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Make Capital Cheap and Labor Costly, and Guess What Happens?

June 28, 2018

Make Capital Cheap and Labor Costly, and Guess What Happens?

Employment expands in the Protected cartel-dominated sectors, and declines in every sector exposed to globalization, domestic competition and cheap capital.

If you want to understand why the global economy is failing the many while enriching the few, start with the basics: capital, labor and resources. What happens when central banks drop interest rates to near-zero? Capital becomes dirt-cheap. It becomes ludicrously easy to borrow money to buy whatever cheap capital can buy: stock buybacks, robots, automation tools, interest-sensitive assets such as housing, competitors or potential competitors, high-yield emerging-market bonds, and so on.

What happens when cartels take control of core domestic industries such as banking, defense, higher education and healthcare? Costs soar because competition has been throttled via regulatory capture, and these domestic sectors are largely non-tradable, meaning they can’t be offshored and have little meaningful exposure to globalization.

Labor-intensive cartels such as these can pass on their rising costs for labor, resources and profiteering. Do you really think assistant deans could be pulling down $250,000 annual salaries in higher education if there was any global or domestic competition?

As for healthcare, I’ve often noted that healthcare/sickcare will bankrupt the nation all by itself. When a cartel such as healthcare / sickcare can force higher prices on employers and employees, the cost of labor throughout the economy rises.

Sickcare Will Bankrupt the Nation–And Soon (March 21, 2011)

Can Chronic Ill-Health Bring Down Great Nations? Yes It Can, Yes It Will (November 23, 2011)

You Want to Fix the Economy? Then First Fix Healthcare (September 29, 2016)

As I’ve indicated on the chart, labor-intensive cartels in non-tradable sectors–higher education, defense/national security, healthcare and banking– can pass on their rising labor costs to their captive customers.

…click on the above link to read the rest of the article…

Is Population Decline Catastrophic?

October 7, 2017

Is Population Decline Catastrophic?

population.PNG

In the 1970’s we heard the earth was going to get so crowded we’d be falling off. Now the panickers have flipped to population decline. They were wrong in the 70’s, so are they wrong again? Is a declining population catastrophic?

Countries from Germany to Japan are investing in mass immigration or pro-birth policies on the assumption that they must import enough warm bodies to stave off economic collapse. I think this is mistaken. Falling population on a country level is certainly no catastrophe and, indeed, may be positive. I’ll outline some reasons here.

Historically, the first question is why population declined. If it’s the Mongols invading again then, yes, the economy will suffer. Not because of the death alone, but because wholesale slaughter tends to destroy productive capital as well.

On the other hand, if the population is declining from non-war, we have a well-studied natural experiment in the Black Plague. Which is generally credited with the “take-off” of the West. Because if the population declines by a third while capital including arable land stays the same, you get a surplus. Same resources divided by fewer people.

Think of zombie movies where dude’s running around with unlimited resources at his disposal — free cars, riverfront penthouses. That, in diluted form, is what a declining population gives us — more land, more highways or buildings, more resources per person.

Now, if the population’s declining not because of a terrible disaster like the Plague, rather because people simply want fewer children, then you don’t even get the massive hit from losing productive people. A worker dying at 40 takes a lot of productivity with him, while a child unborn isn’t actually destroying anything but hopes and dreams.

So if the Plague was a per capita economic bonanza to Europe, having fewer children should be an even larger per capita bonanza.

…click on the above link to read the rest of the article…

The Financialization of America… and Its Discontents

September 30, 2017

The Financialization of America... and Its Discontents

The Financialization of America… and Its Discontents

Labor’s share of the national income is in freefall as a direct result of the optimization of financialization.

The Achilles Heel of our socio-economic system is the secular stagnation of earned income, i.e. wages and salaries. Stagnating wages undermine every aspect of our economy: consumption, credit, taxation and perhaps most importantly, the unspoken social contract that the benefits of productivity and increasing wealth will be distributed widely, if not fairly.

This chart shows that labor’s declining share of the national income is not a recent problem, but a 45-year trend: despite occasional counter-trend blips, labor (earnings from labor/ employment) has seen its share of the economy plummet regardless of the political or economic environment.

Down, Down, Down

Given the gravity of the consequences of this trend, mainstream economists have been struggling to explain it, as a means of eventually reversing it.

The explanations include automation, globalization/offshoring, the high cost of housing, a decline of corporate competition (i.e. the dominance of cartels and quasi-monopolies), a failure of our educational complex to keep pace, stagnating gains in productivity, and so on.

Each of these dynamics may well exacerbate the trend, but they all dodge the dominant driver of wage stagnation and rise income-wealth inequality: our economy is optimized for financialization, not labor/earned income.

What does our economy is optimized for financialization mean?

It means that capital and profits flow to the scarcities created by asymmetric access to information, leverage and cheap credit — the engines of financialization.

Financialization funnels the economy’s rewards to those with access to opaque financial processes and information flows, cheap central bank credit and private banking leverage.

…click on the above link to read the rest of the article…

The Coming Class Wars

February 11, 2017

The Coming Class Wars

The forces dividing us are overwhelming those that unite us 

In the modern era, the phrase Class War is rooted in the socialist/Marxist concept that the conflict between labor (the working class) and capital (owners of capital) is not just inevitable—it’s the fulcrum of history.  In this view, this Class War is the inevitable result of the asymmetry between the elite who own/control the capital and the much larger class of people whose livelihood is earned solely by their labor.

In Marx’s analysis, the inner dynamics of capitalism inevitably lead to the concentration of capital in monopolies/cartels whose great wealth enables them to influence the government to serve the interests of capital. Subservient to capital, the laboring class must overthrow this unholy partnership of capital and the state to become politically free via ownership of the means of production, i.e. productive assets.

This Class War did not unfold as Marx anticipated. The laboring class gained sufficient political power in the early 20th century to win the fundamentals of economic security: universal public education, labor laws that prohibited outright exploitation, the right to unionize, and publicly funded pensions.

(The alternative explanation for this wave of progressive policies is that prescient leaders of the capital/state class ushered in these reforms as the only alternative to the dissolution of the status quo.  Labor reforms began in Germany and Great Britain in the late 19th century Gilded Age, and another wave of reforms were enacted in the decade-long crisis of capitalism in the Great Depression.)

…click on the above link to read the rest of the article…

Automating Ourselves To Unemployment

April 28, 2016

Tatiana Shepeleva/Shutterstock

Automating Ourselves To Unemployment

How shortsighted policies are creating a long-term crisis
Students of Austrian business cycle theory are familiar with the term malinvestment. A malinvestment is any poor use of resources or capital, commonly made in response to bad policy (usually artificially low interest rates and/or unsustainable increases in the monetary supply). The dot-com bubble that popped in 2001? The housing bubble that similarly burst in 2008? Those were classic examples of malinvestment.

With this article, I’d like to introduce a related term: malincentive. While not part of the official economic lexicon, I consider a ‘malincentive’ a useful word to describe any promise of short-term gain whose long-term costs outweigh any immediate benefits enjoyed. The temptation to urinate in one’s pants on a cold winter day to get warm is a (perhaps unnecessarily) graphic example of malincentive. Yes, a momentary relief from the cold can be achieved; but moments later, you’ll have a much larger problem than you did at the outset.

Malincetives and malinvestment go hand-in-hand. In my opinion, the former causes the latter. As humans, we respond remarkably well to incentives. And dumb incentives encourage us to make dumb investments.

In this current era of central planning, malincentives abound. We raced to frack as fast as we could for the quick money, while leaving behind a wake of environmental destruction and creating a supply glut that has killed the economics of shale oil. Our stock exchanges sell unfairly-fast price feeds for great sums to elite Wall Street high-frequency-trading firms, and as a result have destroyed investor trust in our financial markets.  The Federal Reserve keeps interest rates historically low to encourage banks to lend money out, yet instead the banks simply lever up to buy Treasurys thereby pocketing vast amounts of riskless free profit. The list goes on and on.

