The Five Capitals

There are five types of sustainable capital from where we derive the goods and services we need to improve the quality of our lives.

Natural Capital is any stock or flow of energy and material that produces goods and services. It includes:

  • Resources – renewable and non-renewable materials
  • Sinks – that absorb, neutralise or recycle wastes
  • Processes – such as climate regulation

Natural capital is the basis not only of production but of life itself!

Human Capital consists of people’s health, knowledge, skills and motivation. All these things are needed for productive work.

Enhancing human capital through education and training is central to a flourishing economy.

Social Capital concerns the institutions that help us maintain and develop human capital in partnership with others; e.g. families, communities, businesses, trade unions, schools, and voluntary organisations.

Manufactured Capital comprises material goods or fixed assets which contribute to the production process rather than being the output itself – e.g. tools, machines and buildings.

Financial Capital plays an important role in our economy, enabling the other types of Capital to be owned and traded. But unlike the other types, it has no real value itself but is representative of natural, human, social or manufactured capital; e.g. shares, bonds or banknotes.

The Tax Foundation Has Some Explaining To Do

If corporate tax cuts raise GDP by 30%, and the rate of return is 10%, this means cumulative current account deficits of 30% of GDP over the adjustment period. Say we’re talking about a decade: then we’re talking about adding an average of 3% of GDP to the trade deficit each year — around $600 billion a year, doubling the current deficit.

.. Second, all that foreign capital will earn a return — foreigners aren’t investing in America for their health. As I’ve tried to point out, this probably means that most of any gain in GDP accrues to foreigners, not U.S. national income.

.. they’re peddling an analysis that implicitly predicts huge trade deficits and a large jump in income payments to foreigners, they’re using a model that has no way to assess these effects or take them into account.

‘Are We Safe Yet?’ The answer’s not so simple.

Since 2008, U.S. banks have raised roughly $500 billion in new shareholder capital, bringing the total to $1.7 trillion. The added capital provides a larger cushion against losses (and, of course, the new shareholders enjoy any profits).

.. In addition to more capital, banks also have a more stable base of funds used for lending. According to Geithner, deposits now represent 86 percent of U.S. banks’ liabilities, up from 72 percent in 2008. Deposits tend to be stable, because most are insured by the government (up to $250,000 by the Federal Deposit Insurance Corp.) During the crisis, the flight of uninsured short-term funds (so-called repurchase agreements and commercial paper) threatened the entire financial system.

.. Despite this, Dodd-Frank has crippled government’s ability to defuse future financial crises. It has restricted government’s “ability to act as a lender of last resort.” The Fed’s power to lend to individual institutions is curtailed, making it harder to nip future crises in the bud. The Fed can’t act until many institutions are in trouble. Consequently, we are “even less prepared to deal with a crisis” than in 2007.

.. The real Dodd-Frank scandal is that this misinterpretation of events, widely embraced by both parties, has been allowed to stand. In many bailouts, banks’ shareholders suffered huge losses or were wiped out; similarly, top managers lost their jobs. The point was not to protect them but to prevent a collapse of the financial system.

If the Trump administration doesn’t repudiate the conventional wisdom and change the law accordingly, it risks creating a future, self-inflicted wound.

A Better Way to Control the Banks

What gets lost in the discussion is that Dodd-Frank, properly executed, would help to create the conditions for breaking up large and complex banks. That’s because the banks would face rising regulatory costs, which means they might well be worth more to investors if taken apart.

.. Even so, the capital requirements are not strong enough, in part because they do not require banks to fully account for potential losses from the trading of derivatives, a multitrillion-dollar activity.

Recent data provided by the banks to the Federal Reserve show that capital at big American banks recently averaged a healthy 13 percent of assets. But if derivatives and other holdings were fully included — as is required under international accounting rules but not under American ones — capital would come to a feeble 5.7 percent.