Rents, Technical Change, and Risk Premia Accounting for Secular Trends in Interest Rates, Returns on Capital, Earning Yields, and Factor Shares

Abstract

The secular decline in safe interest rates since the early 1980s has been the subject of considerable attention. In this short paper, we argue that it is important to consider the evolution of safe real rates in conjunction with three other first-order macroeconomic stylized facts: the relative constancy of the real return to productive capital, the decline in the labor share, and the decline and subsequent stabilization of the earnings yield. Through the lens of a simple accounting framework, these four facts offer suggestive insights into the economic forces that might be at work.

Labor's Share, the Firm's Market Power, and Total Factor Productivity

“…Recently there has been an upsurge of interest in the functional distribution of income (see, for example, Autor et al 2017aAutor et al , 2017bBarkai 2016;Caballero, Farhi, and Gourinchas 2017;Elsby, Hobijn, andŞahin 2013;Karabarbounis and Neiman 2014;Piketty 2014;Rognlie 2015;Shao and Silos 2014). While Atkinson (2009) has argued that understanding the functional distribution of income remains one of the most important questions for political economy, it remains the case that "little consensus exists on the causes of the decline in the labor share … since the 1980s [and] particularly in the 2000s" (Autor et al 2017b, 180).…”

The Rising Cost of Climate Change: Evidence from the Bond Market

“…12 Caballero et al (2017) and Farhi and Gourio (2019) examine the growing divergence between the risk-free rate and the aggregate return on capital and consider a variety of possible factors including increases in risk premia, market power, unmeasured intangibles, and savings supply together with a slowdown in the growth of technology.…”

What is driving the return spread between “safe” and “risky” assets?

“…If investors perceive risk is increasing or become more risk averse, this wedge increases. We call this the risk premium story (see, for instance, Caballero and Farhi, 2018;Caballero, Farhi, and Gourinchas, 2017;Del Negro et al, 2017;and Marx, Mojon, and Velde, 2018). 3 The third possible cause is that technological change is affecting the return on capital-e.g., through changes in the cost of buying new capital goods, changes in physical depreciation, or changes in the production process.…”