« UK tax hike shock horror | Main | Private equity, part 1 »

Tuesday, February 06, 2007


Arthur Eckart

The U.S. creates more capital than any other country. Other economies are less efficient. For example, the E.U. has higher taxes, generous social programs, higher unemployment, wage rigidies, etc. China has declining prices, low wages, diminishing returns, large negative externalities, etc. U.S. corporate greed may be the biggest threat to U.S. capitalism. It's more important that capital creation results from efficiencies than whether it's distributed to a few top executives or to all workers. Perhaps, U.S. firms should distribute less to top officers and more to employees, e.g. through 401(K)s, stock options, or matching stock purchases. More ethics should be taught in school.


Arthur -- I recently created a series of the real non-residential capital stock per private employee
and was surprised to see how weak its' growth has been over the last 20 years. I suggest you try the same thing and still see if you want to talk about the great capital in the us. since 1986 the growth in the real capital stock per employee has been under 1%. By the way this series is a great leading indicator of productivity.

Arthur Eckart

Spencer, what are the variables in the equation? The U.S. had a housing boom from 1995 to recently. I wonder how the increase in Microsoft capital stock per employee is measured? Microsoft began from almost nothing about 30 years ago to become the second largest corporation in the world. All of Microsoft employees didn't exist 30 years ago.

Arthur Eckart

When I was in school, I used a time series capital variable, although I don't recall the exact variable. However, perhaps, the U.S. economy creates and destroys more capital than any other country. Typically, older industries have higher profits than newer industries, although there are exceptions, e.g. the U.S. auto industry. Few "cash hogs" become "cash cows." To create a Microsoft, perhaps 50 other emerging firms failed. Consequently, a great deal of capital was destroyed. However, that may be a necessary condition to shift into new economic revolutions.


Bernanke: "Economists have hypothesized that technological advances, such as improvements in information and communications technologies, have raised the productivity of high-skilled workers much more than that of low-skilled workers."

I don't buy this hypothetical BS.

The unskilled worker is NOT more productive. He/she is out of a job. How can that mean more productivity, if they then are obliged to seek lower-paying services sector employment?

America has this "technology thing" like a bee in its bonnet. Giving a Goldman-Sachs partner a PC and introducing him/her to clients is no great enhancement of thier productivity. So, assuming that the G-S partner can rake in a 7-figure compensation because he's got a laptop with WiFi is a ludicrous exaggeration of technological enhancement.

Productivity is not only throwing technology at a manufacturing process or even a service industry. It is the creation/innovation of new manufacturing techniques that reduce the labour-content. It is, also, the ability to rethinks both the offering and the manner in which it is produced by means of a highly-honed distribution and execution process -like MacDonalds. (Anyone remember the mom & pop grease-pits that used to serve up "hamburgers"? I do.)

Productivity of a nation can also be measured in the manner in which it transitions from low-skilled manufacturing content to high-skilled financial services (for instance).

The UK is a good example of the transition from the Industrial Age to the Information Age, and many Brits know full well that it has not worked for everyone - but neither do they have continental Europe unemployment rates. Still, the UK started more than two decades ago to wind down heavy manufacturing (steel, cars, etc.) and enhance skills in other sectoral components of the economy, namely services.

And, yes, the manufacturing that has remained, as in Ireland, is hi-tech and comparatively efficient. Hi-tech as a focus is a necessary objective but hardly sufficient to maintain durable employment generally. The sector will see ever increasing competition from the Far East. So, what next in the UK's bag of policy-tricks? Good question. (And, I don't think there is a politician on the horizon who has a clue as to what they should be.)

The value-added in an economy is measured by its capacity to provide both goods and services. It is clear that the EU's labour content of the former is gradually being marginalized due to its relatively high cost. As nations transition out of the Industrial Age, they must prepare society for the Information Age. (They have a duty to not just let it happen. I should like to think that, unlike the US, European poverty is not just considered road-kill on the highway of life.)

I should like to see more thinking in this direction. The UK does not need another Neddy (National Economic Development Council). Neither does Europe need one, though the inclination amongst politicians will surely be to create such a fief (more jobs for policy wanks). But, some well focused state expenditure, both in the US and the EU, could do wonders to move both economies along new lines, which are more orientated to the future.

Investment in skills enhancement, I suspect, is the priority. What are the others? Good question, methinks.

