The economics of labor and capital

Recently, the Economist argued that China's astoundingly high investment rate makes some sense because China is a capital scarce country with a very low level of capital per worker compared to the US.

This may well be true. It is certainly the case that it makes sense that China's investment rate is higher than that of a very capital abundant country like the US.

However, the article concludes with some amazing errors, both factual and economic:

the evidence suggests that China has not seriously overinvested. That does not mean rebalancing is unnecessary. Under China’s capital-heavy model of growth, owners of capital have been getting much richer than workers. The main reason for shifting from capital-intensive production to the more labour-intensive, consumer-friendly sort is not to sustain economic growth, but to reduce inequality. Workers could then enjoy more of the rewards of China’s past investment.

Where to begin?

First, as the graph in the article showed, relative to rich countries China is NOT engaged in "capital- intensive production" because they have very little capital per worker. I thought that was the whole point of the first part of the article.  They are decidedly engaged as a simple matter of fact in labor intensive production compared to countries like the US.

Second, if China stops accumulating capital, the owners of capital will continue to make a lot of money and worker salaries will continue to lag. Owners of capital are getting rich because its relative scarcity makes its rental rate high. If capital is paid its marginal product and marginal product diminishes, capital owners make a greater return when the capital stock is relatively small.

In order to raise worker salaries, workers need to become more productive. Part of this can come from workers' own investments in human capital, but a big part comes from the amount of capital per worker in the economy.

If China wants to reduce inequality between the earnings of capital owners and laborers, then they decidedly should NOT "re-balance" away from investment. Of course they should try and make sure that the investments undertaken actually raise worker productivity and are not state led vanity projects or boondoggles.

The greater amount of capital per worker, the higher is worker productivity, the higher will be wages and the lower will be the return to capital. That is the way to diminish the gap.

Raising China's capital per worker is crucial to raising the living standards of Chinese workers.

ATMs destroy jobs?

So, President Obama went on the TODAY SHOW.

And, according to a couple of people I talked to, and some writers, he said that ATMs are destroying jobs. The quote is this:

There are "structural issues with the economy. ... You see it when you go to a bank you use the ATM, you don't go to a bank teller."

Here is the show excerpt. It's long; the relevant part starts at 3:00 or so.

And...that's not what he said. "Media Matters" has this right, I think. The President just did not say ATMs are costing America jobs. He didn't.

Still, I might not have said "structural problem," which is wrong. The fact is that economies are constantly doing things like replacing people with machines in some sectors and then hiring people somewhere else. That is not a problem at all, but a challenge.

I admit that for a command and control, "let's pass a law" guy like the President, it has to be a little scary to rely on the "creative" part of creative destruction. It's not clear where the new jobs will come from. It never is.

But he came close to telling the truth. The reason that business is not investing now is that investors are uncertain, and can't be sure if the economy is turning up. So they are sitting on cash. In the meantime, productivity (he called it "efficiency," which is accurate enough) is through the roof, so companies are making decent profits. And the Treasury is selling huge amounts of government debt, and companies can park their cash there and make a decent return in the short run.

Here's the thing. KPC BFF Mark Perry has the straight dope: fewer jobs but much larger manufacturing output.

But look at productivity:

ATMs are a good thing. (And the President basically said so). But losing jobs to productivity means that jobs must be created somewhere else, if the economy is to grow. The U.S. is still (by far) the largest manufacturing economy in the world. And U.S. manufacturing is (still) trending up, not down. That's not controlling for population, and not using any tricks. We are number one, by a lot.

Here's what the President should do.
1. Stop the class war rhetoric. Stop blaming business for the depression. He can blame his Wall Street butt boys at Goldman and Lehman, if he wants, but he would never do that and turn off the campaign contribution money pump.
2. Take real steps toward settling the budget and debt crisis. Force the bed-wetters who "lead" the Senate to pass a freakin' budget.
3. Reduce the uncertainty business faces in forecasting health care costs, taxes, and new regulations. The whole health care fiasco is a major cause of the extended recession. Republicans are just as much to blame, in that area. They obstructed without offering a better alternative, and now health care is still a big job-killing tax on new hires. But the President is the one who has to try to do something.

In 1936 and 1937, as Amity Shlaes chronicles in her book THE FORGOTTEN MAN, the Roosevelt administration went after business hard. They tried to pass new taxes, and they blamed business for (wait for it) sitting on piles of cash. The result was a second dip, where employment jumped back above 16%. It could happen again. ATMs are good; uncertainty is bad. And deficits are stupid.

Rising Real Wages and the Spread of Opulence

Prof. G. Kennedy gives, as always, a learned and nuanced description of the problem.

I always come back to these two pictures shown in this post. Which one has higher wages, do you expect? And which one produces cheaper products? Since opulence, by definition, is higher wages and cheaper products, we're done here.