21 June 2013

I Don't Interest You Any More?

One of the recurring themes, recently bolstered by some real data (imagine that), of this endeavor is that interest rates would be low even without Greenspan/Bernanke fiddling with Fed Funds. This notion was based on the observation, supported with that data, that newer tech has a longer payback period, shorter product lifecycles, and larger expenditures.

As mentioned in passing a few times, such a circumstance has two side-effects: real physical investment will only happen at low interest rates (because it's not possible to earn enough to pay high interest), and real physical investment will coalesce to ever larger corporations (because they can afford it, and can control product lifecycles).

Well, lo and behold Krugman has figured it out, too. If he could read my mind (OK, Gordon Lightfoot gets credit for that). He cites GM, while I've cited Ford (ah, an age old rivalry).
... let alone for the financial industry, which is also marked by a lot of what look like monopoly rents, and these days accounts for roughly 30 percent of total corporate profits. Anyway, whether corporations deserve their privileged status or not, the economy is affected, and not in a good way, when profits increasingly reflect market power rather than production.

That 30 percent is actually down from the 40 percent that peaked just as the house of cards collapsed.

AT&T was broken up, allegedly, on the basis that "free competition" would prevail and costs/prices lowered. Hasn't turned out that way. The point is that monopolists see returns as cash flow from stifling investment:
... rising monopoly rents can and arguably have had the effect of simultaneously depressing both wages and the perceived return on investment.

With tech physical investment under pressure from extended payback periods and shortening lifecycles, what's a fella to do? Control the market, of course. Just like Ma Bell did for decades. Except that Ma Bell didn't have a laissez faire free hand to do as it wishes.
If household income and hence household spending is held down because labor gets an ever-smaller share of national income, while corporations, despite soaring profits, have little incentive to invest, you have a recipe for persistently depressed demand. I don't think this is the only reason our recovery has been so weak -- weak recoveries are normal after financial crises -- but it's probably a contributory factor.

So, simply put: those with the moolah are impelled to hoard. And we all know from history what happens in that circumstance.

No comments: