Sunday, December 16, 2012

Interest Rates and Jobs

Krugman and Kensians in general believe that if interest rates are artificially held down by the central bank printing money and buying bonds that more jobs will be created.   They argue that low interest rates drive up asset prices, which makes people feel rich, so they spend more.   It also causes inflation which can make real wages go down, so employers are earning more profits and can afford to hire more workers.  Also, low interest rates make it easier to build a factory and start a business that creates more jobs. 

There is another big effect at work though.   When a company has to choose between a robot and an employee they compare the monthly payment on a loan for the robot to the monthly salary of the employee.   For the employee they also look at all the extra government imposed costs like social security, obamacare, etc.  If the robot is cheaper they will choose the robot.

Artificially lowering interest rates makes the payments on the loan for the robot smaller.  Lower interest rates make it easier to get a loan to buy the robot.   This artificially tilts the market in favor of robots.   It means replacing people faster than the natural rate.    Replacing people faster puts a downward pressure on human salaries.    So lower interest rates are very hard on the average guy.

Lower interest rates help whoever can get the lower interest rates.   This will tend to be the owners of existing capital, not the average guy.   So lower interest rates skew things so the rich get a bigger slice of the pie.   This can be seen in the history of the last 30 years.

The Fed has now said they will keep interest rates down until unemployment gets to 6.5%.   This is just like,  “the beatings will continue until morale improves”.