Peter Morgan argues that earnings-based rent-control would be better at increasing demand than quantitative easing, and will do so for less money as well.
By Peter Morgan
Recent attempts to increase the level of demand in the economy to tackle a deflationary gap, created by the lack of credit fuelled consumption, have consisted of the expanse of the monetary base through quantitative easing. However, this method of increasing demand is often considered a last resort due to the impact of currency debasement often seen after the application of such a policy.
Many economists do not believe an increase in money supply will increase the level of output and consider it to be a monetary illusion of wealth creation.
Interest rates are already at record lows and further reductions seem unlikely if not impossible. The lack of lending and the resulting lack of spending hamper the ability of the western economies to recover.
This would suggest the key to economic growth lies with the low to middle income consumption brackets that have been kept out of the market due to increased risk assessment on borrowing and the fear of negative growth. This would indicate that a successful mechanism to encourage consumption enabling growth should direct funds to the lower or middle income brackets.
One of the largest expenses for lower and middle income earners is housing. Renting is becoming more common place due to the difficulties in getting a mortgage as a result of employment uncertainties and market risk. Currently the cost of renting a property is based partly on demand and partly on the value of the property.
Landlords usually receive an income of 3% – 5% of the value of the property per year. Dependent on the cost of housing the disposable income of the individual will increase or decrease, enabling an increase or decrease in consumption due to the funds made available or retained by the landlords’ income.
As the tenant in this case is a lower or middle income earner they will likely receive a lower income than the landlord so their propensity to consume will be greater, partly as a result of necessity. Therefore by the landlord receiving less rent and the tenant keeping what would have been paid a greater level of consumption is likely to be attained.
Instead of charging rent by the level of demand or by the current value of the property a charge of a percentage of the tenant’s earnings makes the cost of living more transparent and potentially fairer. The cost of housing is now based on output and directly linked to the individual tenant’s income.
By introducing a cap on the percentage of the tenant’s income a landlord can charge the cost of housing is now relevant to what the tenant can pay and helps them maintain a good living standard.
A universal maximum percentage could be introduced setting a standard limit on the cost of housing. This percentage could alter to increase or decrease the disposable income of tenants throughout the affected area. In turn, the level of consumption will increase or decrease dependent on the percentage set.
Through this mechanism it is possible to control demand by giving the lower to middle income brackets access to funds that they can use to consume, compensating for the lost consumption created by the decrease in availability of credit. In this suggestion there is no debasement of the currency, merely a transfer of wealth from affluent people who do not consume to less affluent people who consume at a greater velocity.
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• We need to invest in infrastructure if we are going to reduce the deficit – Cormac Hollingsworth, September 19th 2011
• The 50p tax debate: Are we taxing off our nose to spite our face? – Luke Bozier, September 16th 2011
• The ‘Big Five’ banks’ private welfare state – Lydia Prieg, September 8th 2011
• Flat taxes do not deliver growth – Will Straw, August 23rd 2011
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