Scrooge McDuck's Giant Pool of Money is Real
January 23, 2016 2:11 PM Subscribe
Planet Money's Adam Davidson ponders an emerging economic paradox in this week's NYT Magazine: Why are corporations hoarding trillions in cash? The cash stockpiles being held by many major corporations situation are unprecedented in size, and often vastly exceed any sum of money that these corporations could ever dream of spending. This behavior runs in direct opposition to most economic theories, violates assumptions about how rational corporations should act, and is being rewarded by the market (but only in some industries). So, what gives?
We could have, but chose not to.
The economic theories that said that this was a good idea are still popular among more than half of our elected leaders.
posted by schmod at 2:22 PM on January 23, 2016 [12 favorites]
The economic theories that said that this was a good idea are still popular among more than half of our elected leaders.
posted by schmod at 2:22 PM on January 23, 2016 [12 favorites]
BungaDunga - this is probably a more useful chart. Surpluses were mounting, and there were actually some discussions about how much debt was needed to keep the bond market running, since there was concern it would be paid off quickly. Ha.
[edited to add "Ha."]
posted by blahblahblah at 2:25 PM on January 23, 2016 [18 favorites]
[edited to add "Ha."]
posted by blahblahblah at 2:25 PM on January 23, 2016 [18 favorites]
We could have, but chose not to.
And instead George Bush gave it all to the 1% in tax cuts, because deficits don't matter. Except during a historic economic collapse when a Democrat is in the White House, of course.
If the companies spent their savings, rather than hoarding them, the economy would instantly grow, and we would most likely see more jobs with better pay.
This is the reason. They don't want any inflationary pressure on wages, regardless of the cost. They'd rather hold a trillion dollars they can't spend than pay workers 1$ more per hour.
posted by T.D. Strange at 2:32 PM on January 23, 2016 [79 favorites]
And instead George Bush gave it all to the 1% in tax cuts, because deficits don't matter. Except during a historic economic collapse when a Democrat is in the White House, of course.
If the companies spent their savings, rather than hoarding them, the economy would instantly grow, and we would most likely see more jobs with better pay.
This is the reason. They don't want any inflationary pressure on wages, regardless of the cost. They'd rather hold a trillion dollars they can't spend than pay workers 1$ more per hour.
posted by T.D. Strange at 2:32 PM on January 23, 2016 [79 favorites]
Is it because the money is in juridictions with low or nonexistent taxes, and bringing it out and spending it would mean exposing it to the tax regimes of, say, the US?
posted by the man of twists and turns at 2:38 PM on January 23, 2016 [5 favorites]
posted by the man of twists and turns at 2:38 PM on January 23, 2016 [5 favorites]
https://research.stlouisfed.org/fred2/graph/?g=3dZ2
Blue is corporate after-tax profits.
Red is taxes paid by corporations.
Green is effective corporate tax rate (right axis)
posted by Heywood Mogroot III at 2:42 PM on January 23, 2016 [10 favorites]
Blue is corporate after-tax profits.
Red is taxes paid by corporations.
Green is effective corporate tax rate (right axis)
posted by Heywood Mogroot III at 2:42 PM on January 23, 2016 [10 favorites]
this is probably a more useful chart.
Right, but the article says "close to paying off all its debts"- when actually the government was paying off the debts it had for those years- the deficit- not paying off all the debt from previous years.
posted by BungaDunga at 2:45 PM on January 23, 2016 [2 favorites]
Right, but the article says "close to paying off all its debts"- when actually the government was paying off the debts it had for those years- the deficit- not paying off all the debt from previous years.
posted by BungaDunga at 2:45 PM on January 23, 2016 [2 favorites]
"Buy low, sell high", they may just be waiting patiently for a downturn in the markets.
posted by sammyo at 2:47 PM on January 23, 2016
posted by sammyo at 2:47 PM on January 23, 2016
The people who decide to keep this money out of circulation do so because this leads to the highest personal rewards for them. (I presume people still make these decisions, and I presume they do so for reasons, and these reasons are to some extent rational.)
What can be done, and who can do it, to make these people decide otherwise?
posted by Devonian at 2:49 PM on January 23, 2016 [1 favorite]
What can be done, and who can do it, to make these people decide otherwise?
posted by Devonian at 2:49 PM on January 23, 2016 [1 favorite]
What can be done, and who can do it, to make these people decide otherwise?
According to my layman's econ101, maintaining inflation above 2% is the usual incentive / method for limiting economic slowdown from too much money getting stuffed into too many mattresses. The Fed is trying hard to get back into a safer range of inflation, but can't move quickly lest it spook the recovery... the recovery that is being weakened by too much mattress-stuffing...
There's a hole in my bucket, dear Liza dear Liza...
posted by anonymisc at 2:53 PM on January 23, 2016 [19 favorites]
According to my layman's econ101, maintaining inflation above 2% is the usual incentive / method for limiting economic slowdown from too much money getting stuffed into too many mattresses. The Fed is trying hard to get back into a safer range of inflation, but can't move quickly lest it spook the recovery... the recovery that is being weakened by too much mattress-stuffing...
There's a hole in my bucket, dear Liza dear Liza...
posted by anonymisc at 2:53 PM on January 23, 2016 [19 favorites]
I have been going around saying that we need to raise taxes on rich people to fix this. If you're just going to sit on a giant pile of treasure, well, maybe the government should take it and spend it on something, but I guess that doesn't work if this $$$ is already in other jurisdictions.
The tech sector at one point was lobbying Obama for a corporate tax holiday. The idea was that if there was no tax, the corporations would repatriate the money and spend it. If it actually happened that way it might be a good thing, but you'd have to structure it in a way that ensures that the corporations actually do that.
Reading TFA, it seems like this situation is indistinguishable from a tech bubble.
posted by chrchr at 2:58 PM on January 23, 2016 [10 favorites]
The tech sector at one point was lobbying Obama for a corporate tax holiday. The idea was that if there was no tax, the corporations would repatriate the money and spend it. If it actually happened that way it might be a good thing, but you'd have to structure it in a way that ensures that the corporations actually do that.
Reading TFA, it seems like this situation is indistinguishable from a tech bubble.
posted by chrchr at 2:58 PM on January 23, 2016 [10 favorites]
The other camp doubts that the free market could be allowing executives to hold all that cash if it were purely for their own benefit.
This camp also believes in magical ponies that eat inconvenient poor people and poop pure joy.
posted by GenjiandProust at 2:58 PM on January 23, 2016 [22 favorites]
This camp also believes in magical ponies that eat inconvenient poor people and poop pure joy.
posted by GenjiandProust at 2:58 PM on January 23, 2016 [22 favorites]
FRED used to have a longer S&P 500 series, where I first noticed the correlation between profits & the S&P500 index; but I can re-create it in Excel:
http://i.imgur.com/ZNsTPHd.png
posted by Heywood Mogroot III at 2:59 PM on January 23, 2016 [3 favorites]
http://i.imgur.com/ZNsTPHd.png
posted by Heywood Mogroot III at 2:59 PM on January 23, 2016 [3 favorites]
"Buy low, sell high", they may just be waiting patiently for a downturn in the markets.
That's a good idea, but why didn't they spend in 2008?
posted by chrchr at 3:00 PM on January 23, 2016 [1 favorite]
That's a good idea, but why didn't they spend in 2008?
posted by chrchr at 3:00 PM on January 23, 2016 [1 favorite]
What can be done, and who can do it, to make these people decide otherwise?
