What explains America’s economic anomalies?

Apart from low productivity growth, of course.  That is the topic of my latest Bloomberg column.  Wages have been sluggish throughout the recovery, profits on capital seem to be high, there is a domestic investment drought, and the onset of the internet and globalization make many of the “monopolization” charges less than plausible.  Here is one possible route of inquiry:

Capital today can cross borders more easily than it could a few generations ago. That might keep real wages down in the U.S. If wages threaten to rise during an economic recovery, for instance, it is then profitable to invest more capital abroad, where wages usually are lower. The end result resembles what economists call a “Malthusian” equilibrium. That means there is an upper limit to returns to labor: They cannot exceed the cost of bringing more labor to market, for instance by investing abroad (or perhaps building robots). Even a long recovery won’t help wages rise above that limit.

This same hypothesis can help explain both the U.S. investment drought and supercharged growth in many emerging economies. If capital is flowing overseas, that will boost growth abroad and worsen a shortfall of investment at home. Too much foreign capital flowing into the U.S. is absorbed by Treasury securities, rather than the private sector.

What about the high rates of return measured for capital investment in the U.S.? It seems strange to have high profits but low investment. Why not invest more to earn more money, thereby leading to an investment glut until the profits are competed away?

One hypothesis is that investors now expect a higher rate of return for domestic investments, a possibility suggested by economists Loukas Karabarbounis and Brent Neiman in a recent paper. Let’s say that entrepreneurs used to be willing to make domestic investments for an expected 7 percent return but now they demand at least 10 percent.

Entrepreneurs will cut back on investment, but the remaining projects will have higher returns on average, more closely bunched around 10 percent than 7.

What accounts for this increased reluctance? Karabarbounis and Neiman consider factors such as greater risk aversion. A simpler alternative explanation, consistent with my capital mobility hypothesis, is that newly available rates of return in other countries are high, and that means competing investments in the U.S. will need to offer higher returns too.

Do read the whole thing, I also consider potential flaws in the argument, such as capital possibly not being mobile enough.


Wages might be growing more slowly than productivity because of the rise of the growing myriad of other compensation costs such as health insurance and social security.

Second, the slow grow in productivity will obviously be causing the slow growth in wages.

Third, you cannot make such argument "the pressure for wage hikes is negated by foreign investment opportunities" because if productivity doesn't grow then wages cannot grow in the first place. If productivity is growing and real labor compensation costs are not growing than the labor share is decreasing. The decrease in the labor share is a topic on it's own and apparently our argument is essentially saying that globalization decreases the labor share in National Income.

So far I have the impression that there is no robust evidence for the decline in labor share over the long run. According to Piketty and Zucman (2014), in the US in 1940 the labor share was estimated at 0.672 of the Net National Income while for 2010 it was estimated at 0.679 of the Net National Income. Clearly, the US economy was much more integrated in the global economy in 2010 than in 1940 (when most of the industrialized world was involved in WW2 and international trade was severely depressed).

So if real wages are not rising in the US it's because labor productivity is not rising or because other labor compensation costs are eating up the increase in labor productivity.

High non-wage costs and slowing productivity would imply low returns on capital as well. How do you address that?

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Is there truly a relationship between labor productivity and wages? Mostly through technological advances workers are dramatically more productive than in even the recent past yet their wages haven't seen a corresponding increase. Even the supply-demand ratio hasn't led to a gain for labor in general. With a severe shortage of truck drivers, a large portion of the labor force, compensation remains about the same as it has been. Building contractors complain about a lack of qualified help but there's been zero increase in wages in that field despite a steady growth in productivity.

The fact is, in a society where debt is endemic, workers that must make monthly payments on mortgages, cars, cell phone contracts, cable TV, health insurance, college tuition and bass boats are in no position to bargain over wages.

You’re putting the cart before the horse. The causality mainly (though not exclusively) runs the other way. High wage growth causes productivity growth. Not the other way around.

Not to go on a Kling-ian rant here...

But how much context are we losing by aggregating everything into wages/productivity for workers in general instead of sector/segment/whatever?

The 7-11 clerk isn’t much more productive than he was 15 years ago in any real sense, at least per hour. A barista is a barista, a mechanic a mechanic.

I am dramatically more productive than I would have been 15 years ago. And I’m sure I would have earned much less in compensation if born in the wrong generation.

But for many workers “IT” either means flexible scheduling, which if anything decreases their compensation, or at most Excel and Outlook. A stock of workers in their 20s-60s that neither understand nor have the inclination to learn.

