“New supply-side approaches are required, such as the proposed funding for manufacturing investment contemplated in the COMPETES/USICA conference bill….prudent competition and trade policy reforms will be necessary to boost domestic investment in a highly concentrated economy whose industrial base has eroded.”
Yes, reinvest in the productive economy (not the economy of Think Tanks, higher ed bureaucracy, and the like), especially high-tech manufacturing such as manufacture of pharmaceuticals and medical equipment. Not to mention computer chip manufacturing.
And there’s nothing wrong with a trade policy that favors your own nation and stimulates investment provided you can strike the difficult balance of avoiding outright protectionism.
Also invest in productive higher education, notably STEM, and make it easier for people to attend either technical college or university to study these subjects. Don’t write off student loans acquired by studying politicized subjects of no practical value. Subsidize the STEM students instead.
I hope we see these kinds of changes but so far national competitiveness, and job opportunities that pay ordinary people a living wage, have taken a distant back seat to corporate profits usually achieved by financial engineering.
Great essay from this author. Finally, Unherd has published a full length economics essay.
A note of caution on overly subsidising STEM – creating more graduates with qualifications doesn’t automatically create jobs for them to work, or guarantee that the quality of their credentials makes the someone you’d want to employ.
A glut of unemployed graduates will likely start carving out their own niches, and we’d see an acceleration in the deterioration of science journalism and woke ideology sinking it’s claws in.
Garrett R
2 years ago
Excellent article. The Recession put the cash returns on steroid with labor’s share of income falling even more. For over a decade, companies have failed to invest in productivity-enhancing endeavors and we see the consequences of that today.
Another part of these trends is the global trade imbalances where persistent surplus countries like China, Japan, and Germany must dump their surpluses on persistent deficit countries like the US. Globalized finance without globalized trade results in these issues. For the most part, countries have competed on low wages rather than product quality, which is a race to the bottom. Hopefully we will reverse these trends.
Jeremy Bray
2 years ago
At the risk of sounding like a hippy the premise of this article and some of the comments is that production of more goods is desirable and more should be invested to make this come about. The problem is that just as farmers can be ruined by a harvest glut that drives down prices below the usual cost of production so too many goods simply crushes returns. It may be paradoxical to suggest we are near peak demand for many goods given tales of poverty but the fact is that enthusiasm for decluttering and experiences over more stuff suggests that for the population with money peek demand is here. We have a problem with GP services because large numbers of GPs have accumulated all that they want and prefer to cut the time working or decide to retire early.
Those who are living on the streets contribute no effective demand and the poor are often simply relatively poor. You don’t see the poor in rags with their ribs protruding. In a world where the ecological and climate effects of productivity are continually emphasised the suggestion that expanded productivity might be a good thing ought surely to be questioned rather than more production being seen as desirable.
Last edited 2 years ago by Jeremy Bray
Billy Bob
2 years ago
If we taxed high earners and dividends much more aggressively, and companies at a lower rate, do you think that would encourage investment in improving productivity? If shareholders would see large percentages of the money they take out simply handed over to the taxman would they be more inclined to reinvest it within the business?
For many firms, the problem is that they have too much money to want to invest in the operations of the company, not too little.
Every company has 2 distinct businesses. The first one is the business that the company is famous for — providing the product or service associated with the company name. The second business is a financial business, for managing the money that the firms earns. It used to be that the second business was a very minor part of the whole, to the extent that some very successful firms had a financial strategy of ‘stick the profits in the bank and let it earn interest’ and nothing more was really needed.
But at some point, you may discover that the financials business is making more money than the core business. At this point they no longer care about investing in the core business to make it continuously competitive. Sometimes they sell the core business right off, or allow it to fail. But there are worse things that can happen. The profits as a financials business rarely translates into ‘increased dividends for the shareholder’, but rather into ‘increased price for the stock’, which can be realised only when you sell the stock.