Worldwide taxation on US corporate income. We already do it for individuals.
posted by T.D. Strange at 3:02 PM on January 23, 2016 [51 favorites]
Worldwide taxation on US corporate income. We already do it for individuals.
posted by T.D. Strange at 3:02 PM on January 23, 2016 [51 favorites]
Is it because the money is in juridictions with low or nonexistent taxes, and bringing it out and spending it would mean exposing it to the tax regimes of, say, the US?
That was my first thought too. The article addresses this, and states that the amount of cash is more than can be explained by not wanting to pay tax:
That was my first thought too. The article addresses this, and states that the amount of cash is more than can be explained by not wanting to pay tax:
Corporations have become far more focused on something they call ‘‘tax efficiency,’’ which the rest of us call ‘‘tax avoidance’’: For various reasons, holding on to cash and carefully shifting it among subsidiaries, especially foreign ones, is a great tool to shrink your tax bill.posted by cynical pinnacle at 3:03 PM on January 23, 2016 [3 favorites]
...Companies like Google and GM are holding on to far more cash — many times more — than could possibly be explained by emergency funds and tax efficiencies and M.&A.
If they start spending it, wouldn't the most likely outcome be them buying up other companies?
posted by drezdn at 3:06 PM on January 23, 2016 [1 favorite]
posted by drezdn at 3:06 PM on January 23, 2016 [1 favorite]
With all the patent fervor you'd think some company would start investing in something like the old Bell Labs, basic research may not have an immediate effect on the quarterly profit, but could pay off huge in the future. Google and some other tech companies are sort of doing that, but even then they're more likely to buy up a promising start up after the initial hard work has been done.
If world wide taxation isn't possible, some sort of incentives for corporate investment in basic sciences might be. Particularly since actual government investment in research science is politically impossible in the current government-can-never-do-anything-right-ever-except-bomb-shit era.
posted by T.D. Strange at 3:10 PM on January 23, 2016 [2 favorites]
If world wide taxation isn't possible, some sort of incentives for corporate investment in basic sciences might be. Particularly since actual government investment in research science is politically impossible in the current government-can-never-do-anything-right-ever-except-bomb-shit era.
posted by T.D. Strange at 3:10 PM on January 23, 2016 [2 favorites]
Could it just be a rational response to the 2008 financial crisis? The common wisdom was that you, as GM or another huge corporation, could go to the major banks and get a loan for a few million easily and with low interest. The financial crisis showed that the banks don't actually know what they're doing, and could disappear or cut off lending overnight. This means its not absolutely crazy to think you might have to self fund for a few months to several years if they screw up again. At that point its just prudent to keep a sizable amount of your net worth in cash.
posted by hermanubis at 3:16 PM on January 23, 2016 [11 favorites]
posted by hermanubis at 3:16 PM on January 23, 2016 [11 favorites]
What about the article's conclusion, though?
Their hoarding of it hints that they think the next transformative innovation could be just around the corner. If in fact they do — and if they’re right — it’s good news for all of us.
Maybe I've just read too many corporate-takeover dystopian novels, but I don't see how the second part of that sentence follows from the first.
posted by subdee at 3:17 PM on January 23, 2016 [21 favorites]
Their hoarding of it hints that they think the next transformative innovation could be just around the corner. If in fact they do — and if they’re right — it’s good news for all of us.
Maybe I've just read too many corporate-takeover dystopian novels, but I don't see how the second part of that sentence follows from the first.
posted by subdee at 3:17 PM on January 23, 2016 [21 favorites]
One reason Microsoft was doing that was that they had granted a whole lot of stock options to their employees and that represented a liability that wasn't on their books. Eventually the employees were going to start cashing in, and the company was going to need a hell of a lot of money to buy the stock to cover those options. I think Apple was the same way.
On paper both companies have tremendous amounts of money, but that's because the value of those options isn't on the spreadsheet as a liability, even though it is one. (Part of the reason why is that there's no easy way to determine just how big a liability it is, since it won't be priced until the options are exercised.)
posted by Chocolate Pickle at 3:17 PM on January 23, 2016 [25 favorites]
On paper both companies have tremendous amounts of money, but that's because the value of those options isn't on the spreadsheet as a liability, even though it is one. (Part of the reason why is that there's no easy way to determine just how big a liability it is, since it won't be priced until the options are exercised.)
posted by Chocolate Pickle at 3:17 PM on January 23, 2016 [25 favorites]
CP that makes sense... then General Motors would be hoarding cash to pay the pensions of current employees, no?
posted by subdee at 3:20 PM on January 23, 2016 [1 favorite]
posted by subdee at 3:20 PM on January 23, 2016 [1 favorite]
If you take that cash and move it into any investment at all, you're going to have risk, and opportunity costs that are not covered by reasonably expected returns. This situation will not reverse until the prime lending rate actually exceeds inflation, which isn't likely any time soon. I expect this will continue until something big snaps.
posted by MikeWarot at 3:27 PM on January 23, 2016 [3 favorites]
posted by MikeWarot at 3:27 PM on January 23, 2016 [3 favorites]
Steve Keen's Debtwatch
Analysing the Collapse of the Global Debt Bubble
MikeWarot you might be correct but it also might be they are too paralyzed to do anything with it because they have no good idea what investments are worth.
posted by bukvich at 3:33 PM on January 23, 2016 [4 favorites]
Analysing the Collapse of the Global Debt Bubble
MikeWarot you might be correct but it also might be they are too paralyzed to do anything with it because they have no good idea what investments are worth.
posted by bukvich at 3:33 PM on January 23, 2016 [4 favorites]
I'm not sure it is much different than OPEC deciding how much oil it puts into the market.
posted by Muncle at 3:47 PM on January 23, 2016 [1 favorite]
posted by Muncle at 3:47 PM on January 23, 2016 [1 favorite]
Worldwide taxation on US corporate income. We already do it for individuals.
Surely, the moment this happens, all these corporations will simply "relocate" from whatever tax shelter state they're currently "headquarted" in to some convenient tax shelter country.
posted by tobascodagama at 3:57 PM on January 23, 2016 [3 favorites]
Surely, the moment this happens, all these corporations will simply "relocate" from whatever tax shelter state they're currently "headquarted" in to some convenient tax shelter country.
posted by tobascodagama at 3:57 PM on January 23, 2016 [3 favorites]
There are two obvious explanations: record low tax rates and record low inflation rates.
Low taxes discourage investment and encourage cash hoarding. During the decades after WWII up to the Reagan era, maximum corporate tax rates were 48% to 52%. Back then as a CEO you had two choices of what to do with your profits. You could keep half and give the other half to the government as tax, or you could keep all of it for yourself by investing it in new stuff tax-free. That is why Bell Labs existed. Throwing all of your money at blue sky was better than paying half your money in taxes. The tax cuts of the Reagan era spelled the end of Bell Labs, Xerox PARC and the like.
Second are record low inflation rates. Since the Volcker era of the early 1980s, the Fed's top priority has been to suppress worker wages by targeting historically low inflation rates. Before the 1980s, companies were eager to spend their cash on new investments because every day their money sat in the bank was a day of shrinking value.
