Don’t Fear The Robots, Fear Low Savings And Investment

(This item originally appeared at on June 14, 2017.)


Ever since the dawn of the Industrial Revolution, in the 1780s, mechanization has been destroying jobs. That is not only its aftereffect, but its primary purpose, also known as “labor-saving.” Over time, it is practically inevitable that some better, cheaper, faster way will be found to do some existing task. The profit motive incentivizes it. Usually, this involves automation.

With every job destroyed, via some sort of mechanization or automation, a new job must be created. To some degree, this will happen automatically: the unemployed person must “create a job,” simply to live. Typically, this means underbidding the competition for some low-value, low-wage, low-skill, low-capital-intensity service, like doing laundry or raking leaves. Labor without capital. Statistically, jobs are created, but underemployment is rampant. It has been called “taking in each others’ washing,” although “serving each other food” is closer to the actual fact. What we really want are high-value, high-productivity, high-wage jobs. Normally, these come with a large capital expenditure. It might be a highly mechanized factory, or a big software R&D budget, a big ad campaign that sustains large profit margins for branded goods, or professional skills acquired over years of training.

Thus, an economy needs a high level of capital investment, to create new, high-productivity, high-wage jobs. This high productivity is practically in the math of capital itself. If you invest a million dollars of capital per person, for example some kind of business that has 100 employees and $100 million of investment, then each person must generate perhaps $100,000 of profit per year to justify the investment. This can only happen with high productivity per person.

Among emerging markets, this was often called a “bicycle economy:” you had to keep pedaling or it would fall over. Mechanization of agriculture and transport would generate millions of rural unemployed migrating to cities in search of a new way of life. Without a high level of capital investment and job creation, the situation could become politically explosive. Asia’s leaders knew they had to keep on pedaling. During their best growth years, Asian countries often had savings rates and capital investment in excess of 20%–sometimes, in excess of 30%.

China, however, beat them all, with sustained rates of savings and investment on the order of 50%, an astonishing result not only because of the high number, but that it was achieved on such a gigantic scale, with a population 300 times larger than Singapore. With such a tsunami of capital, it was probably inevitable that much of it would be squandered and stolen. But, it didn’t matter – China could piffle away 10% of GDP, a figure the U.S. hasn’t seen in generations, and the remaining 40% would still have been better than anyone else had ever achieved.

Despite some international flow of capital, domestic savings and investment tend to be correlated. But, it is not enough just to generate capital; it must also be invested in productive uses. Financing of consumption, by individuals or by governments, just leaves liabilities without assets. Instead of creating new jobs, it creates a new drain on the income of existing jobs. Oddly enough, this is exactly how the Keynesian-flavored economists intend to create jobs: typically, by attempting to induce a credit-financed increase in consumption spending by households and governments. It is practically a recipe for capital destruction.

A lot has been said on the effects of tax rates on incentives. However, this often overlooks something even more obvious: tax revenues from corporate taxes and taxes on capital, including capital gains, dividends, interest and inheritances, tend to come right out of total capital. Every dollar of tax revenue generated in this way is – more or less — a dollar less invested in the private economy. Negative saving. This is different from a tax on consumption, for example, which tends to comes out of consumption rather than investment.

As it was, in the U.S. in 2016, the entirety of personal savings ($801 billion) could be explained as an increase in personal nonfinancial assets, mostly residential fixed assets and consumer durables; and an increase in pension entitlements. Other than that, households’ financial savings (mostly bank deposits) was matched by increased indebtedness (consumer borrowing), leaving nothing for business development. Businesses generated $518 billion, of investible corporate profits; government squandered away $857 billion. Total net savings of $516 billion could be explained entirely as an increase in households’ nonfinancial assets–basically, kitchen remodels and car purchases. Which doesn’t exactly sound like “savings” to me.

That is a little scary – far scarier than a machine taking my hamburger order.

This is just one aspect of the story. There are many others, including tax policy, regulatory burdens, floating fiat currencies and central bank distortion of interest rates and asset markets, and more. In total, it is a picture of capitalism made sickly by bad policy decisions.

All of this can be fixed – and fixed quickly. If our “secular stagnation” – which is real — continues, it is not because of some unfavorable alignment of the planets, but because we don’t fix it. Probably, things will dawdle along until some sort of crisis. When the time of action finally arrives, let’s fix these problems, rather than piling on more policy error that just makes things worse.