Tag Archives: labor

Effect of Interest Rates on Economic Returns to Labor v. Capital

A friend recently sent me a video titled “Wealth Inequality in America“, asking for my take on the matter. Unable to quickly demonstrate the Austrian view, I responded briefly and included links to several extant posts here.

Normally, I would walk someone through conceptual scenarios with different mixtures of labor and capital spend while varying interest rates to show how relatively lower rates “make early stage production activities more profitable” (Mises Daily, 4/21/2007). Instead, with Excel 2013 and the St. Louis Federal Reserve Economic Data (FRED) repository, I went looking for a few data series that showed my view of the relationship between interest rates and factors of production.

Using Wages + Salaries as a stand-in for economic returns to labor and Corporate Profits (after taxes) as a proxy for returns to non-labor (ie capital), I created the chart below.

In response to growing wealth inequality, I contend that two decades of relatively low interest rates are largely responsible for the increase in economic returns to capital versus labor. Because the vast majority do not hold claims against returns to capital, wealth inequality will grow until real time preferences are expressed in financial markets.

Effective Fed Funds Rate v. Ratio of Corporate Profits to Wages+Salaries
(1960 – 2012)

Interest Rates and Returns to Labor v Capital

Graph Summary: When the orange line is increasing, gains accruing to capital (in the form of corporate profits) are increasing faster than gains accruing to labor (in the form of wages and salaries). When interest rates (blue) fall, more economic gains accrue to capital than to labor.

The unfortunate irony is that while failing to achieve the case for interest rate manipulation (increased employment), it also transfers a greater proportion of economic returns to capital owners.

Leave a Comment

Filed under Economics, Zeitgeist

Re: China Swallows Obama Stimulus…

A few thoughts in response to Andy Xie’s opinion piece on Bloomberg (via The Third Rail):

I disagree with his statement at the end, that “The Smiths and the Gonzalezes have wealth and won’t accept Third World wages.”

Just as a company doesn’t price its products according to its market cap, individuals don’t price their labor according to their wealth. Wages are determined by costs – rent, education, transportation, food – in the short term I must make enough to cover these and then some. These have all increased in price due to policy decisions. It isn’t the absolute level of wealth but the attendant arrogance that led us to enact ‘progressive’ policies.

The first alarm bells should have gone off when people claimed that domestic labor was ‘above’ performing any type of work. What was implied in those claims is that fixed foundational costs priced domestic labor out of the market.

Leave a Comment

Filed under Consumer, Economics, Zeitgeist

Is America, a Cowardly Nation?

Through a fundamental discomfort with certain kinds of inequality within our society, we created the economic realities that made international labor arbitrage a necessary factor of production of many if not most goods enjoyed in American households. Illegal immigrants are simply another component of this labor arbitrage; filling the void for local, low-cost labor – often in industries where government intervention has created the need for it. (They work on our subsidized farms, and beside unionized labor in construction, etc.)

There are transaction, transportation, and other costs associated with this worldsourcing, which increases the overall price level. The terrible irony is that it is now virtually impossible to be truly poor, and live in America. Take this excerpt from the Wikipedia article

Poverty in the United States:

A typical American categorized as poor has good condition housing. Most have at least two rooms per person and more space than middle-class people in Paris, London, Vienna, Athens, and other cities throughout Europe. Over three quarters have a car and a third of poor Americans have two cars. Poor Americans have air conditioning, a refrigerator, a stove, a clothes washer and dryer, and a microwave oven, two color televisions, cable or satellite TV reception, a VCR or DVD player, and a stereo. Most poor Americans report zero financial or material problems.

Two categories of people would otherwise be employed locally with this arbitraged labor: those with fewer gifts/abilities, and those born to a low station. However, we are uncomfortable with members of these sets living among us (although Democrats sometimes assert that Republicans, without access to education and living in lower cost areas of the country compose most of the first category). The concept that through public education we pay enough to eliminate or reduce the probability of inequality brought about by birth to a low station holds enough weight to support the endurance of that institution. The reality is that many people know it doesn’t, but while still trapped by that hope, instead argue for greater funding and perhaps changing the rules. Again, the affect is an increase in labor cost, outsourcing, and the general price level.

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. – Declaration of Independence

A friend recently posted this humorous article from NY Magazine, What the Hotness of Your Waitress Says About the Economy. In summary, attractiveness has elastic demand, and duration a recession, those possessing attractive qualities must meet other demands, such as waiting tables. But there is another economic metric, ‘What the Whiteness of Your Fast Food Worker Says About the Economy’. Based on my observations, white people who formerly might have had other job prospects have settled for lower wages working at jobs formerly filled by immigrant workers. Perhaps some of you have had similar observations?

I suggest that America is a cowardly nation because we lack the courage to both accept and endure the unpleasant truths about society, ability, station, and equality. The most explicit form of this cowardice exists in minimum wage laws, which are simply (legal) labor price floors – through these we increase the market for illegal workers, while tacitly acknowledging the high level of general prices. The irony here is that the largest employers often have greater access to capital, and are able to replace higher cost labor with capital. As an example, consider grocery store checkouts – as many as four self-service checkout stations are now monitored by one employee where the previous standard was one or two employees per register (one to work the register, and one to bag groceries).

Finally, I’d like to be clear to avoid potential offense or misdirection. I’m not contending that education is irrelevant, that immigration is bad, or that people can and should improve themselves unaided. The material implication I’m making is that the prevailing theology has been insufficient to accept a broad enough understanding of God’s sovereignty that would allow us to accept certain inequalities and simultaneously work to change them.

Leave a Comment

Filed under Rant