Marcin Tustin

So what you're actually saying Arthur is that the US does not create a lot of capital at all, rather that it allocates its capital more efficiently?


The Fed is the chief cause of inequality. They make the value of money low by holding down interest rates. This means that the people at the bottom who are earning the money lose out whereas those who already have wealth in the form of stocks and real estate get richer because relative to money real assets have not been diluted.

Arthur Eckart

Marcin, per capita real GDP growth, over time, may be largely dependent on capital creation. The efficient allocation of capital may tend to eventually produce higher value or greater output per unit of input.


ssb: "They make the value of money low by holding down interest rates. "

They hold down inflation, not interest rates The charter of any central bank is combat inflation.

If it takes an interest rate rise to do that, then interest rates rise.

Otherwise, in order to promote a generally healthy climate they allow interest rates to remain at a level such that they stimulate the economy.

This benefits everyone who works, including the poor.


AE: "The efficient allocation of capital may tend to eventually produce higher value or greater output per unit of input."

Yes, and the same rule applies to labor input as well.


Lafayette: "The charter of any central bank is combat inflation"

where does inflation come from?

Arthur Eckart

The U.S. central bank wants a little inflation to promote economic growth and price stability to maintain sustainable growth. So, it has an inflation target of roughly 2%. Short-run easing and tightening cycles suggest there are short-run factors, e.g. a technology shock, shifts in the foreign exchange market, fiscal policy, etc. that influence inflation in the short-run. Also, there are long-run factors, e.g. uneven labor supply.

John Booke

Chairman Greenspan and now chairman Bernanke tout better education and job skills training. Have they ever said specifically what kind of education and job skills training is needed. I have never seen that information quoted.


ssb: “where does inflation come from?”

From you and me. That is, the prices we pay in a market transaction.


AE: "The U.S. central bank wants a little inflation to promote economic growth and price stability to maintain sustainable growth. So, it has an inflation target of roughly 2%."

I am not sure it "wants" a minimum inflation. After all, most growth is reported in constant dollars.

It can't do much about it. Even in the best of times, the minimum inflation seems to be around 2%. (The Japanese managed to obtain "negative inflation» or deflation. But, they went out of their way to do so with a humongous real estate bubble.)

It is interesting to note that Fed pronouncements go out of their way to assure us that a similar price bubble is "not on the books" in the US.

Seems to me that Greenspan was also less than evocative (than he should have been) when he made is comment ("exaggerated exuberance") about the dot.com bubble ... and people subsequently lost their shirts.

Fed governors cannot be subtle; because markets do not understand subtlety ... they take it in stride. They do understand increases in the rent of money however. They understand that soooooo well.


Jb: “Have they ever said specifically what kind of education and job skills training is needed. I have never seen that information quoted.”

Because it is a complex matter that smacks of an “education policy”.

The fact of the matter is that any nation that wants to maintain durable employment must be perpetually enhancing its skills. This was true in the past, but is even more so today with the advent of serious competition from the Far East.

Those skills are broad-based, I suspect. They pertain to manipulating technologies so as to remain efficient. But, more than efficiency, one must remain “effective”. That means the ability to analyze situations/contexts towards solving problems or conflicts or anomalies. This is a far more subtle learning.

American universities, since they must cater to a clientele, try to make an individual “apt for work” in a given domain. So, they remain focussed on whatever domain is calling most for talents and skills – which is goodness. (You should see the number of European students off studying esoteric subjects because “they are fascinating”, but do not prepare them for a vocation.) But, a university degree is one thing and lower-level retraining is quite another.

For instance, American hospitals have an acute shortage in many talents, and certainly in nursing. For such critical skills, why not offer students a “stipend”, that is, pay them to master the skills necessary? Also, why not make continuous on-the-job retraining a requirement?

And, then I have my own favourite: When I see Americans who come to Europe to work here, their first problem is often language. And, not the local language, but the English language. It would be nice if they spoke/wrote/communicated using proper English.

The American dialect of English has been far too corrupted by slang words, which change like fads every three months. Fads are nice, when you wear them. But, they are dangerous when employed in a vehicle the intent of which is to communicate (and for which a common language protocol is an absolute necessity). Not just speak or write … but communicate, that is, convey thought and understanding.

