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“I don’t see anyone in the US Congress talking about it.” Or so a top fund manager told the ‘FT’.  What worries me is that the issue which no one in Congress is discussing is surely the single biggest challenge facing the global economy today  – for that matter I don’t hear many people discussing it anywhere. This is something of a problem, because unless we face up to this issue, the future of the economy, and beyond that the future of stock markets, is one of nothing, of growth being described by a number that is round and fat and rhymes with hero but means the opposite.


I am talking about the way capital is grabbing itself an ever rising share of the economy. There are lots of potential explanations:  maybe globalisation has led to rising returns to capital and falling returns to labour in an ever more competitive labour market. Maybe technology is slowly but surely undermining meaningful job creation. Maybe it is just the way political pressures have moved. It may be temporary, or to describe it in economic terms, cyclical. But for me the real fear is that is the problem is structural, and can only be fixed by something pretty drastic.

According to the ‘FT’ See Capital gobbles labour’s share, but victory is empty   in 1958 wages made up roughly 50 per cent of US GDP. Today that number is 42 per cent. The article quoted Gary Greenberg, head of emerging markets at Hermes Fund Managers, as saying: “The returns to capital are getting bigger and the returns to labour are getting smaller. I don’t see that changing any time soon. I don’t see anyone in the US Congress talking about it.”

Some might say that from an investor’s point of view this is surely a good thing. But, in the long-run, stock market growth can only occur if the economy is growing, and the economy cannot grow if demand isn’t rising – and how can demand rise when wages are being squeezed? The truth is that the fruits of growth in GDP are not trickling down into wage packets.  In the UK, median wages, after allowing for inflation, are no higher today than in 2000. In the US you need to rewind the clock even further to find a time when cyclically adjusted median wages were lower than they are today.

These days many commentators laugh at the idea of Keynesianism. The fact is that the best 25 year period for economic growth ever, for the UK and global economy, was after World War II. A period of greater equality, and when, as President Nixon said: “We are all Keynesians, now.”

Bear in mind that until 1820, economic growth, at least growth per capita, was something that hardly ever occurred. The median household in 1820 was barely better off than at the time of the collapse of the Roman Empire. Something extraordinary then happened. According to Angus Maddison, between 1820 and 1870 annual growth in the West per capita was 1.07 per cent a year. Between 1870 and 1913 it was 1.56 per cent. Between 1913 and 1950 it was 1.24 per cent. Between 1950 and 1973 it was 3.33 per cent, and between 1973 and 2003 it was 1.93 per cent.  I wonder why growth suddenly accelerated in the 19th century.  Developments such as the repeal of the Corn Laws that had previously handed profits to wealthy landowners, the rise of the Trade Union movement, and even the banning of the slave trade may have all helped.

For what it is worth I think the underlying driver at work here is technology. The greatest age of innovation occurred over the last few decades of the 19th century and ended in 1913. During the pre-war years, the effect of this innovation was job destruction, and demand was quashed. Post World War 11 we adjusted to it. Thanks to Keynesianism we were able use innovation for the collective good. Today we have the internet, computer technology and globalisation having much the same effect as new technology did in the 1920s and 1930s.

You can only solve a problem once you accept it exists.  On both sides of the pond, many politicians have drifted further to the right, others to the left. If unemployment and poor wage growth is caused by deep underlying drivers, then you are not going to solve the problem by humiliating the unemployed, or with lower corporate taxes. But neither can you turn your back on the forces of free markets.

For investors there are lots of opportunities short-term.  I worry about the long-term opportunities. The time to celebrate is the time when politicians start talking about this issue of overriding importance.

These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees


Showing 2 comments

  1. As the developed world’s population ages, the proportion of people relying on capital income increases. Retired people have much more time for political campaigning than workers.
    We are already seeing mass demonstrations whenever inflation goes above 3%, whereas when today’s elderly were working that would have been seen as an unimaginably low number. The grey lobby will come out in force to maintain and increase capital’s share of GDP.

    A much bigger problem is that at least half of this increased share has been captured by the financial industry rather than going to the people providing the democratic (and demographic) rationale for this trend. The financial industry’s share of US GDP has doubled from 4% to 8% in the past 50 years – in the UK the share is over 9%. This has introduced huge distortions into the rest of the economy.

  2. Now, more than ever, the stock market is built on fluff.

    We’ve reaped the ‘benefit’ of banks putting false value on mortgages, but what’s the difference between mythical mortgages and the routine deception of insurance companies owning shares in pension funds which own shares in banks, which own shares in insurance companies (sure, I’m grossly simplifying, but you get the point).

    High street store chains have few assets; some (not all) of the stock, a collection of short term leases (often impossible to resell), and yet they have Market Capitalisation of billions.

    Train operating companies own no track, few buildings, little or no trains (short term leases again) – stock market valuation – billions.

    And the same applies with almost every other industry.

    It’s no surprise that bankrupcies these days pay fractions of pennies on the pound – as soon as trade stops, ‘value’ ceases to exist. No, it hasn’t always been this way!

    Assets are increasingly valueless paper, promising – yes promising – a collapse that will make 2008 look like a picnic. Of course you can argue ‘goodwill’, profitability … whatever you wish. But the ratio of REAL physical assets to (stock market) ‘value’ is unsustainable in the long term … and getting worse all the time.

    I’m hoping the bubble won’t burst for another 20 years or so, which will see me out …. but I’m not 100% confident of that!

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