So these two Republican fundamentals, low taxes and low inflation are behind the cash hoarding and low investment. Not surprising these are also responsible for stagnant worker incomes and growing inequality.
posted by JackFlash at 4:16 PM on January 23, 2016 [78 favorites]
Low taxes discourage investment and encourage cash hoarding. During the decades after WWII up to the Reagan era, maximum corporate tax rates were 48% to 52%. Back then as a CEO you had two choices of what to do with your profits. You could keep half and give the other half to the government as tax, or you could keep all of it for yourself by investing it in new stuff tax-free. That is why Bell Labs existed. Throwing all of your money at blue sky was better than paying half your money in taxes. The tax cuts of the Reagan era spelled the end of Bell Labs, Xerox PARC and the like.
Second are record low inflation rates. Since the Volcker era of the early 1980s, the Fed's top priority has been to suppress worker wages by targeting historically low inflation rates. Before the 1980s, companies were eager to spend their cash on new investments because every day their money sat in the bank was a day of shrinking value.
So these two Republican fundamentals, low taxes and low inflation are behind the cash hoarding and low investment. Not surprising these are also responsible for stagnant worker incomes and growing inequality.
posted by JackFlash at 4:16 PM on January 23, 2016 [78 favorites]
Capital expenditures aren't tax free when you spend them. They create a tax shield down the road but when you spend it the cash comes from earnings which are taxed.
Low inflation is obviously an issue. As is the fact the corporate leaders have had it drilled into their heads by shareholder value peeps that capex is bad. Add in low capacity utilization generally and it all kind of makes sense.
Certainly industries that were over earning like energy and materials weren't shy about spending money. The real outliers were big tech companies that didn't want to deals and don't have internal investment opportunities - so they choice is hoard cash or pay it to shareholders - and if the shareholders don't behave like they care, may as well hoard it. It's actually pretty perfectly rational.
If they had spent it on projects they probably would have been better off starting a bonfire
Of course said bonfire is probably a better outcome for the general populace but that's not who the board is responsible to.
posted by JPD at 4:27 PM on January 23, 2016 [3 favorites]
Low inflation is obviously an issue. As is the fact the corporate leaders have had it drilled into their heads by shareholder value peeps that capex is bad. Add in low capacity utilization generally and it all kind of makes sense.
Certainly industries that were over earning like energy and materials weren't shy about spending money. The real outliers were big tech companies that didn't want to deals and don't have internal investment opportunities - so they choice is hoard cash or pay it to shareholders - and if the shareholders don't behave like they care, may as well hoard it. It's actually pretty perfectly rational.
If they had spent it on projects they probably would have been better off starting a bonfire
Of course said bonfire is probably a better outcome for the general populace but that's not who the board is responsible to.
posted by JPD at 4:27 PM on January 23, 2016 [3 favorites]
Walking around DC late at night, looking in through the giant, story-high windows of many of the new luxury condos, I keep expecting to see someone backstroking through a heated, Olympic-sized pool of gold coin.
posted by ryanshepard at 4:28 PM on January 23, 2016 [1 favorite]
posted by ryanshepard at 4:28 PM on January 23, 2016 [1 favorite]
My own pet theory is that the companies believe their stock is too expensive to buy back with cash, and that paying dividends is still unfashionable. Those aren't in the article, but the other half is. Companies see a lack of good internal investment opportunities, combined with a deep fear that things are going to go very badly in the economy any month now and having a bunch of cash is how you survive.
posted by Nelson at 4:29 PM on January 23, 2016 [3 favorites]
posted by Nelson at 4:29 PM on January 23, 2016 [3 favorites]
Stock buybacks are at or near all time highs. Generally corporates are terrible at buying their own stock low. They usually buy high
posted by JPD at 4:38 PM on January 23, 2016 [4 favorites]
posted by JPD at 4:38 PM on January 23, 2016 [4 favorites]
The Scrooge McDuck vault image is nonsense. Unless you're a drug lord, the money is still in the system, whether in government bonds or money markets or passbook savings. That it couldn't be better used I won't argue, but it's not doing nothing.
Why is it not doing more? Herd behavior. Waiting for opportunity. Uncertainty in the economic and political landscapes. Fear of making the wrong move. All of what Nelson said.
>So these two Republican fundamentals-
Reagan left office twenty seven years ago. Fed rates were 9.75% Since Reagan, we've had eight years of Clinton and seven of Obama. Clinton embraced Greenspan, Obama failed to boot Bernanke, and put in Yellen. Under these last two, we've had seven years of near zero interest rates. I hold no brief for the Republicans, but these last seven years of insane interest have not been their fault.
posted by IndigoJones at 4:42 PM on January 23, 2016 [5 favorites]
Why is it not doing more? Herd behavior. Waiting for opportunity. Uncertainty in the economic and political landscapes. Fear of making the wrong move. All of what Nelson said.
>So these two Republican fundamentals-
Reagan left office twenty seven years ago. Fed rates were 9.75% Since Reagan, we've had eight years of Clinton and seven of Obama. Clinton embraced Greenspan, Obama failed to boot Bernanke, and put in Yellen. Under these last two, we've had seven years of near zero interest rates. I hold no brief for the Republicans, but these last seven years of insane interest have not been their fault.
posted by IndigoJones at 4:42 PM on January 23, 2016 [5 favorites]
Capital expenditures aren't tax free when you spend them. They create a tax shield down the road but when you spend it the cash comes from earnings which are taxed.
For a place like Bell Labs or Google, most of investment is not capital but salaries for researchers which is expensed immediately. As for capital investments, they may be depreciated over a period of years but assuming you have a continuing flow of capital expenditures each year, you also have a similar continuing flow of tax deductions each year. The result that is money you spend on investment is tax-free. Low taxes discourage investment.
posted by JackFlash at 4:46 PM on January 23, 2016 [7 favorites]
For a place like Bell Labs or Google, most of investment is not capital but salaries for researchers which is expensed immediately. As for capital investments, they may be depreciated over a period of years but assuming you have a continuing flow of capital expenditures each year, you also have a similar continuing flow of tax deductions each year. The result that is money you spend on investment is tax-free. Low taxes discourage investment.
posted by JackFlash at 4:46 PM on January 23, 2016 [7 favorites]
The bit about investors giving a negative valuation to coal miners' cash was interesting. My speculation: everyone knows coal is a dying industry, so any indication that directors are contemplating reinvestment is a worrying sign that they don't know what they're doing. Investors want existing coal mines to be fully utilised and all revenue returned as dividends, but they certainly don't want any new ones opened.
posted by Joe in Australia at 4:50 PM on January 23, 2016
posted by Joe in Australia at 4:50 PM on January 23, 2016
Here's my pet theory:
Low inflation + investor preference for cap gains vs dividends + ZIRP + spooked from the Great Recession + unfavorable US worldwide taxation policies.
Plus plus, big companies like Alphabet and Facebook are built on a house of cards and they know it. They know their revenue (advertising from VC funded startups) is going to blow away like so much chaff so they need as much cash as possible for when the economy goes very bad very fast very soon.
posted by zrail at 4:58 PM on January 23, 2016 [5 favorites]
Low inflation + investor preference for cap gains vs dividends + ZIRP + spooked from the Great Recession + unfavorable US worldwide taxation policies.