…click on the above link to read the rest of the article…

Our Phantom Economy

June 15, 2015

Our Phantom Economy

Those who believe that phantom recoveries and phantom metrics can be substituted for reality are in for a shock in the next downturn.

Stripped of artifice, there are only two kinds of media stories: those that support the status quo narrative, and those that are skeptical of that narrative.

What is the status quo narrative? Simply this: not only is this the best possible arrangement of labor, assets and money, it is the only possible arrangement of labor, assets and money.

It is impossible to challenge a system that is the only possible arrangement; the only option is to accept it.

 

One of the greatest and most important PSYOPS of the Imperial State (U.S. Government) and its faithful lapdog the mainstream media is the unemployment rate. As I will show tomorrow, the real unemployment rate is between 20% and 40%, depending on whether you think someone earning $1,500 a year selling stuff on eBay and Etsy should be counted as “employed.”In effect, the mainstream media is a vast Psychological Operation (PSYOPS) aimed at persuading the American public that the status quo Imperial system of predatory, debt-based crony-capitalism that benefits the few at the expense of the many is not just beneficial to all its debt-serfs and welfare recipients, but it is the only possible system–there is no alternative(TINA).

The federal government is delighted to count everyone earning $100 a year as employed, and equally delighted to label everyone without a job (even one paying $100/year) who doesn’t qualify for unemployment insurance a job market zombie–a once living person who is no longer counted as among the living.

…click on the above link to read the rest of the article…

 

U.S. Households Under Pressure: Stagnant Incomes, Rising Basic Expenses

May 29, 2015

U.S. Households Under Pressure: Stagnant Incomes, Rising Basic Expenses

How do you support a consumer economy with stagnant incomes for the bottom 90%, rising basic expenses and crashing employment for males ages 25-54? Answer: you don’t.

Frequent contributor B.C. passed along a sobering set of charts that provide context for How The Average U.S. Consumer Spends Their Paycheck. The basic story is well-known to the bottom 90%: most of the household income goes to taxes, housing, food and transportation, with healthcare and insurance, pensions and retirement contributions rounding out the big-ticket items. (Higher education is, as we all know, paid with student loans by all but the top-tier of families.)

Here’s the question this raises: is the sliver that’s left enough to support a $17 trillion consumer economy? The answer is obvious: no.

 

Stagnant household income has a number of systemic causes, including the generational decline of full-time employment (A Rising Share of Young Adults Live in Their Parents’ Home) and the concentration of wage gains in the top 10%. These dynamics are not easily addressed, for the simple yet profound reason that the amount of human labor that generates a meaningful profit in a stagnant, over-indebted, financialized economy is declining.

The only way most enterprises can sustainably earn a profit is to offload costly human labor (with its immense burdens of healthcare, pensions, workers compensation, disability insurance, etc., and the heavy regulatory burdens of workplace rules) and replace it with networked software and smart machines.

The types of human labor that generate hefty profits are increasingly scarce, and as a result entry-level pay and employment are both capped by the high costs of human labor (even at minimum wage) and the relatively meager profits generated by conventional labor.

 

…click on the above link to read the rest of the article…

Is the slowdown in productivity growth a result of energy costs?

May 25, 2015

Is the slowdown in productivity growth a result of energy costs?

Slowing productivity growth in the United States has been in the news in recent months. It has become a concern to policymakers because they believe it is one of the primary contributors to a middle-class economic squeeze according to the annual report of the White House Council of Economic Advisors.

Simply put, productivity growth refers to the growth in economic output per worker or more precisely, per hour of work. When this growth slows, the potential for real wage increases diminishes since the growth in wages typically reflects the ability of workers to create more output per unit of time.

