Natural Capital and the “RG-bargy” Controversy

Edward B. Barbier

A recent article “RG-bargy” in The Economist focuses on an argument surrounding the central tenet in Thomas Piketty’s economics bestseller, Capital in the Twenty-First Century.

Piketty maintains that a key reason why wealth inequality has worsened dramatically in recent decades is that the return on capital r has exceeded the growth rate of the economy g. As capital is concentrated in the hands of the wealthy, a long period in which there is a growing gap between the return to capital and growth (i.e., r > g) must lead to widening wealth inequality. Citing evidence from eight high-income economies—the United States, Japan, Germany, France, Britain, Italy, Canada and Australia—Piketty shows that, since 1970, long-run growth has slowed but the return on capital has not changed significantly. Thus, in developed economies and throughout the world, wealth has become increasingly concentrated in the hands of the rich. What is more, Piketty predicts that future growth rates are likely to slow down further. Thus, in the coming decades the gap between r and g will widen, and thus wealth inequality will increase.

However, as pointed out by The Economist, Piketty’s evidence concerning r > g has been challenged in a forthcoming article in the Cato Journal by Robert Arnott, William Bernstein and Lillian Wu. The authors do not dispute the slow-down in long run growth g. Instead, they maintain that the future return r to capital, principally bonds, stocks, equities and other financial wealth, will also fall. This is due to two principal reasons.

First, because yields in the developed world are so low, the future returns from bonds are likely to be reduced.  Similarly, sustained periods of low interest rates—such as the current situation—are also associated with reduced equity returns over the long term.

Second, Arnott and colleagues argue that the net capital return to investors is even lower, once one accounts for taxes, fund-management costs, and other investment expenses. If based on the net return to capital, the future level of r will decline further.

However, this “RG-bargy” controversy has a major shortcoming, which is that it ignores an important source of economic wealth—natural capital.

Read the rest of this entry »

Third Bailout and the Third Punic War

John Weeks, Guest Blogger

Shock of Syriza Surrender

In an Open Democracy article I argued that there would be no agreement between the Greek government and the Troika.  I took this position because it was (and is) obvious that the most powerful actor within the Troika, the German government, would not agree to any substantial alteration of the austerity program imposed on previous Greek governments.

As a result, Greece’s Syriza government would have no choice but to abandon the eurozone and introduce a national currency. I was correct in my assessment of the inflexibility of the German government and its clients in the eurozone (e.g., Baltic countries and Finland) and the broader European Union (most obviously Poland).

However, due to naivety and/or the triumph of hope over experience, I never entertained the possibility that the Syriza government would capitulate to the Troika.  The capitulation arrived all the more unanticipated because the Syriza government acceded to EU demands more draconian and more of an affront to national sovereignty than those rejected by 61% of voters in the referendum on 5 July.

Read the rest of this entry »

Letter from Delhi, Part 2

What to do?

James K. Boyce

This is the conclusion of a two-part series on air pollution in Delhi. Part 1, on inequality in exposure—on environmental injustice—is available here.

Public awareness of air pollution in Delhi lags behind that in China, where face masks are a common sight and the remarkable film “Under the Dome” received 100 million views within 48 hours when it was posted in March (before being banned by Chinese authorities). But this may be starting to change.

This spring, the Indian Express, one of the country’s leading newspapers, ran a searching multi-part investigative series on Delhi’s air pollution called “Death by Breath.” The Centre for Science and Environment, which successfully campaigned a decade ago for conversion of Delhi’s buses and auto-rickshaws to compressed natural gas, continues to raise public consciousness and advocate for policy remedies.

In the expatriate community, Delhi’s toxic air is viewed with rising alarm. In the past year, the U.S. embassy imported 1,800 top-of-the-line air purifiers for its personnel. “My business has just taken off,” the director of a local firm selling air filtration units told the New York Times. “It started in the diplomatic community, but it’s spread to the high-level Indian community, too.”

Read the rest of this entry »

What We’re Writing

C.P. Chandrasekhar, The Search for India’s Bulky Middle

C.P. Chandrasekhar and Jayati Ghosh, Looking Back at Debt Relief for the Germans

Gerald Epstein and Juan Antonio Montecino, Banking From Financial Crisis to Dodd-Frank: Five Years On, How Much Has Changed?

