Looking to the U.S.

C.P. Chandrasekhar and Jayati Ghosh

All eyes are focused on the US economy and its performance. The explanations as to what motivates this are residual. With growth in China slowing, India’s economic performance disappointing, Japan still in recession and the uncertainty in Europe resulting from EU brinkmanship with respect to Greece, growth in the US seems to be the only immediate hope for the long awaited recovery from the six years of sluggishness that have followed the 2009 crisis. So, only the US can help.

Chandrasekhar-Ghosh Chart 1

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From “Boring” Banking to “Roaring” Banking, Part 3

Gerald Epstein

This is the final installment of a three part interview with regular Triple Crisis contributor Gerald Epstein, of the Political Economic Research Institute (PERI) at the University of Massachusetts-Amherst. This part focuses on why there have not been more significant reforms since the financial crash and Great Recession, and on a reform agenda for today. Parts 1 and 2 are available here and here.

Dollars & Sense: Of course, bubbles burst and exacerbate the severity of downturns. One of the amazing things about the aftermath of the recent crisis has been the apparent imperviousness of the financial sector to serious reform—especially in contrast to the Great Crash of 1929 and the Great Depression. How do you make sense of that?

Gerald Epstein: You have to use a political economy approach to understand the sources of political support for finance. I call these multilayered sources of support the “bankers’ club.”

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On the Rocky Road to Paris

Martin Khor

One of the biggest global events this year is the United Nations Climate Conference in Paris in December.

A new agreement to tackle climate change is expected, but there are many hurdles to overcome first.

Negotiations for the Paris agreement are now taking place in Bonn. Old unresolved issues have re-surfaced, with sharp divisions between developed countries (the North) and developing countries (the South).

It’s hard to see how they can be settled in the remaining three meetings, including the Paris conference.” But a deal in Paris is a political necessity, so somehow the differences have to be bridged, or else papered over.

There are two requisites for a good climate deal. It has to be environmentally ambitious, meaning that it leads the world to reduce emissions so that the average global temperature does not increase by more than 2°C (or 1.5°C, according to some) above the pre-industrial period.

That present temperature has now exceeded by 0.8°C. With global emissions increasing by about 50 billion tonnes a year, the remaining “space” in the atmosphere to absorb more emissions (before the 2°C limit is reached) will be exhausted in three decades or so.

The deal also has to be fair and equitable. The North, having been mainly responsible for the historical emissions and being more economically advanced, has to take the lead in cutting emissions as well as transferring funds and technology to the South to help it switch to low-carbon sustainable development pathways.

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From “Boring” Banking to “Roaring” Banking, Part 2

Gerald Epstein

This is the second part of a three part interview with regular Triple Crisis contributor Gerald Epstein, of the Political Economic Research Institute (PERI) at the University of Massachusetts-Amherst. This part focuses on the performance of the financial sector, against the key claims that are made by mainstream economists about its socially constructive role, during the era of “roaring” banking. Part 1 is available here.

Dollars & Sense: How does the performance of the financial sector measure up, during this most recent era of deregulated finance?

Gerald Epstein: If you look at the textbook description of the positive roles that finance plays, basically it comes down to six things: channel savings to productive investment, provide mechanisms for households to save for retirement, help businesses and households reduce risk, provide stable and flexible liquidity, provide an efficient payments mechanism, and come up with new financial innovations, that will make it cheaper, simpler, and better to do all these other five things. If you go through the way finance operated in the period of “roaring” banking, one can raise questions about the productive role of banking in all of these dimensions.

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Why it would be good for the IMF if Greece stopped repaying the IMF loans

Bodo Ellmers, Guest Blogger

The creditor community has another shock and awe moment this week, as more and more influential actors argue that Greece should stop repaying the International Monetary Fund (IMF) loans and instead use scarce public resources to tackle its economic and humanitarian crisis. While Prime Minister Tsipras still tries to ease the creditors, the idea is here to stay. And it is a good one: Greece should not just postpone loan repayments but default on them – stopping payments to the IMF for good. This would help to finally reform the IMF from the political puppet that it is now into a real and effective crisis response instrument.

Risk-free lending can quickly become irresponsible lending

Whoever loses in a debt crisis – and usually there are many losers – the IMF is always off the hook. It is common practice that borrowers grant preferred creditor status to the IMF, and pay off the IMF loans in full and in a timely manner. While it isn’t written down anywhere in international law that there’s such a thing as an IMF preferred creditor status – not even in the IMF’s own Articles of Agreements – all countries traditionally stick to this practice. This even goes for countries such as Argentina, which have been branded recalcitrant debtors by US judges and have no intention of maintaining good relations with the IMF.

Repaying the IMF often comes at high opportunity costs for borrower countries’ development, and for the other creditors who do have to take a haircut, and a larger one if the IMF does not participate in a debt restructuring. The fact that everyone’s repaying the IMF means that lending is essentially risk-free for them. And as in all other cases when lending is considered risk-free, the lender is encouraged to act irresponsibly, and to do really stupid things.

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China’s One Belt One Road: Globalization 3.0

Sara Hsu

China’s One Belt One Road initiative is becoming increasingly better financed, expanding China’s reach into Europe, Asia and Africa. The $50 billion Silk Road Fund and the $100 billion Asian Infrastructure Investment Bank are to back the program, while the China Development Bank will invest over $890 billion into over 900 projects in 60 countries. The projects will build up infrastructure, increase trade and finance, and boost connectivity across Europe, Asia and Africa.

The One Belt One Road initiative will jump start China’s foreign policy agenda, which has been relatively low key up until this point. In fact, the plan is so ambitious that it has the potential to boost China’s political and economic power to predominant status in the East.   This type of far-reaching foreign policy focuses on soft power rather than military might or economic coercion, and is arguably a part of a more diverse Globalization 3.0.

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From “Boring” Banking to “Roaring” Banking, Part 1

How the Financial Sector Grew Out of Control, and How We Can Change It

Gerald Epstein

Gerald Epstein is a professor of economics and a founding co-director of the Political Economy Research Institute (PERI) at the University of Massachusetts-Amherst. In April, he sat down with Dollars & Sense co-editor Alejandro Reuss to discuss major themes in his current research. This first part (in a three part series) focuses on the dramatic growth in the financial sector and the transformation from regulated “boring” banking to deregulated “roaring” banking.

Dollars & Sense: What should we be looking at as indicators that the financial sector has grown much larger in this most recent era, compared to what it used to be?

Gerald Epstein: There are a number of different indicators and dimensions to this. The size of the financial sector itself is one dimension. If you look at the profit share of banks and other financial institutions, you’ll see that in the early post-war period, up until the early 1980s, they took down about 15% of all corporate profits in the United States. Just before the crisis, in 2006, they took down 40% of all profits, which is pretty astonishing.

Another measure of size is total financial assets as a percentage of gross domestic product. If you look at the postwar period, it’s pretty constant from 1945 to 1981, with the ratio of financial assets to the size of the economy—of GDP—at about 4 to 1. But starting in 1981, it started climbing. By 2007, total financial assets were ten times the size of GDP. If you look at almost any metric about the overall size of the financial sector—credit-to-GDP ratios, debt-to-GDP ratios, etc.—you see this massive increase starting around 1981, going up to a peak just before the financial crisis, in 2006.

Two more, related, dimensions are the sizes of the biggest financial firms and the concentration of the industry. For example, the share of total securities-industry assets held by the top five investment banks was 65% in 2007. The share of the total deposits held by the top seven commercial banks went from roughly 20% in the early postwar period to over 50%. If you look at derivatives trading, you find that the top five investment banks control about 97% of that. So there’s a massive concentration in the financial system, and that hasn’t declined—in some ways, it’s gotten worse—since the financial crisis.

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US Senate Approves Fast Track Authority, and Krugman Doesn’t

Matías Vernengo

IMG_5469

The Senate approved fast track for the Trans-Pacific Partnership (TPP), giving Obama authority to negotiate. It has to be approved by Congress still. On this topic, it is interesting that it is the first time Krugman came out (or here), as a closet ‘protectionist’, and was against a Free Trade Agreement (FTA). Note that the reason for his Sveriges Riksbank Prize (aka Nobel) was: “his analysis of trade patterns and location of economic activity.”

His contribution to the analysis of trade patterns was essentially to introduce imperfect competition in the mainstream trade model. And actually what introducing imperfect competition in the mainstream Heckscher–Ohlin-Samuelson (HOS) model (the limitations of that model were discussed here before) did was to suggest that under certain circumstances trade management might be a good idea. He edited later a book, Strategic Trade Policy and the New International Economics, in which some more vocal defenders of trade intervention were present (I’m thinking of Laura d’Andrea Tyson, and John Zysman, at least at that time, in the early 1990s).

But he remained committed to free trade (he wanted the ‘Nobel’ badly, is my guess).

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Mapping Environmental Injustice

Race, class and industrial air pollution

Klara Zwickl, Michael Ash, and James K. Boyce

America’s corporate polluters are not color-blind. Nor are they oblivious to distinctions of class. Studies of environmental inequality have shown that minorities and low-income communities often bear disproportionate pollution burdens (for overviews, see Ringquist 2005 and  Mohai et al. 2006). In other words, rather than being an impersonal “externality” randomly distributed across the population, the distribution of pollution mirrors the distribution of power and wealth.

These disparities result from decisions by firms to site hazardous facilities in the most vulnerable communities and from decisions by government regulators to put lower priority on environmental enforcement in these communities. To some extent, the disparities may also reflect demographic changes as pollution leads affluent people to move out, neighborhood property values to fall, and poorer households to move in. But even after controlling for income differences, racial and ethnic minorities typically face higher pollution burdens, a finding that implies that disparities are a result of differences in political power as well as purchasing power (Boyce 2007).

But the US is a big country, and it is not homogenous. Electoral politics, social movements, industrial structure, residential segregation, and even laws and regulations differ greatly across the regions. The extent and pattern of environmental inequalities may vary, too.

In a recent study (Zwickl et al. 2014), we examine regional variations to tackle two key questions. First, is minority status or income more important in explaining environmental disparities? Second, is higher income equally protective for whites and minorities in affecting pollution exposure?

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