The March of the Consumers
Why are interest rates so low? The obvious explanation, of course, is spectacularly loose monetary policy. If the policy rate is barely above zero and central bankers are furiously purchasing billions of bonds every month, no wonder interest rates remain at historic lows. But it is worth considering if central bank policy is as much a symptom as a cause.
Interest is the cost of money, the price required to bring the desires of savers and investors into equilibrium. And today, even at near zero interest rates, savers are accumulating cash faster than firms want to put it to use. That is why the economy remains stagnant. That is why the Taylor Rule would push interest rates even lower than the Fed. Perhaps it is firms’ reluctance to invest that explains both our ultralow interest rates and our anaemic growth.
Corporate timidity is partly a result of the recession: if you can’t sell all the stuff you make, why build a new factory to make more? But on a deeper level it may be that current technology and organizational structures require less capital than we are accustomed. As John Kay reminds us in a typically insightful article, non-governmental bond markets first emerged in the 19th century, primarily to fund railroads. Before that, if a merchant wanted to buy machinery to set up a textile factory, he found the money either in retained profits from previous ventures or his friends and family provided capital in return for a partnership in the business.
But building a railroad required massively more capital than anyone’s acquaintances could spare and so railroad bonds became the dotcom shares of their era. The world’s transport infrastructure was transformed, even as many bondholders lost money. Railroads tied the world together, put Argentine beef on the tables of London workers, increased the value of land in California, raised wages in Sydney, improved the standard of living all around the world.
It was capital markets taking household savings and using them to enable corporate investment that transformed technological knowledge to practical purpose. Without these deep and liquid financial markets, the innovative steam technology of the 19th century would have had marginal impact instead of remaking the world.
Today, the Internet plays a similar role to railroads 150 years ago: a transformative technology that ties us together and will make us all much more productive. The difference is, it hardly requires any capital. How much money does it take to start up a Facebook or Twitter? A bit of office space, some servers, working capital to pay start up workers, almost nothing compared to the cost of building a steel mill. Recently, Apple floated a $17 billion bond, not in order to fund capital improvements but rather to pay its shareholders a dividend. The deal made sense: at these low interest rates, who wouldn’t want to borrow, but it epitomises a momentous shift in the purpose of capital markets.
According to the textbooks, capital markets exist to mobilise societal savings towards the most productive investments. Households save, firms invest, higher capital to labour ratios make us more productive. But for the past thirty years, through dividends and stock buybacks, the US stock market has actually funnelled money in the opposite direction: from corporations to households, from investment to consumption. Not only are firms no longer borrowing to increase productive capacity, they are actually disbursing profits they previously would have retained for investment back to shareholders.
The interest rate can be thought of as the marginal return of capital. Low interest rates, then, suggest capital is not as valuable as it used to be. But of course, neither is labour. Losing your job from the 1940s to the 1970s was not that big a deal. If you were laid off at one plant, you could go across town and find a job at another. Today, the American median male real wage is lower than it was in 1973. In part that reflects the decline in union power but it also demonstrates a reduced demand for workers. Charles Bukowski, the poet laureate of low life LA, managed to rarely be out of work, despite rarely almost never showing up on time and being drunk when he did. Employers would eventually cotton onto his ways and fire him but a few days later another would happily hire him. Try being that useless today and holding onto a job. Back in Bukowski’s day, the supply of labour did not outstrip demand for it. Even drunks and layabouts could get hired. No more. Today, employers hold the whip hand, as do borrowers relative to savers. The railroads and steel mills of the second industrial revolution were both capital and labour intensive. The computer and Internet firms of today are not. Both labour and capital are growing redundant.
This suggests policymakers need to rethink deeply held prejudices. Today, it is consumer demand, not labour scarcity or lack of capital that is the bottleneck of growth. In such a situation, we might need to consider separating the link between work and consumption. Obviously, this will be tricky and will have profound sociological impact but on a purely economic level it makes sense. Technology has made both workers and capital more productive, and so less necessary. Today, we can produce more than we did when labour and capital were more scarcer. This should not frighten us. Making more stuff with fewer inputs cannot be a bad thing, even if it causes pension funds to earn lower returns, even if it eradicates previously good jobs.
Marx got one thing right: capitalism’s magnificent productive capacity means that overproduction is its only Achilles heel. Our problem today is lack of demand. C is declining because workers face stagnant wages and would prefer to pay down debt rather than accumulate more. I is declining because manufacturing firms have more productive capacity than they need and the service firms of the future don’t require that much capital.
Fortunately, overproduction, unlike scarcity is a problem that can be solved purely by political will. If C and I are declining, and we have a gap between our productive capacity and aggregate demand, then G must go up. It is clear that austerity has been a catastrophic mistake. Government spending, on education, on infrastructure should rise. Perhaps the best solution to our interminable economic travails would be to provide all citizens with a basic income. The current economy needs consumers more than it needs workers. A basic income not only would provide a vital safety net, it would provide demand, which unlike capital or labour, is in short supply today.