The Basic Causes of Unemployment

Sydney S. Gilchrist

[A paper delivered at the 1979 Joint Georgist Conference, San Francisco, California]

Revenue Collection; the other concerns the issue of government-granted privileges to able bodied people in the form of licenses, quotas, registrations, zonings, land titles etc., which limit or restrict the expansion of nearly every industry, trade and profession. This allows the holders of these privileges to prevent investment in capital, and prevent the employment of people in many productive activities.

Two examples are given of the effect of a special license causing unemployment: the taxicab industry and the milk industry in Sydney, N.S.W. The worth of the privilege as apart from the true capital investment is shown, together with the resulting cost to the community in higher prices and reduced service, and the reduction in employment opportunities.

The most widespread and greatest privilege which tends to cause unemployment is the license or title to hold land; land tends to be held partly out of use unless there is a firm incentive to use it. Site taxation is a just revenue collection method which acts as such an incentive and causes full employment and prosperity, in contrast to the effects of other revenue collection methods.

The second cause of unemployment is the deterrent effect of types of taxation which extract tax merely because money is being seen to change hands.

A parallel is drawn between fines which are imposed to deter unsocial or criminal activity, and money extracted by governments in relation to normal honest economic transactions. Undoubtedly such transactions are deterred, yet it is by such transactions that people seek to employ each other. Income Taxes and Sales Taxes undoubtedly prevent some transactions taking place, they thus stop sales of goods and services and cause unemployment.

The obvious cure for unemployment is twofold:

• a. Remove all laws which give special privilege to able bodied people.
• b. Steadily increase site taxation, and reduce income and sales taxes etc.

c. Unemployment, or more correctly, the lack of opportunity to be employed, occurs in nearly all so-called free enterprise countries, often to a continuously grave extent. In Australia we have had a few periods when unemployment was low, but in general we are like the rest of the world with continuing unemployment. It is clear that this is not just a floating population of people changing jobs, and it cannot be blamed on advances in technology such as automation and computers.

Many causes have been suggested, some quite false, but there is only one basic cause. This basic cause is that government maintains laws which quite obviously restrict employment and prevent the expansion of industry and the use of resources.

In other words government is causing unemployment by law.

In Australia, we have a cry for government to "create jobs", and politicians promise to do that; but what is really necessary is for government to cease preventing people from being employed.

Why do governments make such laws? Because they get elected by people who want, or condone such laws. It is a matter of education.

There are two main types of law which cause unemployment. One concerns the method of collecting revenue, and the other concerns the issuing of licenses which permit a limited amount of people and of capital to be used in some industry, but which in fact prevents other people from working or investing in it. These laws prevent normal expansion taking place which would employ those currently unemployed.

Let's have a look at these licenses first, although they go under all sorts of names such as registrations, licenses, quotas, zonings etc., sometimes they are incognito or disguised.

I offer two simple examples, and these are not any worse in causing unemployment than hundreds of other cases.

Taxi!

In Sydney the Department of Transport issues registrations for taxi cabs. Such vehicles are inspected regularly for suitability, safety, cleanliness etc. to maintain service to the public, which is quite reasonable. However, that does not mean that anyone, who can provide a vehicle which meets all requirements, may operate a taxi. If you seek to register such a vehicle, you are told "Sorry, Mate, all registrations have been taken up".

But if you really want to operate a taxi service, you can do it by persuading someone who already holds a registration to transfer it to you, the market value of such a transfer being currently about $30,000. Now why should any one offer that, over and above all the cost of purchasing a suitably equipped vehicle (probably $10,000). That $30,000 could be invested in some loan or bond and get say $2,500 per year interest.

So the privilege of holding the registration of a taxi must also be worth about $2,500, that is apart from the return for the investment in equipment, and after all expenses and driver's wages have been paid. What is this income for? and where does it come from? It must be a percentage of the fares, which are thus that much higher than they need be. The extra income is a result of the government granting special privilege to some by restricting the expansion of the industry. The income is at the expense of the remainder of the community who have to pay higher fares, and suffer from a poorer service. In addition it is estimated that some 300 extra taxis could be run and could get a good return on capital investment, and these would employ probably a further 400 people. The drivers already in the industry do not benefit from the restrictions; they have no better security, and their wages are kept low by the continual competition by the vast numbers of unemployed. If their industry and all other similar industries were permitted to employ a further five percent of people, this downward pressure on wages would not occur. It is only the privileged holder of the registration that appears to benefit, the rest of the community suffers - but remember as far as all the other industries are concerned, the taxi registration holder is just one of the community who suffers from these laws of privilege. Actually everyone is worse off.

My next example is a quite different industry.

Milk!

Until a few years ago dairy farmers in N.S.W. were all able to sell milk in Sydney. Then a law was passed which granted only farmers in a certain area around Sydney the right to sell milk there. Farmers outside the area (and prospective farmers within the area), were now excluded from the opportunity to sell milk. So some farmers on our North Coast went out of business, that is they became unemployed by law. Those farmers within the area were granted a quota which allowed them to produce and sell a limited gallonage of milk (except under some very special circumstances). In other words, expansion of the industry was prevented - in spite of a slowly growing population. The community is disadvantaged because the price of milk has risen. The employed workers in the industry do not benefit, and unemployment has been increased. And note, the milk quotas can be transferred, but they do so at a price of thousands of dollars for this government granted privilege of getting extra income without giving extra service. It is the government-granted privilege which causes unemployment, high prices and poorer standards of living.

