This is on my mind as I consider what is wrong with the world’s economic systems. This has concerned me for some time as I see house prices increase beyond affordability all around the world.
Affordable housing is my primary concern because I’ve lived in a cheaper part of England, albeit one that experienced rapid house price increases before 2008. And now I’m living near Stuttgart, Germany, which had historically stable house prices until 2008.
Let me briefly summarize what happened up to and following 2008. 2008 was the year that saw the start of the Great Recession (or the Financial Crisis). Bear Stearns went bankrupt in 2008 followed 6-months later by Lehmann Brothers. Worried about global contagion and falling stock prices and the effect it would have on the wider world economies, governments intervened by reducing interest rates and having their Central Banks print money to buy government bonds, known as quantitative easing (QE).
QE is a stealth tax because printing money devalues the money, it increases inflation and makes the money in our pockets, our salaries and our bank accounts worth less. However, the justification is that we are enriching ourselves because the money goes to the stimulation of our economy thus benefiting us all. But there are rules in place stating that Central Banks cannot directly buy Government Debt, possibly to prevent abuse, and so Central Banks must buy the bonds from private entities (usually banks) who themselves finance the loans (buying bonds) to the Government.
Lowering interest rates should stimulate the economy by causing savers to take their cash and invest in the economy, either in the stock market or by purchasing goods. Often savers, or perhaps investment institutions such as Pension Schemes, decide instead to hold on to cash rather than take on any riskier investments.
Additionally, central banks printing money and buying government bonds gives the Government cheap money that enables them to invest in infrastructure projects and thereby invest in the country’s economy at a time when businesses may not be investing because of uncertainty in the future outlook.
The lowering of interest rates and investing in government infrastructure projects, together with governments bailing out banks considered too big to fail has been accused of only benefitting the rich, essentially taking from the poor and giving to the rich. That may be so, I won’t get into that here, but those who had savings in cash, a stable income and previously could not afford a house could, for a brief time between 2009 and 2012 afford a house, provided that the bank considered them worthy of credit and they hadn’t lost their jobs. Some people who already had houses, especially houses that were paid off could now afford second or third houses. These may have been purchased at the expense of those who bought houses in 2007 only to see prices crash in 2008, or those who lost jobs and could no longer afford their houses.
Our economies these days are somehow casinos and the house always wins. I don’t mean an actual house, or home-ownership, but rather the governments that to some extent control the economies, often not to the benefit of the populace, but to their benefit. Short-term policies trump long-term policies. Doing what appears to be right is often better than doing what is actually right.
So now house prices in Stuttgart are far out of the reach of all but the wealthiest and indeed the wealthiest can accumulate more and more whilst enjoying the tax benefits that come with multiple home ownership.
Housing as a Fundamental Right
Housing is a most basic need; everyone needs a home. Looking around the world there are many examples of homes, by-in-large everyone has one, although it may not be the one they want. And very often they are not the legal owner, but tenants.
In 1948 the United Nations (UN) created what they call the Universal Declaration of Human Rights (UDHR). It goes a long way but I think it stops short. Or perhaps it doesn’t, it simply leaves some terms unclearly defined.
Take for example Article 4 which states “No one shall be held in slavery or servitude…” And compare that to the Bible which states:
The borrower is slave to the lender.
In the West, we have created a financial servitude that allows people to enter an agreement where they are voluntarily slaves or servants. The Bible does a much better job than the UN by simply stating it as a fact. Loans and access to them are an important part of an economy, but more about that later.
Now mortgages on the other hand are very long-term loans intended to finance a house. Mortgages place a person in servitude for an extended period even beyond 50 years in the case of Switzerland. The word mortgage even means death pledge.
The Bible has something to say about this:
¹At the end of every seven years you shall grant a release. ²And this is the manner of the release: every creditor shall release what he has lent to his neighbor. He shall not exact it of his neighbor, his brother, because the Lord’s release has been proclaimed.
This means that the Bible specifically forbids loan terms longer than 7 years. Wouldn’t that be revolutionary. It goes on to say that you should not withold a loan if the 7-year period is almost up. Now we no longer observe a rolling 7-year period as a culture but we can simply say do not be overly risk-averse when assessing the borrower. Also revolutionary is that the Bible suggests the loan gets cancelled if it is not repaid, instead of the lender repossessing the item. These two statements are amazing. If the loan is not paid back within 7-years then the loan gets cancelled.
