Thesis Number: #6 (Page 3 of 8)

Rip-off 3         Waste of Capital

Infrastructure built primarily to serve rent-seekers generates urban sprawl, environmental damage (loss of green fields), additional pollution (from extended commuter journeys) and it wastes capital. Opportunities for land speculation are increased, and resources available to value-adding enterprises are decreased.

The economics of this process has been documented by Mason Gaffney, emeritus professor of economics at the University of California (Gaffney 2009). Capital-intensive infrastructure (like roads to under-populated areas) turns over very slowly: meaning, a slow payback period of 30 years or more. This is at the expense of high-turnover private enterprises which generate profits quickly, and are labour-intensive.

The “bridges-to-nowhere” syndrome illustrates how rent-seekers influence the State. A notorious example is that of Japan during the boom years of the 1980s. Governments were discredited by scandals revealing the way in which politicians favoured their constituencies with capital-draining projects (Harrison 1983). The scandals around Prime Minister Kakuei Tanaka brought shame on the nation, but failed to stop what Americans call “nose-in-the-trough” politics. A recent example is the “roads to nowhere” in Portugal (Wise 2013).

Rip-off 4         Higher Taxes

Socially useful infrastructure is self-financing. There is no need to tax earned incomes to provide the transit systems, utilities and other forms of infrastructure needed to service modern societies. But because the net increase in income created by those public goods is privatised, governments have to resort to one of two financial mechanisms to fund the delivery of the infrastructure.

  1. Increase the taxes on the incomes people earn from work.
  2. Borrow from bankers, who willingly create “credit”: the rents generated by infrastructure are paid to them as interest (Hudson 2012).

Outcome: the economy is permanently locked into a path of growth that is below its potential. The distortions caused by taxes yield gains to rent-seekers and permanent losses to the working population. Those losses are cumulative. If valued on a compound basis, the total sacrifice endured since Li Bing constructed his first dike is of an order that would challenge the mightiest of modern computers to add up.

Rip-off 5         Destruction of Jobs

The rent-seeking culture survived by capturing the science of political economy. Economists misinform policy-makers in ways that undermine the prospects of present and future generations. Spurious theories are promoted to camouflage the forces that destroy people’s livelihoods. One is the argument that “inheritance is the major determinant of wealth inequality” (Harbury and Hitchens 1979: 136). We are told that parents endow their children with the wealth they accumulated from a lifetime’s work, providing their offspring with an advantage over children who do not inherit wealth. That is obvious. But is this the major determinant of inequality?

Public policies that sponsor the mal-distribution of income are the major determinant. Taxes that favour rental income and penalise labour’s income undermine the efforts of each generation to deploy talents and energy to yield the lifestyles of their choice. An example is the way in which Ireland is responding to the land-led boom/bust that destroyed its economy in 2008.

Ireland’s politicians deluded themselves by fabricating the myth of the “Celtic Tiger”. They were actually fuelling an obscene bout of land speculation. Public investment in infrastructure, such as improvements to railways and new motorways (part funded by the European Union’s taxpayers) was under-written by high-octane debt. Governments refused to introduce even a modest property tax on real estate. The property market collapse was spectacular.

Record numbers of people lost their jobs. The government mailed letters to workless youths to encourage them to seek jobs abroad. One recipient was informed of a bus driver vacancy in Malta. The pay was €250 (£209) a week, with the bonus of a “Mediterranean climate” (Smyth 2013). Politicians killed off the jobs, and left the next generation to pay the price.

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