Paul Krugman: Another Economic Disconnect

Why haven't high profits caused an investment boom?:

Another Economic Disconnect, by Paul Krugman, Commentary, NY Times: Last fall Edward Lazear, the Bush administration’s top economist, explained that what’s good for corporations is good for America. “Profits,” he declared, “provide the incentive for physical capital investment, and physical capital growth contributes to productivity growth. Thus profits are important not only for investors but also for the workers who benefit from the growth in productivity.”

In other words, ask not for whom the closing bell tolls; it tolls for thee.

Unfortunately, these days none of what Mr. Lazear said seems to be true. In the Bush years high profits haven’t led to high investment, and rising productivity hasn’t led to rising wages.

The second of those two disconnects has gotten a lot of attention... The administration and its allies whine that they aren’t getting credit for a great economy, but because wages have been stagnant [since 2001]... the economy feels anything but great to most Americans.

Less attention, however, has been given to the first disconnect: the failure of high profits to produce an investment boom.

Since President Bush took office ... rising productivity and stagnant wages — workers are producing more, but they aren’t getting paid more — has led to ... corporate profits more than doubling since 2000. Last year, profits as a share of national income were at the highest level ever recorded.

You might have expected this gusher of profits, which surely owes something to the Bush administration’s pro-corporate, anti-labor tilt, to produce a corresponding gusher of business investment. But the reality has been more of a trickle. ...

It’s possible that sluggish business investment reflects lack of confidence in the economic outlook —... that’s understandable given the bursting of the housing bubble...

But ... there is a more disturbing possibility. Instead of investing in physical capital, many companies are using profits to buy back their own stock. And cynics suggest that the purpose  is to produce a temporary rise in stock prices that increases the value of executives’ stock options, even if it’s against the long-term interests of investors.

It’s not a far-fetched idea. Researchers at the Federal Reserve have found evidence that ... stock buybacks are strongly influenced by “agency conflicts,” a genteel term for self-dealing by corporate insiders. ...

Whatever the reasons, we now have an economy with incredibly high profits and surprisingly low investment. This raises some immediate, short-run concerns: with housing still in free fall and consumers ever more stretched, optimistic projections for the economy depend on vigorous growth in business investment. And that doesn’t seem to be happening.

The bigger issue, however, may be longer term. Mr. Lazear was right about one thing: business investment plays an important role in raising productivity. High investment in equipment and software was one major reason for the productivity takeoff that began in the Clinton era, and continued in the early years of this decade.

And low investment may be one reason productivity growth has slowed dramatically over the last three years — another development that hasn’t received as much attention as it should.

In any case, next time someone tells you that any action that might reduce corporate profits a bit — like actually enforcing health and safety regulations or making it easier for workers to organize — will reduce business investment, bear in mind that today’s record profits aren’t being invested. Instead, they’re being used to enrich executives and a few lucky stock owners.

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Previous (4/27) column: Paul Krugman: Gilded Once More
Next (5/14) column: Paul Krugman: Divided Over Trade

Comments

[Jim Harrison]

Naive question: isn't it possible that the relative lack of business investment reflects an absence of promising things to invest in?

[Robert]

That would be addressed by the following:

"It’s possible that sluggish business investment reflects lack of confidence in the economic outlook"

Poor economic outlook=no business opportunities=nothing to invest in

[Bob Dobbs]

I take "investment" in this context to mean capital spending and related spending, not investment in other firms.

Even if one does not intend to expand a business, investment to increase productivity is always advisable... because it will decrease the cost of doing business and thus lead to increased profits, all other things being equal. For example, an investment in a new, more efficient infrastructure (IT, manufacturing, supply chain), that pays for itself in 3-4 years is a no-brainer, unless money is tight. And apparently it is not.

Investment of this type is advisable even in the worst of times, if money is available, because it will increase profit margins.

If there is a dearth of such investment -- and if productivity improvement has stalled in the last 3-4 years I would say so -- then reduced capital spending is not simply a creature of nervousness about future prospects. Instead, the money likely is either being taken out of the business or diverted to other purposes, as Krugman suggests.

[Bruce Wilder]

Maybe the exchange rate trumps the interest rate.

[Bruce Wilder]

Bob Dobbs: "an investment in a new, more efficient infrastructure (IT, manufacturing, supply chain), that pays for itself in 3-4 years is a no-brainer"

Yes, it is a no-brainer. Unfortunately, for the American worker, many American multinationals do the numbers, and conclude that it makes more sense to build that new plant and infrastructure in China. It takes quite a financial tilt, to create conditions, at any wage, that justify completely building a new plant, a new road from the plant to a port, a new port and new ships to carry goods across the Pacific, in preference to refurbishing plant here, but, maybe, we have such a tilt.

[dissent]

If a firm has 100 schillings for investment, and 50 schillings are used to build a plant in China or to open a lab in India or the equivalent, and they invest 50 schillings in improving business processes [managing outsourced projects, perhaps?] in the USA, does that show up as reduced absolute investment in American statistics?

It seems odd that during a global boom, led by MNCs and associated with capital investment on an unprecedented scale, that a lack of investment in the USA would be taken as an unwillingness to invest.

Just askin'.

[Michael Haley]

Yes, I thought the same, ie that the money is flowing overseas.

Krugman always strikes me as so determined to be partisan that he loses some credibility and gains being a bit of a bore when he writes. He doesn't say what measures he is taking to claim that there is a lack of investments with the profits, and takes the liberty at the end of pronouncing that the money is going to enrich executives, after saying himself earlier that that is only one possibility.

Maybe the whole article is bigger and he explains himself better, but I have noticed this over and over with him. I think his credibility is shaky.

[Lafayette]

pk : “And cynics suggest that the purpose is to produce a temporary rise in stock prices that increases the value of executives’ stock options, even if it’s against the long-term interests of investors.”

