The Australian economy rests on a decades-long property gamble that has disenfranchised younger generations. The situation is not as severe as in America, where there has been an extraordinary transfer of wealth to the so-called top 'one per cent'. But it has split Australian society in two: between those who have little or no debt on their homes, and those who either have to rent or have huge mortgages that put them into lifetime debt slavery to the banks: peonage.
It is why the differing policies of the two major parties at the next federal election take on an unusual significance. The voters' choice will go a long way towards determining if that generational split will get better or worse. Labor's promise to change negative gearing policy, and to reduce the capital gains tax exemptions, will radically change the calculations of investors looking to buy property.
The policy is socially and economically defensible, even advisable, but it is quite a risk. If investors, who make up about half the buyers in Australia's residential property market, decide that the negative gearing tax scam no longer works for them (it might dawn on them that to get the negative gearing tax deduction they have to lose money, and a higher price when they eventually sell is no certainty), then there could be a sharp downward spiral in house prices.
That would mean that Australia's dominant asset class would be in trouble. To give some idea of the relativities, Australian houses are worth almost $7 trillion, which is more than triple the value of the stock market and the superannuation pool.
Worse, Australia's banks, which concentrate most of their business on lending against property, could easily get into trouble if property prices fall. This would in turn probably lead to a sell off in the stock market because the banks make up such a large proportion of the market capitalisation. And it may make business loans harder to get. It is not difficult to imagine, in other words, some seriously problematic outcomes.
Still, addressing the extreme distortion towards property is essential for the health of the Australian economy. As the economist Michael Hudson has documented, the economic history of the West is a continual battle between a rentier class of lenders or a political elite, and the people. Rome, he notes, was a 'financial rentier state', and Athens was for a time under the thumb of a wealth obsessed oligarchy (Socrates went barefoot to protest against the greed).
This inevitably leads to debt-driven crises because the debt becomes unsustainable — a phenomenon now occurring globally as global debt goes over 300 per cent of global GDP — and the solution has usually been some form of cancelling of the loans. But that seems very unlikely to happen in the current context. What is being done instead in most parts of the developed world is 'economic austerity' which is code for bailing out banks, at whatever cost, so as to keep the game going and expand the number of debt slaves.
"These circular arguments are really just there to support the finance sector: rent seekers and creditors. They do it through a sleight of hand that makes transactions primary and everything else secondary — as if money is the reason to exist, rather than a tool."
Australia's version of the predatory, rentier class, is the 1.3 million Australians who claimed rental losses on their tax during 2016-17 and the banks that fund them. What they are doing is quintessentially unproductive because it entails investing in land value — and then making a loss. Land produces, in itself, nothing. Meanwhile, getting money for productive businesses usually requires getting a loan secured against property.
If there is a shock to the economy because of falling land values, it is likely to be far healthier in the long run, because it would mean capital will be invested in a broader range of industrial activity. Australia would have more of a mixed economy rather than one resting on a property bubble, and perhaps an economy in which the question asked is 'What can the market do for us?' rather than 'What can we do for the market?'
The property investment binge has another nasty underside. It is a purely financial play and financial markets are very different to other markets. Whereas demand for most products has limits — you can only eat so many hamburgers, for example — the demand to acquire money is without limit. That is the essence of greed: the desire to keep acquiring continues even when all a person's needs have been met (that is what Socrates was drawing attention to).
For this reason alone, the Alice through the Looking Glass nonsense that is contemporary economic theory should be discarded. These circular arguments are really just there to support the finance sector: rent seekers and creditors. They do it through a sleight of hand that makes transactions primary and everything else secondary — as if money is the reason to exist, rather than a tool.
As Hudson comments, it 'justifies oligarchies breaking free of public control to appropriate the economic surplus by indebting economies to skim off the economic surplus as interest and then foreclose on personal landholdings and public property, overthrowing mixed economies to create a pure oligarchy'. In the Australian context, that oligarchy has become the negative gearers. It is time for a revolution.
David James is the managing editor of businessadvantagepng.com. He has a PhD in English literature and is author of the musical comedy The Bard Bites Back, which is about Shakespeare's ghost.
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