Plus plus, big companies like Alphabet and Facebook are built on a house of cards and they know it. They know their revenue (advertising from VC funded startups) is going to blow away like so much chaff so they need as much cash as possible for when the economy goes very bad very fast very soon.
posted by zrail at 4:58 PM on January 23, 2016 [5 favorites]
Uncertainty in the economic and political landscapes. Fear of making the wrong move. All of what Nelson said.
Hmm, I would also guess uncertainty too, and add that I think the companies are as much afraid of one another as they are of the general landscape. For example, 60 years ago what auto company could compete with General Motors or Ford? Nobody could match their output, quality, and brand name. Nowadays there's Toyota and VW, and there's also a bunch of potential rivals coming up in China and India.
It's the same with the tech industry, except even more pressure. Google's ad revenue is falling and they've stretched themselves into a bunch of different areas like phones and original streaming content. So, not only are they scared of not wanting to end up like Yahoo (or fear foreign competitors once again like Baidu), but they're also afraid of Netflix, Apple, Samsung, Facebook, and Microsoft.
So my speculation is basically everyone is doing well, but everyone is vulnerable and ultimately replaceable.
posted by FJT at 4:59 PM on January 23, 2016
Hmm, I would also guess uncertainty too, and add that I think the companies are as much afraid of one another as they are of the general landscape. For example, 60 years ago what auto company could compete with General Motors or Ford? Nobody could match their output, quality, and brand name. Nowadays there's Toyota and VW, and there's also a bunch of potential rivals coming up in China and India.
It's the same with the tech industry, except even more pressure. Google's ad revenue is falling and they've stretched themselves into a bunch of different areas like phones and original streaming content. So, not only are they scared of not wanting to end up like Yahoo (or fear foreign competitors once again like Baidu), but they're also afraid of Netflix, Apple, Samsung, Facebook, and Microsoft.
So my speculation is basically everyone is doing well, but everyone is vulnerable and ultimately replaceable.
posted by FJT at 4:59 PM on January 23, 2016
Stock buybacks are at or near all time highs. Generally corporates are terrible at buying their own stock low. They usually buy high.
The record stock buybacks are a manifestation of looting by corporate managers. Managers with stock options do not get dividends so rather than issue dividends to stockholders, they use the money to buy back stock which props up the stock price and increases the value of their options. It also hides the share dilution that occurs when they award millions of shares to themselves. In other words, they are using stockholder cash to give themselves bonuses.
You are right that CEOs execute poor timing on buybacks. If CEOs can't think of anything better to do with cash than buy their own stock, they should instead give it to shareholders to reinvest more efficiently. Allowing a CEO to reinvest your money for you on a single stock is like betting all your roulette stake on red. That is not a diversified investment.
posted by JackFlash at 5:01 PM on January 23, 2016 [14 favorites]
The record stock buybacks are a manifestation of looting by corporate managers. Managers with stock options do not get dividends so rather than issue dividends to stockholders, they use the money to buy back stock which props up the stock price and increases the value of their options. It also hides the share dilution that occurs when they award millions of shares to themselves. In other words, they are using stockholder cash to give themselves bonuses.
You are right that CEOs execute poor timing on buybacks. If CEOs can't think of anything better to do with cash than buy their own stock, they should instead give it to shareholders to reinvest more efficiently. Allowing a CEO to reinvest your money for you on a single stock is like betting all your roulette stake on red. That is not a diversified investment.
posted by JackFlash at 5:01 PM on January 23, 2016 [14 favorites]
For a place like Bell Labs or Google, most of investment is not capital but salaries for researchers which is expensed immediately. As for capital investments, they may be depreciated over a period of years but assuming you have a continuing flow of capital expenditures each year, you also have a similar continuing flow of tax deductions each year. The result that is money you spend on investment is tax-free. Low taxes discourage investment
Except in the context of the statistics being discussed here wages aren't what is being talked about. Nor is the term investment generally used to describe the phenomenon you are talking about.
posted by JPD at 5:03 PM on January 23, 2016
Except in the context of the statistics being discussed here wages aren't what is being talked about. Nor is the term investment generally used to describe the phenomenon you are talking about.
posted by JPD at 5:03 PM on January 23, 2016
The share buyback phenomenon is not limited to businesses where comp is heavily driven by options. Of course you are correct about everything else. That said over the last few years high payout stocks were some of the most irrationally over priced areas of the market - mlps, reits, yieldcos, etc.
posted by JPD at 5:07 PM on January 23, 2016 [1 favorite]
posted by JPD at 5:07 PM on January 23, 2016 [1 favorite]
> That said over the last few years high payout stocks were some of the most irrationally over priced areas of the market - mlps, reits, yieldcos, etc.
This is a direct result of ZIRP. Investors who need yield and who would stay in medium to high quality bonds have to hunt for their cash because bonds pay very little and are expensive at the same time. Thus the weird equities that actually have yield because they are so risky get bid up sky high because they're the only game in town.
posted by zrail at 5:15 PM on January 23, 2016 [1 favorite]
This is a direct result of ZIRP. Investors who need yield and who would stay in medium to high quality bonds have to hunt for their cash because bonds pay very little and are expensive at the same time. Thus the weird equities that actually have yield because they are so risky get bid up sky high because they're the only game in town.
posted by zrail at 5:15 PM on January 23, 2016 [1 favorite]
Some explanations:
* Every CEO and CFO has a sharp memory of what happened in 2007-2009: most companies simultaneously suffered a catastrophic decline in operating cash flow AND the loss of access to new capital in the form of debt and equity markets AND a completely unprecedented and unimaginable decline in the value of liquid assets (most notably investment grade bonds) that companies used to like to use alongside government bonds and bank deposits. The "right" level of cash for a prudent company is therefore VASTLY higher than what traditional corporate finance theory would hold proper, or what people who didn't pay close attention to 2007-2009 might think today.
* US companies at this point believe that they will eventually either get Congress to pass a "tax holiday" for domesticating their offshore cash, or that they will invert themselves and as a foreign corporation will be able to pay out their offshore cash in dividend, stock buy-backs and debt reduction in London and Hong Kong.
* Much of the apparently large cash balances that points 1 and 2 seem to explain are actually not NET cash but are simply offsets to large amounts of debt that the company bears. So in reality the company IS spending the money, they just aren't spending their cash in the bank to create jobs and buy assets, but they are spending the cash proceeds of their bondholders' and lenders' investments, while leave cash in the bank too.
posted by MattD at 5:20 PM on January 23, 2016 [5 favorites]
* Every CEO and CFO has a sharp memory of what happened in 2007-2009: most companies simultaneously suffered a catastrophic decline in operating cash flow AND the loss of access to new capital in the form of debt and equity markets AND a completely unprecedented and unimaginable decline in the value of liquid assets (most notably investment grade bonds) that companies used to like to use alongside government bonds and bank deposits. The "right" level of cash for a prudent company is therefore VASTLY higher than what traditional corporate finance theory would hold proper, or what people who didn't pay close attention to 2007-2009 might think today.
* US companies at this point believe that they will eventually either get Congress to pass a "tax holiday" for domesticating their offshore cash, or that they will invert themselves and as a foreign corporation will be able to pay out their offshore cash in dividend, stock buy-backs and debt reduction in London and Hong Kong.
* Much of the apparently large cash balances that points 1 and 2 seem to explain are actually not NET cash but are simply offsets to large amounts of debt that the company bears. So in reality the company IS spending the money, they just aren't spending their cash in the bank to create jobs and buy assets, but they are spending the cash proceeds of their bondholders' and lenders' investments, while leave cash in the bank too.
posted by MattD at 5:20 PM on January 23, 2016 [5 favorites]
Except in the context of the statistics being discussed here wages aren't what is being talked about. Nor is the term investment generally used to describe the phenomenon you are talking about.