This week the Economist writes about a law making the rounds in Congress that would give rights to stockholders that (supposedly) would level the corporate playing field. It is silly to think, in the land that coined the phrase “property rights”, that such a law should be necessary. The courts should have confirmed this notion eons ago.

A stock is a property right ownership in the corporation and its voting rights should be proportional. But, we all know how that simple concept is thrown to the winds by “special rights” that are accorded privileged stock holders. And, who makes this sort of manipulation of ownership rights? You guessed it, the BoD.

Anyway, if it takes a law to put better business governance at the top level, why quibble? I’ll give you a reason. Because, like so many supposedly “anti-business” laws made in America, it is like give the angry dog a bone. Problem is, the dog has no teeth.

And, until the law accords property rights in proportion to the vested interest of stock holders, there will be no fairness at top corporate levels. The feeding at the trough will continue – it will be “business as usual” and “Nardellism” (diamond studded, gilded parachutes will remain the norm), with CEOs competing with one another boyishly for the top spot.

It all makes one wonder what Freud would have said of such adult infantilism.

[Lafayette]

mh : “Krugman always strikes me as so determined to be partisan that he loses some credibility.”

Journalists have a right to be partisan in their outlook. And, there is perhaps even a necessity. Points of view should contrast, strikingly, in order to be well understood.

It is by knowing the extremities of the political gamut that we understand the middle road. It is up to each of us to understand those extremes in points-of-view – even when they are against our most profound convictions.

Of course, if you are looking for the proponents of American conservatism in politics and business on this forum, then you are quite likely to remain disappointed. (And, if you are not, why complain?)

Search for them. They are out there in the blogosphere. Those forums make for interesting reading, if tiresome at times.

[Outside the Box]

The dearth of IT investing may be partly a hangover from Y2K. Over zealous vendors convinced many corporations to spend vast sums to fix a non existent problem. (Nations that did nothing in preparation for Y2K didn't have any significant problems.) Once executives realized that they had been tricked, they put all future IT projects under a microscope before authorizing them.

The lack of expansion of domestic capacity may be partly due to demographics. Executives know that as people retire, they tend to spend less. The large boomer cohort is starting to retire.

Expansion of plants overseas makes more sense from a business prospective, as that is where customer growth is. Customers in many nations tend to accept products made in their own country more readily.

[Lafayette]

bw : “in preference to refurbishing plant here, but, maybe, we have such a tilt..”

If by “tilt” you mean large wage discrepancies, then you’re right.

Some low-skilled manufacturing is leaving both Europe and the US in droves. But, this is nothing knew. Didn’t we have that “large sucking sound” after NAFTA? And, where have those companies that dislocated manufacturing to the “maquilladores” in Mexico finally go? To China.

There is a Plastics Museum in a small town in central Massachusetts. It is there, in the post-war years, that the modern plastics industry was born and flourished. Among its initial innovators was a certain Earl Silas Tupper of Tupperware fame.

The town, once prosperous, now abounds with brick factories that are empty. It’s a bit sad, but the dislocation of low-skilled plastics manufacturing (combs, sun glasses) started in central Massachusetts in the mid-seventies. Even Tupperware is no longer manufactured in the US.

So, may I ask “ just what is it that anyone thinks is new” ? The dislocation of low- unskilled manufacturing has been happening for 35-years in parts of the US.

If we are suddenly appalled at the phenomenon, it is whose fault? The Chinese or ours?

It’s been 35 years that we have been sleeping on our laurels, accumulated since the beginnings of the Industrial Revolution. Let’s face the music, it is not by lamenting the fact that low-skilled labor advantages (in certain manufacturing sectors) has left our shores, never to return, that we will address the challenge of creating durable employment.

It is by undertaking a well-coordinated program to enhance skills and competencies within the general workforce and within education specifically that we will stop the drain.

We've got too soft from self-neglect. It's time to reform and tighten the ranks.

[Lafayette]

otb : “Customers in many nations tend to accept products made in their own country more readily.

That depends.

I remember a paragraph from “The Affluent American” by J.K. Galbraith that impressed the hell out of me. Galbraith explained that the impressively large imbalance of payments due to imports was explained by the fact that Europeans were better at design. (Perhaps he had been impressed by the Marimekko outlet in Harvard Square?)

I came to agree. European design of consumer products is far more avant-garde, particularly in the automotive industry. IMHO. I also feel that better design remains a force behind European imports today.

Branding, however, also played in favour of the US. For a long time, American cars, so very rare due to high duties, were a rave. Not that they were better looking, but because they were bigger than the cramped local variety. Also, the Marlboro cowboy is a well known branding image throughout Europe.

American brand-names are still a rage in many parts of the world, so I suspect that branding does give certain American products a better access to local markets than local knock-offs. This is the case in many parts of China today – where knock-offs are often outright brand pirating.

Will it last? That is hard to tell. Consumer tastes are as fleeting as the morning dew.

[Laurent GUERBY]

Share buybacks and dividends are two ways to give money to shareholders.

The question is what is the tax treatment for the company and for the shareholders of buybacks vs dividends.

Does anyone know a serious source on the topic?

Note: stock options (calls) fare better with share buybacks for their holder through since dividends force the spot price down at their ex date.

[Tim Worstall]

I would be fascinated to see the figures for that fall in business investment. Anyone know where they can be found?
Is it a fall in investment by firms out of retained profits? Or is it the totality of investment in business across the economy?

[Lafayette]

lg : The question is what is the tax treatment for the company and for the shareholders of buybacks vs dividends..

Go here, select "United States":
http://en.wikipedia.org/wiki/Capital_gains_tax#United_States

[Lafayette]

lg : The question is what is the tax treatment for the company and for the shareholders of buybacks vs dividends..

Go here, select "United States".

