Diatribes - Computer, Economic & Political

This blog is really just for me. If you find something interesting on it, leave me a comment. If you disagree with something, let me know what and why. In this blog I am just putting some of my thoughts for computers, the economy, politics, and other topics in writing.

22 October 2005

Re: Economic Squeeze on Firms, Squeezes Workers. Duh

This is my full response to the preceding article (article posted here). I agree this is a problem. My response is more that you want to read (probably) but feel free to disagree on any point.

Basically whatever the cause; the marginal productivity of labor and capital must be the same or else we will substitute one for the other. Since labor prices (wages) are distorted by immobility (see footnote 1), and capital right now is quite cheap (low interest rates); either the price of capital must rise (higher interest rates) or the price of labor must fall.

Normally this increase in interest rates would be softened by people saving more, but nobody is (see footnote 2). And whatever they do save is gobbled up by idiot Government deficits.

Another problem is that our idiot government policy driving the healthcare issue is that the government offers free (to companies) alternatives to expensive healthcare. Workers get government insurance so they don't complain as much or fight as hard for healthcare. In the same way social security is massively decreasing savings, so when companies need capital to replace expensive labor, they can't get it (there is no cheap capital since the government has gobbled it up).

The way this will be fixed is three fold. The government fixes their act (stops spending, interest rates rise), the economy straightens itself out. Or more likely the government doesn't fix anything, the economy continues to go wack, citizens get angry, reformers get
elected, the government fixes things, but not early enough to avoid a recession because of crushing debt, low savings rate, low relative wages. Unions could be a temporary solution. Demand a livable wage and decent benefits. That would force out of America all those industries that really "can't compete", and leave those that can (with innovation or replacing workers with capital). Then we could retrain those laborers.

For a long time I have held the belief that the American economy is built on sand. We don't actually make stuff. The Chinese do, and they sell it to us. We provide services, and to whom? Not to the Chinese, but to ourselves. So the Chinese (or anyone else in their situation) are amassing more an more American capital (in exchange for their stuff), offering more and more stuff now for future payments. Eventually the Chinese repo man will come around, and you know what he'll find? A bunch of hard-working English and liberal arts majors, skilled in services, without real value.

What is driving these all-consuming efficiency demands? Two things: American consumers demanding cheap goods; and arguably more important, stock owners demanding higher dividends (or the decision makers get ousted). Thus wealth travels from those buying goods (the average person) to those owning stock (the rich). So yes the divide will grow. The solution to this problem proves non-trivial, I don't know a
clear one short of restructuring our system, or forcing everyone have more charity.

1. This is the natural shifting of wealth that trade enables. We see distortions because of this simple fact: capital is mobile, labor is not. Thus we see distortions, not in the capital market, but the labor market. There are two solutions to this problem, accept a lower
standard of living, or allow labor more mobility. Both will have a similar effect, wages will fall in industrialized countries, labor will increase, Earth will move closer towards even distribution of wealth.

2. Idiot government policy is also driving this. After massive deficits gobbled up the meager American savings, they moved elsewhere. This comes at a cost, we get stuff and capital now, they get power over us in the future (maintained by holding American dollars). With the government offering low interest rates, for banks to make money
they must pay out even lower interest rates. Thus it is not attractive to save.


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