There are two new papers up at the Roosevelt Institute, building on my Disgorge the Cash paper from last spring. The first, analytic, paper, written by me, attempts to respond to some of the most common criticisms of the idea that shareholders’ lust for payouts is holding back business investment — that investment is doing just fine actually; that payouts are just reallocating capital to its most socially valuable uses; and that there’s no legitimate grounds to challenge shareholder rule over corporations. The second paper, written by Mike Konczal, me, and my former student Amanda Page-Hongrajook, lays out a policy agenda, in the canonical ten points, for rolling back the shareholder revolution.
We released the reports at an event in DC last week with Mike, me, Lynn Stout, and Heather Slavkin of the AFL-CIO, headlined by Senator Tammy Baldwin. Based on my brief conversation with her, Senator Baldwin seems genuinely interested in this stuff. So hopefully, if nothing else, we’ll be able to continue pestering the SEC about shareholder payouts.
There was a nice writeup of the analytic paper by Jeff Spross at The Week; there were also pieces in the Huffington Post and at Bloomberg View. I was on NPR’s Marketplace, very briefly, off this stuff this morning; I’ll be on Bloomberg TV Wednesday afternoon, hopefully for longer.
Hey Josh. Just read part of this, agree w/much off it, but still don’t understand #7. Besides boosting consumption of the rich, where does the money end up other than mattresses? If you ‘hold cash,’ presumably the bank does something with it. Asked Bill Lazonick the same question a few weeks ago, got the same incomplete answer. Keep up the good work. — Cheers.
Hi Max.
It seems to me there are two ways of answering this question.
1. At the micro level, we can think of a dollar of payouts as circulating repeatedly through financial markets via trades of existing assets. At each step the price of some asset is incrementally bid up, and some fraction of the dollar leaks out to increased consumption, to increased liquidity (i.e. higher cash holdings and/or lower debt), or to incomes of the financial sector (in the form of transaction costs). Some fraction also finds its way to financing productive activity via purchases of newly issued securities.
I don’t think it’s right to say that the bank “does something” with the cash. This is clear if we think in terms of balance sheets. At step 1, the corporation takes out a loan from the bank. So the corporation’s balance sheet has the loan as a liability and a new deposit at the bank as an asset, and the bank has the loan as an asset and the deposit as a liability. Now at step 2 suppose the corporation transfers the deposit to shareholders, so it leaves the corporation’s balance sheet and becomes an asset for the household sector. Step 2 doesn’t change the bank’s balance sheet at all — from the bank’s point of view, it makes no difference if the deposit is owed to the corporation or the household. So there is no reason for step 2 to lead to any new loans. (In effect, the bank has already used the money for the loan to the corporation.)
2. The other way too look at it is at the macro level, payouts can’t change in isolation. There is always some other flow that has to change to finance them, and when you take that into account there is no new money that has to go anywhere. The increased shareholder income in the household sector is counterbalanced by reduced saving in the corporate sector, or else reduced income for someone else.
I admit I haven’t got this all as clear as we’d like it to be.
Thanks, that’s helpful. I’ll have to ruminate on it.
Martin Wolf has written a column about the macro level that fails to talk about shareholder payouts
http://www.ft.com/intl/cms/s/0/b2df748e-8a3f-11e5-90de-f44762bf9896.html#axzz3rqr3B8Bk
but talks about a tax on earnings and sums up:
“…Why is corporate investment structurally weak? The ageing of societies is one reason: by slowing potential growth, it lowers the level of investment needed.
Globalisation is another: it motivates relocation of investment from the high-income countries. Another reason is technological innovation. Much investment today is in IT, whose price is collapsing: constant nominal investment finances rising real investment. Again, much innovation seems to reduce the need for capital: consider the substitution of warehouses for retail stores. Another explanation could be that management is not rewarded for investing.
Together, all this might explain why, to take the US example, the ratio of corporate investment to profits has declined substantially since 2000.
The behaviour of the corporate sector also raises important policy questions. Corporate taxation, for example should surely encourage both investment and the distribution of profits. The way to achieve these joint objectives could be through higher tax rates on retained earnings, together with full deductibility of both investment and dividends.
Beyond this, it has to be accepted that, so long as the corporate sector runs a structural financial surplus, macroeconomic balance is likely to require fiscal deficits. Moreover, if the corporate sector is unable to invest even its own savings, savings in the rest of the economy are bound to have a low marginal value. In such a world, both ultra-low real interest rates and high equity prices are not at all surprising. They are to be expected. So stop complaining.”
Thanks, I hadn’t seen this.
The claim here is that the volume of investment is more or less fixed regardless of the funding or opportunity cost. In that story, the problem is actually that payouts are not high enough. Since retained earnings above what’s required for the fixed level of investment spending will not be spent at all, whereas at least some of what’s paid out will be consumed.
I’m not sure this is wrong — it certainly is possible to tell a story in which investment is basically governed by an accelerator principle and where the investment required per increment of output has been reduced, both for technological reasons and because the increasing prevalence of stable monopolies reduces what Marx called “fratricidal” investment. Maybe. But it’s weird to me how many otherwise orthodox people are willing to throw out the econ 101 principle that demand curves slope downward. Surely there are SOME more worthwhile investment projects when the required rate of return is low than when it is high, or when the required payback period is longer rather than shorter?