[anne]

The "potential" of dividends and stock buybacks reward shareholders. Dividends need not be paid, and stock does not have to be bought back. Berkshire Hathaway has never paird diviends or bought back shares, but the potential is there and that has been every much enough. Buybacks must also be tracked carefully enough to understand whether they are only covering option grants, which has been a common mask by managments. The need is for management to use earnings for "employee" and shareholder interests, and this as Berkshire has shown for decades may involve only direct investment.

[anne]

Joseph Stiglitz early on noted the relative lack of American investment in this remarkable bull market period, a feature that needs considerable attention since the lack is not being made up by enough government infrastructure investment. A further tragedy of Iraq, has been less infrastructure investment than we so dearly need.

[anne]

Warren Buffett became generally and rightfully bearish on stocks in 1999, because he noted that corporate profits were at record shares of national income and could not be expected to rise enough in coming years to justify continually rising stock prices. Though right, Buffett was only partially right. Corporate profits have continued to rise at the expense of employee gains.

Interestingly though even with continued gains in corporate profit shares, and with as board and deep an international bull market in stocks as I can find record of, the American stock market has lagged almost all developed country stock markets. Where are American corporate earnings going then?

[spencer]

Tim Worstall -- the data you are looking for is in the gdp accounts at BEA.

The BEA also has some very interesting data on investments by legal organization. This data shows that over the post WW II era investment by individuals, partnerships, s-corps, etc has irregularly fallen as a share of total investments from around 25% in 1950 to some 11% now.
Meanwhile investments by corporations has taken up the slack -- rising to over 80%. The rest is by nonprofits.

But this data makes a very, very strong case that the supply-side thesis that giving money to the "investment class" will lead to greater investment does not work.

I calculate a series of capital stock per employee.
From 1950 to 1980 its trend growth rate was 1.6% and since 1980 growth slowed to 0.9%. It stagnated in the 1980s, rose sharply in the 1990s and is now stagnating again. If you lag this series one year it correlates strongly with productivity and regressions confirms it plays a major role. In a way this series is the Solow one-third of productivity growth we understand.

[evagrius]

The lack of investsments is due to complacency. The U.S. is the best of all possible countries, perfect in every way, therefore nothing needs be done to improve it.
I had an interesting conversation with a gentleman who is a building engineering student going to the U.K. to obtain his Ph.D. in the "natural ventilation" of large buildings. Natural ventilation is less energy intensive, more ecological and so forth.
There is no interest in such things in the U.S.

I think the U.S. has entered its "dinosaur" phase. The large corporations and their directors are so huge that they cannot see the new, smaller, more creative mammals running about.

When global warming/ climate change results in economic chaos, these dinosaurs will vanish.

The smaller mammals, able to adapt, will flourish.

[save_the-rustbelt]

Running a hedge fund requires very little capital investment.

Manufacturing requires a major capital investment.

Manufacturing, per Krugman's preaching, is going overseas.

Construction companies, rather than invest in newer equipment, invested in jobs for 1 million illegals, with bipartisam support.

We can't blame Bush for everything now can we?

[wally]

I agree with the premise that this is insider enhancement at the expense of stockholders. It is looting, in other words. The sheer magnitude of the backdating of options ought to have opened eyes to the fact that there is now an 'insider class' in American business that is hellbent on personal enrichment at any moral and ethical level.
In the case of IBM, they actually propose to borrow to fund the buyback... and how many IBM insiders have bought stock from their personal funds in the last few years? Or insiders in ANY major corporation?

[ken melvin]

Big box outlet stores doesn't require much capital. I suspect that it's a combination of less capital requirement by 'modern' industry, more contracting out of manufacturing to overseas contractors with different investment costs, ...

[Mark Thoma]

In case you miss it, thought I'd note that I just posted a Fed Watch by Tim Duy below this post. He talks about business investment as well as other factors affecting the economic outlook, and how the Fed is likely to respond.

Tim Duy's Fed Watch: Fed Poised to Hold Steady

[me]

He doesn't say what measures he is taking to claim that there is a lack of investments with the profits

Michael Haley, maybe your credibility is shaky. Why do you Palmisanno is BORROWING $15 BILLION to buy back IBM stock. IBM stock is an investment? It means they are brain dead with nothing to invest in and he is cashing in on those zero cost options. when was the last time anyone in IBM management bought IBM shares?

From Business Week:
"There's only one problem. Corporate America is still spending big time, just increasingly outside the U.S. A BusinessWeek analysis of financial reports from more than 1,000 large and midsize U.S.-based companies shows that global capital expenditures in the fourth quarter of 2006 were actually up 18.1% over the previous year, a number that includes nonresidential construction as well as info-tech equipment and machinery. The comparable growth for domestic business investment, which is all the government reports each quarter: only 8.9%, without adjusting for inflation.

So far in 2007, U.S. corporations seem to be keeping up the global spending pace. Alcoa Inc. (AA ), which reported first-quarter earnings on Apr. 10, boosted capital spending by 32% over a year earlier, in part to fund the construction of the company's new smelter in Iceland, as well as investment projects in the U.S., Brazil, Russia, and China. And Boise (Idaho)-based Micron Technology Inc. (MU ) spent almost $1 billion more in the first quarter of 2007 than it did a year earlier: The semiconductor maker developed new plants in China and Singapore and expanded capacity at existing facilities in Virginia and Utah.

Welcome to the global economy, Mr. Statistician. Government measures were well-suited for the 1950s and 1960s, an era when U.S. companies mainly invested at home, and imports and exports were a relatively small portion of the economy. Even as corporations stepped out into the world, most of them still did the bulk of their capital spending at home. So government investment numbers remained an accurate gauge of corporate health."

[Callahan]

Why no boom, why no mushroom clay-owd? Bad intelligence.

[Bruce Wilder]

save_the-rustbelt: "We can't blame Bush for everything now can we?"

Yes, we can. Moreover, we should.

[Wayne Jett]

In Paul Krugman's lamentation of the dirth of benefits flowing to workers from the current economic recovery (which has aged rapidly in the last year), and in the comments posted above, I find not a single mention of the effects of Federal Reserve monetary policy. Is it not plain that monetary policy is the primary cause of the offending condition?

