…in the late 1990s and early 2000s…. The exceptional pace of productivity growth has disappeared, returning to roughly its pre-1995 pace…. The important factor after 2003 is slower growth in innovation…. Fernald (2014a)… finds that the slowdown was in sectors that produce IT or use IT intensively….One slice of the data focuses on the “bubble” industries of the mid-2000s, that is, construction, real estate, finance, and natural resource[s]…. The contribution of bubble industries to overall TFP fell–becoming more negative–between the 2000–04 and 2004–07 periods. But the contribution of the remaining three-quarters of the economy fell even more…. The non-bubble industries are divided into three mutually exclusive groups: IT producers, intensive IT-users, and other industries that do not use IT intensively…. The TFP slowdown is concentrated in industries that produce IT or that use IT intensively…. Three out of the past four decades have seen business-sector productivity growth near 1½%. We could well see future growth in that range. Of course, such a forecast would completely discount the fast growth of 1995 to 2003…. Pessimists argue that IT is less important than great innovations of the past that dramatically boosted productivity, such as electricity or the internal combustion engine. Optimists point to the possibilities offered by robots and machine learning…
Category: Equitablog
Afternoon Must-Read: AFP: ‘Mega-Drought’ Risk in 21st-Century Western U.S.
Increasingly, not just prairie agriculture but California agriculture looks like toast. Phoenix and Las Vegas look uninhabitable because of an unsolvable water problem. And when prairie agriculture goes and we shift away from carbon energy, there will be no reason to live between the Mississippi and the Rocky Mountain Front Range…
…has been experiencing a drought for about 11 of the past 14 years…. ‘I was honestly surprised at just how dry the future is likely to be,’ said co-author Toby Ault…. ‘We are the first to do this kind of quantitative comparison between the projections and the distant past, and the story is a bit bleak,’ said Jason Smerdon…. ‘Even when selecting for the worst mega-drought-dominated period, the 21st century projections make the mega-droughts seem like quaint walks through the Garden of Eden.’… Researchers applied 17 different climate models to analyze the future impact of rising temperatures on regions from Mexico to the United States and Canada…. ‘The results… are extremely unfavorable for the continuation of agricultural and water resource management as they are currently practiced in the Great Plains and southwestern United States,’ said David Stahle… who was not involved in the study…
Weekend reading
This is a weekly post we publish on Fridays with links to articles we think anyone interested in equitable growth should read. We won’t be the first to share these articles, but we hope by taking a look back at the whole week we can put them in context.
Dietz Vollrath asks if the U.S. economy is really below its potential. [growth economics]
Catherine Rampell argues that universal early-childhood education programs can “unlock the earning potential of families, two generations at a time.” [wash post]
Matt O’Brien says that inflation, more or less, is dead. [wonkblog]
Ryan Avent, drawing on research by Institute for Advanced Study economist Dani Rodrik, points out that developing economies can no longer count on manufacturing as a way to kickstart economic development. [the economist]
Izabella Kaminska on how Apple’s borrowing in Switzerland may be the herald of a very unequal economy. [ft alphavile]
Morning Must-Read: Matthew Buettgens et al.: Health Care Spending by Those Becoming Uninsured if the Supreme Court Finds for the Plaintiff in King v. Burwell
…if the court rules in favor of the plaintiff, including 6.3 million people losing tax credits for Marketplace coverage, 1.2 million people purchasing nongroup coverage without tax credits and 445,000 enrolled in Medicaid or the Children’s Health Insurance Program (CHIP), all of whom would become uninsured…. Under the current law, these 8.2 million people will spend an estimated $27.1 billion on health care in 2016, with $11.1 billion spent on hospital care, $4.5 billion for physician services, $5.3 billion for prescription drugs and $6.2 billion for other health care. If these people became uninsured, they would spend $5.3 billion on their own care; another $12.0 billion in uncompensated care for this population would be provided if governments continue to fund such care at historic rates and health care providers continue to make in-kind contributions to the uninsured at the same rates as they have in the past…. This significant decrease in expenditures and the rise in the demand for uncompensated care would adversely affect both the amount of health care received by those losing coverage and health care providers’ revenues. This is particularly true for hospitals because the ACA reduces Medicare and Medicaid disproportionate share hospital (DSH) payments, which are historical sources of funding for uncompensated hospital care…
Has David Autor Gotten Himself Hopelessly Confused with Respect to Average and Marginal Products?: Focus
Something has bothered me ever since I read the highly-eminent and highly-esteemed David Autor’s “Polanyi’s Paradox and the Shape of Employment Growth”:
(2014): Polanyi’s Paradox and the Shape of Employment Growth: “[The] human tasks that have proved most amenable to computerization…
…are those that follow explicit, codifiable procedures…. Tasks that have proved most vexing to automate are those that demand… skills that we understand only tacitly…. The interplay between machine and human comparative advantage allows computers to substitute for workers in performing routine, codifiable tasks while amplifying the comparative advantage of workers in supplying problem solving skills, adaptability, and creativity. Understanding this interplay is central to interpreting and forecasting the changing structure of employment in the U.S. and other industrialized countries….
