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Friday, October 24, 2014

Market Power, 'the Profits-Investment Disconnect,' and the Mal-Distribution of Income

Maybe we'll finally start discussing something I've been writing about for years with little traction, how market power affects the distribution of income (the disconnect between income and the contribution to final product that occurs when market power exists):

The Profits-Investment Disconnect, by Paul Krugman: I caught a bit of CNBC in the locker room this morning, and they were talking about stock buybacks. Oddly — or maybe not that oddly, given my own experiences with the show — nobody brought up what I would have thought was the obvious question. Profits are very high, so why are companies concluding that they should return cash to stockholders rather than use it to expand their businesses?
After all, we normally think of high profits as a signal: a profitable business is one people should be trying to get into. But right now we see a combination of high profits and sluggish investment...
What’s going on? One possibility, I guess, is that business are holding back because Obama is looking at them funny. But more seriously, this kind of divergence — in which high profits don’t signal high returns to investment — is what you’d expect if a lot of those profits reflect monopoly power rather than returns on capital.
More on this in a while.

    Posted by on Friday, October 24, 2014 at 10:02 AM in Economics, Income Distribution, Market Failure | Permalink  Comments (51)


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