The Bush cuts in marginal tax rates of May 2003 had barely begun producing net job growth in April 2004 when the Fed let it be known it would be raising the funds rate target. Every such funds rate hike raises the cost of credit for small business (and consumers) by a commensurate amount. So small business and consumers now pay double digit interest rates for credit, while big business still borrows at low rates on the long end of the yield curve.

With its funds rate hikes, the Fed presently drains several hundred billions of dollars from the capital accounts of small business into the coffers of the big banks. By doing so, it assures that small business has much less capital to invest in new jobs and equipment. I'm sure you all know small business is where the great majority of job creation occurs, if at all.

The truth is: reducing and reversing job growth and wage growth is precisely the theoretical target of Fed policy. They think (erroneously, I'm sure) that putting people out of work reduces the leverage of all workers to require higher compensation for their services. This reduces upward pressure on wages and prices, which the Fed sees as one of its mandates. Unfortunately, instead of keeping the dollar's value stable, the Fed chooses the irrational way of allowing the dollar to lose value while preventing workers from adjusting their wages to maintain their buying power. The workers' standard of living falls as the result.

[happyjuggler0]

me has it right, US corporations aren't underinvesting, they are merely investing outside the US. Sounds like we are overdue for slashing the corporate income tax rate to get more in line with the everyone else. Why should we want a foreign (or American) company to invest in Ireland instead of the US simply due to corporate tax rates?

[happyjuggler0]

According to this link there are only 8 countries out of a list of 155 that have a higher corporate income tax than the US. These 8 countries are all economic disaster areas by the way.

Incentives matter....

[bakho]

Does capacity utilization have anything to do with investment? Will smart investors put money into new capacity in the face of a glut, overcapacity and sharp drop in capacity utilization? Should we expect capicity utilization to approach pre-recession levels before we start to see an increase in investment? Do you think this data suggests possible reasons for lack of investment? Stock buyback?

http://www.ita.doc.gov/competitiveness/mbu/120106/mprcu_d.asp

http://www.ita.doc.gov/competitiveness/mbu/120106/mprcu2_graph.asp

[bakho]

Better Data link

Better Graph link

[James Killus]

I can think of a few more reasons why there might not be an investment boom.

When the most profitable "investments" are in lobbyists who pay congressmen, I'm sorry, I mean contribute to congressional campaign funds, in exchange for laws that either game the market or simply reward them with no-bid contracts paid for by money borrowed from China or skimmed off the Social Security Trust Fund, why would one bother to spend on such risky things as new plants or corporate infrastructure?

Then, when the whole purpose of the enterprise is to leave the general population with less money to spend, (and how many corporate executives believe, like so many other Americans, that Social Security will soon ruin dry?) why would one wish to invest in new plant? Who will buy the goods and services once the lower and middle classes have been stripped bare? Whether this will actually happen is another question; the important point is, are the decision makers planning for the corporate future or just trying to take the money and run?

[ig]

Wayne Jett,
"The Bush cuts in marginal tax rates of May 2003 had barely begun producing net job growth in April 2004 when the Fed let it be known it would be raising the funds rate target. Every such funds rate hike raises the cost of credit for small business (and consumers) by a commensurate amount."

Then why let the section 179 acceleration or bonus expire? If it were truely the Bush administrations intention to spur Capx, wouldnt this be the program to do it?

[kharris]

The BusinessWeek piece argues that foreign investment accounts for the weakness of domestic investment. That assertion only makes sense if the combination of the two is roughly in line with historic norms, relative to profits. If foreign investment is through the roof in terms of y/y change, but is small relative to the level of domestic investment, then claiming that businesses are investing lots is probably wrong. They are investing less than normal, even though investing lots overseas.

This is a question of numbers, rather than of Mandel-style anecdotes. Anybody have the numbers?

[anne]

KHarris as usual adds well. The solution is not that international investment is replacing domestic investment, as Joseph Stiglitz noticed years ago this was not and has not been the case even for energy companies which international oil executives have noted. I have followed the matter closely and international investment has never struck me as the problem.

[robertdfeinman]

The thing that started this ball rolling was the column by Floyd Norris in last week's NY Times. Krugman referred to this in passing.

Norris's point was that IBM was borrowing money to finance a stock buyback. This behavior is not unique. So leaving all the high flying ideas aside the facts on the ground are that firms are buying back their stock. Whatever the extent of this and whether it is from borrowed funds or retained earnings it is a diversion from real capital investment.

To my mind there is never a case where such behavior is justified. If you have more earnings than the firm can invest the proper action is to issue it as a dividend. This rewards stockholders. Buybacks reward those who are ex-stockholders, which increasingly are the (former) CEO's of these firms.

One a share has be issued what happens to it should be of no interest to the firm. Whether it goes up or down can only be of importance if a further share issuance is contemplated. So share buybacks are trading real money for useless pieces of paper.

What it all means is that firms are being run to promote financial manipulation, not to maximize the future returns for the current owners. But you knew that...

[anne]

http://select.nytimes.com/2007/04/27/business/27norris.html

April 27, 2007

Why Won't Companies Invest More?
By FLOYD NORRIS

To the Federal Reserve, it is puzzling that business investment is not stronger. To business executives, it is only natural. They see relatively few opportunities for investment, and ample reason to send cash to shareholders.

In a speech to a conference at the Levy Economics Institute of Bard College last week, Frederic S. Mishkin, a Fed governor, pointed to the housing slowdown as one reason for worry. But then he added that the low level of business investment was the "second major area of concern," one that "perhaps could pose noticeable downside risks."

He speculated that businesses might be less optimistic about the economy than the Fed was, and voiced hope that investment would pick up as the economy continued to do fine and companies realized their pessimism was unwarranted.