Sunita Narain, Food for nutrition, nature and livelihood

Matias Vernengo, Europe in its Labyrinth, Greece on its Knees

Triple Crisis welcomes your comments. Please share your thoughts below.

Triple Crisis is published by

What’s Next for Greece?

Harry Konstantinidis, Guest Blogger

Harry Konstantinidis is an assistant professor of economics at the University of Massachusetts-Boston.

Most readers already probably know the sequence of events around Greece and its creditors over the last month, but they are worth reviewing: a fruitless and frustrating negotiation leading to a take-it-or-leave-it offer from the creditors; the announcement of a referendum (the first in more than 40 years) for the people of Greece to decide whether to accept the offer; a triumph of the No vote with 61.3% rejecting the offer, despite a visceral campaign in favor of the Yes vote by the Greek media and foreign politicians; the resignation of Finance Minister Yanis Varoufakis; a retreat by Syriza offering austerity for a deal; the creditors’ outrageous demand in a rather open attempt to push Greece or Syriza towards exit; and finally a roadmap towards a deal that no party really believes in.

The terms of the agreement reflect the creditors’ attempt to make Syriza renege on all its promises and cross all its “red lines,” except for euro membership. Sharp value-added tax (VAT) increases, the establishment of a privatization fund including 50 billion euros worth of assets, no restoration of collective bargaining rights or minimum wages, automatic cuts when fiscal targets are not achieved, vetting of all legislation by the Troika (European Commission, European Central Bank, and IMF), and the depoliticization of Greek public administration. The deal passed the Greek parliament without the support of almost one-fourth of Syriza MPs, rendering Syriza effectively a minority government and prompting a cabinet reshuffle. How could Syriza have agreed to such a deal? Wouldn’t Greece be better off introducing its own currency, rather than conceding both fiscal and monetary policy?

Read the rest of this entry »

Development Central Banking, Part 2

Answering the Questions about Development Central Banking

Gerald Epstein

This is part 2 of a two-part series by regular contributor and Political Economy Research Institute (PERI) co-director Gerald Epstein, adapted from his recent International Labour Office (ILO) working paper “Development Central Banking: A Review of Issues and Experiences.” Part 1 is available here. The full paper is available here.

In both the developed and developing world, countries face significant transformational challenges. According to the International Labour Organization (ILO), global unemployment is over 200 million, with vulnerable employment being almost 50% of the total; among youth the unemployment rate stands at 13.1% but, in some places, such as the southern European countries, it is significantly higher. If current trends continue, these levels of unemployment and unemployment rates are unlikely to decline appreciably (ILO, 2014). In fact, in some respects, current trends are virtually guaranteed to get worse. Specifically, climate change, which is already creating considerable economic dislocations in many parts of the world, is predicted to accelerate over the next decades. It will especially harm poor and economically vulnerable communities (IPCC, 2014).

Historically, central banks have often been part of the policy apparatus that has helped to guide and provide financing for important development and transformational projects. (Bloomfield, 1957; Brimmer, 1971; Chandavarkar, 1987; Epstein, 2007). However, with the rise of the “Washington Consensus”, the global drive toward financial liberalization and the elimination of so-called “financial repression”, central banks were instructed or chose to follow the increasingly prevalent norm of the “inflation targeting” approach to central banking. This approach eschews virtually all goals other than keeping inflation in the low single digits. Its tool-kit was limited to just a few and ideally only one instrument – a short term interest rate (Bernanke et al., 1999; Anwar and Islam, 2011).

This approach to goals and instruments was accompanied by a drive to change the governance structure of central banks. Hitherto, they had tended to be integrated into the government’s policy apparatus but were also potentially subject to inappropriate influence by government officials. Now, they were able to “independently” implement inflation targeting policy structures and, especially, resist excessive financing of government expenditures.

If inflation targeting is not the best monetary policy framework for achieving broad economic and social goals, then what kind of central bank frameworks—goals, governance and instruments—are likely to best help developing countries address the key problems they face? Important lessons can be learned from history with respect to the kinds of central bank frameworks that have been tried and those that have been successful in achieving macroeconomic stability and economic development (Epstein, 2007, 2013).

