Capital Investment

Saw this post at The Burning Platform.  It’s a take down of Keynesianism.  I am no fan of Yellen, the Bernanke, Krugman, et. al. either.  But then I saw this odd chart and statement:


The ratio of capital vs. consumer goods production: an indicator of the economic distortions wrought by monetary pumping.

That unreadable part says:  Sign of a severely imbalanced bubble economy:  factors of production are increasingly shifted into the higher stages of the production structure as monetary pumping distorts relative prices.

Really?  I thought that over the last 50 years or so, we have been moving to a more and more automated manufacturing sector, regardless of monetary regime.

Here’s that same info starting in 1950:

bus eqpt cons prdn

If it’s debt fueled, there should be some correlation in a chart like this one, showing total US debt (public and private) vs. the ratio of business equipment to consumer goods production:

bus eqpt vs debt

No.  And especially not in the time period specifically called out – more recent experience.

Well then what is driving these changes?  Is it those gangbusters corporate profits?  Here’s the long dated chart:

corp profits long

And the short dated one:

corp profits short

No, and it looks like lately they continue making business equipment even when profits are well into a cyclical decline.

How about this:


OK, that’s a pretty good correlation.  To total industrial production.  But really, that’s part of the equation, so it kind of has to correlate.  But what about the labor hours?  That looks like a pretty good negative correlation.

Here it is with the right axis rotated over the full time period available:

full data

And here is the more recent time period, starting in 1982:


While it is certainly far from perfect, it seems to me that the story here is automation, not bubbly debt.

Not that bubbly debt isn’t a problem, but I don’t think it’s related much to the purchase of capital equipment.  That’s actually capitalism at work.

Going forward, I would expect these charts to decouple, as capital equipment goes into automating service industries.  Automation of fast food ordering is already commonplace, and certainly many other repetitive tasks in food preparation and service can be automated as well.  Increases in minimum wages will accelerate this trend.  I think that’s good.  It frees people up to do more valuable work.  The flip side of that is unemployment for the unskilled, who must now make themselves more valuable.  That’s a separate post.









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