Perhaps so, but the reality is that companies are quite happy spending their profits — and in many cases, much more — on buying back their stock.

I.B.M. shares spurted up this week on the news that it was planning to increase its already substantial spending on repurchases, and in addition, would raise its dividend.

The dividend is nice, but at the new quarterly rate of 40 cents a share, it amounts to something like 1.6 percent of the stock price. But if the company spends all the $15 billion it set aside for share repurchases over the next year, it will retire about 10 percent of its shares.

Most of the money I.B.M. spends on stock will be borrowed, a fact that reflects the friendliness of debt markets, which are quite willing to lend money at low rates to companies with far lower-quality debt than I.B.M. Its Triple-A days are long past, but it still is a high Single-A credit.

"We see an opportunity here, because of the strength of the business," I.B.M.'s treasurer, Jesse J. Greene, told me. He figures that having gotten out of personal computers, the company's cash flows are more stable and it can easily carry more debt.

I.B.M.'s planned repurchases are extraordinary, at about twice the going rate for big companies. Howard Silverblatt, the senior index analyst at Standard & Poor's, estimates the payout ratio of companies in the S.& P. 500 — adding together dividends and buybacks — is now 5.3 percent....

[Lafayette]

Have we all forgot the investments provoke a return, or they are not made?

If companies are "investing abroad", it is because the returns are higher than in the US. When domestic markets strengthen US and foreign companies will start investing at home. It's that simple.

Investments follow market strengths, not vice-versa. It is senseless to invest in American operations when they are already sufficient to meet present demand.

America is bogged in the morass of Iraq - both morally and financially. Once that war winds down, then the economy will free itself to expand. There is a pernicious psychological response to Iraq, always in the nightly news with casualty figures, that keeps Americans from spending as they would otherwise.

It is difficult to imagine that Americans can blithely "shop till the drop" with that war behaving like a monkey on their backs.

Patience, everyone, patience. We voted lead-head into the WH, so let's assume the consequences of our choice.

Next time, think! before you vote.

[anne]

John Bogle, for whom I have complete respect and admiration, has suggested an answer to the relative decline in domestic corporate investment lies both in the increasing separation of ownership and management and the emphasis by institutional ownership on near term returns. Institutional ownership has shortened time frames progressively for 25 years. The turnover by managers of mutual fund shares is about 100%. Warren Buffett and David Swensen agree.

[Laurent GUERBY]

Lafayette, thanks but that's only for the stockholder side.

Any idea of the tax treatment of buybacks for corporations?

[anne]

http://krugman.page.nytimes.com/b/a/258224.htm

April 30, 2007

Their Profits and Ours Don't Add Up

Steve A., New York: What do you see as the impact of global capital flows on U.S. investment? While U.S. companies are booking record profits, how much of their investment is being made in the U.S. vs. overseas? If our fiscal policies benefit U.S. corporations and wealthy U.S. investors who increasingly choose to invest their profits in other countries rather than at home, what will that mean for U.S. economic growth?

Paul Krugman: A number of people have asked me this question. The short answer is that diversion of investment abroad doesn't seem to be the big story. Overall, money actually flowed into the United States last year, on a massive scale, although a lot of that was the Chinese government buying bonds. In terms of "direct foreign investment", basically investment by corporations, $249 billion went out, but $183 billion came in, so the overall effect was only about $85 billion. I know, $85 billion here, $85 billion there, and soon you're talking about real money, but it wasn't the main factor in low investment.

[anne]

Paul Krugman also makes a point I have made several times, there is a general shortage of investment funds internationally other than for housing. Economists who seem especially aware of this are Chinese, and I have often argued that China needs to be a model in infrastructure investment and to an extent it is so but not nearly enough so. Even India, growing so strongly, shows up relatively poorly in infrastructure investment, while Mexico is sadly lagging.

[anne]

Infrastructure investment in China continually reminds me of investment in America from, say, 1865 to 1910. And, remember as well the infrastructure development legacy from the New Deal. When I refer to such development, I am thinking much of soft as well as hard development or education investment as well as railroads to highways.

[anne]

http://select.nytimes.com/2007/04/24/opinion/24kristof.html

April 24, 2007

In Its Match With China, India Penalizes Its Own Team
By NICHOLAS D. KRISTOF

KHAWASPUR, India

India is stirring after many centuries of torpor, and it has a chance of ending this century as the capital of the world, the most important nation on earth. You see up-and-coming cities like Hyderabad or Ahmedabad, and it's easy to believe that India will eventually surpass China.

But here in rural Bihar state in northern India, there's no economic miracle to be seen. And it's difficult to see how India can emerge on top unless it takes advantage of its greatest untapped resource: its rural population.

The village of Khawaspur has no electricity. It has a school with 600 students, but — as is common in Indian state schools — many teachers show up only rarely. "We go to school, but the teachers don't," explained Doli, a second-grade girl.

On a typical day there will be just one or two teachers in the whole school, and the students learn next to nothing. "You have to bribe your way to be a teacher there," explained Yogender Singh, who tutors children for payment.

No child I met in Khawaspur had ever been vaccinated for anything. And the local government hospital exists only in theory.

"There is a hospital," said a villager named Muhammad Shaukat. "But there's not even a door or a window. Forget about a doctor."

That's a common problem: the government pays for schools, clinics or vaccinations, but someone pockets the money and no education or health care materializes.

In a village in Gujarat that I visited on this trip, all the children were out of school because the teachers had decided to take a monthlong vacation. One sixth-grade student, Ramila, could not write her name, not even in Gujarati.

Another sixth grader, Janah, said that when it came time for exams, the teachers wrote the answers on the blackboard for students to copy so the exam results wouldn't embarrass the school.

Then there's the toll of malnutrition. India has more malnourished children than any country in the world and one of the highest rates of malnutrition, 30 to 47 percent, depending on who does the estimating....

