The Global Crisis According to Stiglitz
[A Critique of The Stiglitz Report: Reforming the
International Monetary and Financial Systems in the Wake of the Global
Crisis, commissioned by the Robert
Schalkenbach Foundation, New York; and written in conjunction with a
Roundtable at the annual Council of Georgist Organizations conference,
held in Minneapolis, Minnesota, 5 August, 2011]
The seizure of the financial sector
in 2008 inaugurated the most disturbing economic crisis since the
Great Depression. In the US, house prices (June 2011) have declined
further than they did in the 1930s, and nearly one in six people
depend on government food stamps to ensure they have enough to eat.
The United Nations appointed a panel of experts to investigate the
reasons and offer recommendations for reforms. The experts chaired
by Joseph Stiglitz, a Nobel Prize winning economist who has earned
his credentials as an independent-minded public servant, attributed
ultimate responsibility to financiers. These were the people who had
reaped huge rewards and then shifted the costs on to taxpayers. If
reforms are confined to those elaborated in The Stiglitz Report,
however, the next boom/bust cycle is unavoidable. This will
terminate with a peak in land and house prices in 2026.
Extrapolating current trends and the anticipated shifts in economic
and political power over the new 18-year business cycle, we predict
a global crisis centred on 2028 that will be even more socially
damaging than those currently being experienced. The stakes are
high: failure of economic policy today will drive the world past the
tipping points on climate change, global poverty and resource wars.
In his Foreword, Joseph Stiglitz stresses that his panel was
comprised of experts who could offer an independent assessment of the
economic crisis. He emphasises that personal and political interests
colour the views of many social scientists that help to shape economic
policy. We may, therefore, judge the validity of his claim in terms of
whether The Stiglitz Report reaches beyond the conventional
policies currently recommended (or being considered) by governments,
agents of the state and their consultants, who claim to be working
towards stable economic growth.
Stiglitz maintains that it is possible to achieve standards of
objectivity in which economic theories and insights may be offered
that have not been compromised by (say) the lure of bonuses that are
said to influence financiers, or the prejudices of "free market
fundamentalists". Stiglitz draws attention to the policy
preferences known as the Washington Consensus which he characterises
as the "dominant orthodoxy". If the economic crisis was
facilitated by that ideology, is The Stiglitz Report free of
the bias and material interests that subvert those ideas that could
generate the desired outcomes from economic practices?
The standards against which we must judge the report are set by
Stiglitz. His targets and aspirations
for a new globalisation are fourfold.
- Better, more democratic governance
- Greater stability
- Faster growth
- Output more equitably shared
We conclude that the recommendations in this report cannot deliver on
most of these goals. The Stiglitz Report confines itself to
the conventional wisdoms that are reported in the daily press.
Although Stiglitz himself claims that they were commissioned with the
freedom to develop "new ideas",
the burden of their recommendations is directed at the re-regulation
of the financial sector. Fiscal reform is limited to issues relating
to the environment, and is largely presented in obtuse language. There
is no treatment of tax reform in terms that would amount to a counter
cyclical strategy for stabilising the capitalist economy. This means
that the primary source of instability in the capitalist economy (the
pursuit of unearned income via the land market) will continue to
destabilise the global economy over the next business cycle.
The Role of Real Estate
The clues that could have led to a substantive analysis of the 2008
crisis were noted by Stiglitz himself. He recognised how "the
real losses in output would come after America's real estate bubble
 The report alludes to the collateral
damage inflicted by activities in the property markets in the
developed countries which endured real estate bubbles that "precipitated
problems in financial markets".
The increase in the value of collateral offered for loans contributed
to the expansion of credit.
Interestingly, the report does note that if lending to real estate was
constrained, there would be an increase in capital investment in other
sectors. And yet, despite these
insights, The Stiglitz Report fails to offer a formula for
synthesising all these strands in a problem-solving blueprint.
Instead of forensically examining the way factor incomes are affected
by property bubbles, and tracing the linkages to bankers and the wider
economy, the experts sidelined the sub-prime mortgage market. It was
no more than one example of "predator lending".
As a consequence, important issues that might have affected their
conclusions were not explored.
Speculative activity in the housing market does receive a glancing
reference on page 20. Responsibility for the consequences, however, is
diverted away from land speculators. Culpability is assigned to
financiers rather than to the flaws in governance which actively
encourage property speculation. Thus, we are not told about the
implications of the policy failures that encouraged banks to "exploit
those who were financially unsophisticated and incentives to maximise
transaction costs". And so, rather
than offering the new ideas promised by Stiglitz, the experts direct
their wrath at financial markets.
Given the report's references to the property market, we might have
expected a discussion on fiscal reforms that would neutralise the
propensity to speculate in property. Instead, that discussion is
confined to issues relating to climate change. The dynamics of urban
real estate are absent from consideration.
But even to the extent that the report does discuss fiscal policy,
untutored readers would not understand that
The Stiglitz Report was referring to the need to tax a
particular flow of income (rents), offset by a reduction in taxes on
labour remuneration and the profits of man-made capital. These issues
are glossed over with the repetition of the street slogan: tax "bads"
(like pollution) rather than good things (like work and savings).
How would taxes on carbon emissions reshape the economy? They would "simultaneously
correct a negative externality".