The upper cap for house prices, at least starter homes, would therefore be seven times the “disposable income” (meaning after food, water, taxes are paid), and there would not be housing market crashes because there would be no need to sell in case of tragedy, famine, or major market downturns etc.
The UDHR includes Article 17:
Everyone has the right to own property…
That right however can be gradually eroded through the creation of additional rules to circumvent it. I’d suggest, although I’m open to persuasion, that allowing ownership of multiple homes should not be allowed as it turns the ownership of housing into an investment and a human right should not be something that someone can invest in. Secondly, with appropriate pricing and loans as laid out by the Bible, renting would not be required because everyone would be able to afford a home.
In Europe in particular, but also in many parts of the developed world, there are building codes that determine how a house should be built. Overdoing these building codes has created problems. A good example is by stating exactly how water should be managed. So now we have a situation where we use drinking water to flush the toilet, and what could be perfectly good fertilizer is transported miles away by underground pipes. We are then asked to pay for the rest of our lives because the town has provided us with water and sewerage. God has already solved this problem with rain and with decomposition. And so it is that building codes enforce a servitude. They do have benefits, of course they do, but rules tend to be inflexible. Restrictions on the building materials is often to reduce fire risk, and restrictions on the closeness of buildings for the same reason. Sewer systems were introduced to deal with the stench and pollution in London. Now we know it can be easily composted, but you really need a garden for this so maybe composting waste isn’t appropriate for a city. Neither is a sewer system appropriate for every village. I wrote on my other blog about how in Munich right up until about 1950 water was treated simply through a system of natural ponds but then when industry polluted the ponds killing the fish and plants, they had to replace them with water treatment works.
In the UK there is a final piece in the puzzle. I was not old enough to have noticed its introduction in 1993, nor to contemplate its implication, but thirty years later UK residents are still living with the Council Tax. I’m also open to persuasion on this point, I can see both pros and cons, but by far the largest con is perpetually taxing a resident. Not homeowners but tenants, not landowners but residents (aged 18 and over). If you want to live in this town, you will pay for the privilege, and not just this town but every town throughout the country. Okay, the pros of the tax are that it pays for a police and fire service, waste management, schools, libraries, leisure facilities and support services. It is a socialist approach rather than a capitalist approach to solving a problem. It expects the Government to supply rather than allow a grassroots establishment of such services. In Germany, for example, most towns have a volunteer fire service, which seems to work for all but the largest cities.
Maybe it’s outside of the scope here but whenever the government applies a tax so that they can then provide a service in return for the tax then there is a system set up that can be abused. There is no market dynamic to hold the government to account and there is no incentive to build efficiencies. Efficiencies to government means choosing the cheapest suppliers even to the detriment of the local economy. Or choosing the supplier that is willing to provide a bribe. Let’s move on.
Tiny Homes
There is a trend, mostly from America, called Tiny Homes. I think it started in America because they typically have large homes. They also have more freedom, meaning less stringent building regulations. So the idea is you build a house for about $50,000 usually without a mortgage and having only the essentials to make life enjoyable. Actually, they are often like caravans but designed to stay in one place and built to last and for permanent residence. This can also include container homes where a shipping container is converted into a house.
I like the idea of a tiny home, I have also blogged about tiny homes and considered how I could live in a tiny house here in Germany. My conclusion is that having three children means the house would no longer be so tiny, and the house price and size is not so much the challenge as the price of approved development land and the building regulations. These are all policies that are driven by the government placing restrictions on its citizens.
The outworking of these policies, together with the problems of mortgages, is unaffordable housing. Unaffordable housing brings with it new social problems because people start to consider ways to increase their income to be able to afford housing, such as second jobs or sending spouses out to work or both.
Women entering the workforce was a major cause of increasing house prices following World War II. Once house prices increase beyond the affordability of a single-wage earner, then there is no return, from that point onwards both spouses need to work to afford housing and so they become trapped. We call it a hamster wheel, because we place value on a good, well-paying job, usually in a city with good infrastructure and modern housing. A mortgage is required to afford the house and from that point on both spouses continue to have to work until the house is paid off, which could be between 25 and 50 years.
To create a system where the most basic of needs places both adults of the family into the workplace for 25-50 years is modern-day slavery. The government, or possibly the banks, are the slave owners. They receive taxes now from twice the population that they did when only men worked and have no incentive to change that.
I believe the system is broken and rigged to benefit the government and big businesses.