[anne]

http://krugman.page.nytimes.com/b/a/258224.htm

April 30, 2007

Their Profits and Ours Don't Add Up

Tom Fennell, Omaha, Neb.: The column on low-profit investment failed to address what would seem to a layman like me to be a primary cause. One critical question remained unclear in the article. Are we talking about low investment in the U.S. economy, or low corporate investment by U.S. corporations? If the matter is low investment in the U.S. economy, the first explanation that comes to my mind is that profits are being invested abroad. If we are talking about low global investment by U.S. companies that is a different matter.

Still, in the end the effect may be the same. Shareholders stock is bought back and prices rise, causing an increase in wealth. Ever wealthier beneficiaries of capital gains have a greater portion of their funds available as risk capital, first and foremost investments in emerging markets. Net result: transfer of profits to emerging markets.

Your analysis of these ideas would be greatly appreciated.

Paul Krugman: OK, I answered this pretty much in an earlier reply. Adding in the overseas investment wouldn't change things that much, because foreign companies investing in the US almost make up for U.S. companies investing abroad. Worldwide, there seems to be a general shortage of investment other than in housing.

[anne]

Play now with some numbers, we invest about $85 billion a year more internationally than is, in turn, being invested here from abroad. But, even if we consider this an $85 billion investment deficit, the deficit is made up easily in infrastructure investment and is easily affordable knowing that we are spending more than $15 billion a month on Iraq. What then is stopping us from adding to domestic investment beyond the corporate?

[im1dc]

As has been pointed out by "Happyjugglar0" USA's Corporations are investing investing overseas, not in the USA.

Krugman's Editorial took off from here: "Edward Lazear, the Bush administration's top economist, explained that what's good for corporations is good for America. "Profits," he declared, "provide the incentive for physical capital investment, and physical capital growth contributes to productivity growth. Thus profits are important not only for investors but also for the workers who benefit from the growth in productivity" and "Unfortunately, these days none of what Mr. Lazear said seems to be true. In the Bush years high profits haven't led to high investment, and rising productivity hasn't led to rising wages" therefore PK's remarks were intended to be viewed in the context that US workers are benefiting minimally from the Economic Policy's of GW Bush and the Republican Congress and Senate of 2001 to 2006 as represented by CEA's Lazear, while the Stockholders, CEO's and other corporate insiders with large stock holdings and or incentives were and are benefiting the most from these policies.

It's the old 80/20 rule, herein everyone shares in the distribution of the benefit/reward/money but distribution is lopsided (fat tail distribution anomaly) 80% receive and share 20% of the benefits while 20% receive and share 80% of the benefits.

I am surprised Paul Krugman did not ask the obvious next question: Why should US Federal Economic and Tax Policies skew the benefits to the richest few and exclude the majority in our Democratic Republican Capitalist society?

Where in the US Constitution is it written that the wealthiest don't have to pay their proportional share for government?

Is there a societal benefit in the rich getting richer while the poor get poorer and average workers have stagnant incomes from work?

Is this evidence of the rich having secured political influence to ensure tax code preferences and assorted financial distribution preferences favorable to them, i.e., they are not required to pay their fair peoportional share while simultaneously shifting their shares unpaid costs of society (eg., Iraq war) to the average tax payer in America?

[anne]

No; as Paul Krugman repeatedly explains and as Joseph Stiglitz has explained, American corporations are not investment disproportionately abroad. They just aren't, really really really not.

[anne]

American corporations are not "investing" disproportionately abroad.... Sorry, but I wll really learn to proof read eventually.

[paine]

why no domestic plant and equipment boom.....

well krugs buy back hole in the recycling of profits
into tangible purchases on product markets
seems like a fun idea
to humean trogs
that would
mean by measuring some spooky monetary base
or other
we should find
" velocity" taking a tail spin
since its measured against product markets only

think that one thru rrangers

btw

b wilder is right on the bull's eye
here

capital export is enhanced by an over valued currency

apply where appropriate

[anne]

No; this is not a case of using a highly valued dollar to buy cheaply into international development. This is not a currency valuation problem and has not been as the dollar has been stronger and weaker with no significant changes in investment flows. Also, we are well invested in from abroad.

[bakho]

If GM Ford and Chrysler are cutting production by 25+ percent, then are they investing in new production? Toyota is picking up slack by a combo of Japanese production and funding a Subaru line that was under capacity. Is domestic steel "overcapcity" and in need of investment? Refineries are near capacity, but are only one conservation fad away from overcapacity. Housing is now at or over capacity. Computer tech uses technology advances to produce more capacity with the same resources. Other than corn for ethanol production, where are we near capacity in production that would attract investment? If there is overcapacity, there is little reason to make great improvements in productivity and no reason to hire workers and raise wages.

[bakho]

One of the reasons why we are meeting demand has to do with wealth distribution. How much money can Bill Gates reasonably spend? If the gains are going to the top incomes and the middle and lower class are stagnant, then demand WILL erode. People are "doing without" services because they are unaffordable. This is a situation where poor distribution of wealth becomes an economic impediment.

The current economy is dominated by "structural issues" that don't fit nicely into monetary policy models. Krugman identifies "guilded age" as a problem. However, Krugman is not incorporating the wealth distribution problem into current economic models, so his critique is not being taken seriously.

[calmo]

I agree bakho that Krugman doesn't dwell on the wealth distribution problem in this piece but it is part of his economic picture...(like arguing that you haven't included dwindling MEW into your comment to detail the nature of that wealth distribution).
If there is overcapacity, there is little reason to make great improvements in productivity and no reason to hire workers and raise wages. As noted above (James, kh, paine, ) there is an export economy that has been attracting transnationals for quite a while.
Laurent G, I wonder if promise of a continuation with the repatriotization of foreign earned income at <6% vs the domestic rate of ~35% weighs in on your question about tax treatments.

[Lafayette]

bakho: If there is overcapacity, there is little reason to make great improvements in productivity and no reason to hire workers and raise wages.

