Capital vs. Labor Intensivity

June 14th, 2011 at 10:32 pm

A few weeks ago, I made this comment to Peter Nicholas from the LA Times:

“Many projects turned out to be a little more capital intensive than we might have thought, rather than labor intensive. So, instead of 50 guys and 10 machines, you’d have 10 guys and 50 machines.”

My old colleague Ron Klain has an important piece out today that fleshes that thought out much further.  Ron worked closely (and very effectively) with VP Biden on implementation of the Recovery Act, and he knows of what he speaks.

Gather round all ye Keynesians and absorb this key lesson.  Keynes actually said little about implementation.  His famous letter to Roosevelt (still remarkably resonant) was about the deepest he got into it, aside from the “pay one group of unemployed to bury money and another group to dig it up” quip.

But implementation is a huge issue: balancing speed and oversight, getting the biggest bang for the buck, evaluating “shovel-readiness”…all very challenging.

As Ron notes, you also have to think carefully about capital vs labor intensivity.  All else equal, you want to place your money on labor intensive projects, or at least be aware of the job-creation limits when a project is highly capital intensive.

And when in job creation mode (say, versus productivity-enhancing mode), these insights might move you away from tax policies that subsidize equipment vs. labor (e.g., on this margin, a payroll tax cut dominates accelerated depreciation or equipment expensing tax credits).

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7 comments in reply to "Capital vs. Labor Intensivity"

  1. James says:

    That’s always the problem in Washington: nobody seems to listen to anyone who knows what they are talking about. Instead, we get big programs and big legislation designed by political hacks instead of people with expertise in the subject area and approved or criticized by political pundits who know even less. And then let truly intellectually challenged Senators and Congress people fiddle with it even more.

    Stimulus bills, health care bills, economic policies — all designed by political strategists and discussed pro and con by pundits who don’t know what they are talking about. The funniest thing I’ve seen all year was a panel on Meet the Press where Cokie Roberts(!) and George Will(!) were arguing economic issues with Paul Krugman. Krugman was gentlemanly, of course, and these two people actually thought they knew what they were talking about. It was pretty pathetic to the observer, though.

    Meanwhile, people who actually have expertise are out here screaming about how profoundly flawed and unworkable these ideas are. And so the failure of the Obama administration — consistently listening to the wrong people. What’s with that?

    I mean, didn’t you guys talk to A N Y O N E who knew how to do this stuff? People who could have *told* you what projects were capital intensive and which would require jobs?


  2. John says:

    I can’t tell you how glad I am that you recognize this issue and take it seriously.

    Thank you. 8^)


  3. R. Song says:

    Jared,

    I am very concerned about the diminishing labor share of earnings (or, why wages remain low even when corporate profits rise). Robert Reich discusses this in some depth. I am trying to understand what is driving this seemingly long-term trend.

    Could it be simply a matter that production is becoming more capital-intensive generally? I see that as a factor, but attributing the trend primarily to that strikes me as an oversimplification. If that is the primary driver, it also speaks to a certain inevitability of the situation.

    What else could be behind it? There have been a number of political initiatives chipping away at the bargaining power of labor, but it’s hard to imagine they have been THIS successful. Perhaps labor and capital markets don’t work the same – one could argue that labor supply is much less elastic than capital supply. While that could explain rapidly falling wages in the downturn, it would also imply strong wage gains in the upturn.

    What’s your take on this? And what do the data show? Does diminishing wage share a fairly consistent trend across industries? If wage share is falling in broad-based, lower-skilled industries but remains strong in specialized, high-skill (“human capital”-intensive) industries, that might support the view of technological progress driving capital-deepening production (say, in manufacturing and the like).


  4. veblen says:

    Qualitatively, the purchase of machinery can result in the manufacturer of those machines adding jobs, therefore,provided that the machinery is manufactured in the US, capital expenditures can have an indirect impact on job creation. Do you have the data on the indirect job creation due to capital expenditures?


  5. John says:

    I’m back, on this subject, since I wanted to mention something else.

    Brad De Long sometimes gets on my nerves – he’s not always civil like you are.

    Anyway, he has a post on his blog criticizing Ron Klain:

    http://delong.typepad.com/sdj/2011/06/infrastructure-investment-fake-numbers-about-the-hoover-dam-from-former-biden-chief-of-staff-ron-klain.html

    I think he’s being grossly unfair, though he does have a point of information.

    He noted that the Hoover Dam cost $50M ($49M, from Wikipedia, from ’31-’36). He then maps that to “employment years” assuming an average wage for that period, and gets to 150K employment-years, assuming a multiplier of 3, disputing Klain’s claim of 5200 jobs.

    He didn’t address the issue of capital vs. labor. He could have, and it would have been useful. Not all of that $49M was labor cost – the Wikipedia page, e.g., documents the amount of materials used, and it was considerable.

    I’d like to see someone continue this discussion, not to argue about who’s right or wrong, but to flesh out the considerations that this kind of example makes manifest, instead of just trying to shut it down – which it seems was De Long’s intent. E.g., once capital costs are known for the Dam project (and the bridge project more recently – Pat Tillman bridge), one can speak not only to jobs added or lost – which are events – but to durations of employment, like job-months or job-years, to include De Long’s observation and in fact expand it to an apples-to-apples and understandable labor-centric metric.

    To say 54,000 jobs were added last month is one kind of information, but to compute the number of job-months lost last year, or over the recession, would be another. I can imagine a calculation of the total job-months for a year, in fact, as a labor-centric measure alternative to GDP, which is output-centric and thus ambiguous on the question of capital vs. labor.

    Could you, as an economist, compute annual job-months for the economy and track that, and then go on to track changes on that basis, e.g., year-over-year, etc., in a moving average manner?

    It seems to me that that kind of representation for data – if such data is available – would not only be more pertinent, but also understandable and accessible to non-economists.

    More Stevie…

    http://www.youtube.com/watch?v=4wZ3ZG_Wams


  6. general c. san desist says:

    … every time I hear the call of the futile, no shovel ready stuff, I’m reminded of the following.

    …Arthur Burns 1954 said about shovel ready jobs:

    Anti-depression planning by the Administration includes plenty of stop-gap measures just in case the experts prove wrong and the expected moderate decline turns into full-scale recession. On the shelf are $15 billion of public-works projects already blueprinted and approved by Congress, which can quickly be set in motion. Plans have been made to speed up state and local public-works projects, if need be by buying up their bond issues. The “tight money” policy, which has already been liberalized, would quickly be switched to fast expansion of credit by decreasing Federal Reserve margins, resuming the price-pegging of government bonds, and stimulating installment buying. Taxes would be cut still more, the building industry would get special inducements to expand. The republicans say they will spend money faster than the New Deal if they have to. But they don’t think they will have to.

    Jan. 4, 1954 LIFE Magazine

    …JB, you’re Wes recommendation led to spinning Caravan, thanks.


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