A Reflection on Capital in the 21st Century

Philip Arestis and Malcolm Sawyer

The recent book Capital in the 21st Century by Thomas Piketty (2014) has attracted an enviable amount of attention with its detailed history of income and wealth inequality. A central idea in this book comes from (r > g); that is, the idea that the rate of return on wealth (r) exceeds by a considerable margin the rate of economic growth (g) so far as Western industrialised countries are concerned. This, Piketty argues, has implications for rising inequality especially of wealth and of rentier income.

The basic mechanism is that when the rate of return is greater than the income growth rate, then savings made out of the return on wealth received in the form of dividends, rents, interest and capital gains adds to wealth, which then rises at a rate determined by these savings (and equal to savings propensity out of wealth (s), multiplied by the rate of return (r), (i.e., s∙r), and then the stock of wealth rises faster than income. The wealth to income ratio then rises, and the gains from wealth rise faster than other incomes. Wealth inequality also rises on the basis that rich wealth owners can achieve higher returns on their wealth than the poorer wealth owners. This is a substantial, though not complete, part of the general rises in inequality over the past three or more decades (and a large part of his book is concerned with documenting those rises in inequality).

Read the rest of this entry »

Green Keynesianism: Beyond Standard Growth Paradigms

Jonathan M. Harris, Guest Blogger

In the wake of the global financial crisis, Keynesianism has had something of a revival.  In practice, governments have turned to Keynesian policy measures to avert economic collapse.  In the theoretical area, mainstream economists have started to give grudging attention to Keynesian perspectives previously dismissed in favor of New Classical theories.

This theoretical and practical shift is taking place at the same time that environmental issues, in particular global climate change, are compelling attention to alternative development paths.  Significant potential now exists for “Green Keynesianism” : combining Keynesian fiscal policies with environmental goals.

Read the rest of this entry »

No Standards, Not Poor

C.P. Chandrasekhar

Early February, the Department of Justice (DoJ) of the US government—represented by the United States attorney general and supported by attorneys general from 16 states—filed civil fraud charges against the ratings giant Standard & Poor’s (S&P). S&P is the largest of the big three agencies—the other two being Moody’s and Fitch—which, for a fee, take on the task of assessing how risky and robust securities of different kinds issued by financial firms are.
The charges were not minor. The DoJ argues that for more than three years between September 2004 and October 2007, S&P “knowingly and with the intent to defraud, devised, participated in, and executed a scheme to defraud investors” in mortgage-related securities. This was the period when S&P was raking in huge earnings by granting high ratings to complex and opaque derivatives named “collateralised debt obligations” (CDOs) based on mortgage bonds. The DoJ’s case reportedly focuses on 40 such CDOs created at the height of the US mortgage bubble, the rating of which gave S&P $13 million in fees. These bonds went bust, resulting in losses to investors. The DoJ not only claims that S&P knew this could happen when it gave them high ratings or left them unrevised, but also that it misinformed investors by arguing that its ratings “were objective, independent, uninfluenced by any conflicts of interest.”

Progress on punishing institutions seen as responsible for the 2008 crisis has been slow. So it has not just been business as usual for these firms, but license to do things that seem substantially aimed at regaining the credibility they lost in the aftermath of the crisis. The most controversial of these was its decision to downgrade the long-term credit rating of the United States from AAA to AA+ in August last year during the standoff between the Democrats and Republicans over ratifying an increase in the prevailing ceiling on US public debt.

Read the rest of this entry »

Yellen to Washington, D.C.: Fiscal Austerity Slows Recovery

Thomas Palley

Last Monday, Federal Reserve Vice-Chair Janet Yellen gave the keynote speech at an AFL-CIO economic policy conference on restoring shared prosperity.

Dr. Yellen began by noting that the Federal Reserve “is the only agency assigned the job of pursuing maximum employment.” She then went on to acknowledge “the gulf between maximum employment and the very difficult conditions workers face today.” That gulf is the reason behind the Federal Reserve’s on-going actions to strengthen the recovery and why there is continued need for “forceful action to increase the pace of economic growth and job creation.”

Read more at:

http://www.aflcio.org/Blog/Economy/Yellen-to-Washington-D.C.-Fiscal-Austerity-Slows-Recovery

Let's Stop Calling Countries "Markets"

Robin Broad

Here’s my most recent — and, I believe, imminently winnable — campaign: Let’s stop calling countries “markets” or “economies.” And while we’re at it, let’s not call any set of countries “emerging markets.”

It seems like a small thing – the change in terminology from “countries” and “people” to “markets” and “economies.” But it makes countries and people – in all their diverse reality – disappear.  And it puts an unspoken premium on places that are buying lots of goods from U.S. corporations.

Some of us slip into this terminology ourselves, from time to time, without even thinking. But, when I hear my colleagues and students use it, I find myself cringing for all that is unsaid between the lines. And I cringed even more at a recent Washington, D.C. event when an Obama government official proudly introduced herself as someone with “emerging market” expertise.

Read the rest of this entry »

Let’s Stop Calling Countries “Markets”

Robin Broad

Here’s my most recent — and, I believe, imminently winnable — campaign: Let’s stop calling countries “markets” or “economies.” And while we’re at it, let’s not call any set of countries “emerging markets.”