First of all, we are no where near capacity (of 100%) or even near 90% in terms of production capacity in the US – but 81.4% (Federal Reserve; April 2007 release ), with a year-on-year increase of 2.3%.

Secondly, when production approaches 90/95% companies reopen unused capacity to meet demand. When that occurs, they typically invest in new production (new plant, or productivity improvement of older plants) with a considerable delay before the additional capacity comes on-line. So, we are seeing industrial expansion without a meaningful increase in employment.

What we have do have more than enough of are posters who do not understand some base principles of industrial production – yes, there, we have over-capacity on this forum.

[Icarus]

The wealthy in the US already pay a significant proportion of the tax bill. The stats I've seen estimate that the top 20% pay close to 80% of the total income tax bill, and the top 10% pay close to half. So, in essence, the wealthy are paying their proverbial "fair share". What leftists want, or expect, is further income re-distribution, which, in the long run is very bad for the economy. It kills incentive in many, many ways.

Also, the reason for wage stagnation for the bulk of US workers isn't exactly related to profits accrued by the coporate elite. Wages still reflect a supply/demand logic, and always will, especially in the age of offshoring.
A person's wage is simply an estimate of the cost of replacing them. That's it. There's no inherent value of a person's labor. If we can replace that person for one penny less per hour, then, the wage will gravitate downwards. If we can't replace them for one penny more an hour, the wage will gravitate upwards. Simple, elegant, and value neutral.
The reason most US workers have seen their wages stagnate, or decrease, is simply because the services they offer are easily replaceable. Is that so hard to believe? In fact, the opposite is harder to fathom...that a high school dropout somehow has a 'right' to a job which allows for enough funds to raise a family, especially if that entails 2-3 children, a home, and two cars.
That's just not the world we now live in, and I for one would not want to re-enter such a costly world. The wage for a high school drop out should be roughly the cost of its replacement. In US terms, 10 to 15 bucks an hour. And that's generous. If someone wants to earn more, they have to provide more valuble wage labor, which means train, further educate, or enter a field with greater demand. But, to pay menial labor middle class wages is ridiculous.
The net benefit is in the product costs we experience. The costs for food, electronics, and other items come further down, and are technically affordable by a larger cross section of the population.

At any given wage rate, people compete to offer their labor. For $15/hour, I can hire a person with a masters degree in the sciences overseas. I work in off-shoring, so I'm quite familiar with the pricing of resources.
For that rate, I get a inferior product/person in the US. There's no reason to keep that job here, if it is tradable, which, it often can be.

The corporate elite are not hoarding profits...they're earning them. That's the unfortunate reality for the quasi-educated masses in the US. If they want to partake in the feast, they need to earn their way in, and not whine/complain, and attempt to get politicians to subsidize their lives with some form of governmental handout. It won't work, and, it will further incentivize offshoring.
The key step is to instill a culture of education and growth. The 'middle class' american better learn to compete, in terms of skills and knowledge with their global competitors.

There's a kid in India right now, waking up at 5am, to attend a small tutoring class in math, before school. He/She walks there, then attends school, does homework, and sleeps at 9pm, to wake at 4am the next day. And, this child's parents earn around $500 per month. That's drive, that's motivation. They will eventually become an employee of a MNC one day, and lift their next generation out of lower middle class life ($500/month is lower middle class in India).

The equivalent child here is skateboarding with his friends at the local 7-11, watching 5 hours of TV per day, and possibly impregnating the locals. Then, half of them are dropping out of high school, blaming the system, and living a life of menial labor. We shouldn't help subsidize these lives...we should embrace a system which doesn't reward such slack.

[anne]

Quite a sickening comment you make; no surprise though as your sickening comments go.

[anne]

So we understand what the fierce sad problems of development can be:

http://select.nytimes.com/2007/04/24/opinion/24kristof.html

April 24, 2007

In Its Match With China, India Penalizes Its Own Team
By NICHOLAS D. KRISTOF

KHAWASPUR, India

India is stirring after many centuries of torpor, and it has a chance of ending this century as the capital of the world, the most important nation on earth. You see up-and-coming cities like Hyderabad or Ahmedabad, and it's easy to believe that India will eventually surpass China.

But here in rural Bihar state in northern India, there's no economic miracle to be seen. And it's difficult to see how India can emerge on top unless it takes advantage of its greatest untapped resource: its rural population.

The village of Khawaspur has no electricity. It has a school with 600 students, but — as is common in Indian state schools — many teachers show up only rarely. "We go to school, but the teachers don't," explained Doli, a second-grade girl.

On a typical day there will be just one or two teachers in the whole school, and the students learn next to nothing. "You have to bribe your way to be a teacher there," explained Yogender Singh, who tutors children for payment.

No child I met in Khawaspur had ever been vaccinated for anything. And the local government hospital exists only in theory.

"There is a hospital," said a villager named Muhammad Shaukat. "But there's not even a door or a window. Forget about a doctor."

That's a common problem: the government pays for schools, clinics or vaccinations, but someone pockets the money and no education or health care materializes.

In a village in Gujarat that I visited on this trip, all the children were out of school because the teachers had decided to take a monthlong vacation. One sixth-grade student, Ramila, could not write her name, not even in Gujarati.

Another sixth grader, Janah, said that when it came time for exams, the teachers wrote the answers on the blackboard for students to copy so the exam results wouldn't embarrass the school.

Then there's the toll of malnutrition. India has more malnourished children than any country in the world and one of the highest rates of malnutrition, 30 to 47 percent, depending on who does the estimating....

[Lafayette]

Ic: What leftists want, or expect, is further income re-distribution, which, in the long run is very bad for the economy. It kills incentive in many, many ways.
.

Nice as pet theories go. Bunk as regards social fairness.

Taxes are far higher in Europe on individual income and even, yes!, on wealth. Yes, yes, yes - in some European countries, once you've paid income tax then they slap you with ... a wealth tax!

