Boris Johnson goes to Preston
29 November 2019
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Economic Theory
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3 December 2019
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Boris Johnson’s announcement that he is planning to rejig procurement rules to allow local authorities to support local businesses is no doubt a canny move to win votes in the North of England. But does it make sense in economic terms?
It’s a clear shift leftwards into territory which the Labour Party considers its own. Earlier this year John McDonnell spoke favourably of the ‘Preston model’, introduced in 2013 to link the local council with key local organisations and businesses. The initiative aimed to revive and grow the economy of Preston, one of many apparently ‘left behind’ areas of the country, and may be an example of what the Prime Minister and his advisors have in mind.
As a result of this initiative, the share of the public procurement budget spent within the city has risen from 5% in 2013 to 18% (an increase of £75 million). Similar initiatives across Lancashire have seen the proportion procured locally rising from 39% to 79%. It has been claimed that as a consequence unemployment in Preston has more than halved, and that there have been above-national-average improvements in transport, skill development and (more tenuously) health and work-life balance.
The Preston experiment involves local ‘anchor institutions’ in Preston and the surrounding area – colleges, police, the university of Central Lancashire – being induced to spend more of their budgets locally.
Controversially, Lancashire’s County Pension Fund has invested up to £100 million in Preston and South Ribble developing student flats, new hotels and office space as part of a ‘City Deal’ to revive the local economy. There has been encouragement to new worker cooperatives, and talk of starting a municipally-owned regional bank.
This scheme of ‘community wealth building’ has been widely praised on the Left, for example by Demos and the New Economics Foundation. Mr McDonnell regards it as a model to be rolled out across the country.
But this model of ’socialism in one city’, while certainly an interesting experiment, seems to negate the advantages of national, let alone international, trade and capital mobility. It may also be unwise for pension funds to be used in this way, as it increases the risk to pensioners’ incomes.
Labour has used this model as an inspiration for thinking about decentralisating utilities after its planned renationalisations. If applied to, say, energy, this model would imply a bias towards local self-sufficiency and ignoring the benefits of scale and networks.
There is certainly a role for local non-profit energy suppliers – Robin Hood Energy, set up by Nottingham City Council, is often favourably mentioned. However, Cardiff Energy has just ceased trading and Ofgem has appointed SSE as supplier of last resort for its 800 or so domestic customers. Non-profit supplier Our Power, set up in Edinburgh four years ago with support of Scottish ministers, went bust in January 2019 with 38,000 customers, causing a loss of £10 million in loans from the Scottish government. And none of the English local authority suppliers has yet made a profit.
Whether Boris Johnson intends to buy into the entire programme is doubtful. He or his colleagues will be mindful of possible difficulties with changing procurement rules as planned post-Brexit negotiations with the EU get under way. However, as my colleague Victoria Hewson points out, the rules need not be changed very much. What has gone on in Preston so far is perfectly legal and single market rules do permit assistance to areas of high unemployment and to SMEs to help them to bid for government work.
Advocates of free markets would be much happier to see a new government starting to unpick the swathes of regulation which hold back business in many parts of the country. They will point to the very poor record of publicly-sponsored enterprises in the 1970s and the potential for rising costs to the taxpayer and ratepayer as a consequence of Preston-style initiatives. But we may have to get used to the New Localism.
It’s a clear shift leftwards into territory which the Labour Party considers its own. Earlier this year John McDonnell spoke favourably of the ‘Preston model’, introduced in 2013 to link the local council with key local organisations and businesses. The initiative aimed to revive and grow the economy of Preston, one of many apparently ‘left behind’ areas of the country, and may be an example of what the Prime Minister and his advisors have in mind.
As a result of this initiative, the share of the public procurement budget spent within the city has risen from 5% in 2013 to 18% (an increase of £75 million). Similar initiatives across Lancashire have seen the proportion procured locally rising from 39% to 79%. It has been claimed that as a consequence unemployment in Preston has more than halved, and that there have been above-national-average improvements in transport, skill development and (more tenuously) health and work-life balance.
The Preston experiment involves local ‘anchor institutions’ in Preston and the surrounding area – colleges, police, the university of Central Lancashire – being induced to spend more of their budgets locally.
Controversially, Lancashire’s County Pension Fund has invested up to £100 million in Preston and South Ribble developing student flats, new hotels and office space as part of a ‘City Deal’ to revive the local economy. There has been encouragement to new worker cooperatives, and talk of starting a municipally-owned regional bank.
This scheme of ‘community wealth building’ has been widely praised on the Left, for example by Demos and the New Economics Foundation. Mr McDonnell regards it as a model to be rolled out across the country.
But this model of ’socialism in one city’, while certainly an interesting experiment, seems to negate the advantages of national, let alone international, trade and capital mobility. It may also be unwise for pension funds to be used in this way, as it increases the risk to pensioners’ incomes.