7-year Loans
What would life look like if mortgages were a maximum of 7 years, the banks could not repossess the homes and second home ownership was in some way discouraged? Probably house prices would still inflate due to an increase in cash purchases but not as excessively as we’ve seen.
If you think about it, a house that is 7 times your [disposable] salary would need to be limited in scope and materials, assuming everyone is paid the same. You can assume 50% of a standard salary is available for housing and you’ve got 7 years to pay it off, then you’re limited to 3.5x salary for an affordable house.
Land ownership is something else. In the Bible land is apportioned to tribes and it remains the possession of the tribe. Land could be effectively leased for a maximum of 50 years but it could not cease to belong to that tribe. Some countries have this system, foreigners cannot own land. The question is “what happens when a tribe dies out” or when a tribe outgrows its allotted space. I suppose a sort of auction would need to take place or an inheritance rule. This does need more thought. In terms of outgrowing a space, I like to think that this will cause innovation as large family houses might be replaced with apartment blocks and farming needs to intensify or food imported from elsewhere. The cost of land would surely increase as the need for housing increases, as we see in cities worldwide.
I do not think renting is a solution because surely this will mean that the wealthy can purchase the houses with cash as an appreciating asset and then charge what they like in perpetuity to the tenant. This does not solve the 7-year debt problem and I think circumvents it. It turns house ownership back into an investment and enslaves the tenant. The public servants are typically paid less than business owners or the well-educated. We cannot tolerate living in a society where a large segment is in servitude for life.
Let’s throw another Biblical rule into the mix:
You shall not charge interest on loans to your brother…
Not charging interest on loans would be a really interesting policy (pardon the pun). In God’s society, love and generosity are supposed to be the motivator, not profit. How this has changed. Christians are often as motivated by return-on-investment as non-Christians. Have we again become ensnared by mamon?
If low interest rates contributed to excessive house prices what would a zero interest rate policy do? Not much different because in God’s system there is still a limit to what most people can earn and pay back within a lifetime. Combined with a 7-year term this should not be a problem.
Market Sentiment
The reason economies need stimulating is that there are times when people are happy to spend money, usually because they expect to get at least the same money back in return, and there are times when people are not happy to spend money because they are fearful that they will not receive the money back again, or that they may lose their jobs. This is an outworking of growing an economy on large business owners who prioritize profit ahead of stable growth. When profit is at risk then people will not be paid and may be laid off. Profit can be at risk for multiple factors including increasing competition and cheaper imports, or maybe more expensive imports leading to increased costs and then decreased orders.
In recent years the economy has gone through boom and bust cycles because of instabilities in the stock market. When money and investment comes in then spending occurs, but at the hint of something going wrong and markets slowing down then investments get withdrawn and converted to cash and then the money isn’t there any more as it is sat in cash, under the proverbial mattress. This is the debt-based and private equity-based economies that we’ve built.
Stock markets ramp up quickly because of the fear of missing out (FOMO) and they tumble down even faster as fund managers try to protect perceived gains.
Bankruptcy
I’ve witnessed first-hand, a customer of mine declare his business bankrupt after a customer failed to pay for work that had been done. This is an issue that inevitably comes up when a customer and supplier dispute some aspect of the work. I have only some wisdom but not a specific rule here. A free market allows for competition and you are free to choose supplier A or supplier B. Suppose you opt for supplier A only to find that their work is not as you expected and you wish you had gone with supplier B. A generous heart says you will pay supplier A for their work as you agreed. Then there is a greedy heart that will try to argue in court why they should not have to pay. Or perhaps it will not get to court and the supplier has to accept that the customer has stolen the work and refused to pay. Do not steal is one of the Ten Commandments, there must be a system in place where payment is rendered for work done, perhaps a minimum wage, although in general, I’m against minimum wages.
Unfortunately in business, the unexpected can happen, a delivery doesn’t turn up, in the past ships could sink with precious cargo. Dealing fairly in our businesses and preferring generosity will ensure a better society. The lower the cost of participating in society, the easier it is for everyone to bounce back. It is a long way to fall and a scary prospect to go from €100k income to zero income whilst having a mortgage of €1 million. Now imagine that there are only 3 years left on the mortgage and then it simply gets cancelled, it’s not so scary any more.