As the price of computing power has fallen, computers have increasingly displaced workers in… middle-skilled cognitive and manual activities, such as bookkeeping, clerical work, and repetitive production…. But the scope for substitution is bounded…. There are many tasks that we understand tacitly and accomplish effortlessly for which we do not know the explicit “rules” or procedures… break an egg over the edge of a mixing bowl, identify a distinct species of birds based only on a fleeting glimpse, write a persuasive paragraph, or develop a hypothesis to explain a poorly understood phenomenon….
Let me interrupt to say that I would be serious money that soon computerized robots will be breaking eggs and identifying omelets, and scrutinizing satellite photographs to conduct bird censuses, so it seems to me that at least two of Autor’s four examples are badly-chosen from the viewpoint of a generation from now.
Autor continues:
At an economic level… tasks that cannot be substituted by computerization are generally complemented by it. This point is as fundamental as it is overlooked…. Productivity improvements in one set of tasks almost necessarily increase the economic value of the remaining tasks…. By historical standards, contemporary construction workers are akin to cyborgs. Augmented by cranes, excavators, arc welders, and pneumatic nail guns, the quantity of physical work that a skilled construction worker can accomplish in an eight-hour workday is staggering…. Construction workers have not been devalued by this substitution. Despite the array of capital equipment available, a construction site without construction workers produces nothing…. A worker wielding a single shovel can do a fairly limited amount of good or harm in an eight-hour day. A worker operating a front-end loader can accomplish far more. To a first approximation, automation has therefore complemented construction workers–and it has done so in part by substituting for a subset of their job tasks…
But I was always taught that factors of production were not complements if additional quantities of the one increased the average product of the other.
I was always taught that factors of production were complements if and only if additional quantities of the one increased the marginal product of the other.
If additional quantities of the one decreased the marginal product of the other than the factors were not complements but substitutes–even though the average product of the other factor went up.
Is anything Autor has said relevant to the effect of computerization on the marginal product of construction workers, or indeed of production workers, or wage- and salary-workers, or indeed of labor more generally? Why don’t graphs like this create a prima facie case for Autor and others that while labor (in the form of human brains serving as cybernetic control mechanisms for blue-collar machine-managing production and white-collar information-managing paper-shuffling tasks) was a complement to industrialization up until the coming of the Information Age, that now labor is not now a complement to computer-embodying machines but a substitute for them?
I mean: am I missing something very basic here?
The Four Must-Reads You Need to Understand Thomas Piketty and His “Capital in the Twenty-First Century”: Focus
Over at Equitable Growth: I have a new list of three articles that bring you up to speed on the current state of the process of assessing and assimilating Thomas Piketty’s Capital in the Twenty-First Century:
…between r and g is indeed one of the important forces that can explain historical magnitudes and variations in wealth inequality: in particular, it can explain why wealth inequality was so extreme and persistent in pretty much every society up until World War I…. That said, the way in which I perceive the relationship between r > g and wealth inequality is often not well-captured in the discussion that has surrounded my book–even in discussions by research economists…. For example, I do not view r > g as the only or even the primary tool for considering changes in income and wealth in the 20th century, or for forecasting the path of income and wealth inequality in the 21st century. Institutional changes and political shocks–which can be viewed as largely endogenous to the inequality and development process itself…. READ MOAR
My book is primarily about the history of the distribution of income and wealth…. My book is probably best described as an analytical historical narrative based upon this new body of evidence. In this way, I hope I can contribute to placing the study of distribution and of the long-run back at the center of economic thinking…. In this essay, I will take up several themes from my book that have perhaps become attenuated or garbled…. I stress the key role played in my book by the interaction between beliefs systems, institutions, and the dynamics of inequality…. I briefly describe my multidimensional approach to the history of capital and inequality…. I review the relationship and differing causes between wealth inequality and income inequality…. I turn to the specific role of r > g in the dynamics of wealth inequality…. I consider some of the scenarios that affect how r−g might evolve in the 21st century…. Finally, I seek to clarify what is distinctive in my historical and political economy approach to institutions and inequality dynamics, and the complementarity with other approaches…
…But what keeps r high? Piketty never explicitly says. This question is at the heart of… how to interpret his book…. The conventional liberal economist’s interpretation of Piketty’s work… stays inside orthodox growth theory…. [This] misunderstands capital by putting politics outside the production function, rather than inside it. The increasing elasticity of substitution between ‘capital’ and ‘labor’ may be as much determined by institutions and property rights as by technology…. The robot economy and the slave economy may both have higher elasticities of substitution than industrial capitalism….
Capital is a set of property rights entitling bearers to politically protected rights of control, exclusion, transfer, and derived cash flow…. The book… contains an excellent section on the gap between cash-flow rights and control rights in corporate governance, which suggests a capital demand schedule derived not just from firm optimization decisions, but from the distribution of power within the firm…. The collapse in the capital and top income shares after World War II (and other wars) came along with radical transformations of all kinds of economic institutions, with millions of dead, sui generis geopolitics, and a host of newly mobilized popular forces…. Piketty oscillates between paying homage to fundamental forces of technology, tastes, and supply and demand, and then backtracking to say that politics and institutions are important…
…predicts a rise in capital’s share of income and the gap r-g between capital returns and growth. In this note, I argue that neither outcome is likely given realistically diminishing returns to capital accumulation. Instead–all else equal–more capital will erode the economy-wide return on capital.
When converted from gross to net terms, standard empirical estimates of the elasticity of substitution between capital and labor are well below those assumed in Capital. Piketty (2014)’s inference of a high elasticity from time series is unsound, assuming a constant real price of capital despite the dominant role of rising prices in pushing up the capital/income ratio. Recent trends in both capital wealth and income are driven almost entirely by housing, with underlying mechanisms quite different from those emphasized in Capital.
…The really dramatic issue: the tendency for the very top incomes–the “1 percent”–to pull away from the rest… forty-year trend common to the advanced economies of the United States, Europe, and Japan…. I will call it the “rich-get-richer dynamic.” The mechanism is a little more complicated than Piketty’s book lets on… [but] you get the picture: modern capitalism is an unequal society, and the rich-get-richer dynamic strongly suggest that it will get more so. But there is one more loose end to tie up… the advent of very high wage incomes…. Piketty… attributes this to the rise of what he calls “supermanagers”… top executives… financial services…. Another possibility, tempting but still rather vague, is that top management compensation… [is] a sort of adjunct to capital…. The class of supermanagers belongs socially and politically with the rentiers, not with the larger body of salaried and independent professionals and middle managers…
Are these the right four articles? Are there others that should rank with them?
As for me, I still think what I thought ten months ago:
Over at the Washington Center for Equitable Growth: Piketty Day Here at Berkeley: The Honest Broker for the Week of April 26, 2014 (Brad DeLong’s Grasping Reality…): There are a bunch of people making nonserious complaints:
- That Piketty goes too far in coquetting with some of the modes of expression of Karl Marx.
- That Piketty’s arguments lead to political conclusions regarding the desirability of more progressive income and wealth taxation that they do not like.
- That Piketty’s arguments lead the political conclusions regarding the desirability of more progressive income and wealth taxation that those who write their paychecks do not like.
- That Piketty’s analysis indicates that the dirty hippies of the Occupy Movement were right after all, and that is intolerable….
[But] what do we think of the (serious) critiques of pieces of the argument?”
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((That Piketty tacks back-and-forth between a market value and a physical quantity conception of capital:** Yes. He does. He shouldn’t. It is a potential source of confusion–and it has, I think, confused some readers. But this seems to me to be a very minor criticism: recognize that he is talking about the market value of wealth understood as capitalized claims on incomes from whatever source–land, location, buildings, machines, organizations, production processes, intellectual-property rights, protected monopolies, and so on–and things become clearer and the argument, I think, becomes stronger.
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That Piketty speaks of ‘tendencies’ that can be counteracted when he ought to be doing comparative statics on the steady-state growth path: This is what I think. This is what my model of what Piketty is doing that I summarized here does. But, once again, not a biggie.
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That Piketty has no real theory of what determines the rate of profit, and so doesn’t have a real theory of wages either: This is what led to Matt Rognlie’s complaints and his claims that Piketty ought to be saying that the processes of wealth accumulation he identifies (a) reduce the salience of the rich–that although they own more wealth relative to a year’s national income they receive a smaller share of national income–and (b) amplify the real incomes of the not-rich and (c) lead not to less but more income inequality.
This criticism is, I think, in large part a consequence of criticism (1): if you have a physical-factor-of-production definition of ‘capital’ in the forefront of your mind, it is a very natural criticism to make. Piketty seems to need an additional argument here: that control over wealth shapes politics, and that politics will make sure that the rate of profit does not fall too far–that wealth is not allowed to compete with itself and so lower the rate of return and boost wages substantially as the process of wealth accumulation continues. It seems to me that Piketty has a good case here. But I think he needs to make it.
If he were to make it, what would he say? Suresh Naidu, I think, lays out the issues rather well. He speaks of the ‘”domesticated” version of [Piketty’s] argument… a story about technology and the world market making capital and labor more and more substitutable over time, and this is why r does not fall very much as wealth accumulates…. This is story that is told to academic economists, and it is plausible, at least on the surface…’ The problem for Piketty is that it is only plausible. There are the Matt Rognlie’s who believe that capital and labor are not (yet) that substitutable (if they ever will be), and consequently that capital accumulation raises the bargaining power of labor by enough to guarantee rapidly-rising real wages and probably a rising labor share and thus a decreased salience of capital ownership in income if not in wealth. They look forward to at least a partial euthanasia of the rentier, and see the process of accumulation that Piketty describes as an equalizing rather than an unequalizing process. Thus, I think, the ‘domesticated’ version of Piketty–the one that speaks of wealth-as-productive capital, and of the return to wealth as the marginal physical product of that capital times the value of undifferentiated output, is relatively weak.
Suresh, however, does not believe in the ‘domesticated’ Piketty. He writes: ‘There is another story… that the rate of return on capital is set much more by institutions, norms and expectations than by supply and demand…. I think the production approach is less plausible… housing [with land] plays such a large role… [in the ‘domesticated’ version] average wages would have increased along with K/Y [if factors are paid marginal products]…. The (really great) sections from the book on corporate governance actually suggest something quite different… a gap between cash-flow rights and control rights…. This political dimension of capital, the difference between the valuation written down in the balance sheet and the real power to dispose of the asset, is something that the institutional view of capital can capture better than the marginal product view…’ And here we have passed out of neoclassical economics entirely. Factors of production are no longer paid their marginal products. Instead, wealth controls government. Government sets barriers to keep those kinds of property that the wealthy control safe from competition and earning their rents. The government is an executive committee for managing the affairs of the ruling class. And, as a bonus, the property rights system acts as a fetter on the process of economic development because it is tuned not toward equalizing private and social values but toward enriching the already-rich.
As Suresh points out, if you adopt the ‘domesticated’ version of Piketty, then, first of all, nothing can be done save for progressive taxation: ‘This is, I think, also a fruitful interpretation of what was at stake behind the old capital controversies…. If it is just a very high substitutability… labor market reforms are… off the table, as firms just replace workers with machines if you try to raise the wage…’ In the ‘domesticated’ version, the market is working: labor is low-paid because it is not very valuable and capital is high-paid because it is very useful indeed. Plus, I would add, the ‘domesticated’ version is subject to Matt Rognlie’s critique in a way that the wild version is not.
But by now we have arrived at the point that Piketty needs to write another book–a book about control rights and cash flow rights and the political economy of distribution and the state, a book that is (mostly) hidden behind Piketty’s assumption that r will not fall by much as W/Y rises… -
That Piketty’s argument that the rate of profit has a floor needs to be spelled out: this is essentially (3) in a different form: the argument that accumulation might lead to more wealth equality but less income inequality and much higher real wages is a serious and important one. Piketty does not believe it. But what I see as his failure to deal with it head-on and convincingly is the biggest hole in the book.
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That the true historical drivers of the process are not the rate of profit r and the growth rate of the economy g that Piketty speaks of, but rather (1) the economic destruction of the relative wealth of the old European aristocracy as its landed rents collapsed under the impact of competition from the new regions of European agricultural settlement in the New World; and then (2) the rise of urban landed wealth in the form of location as population growth and economic density have outran transportation technologies, and congestion has become a first-order economic cost: This is the economic historians’ critique. It is one I still have to think about. It is clearly right: one of the things that destroyed European aristocratic oligarchies’ wealth was New World agricultural competition that reduced valuation ratios, just as the landed wealth of the owners of Mayfair, Paris, and Manhattan is a substantial part of the runup in wealth. But is this a criticism of Piketty’s argument or just a mechanism through which it works? I am not sure…
Things to Read on the Evening of February 12, 2015
Must- and Shall-Reads:
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: Economist’s View: Erskine Bowles is Back: “Erskine Bowles writes a letter to the NY Times…. ‘Mr. Krugman’s assertion that America followed a course of austerity while the economy was still in a deep slump due to the influence of “Bowles-Simpsonism” ignores the fact that one of the key principles set out in the National Commission on Fiscal Responsibility and Reform report was that deficit reduction must not disrupt the fragile economic recovery. Indeed, it is largely due to the failure of our elected leaders to reach agreement on long-term deficit reduction along the lines of our recommendations that we ended up with the mindless austerity of sequestration….’ Does anyone remember Bowles or his associates objecting strenuously to the sequester, getting out in public forums and arguing it was a big mistake? Writing letters and op-eds to the NY Times, that sort of thing? I don’t…. I don’t see them calling for delay until the economy recovers, only for a different type of austerity, e.g. ‘simply waiving this sequester–or coming up with some agreement to spend partway between pre- and post-sequester levels–would represent a huge failure… send a message… that Washington is not serious….’ Many projections suggest that our major social insurance programs will face financial difficulties in the future…. At some point we may need to cut benefits. But why, exactly, is it crucial that we deal with the threat of future benefits cuts by locking in plans to cut future benefits [now]?…” -
(2008): The State of Macro: “The so-called new-Keynesian (or NK) model has emerged and become a workhorse.… The model starts from the RBC model without capital, and… introduces monopolistic competition in the goods market…. If the economy is going to have price setters, they better have some monopoly power. It then introduces discrete nominal price setting, using a formulation introduced by Calvo… which turns out to be the most analytically convenient…. [It] has largely replaced the IS-LM model as the basic model of fluctuations in graduate courses…. It reduces a complex reality to a few simple equations. Unlike the IS-LM model, it is formally rather than informally derived from optimization by firms and consumers…. The costs are that… the first two equations of the model are patently false.… The aggregate demand equation ignores the existence of investment, and relies on an intertemporal substitution effect… hard to detect in the data on consumers. The inflation equation implies a purely forward looking behavior of inflation, which again appears strongly at odds with the data…. One striking (and unpleasant) characteristic… is that there is no unemployment! Movements take place along a labor supply curve…. One has a sense… that this may give a misleading description of fluctuations, in positive terms, and, even more so, in normative terms…” -
: The Case Against the Case Against the Crusades: “The Crusades as an epoch-spanning phenomenon aren’t in and of themselves a great stain on Christian history: They’re a phenomenon in Christian history that includes many stains and sins and great crimes, but also involves many admirable figures and heroic moments, many great tragedies, and many individuals and incidents that simply resist any kind of manichaean reading. Contemporary Christians should reject and disavow the great crimes that some Crusaders committed as they should reject and disavow the un-Christian hatreds that motivated them. But we are under no obligation to reject and disavow the entire multi-century struggle with an armed and equally-militant foe as merely the manifestation of some irrational religious ‘phobia,’ let alone accede to analogies that cast an entire civilization’s worth of kings and theologians and soldiers as the moral equivalent of Osama Bin Laden…” -