Perhaps you are unaware, but since 2013 the U.S. government Bureau of Economic Analysis has officially counted R&D as investment when computing GDP, and in fact is reworking GDP going all the way back to 1929. Wages are definitely a major part of R&D spending.
The context of what we are talking about is why corporations aren't spending more money on investment and R&D is one of the major aspects of investment. Low taxes rates discourage that investment.
posted by JackFlash at 5:22 PM on January 23, 2016 [4 favorites]
Perhaps you are unaware, but since 2013 the U.S. government Bureau of Economic Analysis has officially counted R&D as investment when computing GDP, and in fact is reworking GDP going all the way back to 1929. Wages are definitely a major part of R&D spending.
The context of what we are talking about is why corporations aren't spending more money on investment and R&D is one of the major aspects of investment. Low taxes rates discourage that investment.
posted by JackFlash at 5:22 PM on January 23, 2016 [4 favorites]
> most companies simultaneously suffered a catastrophic decline in operating cash flow AND the loss of access to new capital in the form of debt and equity markets AND a completely unprecedented and unimaginable decline in the value of liquid assets (most notably investment grade bonds) that companies used to like to use alongside government bonds and bank deposits
This paper (pdf) is a good introduction if you don't know what "commercial paper" is or why it is (or rather, was) important to companies and the economy as a whole.
posted by zrail at 5:28 PM on January 23, 2016 [2 favorites]
This paper (pdf) is a good introduction if you don't know what "commercial paper" is or why it is (or rather, was) important to companies and the economy as a whole.
posted by zrail at 5:28 PM on January 23, 2016 [2 favorites]
Privare r&d as a % of gdp is at an all time high.
posted by JPD at 5:38 PM on January 23, 2016 [1 favorite]
posted by JPD at 5:38 PM on January 23, 2016 [1 favorite]
I would also like to offer the notion that "excess" cash is the last problem that requires government intervention. Every hedge fund on the planet is focused like a laser on corporate activism opportunities these days, and forcing companies to increase dividends, effect buy-backs or retire debt if cash balances are inefficient are Activism 103. (101 and 102 being "your CEO is doing dumb things pls stop tia" and "you don't need to be, please sell yourself" respectively).
posted by MattD at 5:40 PM on January 23, 2016 [2 favorites]
posted by MattD at 5:40 PM on January 23, 2016 [2 favorites]
Just reading this thread, I think the bottom line is: I dunno.
posted by valkane at 5:42 PM on January 23, 2016 [2 favorites]
posted by valkane at 5:42 PM on January 23, 2016 [2 favorites]
Surely it could use those acquisitions to earn more than 2 cents on the dollar.
Oh hell no. The list of failed acquisitions is loooooong...
posted by Cool Papa Bell at 5:44 PM on January 23, 2016 [1 favorite]
Oh hell no. The list of failed acquisitions is loooooong...
posted by Cool Papa Bell at 5:44 PM on January 23, 2016 [1 favorite]
The answer, perhaps, is that both the executives and the investors in these industries believe that something big is coming...
Major breakthrough in energy generation and/or storage that upends the petroleum markets. A self-driving Tesla in every garage.
posted by Cool Papa Bell at 5:49 PM on January 23, 2016
Major breakthrough in energy generation and/or storage that upends the petroleum markets. A self-driving Tesla in every garage.
posted by Cool Papa Bell at 5:49 PM on January 23, 2016
CP that makes sense... then General Motors would be hoarding cash to pay the pensions of current employees, no?
They've probably funded ~80% of that liability due to ERISA.
Worldwide taxation on US corporate income. We already do it for individuals.
We do it for corporations, too. The difference is that we don't tax foreign corporations on foreign income; so if GE does business in Germany, they set up a German corporation. Just like a US citizen doesn't get taxed on income from a company they have stock in until they get a dividend, GE doesn't get taxed on GE Germany until they get a dividend from it.
posted by jpe at 5:49 PM on January 23, 2016 [3 favorites]
They've probably funded ~80% of that liability due to ERISA.
Worldwide taxation on US corporate income. We already do it for individuals.
We do it for corporations, too. The difference is that we don't tax foreign corporations on foreign income; so if GE does business in Germany, they set up a German corporation. Just like a US citizen doesn't get taxed on income from a company they have stock in until they get a dividend, GE doesn't get taxed on GE Germany until they get a dividend from it.
posted by jpe at 5:49 PM on January 23, 2016 [3 favorites]
why invest -- where's the ROI -- if (most) people don't have any (extra) money -- disposable income -- to spend? /keynes
re: deflation (and rents/productivity...)*
Could it just be a rational response to the 2008 financial crisis?
Causes of the Great Recession and the Prospects for Recovery
posted by kliuless at 5:49 PM on January 23, 2016 [3 favorites]
re: deflation (and rents/productivity...)*
Could it just be a rational response to the 2008 financial crisis?
Causes of the Great Recession and the Prospects for Recovery
posted by kliuless at 5:49 PM on January 23, 2016 [3 favorites]
I generally find "you've got excess cash" activism some of the laziest lamest activism around. surpassed only by "you own too much real estate"
posted by JPD at 5:51 PM on January 23, 2016
posted by JPD at 5:51 PM on January 23, 2016
What can be done, and who can do it, to make these people decide otherwise?
Torches and pitchforks.
posted by Faint of Butt at 6:01 PM on January 23, 2016 [1 favorite]
Torches and pitchforks.
posted by Faint of Butt at 6:01 PM on January 23, 2016 [1 favorite]
I guess JPD would find me pretty lame, then.
posted by entropicamericana at 6:04 PM on January 23, 2016 [1 favorite]
posted by entropicamericana at 6:04 PM on January 23, 2016 [1 favorite]
One reason Microsoft was doing that was that they had granted a whole lot of stock options to their employees and that represented a liability that wasn't on their books. Eventually the employees were going to start cashing in, and the company was going to need a hell of a lot of money to buy the stock to cover those options. I think Apple was the same way.
I don't think this is how employee stock options work. Employee stock options typically create new shares when the option is exercised (or the shares come from a special pool of shares already held by the company). This dilutes the stock, because there are now more shares than there used to be. (Or shares from the special pool are now publicly tradeable). It may result in an accounting or tax liability for the company, which may be a reason to hold on to some cash. But the company does NOT have to go out and buy shares on the open market to give to the employees exercising options. (The company might want to do this to limit the amount of dilution caused by employees exercising shares, but it's not an obligation).
Diluted earnings per share on investopedia.
posted by cruelfood at 6:04 PM on January 23, 2016 [4 favorites]
I don't think this is how employee stock options work. Employee stock options typically create new shares when the option is exercised (or the shares come from a special pool of shares already held by the company). This dilutes the stock, because there are now more shares than there used to be. (Or shares from the special pool are now publicly tradeable). It may result in an accounting or tax liability for the company, which may be a reason to hold on to some cash. But the company does NOT have to go out and buy shares on the open market to give to the employees exercising options. (The company might want to do this to limit the amount of dilution caused by employees exercising shares, but it's not an obligation).
