(In times of prosperity the opposite applies and the prime-rate is raised to be as high as the stock-market average yield or even better, in order to successfully compete with it. Due to the need to maintain the National Debt, most governments favour a slow rate of inflation, to reduce its effective magnitude whilst avoiding the alternative of regular deficit budgeting.)
Secondly, it indirectly influences and reduces the amount of interest being paid on new mortgages and on other loans, thereby easing the borrower's difficulties, helping to avoid the risk of defaulting and encouraging the entrepreneur's efforts. It reduces the degree of his/her competition with the banks for savings and investment money. The low interest may cause the banks to reduce the rate they take on steady mortgages and what they offer on new ones too, after they realise what the greater interest rates do to the general investment situation and to their own struggling mortgagees.
However and thirdly, there are limits between which this policy may be applied. For very small reductions in the prime-rate the effect on the tax-payer is of little significance, but if the reduction is too great or if it is introduced in large announced steps, it will drive the investors into taking their money aboard, where the interest rates may not (yet) have diminished to such a large extent.
3.4.3 To Stimulate Production by the Proper Use of the Land
Since the macro-economy eventually will recover from the effects of the slump, it is instructive to ask how this comes about and to take steps to speed up the process. This enquiry also brings us back to questioning the initial cause of the slump. As described above, the slump originates from speculation in land-values, where the inflated prices inhibit its sale and proper use. After the slump develops, the smaller sums of money still available for investment are attracted by the reduced land prices, which are all that the landlords (and banks) can now obtain. The indirect effect of the Keynesian initiative for new public-works is to make the land more productive and valuable, thereby encouraging land-speculation once again. As the prospects slowly improve, these two effects enable the building trade to gradually recover. The depleted prices of the land begin to grow during the new business-cycle, although in practice this process is protracted.
To better stimulate the recovery, the Government should progressively introduce a tax based on the value of the land. This tax drives out any speculation in the land and steadily lowers its price. The taxed sum grows more slowly as this value falls. No longer does it become worthwhile for a land-owner to continue to hold onto unused land for speculation in its value. Either he/she brings it into proper use or rents or sells it to somebody else who can. This easily defined tax disregards whether the land is built-on or undeveloped, nor does it depend on the use that the site in question is currently providing. Then the land-value ceases to be speculative and it self-adjusts downwards until the competitive costs for its ownership and use are stable. Thus land-value tax is an incentive which gives the entrepreneurs opportunities for producing goods at reduced costs. The numbers of unemployed workers decreases as the land monopolies are steadily eliminated.
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