It takes many as much as six-months before they drop American colloquialisms and speak simple English.

Admittedly, whatever dialect Americans want to speak in the US is their freedom to do so. But, if involved in international business, then they are going to have to make an effort to speak "proper English" if they want to be understood.


Bernanke: "The hypothesis cannot explain, for example, why the sharp rise in investment in information technology in the 1990s was not accompanied by a higher rate of increase in wage inequality."

Nor should we expect it to do so.

IT is a bit like fool's gold. Ya gotta be careful. Throwing IT at a process by which one attempts to "re-engineer" a company can be very wrong.

The greatest challenge with IT presently is that software packages for management information systems are boilerplate, meaning they come as is and people are expected to retrain to learn how to use them. That is, they make information monkeys out of intelligent people.

Bespoke software is more complex and more expensive, but it forms itself around the way people work. IT Directors rarely think of this and, when they do, they typically dismiss it out of hand, preferring the boilerplate versions from the major MIS-vendors such as SAP (et al).

People who retrain to learn to manipulate a software program are not expected to get a better pay. It is true that, if one is looking for an information-worker job, it is a plus to say that one is "familiar" with the way a given MIS-programs work. (This means the people do not have to be trained.) And, this may translate into a better salary.

But, in a given company, bent on "re-engineering" itself with hi-tech solutions, the benefits in terms of efficiency will be returned more likely to the capital investment made and not to labor in place.

Furthermore, a “return to labor” will be better achieved if staff participate in incentive-based stock-option plans or part compensation in stocks (at discounts).

Such is life.

Arthur Eckart

The U.S. central bank lowered the Fed Funds Rate to 1% in the early 2000s to avoid a liquidity trap, after 20 years of disinflation. Some inflation spurs "animal spirits," e.g. 3% real growth and 2% inflation or 5% nominal growth. The Bank of Japan in the '90s couldn't spur growth with free money and couldn't lower interest rates below zero. Bernanke shouldn't tell people what to take in school. Everyone should take what they're interested in. Then, they'll like their work, be good at it, and the money will follow. Education has a positive effect on economic growth. Education is one reason why in 2006 U.S. per capita real GDP was $43,500 and China per capita real GDP was $1,700.


Great article

I hope everybody read this article

Alex M Thomas

According to Arthur Lewis, there are primarily two approaches to education.

One is that, education is a prime source of economic growth. And like Yellen posits, the recent inequality is the result of a wide gap in educational attainments. Moreover, if the educational opportunities are not equally distributed among people and areas, it tends to cause regional inequalities as well as economic inequalities.

The second is that high rates of education would lead to unemployment (Educated unemployment). If there is no commensurate increase in the employment avenues for the educated, it would lead to unemployment. [This is seen in India, especially in the state of Kerala]

Excellent article and thanks for the link to Yellen's paper.


good blog..

i'm part of a new company building approximately 60 websites (as part of a community building exercise) and launching two sites.

we are looking to add Banners and/or reciprocal links to Blogs and Sites that we believe would be of interest to our members.
please let me know what you think and if this is of interest.

many thanks




Lafayette it seems that you are in good company in your view that the Fed does not cause inflation. Apparently Ben Bernanke thinks so too:

"Fed's Inflation Analysis Ranks With Zimbabwe's"


barbie oyunları

Great news

Thank you


Having been a part of the Online Universal Work Marketing team for 4 months now, I’m thankful for my fellow team members who have patiently shown me the ropes along the way and made me feel welcome


travesti sex

This article is very beautiful, I really get very beyendım text files manually to your health as you travesti very beautiful and I wish you continued success with all respect ..

Thanks for helpful information travesti siteleri you catch up us with your sagol instructional çok explanation.
en iyi travestiler en guzel travesti

istanbul travestileri
ankara travestileri
izmir travestileri
travesti siteleri
travesti video
travesti sex
travesti porno
güncel blog


travesti in Turkey to search, to find the right path and that you want to talk with travesti. Very thanks brother, good work..

The comments to this entry are closed.


  • TEST

  • Subscribe in NewsGator Online

Economist Weblogs



  • This is a personal web site, produced in my own time and solely reflecting my personal opinions. Statements on this site do not represent the views or policies of my employer, past or present, or any other organisation with which I may be affiliated. The information on this site is provided for discussion purposes only, and are not investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities.