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)
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.
What follows is an update to my Feb 14, 2011 post Unemployment Duration and the Labor Market. Back then, Average Weeks Unemployed had just leveled off at a blissful ≈35 weeks. Now at over 40 weeks, businesses have open positions but unemployment is still over 16%, and growth in student loan debt shows no sign of abating.
However, I’m not advocating for student loan forgiveness. I have made significant sacrifices to live well below my means and it would be a travesty to see my selfish and profligate peers rewarded for not taking the same measures.
No, the real problem is real prices; to be addressed at length in the future.
WSJ: Why Companies Aren’t Getting the Employees They Need (Oct 24, 2011)
Some of the complaints about skill shortages boil down to the fact that employers can’t get candidates to accept jobs at the wages offered. That’s an affordability problem, not a skill shortage. A real shortage means not being able to find appropriate candidates at market-clearing wages.
Forbes: The American Nightmare: Student Debt Will Be A Long-Term Drag On The Economy (Oct 22, 2011)
Over the next decade the Bureau of Labor Statistics projects that the greatest number of employment gains will be made in low-wage industries not requiring a college degree. Nasser believes that education debt will place an additional drag on America’s low-wage, low-purchasing power future. For many, the debt will delay or put entirely out of reach things like owning a home or a car.
The Atlantic: Chart of the Day: Student Loans Have Grown 511% Since 1999 (Aug 18, 2011)
BLS: Average Weeks Unemployed
BLS: Total unemployed, plus all marginally attached workers plus total employed part time for economic reasons
I’m only 24 pages in to Hazlitt’s book, The Failure of the “New Economics”: An Analysis of Keynesian Fallacies, and already I’ve come across some juicy quotes criticizing price levels and macro-economics.
In the same way, “the general level of wages,” like “the general level of prices” (both of which concepts are central to Keynes’s thought), has no existence in reality. It is a statistician’s construct, a mathematical average which has a limited value in simplifying certain problems. But it simplifies away some of the chief dynamic problems in economics. –p.24
The word “level” can give rise to an additional false assumption–that prices and wages rise or fall evenly or uniformly. It is precisely their failure to do so that creates most of the problems of inflation or deflation. It is also the failure of specific prices or wages to rise or fall as much as the average that permits the continuous structural changes in production and in the labor force necessary for continuous economic efficiency and progress. –p.25
Keynes is constantly falling into this fallacy of averages or aggregates. His “aggregate” or “macro-economics” is not a step in advance; it is a retrograde step which conceals real relationships and real causation and leads him to erect an elaborate structure of fictitious and relationships and fictitious causation. –p.28