Wednesday, September 3, 2014

Quotation Of The Day: The Problem With The Economy Is Big Business Edition

From this James Pethokoukis post at The Week:
The missing link in the anemic, five-year-old recovery has been business investment. And big business itself deserves a lot of the blame for that. Instead of using record profits to buy new equipment or build factories — and boost the economy — corporate America has been sitting on nearly $2 trillion in cash. Corporate balance sheets are stuffed.
When CEOs do put money to work, it's almost always to help shareholders, through higher dividends and stock buy-backs that boost share prices. More recently, companies have been using some of that dough for a tricky financial technique known as an "inversion," buying an overseas rival to take advantage of lower international tax rates. Never have companies spent such a tiny share of the cash they generate on capital investment, according to economist Andrew Smithers.
Even worse, argues Harvard's Clayton Christensen in a recent paper, much of that investment is directed toward making existing products or delivering existing services more efficiently — often with fewer workers — rather than innovating new products or services that create new, high-paying jobs. This plague of risk-averse "short-termism," as Nobel-winning economist Edmund Phelps writes in Mass Flourishing, reduces the total "supply of innovation" in the U.S. economy, resulting in slower growth and job creation.


P&R said...

So why aren't they investing?

Established businesses are always risk averse. And a company exists to make a profit for its owners. So pointing out that they're risk averse and trying to game the system to make money for their owners is not a complaint so much as a truism.

And it doesn't address the real question. Why is it that sitting on their cash seems to these people a better use of their money than the kind of investing Pethokoukis thinks necessary? These are not stupid people who are doing this. Neither are they mean-spirited paragons of evil. They must have some reason and it is not merely to screw somebody over.

Kal Lis said...

The business class has told us ad nauseum that businesses with full coffers will invest in in projects that will create jobs if their coffers are full. Two trillion dollars would indicate to me that coffers are full but the investment that produces jobs is not happening.

While those in charge of the business may not be "mean spirited paragons of evil," they likely are not the epitome of virtue either. One does not get to the top of a major corporation without stabbing a few folk in the back on that climb.

To try to answer your question about why, I believe Pethokoukis would contend that they are extremely short sighted.

While these people may not be stupid, they,like many other talented folk in the past, have a few tragic flaws. In this case, the wealth concentrated in the hands of the few, combined with the knowledge that they are all smart people leads to a group think.

I am less sanguine than you that they are not holding back from investment just to screw people over. Humans of all intellects and social standing are not immune from cutting off their noses to spite their face