Those were only two examples. The evil practice affects nearly every trade, industry, business, profession or calling.

Nearly every organisation of able-bodied people seeks to have government issue some license or registration which limits the competitive expansion of that trade (there are perhaps some exceptions such as government services). There are all sorts of licenses which superficially guarantee qualifications or safety, but which in addition give privilege. Governments recognize all sorts of customs and traditions in many professions such as doctors, lawyers etc., and in trade unions, such as "demarcation", and even picketting, which is the use of violence.

The main reason for the continuing failure of our so-called free enterprise system is that it is not free at all. It is a restricted enterprise system. I would avoid calling it a privileged enterprise system because that leaves out half of the equation. You can't have privilege without causing disadvantage. In the long run always, and even sometimes in the short term also, the disadvantage and distress outweigh the benefits of privilege. That is what has been learned and forgotten many times through history. I would therefore prefer to call our system a disadvantaged enterprise system.

Land

But what is by far the biggest privilege issued by government? What privilege overshadows all the others? It is the license to hold land for ever at the expense of the remainder of the community. The amount of land is limited by nature, just as taxis and milk quotas are limited artificially.

Titles to land are merely licenses issued by government which give exclusive opportunity to the title holder and exclude the remainder. Although the area of land is limited, its worth is not, for it can be increased by public works and services.

Just as with taxis, and milk, the license for land can be transferred at a price.

The holding of land is the holding of opportunity for employment. If you hold no land, you are deprived of a basic opportunity to be employed, and you have to offer to work for someone who holds such a site advantage. The holders of sites can and often do let land be idle, or operate it with far below the optimum amount of capital and labour (unless they can get a high tribute for the use of the land). Again privilege prevents both capital investment and employment.

Of course the simple way to remove this privilege and disadvantage is to levy steadily increasing site taxation, which removes the privilege by the holder having to pay the community according to the market value of the privilege service, opportunity and benefits which go with the site, and which also removes the disadvantages because of the strong incentive which site taxes give towards the reasonably full and efficient use of all sites, which then requires the full use of people. Site taxes cause prosperity and full employment and they allow the reduction of other taxes.

Taxes

I have already started talking about site tax as a revenue collection which removes unemployment.

Before I talk of other taxes, I want you to consider how we discourage crimes. If some one shop lifts, or parks in a forbidden place, we have a system which detects such behaviour and aims to discourage it by imposing a punishment. One of the widely used deterrent penalties is to extract a money payment under threat of something worse (jail). Does this fine deter repetition? If parking fines are small some people will still occasionally park illegally, but as the penalty is increased more and more are deterred. Fines do deter.

Now, I ask you what is the largest amounts of money which government extracts under threat of force? Are they not fines? What are the horrible crimes which people are committing which incur such penalties? But more importantly, do they act as deterrents? What is the difference between a tax and a fine? Consider Income Tax and Sales Tax.

Firstly, the "crimes" consist of the quite moral and economic transactions of using money to buy and sell goods and services. In the main, that is how we employ each other (while agreeing that some people get some privileged income).

If we fine people for employing each other, will it deter them? Of course it will. If the fines are small we may still tend to continue on the "criminal" activity of employing each other and earning our living. But as the level of punishment increases, a few transactions stop; and with increasing levels of tax more and more transactions cease. Government then finds it has less transactions to tax, so it raises taxes even morel It also finds that fewer transactions mean more unemployed, and it has to provide extra social services and doles; and it knows that even further taxes will be even worse deterrents. So at that stage it probably starts to issue more money and debases the currency which only leads to more problems. So any tax which confiscates money just because money is seen to be changing hands must tend to reduce transactions and to cause unemployment. The main taxes are Income Tax and Sales Tax, but among others in Australia we also have a Pay Roll Tax which actually taxes (fines) people for employing others, yet government is surprised at unemployment. Yet a tax which does not cause unemployment is available!

The basic causes-of unemployment are therefore twofold:

• 1. Government granted privileges which allow some people to rob others, by a method requiring that industry and employment is restricted by licenses etc.
• 2. A taxation system which taxes and deters production and effort by fining people for normal economic transactions.

The cure for unemployment is therefore also twofold:

• a. Remove all laws giving special privilege to able-bodied people.
• b. Steadily increase site value taxation (a tax on privilege), and reduce all taxes on economic transactions.

Of course we have some site value .taxation in Australia, particularly in N.S.W., and Queensland, but there have been changes in the last ten years or so which have reduced the intensity of site taxation, while income tax has been severely increased. I think it is rather more than coincidence to observe that although we had a rather good record for little unemployment from 1960 to 1970, our unemployment and inflation rates have risen alarmingly in this decade. Basically the trouble is that people elect governments which promise to increase privilege and handouts. They are virtually calling for other people to be robbed. Our economists and moralists have failed to teach them that robbery is an uneconomic transaction; it produces less satisfaction and more distress overall.

Our reform-type politicians are calling for more robbery to finance social welfare. They are seeking to increase privilege rather than remove it, and are continually causing poverty rather than progress.