It seems like a small thing – the change in terminology from “countries” and “people” to “markets” and “economies.” But it makes countries and people – in all their diverse reality – disappear.  And it puts an unspoken premium on places that are buying lots of goods from U.S. corporations.

Some of us slip into this terminology ourselves, from time to time, without even thinking. But, when I hear my colleagues and students use it, I find myself cringing for all that is unsaid between the lines. And I cringed even more at a recent Washington, D.C. event when an Obama government official proudly introduced herself as someone with “emerging market” expertise.

Read the rest of this entry »

Responding to Financial Crisis: Are Austerity and Suffering Inevitable?

Jayati Ghosh

All too often people in countries experiencing financial crisis are told that the road to recovery necessarily involves pain, that fiscal austerity and cuts in spending that adversely affect the lives of ordinary citizens are necessary costs of correction of macroeconomic imbalances and the consequent adjustment that is considered essential for recovery. This is repeated so often that it is now taken as received wisdom by policy makers and civil society alike – yet in fact it is not true at all. It can actually be plausibly argued that in several situations the reverse is correct, that attempts to reverse economic downswings through cuts in public spending are counterproductive and makes matters much worse. This is clearly evident for all to see in the case of crisis-ridden countries in the eurozone, for example.

And there are also positive counter-examples, that show how taking into account the concerns and requirements of ordinary citizens (and paid and unpaid workers in particular) can work as a positive macroeconomic strategy that actually provides a route out of crisis. Sweden provides an example of a country that responded to the financial crisis by explicitly recognizing and attempting to reduce the pressures on workers, and particularly women workers whose needs are often the last to be considered in such periods of crisis. Sweden incorporated measures to maintain or ensure favourable conditions of women’s work and life into its broader economic recovery strategy.

Read the rest of this entry »

Austerity is not working in Europe

Philip Arestis and Malcolm Sawyer

The GDP figures published in the Eurostat press release on the 15th of November 2012 for the Economic and Monetary Union (euro area) marked the confirmation of a double-dipped recession (with negative growth in quarters 2 and 3 of 2012). Gross domestic product was 0.6 per cent lower in the third quarter of 2012 compared with 12 months earlier. Germany and France have so far managed to escape the double dip for the present, but most other countries, including the more hawkish on fiscal austerity (such as Netherlands, Finland) recorded lower output in 2012 Q3 compared with 2011 Q3. For other European Union (EU) countries, the UK had emerged from its double-dip recession with Olympic boosted growth in Q3 after three quarters of negative growth, leaving 2012Q3 GDP at same level as 12 months earlier. Output remains below its 2007 level in the EU and in the European Monetary Union (EMU) — indicating, in effect, at least a lost half-decade.

The return of recession is symbolic of the failure of the austerity programmes, which have been striking down economic activity throughout the EU and EMU. It should give rise to some thoughts as to why the austerity programmes are not working to bring down budget deficits without damaging economic activity. There have been many claims that austerity does work in that the so-called fiscal consolidation brings down deficits and restores full employment – under the heading of expansionary fiscal consolidation. The national income accounts equality between income, output and expenditure necessarily means that a rise in output has to go alongside a rise in expenditure. A cut back in public expenditure can then only go alongside a rise in output if there is a more than compensating rise in private expenditure. The mainstream argument (wrapped up in arguments such as the Ricardian Equivalence Theorem) is that indeed cutting public expenditure will “restore confidence”, lower interest rates, etc., leading to higher private expenditure.

Read the rest of this entry »

Importing Risk into Insurance

C.P. Chandrasekhar

On October 4, in a cabinet decision that had been predicted by the media and expected by the stock market, the United Progressive Alliance (UPA II) government announced hikes in the ceiling on foreign equity ownership from 26 to 49 per cent in units in the insurance sector and from nil to 49 per cent in the pension fund industry.

The immediate motivation for approving these measures was the government’s declared intent of winning the approval of international rating agencies and foreign investors. To that end, the insurance reforms were presented as part of a set of decisions, including clearance for FDI in multi-brand retail and civil aviation, hikes in diesel and LPG prices and changes to the forward contracts regime, announced end-September and early-October.

Read the rest of this entry »

Is South-South economic interaction any better for poor countries?

Jayati Ghosh

It used to be believed that that economic interaction between developing countries (South-South integration) would necessarily be more beneficial than North-South links. The latter were seen as reproducing the global division of labour that emerged by the mid 20thcentury, whereby much of the developing world essentially specialized in primary commodities and labour-intensive (and therefore lower productivity) manufactured goods, while the North kept the monopoly of high value added production. By contrast, trade and investment links between countries in the Global South were supposed to allow for more diversification because of their more similar stages of development, thus creating more synergies.

In the past decade, these perceptions have changed drastically. First, the emergence of East Asian countries (especially China) as giant manufacturing hubs has been driven to a significant extent by North-South trade and investment. Second, the relations between China, India, Brazil and other “emerging” countries with less developed countries has not always followed the predicted lines.

Read the rest of this entry »