A trained economist would know what that meant (maybe); but what about
the people whose political support is needed, if there is to be a
radical restructuring of the incentives that affect the fabric of
society? What does that word "externality" mean, exactly? We
shall explore that concept below. Here, we need to note that even the
carbon tax recommendation is presented in contradictory terms. The
authors appear to endorse the cap-and-trade arrangement for
diminishing CO2 emissions. That means The Stiglitz Report
implicitly accepts the privatisation of at least part of the rents
that measure nature's capacity to absorb waste. As such, The
Stiglitz Report actually reinforces the doctrines that endorse a
form of income distribution that is at the heart of the global crises.
We need to unpack the report's failure to use language that people can
understand in a way that leads to the democratic mandate that is the
political pre-condition for the adoption of the appropriate corrective
policies (see Box 1).
Box 1 / Choking on Agglomerations
The Stiglitz Report refers to
proposals for what is known as the Tobin tax (a charge on
financial transactions). There are difficulties with the
implementation of that proposal, they note, such as the risk of
banks losing some of their trading business to smaller
exchanges. But The Stiglitz Report suggests that a small tax on
financial transactions could work. Why? Because of the "
positive agglomeration externalities" associated
with banking (Report, p.189).
What does this mean? In layman's language, the experts are
saying that the rents of the locations occupied by banks are
raised because of the close physical proximity of financial
institutions. Bankers and brokers want to rub shoulders with
each other, and are willing to pay a premium to occupy buildings
close to one another's offices. A charge on those rents could be
carried without distorting economic incentives. But The Stiglitz
Report fails to spell out the economics of this virtuous way of
raising revenue in terms intelligible to people not familiar
with the jargon of economics. To be fair to laymen, however, we
need to acknowledge that even the most celebrated of economists,
including those with Nobel prizes, lack the understanding needed
to explain why a public charge on the value of locations cannot
be transferred to others (which would distort activity).
On taxation, criticism in The Stiglitz Report is directed at
tax havens. But the report does object to the way fiscal jurisdictions
in the global South have been turned into scapegoats while US states
like Nevada offer corporations the opportunity to register themselves
in ways that are not transparent to fiscal authorities.
Fatally, from an analytical point of view, The Stiglitz Report
fails to develop the implications of its references to money
laundering. Drug lords and kleptocratic dictators are fingered,
without an additional discussion of how the largest part of the value
extracted out of the economy is by owners of land who (qua owners)
contribute no inputs of matching value. The notion of free riding is
employed in relation to countries that are tempted to employ
protectionist policies, while ignoring
the people who free ride on society by living off the rents generated
Culpability, when it is assigned, is directed at Stiglitz's bête
noir, the IMF, for pushing developing countries towards policies
that caused the crisis. This
institutional critique camouflaged the failure to provide the
assessment of the theory of post-classical economics which is
required, if the needed forensic examination is to be equipped with
the appropriate tools to interrogate the facts.
Box 2 / Risks & Rewards, Rip-offs &
Following conventional wisdom, The Stiglitz
Report claims that "financial markets did not manages the
risks well before the crisis" (p.xxii). On the contrary,
bankers rode the risk curve very well to maximise their incomes
over the property cycle.
The financial sector is not a state-sponsored service. It is a
profit-seeking, privately owned business. Taking into account
all the factors that are permitted under the law, including
moral hazard and the gullibility of low-income families,
financiers structured their business deals to generate returns
which, over the years 1997-2007, yielded handsome rewards
(stocks, bonuses) which far eclipse the losses subsequently
incurred (2008 to date).
If this outcome is viewed as a risky approach from society's
point of view, we need a deeper debate on precisely what claims
society has to the forms of income which render the economy
unstable. If the responsibility is not with the financial sector
and its agents (they do not create the laws of the land or frame
the nation's tax policies), could the failure be in the realms
of governance? If so, a debate is needed that reaches beyond the
alleged failures of those civil agencies deputed to regulate the
Thus, the analysis of risk is emotive rather than analytical.
Stiglitz himself repeats the general complaint that bonus schemes in
the banking sector encouraged "short-sighted behaviour and
excessive risk-taking". Financial
incentive schemes were, in fact, long-sighted as far as the financiers
were concerned. Apart from the individuals who were held to account
for operating Ponzi schemes, bankers continue to enjoy their
millionaire lifestyles funded by the bonuses received over the past
decade, and they are receiving their bonuses in the post-crisis
period. If incentives are really distorted by bonus schemes, a
comprehensive analysis is needed which takes into account the
corresponding failures of governance (see Box 2).
Equally shallow is the report's review of the benefits allegedly
derived from the regulation of the financial sector. Faith placed in
the gains from re-regulating banks relies on the belief that the
regulations spawned by the 1930s Depression delivered a period of
stability. This historical
perspective, which helps to legitimise the notion that the financial
sector can be managed by regulators, can be challenged (see Box 3).