Labour has used this model as an inspiration for thinking about decentralisating utilities after its planned renationalisations. If applied to, say, energy, this model would imply a bias towards local self-sufficiency and ignoring the benefits of scale and networks.
There is certainly a role for local non-profit energy suppliers – Robin Hood Energy, set up by Nottingham City Council, is often favourably mentioned. However, Cardiff Energy has just ceased trading and Ofgem has appointed SSE as supplier of last resort for its 800 or so domestic customers. Non-profit supplier Our Power, set up in Edinburgh four years ago with support of Scottish ministers, went bust in January 2019 with 38,000 customers, causing a loss of £10 million in loans from the Scottish government. And none of the English local authority suppliers has yet made a profit.
Whether Boris Johnson intends to buy into the entire programme is doubtful. He or his colleagues will be mindful of possible difficulties with changing procurement rules as planned post-Brexit negotiations with the EU get under way. However, as my colleague Victoria Hewson points out, the rules need not be changed very much. What has gone on in Preston so far is perfectly legal and single market rules do permit assistance to areas of high unemployment and to SMEs to help them to bid for government work.
Advocates of free markets would be much happier to see a new government starting to unpick the swathes of regulation which hold back business in many parts of the country. They will point to the very poor record of publicly-sponsored enterprises in the 1970s and the potential for rising costs to the taxpayer and ratepayer as a consequence of Preston-style initiatives. But we may have to get used to the New Localism.
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Really poor commentary this. Note the ‘left behind’ in quotation marks as if this may not be true. Completely ignores the utter failure of global capitalism for these towns, abandoned by industry, government and begging for scraps of inward investment. ‘Controversially’ Lancashire Pension Fund is the best performing local government pension fund in the country, 98% funded and enabling reducing contributions from its council members, so vital thanks to Austerity. And the absolutely clueless, ‘socialism in one city’ when the Preston Model has trapped £200m in Lancashire and no doubt even more has spilled out over its borders. The model does not exclude international trade, it just produces quality local capital before it goes on its merry way into your precious free market – which has little intention of solving poverty or climate change unless there is quick exploitative buck in it for them.
Socially Just Taxation and Its Effects (17 listed)
Our present complicated system for taxation is unfair and has many faults. The biggest problem is to arrange it on a socially just basis. Many companies employ their workers in various ways and pay them diversely. Since these companies are registered in different countries for a number of categories, the determination the criterion for a just tax system becomes impossible, particularly if based on a fair measure of human work-activity. So why try when there is a better means available, which is really a true and socially just method?
Adam Smith (“Wealth of Nations”, 1776) says that land is one of the 3 factors of production (the other 2 being labor and durable capital goods). The usefulness of land is in the price that tenants pay as rent, for access rights to the particular site in question. Land is often considered as being a form of capital, since it is traded similarly to other durable capital goods items. However it is not actually man-made, so rightly it does not fall within this category. The land was originally a gift of nature (if not of God) for which all people should be free to share in its use. But its site-value greatly depends on location and is related to the community density in that region, as well as the natural resources such as rivers, minerals, animals or plants of specific use or beauty, when or after it is possible to reach them. Consequently, most of the land value is created by man within his society and therefore its advantage should logically and ethically be returned to the community for its general use, as explained by Martin Adams (in “LAND”, 2015).
However, due to our existing laws, land is owned and formally registered and its value is traded, even though it can’t be moved to another place, like other kinds of capital goods. This right of ownership gives the landlord a big advantage over the rest of the community because he determines how it may be used, or if it is to be held out of use, until the city grows and the site becomes more valuable. Thus speculation in land values is encouraged by the law, in treating a site of land as personal or private property—as if it were an item of capital goods, although it is not (see Mason Gaffney and Fred Harrison: “The Corruption of Economics”, 2005).
Regarding taxation and local community spending, the municipal taxes we pay are partly used for improving the infrastructure. This means that the land becomes more useful and valuable without the landlord doing anything—he/she will always benefit from our present tax regime. This also applies when the status of unused land is upgraded and it becomes fit for community development. Then when this news is leaked, after landlords and banks corruptly pay for this information, speculation in land values is rife. There are many advantages if the land values were taxed instead of the many different kinds of production-based activities such as earnings, purchases, capital gains, home and foreign company investments, etc., (with all their regulations, complications and loop-holes). The only people due to lose from this are those who exploit the growing values of the land over the past years, when “mere” land ownership confers a financial benefit, without the owner doing a scrap of work. Consequently, for a truly socially just kind of taxation to apply there can only be one method–Land-Value Taxation.
