Berkeley professor and economist Barry Eichengreen reconciles the nominal and real interest rates to argue in favor of greater fiscal deficits.

Joseph Corr

2019-05-23 10:33:00 Thu ET

Berkeley professor and economist Barry Eichengreen reconciles the nominal and real interest rates to argue in favor of greater fiscal deficits. French economist and author Thomas Piketty advocates that there is an innate tendency toward wealth concentration in most market economies where the nominal interest rate on capital investments well exceeds the economic growth rate. Former IMF chief economist Olivier Blanchard argues that the real interest rate on risk-free government bonds must be lower than the economic growth rate for most market economies to carry greater government debt with low inflation. Blanchard focuses on the real interest rate on low-risk government bonds, whereas, Piketty focuses on the nominal return on risky capital investments.

These interest rates diverge by a 5%-6% equity risk premium, which reflects how risk-averse the typical stock market investor is through the real business cycle. For Piketty, high wealth concentration can result from a large equity risk premium that calls for higher taxes on the rich. For Blanchard, the government can accumulate higher public debt as core CPI inflation remains moderate over time. On balance, Eichengreen supports greater fiscal deficit finance for health care, infrastructure, R&D, and social security as prices and asset premiums stabilize in recent times.

 


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