Box 3 / Regulating the Boom/Bust Business Cycle
The Stiglitz Report breaks 20th century
financial history into three phases:
- Pre-1929, leading to the Wall Street
- Post-1930s up to the 1970s: absence of
crises. The world had learnt the lessons of the Great
- 1980-2010: de-regulation ("liberalisation")
of the late 1980s was followed by more than 100 financial
An alternative scenario can be constructed that locates the
post-1980s events in an historical process that spans 200 years
of financial instability. The early postwar decades were
relatively stable because of the massive levels of capital
formation necessitated by the destructive world war. But, even
so, the banking sector was not immune from crises despite tight
regulation following the Glass-Steagall Act. The UK suffered the
"secondary banking crisis" (1973-75), and in 1976
James Callaghan's Labour administration suffered the humiliation
of a financial crisis that led to an appeal to the IMF for
Research is needed into the hypothesis that the financial
crisis of 2008/10 would have occurred even if the Thatcher and
Reagan liberalisation policies had not been implemented. That
research would need to take into account the continued presence
of incentives that shaped the boom/bust cycle of the past 200
The Managerial Hypothesis
It is disappointing to find that Stiglitz himself narrows the
analytical framework by endorsing the view that developing countries
were innocent victims of "America's mismanagement of its economy".
The authors appear to be confused about the origins of the crisis. On
page 191, we are told that the crisis spread from the "country of
its origin" - America. But we are also told that "Other
countries had real estate bubbles which also collapsed, with similar
consequences. These difficulties in the real estate sector precipitated
problems in the financial markets".
Here was an insight that required a deep analysis of real estate
economics and this sector's the macro-economic influence. That
analysis, if it was undertaken by the experts, is not disclosed in
Instead, we are offered the impression that the problem was of a
managerial character. But if there was mismanagement, it is difficult
to see how we can exonerate other countries which employ a similar
financial model to the one favoured by the USA. It may be that the US
took the lead (through its advocacy of the Washington Consensus) in
advocating "liberalisation" on developing countries. But at
what point do sovereign nations in the global South begin to take
responsibility for their actions? If they acquiesce in the doctrinal
preferences of the US, should they not share the blame for
The mismanagement approach to diagnosing the crisis distracts
attention from the structural flaws that may actually be the source of
cyclical financial crises. The managerial hypothesis presupposes that
the economy is such that people in authority can exercise power to
maintain stability of the system (presumably if they remained alert at
The Metrics of Externalities
The Stiglitz Report refers repeatedly to externalities without
adequately elaborating on the metrics of the costs and benefits of
decisions that influence outcomes. The use of that word "externality"
may reveal much about why contemporary economic analysis continues to
fail to deliver coherent strategies for establishing stable growth
that benefits everyone.
We get the idea that a bad externality imposes negative consequences,
as with the pollution from a power plant that damages people's health.
And then there are the good externalities. These, notes the report,
may arise from the "positive agglomeration" associated with
the concentration of stock market activities in particular locations.
But The Stiglitz Report fails to lead us to the one policy
that would painlessly transform bad externalities into good ones.
Repetitive use of the world externality compromises analysis by
suggesting that, in some material way, consequences in the economic
sphere are ejected into some non-economic space. In reality, the
consequence of every action is measured by the pricing mechanism (see
Box 4 / Can we Externalise our Actions?
Post-classical economists suggest that the
pricing mechanism in private markets is so constructed as to
make it possible for some people to avoid the consequences of
their actions. Thus, the costs of pollution are "externalised".
This is an example of "market failure", and it leads
to policy prescriptions such as the need for regulatory
intervention. Thus, polluters escape the consequences of their
anti-social action: they dispose of their waste in a way that
imposes disadvantages on others. Take a closer look at what
- The cost of disposing of waste
by-products is not borne by the polluter. Ergo, this is
reflected in higher profits. The cost is not "externalised":
it is transferred to others. Insofar as property rights
permit this, we are dealing with a process that is internal
to the economic system.
- When others are forced to absorb the
cost, this reduces the economic value of the locations they
occupy: the rents are lower because of the health hazards.
This cost-transferring process is internal to the social
system. It was intended by those who, in the past, framed the
tax-and-tenure rules. It is misleading, therefore, to
characterise the process as a failure. In fact, it is eminently
successful in its intent. We do not improve analysis by talking
about the need to internalise the costs within the pricing
system, because they are already internalised, through the land
We need to appreciate the awesome financial implications that are
camouflaged by that clunky concept "externality". Investment
in education, or laws that permit labour migration, draw attention to
outcomes that may be good, or disruptive of people's lives, depending
on the character of the financial system.
Education delivers returns that exceed the rewards received by
employees and the entrepreneurs who invest in the capital of
enterprises. By one route or another, that additional value (surplus
to the labour and capital markets) is transformed into rents that are
charged for the use of land and natural resources. A similar outcome
arises with the freedom of people to move to places where there are
economic opportunities. The free flow of labour results in additional
value being created in excess of what is paid to Labour and Capital.
Remittances by workers from developing countries, for example,
totalled $325bn in 2010, according to the World Bank.
Much of that money is invested in real estate (such as building homes
in recipient countries where many of the extended families could not
otherwise afford to pay for the construction of modern dwellings).
This, in turn, raises the prices paid for the use of land.
Australia offers an overview of the outcome of the confluence of such
externalities. Figure 1 traces the distribution of income over the
20th century. As a proportion of GDP, the net earned income of Labour
and Capital declined. But the real living standards of a workforce
that grew through migration rose by an enormous factor. The share of
rents rose from about 14% of GDP in 1911, to a combined tax and rent
total of 61% a century later. If government had not used income,
corporation and consumer taxes to raise its revenue, the taxed income
would have surfaced as land rents.
