Category Archives: Labor vs Capital

10/1/20: Eight centuries of global real interest rates


There is a smashingly good paper out from the Bank of England, titled "Eight centuries of global real interest rates, R-G, and the ‘suprasecular’ decline, 1311–2018", Staff Working Paper No. 845, by Paul Schmelzing.

Using "archival, printed primary, and secondary sources, this paper reconstructs global real interest rates on an annual basis going back to the 14th century, covering 78% of advanced economy GDP over time."

Key findings:

  • "... across successive monetary and fiscal regimes, and a variety of asset classes, real interest rates have not been ‘stable’, and...
  • "... since the major monetary upheavals of the late middle ages, a trend decline between 0.6–1.6 basis points per annum has prevailed."
  • "A gradual increase in real negative‑yielding rates in advanced economies over the same horizon is identified, despite important temporary reversals such as the 17th Century Crisis."

The present 'abnormality' in declining interest rates is not, in fact 'abnormal'. Instead, as the author points out: "Against their long‑term context, currently depressed sovereign real rates are in fact converging ‘back to historical trend’ — a trend that makes narratives about a ‘secular stagnation’ environment entirely misleading, and suggests that — irrespective of particular monetary and fiscal responses — real rates could soon enter permanently negative territory."

Two things worth commenting on:

  1. Secular stagnation: in my opinion, interest rates trend is not in itself a unique identifier of the secular stagnation. While interest rates did decline on a super-long trend, as the paper correctly shows, the broader drivers of this decline can be distinct from the 'secular stagnation'-linked declines in productivity and growth. In other words, at different periods of time, different factors could have been driving the interest rates declines, including higher (not lower) productivity of the financial system, e.g. development of modern markets and banking, broadening of capital funding sources (such as increase in merchant classes wealth, emergence of the middle class, etc), and decoupling of capital supply from the gold standard (which did not happen in 1973 abandonment of formal gold standard, but predates this development by a good part of 60-70 years).
  2. "Permanently negative territory" for interest rates forward: this is a major hypothesis from the perspective of the future markets. And it is consistent with the secular stagnation, as availability of capital is now being linked to the monetary expansion, not to supply of 'organic' - economy-generated - capital.


More hypotheses from the author worth looking at: "I also posit that the return data here reflects a substantial share of ‘non‑human wealth’ over time: the resulting R-G series derived from this data show a downward trend over the same timeframe: suggestions about the ‘virtual stability’ of capital returns, and the policy implications advanced by Piketty (2014) are in consequence equally unsubstantiated by the historical record."

There is a lot in the paper that is worth pondering. One key question is whether, as measured by the 'safe' (aka Government) cost of capital, the real interest rates even matter in terms of the productive economy capital? Does R vs G debate reflect the productivity growth or economic growth and do the two types of growth actually align as closely as we theoretically postulate to the financial assets returns?

The macroeconomics folks will call my musings on the topic a heresy. But... when one watches endlessly massive skews in financial returns to the upside, amidst relatively slow economic growth and even slower real increases in the economic well-being experienced in the last few decades, one starts to wonder: do G (GDP growth) and R (real interest rates determined by the Government cost of funding) matter? Heresy has its way of signaling unacknowledged reality.

4/8/18: Collapsed Labor Share of Economy 1947-2016


The frightening fate of the U.S. labor is best highlighted by the share of labor in economic output. Fred database only provides the data through 2014, and then stops. BLS provides data through 3Q 2016, and then stops. No one bothers to measure the contribution of the largest factor of production to the economy any more. Here is the BLS data:


The share of labor contribution in total economic output has, basically, collapsed. The slide started with the technological revolutions of the 1960s and 1970s, followed by computerization and supply chain management revolutions of the 1980s and 1990s. But the real collapse took place starting with 2002 post-dot.Com bust. Despite the tight labor markets and very low unemployment, labor share never really recovered from this decimation.

If this chart offers a stark cross-reference to socio-political environment we are living in today, such cross-referencing is not ad hoc. Labor is what we, people, have to supply in return for the life's necessities and luxuries. For the majority of us, it is ALL that we can supply.  Even our assets, such as homes and pensions savings are, ultimately, tied to labor, not to capital, because their performance is linked to our peers' labor-paid demand. A middle class house is an asset to other middle class households. It is not an asset to the jet-set shopping for homes in the Hamptons. When that demand collapses, as is currently happening in a number of rapidly ageing economies, real assets we hold turn out to be if not completely worthless (https://www.businessinsider.com/italian-town-free-homes-residents-2018-1), at least severely depressed in value (https://www.soa.org/Files/.../lit-review-popl-aging-asset-values-impact-pension.pdf).

So a decline in economic value added share accruing to labor is a transfer of income (and therefore wealth) from those who work for living to those who invest for living (invest in technology and/or financial assets). This game is a zero sum game even after we account for pensions funds and household investments: someone loses (labor), someone gains (investors). It is made even worse by higher taxes on labor and by transfers via monetary policy (Quantitative Easing).

The only way to offset such transfers is to vest labor with claims to financial returns. In other words, by providing workers with shares in the financial markets. Simply taxing and shifting income from higher earners to lower earners won't do the trick, because some higher earners are generating their income through labor (and human capital), while others are doing so through inherited and acquired financial assets. Taxing income of the latter implies taxing incomes of the former, which, in turn, depresses returns to investment in human capital (or, ultimately, returns to investment in labor).

Basic income structure of the future will have to achieve exactly that: create broad share ownership of financial instruments linked to financial and technological capital amongst those supplying labor.