Friday, November 20, 2009

The great jobs-stocks disconnect article "The great jobs-stocks disconnect" (November 18th, 2009) is short-sighted in its understanding of growth theory.

How can the stock market hit new highs at the same time unemployment is hitting new highs? Simple. The market is up because corporate earnings are up. Corporate earnings are up because companies are cutting costs. And the biggest single cost they’re cutting is their payrolls. So they let people go and, presto, their balance sheets look better and their stock prices rise.


The result, overall, is an asset-based recovery, not a Main Street recovery. Yes, the economy is growing again, but the surge in productivity is a mirage. Worker output per hour is skyrocketing because companies are generating almost as much output with fewer workers and fewer hours.

There are, generally speaking, two inputs to goods: labor, and capital. The return to an investment of labor is the wage the labor receives, just as invested capital has its own average return. Every increase in productivity of capital or labor In the past two centuries, accrues to one or the other (every dollar a business takes goes out somewhere). But capital is elastically supplied, while labor is relatively inelastic, even in the long run. Because of this, in the last two centuries, it has been the wages of labor that have increased by factors of magnitude, while the return to capital has stayed relatively constant.

To deride a short-term increase in the return on captial is to misunderstand that all productivity gains in the last two centuries are collected not by capital, whose rate eventually returns to 5-7%, but to labor, who permanently gains.

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