Australia benefited from investment in public services funded out of
rents. A huge sum was delivered as a result of migration and
investment in the families who relocated themselves on this continent
from Europe and Asia. This case illuminates the vision of how good
externalities secure the welfare of the nation.
But we need to pause to reflect further on this case. Might Australia
have been materially richer and environmentally healthier if she had
continued with her 19th century policy of funding infrastructure
directly out of the rents of land? 
Did the almost complete abandonment of the rents-as-public-revenue
policy, in favour of conventional fiscal policies like the income and
corporation taxes, inflict deadly losses on the economy? These
questions relate to the way in which the pricing mechanisms - of both
the public and private sectors - either worked in harmony with each
other, or were in conflict. If they were in conflict - as when prices
do not distribute incomes according to the contributions of those who
participated in the economy - this process was responsible for
imposing artificial limitations on the productive abilities of the
The Stiglitz Report would have performed a valuable service if
it had drawn attention to this reality. It could have done so by
employing the insights of the Henry George Theorem elaborated by
Joseph Stiglitz in 1977. Instead, the
report, while drawing attention to bad externalities, does not do so
in terms that would animate public support for the radical changes
which Stiglitz himself considers are necessary.
The Soft Shoe Shuffle
The Stiglitz Report wants to go in for "the kill,"
but ultimately fails to do so. Its analytical apparatus does not
empower the experts to follow their instincts to their logical
conclusion. We see this with their use of metaphors, and the
inadequate deployment of terms like subsidies.
Negative subsidies create losers. Should we measure these losses to
determine whether the financial system should be re-calibrated to
eliminate subsidies? The report refers to "free riders"
without adequately exploring how the capitalist economy operates to
discriminate in favour of privileged people who enjoy lifestyles on
the backs of other people's labours.
In relation to the banking system, the discussion on externalities
offered by The Stiglitz Report is superficial. If an
individual bank exposes itself to risks that may render it bankrupt,
it may also undermine other banks to which it is linked through debts
and the trades in financial instruments that were backed by sub-prime
mortgages. The Stiglitz Report contrasts this vulnerability
with the macro-economic consequences of a shoe shop failure.
This facile comparison does not illuminate the junction boxes in the
structure of the economy that are liable to trigger shock waves if one
of them should fail under stresses caused by overloading the system
(see Box 5).
Box 5 / Shoeing in the Wrong Metaphors
Investigation into the causes of the financial
crisis needs to reach beyond the use of metaphors. If the report
had substituted a construction company for the shoe shop, it
could have derived insights that were significant as advanced
warning of an impending financial crisis.
We know from historical evidence that speculative activity in
the land market raises prices for assets that are in fixed
supply above the levels that many users can afford. The negative
effects may be traced in the increasingly onerous terms imposed
on people taking out mortgages, and the effects on the balance
sheets of shoe shops on Main Street through the reduction in
disposable incomes. If a construction company should fail, that
would tell us a great deal about the distribution of income, the
strains on household budgets and the approximate point reached
by the property cycle within the overall 18-year business
* Fred Harrison, Boom Bust, London: Shepheard-Walwyn,
Laying Bare the Linkages
Figure 2 traces the chain of events triggered by investment in
education and occupational skills, which raise productivity in the
economy. One consequence is an increase in rents people are willing to
pay for the use of land. This, in turn, encourages banks to increase
the credit advanced to all the participants in the property market.
Thus, as value-adding people raise the levels of productivity in the
economy, many of the benefits tend to be captured in prices that rise
faster for assets that are fixed in supply. Urban land is an obvious
example of such assets. In the composition of the nation's income (as
we saw in the case of Australia), this is reflected in the shift in
the ratio of economic rents relative to wages (W) and profits (I).
Given the tax-and-tenure rules as currently constructed, it would be
irrational for profit maximising bankers not to focus
their attention on the rewards to be derived from all the activities
associated with trades in assets that include land. This is what
happened in the run-up to the peak in property prices (2006 in the US,
2007 in Europe). The fiscal system reinforced the incentives to
concentrate on such deals because, at present, it rewards land
speculation while penalising the value-adding activities that take
place through the labour and capital markets. Might it be otherwise?
The Stiglitz Report is silent. If we are looking for an
Economic Stabilisation Theorem, we need to look elsewhere. A starting
point would be to take a close look at the points of tension in the
market economy. Some of these are schematically illustrate in Figure
Asset prices rise as productivity raises returns in the land market,
causing banks to expand the supply of credit. This further raises land
prices, which (under the current fiscal policy regime) drives prices
to heights that are beyond affordability for many people and firms.
What would happen if, instead, the good externalities that surface as
rents were treated as public revenue? The threat of internal shocks is
neutralised. The incentive to speculate in land is removed (negative
feed-back). Instead, the extra revenue is channelled into social
infrastructure, which gives a further upward twist to productivity.
The economy is on a virtuous growth cycle.
Bereft of an awareness of this process, it was not possible for The
Stiglitz Report to deliver anything but recommendations that
happen to suit those who continue to live off the rents produced by
the value-adding population. The Producer economy will continue to
suffer violent swings (positive feed-backs) if rent-seekers are free
appropriate the increments of new income added to the economy.
