Blog Archives

Costs Are Spiraling Out of Control

If we had to choose one “big picture” reason why the vast majority of households are losing ground, it would be: the costs of essentials are spiraling out of control. I’ve often covered the dynamics of stagnating income for the bottom 90%, and real-world inflation, i.e. a decline in purchasing power.

But neither of these dynamics fully describes the relentless upward spiral of the cost basis of our economy, that is, the cost of big-ticket essentials: housing, education and healthcare.

The costs of education are spiraling out of control, stripping households of income as an entire generation is transformed into debt-serfs by student loan debt. The soaring costs of healthcare are a core driver of higher costs in the education complex (and government in general), and to cover these higher costs, counties raise property taxes, which add additional cost burdens to households and enterprises as rents rise.

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Marx, Robotics and the Collapse of Profits

Yesterday I discussed how robots only do work that’s profitable, as any enterprise buying, programming and maintaining robots to do unprofitable work will soon be out of business.

What few observers seem to grasp is that automation goes through two distinct stages of profitability: when robots/automation first replace high-cost human workers, profits soar. Observers then draw projections based on the belief that these initial profits will continue essentially forever.

But this initial boost phase of profits gushing from automation is short-lived;as the tools of automation are themselves commoditized and become available to anyone on the planet with some capital and ambition, lower cost automated competitors come to market, destroying the pricing power of the first adopter.

Once an enterprise is competing only with other automated enterprises, profits fall to near-zero as lower cost competitors emerge. Competitive advantages are small once a field has been commoditized/globalized, and there is little pricing power left except for brands that establish some cache people will pay extra to have and hold.

But everything that’s been commoditized will no longer be profitable, as the competitive advantage of replacing human workers with robots vanishes once competitors have also replaced their human workers with robots.

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You Want to Fix the Economy? Then First Fix Healthcare

What is blindingly obvious to employers but apparently invisible to the average zero-business-experience mainstream pundit is this: if you want to fix the economy, you must first fix healthcare. If you want to pinpoint a primary reason why U.S. enterprises shift jobs overseas, you have to start with skyrocketing healthcare costs.

According to a report by the St. Louis Federal Reserve, real (adjusted for official inflation) wages have risen a mere 3% since 1970. (No wonder wage earners don’t feel wealthier; if we use a more realistic measure of inflation, we haven’t gained 3%–we’ve lost ground.)

But if we look at total compensation costs paid by the employer (health insurance, workers’ compensation, employer’s share of Social Security, etc.) we find that these costs have soared 60%. In other words, if these labor overhead costs had remained stable (i.e. gone up only as much as inflation), employers could have distributed raises of 60%.

These labor overhead costs are the reason why wages have been stagnant for 46 years, and the dominant overhead expense is healthcare insurance. Why has healthcare soared from 6% of GDP to 18% in four decades?

One reason is we have the worst of all possible worlds:

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Technology, Competition and the ‘Crapification’ of Jobs

Two recent articles shed light on the ‘crapification’ of jobs and the rise of income inequality:

Martin Wolf on the Low Labor Participation as the Result of the Crapification of Jobs (Naked Capitalism)

The Measured Worker: The technology that illuminates worker productivity and value also contributes to wage inequality. (Technology Review, via John S.P.)

While both articles offer valuable insights into the secular trend of stagnating employment and wages, I think both miss a couple of key dynamics.

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Sorry, Fed Inflationistas: Technology Is Deflationary

Technology, like Nature itself, has no emotional stake in what is creatively destroyed.

We all know the Federal Reserve is terrified of deflation, because they keep telling us that deflation is the equivalent of death and inflation is the equivalent of oxygen. What they fail to mention is that inflation is only oxygen for debtors barely able to service their debt and those who profits from debt, i.e. bankers and financiers.

For everyone earning a wage or salary, inflation is the equivalent of death by a thousand cuts and deflation is the elixir of life. When prices decline, our money goes further, i.e. our purchasing power increases.

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