How many firms Really, and I mean really, take advantage of the IT revolution to increase productivity?

Tech maybe. Hedge funds definitely.

Anywhere else?

Or is half the economy stuck in 1995.

"Or is half the economy stuck in 1995."

+1, What's are the productivity gains for a convenience store since 1945? For a truck driver since 1975? On the other hand some gains are phenomenal, but not evenly distributed. What are the gains for a Video Store clear? Well they are mostly all gone, replaced by streaming, Netflix DVDs, Red Box, etc. The movie at home industry has had very large gains, but its mostly automation (streaming video) replacing Video stores in a vastly more efficient manner.

Regarding "For a truck driver since 1975?":

[Truck] "multifactor productivity (MFP) growth in the years 1979-1992 is found to average 1.6% p.a. for TL [truck load] and 1.0% p.a. for LTL [less than truck load]. After initial productivity stagnation, MFP growth from 1983 on was 2.0% and 1.7% p.a. for TL and LTL, respectively. This is suggestive of steady improvement in efficiency, if not a productivity revolution."


I'm pretty sure all those gains are on the loading, unloading and packing size. Probably some small amount on the driving side, mostly GPS w/ feedback efficiencies, both in not getting lost and the potentially more lucrative, not intentionally going off route. I've known enough truck drivers to know that it was common for drivers to go site seeing. Often driving hundreds of miles off the direct route to visit something of interest. It was considered a perk of the job, but it was far too expensive not to be curtailed.

Healthcare, yes. But Social Security? It's been over thirty years since the payroll tax rate increased on ordinary wage earners.

Suppose that this hypothesis of capital being able to cross borders more easily is correct. How might this influence our views on whether US immigration policy should become more open or closed?

'and the onset of the internet and globalization make many of the “monopolization” charges less than plausible'

Because Amazon is noted for its small market share and paying its employees high wages?

And to solve the puzzle of why economists love puzzles, it is because they love telling just so stories.

Wow! It's unbelievable how hard you are working to deny that monopsony and monopoly type market concentration is causing all all these issues. Do you think it's easy to compete with Amazon? Think about all the industries amazon just thought about entering and what that did to the share price of incumbents. Do you think Amazon doesn't use its market clout and brand name to pay people less? Don't the use the same to extract incentives from politicians? Corporate profits are at record highs as a percent of the economy, how is that maintained? What is your motivation for closing your eyes and denying consolidation? It doesn't seem that you are being logical.

'It's unbelievable how hard you are working to deny that monopsony and monopoly type market concentration is causing all all these issues.'

No it isn't.


What do you think Mercatus gets paid for?

Well, somebody has to pay the rent to GMU so the center can claim to be 'at' George Mason after all.

Let's not forget that Amazon is enabling tremendous amounts of new business by becoming a significant sales channel for many brands, who otherwise would have trouble finding specialty customers.

Koch $$$

As regards wages versus productivity, I found this comment by Greg Mankiw interesting:

"There is heterogeneity among workers. Productivity is most easily calculated for the average worker in the economy: total output divided by total hours worked. Not every type of worker, however, will experience the same productivity change as the average. Average productivity is best compared with average real wages. If you see average productivity compared with median wages or with the wages of only production workers, you should be concerned that the comparison is, from the standpoint of economic theory, the wrong one."

Both low productivity and low measured real wages are due to high rents. Rent inflation is a transfer to protected asset owners, not true inflation.

Capital has been very mobile, not stopped by many laws/regulations, between Mississippi or West Virginia and NY or SF, yet there still seems to remain a substantial differential in price and wage levels within the U.S.

These places have the same currency. If Mississippi had its own currency, it would be a hell of a lot more competitive (wrt NY or CA) than it is now.

There are bullet trains in Wuhan but not in California. Capital seeks to get in early in investing where there returns will soon be returns compounding at superior growth rates. (*Dusts off Keynesian Multiplier* .. ) One of the best indicators of long term superior growth rates is big money investing in economic infrastructures like transportation and housing, associated with new jobs and new household formation. (*Dusts off Boston Consulting Group Growth-Share Matrix*.) Countries, as with firms, that have high market share and low growth potential are sometimes called cash cows. Cash cows get milked for high rates of return but are not expected to experience much growth and possibly in the long run will even turn into 'dogs' (low market share ~and~ low growth.) Countries/Firms with high growth potential but low market share are 'stars', to be invested in heavily. Eventually when their growth slows they sometimes become cash cows. The group-level market expectation that a place is a star is often a self-fulfilling prophecy - people see that that others and the government is investing in building new infrastructure, and being afraid of missing out in an opportunity they invest as well. There are many reasons to consider the USA a cash cow in terms of the BCG Matrix (demography and so on), but one very stark indicator is the situation with the bullet trains. (There's a similar logic in real estate about infrastructure and watching where other's are investing. The boom that was in Bend, Oregon may be classic.) All of this here works more so with the increase in the global mobility of capital.