Diluted earnings per share on investopedia.
posted by cruelfood at 6:04 PM on January 23, 2016 [4 favorites]
fundamentally, it's to hide weakness, avoid paying taxes, and a bet against deflation. When interest rates mattered, you'd never hold that cash, you'd stick it into bonds.
Big corps have always had big reserves. They're just visible now because there's nowhere risk free to put that money that's worth losing value of money. When bonds are less than 3% and money market funds are dancing with inversion, why put your cash there?
When those paid, they'd invest those and borrow against the bonds if they needed that cash immediately. But with those so valueless, they just hold cash.
posted by eriko at 6:06 PM on January 23, 2016 [4 favorites]
Big corps have always had big reserves. They're just visible now because there's nowhere risk free to put that money that's worth losing value of money. When bonds are less than 3% and money market funds are dancing with inversion, why put your cash there?
When those paid, they'd invest those and borrow against the bonds if they needed that cash immediately. But with those so valueless, they just hold cash.
posted by eriko at 6:06 PM on January 23, 2016 [4 favorites]
And, any bond interest they get is marginal income taxed in the US (regardless of whether it's held offshore or not). With interest rate expectations making it likely that bonds will drop in the future, they're taking on market risk to get that income which they have to pay tax on.
posted by jpe at 6:09 PM on January 23, 2016
posted by jpe at 6:09 PM on January 23, 2016
surpassed only by "you own too much real estate"
real estate is a zero-sum game, much like Monopoly.
http://geolib.com/essays/sullivan.dan/royallib.html
posted by Heywood Mogroot III at 6:34 PM on January 23, 2016 [1 favorite]
real estate is a zero-sum game, much like Monopoly.
http://geolib.com/essays/sullivan.dan/royallib.html
posted by Heywood Mogroot III at 6:34 PM on January 23, 2016 [1 favorite]
Part of this analysis is very biased toward a supply-side only view -- as if capital investment necessarily would always make sense and would necessarily be macroeconomically productive.
As the trend began long before 2008, I think we can be certain that the underlying primary factors are a combination of the ones mentioned in the article and in the discussion above. But all the factors taken together are: low inflation (especially since 2009), tax policy, the trend against paying dividends, sector differences where in some of them investors reward companies with large war chests, difficult-to-value liabilities in some sectors, macroeconomic uncertainty that biases companies away from a lot of capital investment and toward savings (especially since 2008), low relative labor costs / stagnant wages which reduce incentives toward capital investment that would improve competitiveness with regard to labor costs. Some of those are part of the demand constraints that have weighed so heavily since 2008, but the rest form a foundation such that the present demand constraints greatly amplify the bias toward savings.
What's frustrating is much of this works together, reinforcing itself, and big parts of it also represent the interests of the rentier class. They don't need enormous returns, just safe ones, and they're especially happy when those returns represent an increasing income share under a favorable tax policy.
"We could have, but chose not to. The economic theories that said that this was a good idea are still popular among more than half of our elected leaders."
And just to make this clear, we were correct to choose not to do so. The idea that it's Very Important for the US and a number of other countries to pay off sovereign debt is just dumb. All the debt issued in the last seven years is actually a gift to the US taxpayers, as the interest it pays is lower than inflation. Not that there aren't more general reasons, but it's especially dumb in the current context.
"Reagan left office twenty seven years ago. Fed rates were 9.75% Since Reagan, we've had eight years of Clinton and seven of Obama. Clinton embraced Greenspan, Obama failed to boot Bernanke, and put in Yellen. Under these last two, we've had seven years of near zero interest rates. I hold no brief for the Republicans, but these last seven years of insane interest have not been their fault."
Wow. What you did there was sort of impressive, given that the comment you were responding to was arguing that high interest rates aimed at controlling inflation, which implicitly controls wage growth and therefore favors capital, has been a bad thing ... and your comment is asserting that the good thing in the last eight years would have been to raise rates. Because what we really needed was for the Fed to turn the Great Recession into The Second Great Depression. It would have been 1932 and 1937 all over again! Woohoo!
posted by Ivan Fyodorovich at 6:40 PM on January 23, 2016 [4 favorites]
As the trend began long before 2008, I think we can be certain that the underlying primary factors are a combination of the ones mentioned in the article and in the discussion above. But all the factors taken together are: low inflation (especially since 2009), tax policy, the trend against paying dividends, sector differences where in some of them investors reward companies with large war chests, difficult-to-value liabilities in some sectors, macroeconomic uncertainty that biases companies away from a lot of capital investment and toward savings (especially since 2008), low relative labor costs / stagnant wages which reduce incentives toward capital investment that would improve competitiveness with regard to labor costs. Some of those are part of the demand constraints that have weighed so heavily since 2008, but the rest form a foundation such that the present demand constraints greatly amplify the bias toward savings.
What's frustrating is much of this works together, reinforcing itself, and big parts of it also represent the interests of the rentier class. They don't need enormous returns, just safe ones, and they're especially happy when those returns represent an increasing income share under a favorable tax policy.
"We could have, but chose not to. The economic theories that said that this was a good idea are still popular among more than half of our elected leaders."
And just to make this clear, we were correct to choose not to do so. The idea that it's Very Important for the US and a number of other countries to pay off sovereign debt is just dumb. All the debt issued in the last seven years is actually a gift to the US taxpayers, as the interest it pays is lower than inflation. Not that there aren't more general reasons, but it's especially dumb in the current context.
"Reagan left office twenty seven years ago. Fed rates were 9.75% Since Reagan, we've had eight years of Clinton and seven of Obama. Clinton embraced Greenspan, Obama failed to boot Bernanke, and put in Yellen. Under these last two, we've had seven years of near zero interest rates. I hold no brief for the Republicans, but these last seven years of insane interest have not been their fault."
Wow. What you did there was sort of impressive, given that the comment you were responding to was arguing that high interest rates aimed at controlling inflation, which implicitly controls wage growth and therefore favors capital, has been a bad thing ... and your comment is asserting that the good thing in the last eight years would have been to raise rates. Because what we really needed was for the Fed to turn the Great Recession into The Second Great Depression. It would have been 1932 and 1937 all over again! Woohoo!
posted by Ivan Fyodorovich at 6:40 PM on January 23, 2016 [4 favorites]
When bonds are less than 3% and money market funds are dancing with inversion, why put your cash there?
It's not just cash. Technically what we are talking about here colloquially as "trillions in cash" is what appears on the balance sheet as "cash and short-term investments," not just cash.
Short-term investments are stocks and bonds that are readily convertible to cash and have a holding period of one year or less. This could include Treasury bonds or publicly traded stocks. So, for example, Microsoft holds $5.5 billion in actual cash plus $94 billion in short-term investments. Together these represent almost $100 billion in cash and short-term investments readily convertible to cash. Actual cash is only a small part of it.
posted by JackFlash at 6:45 PM on January 23, 2016 [5 favorites]
It's not just cash. Technically what we are talking about here colloquially as "trillions in cash" is what appears on the balance sheet as "cash and short-term investments," not just cash.
Short-term investments are stocks and bonds that are readily convertible to cash and have a holding period of one year or less. This could include Treasury bonds or publicly traded stocks. So, for example, Microsoft holds $5.5 billion in actual cash plus $94 billion in short-term investments. Together these represent almost $100 billion in cash and short-term investments readily convertible to cash. Actual cash is only a small part of it.
posted by JackFlash at 6:45 PM on January 23, 2016 [5 favorites]
ryanshepard: "Walking around DC late at night, looking in through the giant, story-high windows of many of the new luxury condos, I keep expecting to see someone backstroking through a heated, Olympic-sized pool of gold coin."
