Share buybacks, our investment deficit, and bad tax ideas

July 13th, 2016 at 9:08 am

A quick note with more pictures than words.

–Investment, both private business investment and public investment (infrastructure), have been weak of late.

Source: BEA, CBPP

Source: BEA, CBPP

–In fact, as a share of GDP, business investment has consistently hit lower peaks over the last few business cycles.

Source: BEA

Source: BEA

–Yet we know corporate profitability is high and the cost of capital is rock-bottom cheap. If they’re not investing their retained earnings in future growth, what are firms doing with the money? A: Share buybacks.

Source: WSJ

Source: WSJ

–This hurts productivity and boosts inequality. It is, I believe, a source of the capital misallocation that’s in part responsible for one of our most significant economic problems: historically slow productivity growth.

–What to do? Republicans have an idea that’s showing up in all their tax plans: cut the cost of capital by allowing full expensing of new equipment purchases. But as stressed, the cost of capital isn’t the constraint. All full expensing will do is increase the budget deficit, making it increasingly difficult to take the obvious step:

–If pvt investment won’t step up, public investment must do so. As the first figure on the right above shows, the need is there. I agree that economists need to figure out why pvt inv has been so weak (I’d bet: weak demand, higher returns from financial “innovations,” and short-termism (buybacks)), but in the meantime, I’m hearing increasing agreement around the need for infrastructure investment. Economists and many in the biz community get this. Voters, OTOH, are disengaged on this point and that needs to change. There needs to be bottom up pressure–let’s start with not poisoning our kids with lead-infused water pipes.

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6 comments in reply to "Share buybacks, our investment deficit, and bad tax ideas"

  1. Smith says:

    Lower R&D is not a mystery.
    1) Does an executive keep their job by boosting the stock price or R&D that may benefit the company 5 or 10 years down the road?
    2) Double whammy, because whacking R&D (lowering expenditures) adds to the bottom line.
    3) Everyone (the board, stockholders, other execs) has incentive for number 1) and number 2), but the executive who actually holds a large amount of stock has an added incentive.
    4) When R&D is shortchanged, companies buy other companies for their IP, combined operations, includes R&D, and less of it. This also leads to lower costs, lower employee count, and oligopolies if not monopolies.
    5) The oligopolies and monopolies put less pressure on keeping up R&D to compete with other companies R&D spending, race to the bottom instead of virtuous cycle*.
    6) The management mantra is lower costs, cut wages and staff, downsize and outsource. as a way to succeed. R&D is left to the government, universities and startups.
    7) Government spending on R&D is also down, NIH and EPA budgets have not kept pace with inflation after cuts of sequestration. Cancer moon shots, brain maps, and actual moon shots are not the same as basic science, or applied science.
    8) When wages are stagnant, unemployment high, labor cheap or outsourced, no incentive to find productivity increased by new processes.
    9) Demographic shift adding 5 to 10% beyond labor pool decreases demand which would slow investment absent numbers 1 through 8.
    10) IP law changes including corporate favored “first to file” instead “first to invent” means of IP from R&D is of less value, strategy instead is buy patents for bargaining chips to prevent lawsuits, billions of dollars involved.
    11) The R&D that facebook spends to keep users engaged on their website and see more ads is not the same as doubling the power of chips every two years.
    12) R&D is also being outsourced, and globalized, and that’s without accounting for the fact China insists on taking our R&D for free if you want access to their market.
    13) There is a shortage of jobs for people in R&D, there is a shortage of STEM jobs, there is a shortage of high skills jobs. As long as wages for college graduates are fairly stagnant, and recent college graduates take away jobs from those who started careers with less formal education, the ranks of executives who value R&D will continue to dwindle.

    Infrastructure, shminfrastructure, what about the jobs who aren’t in construction?

    * The Bell Labs and I.B.M. of old, and google, may be exceptions, though one may question the drive for driverless cars, vs. just much safer cars. How many people die because later is more achievable?

    • Howard Johnson says:

      Impressive, I think you nailed it processually!

    • Smith says:

      Here is some recent data to back up my statements, there is a shortage of college level jobs, not college educated workers.

      Figure O
      “Real average hourly wages of workers with a bachelor’s degree, by age,1989–2015”

      Here is a chart on over educated workers covering 2000 -2010 and quote giving update through 2014 (it gets worse).

      “In 2007, 38 percent of employed college graduates under age 27 were working in a job that did not require a college degree, and this share increased to 46 percent by 2014 (Abel and Deitz 2014). Furthermore, the “non-college” jobs that workers with a college degree are ending up in are of lower quality now than they used to be.”

      “Similarly, for computer programmers, the median hourly wage increased from $30.49 in 2005 to $38.24 in 2015, which, after adjusting for inflation, represents a three percent decrease in buying power.[42]”
      Although I see a 5% increase for Computer & Math occupations in total, with a 10% increase for subgroup of computer programmers, despite drop in number, and projected 7% decline in jobs over next 10 years, from these sources: 2015 2005

      The 5% climb is still only .5% a year for the ten years, the median at $75,000.

      That’s just to say watch out when even STEM jobs are not plentiful, let alone jobs for non-STEM college graduates.

      And for good measure:

    • Smith says:

      Krugman backs me up (points 4 & 5) monopolies are a significant factor in the economy:
      “If the private sector doesn’t see itself as having a lot of good investment opportunities, how can profits be so high? The answer, I’d suggest, is that these days profits often seem to bear little relationship to investment in new capacity. Instead, profits come from some kind of market power — brand position, the advantages of an established network, or good old-fashioned monopoly.”

      “In other words, while record stock prices do put the lie to claims that the Obama administration has been anti-business, they’re not evidence of a healthy economy. If anything, they’re a sign of an economy with too few opportunities for productive investment and too much monopoly power.”

      He adds to buybacks vs. investment with 3 points
      1) Corporate profits benefit the rich, and their outsized share of national income
      2) There’s a lack of investment opportunity due to weak economy, slack demand
      3) Monopoly power keeps profits stable and high

      There’s also a nod to my point 11) about nature of economy, not bricks and mortar.

  2. Bob Wyman says:

    Tax cuts for the wealthy were supposed to increase savings and investment. If that hasn’t happened, then why do we keep the cuts?

    Facts Matter…

  3. Jeffrey says:

    Hi Jared,
    I’m curious how you would respond to a friend’s comment to your blog entry:

    “The large dip after August 2007 is directly tied to the crash of the bond market and the financial ruin that followed. Investment was nearly strangled to death for the next couple of years, getting a loan was nearly impossible. The trajectory of the blue line of “private investment gap” is consistent with the historical average pre-2007, with a correction for the market correction during that time. I also note that each of those spikes in the private investment chart is followed by a major correction – recession in 1981, crash in tech market in early 2000’s, crash of bond market in 2007. The spikes are artificially high and not sustainable – boom and bust cycle. As someone who works in an investment industry, post 2007 loans may be super cheap, but they’re not easy to get.

    “I don’t disagree with the lack of investment in infrastructure, but think this author’s jumps from point A to point B are not logical. I’d also be curious about the continuation of those charts into 2016.”