goal in a context where young people have felt the brunt of mass unemployment.
A vacant property tax is hardly a panacea and it would be much better if the ECB would reverse its policy and seek to promote growth and inflation in the core countries. However, given the range of choices available to the governments in the crisis countries, a vacant property tax should rank high on the list.