So, the company does things that increases the price of the shares. The executives sell their shares and realise a great profit. Then the company goes into decline. The share price drops. The company buys back the stock at reduced prices. It then uses them for stock options for the next round of employees. And gets another big win when selling off or shutting down its non-competitive business to focus on its profitable real-estate arm causes the prices to jump again …
Usually, not always, but usually the people who want more dividend revenue are also the people who want more investment in the core business. They don’t care all that much if the stock price rises because they don’t want to sell their stocks. They just want enough investment in the business to keep it healthy and profitable — ideally forever. And spitting out nicer and nicer dividends for them. The people who are focused on making money through share price differentials desire a boom-and-bust in share prices. It’s easier to create a bust, or allow one through decreased competitiveness than it is to boom on your increased competitiveness. Besides, the big winners in the competitiveness game tend to be small, lean companies. Better to buy them than to try to compete with them ….
So if you want to use tax policy to make firms invest more, going after dividends seems to not be the way. What I think could work is to define a ‘financial services’ company and ‘financial services’ income and then tax the heck out of that. But this is just my theory. And to get it to work you will need a certain amount of international co-operation, or everybody will just relocate overseas. (Which is another thing I want to make laws against, but nevermind, this is too long already. ) Belling this particular cat, when what I want to do, aside from the belling, is out and out shave all the fur off the financial services industry, declaw it and leave it with very short whiskers seems impossibly hard to me.
Unless there is a violent and bloody revolution, or world war. Then all bets are off, but it’s not something to wish for.
Great summary thanks Laura – at last we are getting more economics on Unherd – and you obviously have a handle on that !
Matthew Powell
2 years ago
So essentially the low interest environment, rather than encouraging investment, encourages inertia, as without any of the alternatives traditionally used for saving, investors incentivise companies to provide this service through favouring those that paid high dividends and engage in generous share buy backs. This distorts the market, as companies that do invest in the core business are penalised, as it diverts resources away from providing shareholder returns in the short term and capital seeking economic growth is crowded out by capital seeking immediate market returns.
This should come to an end with the FED raising interest rates but a lot will depend on what the political will there is to allow a Schumpeterian blood letting. America stock markets have been pumped up by cheap credit for over a decade and once bonds start to become a viable investment again, we may be about to find out just how big a bubble has been inflated.
However, given that political consensus is always to artificially extend the growth cycle and hope that the next administration are left holding the parcel when the music stops; I expect that nerves will fail before the boil has been lanced.
When interest rates suggest capital has no value as we have experienced, the answer is to borrow as much as possible to buy whatever real assets you can. That leads to asset inflation and bubbles. Corporations then discover better income via engineering finance. This distortion of the value of capital has also allowed no consideration of debt service expense.
As you note somebody will soon be holding the bad news bag.
Sidney Mysterious
2 years ago
We are all impressed by the scholarly analysis of the current socio-economic conditions created by Tools and Fools in the US and worldwide.
Bravo.
How about the truth: Joe Biden and the ever-present band of elite “One Worlder control cadre” are upset that they don’t have the power and immunity of past Kings, Kaiser, Tsars, and potentates, because of tho pesky US constitution and some Forefather Fuddy-duddies. Ruminating about symptoms and pontificating about causes wastes ink, and does not lessen the stink.
David Jennings
2 years ago
Thanks for this essay. As others have noted, it is good for Unherd to publish more economic analysis.
One significant factor in corporate behaviour was not addressed: those shareholders seeking maximum cash back and dividends are often pension funds (or funds compared to pension funds) that have a duty to fund the retirements of those comprising the West’s demographic bomb (especially since governments have woefully underfunded public retirement plans). So corporations are feeling the tremendous stress to provide and increase dividends (which increases share prices as these shareholder funds chase returns) rather than invest in future and risky market growth. One only needs to see the composition of top US busiensses over time (only 25% of the top 30 in 1988 were still in the top 30 in 2017) to see that business is risky, even (or especially) for the successful. For many CEOs, giving the money to shareholders is a more popular and less risky way to achieve success. that does not make them “less greedy”, just rational.
N T
2 years ago
So…more money should be thrown innto solve a problem that is fundamentally caused by too much money? Did I read that correctly?
I’m all for solving wage inflation by deeper investment in automation of all sorts. I don’t think the unwashed would agree.
Neven Curlin
2 years ago
This was a more interesting article than I expected from the title, which seems to harken back to the 80s.
