If you ever want to make sense of what happens in the general economy, you’ll need to learn an iron law of economics: and that’s 19th Century economist David Ricardo’s Theory of Rent, or, as I like to call it, the ‘economic rent’. It fools everyone — including modern economists. Don’t allow yourself to be misled.
Victorian Premier Dennis Napthine just gave us a great example of how this law is completely misunderstood. To prove that the ignorance is across both sides of politics, his opposition just agreed with the idea.
I’m going to tell you why they’re misguided shortly. But first here’s the news in case you missed it.
According to the Herald Sun,
‘Labor has backed the Napthine Government’s move to cap maximum daily fares at the Zone 1 rate across Melbourne’s entire tram, rail and bus network from January 1.
‘Commuters in Melbourne’s outer suburbs would see the cost of travelling to work by train slashed by up to $1200 a year under sweeping changes proposed by the State Government in the lead-up to the election.
‘A couple who commute from the suburbs to the CBD each weekday using daily myki passes would save about $50 a week.’
Now, I would never begrudge workers and labourers being allowed to keep more of their earnings.
The only problem is it’ll never work.
The only way commuters are going to keep the $1200 gain is if they own a property in Melbourne. If those commuters rent, those workers will now pay $1200 a year extra to their landlord. They’ll never see a dollar of savings.
Eh? What? How does that make sense?
You see, you absolutely must understand this. Despite what Dennis Napthine thinks, what really happens is this: the locational value of real estate inside Melbourne’s public transport will increase with the cut to the cost of the public transport. This $1200 cut will ‘capitalise’ into the price of property.
Landlords can then charge renters more for the privilege of access to the ‘free’ public transport.
That’s why renters will never see a long term gain from the cuts.
We’ve been here before in history too…
A young Winston Churchill wanted to get into Parliament back in the 1890s. But he needed a platform. An idea. Something to campaign on. Something that would get votes, make him popular, get him elected. But what? The idea came to him eventually; it just seemed so obvious he noted in his diary later, in retrospect.
You see, back then, there were tolls over most of the bridges across the Thames. Only a halfpenny, nothing really, but it was an imposition on the poor, on the infirm and especially on all those young families whose father had to cross the bridge every day to go to work on the other side. And pay up to go back home as well… So there it was. Winston campaigned for the removal of the toll.
The government levied the tolls. Who could argue against abolishing them? The government collected too much money anyway. Churchill won the election. He removed the tolls. The problem?
It was discovered that once the tolls were removed, housing rent had gone up by exactly the same amount as the removal of the toll.
So what the government had given, the land-owners (House of Lords) took away. Winston never forgot this lesson, and campaigned for the rest of his life on the issue of the economic rent. (There are those words again.) Yep he did. Made him extremely unpopular with those Lords, that’s why he was a Liberal. Until world war broke out, but that’s another story.
If you’re a renter, you simply must understand this process. Effectively your taxes subsidise property owners. Under our current system, long term you simply must be on the side of the landlords.
The choice is yours: renter, or rentier.
But there’s much, much more to be gleaned from a study of the economic rent.
I’ve produced a free series of video — with more to come — so you can learn how our economy really works. And how you can use your money to take advantage of it all. All you need to do is sign up here.
I’ve produced a free series of video – with more to come – so you can learn how our economy really works. And how you can use your money to take advantage of it all. All you need to do is sign up here.
Contributing Editor, Money Morning
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