Consider how land becomes valuable. New settlers in a region begin to specialize and this improves their efficiency in producing specific goods. The central land is the most valuable due to easy availability and least transport needed. This distribution in land values is created by the community, after an initial difficult start and not by the natural resources. As the village and city expand, speculators in land values will deliberately hold potentially useful sites out of use, until planning and development have permitted their site-values to grow. Meanwhile there is fierce competition for access to the most suitable sites for housing, agriculture and manufacturing industries. The limited availability of useful land means that the high rents paid being by tenants make their residences more costly and the provision of goods and services more expensive. It also creates unemployment when entrepreneurs find the rents too high for them to operate and employ workers. This speculation causes wages to be lowered by the monopolists, who control the big producing organizations and whose land was previously obtained when it was cheap. Consequently this basic structure of our current macroeconomics system, works to limit opportunity and to create poverty, see above reference.
The most basic cause of our continuing poverty is the lack of properly paid work and the reason for this is the lack of opportunity of access rights to the land on which the work must be done. The useful land is monopolized by a landlord who either holds it out of use (for speculation in its rising value), or charges the tenant heavily in rent for its right to access. In the case when the landlord is also the producer, he/she has a monopolistic control of the land and of the produce. The product becomes more costly–this monopolist can effectively charge more for it, than what an entrepreneur normally would, were he/she able to compete on an equal basis, because of the excessive rent demanded by the landlord.
A wise and sensible government would recognize that this problem derives from lack of opportunity to work and earn. It can be solved by the use of a tax system which encourages the proper use of land and which stops penalizing everything and everybody else. Such a tax system was proposed almost 140 years ago by Henry George, a (North) American economist, but somehow most macro-economists seem never to have heard of him, in common with a whole lot of other experts. (I would guess that they don’t want to know, which is worse!) In “Progress and Poverty” 1879, Henry George proposed a single tax on land values without other kinds of tax on produce, services, capital gains, etc. This regime of land value tax (LVT) has 17 features which benefit almost everyone in the economy, except for landlords and banks, who/which do nothing productive and wrongly find that land dominance has its own reward.
17 Aspects of LVT Affecting Government, Land Owners, Communities and Ethics
Four Aspects for Government:
1. LVT, adds to the national income as do all other taxation systems, but it can and should replace them.
2. The cost of collecting the LVT is less than for all of the production-related taxes—then tax avoidance becomes impossible because the sites being taxed are visible to all.
3. Consumers pay less for their purchases due to lower production costs (see below). This creates
greater satisfaction with the government’s management of national affairs.
4. The national economy stabilizes—it no longer experiences the 18 year business boom/bust cycle, due to periodic speculation in land values (see below).
Six Aspects Affecting Land Owners:
5. LVT is progressive–owners of the most potentially productive sites pay the most tax.
6. The land owner pays his LVT regardless of how his site is used. When fully developed, a large
proportion of the ground-rent from tenants becomes the LVT, with the result that land has less sales-value but a significant “rental”-value (even when it is not being used).
7. LVT stops the speculation in land prices and any withholding of land from proper use is not
worthwhile.
8. The introduction of LVT initially reduces the sales price of sites, (even though their rental value can still grow over long-term use). As more sites become available, the competition for them becomes less fierce so entrepreneurs are more active.
9. With LVT, land owners are unable to pass the tax on to their tenants as rent hikes, due to the reduced competition for access to the additional sites that come into use.
10. With LVT, land prices will initially drop. Speculators in land values will want to foreclose on their
mortgages and withdraw their money for reinvestment. Therefore LVT should be introduced
gradually, to allow these speculators sufficient time to transfer their money to company-shares etc.,
and simultaneously to meet the increased demand for produce (see below).
Three Aspects Regarding Communities:
11. With LVT, there is an incentive to use land for production or residence, rather than it being unused.
12. With LVT, greater working opportunities exist due to cheaper land and a greater number of available sites. Consumer goods become cheaper too, because entrepreneurs have less difficulty in starting-up their businesses and because they pay less ground-rent–demand grows, unemployment decreases.
13. Investment money is withdrawn from land and placed in durable capital goods. This means more
advances in technology and cheaper goods too.
Four Aspects About Ethics:
14. The collection of taxes from productive effort and commerce is socially unjust. LVT replaces this
extortion by gathering the surplus rental income, which comes without any exertion from the land
owner or by the banks–LVT is a natural system of national income-gathering.
15. Bribery and corruption on information about land cease. Before, this was due to the leaking of
news of municipal plans for housing and industrial development, causing shock-waves in local land
prices (and municipal workers’ and lawyers’ bank balances).
16. The improved and proper use of the more central land reduces the environmental damage due to a) unused sites being dumping-grounds, and b) the smaller amount of fossil-fuel use, when traveling between home and workplace.
17. Because the LVT eliminates the advantage that landlords currently hold over our society, LVT
provides a greater equality of opportunity to earn a living. Entrepreneurs can operate in a natural
way– to provide more jobs. Then earnings will correspond to the value that the labor puts into the
product or service. Consequently, after LVT has been properly introduced it will eliminate poverty
and improve business ethics.
TAX LAND NOT PEOPLE; TAX TAKINGS NOT MAKINGS!