Oh, the poor rich of Europe, what an excruciated lot. Maybe that is the reason most of the yachts quayside in St. Tropez are flying American flags? You betcha!

Of course, there are other reasons for taxing the rich. As Dillinger once said, when asked why he robbed banks, "Hell, that's where the money is!" Not good enough for you, this reason?

Ok, then try this: Do you know any rich man who made his money all alone on an island? I don't. Richness is a comparative attribute. You need a market economy to generate it and a society to enjoy it. ("Look what I've got! You poor slobs ...") Richness is an exercise in self-adulation.

It is therefore natural for those who have benefited most to pay more than those who have benefited least. No, income equity is not your "thing" either? You don't "do" fairness? Lots of streets are named after you: One Way.

How about the simple fact that the accumulation of riches beyond a certain point, one allowing comfort and ease and no worry for the future, riches are totally meaningless? All those zeros on your net worth estimate are there for what? To show your "score" to the rest of the guys? Get a life.

Either that or go live on an island. Some people are not even fit to be social beings.

[Icarus]

The Island analogy is unnecessary, and silly. Wealth creation is a benefit to any society it occurs in. And, the incentive to create wealth is the key to technological growth.

And, the wealthy already pay their disproportionate share...virtually all the income tax collected is paid by the top half of society, and the share only grows as we move up towards the top 1%. I'm sure most think this is "fair", and yet, they want to further tax and spend, tax and spend, tax and spend. How can we then blame the wealthy for their offshore havens...places like Jersey and the Caymans exist because of the fear of redistribution.

The island you speak of is one in which everyone shares? Is that the ideal? That those who don't contribute are given all requirements to live? Wow, I'd love such a place...could I sit at home and do nothing, under-educate myself, and expect a handout from those who have created and earned? Is this the fairness you speak of?

You may want to concentrate less on hating the wealthy, and instead re-calibrating the behavior of the poor to better take advantage of the society they live in.

Capitalism requires any organization, whether an individual, or a corporation, to forego current consumption, in the name of investment for future gain. It's a continuous process, and will be the only path towards a developed state. For an individual, it comes down to basic concepts of intellectual and social capital, which have to be developed. Learning algebra instead of playing video games is a reduction in current utility, in the hope for future gain. It is the law of the educational jungle. Those who don't heed it will be precisely those complaining of the concentration of wealth. They'd be better served if the Left actually instill an attitude of work and effort, as opposed to resentment.

Ironically, all the offshore havens are precisely the islands you speak of...hmmm...may indeed be better to live there, away from the redistributive rhetoric of those who can't adapt to the most productive system ever attained by our species.

[Icarus]

Anne...as for my "sickening" comments, sure, it may make you ill to hear an opinion beyond pity and class hatred. Of course, our great models for equality and social redistribution seem to have gone down a path of autarchy and violence, which, I guess, didn't make you so sick.

[anne]

Rubbish, as always.

[Icarus]

By Rubbish, are you referring to your pre-1991 logic? Or, is there more to your trotskyite ways?

[bakho]

Lafayette- Bad link

Why are companies buying back stock? A shortage of investment opportunities? It should come as no surprise that Bush tax cuts for investors had little economic stimulus. After the recession there was capacity utilization dropped substantially. Capacity utilization is only recently returning to pre-recession levels.

[anne]

Actually, the question as to use of corporate resources is readily answered. There is a separation of management and ownership and much of the active ownership of corporation is high turnover, short term owndership institutional ownership. So, the profitability for management has increasingly been in financial "investment." That has been the point of Warren Buffett, Charles Munger, David Swensen and John Bogle for many years and Joseph Stiglitz more recently.

Look to the investment patterns of Berkshire Hathaway, then look even to an Exxon which is astonishingly profitable but has lobbied incessantly for investment subsidies thorugh an extended period of astonishing profits.

[anne]

The profits in direct investment are there for American corporation, both in America and internationally, but financial investment is an increasing priority and there is always lobbying for investment incentives as the energy industry has been so successful in gaining. So, "investors" as I described here early on have had the advantage of owning energy companies that are asto9nishingly profitable because of high energy prices, financial "investment" and investment subsidies these last years. Nice.

[anne]

"Why are companies buying back stock?"

Because of the structure and incentives in investment markets.

"A shortage of investment opportunities?"

Absolutely not.

[anne]

Also, keep in mind that the current international bull market in stocks is the broadest and deepest I can find record of, as I have been noting for some while. And, importantly, the returns have been excellent the more conservative the investor.

[Lafayette]

bakho: Lafayette- Bad link

Thanks for noting it. It worked on the preview version, but not on the posted version.

As I've said before, html tagging is a real hassle. You'd think that they would have thought up an easier way to employ them. It ain't rocket science.

[reason]

I think some of you (perhaps including Bakho) misinterpreted or forgot something important he said. Distribution of wealth is not in the economic models. Very astute.

In macro economics there is an obsession with aggregates. Aggregates hide a lot.

[Lafayette]

reason: Distribution of wealth is not in the economic models. Very astute.

Why should it be part of any "model". Of what?

You make it seem like it was "repressed information". ; ^ ) Please explain.

(I am sure you know of the Pickety studies, so it can't be that an analysis has never been done.)

[reason]

Lafayette...
repressed no, forgotten yes. Models are always abstractions, simplifications. One of the simplifications commonly made in aggegate is to ignore distribution effects. As Bakho says, because distribution effects are not in the models being used by macro-economists the effect of changes in distribution are neither captured nor predicted.

Yet another reason why I am in favour of a move to proper object oriented simulation models and away from linear regression models.

[Lafayette]

reason: Yet another reason why I am in favour of a move to proper object oriented simulation models and away from linear regression models.

Say no more ... I wish you good hunting.

I gave up on models a long, long time ago. But, I am pleased to see that there are still believers.