To the obstensibly naive observer the following idea may seem a plausible explanation: Higher-cost energy inputs into the production of goods and services reduce productivity growth because the economic output per dollar of energy consumed declines. And, though energy inputs aren’t the only thing to consider, they are important. The high energy prices of the last decade or so may be, in part, responsible for low productivity growth. (Conversely, low energy costs would imply more output per dollar of energy consumed.)

But strangely, almost all economic models for productivity consider only so-called “tangible” factors, that is, labor and capital. In the bizarro world of modern economics, energy and materials are not considered “tangible.”

Now, the way in which that productivity growth which is attributable to “technological advances” is typically calculated is to add up contributions to productivity growth from labor and capital (machines, buildings, vehicles, tools of any kind) and then subtract this sum from the known amount of total productivity growth. What is left is the so-called “residual” which is presumed to result from “technological advances” caused by increases in human knowledge. These advances and the increases in capital per worker are assumed to be the drivers of productivity growth.

…click on the above link to read the rest of the article…

Chinese Company Moves to Replace 90% of its Workforce with Robots

May 7, 2015

Chinese Company Moves to Replace 90% of its Workforce with Robots

I’m not one of those people who thinks robots taking over menial labor from human employees is a bad thing. On the contrary, I think such a displacement could ultimately prove very positive for the species. Nevertheless, the short-term pain and suffering that this could cause for displaced workers and their families likely will have tremendous negative repercussions to the societies that are most affected in the near and intermediate-term.

Since robots entering the workforce is probably one of the most significant economic trends in the decades ahead, we should all start thinking about how to deal with what will be a major adjustment for hundreds of millions, if not billions, of people.

From the South China Morning Post:

Construction work has begun on the first factory in China’s manufacturing hub of Dongguan to use only robots for production, the official Xinhua news agency reported.

A total of 1,000 robots would be introduced at the factory initially, run by Shenzhen Evenwin Precision Technology Co, with the aim of reducing the current workforce of 1,800 by 90 per cent to only about 200, Chen Xingqi, the chairman of the company’s board, was quoted as saying in the report.

Robots are set to take over in many factories in the Pearl River Delta, the area of southern China known as the ‘world’s workshop’ because of the huge export manufacturing industry there, as labour shortages bite and local authorities face the need to spur innovation to counter the economic slowdown.

Since September, a total of 505 factories across Dongguan have invested 4.2 billion yuan in robots, aiming to replace more than 30,000 workers, according to the Dongguan Economy and Information Technology Bureau.

By 2016, up to 1,500 of the city’s industrial enterprises will began replacing humans with robots.

 

…click on the above link to read the rest of the article…

 

charles hugh smith-Our New Robot Overlords & The Third Type of Capital

October 18, 2014

charles hugh smith-Our New Robot Overlords & The Third Type of Capital.

Our New Robot Overlords & The Third Type of Capital   (October 18, 2014)

Fortune will instead favor a third group: those who can innovate and create new products, services, and business models.A recent issue of Foreign Affairs sported a catchy cover teaser: Our New Robot Overlords. This brings to mind various sci-fi scenarios, but the actual article title is academic to the point of obscurity: Labor, Capital and Ideas in the Power Law Economy.

Rather than rehash the usual failed Keynesian Cargo Cult economics, the authors describe three powerful ideas that resonate very strongly with my own work:

1. Digital technologies (networked software, automation and robotics) are radically reducing the need for human labor and the leverage of traditional capital (land, fixed assets and cash) globally.

2. Premiums flow to whatever inputs are scarce. Labor and traditional capital are no longer scarce; what’s scarce is innovative, practical ideas. Ideas (for new models, products, services, processes, etc.) are a third form of capital that will accrue most of the rewards.

3. This distribution of premiums/rewards follows a power law, i.e. the Pareto Distribution where the “vital few” with the 3rd type of capital (good ideas) reap most of the rewards.

…click on the link above for the rest of the article…

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