Stiglitz to Piketty: its the land!

Economist, academic and author Joseph Stiglitz



Joseph Stiglitz’s recent interview with Lynne Parrymore of the Institute for New Economics demonstrates the difference between land and capital:

My paper begins with the observation that in fact, you cannot explain what has happened to the wealth/income ratio by that (Piketty’s) analysis. A closer look at what has gone on suggests that a large fraction of the increase in wealth is an increase in the value of land, not in the amount of capital goods.

LP: When you say “land,” you’re not talking about land in the Jane Austen sense, that is, agricultural land under the ownership of the lord of the manor.

JS: It’s not agricultural land, it’s the value of urban land, and I would include in that, broadly, rents associated with natural resources. It’s the value of existing assets. As a footnote, some of what has gone on, in addition to an increase in the wealth/income ratio, is a capitalization of the increase in other kinds of rents, like monopoly rents. If monopoly rents get increased, if the market power of firms relative to workers gets increased, as when you have the ability of a few, like the banks, to get government guarantees — the value of that is increased and gets capitalized. And that increases wealth but it doesn’t increase capital.

Land and land-like assets – natural monopolies are scarce. Capital is man-made. It also depreciates. Stiglitz goes on to say:

What has happened repeatedly in recent years is that we’ve had monetary authorities allowing — through deregulation and lax standards —banks to lend more, but not for creating new business, not for capital goods. The effect of it has been actually to increase the value of land and other fixed resources [buildings, real estate, etc]. Disproportionately it goes to the increase in the value of these fixed assets. And that’s what everybody was worried about. So in that sense, in that discussion that occurred with quantitative easing — nobody linked that with inequality or linked it with the overall macro growth. The links with inequality are twofold: one is that at a very, very macro level, if more of the savings of the economy leads to an increase in the value of land rather than the stock of capital goods, then worker productivity won’t go up. Wages won’t go up. So some of what is going on is that we haven’t been doing the kind of investment that we should be doing.

But the other part that’s probably more important, I would say, is that when you deregulate, you allow more lending against collateral. Then those who have the assets that can be used for collateral see those assets go up in price, like land. And so those who hold wealth become wealthier. The workers, who have no wealth, don’t benefit from that expansion. So the link is that credit affects land prices and fixed asset prices, and those go disproportionately to the rich. And that is a major part of the increase in the wealth.

Stiglitz rightly reflects on how easy credit begets higher land prices which begets more credit via leveraging. But how do we cut the leveraging capacity out at source?

There are many other wrinkles in the paper, but the final insight is that when you think of policies that are going to address inequality of wealth, you have to be very thoughtful about what economists call “incidence of taxes.” If most of the savings is being done by capitalists, and you tax the return on capital, then they will have less to invest. That would mean, over the long run, that the rate of interest would go up. That would therefore undo some of the intent to lower the income of capitalists.

It is the incidence of taxes that is most important. Piketty’s advocacy of a global wealth tax has been criticised for the broad nature of its application. His failure to delineate between land and capital is endemic of the hole neo-classical economists have dug for themselves. Piketty does not even reference the Physiocrats, the pioneering Frenchmen who grounded Adam Smith in economic thinking. Thus the lineage of neo-classical economists cannot fathom the difference between depreciating capital and the scarcity of land and land-like assets. As Stiglitz points out, a tax on capital will hurt employers, whilst leaving land owners with the free lunch.

A tax on the naturally rising value of the earth captures for the public good the value created by the community. The property owner did not produce anything, instead enjoying the benefits of legal privilege over a portion of the earth. This Land Taxes away the rising value, cutting off the leveraging capacity of higher land prices at source.

LP: How can we prevent inequality from getting worse?

I divide it into two parts, what can we do to reduce inequality of before-tax and transfers income and what can we do to improve the after-tax and transfers income. The first part is things like higher minimum wages, stronger unions, better education, and stronger enforcement of anti-trust laws and corporate governance laws. Those are the kinds of things that are likely to improve the before-tax and transfers income. The second part is addressing things like capital gains taxes, the preferential treatment that mainly benefits people at the very top, and better redistributive policies. Those would help the after-tax and transfers income become more equal.

But alas Stiglitz finishes with a preference for capital gains tax. This is a lumpy alternative that will delay the turnover of land. This will not assist the fluidity of government revenues, ensuring the maintenance of taxes on the productive sector.

This article shows how far we have to go. One of the world’s great economists maintains the difference between land and capital, but due to the conceptual barriers of a Land Value Tax amongst the wider community, advocates for the inferior capital gains tax.

Join our cause as we continue to work on simplifying a key reform addressing the big issues of our time: small business creation, the intergenerational wealth gap and housing affordability.

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