: Historia Francorum qui Ceperunt Iherusalem: “Finally, our men took possession of the walls and towers and wonderful sights were to be seen. Some of our men (and this was more merciful) cut off the heads of their enemies; others shot them with arrows, so that they fell from the towers; others tortured them longer by casting them into the flames. Piles of heads, hands, and feet were to be seen in the streets of the city. It was necessary to pick one’s way over the bodies of men and horses. In the Temple of Solomon, men rode in blood up to their knees and bridle reins. Indeed, it was a just and splendid judgment of God that this place should be filled with the blood of the unbelievers, since it had suffered so long from their blasphemies. Some of the enemy took refuge in the Tower of David, and, petitioning Count Raymond for protection surrendered the Tower into his hands. How the pilgrims rejoiced and exulted and sang a new song to the Lord! On this day, the children of the apostles regained the city and fatherland for God and the fathers… -
: QE Truthers: “Not many people seem to know about an opinion piece by John Taylor and Paul Ryan… even more revealing about the GOP’s monetary madness…. It attacks not just QE2, which was about to commence, but QE1–the Fed’s intervention during the chaotic post-Lehman period…. “QE1 failed to strengthen the economy, which has remained in a high-unemployment, low-growth slump.” Also, when I stepped outside this morning, it was cold, so I put on a coat — but it didn’t work, because it was still cold. But the truly amazing thing is the conspiracy theorizing. The article is titled “Refocus The Fed On Price Stability Instead Of Bailing Out Fiscal Policy”, and the text matches that theme: ‘This looks an awful lot like an attempt to bail out fiscal policy, and such attempts call the Fed’s independence into question.’ So Ryan and Taylor were accusing the Bernanke Fed of deliberately betraying its mandate in order to help out Obama by monetizing deficits…. That’s one heck of a conspiracy theory…. The Fed… insist[ed] it was… defend[ing] price stability against… below-target inflation–a defense of its actions completely borne out by events. Furthermore… suppose that you believe that the Fed’s actions were staving off what would otherwise have been a fiscal crisis. That’s supposed to be a bad thing? Were Ryan and Taylor casting envious glances at the euro area, where the ECB’s failure to do its job as lender of last resort provoked a series of near-catastrophic speculative attacks until Mario Draghi stepped up to the plate?… Rand Paul by no means has a monopoly on monetary crazy, conspiracy theories very much included…”
Should Be Aware of:
- : The Sad Story of the Battery Breakthrough that Proved Too Good to Be True
- : “Desperate to find a mythical ‘reasonable conservative,’ the NY Times helps inflate a myth. Here’s the ugly reality…”
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(2013): Giving Secondary Earners a Tax Break: A Proposal to Help Low- and Middle-Income Families: “The tax and transfer system has an inherent secondary-earner penalty that discourages work efforts and reduces the return to work for a second earner within a married couple. When children are present, a spouse’s work efforts often brings associated child-care costs, making the return to work even lower…. A family headed by a primary earner making $25,000 a year will take home less than 30 percent of a spouse’s earnings. They propose a secondary-earner deduction for low- to moderate-income families…” -
: How Mortgage Fraud Made the Financial Crisis Worse: “”New academic research… deserves attention for providing evidence that the lending industry’s conduct during the housing boom often broke the law…. Atif Mian… and Amir Sufi of the University of Chicago focuses on a particular kind of fraud… overstating a borrower’s income in order to obtain a larger loan…. Oncomes reported on mortgage applications in ZIP codes with high rates of subprime lending increased much more quickly than incomes reported on tax returns in those same ZIP codes between 2002 and 2005…”
Why borrow money just to give it to shareholders?
Apple Inc. earlier this week issued a number of bonds in Switzerland, taking advantage of the extremely low Swiss interest rates, to raise approximately $1.35 billion. But why is Apple borrowing money? The company is famously sitting on a large pile of savings, roughly $178 billion in easy-to-access cash or near-cash holdings. Proportionally, its reserves are roughly equivalent to the sovereign wealth fund built up by Norway. With this much cash, why borrow money at all?
The immediate answer has to do with current state of corporate taxation, but the deeper answer may be due to a shift in the management priorities at public firms.