*Dusts off Keynesian Multiplier* I believe in the multiplier, but after the dead weight loss of taxation, I'm not convinced it's positive.

There is a bullet train in California, it is called Southwest Airlines, trips between LAX and SJC every hour...

Like water seeking its own level, capital seeks the highest rate of return. And if the highest rate is in China, well, that's where the money is. A couple of complementary (to Cowen's essay) comments. First, American firms are investing in China (and other developing countries), and those investments are generating some of the high level of profits being reported by American firms. Second, by generating profits overseas, American firms are better able to avoid American taxes, thereby further increasing profits. Third, most of the profits generated by American public firms are generated by 200 firms - the rest generate a net loss. And many of those 200 firms don't require a substantial amount of productive capital (Facebook, Google, etc.). Fourth, rising wages depend on rising productivity, and rising productivity depends on investment in productive capital (including infrastructure), the latter of which is happening in China but not here. Fifth, the rate of return on productive capital being higher in China than in America, the owners of capital seek the higher rate of return on productive capital in China. But that doesn't mean investment in America doesn't generate high returns, because it does, it's just not investment in productive capital. Instead, it's in rising asset prices, real estate and financial assets (such as stocks). The corporate windfall from the corporate tax cut that supporters promised would be invested in productive capital was instead invested in rising asset prices, mostly the corporation's own stock. China critics say China is investing billions in bullet trains to nowhere and other currently unneeded infrastructure, productive capital to produce goods for which there is no current demand, and empty or underused factories and nearby apartments for labor that isn't needed. That may be true. But in the end China will have bullet trains and other infrastructure, productive capital, and factories and apartments, and America will have financial instability because it relied on rising asset prices for prosperity.

If returns on capital are so high in china, how to explain the mediocre performance of chinese-domiciled equities?

"Third, most of the profits generated by American public firms are generated by 200 firms - the rest generate a net loss. "


This is basically the underpants gnomes theory of economic growth.

Step 1: invest in high speed passenger rail

Step 2: ???

Step 3: Economic growth

Why would the lack of high speed commuter rail be the binding constraint on economic growth ? You need a plausible explanation.

Hard to imagine that capital is simply demanding higher returns. If this were true you'd see in it places where it can be measured. For example the return required to move from AAA debt to high yield debt. And yet, spreads like that are quite low. The required return per unit of risk does not appear to be abnormally high...not even close.

High taxes, regulatory burden, minimal rule of law (see Monsanto jury verdict.)

"regulatory burden,"

+1, regulations have costs. The world in general and first world specifically have been adding regulations for decades.

Regulations mean that companies make a substantial investment in new hires before those workers touch a widget. That expense discourages hiring and has had a major influence on the growth of agencies that supply temporary workers, not noted for extravagant wages.

You are correct, the cost of both hiring and training have gone up. Furthermore, having to deal with a host of regulations drives up both equipment and labor costs throughout the economy. TANSTAAFL

Currently American factories are in the process of replacing an enormous amount of electrical equipment. 120V AC is being replaced with 24 DC to meet Arc Flash regulation. It's undoubtedly safer. It's also less electrically efficient and requires more expensive hardware.

Edison is winning the War against Tesla 150 years after their feud.

To what extent is the increase in hiring costs driven by voluntary trends in the work place: the HRization of everything. There's no reason firms could not go back to, say, 90s methods of job listing and hiring (with some allowance for technical changes; e.g., online job postings rather than newspaper help wanteds) and HR reduced to the role of the old personnel offices: mainly about clerical tasks, not being put in the drivers seat. There seems to have been a massive snow job perpetrated on businesses by HR people which has convinced many companies to expand their HR departments and dump a lot of money on them in hopes that better hires will result-- which I really do not see happening.

There are too many legal and regulatory changes to go back to that day. It's not like the HR departments don't do anything. They have a ton of paper work to fill out. it's not all optional make work.

HR departments don't look for qualified individuals for various open positions, they fill out forms required by both their own bureaucratic battalions and those of the government.