Limited Companies
What about corporations in general and the limit of liability? The purpose of a limit of liability is to say that the owner, and this includes all shareholders, if the business goes bankrupt, do not have to pay the debts of the company using their personal wealth. So when times are good the company can make large profits that get paid to the owners and when times are bad or decisions by the executives are bad, then the owners simply shut the business down and keep 100% of the profits. The debts however are owed to the employees and suppliers of the business. So the suppliers lose and the owners win. That does not appear to be fair. Now imagine a world without corporations, where shareholders paid from their own pockets for company failures. I suppose these debts could be paid off over a maximum of 7 years, therefore not a long sentence, and I believe possessions should be forcibly sold if debts are remaining at the end of this term to prevent a situation where a shareholder could sit in their luxurious mansion for 7 years with zero income and paying zero towards their debts. I don’t know enough about business to know how debts are structured. Still, I could imagine a company owned by its shareholders that could never accrue a debt that exceeded the total assets owned by the company and shareholders. It would also introduce some extra transparency as shareholders would need to expose their total net worth and essentially put it on the line for the benefit of the company. That would be revolutionary and surely cause an extra level of due-diligence in the stock markets.
Work Ethic
Some might say that if you own a house after only 7 years then what will you do for the rest of your life? The Bible says:
If anyone is not willing to work, let him not eat.
The application is clear, that work affords food. In context, it is a warning against idleness and surely someone with a good inheritance or investments may afford food also but can still be lazy. In watching an interview below (linked below), Christian Economist, Dave Arnott introduced me to the concept of work being primarily for the benefit of others. So by not working you are neglecting your role in society given to you by God. We are commanded to work six days. Involvement in local government, education or care could be a great option if you are in the privileged position of not needing to work.
In visiting Africa I saw there an opportunity to do things differently. It feels easier to influence change because they have so little to begin with. To do things differently does not bring with it so much risk. Or there are bigger problems and interfering in village life is not a priority.
In researching this topic I found an interview with Professor Dave Arnott, an Economics and Management professor from Dallas Baptist University. He has taken the Bible and performed a systematic analysis of what it teaches with regard to economics. Doing a search for Biblical economics leads to many sites and sermons espousing sowing and reaping, or “give and you shall receive”, but not a systematic coverage of the principles expected of a society seeking to follow God.
Professor Dave Arnott published an article examining the Bible for Economic principles and he summarized it in Ten Commandments.
Here are those ten commandments:
- People should be free (tending towards Capitalism)
- Work is good (6 days a week and rest 1 day a week)
- Do not steal (tending away from Socialism and the inherent taxes)
- Do not covet (or desire belongings, do not expect equality in outcome).
- Honest measures (deal with people honestly)
- Trade is good (and earn a profit)
- Love your neighbour (you both become more profitable by trading)
- Care for Widows and Orphans (individual and church responsibility)
- Be a good Samaritan
- Honour those in power
Dave mentions that the Bible emphasises looking after our neighbours. This is most commonly done through relationships and through smaller businesses. As businesses, and governments, get large and removed from people, they no longer meet the needs of the community. He also believes that it is an obligation for the church but not for the Government, and I’d agree. The government does a very bad job of caring for people. This doesn’t mean that the Church should do so free of charge, maybe an appropriate business model could be found.
Dave believes that freedom should be extended to businesses because where there is competition then good business typically prospers ahead of bad business, but we need to guard against monopolies which can then become bad as there remains no more competition. Likewise, governments can be compared to monopolies as they have the power to become the single supplier of a resource.
What I find absent in his “ten commandments” is any consideration of debt including the cancellation of debts as mentioned above.
Taxes
What about taxes? Taxes make the most sense at the local level, let’s call it the “state level” because services can be provided with more direct benefit to those being taxed. Federal taxes do not seem to make sense - the Federal government can tax the State government, or simply charge them for services that they provide. This brings some level of competition between the States which leads to efficiencies. I think the US has got a number of things right here.
Value-added taxes do not make sense because the government has not done anything to earn this money. The consumer is taxed at point of purchase but no service is provided in return. Instead, I agree to an income tax, or some similar mechanism that can estimate the cost to society in the production of goods. It’s difficult, to get this right because often the true costs are not understood until years later, such as the way tobacco companies earned huge profits but the public lost their health, or we could consider Monsanto and the Round-Up saga also leading to negative health consequences. What about the banking crisis of 2008, banks reaped huge profits and banking executives regularly get huge bonuses but when they cause massive social instability there is no consequence to them. I could imagine something like an insurance fund created by taxing the profits, but probably not even taxing profits because these days there are mechanisms to reduce profits to zero whilst having huge revenues. You could also argue that as companies grow then there is a monopoly cost to society that makes it harder to compete. Some sort of progressive tax might be appropriate if it were reinvested into the economy for the public good. I think the tax also makes sense at the point of sale, this is maybe similar to a value-added tax I don’t think it should be a blanket tax based on product type but should be so structured to aid competition and investment in the local economy thereby discouraging large organisations and multi-nationals that may form monopolies. I’d call it something like a locally derived revenue tax. And perhaps the distribution of the tax funds should be up for discussion by the community. Funding of Universities, Libraries or Museums might be suitable suggestions. Consider it an “Amazon tax”, they build large warehouses and import goods that are delivered straight to your door but undercutting the local businesses all whilst paying less tax.
On trade, I agree that it can and often does enrich both sides but it can also disadvantage local producers and incentivise slavers. Meaning if people can be exploited in a less fair or moral society to produce cheaper products, then global markets can be flooded with these products, out-competing local producers and decimating entire industries. China is particularly effective and does so often by government sponsorships and currency manipulation, both of which are usually banned by international treaties. Therefore I believe international trade agreements need to be carefully weighed to ensure a benefit to the local economy. This was recently highlighted in a case in Germany as a local Solar Panel manufacturer warned of bankruptcy. This is the direct result of China subsidising solar panel production so that they can be sold below cost price to beat out competition.
Georgianism
Back to property, I heard about Georgianism, named after Henry George who had similar misgivings to me about the creation of wealth inequality through property ownership. He proposed a tax on property ownership, specifically land ownership. Because land can be left unoccupied or unproductive, but grow in value because of the productivity of its neighbours. Such a tax as he proposed would prevent land owners from buying up large swathes of property and leaving it unproductive in the hope of getting rich and also from property developers seeking to control the housing market by keeping out competition.
Unproductive land benefits from the productivity of those around it. That’s true, but I don’t believe you need to tax it for doing nothing. Tax it when it becomes income. It will eventually be sold and if it has increased in value then so too has the tax.
What about corporations owning land? I don’t believe this is in line with what God laid out in the Bible. Land belongs to people and not to a legal entity. Corporations should be able to lease land for up to 50 years at which point they have the option to renew the lease, and they can build buildings and buy equipment with 7-year loans not exceeding the assets of the shareholders.
Does this solve Henry George’s problems? I’m not sure it does entirely. It seems that he was partly envious of some landowners who got wealthy by being in the right place at the right time and without making a contribution. The same could be said for day-traders and others who make money in the stock markets without actually contributing to the running of the companies. A tax on income that goes to the local community makes sense.
I’m not sure about unproductive land being left unproductive despite a need for the land in a growing community. It might come down to a compulsory purchase at an agreed price based on the agreement of the local community, i.e. town council. This system may be open to abuse but at least the appraisal should be accurate (based on the honest measures commandment) and the owner will be a person in the local community.
As a community grows I want a system that ensures equal land ownership for all. Not a system where the wealthiest can purchase more and more land. What could be a solution?
Conquered Lands
In the US, the lands were conquered. The army was paid for by the people but somehow the land became the king’s and was divided amongst his friends as he saw fit. Israel on the other hand, conquered the land as a people and the people became the owners of the land. This makes sense. The people funded the conquest through the provision of their young men and their taxes and they should therefore share in the spoils. War, however, is another subject that comes up only because of the need for expansion as a population grows. If we think back to Abraham wandering Canaan with his family and livestock there were probably 1000 people including women and children. They came to agreements with the local people that they could settle nearby. At this time they did not own the land but when Abraham wanted to purchase a tomb the people agreed to sell a tomb to Abraham.
I think without getting into discussions on war, the resolution to a lack of space would be agreements with neighbours. Some people groups grow and some shrink and there should be scope for the expansion of people into new territories. Where neighbours are unwilling to allow expansion then it may inevitably lead to war. Borders I think are artificial anyway. People groups have always moved freely and only in recent years have borders been imposed usually as a way for governments to better control the people.
In Conclusion
This topic has led me on quite a journey and seems to be far from over. I have only scratched the surface and believe that it could form a book. The article seems rather disorganised because each topic formed a new thought. So I’m just putting out there as an expression of ideas for now that can be further developed at a later date.
I have just purchased The Poverty of Nations by Wayne Grudem and Barry Asmuth and intend to review this book once I’m done reading it.
Please leave your comments below and subscribe for further updates as this topic deserves further discussion to develop the ideas.
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