The productive economy needs a mechanism for re-balancing itself, at
higher planes of income to secure evolutionary progress. Negative
feedbacks are positive inducements to qualitative advances in
lifestyles. People may opt to work less, at current levels of material
income, rather than accumulate more tangible wealth. This is the
trade-off in the pursuit of leisure and aesthetic wealth, which is the
mark of a civilisation when everyone is free to engage in this
process. How might the Stiglitz experts have led themselves to
more profound conclusions? One route would have been through a deeper
examination of cases of recent boom/busts. One such example is the
Asian crisis of 1997, to which they had drawn attention.
The Asian Crisis
The low interest rate policy promoted by Alan Greenspan (then
Chairman of the US Federal Reserve), in part to combat the Asian
crisis, created the flow of "hot money" into the property
markets of countries like Thailand, Indonesia and the Philippines.
Real estate prices rose to levels that became unsupportable. They had
one direction only in which to move - downwards. Focusing on this
case, the Stiglitz experts could have asked two questions:
1. Would the incentives that attracted the hot money
speculators have been diminished if the Asian banking system was
more tightly regulated (complying, say, with the notions now being
touted for controls over banks in Wall Street and the City of
To answer that question it would have been necessary to evaluated the
rates of return from the continuation of property speculation after
allowing for the cost effects of greater oversight in that region's
financial sector. As land prices can rise at annual rates achieving
30% and more, there is a high probability that tighter regulation of
lending would not have deterred the practices that are adopted by
banks that fuel property booms.
2. If Asia's governments had applied the Henry George
Theorem, so that a rise in land and resource rents would have
benefited the public sector, would that have moderated the direction
of capital flows?
We suggest that the people of Asia would now be richer for having
bypassed the boom that led some of their countries into busts and the
arms of the IMF. If Western investors could not extract high returns
from Asian property, would they have invested their money in
productive enterprises within their home economies? The answer, again,
depends on the nature of the fiscal incentives within the
Japan's Lost Decade
In my view, on the basis of current policies recommended for the
financial sector, the economies of Europe and North America will
endure the fate suffered by Japan in the years following its last
land-led asset bubble.
Figure 3 tracks land prices in the run-up to the bubble's peak, and
the social trauma that followed. To try and escape that economic
depletion, successive governments resorted to a monetary policy of low
interest rates and the protection of banks (by refusing to write-off
the bad loans to the property market 
). The result was protracted economic losses with substantial negative
effects on the quality of people's lives. This included the
dismantling of the lifetime employment arrangement that had hitherto
been practised by many successful corporations.
Japan's policy-makers were deceived by indicators that convey false
information. GDP, for example, continued to grow even as the quality
of people's lives contracted (Figure 4).
A Land Price Index, as the measure of the economy's net income,
provides the best indication of the health of the economy. But
although Japan's statistics on prices in the land market are second to
none, her policy-makers lack the theoretical apparatus that turns
their Land Price Index into the primary diagnostic tool. If they had
correctly interpreted their Land Price Index, they might have drawn
different conclusions about how best to cope with the crisis. The
losses were staggering (Figure 5).
The people of Japan were not the only ones to suffer from this
failure of governance, however. By keeping the cost of money at zero,
the rest of the world endured the carry trade. Money was borrowed in
Japan and reinvested by speculators in real estate in Europe and North
America. This added to the "over-heating" of prices in land
markets that peaked in 2006/7. Because of the low cost of borrowing
money out of Japan, western banks could afford to carry the higher
risk of lending to sub-prime borrowers in Baltimore and Detroit (USA)
and Birmingham and Droitwich (UK).
The Threat from China
Joseph Stiglitz has personally made a notable contribution to
economic theory, not least with his formulation of the Henry George
Theorem. This renders it all the more puzzling that he fails to place
the Georgist paradigm at the heart of his macro-economic analyses.
High finance (in both the private and public sectors) do more than
just circulate within some surreal financial world: it is the
facilitator that links all the component parts of the economy,
including public policy and the property markets. Thus, failure to
understanding the way in which the financial arteries operate leads to
fatal consequences. An example is the way in which monetary theorists
emphasise the quantity of money as central to the stability of the
economy. They are misled by their inability to recognise the direction
of causation. Credit expands
in response to rises in the price of land.
By failing to highlight the structural weaknesses in the foundations
of the capitalist economy, The Stiglitz Report lost a golden
opportunity to guide policy-makers towards the sustainable forms of
production and income distribution. This lost opportunity will be seen
to have been responsible for fatal errors in the coming decades. The
crisis in economic philosophy is most ominously highlighted by the way
in which western economies are sleep-walking into a trap being laid by
China's policy changes in the realms of property rights and taxation
will protract the restoration of full employment in the West while
guaranteeing that the next property cycle will disrupt the global
There is no mystery about the communal and macro-economic stresses
that can be tracked back to the tax-and-tenure model that is at the
core of capitalism's problems. The relevant information is in the
public domain, and was therefore available to the Stiglitz experts. A
recent example is the publication of articles in the Financial
Times which leave no doubt as to the way the disruptive forces
operate within the market economy.
- June 1, 2011: Jamil Anderlini contributed an article headlined "Fate
of real estate is global concern". Stability within the
Chinese economy was predicated on the health of its property
market. Prosperity within China, in turn, affected the flow of
world trade and therefore the health of household economies in
Europe and North America.
