This post originally appeared on my substack.
A few months ago Nathan Tankus penned a brief article urging caution about the conventional wisdom of zombie companies – companies where earnings have fallen below their interest payment obligations. He suggested that far from trying to shut them down these corporations through higher interest rates and a tighter credit markets in order to boost productivity, concerns about productivity and high debt levels was a function of a failure of fiscal policy. In his telling, if only we had a sufficiently expansionary fiscal policy, sales would rise at such a rate that productivity and earnings would increase, eliminating the so called zombies.
This narrative, however, misses the real issue with America’s zombie apocalypse, and why our post global financial crisis economy is in such trouble.
First, productivity. Tankus notes that productivity necessarily includes a measure of output: output divided by labor input. The measure I will be using here of labor productivity is Real GDP/Total Annual Hours Worked. Therefore it is logical that an increase in output would increase productivity overall, assuming that labor inputs did not increase at a faster rate. However, if labor inputs increased at an equal rate as output, then there would be no change in productivity at all.
When we talk about labor productivity we can’t just talk about output – we must talk about the other big factor of production: capital. Capital is generally required to increase the output of labor, although it’s sometimes possible to squeeze more out of labor by increasing the intensity of work or using more efficient techniques on existing equipment.
Historically, capital intensity tends to increase with economic development both in terms of capital consumption costs to wage costs as well as service life of capital goods to hours worked. The reason why is quire simple, as labor saving technologies pop up, enterprises are forced to adopt them in order to compete more effectively. Capitalists seek to rationalize production, the more output they can produce in a given amount of time (ceteris parabus), the bigger edge on their competitors they have. One thing important to keep in mind here is that the adoption of labor saving technology is a function of the price of labor and competition, the higher the price of labor, and the greater the competition, the more labor saving technology you’re going to see adopted.
Once we think about how capital intensity affects productivity, the low productivity growth immediately after the 2008 financial crisis makes a lot of sense. Both began to flatline in 2009/10, with capital intensity peaking first.
What caused this flatline in capital intensity? The simple answer is capital. In the initial stage of the crisis we see a jump upwards in both productivity and capital intensity – this is the result of a dramatic decrease in working hours as unemployment increases. However, unlike in past recessions, capital intensity didn’t continue to increase at a similar rate afterwards. Rather, capital services (the metric that BLS uses, which measures capital in terms of its machinery lifetime weighted by sector income) plateaued.
It’s here that we can now engage in the true heart of the matter, the relationship of fixed capital investment to interest rates. The mainstream, traditional account posits that interest rates and fixed capital investment are negatively correlated. This makes some sense at first, when planning for capital expenditures, a lower interest rate means that more possible expenditures can be profitable.
But rather, the opposite is true. Interest rates are positively not negatively correlated with fixed investment.
To understand why exactly this is the case, first we have to understand where investment comes from. Overwhelmingly, it comes from profit. In fact, changes in the level of profit can explain roughly 55% of the changes in the level of investment.
The rest of the story comes down to the decisions of firms and capitalists – ultimately, how much of profit is going to be consumed by capitalists and how much is going to be reinvested into production. Here we can return to our earlier comments about competition. When competition is stiff, and when the cost of labor and money capital is high, capitalists have no choice but to invest more if they want to maintain their class status as capitalists. This is precisely what happened in the post-war period.
From 1945 to 1980, investment went from 22% of net operating surplus to 74%. But then, after some 40 odd years of growth in the social democratic period, investment stopped growing as a share of net operating surplus.
This was when neoliberalism began, when investment stopped growing as a share of both net operating surplus and GDP more generally. From here on out, it was only a matter of time for the stock of capital to shrink. Capital consumption and investment moved towards convergence, using the ratio between capital consumption and investment we can arrive at a proxy for the growth of the capital stock as a whole, albeit an imperfect one. Despite the econometric issues at hand, we can see that 2009 was the low point by both the indirect and direct measures, and with it negative growth of the capital stock.
So it should be clear by now, that the flagging productivity in the aftermath of the 2008 crisis was the direct result of falling investment forcing down the level of capital and not falling output, especially considering that output resumed normal growth levels after 2009 while productivity did not. Profits, too, began recovering even earlier than output.
I believe that this low capital investment was in fact the result of low interest rates themselves in the 2008 crisis. The phenomena of investment falling deeper and longer than profits is largely unique to the neoliberal era. Every recession since Reagan’s inauguration has seen investment fall more than profits, whereas out of the 7 post-war recessions before that point, only 1 saw this happen: the recession of 1958 which was partly caused by overproduction of capital goods.
What happened in 1981 exactly? Interest rates and inflation began to fall. This, combined with the extremely low real wage growth of the neoliberal period meant less competitive pressure to rationalize production for firms. Capitalist consumption as a share of surplus never recovered to the old levels, but now they were no longer squeezed further. We can see the end of rationalization most clearly when looking at people’s annual working hours.
Had this tendency for rationalization, automation and higher capital investment continued, the destruction of the capital stock would not have been nearly as bad as it was in the Financial Crisis. Instead of being forced to use debt to make real capital investments, easier access to money capital and cheap labor meant that capitalists could use debt to pay variable costs or enrich shareholders.
Notably, using debt to pay shareholders doesn’t officially make shareholders wealthier because now they have a liability on the balance sheet of the company they own, and yet, the power dynamics at play should be obvious. Capitalist’s can’t consume the surplus that is retained by the firm, and executives have many material incentives to increase share price as much as possible.
The consequences for corporate balance sheets is striking: net worth has stagnated when assets are accounted for at historic costs.
Even when using the less conservative market cost accounting for assets, the hit to corporate balance sheets in 2008 was unprecedented.
And simply increasing wages alone won’t solve this problem. After all, the Obama administration was able to lift the federal minimum wage significantly in 2008. It will require raising rates and creative destruction. We should be wary of solutions that rely on simply increasing demand and forgetting about the system of production. After all, higher demand and higher profits will simply accentuate all the existing tendencies of our ossifying class system. A fiscal regime of pure stimulus, even with some pro-wage growth measures, wouldn’t be enough to fix the issues with labor productivity we have discussed.
At some point, the extraordinary subsidies we have extended to corporations due to the crisis will have to end. Even after a vaccine, there will be economic fallout. We shouldn’t be sentimental about unprofitable, unproductive businesses losing out, even as we support workers and, as Tankus suggests, use fiscal policies to increase demand and output.