Has aggressive monetary policy made labor less valuable?
I would like to ask a question of the readers for their comments.
Has aggressive monetary policy made labor less valuable?
The idea is that cheap money for so long to investors has made profits easier to obtain, and that labor was not valued and rewarded as a means to produce profits. Therefore, wages held low while QE was in place. Now that QE is going away slowly and there is talk of interest rates rising, we see wages climbing.
So what do the readers think of this relationship between aggressive loose monetary policy and low rewards to labor for their contribution toward profits?
Without QE, growth and employment would be much lower.
Wages remain depressed, because there’s still abundant labor.
Without QE, there would’ve been more unemployment, which would’ve depressed wages even more.
It should be noted, the Fed works in the future economy, because of lags in the adjustment process.
For example, the Fed will begin to tighten the money supply well before growth accelerates and to preempt inflation.
Politicans have plenty of time to shift blame, e.g. to the Fed, for their incompetence. That’s a big part of politics.
The Fed has done its part, and did it brilliantly, since the U.S. went off the (rigid) gold standard.
The Fed stimulated growth by lowering interest rates for households and firms, along with creating a “Wealth Effect” (in asset markets) to induce demand and reduce saving, in the attempt to generate a self-sustaining cycle of consumption-employment (where consumption generates employment and employment generates consumption, etc.).
Moreover, the Fed raised “animal spirits” to facilitate nominal growth, which facilitates real growth.
However, a virtuous cycle of consumption-employment failed to take hold, because fiscal policy, and policies out of Washington, basically resulted in an economy that has one foot on the accelerator and the other foot on the brake, causing an expensive recoverless expansion.
Here’s what Bob Brinker said about the Fed (Dec 2012):
“It’s only because the Federal Reserve has been active that we have any growth at all in the economy….The Federal Reserve is the only operation in Washington doing its job.
The only person that would criticize Ben Bernanke would be a person who is so clueless about monetary policy and (the) role of the Federal Reserve as to have nothing better than the lowest possible education on the subject of economics….Anybody going after Ben Bernanke is a certified, documented fool….”
LET’S nationalize Goldman-Sachs. ALL that beautiful QE Cash in that basement vault, just lying there, waiting and waiting for SOMEONE to come around and put it to good use, SOME use. All it would take is for Holder to make a few HONEST charges against The Board of Directors, a quick “fair and balanced” trial, maybe pitch a couple of them out the door to keep the rabble from getting out of hand.
PT,
I hear what you say, but let me play devil’s advocate.
The Fed has done the most that it can to support investment, but have they done too much? Did they make profits from higher liquidity more attractive, so that labor was less attractive for its capacity to produce value? Remember, labor is not mobile, while money is. Labor cannot go where it is most valuable, if it is overseas. Whereas money can go overseas.
So the ultimate question would be… if monetary policy had been less aggressive, less liquid, less able to flow overseas, would businesses have relied more on domestic labor to produce profits?
I know people with a lot of capital. They put their money into REITs in Europe and in other investments in Asia and Latin America. Money was easy for them to come by. But they didn’t need labor to produce the money. Therefore, they still don’t think about labor.
For example, investment money has been going to Spain, some to REIT (real estate investment trusts). But wages are very low there, inflation is very low, unemployment is still very low, housing prices have yet to bottom out. The domestic economy of Spain is not able to support prices, but the capital moving into Spain has the capability to produce its own market among itself. Therefore, profits can be made just from capital moving in blocks irregardless of the fact that labor in Spain is suffering.
The problem is not that labor can not move to where it is most valuable. This is the wrong way to view how it is capital is making money. It’s not moved to more to more value, it is moved to the greatest differential of the currency being used.
Thus, the problem is that labor can not export its self and then import the results and pocket the differential. It just can’t happen. There is no way for labor to play the arbitrage game in any form. I can not position my labor such that I can be arbitraging it.
On a more visceral level, the capitalist only recognizes the need for labor when labor is able to remove it’s input of energy into the creation of capital. That is, the most valuable labor in NY City was recognized when they used to be able to strike: the Garbage Man. Capital saw their actual shit piling up in the streets.
Edward, you seem to be saying if interest rates were higher, asset prices were lower, and economic growth was slower, U.S. labor would benefit somehow.
The Fed will do too much if it creates too much inflation, e.g. causing a price-wage spiral (where wages will try to catch-up to prices), which will eventually require even more tightening, to compensate, and may tip the country into recession.
Cheap rates support economic activity – but – there are two sides to this coin.
Consider Capex (capital expenditures). US companies have been on a tear adding Capex the past 4 years. There is no doubt that adding Capex increases economic output. There is also no doubt that the Capex increase is, in part, the result of zero cost money. But Capex is also a jobs killer.
Every time a company buys a new robot, jobs are lost. The more Capex the better – but more Capex means less quality jobs.
Does QE and ZIRP result in high levels of Capex? Absolutely.
Does high Capex add to economic activity? Absolutely.
Does high Capex eliminate high paying jobs? Absolutely.
It’s a Whack-A-Mole problem.
Capital spending not only increases output, it creates higher-skilled jobs, although reduces lower-skilled jobs somewhat, through productivity.
Higher-paying jobs are created, because workers are needed to create, build, ship, install, improve, maintain, operate, and manage those machines.
You guys appear to forget something, the capital expenditures experienced over the last decade were not Labor intensive and were not intended to employ Labor. In a traditional economy, you would be correct on capital expenditures. This has not been a traditional economy.
Companies have not been expanding capacity as they have too much under-utilized capacity too date.
run75441, economics works regardless of time or space. Until 2007, the U.S. economy produced more output with fewer inputs and those freed-up inputs, including labor and capital, were employed to expand the economy. The result was a steep rise in U.S. living standards.
However, over the past few years, many government policies have prevented and slowed the employment of those inputs to expand the economy. So, there’s massive idle inputs, or resources, e.g. labor and capital. The improvement in U.S. living standards either slowed dramatically or declined.
Also, the financial crisis and severe recession wouldn’t have happened if there were tax cuts, or reducing the national debt, from the huge trade deficits, rather than government directing money into the housing market, creating widespread “moral hazard,” and balking at “too-big-to-fail.” It was an ignorant, incompetent, and irresponsible policy.
Moreover, it was unfair that only some Americans benefited from the housing market, e.g. using their homes as ATMs, and many of them benefited enormously for many years. A tax cut could’ve benefited all Americans.
Depends on the counterfactual.
Since it prevented financial meltdown and mass unemployment, QE has kept labor share from really collapsing. So relative to doing nothing, the answer is no.
But if the counterfactual is energetic fiscal policy, the answer is yes.