Yeah. Who lives in those? Are there careers in DC that can support that? Lobbying is a pretty sweet deal if you can get it, but there aren't many of them, and those guys aren't living in expensive rentals (almost none of the new buildings are condos), so.... who's living there?
posted by schmod at 7:32 PM on January 23, 2016
Yeah. Who lives in those? Are there careers in DC that can support that? Lobbying is a pretty sweet deal if you can get it, but there aren't many of them, and those guys aren't living in expensive rentals (almost none of the new buildings are condos), so.... who's living there?
posted by schmod at 7:32 PM on January 23, 2016
So, for example, Microsoft holds $5.5 billion in actual cash plus $94 billion in short-term investments.
And that $5.5 billion is in the bank too, right? It's not palettes of $100 bills?
posted by chrchr at 8:12 PM on January 23, 2016
And that $5.5 billion is in the bank too, right? It's not palettes of $100 bills?
posted by chrchr at 8:12 PM on January 23, 2016
I suspect they are stockpiling the cash in order to weather-through the coming Sovereign Citizen revolution.
posted by Thorzdad at 8:23 PM on January 23, 2016 [3 favorites]
posted by Thorzdad at 8:23 PM on January 23, 2016 [3 favorites]
real estate is a zero-sum game, much like Monopoly.No, it's not. If I sell my house for twice what I payed for it, the values of my neighbors houses do not decrease by the delta (as they would in a zero sum game), in fact they generally increase in kind.
Thus real estate, stocks, and most assets are not zero sum games.. they are all subject to bubbles and bursts dictated by the turns of the market.
posted by MikeWarot at 10:27 PM on January 23, 2016 [1 favorite]
And that $5.5 billion is in the bank too, right? It's not palettes of $100 bills?
Some of the actual cash is in the bank. They need to be able to write checks to pay their bills, wages and taxes. But most of it is in cash equivalent securities with a maturity of less than 3-months -- money market funds, T-bills, commercial paper. The securities must be of very low risk of having their market value change within three months.
The $94 million on the other hand is in short term investments of less than one year.
posted by JackFlash at 10:35 PM on January 23, 2016 [1 favorite]
Some of the actual cash is in the bank. They need to be able to write checks to pay their bills, wages and taxes. But most of it is in cash equivalent securities with a maturity of less than 3-months -- money market funds, T-bills, commercial paper. The securities must be of very low risk of having their market value change within three months.
The $94 million on the other hand is in short term investments of less than one year.
posted by JackFlash at 10:35 PM on January 23, 2016 [1 favorite]
Interesting article, thanks for posting it.
posted by Tell Me No Lies at 10:40 PM on January 23, 2016
posted by Tell Me No Lies at 10:40 PM on January 23, 2016
In Apple's case, it's a hangover from the '90s they're still swigging vitamin water and popping Excedrin pills for. Only Apple's VAST HOARD OF CASH prevented it from a) going out of business despite being unprofitable for years and b) swallowed whole and dismembered by more of-the-moment companies. Sun Microsystems was, at one point in 1997, all but certain to do the hostile takeover thing with a Pre-Steve AAPL, except no-one could figure out a way around their GIANT WALL OF CASH.
These days, it's ludicrous and stupid. That quarter-trill not invested is money not being put to use to bury Microsoft and destroy Google and squash Intel like a roach. Wasted. The whole earth teaming up could not buy you out. Invest in tech. Be OK with losing some money to gain cool tech you can package and sell to make more money than you lost.
posted by Slap*Happy at 10:43 PM on January 23, 2016 [7 favorites]
These days, it's ludicrous and stupid. That quarter-trill not invested is money not being put to use to bury Microsoft and destroy Google and squash Intel like a roach. Wasted. The whole earth teaming up could not buy you out. Invest in tech. Be OK with losing some money to gain cool tech you can package and sell to make more money than you lost.
posted by Slap*Happy at 10:43 PM on January 23, 2016 [7 favorites]
Invest in tech. Be OK with losing some money to gain cool tech you can package and sell to make more money than you lost.
A brief aside on Tech M&A:
They are investing in tech. As the article indicates, Google buys a new tech company once a week. It's not easy to integrate companies after an acquisition. It takes a lot of time to become productive after an acquisition, and many of them fail. The stat I've seen from HBR is that 70 - 90% of M&A activities are considered failures. To paraphrase what someone said upthread, going crazy with M&A is the same as setting your cash on fire. In the worst case, it can destabilize your core business and be a total disaster.
I co-founded a tech company in 2011 and sold it about 30 months later in 2013. We're now into the third year post-acquisition, and I think it's safe to call it a success at this point, but it wasn't a sure thing in the first 18 months by any stretch. We were acquired by a larger tech company that had very little history in M&A, and the executives on both sides were extremely motivated to put in the effort required to make it work.
If you look at a place like Google, Apple, or Yahoo, where the model is typically to purchase a small startup for $10 - $50M, it's very easy for an acquired company to almost immediately get lost in the parent company. I worked for Google for many years, and I watched a lot of acquired companies vanish in a puff of smoke. We got a lot of good people out of those acquisitions, but I'm not sure the acqui-hire model makes financial sense in 90% of cases. Sometimes you buy YouTube, Danger (Android), or DoubleClick and end up getting a huge ROI. Sometimes you buy Dodgeball or Motorola and flush millions or billions down the toilet. Yahoo has been doing a lot of the latter, lately, which is part of the reason that investors think the company is worth less than the value of its assets.
posted by drklahn at 11:21 PM on January 23, 2016 [7 favorites]
A brief aside on Tech M&A:
They are investing in tech. As the article indicates, Google buys a new tech company once a week. It's not easy to integrate companies after an acquisition. It takes a lot of time to become productive after an acquisition, and many of them fail. The stat I've seen from HBR is that 70 - 90% of M&A activities are considered failures. To paraphrase what someone said upthread, going crazy with M&A is the same as setting your cash on fire. In the worst case, it can destabilize your core business and be a total disaster.
I co-founded a tech company in 2011 and sold it about 30 months later in 2013. We're now into the third year post-acquisition, and I think it's safe to call it a success at this point, but it wasn't a sure thing in the first 18 months by any stretch. We were acquired by a larger tech company that had very little history in M&A, and the executives on both sides were extremely motivated to put in the effort required to make it work.
If you look at a place like Google, Apple, or Yahoo, where the model is typically to purchase a small startup for $10 - $50M, it's very easy for an acquired company to almost immediately get lost in the parent company. I worked for Google for many years, and I watched a lot of acquired companies vanish in a puff of smoke. We got a lot of good people out of those acquisitions, but I'm not sure the acqui-hire model makes financial sense in 90% of cases. Sometimes you buy YouTube, Danger (Android), or DoubleClick and end up getting a huge ROI. Sometimes you buy Dodgeball or Motorola and flush millions or billions down the toilet. Yahoo has been doing a lot of the latter, lately, which is part of the reason that investors think the company is worth less than the value of its assets.
posted by drklahn at 11:21 PM on January 23, 2016 [7 favorites]
hey, so inspired by Heywood Mogroot III, i thought i'd try my hand at a FRED graph! (because mcafee's was bothering me -- second machine age this! -- and i couldn't find a better/more recent one + nothing else to do on a saturday night ;) here's corporate profits' (blue, LHS) and employee compensation's 'labor' (red, RHS) share of GDP since 1947 :P
also btw, what if you stripped out top incomes from the labor share?
