Make Capital Cheap and Labor Costly, and Guess What Happens?

Make Capital Cheap and Labor Costly, and Guess What Happens? by Charles Hugh Smith – Of Two Minds

Employment expands in the Protected cartel-dominated sectors, and declines in every sector exposed to globalization, domestic competition and cheap capital.

If you want to understand why the global economy is failing the many while enriching the few, start with the basics: capital, labor and resources. What happens when central banks drop interest rates to near-zero? Capital becomes dirt-cheap. It becomes ludicrously easy to borrow money to buy whatever cheap capital can buy: stock buybacks, robots, automation tools, interest-sensitive assets such as housing, competitors or potential competitors, high-yield emerging-market bonds, and so on.

What happens when cartels take control of core domestic industries such as banking, defense, higher education and healthcare? Costs soar because competition has been throttled via regulatory capture, and these domestic sectors are largely non-tradable, meaning they can’t be offshored and have little meaningful exposure to globalization.

Labor-intensive cartels such as these can pass on their rising costs for labor, resources and profiteering. Do you really think assistant deans could be pulling down $250,000 annual salaries in higher education if there was any global or domestic competition?

As for healthcare, I’ve often noted that healthcare/sickcare will bankrupt the nation all by itself. When a cartel such as healthcare / sickcare can force higher prices on employers and employees, the cost of labor throughout the economy rises.

Sickcare Will Bankrupt the Nation–And Soon (March 21, 2011)

Can Chronic Ill-Health Bring Down Great Nations? Yes It Can, Yes It Will (November 23, 2011)

You Want to Fix the Economy? Then First Fix Healthcare (September 29, 2016)

As I’ve indicated on the chart, labor-intensive cartels in non-tradable sectors–higher education, defense/national security, healthcare and banking– can pass on their rising labor costs to their captive customers.

Central bank policies of super-low interest rates and abundant credit for big players and financiers have made capital cheap. Given a choice between cheap-to-finance robots and software, and ever-more costly labor, what’s the rational choice for employers facing unrelenting margin pressure from rising costs for virtually everything–from taxes and junk fees to resources, rent, regulatory compliance and other inputs?

It’s obvious, isn’t it? The rational move is use cheap capital to replace labor as fast as possible. If capital was costly and difficult to borrow, the decision wouldn’t be so easy.

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