Could a cap on wealth be a solution to this problem? Once people can’t get richer, there is no need for them to demand shareholder returns, which gives companies more leeway to invest.
Main Edition
US
FR
“New supply-side approaches are required, such as the proposed funding for manufacturing investment contemplated in the COMPETES/USICA conference bill….prudent competition and trade policy reforms will be necessary to boost domestic investment in a highly concentrated economy whose industrial base has eroded.”
Yes, reinvest in the productive economy (not the economy of Think Tanks, higher ed bureaucracy, and the like), especially high-tech manufacturing such as manufacture of pharmaceuticals and medical equipment. Not to mention computer chip manufacturing.
And there’s nothing wrong with a trade policy that favors your own nation and stimulates investment provided you can strike the difficult balance of avoiding outright protectionism.
Also invest in productive higher education, notably STEM, and make it easier for people to attend either technical college or university to study these subjects. Don’t write off student loans acquired by studying politicized subjects of no practical value. Subsidize the STEM students instead.
I hope we see these kinds of changes but so far national competitiveness, and job opportunities that pay ordinary people a living wage, have taken a distant back seat to corporate profits usually achieved by financial engineering.
Great essay from this author. Finally, Unherd has published a full length economics essay.
A note of caution on overly subsidising STEM – creating more graduates with qualifications doesn’t automatically create jobs for them to work, or guarantee that the quality of their credentials makes the someone you’d want to employ.
A glut of unemployed graduates will likely start carving out their own niches, and we’d see an acceleration in the deterioration of science journalism and woke ideology sinking it’s claws in.
Excellent article. The Recession put the cash returns on steroid with labor’s share of income falling even more. For over a decade, companies have failed to invest in productivity-enhancing endeavors and we see the consequences of that today.
Another part of these trends is the global trade imbalances where persistent surplus countries like China, Japan, and Germany must dump their surpluses on persistent deficit countries like the US. Globalized finance without globalized trade results in these issues. For the most part, countries have competed on low wages rather than product quality, which is a race to the bottom. Hopefully we will reverse these trends.
At the risk of sounding like a hippy the premise of this article and some of the comments is that production of more goods is desirable and more should be invested to make this come about. The problem is that just as farmers can be ruined by a harvest glut that drives down prices below the usual cost of production so too many goods simply crushes returns. It may be paradoxical to suggest we are near peak demand for many goods given tales of poverty but the fact is that enthusiasm for decluttering and experiences over more stuff suggests that for the population with money peek demand is here. We have a problem with GP services because large numbers of GPs have accumulated all that they want and prefer to cut the time working or decide to retire early.
Those who are living on the streets contribute no effective demand and the poor are often simply relatively poor. You don’t see the poor in rags with their ribs protruding. In a world where the ecological and climate effects of productivity are continually emphasised the suggestion that expanded productivity might be a good thing ought surely to be questioned rather than more production being seen as desirable.
If we taxed high earners and dividends much more aggressively, and companies at a lower rate, do you think that would encourage investment in improving productivity? If shareholders would see large percentages of the money they take out simply handed over to the taxman would they be more inclined to reinvest it within the business?
The simple answer is yes, if combined with incentives on investments.
For many firms, the problem is that they have too much money to want to invest in the operations of the company, not too little.
Every company has 2 distinct businesses. The first one is the business that the company is famous for — providing the product or service associated with the company name. The second business is a financial business, for managing the money that the firms earns. It used to be that the second business was a very minor part of the whole, to the extent that some very successful firms had a financial strategy of ‘stick the profits in the bank and let it earn interest’ and nothing more was really needed.
But at some point, you may discover that the financials business is making more money than the core business. At this point they no longer care about investing in the core business to make it continuously competitive. Sometimes they sell the core business right off, or allow it to fail. But there are worse things that can happen. The profits as a financials business rarely translates into ‘increased dividends for the shareholder’, but rather into ‘increased price for the stock’, which can be realised only when you sell the stock.