Read the rest of this entry »

Letter from Delhi, Part 1

Air Pollution as Environmental Injustice

This is part 1 of a two-part series from UMass-Amherst professor of economics and regular Triple Crisis contributor James K. Boyce. This part focuses on disparate exposure to air pollution in Dehli. Part 2, to be posted next week, focuses on solutions to the problem.

James K. Boyce

Arriving in Delhi in January, at the height of the winter pollution season, you notice the air as soon as you step off the plane. A pungent smell with hints of burning rubber and diesel fumes assaults the nose and stings the eyes. On the highway into the city center, a digital screen shining through the smog displays the current level for suspended particulate matter. You don’t need to understand what the number means to know it’s bad.

Delhi has extensive parks, broad avenues, beautiful buildings (like the tomb of Mughal emperor Humayan, shown below), and a vibrant culture. But casting a pall – quite literally – over it all is the worst air pollution of any major city in the world.

Humayan's tomb

Humayan’s Tomb

Read the rest of this entry »

The Failed Project of Europe

Jayati Ghosh

There is a stereotypical image of an abusive husband, who batters his wife and then beats her even more mercilessly if she dares to protest. It is self-evident that such violent behaviour reflects a failed relationship, one that is unlikely to be resolved through superficial bandaging of wounds. And it is usually stomach-churningly hard to watch such bullies in action, or even read about them.

Much of the world has been watching the negotiations in Europe over the fate of Greece in the eurozone with the same sickening sense of horror and disbelief, as leaders of Germany and some other countries behave in similar fashion.

Read the rest of this entry »

Development Central Banking, Part 1

What’s Wrong with Inflation Targeting?

Gerald Epstein

This is part 1 of a two-part series by regular contributor and Political Economy Research Institute (PERI) co-director Gerald Epstein, adapted from his recent International Labour Office (ILO) working paper “Development Central Banking: A Review of Issues and Experiences.” This post focuses on the “inflation targeting” central-bank policy pushed on developing countries under the “Washington Consensus” and what is wrong with it. Part 2, next week, will follow with answers to the principal mainstream objections to a broader “development central banking.”

In its strict form, “inflation targeting” posits that central banks should have only one objective—low and stable inflation—and should utilize only one policy instrument—usually a short-term interest rate. As a corollary, the conventional wisdom usually promotes the idea that central banks should be “independent” of the government, in order to enhance their ability to reach the inflation target. This is usually justified on the basis of avoiding time inconsistency and resisting pressures from governments to finance fiscal deficits. No matter how much policy makers such as Olivier Blanchard question inflation targeting in the rich countries, as they have in recent years, it is still widely seen as the current “best practice” for developing countries.

Even if one believes that this general approach is a good one, a key question arises: what is the appropriate inflation rate? The standard practice is that countries should try to maintain inflation in the low single digits (Anwar and Islam, 2011). Where does this number come from? One might expect that a number designed to guide the making of monetary policy in many parts of the globe would come from rigorous research and a broad consensus that the optimal rate of inflation for developing countries is in the low single digits. However, nothing could be further from the truth.

Read the rest of this entry »

The Age of Megaprojects

Nancy Alexander, Guest Blogger

We seem to be entering a new age of megaprojects, as countries, in particular those of the G-20, mobilize the private sector to invest heavily in multi-million (if not multi-billion or multi-trillion) dollar infrastructure initiatives, such as pipelines, dams, water and electricity systems, and road networks.
Already, spending on megaprojects amounts to some $6-9 trillion a year, roughly 8% of global GDP, making this the “biggest investment boom in human history.” And geopolitics, the pursuit of economic growth, the quest for new markets, and the search for natural resources is driving even more funding into large-scale infrastructure projects. On the cusp of this potentially unprecedented explosion in such projects, world leaders and lenders appear relatively oblivious to the costly lessons of the past.

To be sure, investments in infrastructure can serve real needs, helping meet an expected surge in the demand for food, water, and energy. But, unless the explosion in megaprojects is carefully redirected and managed, the effort is likely to be counterproductive and unsustainable. Without democratic controls, investors may privatize gains and socialize losses, while locking in carbon-intensive and other environmentally and socially damaging approaches.

Read the rest of this entry »