Somewhat to my surprise in his most recent column Harold Meyerson lurches uncontrollably onto the point I’ve been making at this blog since the very beginning. If you want to know why economic growth and, importantly, wage growth are phlegmatic, look to business investment:
Over the past decade, more than 90 percent of Fortune 500 corporations’ net earnings have been funneled to investors. The great shareholder shift has affected more than employees’ incomes. As Luke A. Stewart and Robert D. Atkinson noted in a 2013 report for the Information Technology and Innovation Foundation, business investment in equipment, software and buildings increased by just 0.5 percent per year between 2000 and 2011 — “less than a fifth that of the 1980s and less than one-tenth that of the 1990s.â€
Mr. Meyerson blames that on “the power of major shareholders to appropriate corporate revenue” but engages in only a superficial consideration of that power and doesn’t have much in the way of a prescription for changing that or mitigating its effects. He does take a nostalgic glance at private sector unions but that’s confusing causes with effects.
In my view the place to look is the rise of institutional investors, i.e. mutual funds, pension funds, and the like. These are the “major shareholders” for most large companies these days and their objectives are very different from those of the shareholders of the past as exemplified by the much shorter durations stocks are held than was the case in the past:
In 1960, the average length of time an investor held a stock was eight years; today, it’s four months, and when computerized high-frequency trading is factored in, it’s 22 seconds.
They’re looking for short term movements in stock valuations rather than long term growth in markets and capitalization—the stuff that makes a company great. Their weight makes attracts boards to managers who’ll lay off employees beyond the level at which it adversely affects the company’s ability to function or who engage in other manipulations to boost stock value rather than the difficult work of improving and expanding companies. Giving managers stock in the company is a contributing factor as well.
The reason that I opposed the “Bush tax cuts” was that they were obviously at the very best a quick fix, ordinary Keynesian pump-priming. Their intent was to give a quick boost to consumer spending (which hadn’t fallen dramatically) rather than encouraging business investment (which had).
It is simply untrue that businesses only invest when sales are expanding. That’s only true of companies that are managed poorly. Businesses invest in order to expand sales, especially future sales. When the only future you’re interested in is the next 22 seconds, investment flags.
We need to be incentivizing a different kind of management but politicians have staunchly resisted any moves that might cause that to happen, e.g. abolishing the corporate income tax. I’m open to other suggestions but until we see a change in corporate governance and management we’ll just get more of the same.
Somehow I think the growth of larger firms and conglomerates are also a problem.
For example, you can have a civil engineering firm that blankets the world, or you can have one for England, one for France, one for Japan, one for the US, etc. I think the former leads to a less flexible, or perhaps I should say nimble, company, which will have greater difficulties adapting to the reality that each unit faces in each locale. The problem in that case, though, is that governments do the bulk of civil engineering projects (or at least the big ones), and as you point out, governments generally prefer to deal with larger entities.
Incidentally, I’ve long liked the idea that stock ownership should come with a minimum holding period. You buy a share, you’ve got to hold it for six months or a year, save in extreme cases. (Death, bankruptcy, and so on.)
The reason for enforcing a longer ownership period is to make the financial markets more an opportunity for allocating capital efficiently, and less of a giant gambling institution, with rigged rules favoring certain entities.
While I agree with you on the big firms and conglomerates point, it’s actually a pretty complicated question. Let’s just take one industry: banks.
The argument in favor of big banks is that in lots of countries there’s just one bank and it’s owned, partly or completely, by the government. When that bank comes to this country and opens up shop here, it can be darned hard to compete against.
My preference would be that we just ban state owned enterprises from doing business here, don’t import goods made by state owned enterprises, etc. Instead we’ve chosen to have big banks.
Oh, it’s very complicated. But it is also in large part a matter of regulation, as you banking example illustrates.
Mostly, it’s a question of whether or not one sees markets as the be all and end all (which has become commonplace in the last few decades), or just another tool. And it’s critical to choose the right tool for the right job.
The reason for large international engineering companies is logistics and local access. Haliburton knows how to get diesel generators, pumps, 40″ pipes, personnel, housing, and everything that is needed for support into a sh*thole. They also know who needs to be bribed and what is the going rate. Joe’s Engineering Company does not. Haliburton subcontracts Joe’s for whatever Joe does best.
Years ago, I saw a proposal for an enforced lifespan for corporations. After a certain number of years (75?), their corporate status would expire, and they would be liquidated. It was an interesting concept.
As recently as the late 80s when I was in business school there were raging debates and academic inquiry as to whether management should reinvest or distribute capital. At the time they were criticized for reinvesting. “Empire builders.” Now they are criticized for distributing. Chickens, I guess.
Perhaps the real answer is that they are responding to the environment and the opportunities they perceive. It’s the point I’ve been making and people here have been resisting for a good 7 yrs now.
I can’t speak for mutual funds, but I certainly can for pensions and endowments. The notion that they desire to churn holdings is just wrong. Reinvestment risk is a constant headache for them. They would love to have an abundance of Berkshire Hathaways at their disposal. But they must diversify so they deal with the world as is.
As for equity comp. the solution is easy. Put the vesting date far enough into the future. You could legislate that, although that’s really not what the tax code should be – in the hands of politicians. But it would do a lot. Give me a manager who wants equity vs an annual bonus any day.
Show of hands. Who supports ObamaCare? Then you supported short term incentives like the cap gains tax premium. Who supports an increase in cap gains taxes in general? Dirty rich people. Then you support short term thinking. Who cheers the Fed driven stock market because they think it validates Obama? You get the point.
Stuff like this is probably best asked of the OTB crowd. But they advocate for the very policies and results they say they do not want. Strange.
Obviously, there’s no one right answer that’s invariant over time. However, given the historically low rate of business investment today I think it’s fair to say there should be more re-investment.
We had more investment when corporate tax rates were higher in the past. We had more investment when top personal marginal rates were higher. What makes you think that lowering corporate tax rates now would lead to more investment? Why wouldn’t it lead to just more money being distributed to management and shareholders? (Note that this has been going on since 2000, so Drew will try, but have a tough time sticking this one on Obama.) The idea was supposed to be that if we cut cap gains rates, which we did, people would be more likely to invest. Instead we saw the opposite.
Steve
Capital gains weren’t treated as income then. There are a lot of moving parts.
TB, you’re describing a company working in the Third World. I’m discussing companies working in the USA.
@Icepick
I was not going after you, but my mind is kinda scrambled. If I am not mistaken, there is a French firm that competes with Halliburton, and that is where the comment came from.
I agree, Dave. There should be more, but there is less for well worn reasons I cite. Little understood is that an awful lot (record amounts) is going to change of control investment. Better to take underperforming, risk averse properties and spuce them up than heavy reinvestment in reasonable assets.