In the current U.S. economic and political
environment, capital is relatively free. It has almost zero cost, provided one
can acquire any. The interest rate is near zero, implying there is plenty
of fungible money. The federal government has adopted a set of policies
to ensure capital has an even lower cost, through tax credits, favorable tax
treatment of capital gains compared to ordinary gains, and immediate expense
deductions of limited amounts of capital for tax purposes. In fact, there
is a much-used section of the tax code (1031) allowing "tax payers" to
not pay taxes on the sale of capital items, provided they accepted like-kind property in exchange for their property instead
of cash within 18 months. (Example: Person X trades Person Y 100 acres of suburban sprawl
for 10,000 acres of tillable land.) Yet, people are concerned about the
rate of employment growth. Why the conundrum?
In the olden days of post-WWII economic growth, job
creation was supported by lowering the cost of capital. Capital was in short supply and therefore
expensive. The complementary inputs of
capital and labor were needed to provide economic growth. The Kennedy administration introduced the
Investment Tax Credit in the early 1960s to further lower the cost of capital, to encourage
investment that would employ the growing population.
In the current economic environment, however,
capital and labor are more often substitutes for each other, not complements. So, when economic policy encourages capital
instead of labor, one would naturally expect companies to invest in capital to
replace labor. Capital is cheaper than
labor in the U.S. And capital is frequently more productive. Economic theory is clear that the appropriate
amounts of capital and labor to use are determined by equating the inverse
price ratio of the two inputs (Pcapital and Plabor) to the ratio of the marginal productivity (MP) of each input. Thus, the amount of each input to use is where Pcapital/Plabor = MPlabor/MPcapital. When the price of capital
is zero, one expects the amount of labor utilized to be minimized.
In other countries labor is cheaper than
capital. Consider the BRIC(S)
countries. I have seen small squadrons
of people carrying 25kg and 50kg bags around warehouses, up stairs to blending
mixers, and other places. These people
would have been replaced by conveyors, elevators, sensors and other equipment
in the U.S. But capital is too expensive
in many areas to consider substituting it for labor.
I am not suggesting a U.S. policy change to support
jobs for people to carry 50kg bags. In
fact, I do not know why we consider “economic impact” of events to include the
bed sheet changing and dishwashing jobs that we import people to perform and
subsequently complain about them “taking jobs.” Job quality and job quantity are not synonyms.
Rather, I am suggesting that we stop emphasizing
one economic input over another and let the markets equilibrate as they
may. We have encouraged capital so much that we have an oversupply and an underutilization of both capital and labor. And we are still paying for encouraging
people to have used capital unwisely.
Erecting barriers to entry, including raising the minimum efficient size or scale to compete through lack of enforcement of antitrust law, has fundamentally contributed to capital and labor being substitutes at low and moderate amounts. It takes a large investment for capital and labor to be complements in the way envisioned by current, conflicting policy.
Mike M.