What Do We Know About the Labor Share and the Profit Share? (pdf) - "We find that the labor shares for the bottom 90%, 99% and 99.9% have decidedly fallen since the early 1980s, so much so that the labor share is lower today than at any other period since 1930. The fall took place over 1980-2012 and it is substantial, ranging between 8 and 18 points of the net national income, depending on which top income category is retained. This is the equivalent of an annual transfer of $1 to $2.25 trillion from labor to 'capital' (using 2012 data). Recall, for comparison, that our best estimate of the aggregate labor share has it falling 5 points of net national income over the same period. Thus, whatever the forces shape the labor share, one of the most powerful is the concentration of incomes at the top."
oh and just out of curiosity, here's a look at financial vs. nonfinancial profit shares since 1947; financial profits (blue line) got as high as 40% in 2001 and have since been 'volatile' but still over 20%, which it never really got above before 1990... now raise your hand if you think the finance 'industry' has been doing a good job (you had one job!) of intermediating savings with investments* lately and, if not, why are they still making 20%+ of total domestic profits?
---
*i can't stop :D notice the break in 2009 of loan (red) to deposit (blue) growth (LHS) the difference of which (green, RHS) roughly matches excess reserves (purple) that the fed started paying interest on in 2008; that's right, they're getting paid to stuff money into mattresses and sit on it...
posted by kliuless at 11:34 PM on January 23, 2016 [3 favorites]
also btw, what if you stripped out top incomes from the labor share?
What Do We Know About the Labor Share and the Profit Share? (pdf) - "We find that the labor shares for the bottom 90%, 99% and 99.9% have decidedly fallen since the early 1980s, so much so that the labor share is lower today than at any other period since 1930. The fall took place over 1980-2012 and it is substantial, ranging between 8 and 18 points of the net national income, depending on which top income category is retained. This is the equivalent of an annual transfer of $1 to $2.25 trillion from labor to 'capital' (using 2012 data). Recall, for comparison, that our best estimate of the aggregate labor share has it falling 5 points of net national income over the same period. Thus, whatever the forces shape the labor share, one of the most powerful is the concentration of incomes at the top."
oh and just out of curiosity, here's a look at financial vs. nonfinancial profit shares since 1947; financial profits (blue line) got as high as 40% in 2001 and have since been 'volatile' but still over 20%, which it never really got above before 1990... now raise your hand if you think the finance 'industry' has been doing a good job (you had one job!) of intermediating savings with investments* lately and, if not, why are they still making 20%+ of total domestic profits?
---
*i can't stop :D notice the break in 2009 of loan (red) to deposit (blue) growth (LHS) the difference of which (green, RHS) roughly matches excess reserves (purple) that the fed started paying interest on in 2008; that's right, they're getting paid to stuff money into mattresses and sit on it...
posted by kliuless at 11:34 PM on January 23, 2016 [3 favorites]
The other camp doubts that the free market could be allowing executives to hold all that cash if it were purely for their own benefit.
Hahahahahahahahahahahahahahahahahahaha. Hahaha. Ha.
Jesus, there are people who actually think like this...
posted by Dysk at 12:52 AM on January 24, 2016 [3 favorites]
Hahahahahahahahahahahahahahahahahahaha. Hahaha. Ha.
Jesus, there are people who actually think like this...
posted by Dysk at 12:52 AM on January 24, 2016 [3 favorites]
No, it's not. If I sell my house for twice what I payed for it, the values of my neighbors houses do not decrease by the delta (as they would in a zero sum game), in fact they generally increase in kind.Real estate is a zero-sum game in the sense that everyone needs it and nobody is creating any more of it.*
Thus real estate, stocks, and most assets are not zero sum games.. they are all subject to bubbles and bursts dictated by the turns of the market.
In your example, you're ignoring the effect that real estate appreciation has on the bottom third of the U.S. population, which doesn't own homes. All of those folks now have to pay higher rents or put off buying a house until they can save more money.
Meanwhile, the folks who only own one home aren't going to gain much from the appreciation unless they take out a home equity loan. Buying a first home isn't an investment- it's a necessary hedge bet to keep your economic gains from evaporating.
*Yes, we can increase living space by building high rises; but keep in mind that in addition to being expensive, doing so imposes hidden costs on the surrounding real estate by reducing open space and increasing congestion.
posted by droro at 7:11 AM on January 24, 2016 [1 favorite]
The tax cuts of the Reagan era spelled the end of Bell Labs, Xerox PARC and the like.
Ronald Reagan. The actor?!?
posted by petebest at 7:18 AM on January 24, 2016 [9 favorites]
Ronald Reagan. The actor?!?
posted by petebest at 7:18 AM on January 24, 2016 [9 favorites]
They're still making real-estate near me, and destroying productive farmland in the process.
posted by MikeWarot at 7:44 AM on January 24, 2016 [1 favorite]
posted by MikeWarot at 7:44 AM on January 24, 2016 [1 favorite]
^ that was my point about "people owning too much land" being lame activism.
the more land monopolized, the more people pushed out to the economic margin.
plus the rent flow from renters to landlords is immense in this country -- this wealth tap is our primary economic asymmetry.
posted by Heywood Mogroot III at 10:07 AM on January 24, 2016 [1 favorite]
the more land monopolized, the more people pushed out to the economic margin.
plus the rent flow from renters to landlords is immense in this country -- this wealth tap is our primary economic asymmetry.
posted by Heywood Mogroot III at 10:07 AM on January 24, 2016 [1 favorite]
FRED used to have a longer S&P 500 series, where I first noticed the correlation between profits & the S&P500 index; but I can re-create it in Excel:
Actually, in 1981, Shiller published "Do Stock Prices Move Too Much to be Justified by Subsequent Dividends?", which argued that stock prices overreact too strongly to short term information relative to the dividends later paid out.
posted by pwnguin at 2:05 PM on January 24, 2016
Actually, in 1981, Shiller published "Do Stock Prices Move Too Much to be Justified by Subsequent Dividends?", which argued that stock prices overreact too strongly to short term information relative to the dividends later paid out.
posted by pwnguin at 2:05 PM on January 24, 2016
You all misunderstood the "activism" point. MattD and I were referencing activist investors who essentially try to force a board to do something because they think it means the share price conversion.
The real estate example in particular was about "activists"who try to force retail companies to spin their real estate holdings into a REIT that they sign a long-term lease deal with
The comment wasn't about political activism at all.
posted by JPD at 2:50 PM on January 24, 2016 [2 favorites]
The real estate example in particular was about "activists"who try to force retail companies to spin their real estate holdings into a REIT that they sign a long-term lease deal with
The comment wasn't about political activism at all.
posted by JPD at 2:50 PM on January 24, 2016 [2 favorites]
never mind
posted by Heywood Mogroot III at 4:23 PM on January 24, 2016 [2 favorites]
posted by Heywood Mogroot III at 4:23 PM on January 24, 2016 [2 favorites]
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Sorry, what?
posted by BungaDunga at 2:19 PM on January 23, 2016 [2 favorites]