Low Interest Rates Don’t Discourage Hiring

New Yorkers line up for the checkout line at the Fairway Supermarket on the Upper East Side of New York as Hurricane Irene continued toward the East Coast
New Yorkers line up for the checkout line at the Fairway Supermarket on the Upper East Side of New York as Hurricane Irene continued toward the East Coast

Photograph by Timothy A. Clary/AFP/Getty Images.

Joe Stiglitz offers what I think is a pretty confused view of the monetary policy landscape, including this:

Today, persistent low interest rates encourage firms that do invest to use capital-intensive technologies, such as replacing low-skilled checkout clerks with machines. In this way, the Fed may still be contributing to a jobless recovery, when we finally do recover.

For starters, although I know it’s conventional to identify loose money with low interest rates I think that’s a backward form of reasoning. Rates are persistently low in the United States for the same reason they’ve been persistently low in Japan since the 1990s—extremely low growth expectations caused by tight money lead to low interest rates.

More generally, I think the question to ask is not “Will low interest rates encourage firms to replace workers with machines?” but “Given high unemployment and falling wages, why would firms bother to invest in labor-saving technology?” After all, in the long run we’ve grown more prosperous as a society precisely by using labor-saving technology. Consequently, an hour of laboring in 2012 earns a consierably larger consumption bucket than did an hour of laboring in 1912 or 1812. But the prerequisite for this is full employment and rising wages. If money were loose, unemployment low, and agitation for additional wages high, then Apple could easily afford to give its retail store workers a raise while lower-margin firms would be forced to rely on labor saving technology. The result would be higher pay for retail workers (as they shift out of the low-margin CVS sector into the high-margin Apple Store sector) plus increased employment for computer programmers, chip manufacturers, and other people involved with the development of instant checkout machine technology. After all, one of the striking things to me about existing automatic checkout technology is how poorly it works. It just seems like making this work is not a task the best people in high tech are seriously working on, in part because persistently high unemployment makes it not so pressing a concern. In circumstances of full employment and rising wages, lots of people would be dedicating themselves to finding a way to reduce the retail economy’s dependence on low-wage labor.

But tight money, high unemployment, and falling wages mean that even though technological progress keeps happening, it’s simple for firm owners to just lazily rely on low pay and the reserve army of the unemployed as a business strategy.

P.S.: I don’t disagree with Stiglitz that this would be a good time to make debt financed investments in physical infrastructure and human capital, but making said investments is not in tension with or a substitute for adopting a monetary policy that actually aims at full employment.