- June 2, 2011: the headline for the article by Henny Sender and
Jamil Anderlini was "Land price fall threatens local finances".
Municipal governments became heavily dependent on the sale of land
to speculators for revenue needed to invest in infrastructure. The
prospects of windfall gains from land speculation had driven
prices beyond the affordability of most people. Beijing imposed
restrictions on the property market, which staunched the flow of
revenue to local governments, causing a fiscal crisis.
- June 3, 2011: "Rise in evictions sparks deadly violence",
reported Jamil Anderlini. An estimated 3m farmers faced the
prospect of losing their land every year in "a massive new
wave of land grabs". This provoked protests as communities
were broken up in a transformation of neighbourhoods that were
perceived to be driven by a malevolent political agenda that
enriched a few property developers and which corrupted civil
Thus, a few pithy articles explain why the global economy will not
achieve the desired stability over the next business cycle. To rub
home the lesson, Anderlini returned with another article on June 6,
2011, headlined: "Beijing must avoid at all cost a giant pop as
it reins in house prices". It was, of course, the land price (not
the price of reproducible bricks-and-mortar) that counted.
China over the next business cycle, in the run-up to the peak in
global house prices in 2026, may be treated as a laboratory-like test
of the thesis in Henry George's Progress and Poverty (1879).
To date, all the evidence affirms the contention that land speculation
is the single most destabilising form of activity in the market
economy. The antidote prescribed by George: socialise the rents and
eliminate the injurious taxes, to convert bad externalities into good
ones through accelerated investment in public goods and the expansion
of demand for employees.
None of this empirical evidence informs The Stiglitz Report.
Consequently, the fiscal remedy fails to surface in the
recommendations on how to deliver a financial industry that works with
the value-adding sectors. As a result, the discourse on policy reforms
is left open to vacuous proposals such as the need for a Happiness
Index to track the state of health of the economy (see Box 6).
Box 6 / Are You Happy?
In May, 2011, the OECD launched its on-line
Better Life Index. Individuals may calculate standards of living
in the 34-member countries. David Cameron's Coalition government
in Britain is elaborating a similar Happiness Index against
which to judge the efficacy of its policies.
The happiness concept was effectively deployed by America's
Founding Fathers. They substituted happiness for the word "estate"
(the old English legal term for landed property) when they
formulated the future of the United States. They aimed to
deliver "Life, Liberty and the pursuit of Happiness"
in place of John Locke's "Life, Liberty and Estate".
The political convenience of the happiness goal is that one
cannot begrudge and question some people who may be happier than
others. Nor can an unhappy person demand her constitutional
right by suing government for more happiness. It is, of course,
possible to sue government if people had a constitutional right
of equal access to land or the benefits funded by the rents
channelled through the land market.
Towards a Better World?
Stiglitz claims that "the world after the crisis will be
different than the world before the crisis".
[24 Confidence in this forecast is
grounded, in part, in the capacity of people like the UN's experts to
identify a uniform one-size-fits-all approach to solving the problems
of the global economy. The imperative for such a uniform approach is
illustrated by the report's claim that it was "hard" to
achieve global recovery if one part of the world remained in recession
(isn't this tautology?).
Policy-makers seek comfort in the view that all countries should pull
together according to some agreed set of policies. But why rely on a
single strategy to re-float every country simultaneously? Does that
not pose the risk that a failed package of policies may constrain all
countries below their optimum operational levels? After all, we have
it on the authority of The Stiglitz Report that "It is
not clear that there is yet an adequate understanding of the
dimensions of the required action".
And if that is the case, why should we have confidence in the ability
of an International Panel of Experts to deliver advice any more
reliable than that which was on offer from the IMF?
The pursuit of uniformity (conformity?) distracts from the possibility
that lessons may be derived from the success of an individual country
that chose to "go it alone" (see Box 7).
Box 7 / The Sovereign Wealth Strategy
If the global economy is operating at
sub-optimal levels, is it possible for a country or region to
break away from consensus policies to elevate their operational
efficiency and achieve full employment of resources?
There is no reason, in principle, why a nation could not
generalise the Henry George Theorem (which Stiglitz developed in
terms of the economics of an individual city). An individual
country could restructure the way it raised revenue without
transgressing international agreements under treaties such as
those enforced by the World Trade Organisation. This financial
reform would reduce costs of production and raise the economy's
competitiveness in global markets without the need for the
austerity policies that are now reducing people's living
standards within the trans-Atlantic regions. Some countries
would complain that this gave the reformed economy an "unfair"
competitive advantage (lower prices flowing from political
decisions). But there would be nothing to stop such complainants
from adopting the same reforms.
In the terms of my assessment, there is little in the report's
recommendations to suggest that the Stiglitz experts would lead us to
a better world. They do not suggest ways of altering the incentives
that are ultimately responsible for triggering cyclical breakdowns. If
the world is going to be different, after the crisis, the changes will
not be for the better for most people in the trans-Atlantic countries.
I now offer my overall assessment of the value of The Stiglitz
Report under the four criteria stipulated by Joseph Stiglitz.
"Better, more democratic governance"
Institutional reforms are proposed that would lead to greater
transparency and democratic participation. Pensioners, for example,
should be represented on regulatory institutions,
 because they are particularly
vulnerable to the losses induced by financial crises. Such
interventions, however, would prove to be cosmetic. Ultimately, the
power resides with those who control the nation's net income (rents).