First, the issue of taxation. Apple’s cash horde is largely held outside the United States as the company has been part of the shift toward off-shoring profits. So if Apple wants to shift money back to the United States then it would have to pay tax on these profits. And the reason Apple would want to move money back to the United States is to give it to Apple shareholders in the form of stock buy backs and dividends, as Tomas Hirst points out.
So instead, Apple is taking on debt in the form of Swiss bonds to increase its returns to shareholders. You’d think that a company would only borrow to help meet costs in the short run or finance productive investment in the long run. Yet the company has decided that its priority is to increase payouts.
Apple isn’t alone. Economist J.W. Mason at John Jay College has noted this trend can be summed up as an effort to “disgorge the cash” by public firms. Indeed, the U.S. financial system seems to favor paying out profits to investors instead of increasing investment. In a yet-to-be-published working paper, Mason shows a strong relationship between corporate borrowing and payouts, but no real relationship between borrowing and investment.
Research by University of California, Berkeley economist Danny Yagan finds a similar result. Taxes on dividends were reduced in the United States as part of a larger package of tax cuts in 2003. The idea behind the dividend cut was that it would increase corporate investment. But Yagan finds that investment didn’t increase after the cut. Instead, shareholder payouts did.
The potential harm of this shift is that the growth in U.S. gross domestic product is suffering from a lack of investment. Firms reacting to incentives from the financial system—favoring the importance of short-term stock prices over long-term share appreciation via careful investment—may result in a general reduction in investment. Data show that the non-construction net investment share of GDP has been roughly constant since the 1970s even though the price of investment goods has declined over this time. Shouldn’t we expect firms to increase investment in light of declining prices?
Now, these shareholder payouts could just be because these large public companies have run out of valuable investment opportunities. But assuming that is true, then the firm could use the would-be investment funds for purposes other than paying shareholders. It could increase the wages and salaries of its workers. Or it could reduce the price of its goods to capture more market share.
So if Mason’s thesis is correct then the financial system is giving signals to companies that may not be in the best interest of the overall economy. Corporate governance and public capital markets seem to reward companies that favor payments to capital over productive investments. And given the concerns about the pace of long-run growth, this orientation could be a wasteful choice.
Evening Must-Read: Mark Thoma: Erskine Bowles is Back
Mr. Krugman’s assertion that America followed a course of austerity while the economy was still in a deep slump due to the influence of “Bowles-Simpsonism” ignores the fact that one of the key principles set out in the National Commission on Fiscal Responsibility and Reform report was that deficit reduction must not disrupt the fragile economic recovery. Indeed, it is largely due to the failure of our elected leaders to reach agreement on long-term deficit reduction along the lines of our recommendations that we ended up with the mindless austerity of sequestration….
Does anyone remember Bowles or his associates objecting strenuously to the sequester, getting out in public forums and arguing it was a big mistake? Writing letters and op-eds to the NY Times, that sort of thing? I don’t…. I don’t see them calling for delay until the economy recovers, only for a different type of austerity, e.g.:
simply waiving this sequester–or coming up with some agreement to spend partway between pre- and post-sequester levels–would represent a huge failure… send a message… that Washington is not serious….
Many projections suggest that our major social insurance programs will face financial difficulties in the future…. At some point we may need to cut benefits. But why, exactly, is it crucial that we deal with the threat of future benefits cuts by locking in plans to cut future benefits [now]?…
Evening Must-Read: Olivier Blanchard (2008): The State of Macro
…has emerged and become a workhorse.… The model starts from the RBC model without capital, and… introduces monopolistic competition in the goods market…. If the economy is going to have price setters, they better have some monopoly power. It then introduces discrete nominal price setting, using a formulation introduced by Calvo… which turns out to be the most analytically convenient…. [It] has largely replaced the IS-LM model as the basic model of fluctuations in graduate courses…. It reduces a complex reality to a few simple equations. Unlike the IS-LM model, it is formally rather than informally derived from optimization by firms and consumers…. The costs are that… the first two equations of the model are patently false.… The aggregate demand equation ignores the existence of investment, and relies on an intertemporal substitution effect… hard to detect in the data on consumers. The inflation equation implies a purely forward looking behavior of inflation, which again appears strongly at odds with the data…. One striking (and unpleasant) characteristic… is that there is no unemployment! Movements take place along a labor supply curve…. One has a sense… that this may give a misleading description of fluctuations, in positive terms, and, even more so, in normative terms…