Subsidizing Capital at the Expense of Labor: Unintended Consequences of low interest rates

The mandate of a central bank is normally “the goals of maximum employment, stable prices, and moderate long-term interest rates.” These goals are known today as the “dual mandate.”
Of course, the Fed’s tools for achieving the dual mandate were the setting of short term interest rates and market operations that impacted interest rates. Most of the time over the past 40 years the Fed has kept interest rates low with an intact trend of ever lower rates (with every cycle experiencing lower lows and lower highs). This has resulted in an enormous mountain of debt that now requires even more continuously low interest rates to avoid undue financial stress.
Surely one unintended consequence of these lower rates is an increasing subsidy of capital relative to labor. As interest rates get lower the relative attractiveness of investment over labor increases. Although the official unemployment rate shows near full employment, more broad based measures show that employment among many parts of the population is persistently much lower now than it has been in the past.

Businesses use the key inputs of capital and labor to grow. Managers must choose the optimal mix from among these factors. Both cost money. However, the Fed’s low interest rate policy is a subsidy to capital, making it cheaper relative to the cost of unsubsidized labor. In fact, labor is taxed (payroll taxes, income taxes, etc.) making it further relatively unattractive. So it should be little surprise that the returns to labor have been suffering relative to the returns on capital and thus labor is suffering. It seems it is not easy to achieve the dual mandate.
Robots are the Labor Saving Capital of the Future
Robotics and automation are the forms of capital most likely to be used to substitute labor. This is because the technologies necessary for game changing robotics and automation are all seemingly approaching the critical mass required for transformative change and wide scale commercial adoption. Many of these companies are leaders in the technologies necessary to make a unified robotic product or in the specialized application of a more narrow, but powerful, solution. A number of key technologies include 1.) computing and processing functions necessary to enable robots to work independently, 2.) “thinking” by artificial intelligence, algorithms, and machine learning, 3.) sensing information about the environment such as through visual mapping, GPS technology, and highly sensitive grips, 4.) directing the movement of the machine, and 5.) the integration of all these necessary steps into a fully functioning whole.
As Lewis Johnson writes in Trend and Tail Risks…….We should seriously heed Nils Bohr’s warning about the difficulty of prediction when it comes to the future. But an idea that one cannot stop pondering is the close relationship between stock market indices and industrial production. There has been a near 90% correlation over the last 100 years between the two in the United States. This close correlation makes intuitive sense given the extreme importance of companies driving long-term productivity growth to industrial production and thus living standards. Such companies in aggregate are the stock market. This realization helps us find comfort in an uncertain and rapidly changing world. When that future day arrives and we truly do find ourselves in a profoundly robotic world, could the accompanying productivity boom drive industrial production to levels that may shock even the bulls? The time between then and now may be very long indeed, or it may be far closer than we think. The prospect is surely one worth pondering. Given the stakes, we intend to keep an open mind!

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