The Stiglitz Report fails to articulate the one fiscal reform
which, if implemented, would democratise the public's revenue.
Systematically shifting taxes from "bads" to "goods"
- to use their terminology - would deliver a revenue system based on
moral imperatives as well as delivering efficient economic outcomes.
But Stiglitz confines this strategy to those cases that would affect
polluters. And even in this area, the discussion is nebulous. One
result is unfolding even now (2011): governments are diluting their
plans to intervene with polluter-pays policies under the stress of the
Having failed to exploit the benefits of a radical reform of fiscal
policy, it is not surprising that the report retreats to proposals
that would further exacerbate the very problems that it censures. One
of these is moral hazard in relation to the protection offered to the
"too big to fail" bankers. The report seeks to expand the
risks associated with moral hazard with its proposal to protect
home-owners from their own actions (see Box 8).
Box 8 / The Land Speculating Home Owner
The Stiglitz Report seeks to exonerate the
millions of home-owners who found themselves in financial
trouble when prices began to decline in 2007, in the USA, and
thereafter in Europe. Provision, apparently, ought to be made to
made for "keeping people in their homes" (pp.
Many families were undoubtedly innocent victims of the property
bubble - but that does not mean they did not feel good about the
rise in the equity in their homes. But many millions of
home-owners bought properties as investments, not just as
somewhere to live and raise a family. Many transactions were of
the "moving up the property ladder" type, in which
people made decisions solely on the basis that they were
shrewdly accumulating wealth by borrowing more and buying
dwellings in higher-value locations. This was classic land
speculation activity. If that activity has negative
macro-economic consequences, home-owners contributed to the
financial crisis in 2008. To protect them from the consequences
of their actions, therefore, is precisely the kind of moral
hazard action to which The Stiglitz Report objected in relation
to banks. But the report steered clear of any evaluation of the
moral culpability of home-owners. In this, it was being as
politically correct as the politicians whom the report seeks to
The recommendations in The Stiglitz Report do not favour
improvements in the quality of governance. By relying on bureaucratic
and regulatory mechanisms, the power of the state's agencies would be
enhanced. This would not reduce the democratic deficit that causes the
apathy displayed by large numbers of people who stay at home rather
than vote in elections.
Modifications to lending practices in property markets (such as
ceilings on how much might be advanced as mortgages to borrowers
) would not stabilise the
trans-Atlantic economies. During the 19th century, in the UK, highly
disciplined building societies were ultra responsible in their lending
practices. And yet, the boom/bust cycles wreaked havoc with the most
powerful industrial nation in the world. Periods of "stability"
were merely the recovery phases between the previous recession and the
next one. As soon as the economy started to grow, again, the
propensities of the predator culture re-asserted themselves. Given the
laws of tax-and-tenure, it could not have been otherwise; and will not
be otherwise, no matter how many of the Stiglitz recommendations are
adopted, because none of the proposed measures neutralises the
distortions that arise from the licence to speculate in land.
The report proposes the creation of a Global Economic Co-ordination
Council. We may assume that the experts had confidence in the
leadership of Joseph Stiglitz, such that this new body would perform
more effectively than the existing international institutions that
sought to guide the global economy along a stable path. Stiglitz is
undoubtedly an authority on problems like those associated with
asymmetric information. But his willingness to put his name to this
report does not inspire confidence. An example is the criticism of
credit rating agencies, which failed to publish risk assessments that
alerted investors to the build up of a dangerous situation in the
financial sector. This was a defect in
the quality of information available in the public domain. But was it
a problem intrinsic to the market economy, or due to bad governance?
It would be trite to expect a perfect information system (no
more probable than perfect competition in the real world), but might
economic instability be due to constraints on information that are
artificial in their nature (see Box 9)?
Box 9 / Can Joseph Stiglitz Fill the Missing Gaps?
Joseph Stiglitz was honoured with a Nobel Prize
for his work in the realms of asymmetric information. But his
thesis that the discontinuities in economic activity are the
result of gaps in the flow of information - which affect
decisions in negative ways, including raising risks - bears
Stiglitz presumes that "market failures", such as
those in the financial sector (Report, p.58), would continue to
disrupt growth, because information asymmetries were inevitable.
An example from the financial-property sectors is offered by the
UK financial institutions' use of offshore vehicles (registered
in tax havens like the Channel Islands) to hold mortgages. These
were "off balance sheet" assets. The scale of the
sector's involvement in property was consequently disguised. But
this information deficit was intentional: it was the outcome of
"tax efficient" practises. This was not a case of
market failure, but an eminently successful way to maximise the
profits of shareholders.
Thus, the pricing mechanism, as the prime route to discovering
information in the marketplace, may be distorted by government
policy. If the private pricing mechanism is inefficient because
of an aberrant public pricing mechanism (taxation), why treat
asymmetric information as intrinsic to the market economy? Could
the public pricing mechanism be reformed so that the private one
could work more efficiently in the financial and property
sectors? The Stiglitz Report is silent on this possibility. This
is disappointing, given the report's assertion (p.31) that the
burden of remedial action now had to fall on fiscal policy.