Well I think it's a matter of prioritization, but I do agree that hiring the best people often is a B priority.

Re: They have a ton of paper work to fill out. it's not all optional make work.

Those two statements are not mutually exclusive. And a heck of a lot of that paperwork has been around for a long time. One of the downsides of the digital revolution is that it has become a lot easier to produce a myriad reports-- and the work has expanded to full that niche. Whether it adds anything to productivity is another question.

Or maybe long term stagnant wages have slowed the investment opportunities here. Or maybe it is now labor supply is stagnating is effecting investment opportunities as well. There is plenty of investment opportunities but small business can't open as they can't hire good workers at 'fair' wages. (note I find ironic that employers complaining about finding workers use 'Bernie' minimum wage language that they pay 'fair' wages.) So the US has enter the modern day Japanese economy.

The theory of capital can not move national borders seems very weak as these barriers are relatively minor.

"So the US has enter the modern day Japanese economy."

No, not even close. Household income in the US is up around 4% in the last 18 months.

Perhaps something has happened to the risk-adjusted rate of return. I can invest in a small firm, with a greater variation in potential returns, or I can invest in a larger firm, which is more diversified across markets. Diversification gives you higher and more stable returns.

These larger diversified firms also have the ability to employ superior managers, or they may have become large due to superior management. In either case, these managers take a larger share of the returns. Top managers become very rich. In contrast, at lower levels, the firms become turn key operations with interchangeable workers lacking bargaining power.

In some cases this may mean diversification overseas but not always. It might just mean better domestic geographic or demographic. diversification. Skill in finding new markets while having the scale to better manage the risk of expansion has value for investors.

Not to mention size gives you an advantage in political markets. Having the size to cost-effectively deal with regulatory challenges or meet political challenges (even in international markets) is also a skill that is partially captured by top managers in the form of higher compensation. One need look at the generous compensation that former government officials receive to see the value that such contacts are worth.

Wages are depressed because the marginal value of workers lower in the firm is low. They add less value. Look to baseball where they measure a players WAR, i.e. wins above replacement. How much does a player contribute above the value of the average player who might replace them? If worker productivity is increasing overall, and the workers are easily interchangeable, do they gain bargaining power? If comparable substitutes are easily available what happens to the price? Will prices be bid up enough to encourage mobility in workers? Or will the cost of moving (higher housing prices etc.) cause some of those potential gains to workers to be siphoned off by others? Unless you are at the top of the food chain?

Of course, the entry of new firms could increase competition for resources. An expansion of the economy could see new firms enter. Unless investment in these firms is seen as too risky. Perhaps they lack the diversification and scale to compete in the regulatory environment? The root cause becomes an inability to generate enough new entrants that can compete. The risk-adjusted rate of return is too low to generate investment.

"That means there is an upper limit to returns to labor: They cannot exceed the cost of bringing more labor to market, for instance by investing abroad (or perhaps building robots). Even a long recovery won’t help wages rise above that limit."

Total compensation has risen since 1973. Furthermore average & median wages, for the whole labor market (both sexes, all groups, etc) has risen.

So clearly Tyler, your statement is not correct. (At least not at current total compensation.)

"Economy: Median household income is up more than 4%, the economy is growing fast, optimism is at decades long highs. ..Inflation-adjusted median household incomes in July hit $62,450 according to the latest release from Sentier Research. That's the highest level since Sentier started tracking this more than 18 years ago. And if you combine Sentier's numbers with annual Census data, median household income is at all-time highs."


What's next, MR readers denying that the sun rises in the east? While one may disagree with Cowen on questions of causation, one can't disagree with him on questions of fact. Not unless one believes Cowen is spreading fake news. Why would one bother to read this blog if one believes Cowen is nothing more than Trump with an advanced economics degree. That Cowen is exploring ideas beyond the conventional wisdom impresses me. But then, I expect for him to impress me. That's why I read his blog.

I think there's an interesting story in what it takes to get investment in the US. There might be a case for investors being equally picky, but not regarding return percents, but regarding things they take as signals, and there's very little growth in the sources of said signals.

The sources are, of course, a certain set of elite universities. Almost any Stanford graduate will get funding for their startup with a bit of work: You can't imagine the nonsensical pitches I see funded all the time, just because they are attached to a Stanford CS degree. This will also link to the wide variation in performance of venture capital: A few firms do great all the time, and the large majority are just following trends, and getting mostly the terrible bets.