So, the company does things that increases the price of the shares. The executives sell their shares and realise a great profit. Then the company goes into decline. The share price drops. The company buys back the stock at reduced prices. It then uses them for stock options for the next round of employees. And gets another big win when selling off or shutting down its non-competitive business to focus on its profitable real-estate arm causes the prices to jump again …
Usually, not always, but usually the people who want more dividend revenue are also the people who want more investment in the core business. They don’t care all that much if the stock price rises because they don’t want to sell their stocks. They just want enough investment in the business to keep it healthy and profitable — ideally forever. And spitting out nicer and nicer dividends for them. The people who are focused on making money through share price differentials desire a boom-and-bust in share prices. It’s easier to create a bust, or allow one through decreased competitiveness than it is to boom on your increased competitiveness. Besides, the big winners in the competitiveness game tend to be small, lean companies. Better to buy them than to try to compete with them ….
So if you want to use tax policy to make firms invest more, going after dividends seems to not be the way. What I think could work is to define a ‘financial services’ company and ‘financial services’ income and then tax the heck out of that. But this is just my theory. And to get it to work you will need a certain amount of international co-operation, or everybody will just relocate overseas. (Which is another thing I want to make laws against, but nevermind, this is too long already. ) Belling this particular cat, when what I want to do, aside from the belling, is out and out shave all the fur off the financial services industry, declaw it and leave it with very short whiskers seems impossibly hard to me.
Unless there is a violent and bloody revolution, or world war. Then all bets are off, but it’s not something to wish for.
Great summary thanks Laura – at last we are getting more economics on Unherd – and you obviously have a handle on that !
So essentially the low interest environment, rather than encouraging investment, encourages inertia, as without any of the alternatives traditionally used for saving, investors incentivise companies to provide this service through favouring those that paid high dividends and engage in generous share buy backs. This distorts the market, as companies that do invest in the core business are penalised, as it diverts resources away from providing shareholder returns in the short term and capital seeking economic growth is crowded out by capital seeking immediate market returns.
This should come to an end with the FED raising interest rates but a lot will depend on what the political will there is to allow a Schumpeterian blood letting. America stock markets have been pumped up by cheap credit for over a decade and once bonds start to become a viable investment again, we may be about to find out just how big a bubble has been inflated.
However, given that political consensus is always to artificially extend the growth cycle and hope that the next administration are left holding the parcel when the music stops; I expect that nerves will fail before the boil has been lanced.
When interest rates suggest capital has no value as we have experienced, the answer is to borrow as much as possible to buy whatever real assets you can. That leads to asset inflation and bubbles. Corporations then discover better income via engineering finance. This distortion of the value of capital has also allowed no consideration of debt service expense.
As you note somebody will soon be holding the bad news bag.
We are all impressed by the scholarly analysis of the current socio-economic conditions created by Tools and Fools in the US and worldwide.
Bravo.
How about the truth: Joe Biden and the ever-present band of elite “One Worlder control cadre” are upset that they don’t have the power and immunity of past Kings, Kaiser, Tsars, and potentates, because of tho pesky US constitution and some Forefather Fuddy-duddies. Ruminating about symptoms and pontificating about causes wastes ink, and does not lessen the stink.
Thanks for this essay. As others have noted, it is good for Unherd to publish more economic analysis.
One significant factor in corporate behaviour was not addressed: those shareholders seeking maximum cash back and dividends are often pension funds (or funds compared to pension funds) that have a duty to fund the retirements of those comprising the West’s demographic bomb (especially since governments have woefully underfunded public retirement plans). So corporations are feeling the tremendous stress to provide and increase dividends (which increases share prices as these shareholder funds chase returns) rather than invest in future and risky market growth. One only needs to see the composition of top US busiensses over time (only 25% of the top 30 in 1988 were still in the top 30 in 2017) to see that business is risky, even (or especially) for the successful. For many CEOs, giving the money to shareholders is a more popular and less risky way to achieve success. that does not make them “less greedy”, just rational.
So…more money should be thrown innto solve a problem that is fundamentally caused by too much money? Did I read that correctly?
I’m all for solving wage inflation by deeper investment in automation of all sorts. I don’t think the unwashed would agree.
This was a more interesting article than I expected from the title, which seems to harken back to the 80s.
Could a cap on wealth be a solution to this problem? Once people can’t get richer, there is no need for them to demand shareholder returns, which gives companies more leeway to invest.