The market economy has under-performed by a significant margin
throughout the history of industrial society. The rate of growth was
compromised by the determination to divert rents away from investment
in infrastructure, which inevitably meant that some of the potential
gains from higher productivity were not achieve. Under the Stiglitz
recommendations, those constraints on productivity remain in place.
In the 21st century, the increased complexity of the globalised
economy means that property speculators will have little difficulty in
evolving stratagems to circumvent new regulations. The 2010-2028
business cycle will display all the dramas which, to a more or less
degree, were present in the cycles of the last two centuries. It is
improbable that recommendations in
The Stiglitz Report could lead to faster rates of growth in
Europe or North America. The pace will be set by the Asian countries.
It is in their interest to use west countries as markets for their
consumer goods, so they will do nothing to benefit their competitors
in the sphere of production.
Thus, western nations will discover that the "recovery" of
their economies will be of the jobless kind. Shrinking productivity in
the labour markets will not be countered by investment in
infrastructure. The outcome will be protracted stagnation. Insofar as
governments continue to use the money printing presses to bolster
their economies, there will be inflation. That inflation will not
encourage capital formation on a sufficient scale to compensate for
the loss of capital and entrepreneurial opportunities that exit
towards Asia. Nothing in the Stiglitz recommendations can neutralise
"Output more equitably shared"
The current trend in income distribution was established in the
1970s: an increasing gap between rich and poor, with a measurable
squeeze on middle class incomes. Stiglitz relies on "progressive"
income taxes to transform this trend. The hope is forlorn. As I
Ricardo's Law, the "progressivity"
doctrine that underpins income taxes provides philosophical cover for
the redistribution of wealth from low-income people who rent their
homes, to high net worth individuals who occupy prime residential
Given the current outlook for employment - deterioration in prospects
for low-skilled workers whose jobs will continue to gravitate towards
Asia - this process of income redistribution will continue. As the
productivity of western nations shrinks, so the taxable capacity of
their economies will diminish. The scope for redistributing income to
those in need will be reduced. This process has already begun, under
the guise of the "austerity" measures that governments in
Europe say are necessary to pay down sovereign debts. Politicians are
leaving their electorates to assume that, once the debt overhang has
been brought under control, the generous safety net that existed in
the early decades of the Welfare State will be restored. In time, it
will dawn on people that this route to equity has been closed for
good. Stiglitz fails to point to an alternative door, through which we
might find the formula for fairness.
Given that Joseph Stiglitz understands the economics of the land
market, including the fiscal implications of rent-as-public-revenue,
and that he personally
does advocate the collection of rents at the rate of 100% for
the benefit of the common good, how do we account for the absence of
this policy in the report that bears his name? I searched in vain for
the ideas "which might have been more helpful in avoiding the
crisis and mitigating its extent".
My assumption is that Stiglitz was obliged to confine himself to those
ideas with which his experts were comfortable.
Their ideas did not encompass those that would have permitted a
radical re-appraisal of the tax-and-tenure paradigm favoured by
post-classical economists. As a result, there is little in The
Stiglitz Report that would upset the vital, long-term interests of
land speculators, their support services (which includes the banking
sector), and the wider circle of people who pocket the rents of the
ENDNOTES AND REFERENCES
- UN Commission of Financial
Experts (The Stiglitz Report), New York: The New York Press, 2010.
- Report, p.xxiv.
- Report, p.xiii.
- Report, p. xvi.
- Report, p.27.
- Report, p.84.
- Report, 94.
- Report, p.93.
- Report, p.78.
- Report, p.188.
- Report, p.187-188.
- Report, p.29.
- Report, p.xii.
- Report, p.xx.
- Report, p.59.
- Report, p.x.
- Report, p.27, emphasis added.
- "Drain of Gain?",
The Economist, May 28, 2011, p.80.
- This is the ATCOR thesis,
originally articulated by John Locke and currently elaborated by
- R.V. Andelson, Land Value
Taxcation Around the World, 3rd edn., Oxford: Blackwell.
- Joseph Stiglitz, "The
theory of local public goods", in M.S. Feldstein and R.P.
Inman (eds.), The Economics of Public Services, London: Macmillan,
1977; Anthony B. Atkinson and Joseph E. Stiglitz, Lectures on
Public Economics, London: McGraw-Hill, 1980, pp. 525,528,542.
- Report, p. 70.
- A similar attempt to maintain
the viability of banks, by not writing off their loans to the
property sector, is being made today. In Britain, banks are using
soft terms to for borrowers so that they do not default - leaving
the banks with bad debts. This tactic has been criticised by the
Financial Services Authority (Philip Aldrick, "Banks 'use
soft terms to conceal bad debt', The Daily Telegraph, June 1,
2011). The IMF warned of the systemic dangers implied by this
strategy in its report published on June 7, 2011. Building
companies are similarly evading reality by subsidising their
customers to the tune of £1bn. Shared equity schemes convey
the impression of buoyancy in the housing market that could
mislead government into thinking that their "growth
strategies" are working; when, in fact, the financial
integrity of the building companies is being further damaged.
- Report, p.xxiv.
- Report, p.x.
- Report, p.194.
- Report, p.127.
- Report, p.106.
- Report, p.106.
- Report, pp.97-98.
- Fred Harrison, Ricardo's Law:
House Prices and the Great Tax Clawback Scam, London:
- Report, p.192.