The number of startups also decreases precisely because, as a rational Stanford graduate, you are most likely better off by working at a tech megacorp. This makes the pool of Stanford graduates that you can fund smaller, and with lower qualifications comes lower chances of raising money, and if you do, it will be a 3rd tier VC fund that will hinder you instead of helping you.

As far as why this doesn't affect wages, it's clear enough: The places where people are investing just have very specific requirements, as far as skills and background. Developers in the bay area with the right pedigree are a very hot commodity: 10-15% raises are standard nowadays, and a little bit is going to people with second tier credentials, but if you aren't a programmer in the bay, the pay improvements are not for you.

I wonder what would happen if Stanford's undergraduate class got 4 times bigger. The demand is there.

Like many other economists, Tyler wants to explain some economic data rather than the economy. The quality of data is not good, sometimes poor enough for the economists to jump to the conclusion we are facing puzzles that need to be explained. Yes, we face puzzles but not because of the poor quality of the data. It’s because we don’t know how to explain the economy —in particular, how to explain it without taking into account the many details that our theoretical models ignore.

Indeed, the pretension of applying theoretical models leads to single out just one factor —in Tyler’s explanation, the international mobility of capital. By assuming some unexplained increase in the mobility of international capital as an exogenous determinant of the relevant variables (defined by data availability rather than by theoretical considerations), Tyler first tells us why that increase could provide a reasonable explanation of the data, not of the economy. Since Tyler knows that there is no single determinant of any economic phenomenon, he concludes the column by suggesting that perhaps the increase in mobility was far lower than expected or that the savings glut was partially a consequence of poor opportunities in some relevant type of investment (the type that Tyler regards intuitively as being important).

Forget about the data. To understand “recent” developments (Tyler never makes clear the timeframe work of his analysis of “recent” data), first, we have to explain what has been happening in the “global” economy since at least 1980. In a few words, the “global” economy changed completely as a result of the integration of several countries into it, at least doubling the relevant population and workforce. In addition, other “exogenous” changes took place (that is, changes that theoretical models do not explain but assume as the immediate causes of changes in the “endogenous” variables). No data can describe the magnitude of the big shock and the other shocks, and therefore we should center on understanding them, including its causes and consequences. Yes, if properly measured, very likely there has been a significant increase in international capital mobility, but we cannot ignore the role of politics and governments in attempting to control that mobility as well as the domestic mobility of capital (in particular, after 2008). In addition, we cannot ignore the heterogeneity of individuals, societies, and countries, which finally is being recognized in the economics of all markets and governments.

Too much additional regulation added after the crisis. It's been a drag on the economy ever since. Add that to, until recently, the uncertainty of even more regulation. Why would you invest in the US?

This is a good read on this: https://www.hoover.org/research/not-obamas-economy

"He looks at the major changes to policy under President Obama and considers whether each was likely to foster or hamper economic growth. His bottom line, using basic economics, is this: each policy was likely to hamper economic growth. " -David Henderson

I think this is too narrow focused. This isn't an Obama issue. It's not like the Bush administration was a paragon of prudent regulatory governance. The US has been on a regulatory binge for 70 years. That has a direct impact on the fluidity of the market and the wealth of the nation.

Granted, it's a trade-off. We, for example, spend a lot of money on environmental compliance to make it cleaner. We all enjoy the benefit, but it's silly to not understand that it costs money. And this kind of cost is a flat tax and might even be closer to a flat fee. It doesn't cost appreciably more to meet the environmental requirements for a $100K car than a $15K car. However, an extra $1k to the cost is far more impact to the budget of the typical $15K car than the person buying a $100K car.

If that is true why is income so expensive now. The yield on VTI is 1.65% that's some expensive income!

How about the phenomenon of people moving from high pay parts of the country to low pay parts of the country due to slow growth policies in the high pay parts of the country?

I thought we already knew the answer here. Henry George's Revenge.

Greater than 100% of the decline in labor's share of income has gone to owners of land. Both labor and capital are losing to land.


There was a temporary reprieve in the post war era as suburbanization greatly increased the amount of accessible cheap land near job centers. Now with job centers more concentrated and accessible cheap land in short supply, real rents are rising again.

Re Malthusian equilibrium, there's only a stub in Wikipedia.
Which economists are talking about this? Are we in subsistence mode because we are mostly expected to consume quality non discretionary product in our non tradable sectors, with wages that are no longer rising due to services sector dominance? That dominance is not increasing output in general, because much of it is oriented to time and placed based scarcities.

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