Apparently, Corporations Are Not Investing Because They Are Not "Socially Engaged"

Paul Roberts has an editorial in the LA Times that sortof, kindof mirrors my post the other day that observed that corporate stock buybacks (and investments to reduce tax rates) were likely signs of a bad investment climate.  Until he starts talking about solutions

Roberts begins in a similar manner

Here's a depressing statistic: Last year, U.S. companies spent a whopping $598 billion — not to develop new technologies, open new markets or to hire new workers but to buy up their own shares. By removing shares from circulation, companies made remaining shares pricier, thus creating the impression of a healthier business without the risks of actual business activity.

Share buybacks aren't illegal, and, to be fair, they make sense when companies truly don't have something better to reinvest their profits in. But U.S. companies do have something better: They could be reinvesting in the U.S. economy in ways that spur growth and generate jobs. The fact that they're not explains a lot about the weakness of the job market and the sliding prospects of the American middle class.

I suppose I would dispute him in his implication that there is something unseemly about buybacks.  They are actually a great mechanism for economic efficiency.  If companies do not have good investment prospects, we WANT them returning the cash to their shareholders, rather than doing things like the boneheaded diversification of the 1960's and 1970's (that made investment bankers so rich unwinding in the 1980's).  That way, individuals can redeploy capital in more promising places.  The lack of investment opportunities and return of capital to shareholders is a bad sign for investment prospects of large companies, but it is not at all a bad sign for the ethics of corporate management.   I would argue this is the most ethical possible thing for corporations to do if they honestly do not feel they have a productive use for their cash.

The bigger story here is what might be called the Great Narrowing of the Corporate Mind: the growing willingness by business to pursue an agenda separate from, and even entirely at odds with, the broader goals of society. We saw this before the 2008 crash, when top U.S. banks used dodgy financial tools to score quick profits while shoving the risk onto taxpayers. We're seeing it again as U.S. companies reincorporate overseas to avoid paying U.S. taxes. This narrow mind-set is also evident in the way companies slash spending, not just on staffing but also on socially essential activities, such as long-term research or maintenance, to hit earnings targets and to keep share prices up....

It wasn't always like this. From the 1920s to the early 1970s, American business was far more in step with the larger social enterprise. Corporations were just as hungry for profits, but more of those profits were reinvested in new plants, new technologies and new, better-trained workers — "assets" whose returns benefited not only corporations but the broader society.

Yes, much of that corporate oblige was coerced: After the excesses of the Roaring '20s, regulators kept a rein on business, even as powerful unions exploited tight labor markets to win concessions. But companies also saw that investing in workers, communities and other stakeholders was key to sustainable profits. That such enlightened corporate self-interest corresponds with the long postwar period of broadly based prosperity is hardly a coincidence....

Without a more socially engaged corporate culture, the U.S. economy will continue to lose the capacity to generate long-term prosperity, compete globally or solve complicated economic challenges, such as climate change. We need to restore a broader sense of the corporation as a social citizen — no less focused on profit but far more cognizant of the fact that, in an interconnected economic world, there is no such thing as narrow self-interest.

There is so much crap here it is hard to know where to start.  Since I work for a living rather than write editorials, I will just pound out some quick thoughts

  • As is so typical with Leftist nostalgia for the 1950's, his view is entirely focused on large corporations.  But the innovation model has changed in a lot of industries.  Small companies and entrepreneurs are doing innovation, then get bought by large corporations with access to markets and capital needed to expanded (the drug industry increasingly works this way).  Corporate buybacks return capital to the hands of individuals and potential entrepreneurs and funding angels.
  • But the Left is working hard to kill innovation and entrepreneurship and solidify the position of large corporations.  Large corporations increasingly have the scale to manage regulatory compliance that chokes smaller companies.  And for areas that Mr. Roberts mentions, like climate and green energy, the government manages that whole sector as a crony enterprise, giving capital to political donors and people who can afford lobbyists and ignoring everyone else.  "Socially engaged" investing is nearly always managed like this, as cronyism where the politician you held a fundraiser for is more important than your technology or business plan.  *cough* Solyndra *cough*
  • One enormous reason that companies are buying back their own stock is the Federal Reserve's quantitative easing program, which I would bet anything Mr. Roberts fully supports.  This program concentrates capital in the hands of a few large banks and corporations, and encourages low-risk financial investments of capital over operational investments
  • All those "Social engagement" folks on the Left seem to spend more time stopping investment rather than encouraging it.  They fight tooth and nail the single most productive investment area in the US right now (fracking), they fight new construction in many places (e.g. most all places in California), they fight for workers in entrenched competitors against new business models like Lyft and Uber, they fight every urban Wal-Mart that attempts to get built.  I would argue one large reason for the lack of operational investment is that the Left blocks and/or makes more expensive the investments corporations want to make, offering for alternatives only crap like green energy which doesn't work as an investment unless it is subsidized and you can't count on the subsidies unless you held an Obama fundraiser lately.
  • If corporations make bad investments and tick off their workers and do all the things he suggests, they get run out of business.  And incredibly, he even acknowledges this:  "And here is the paradox. Companies are so obsessed with short-term performance that they are undermining their long-term self-interest. Employees have been demoralized by constant cutbacks. Investment in equipment upgrades, worker training and research — all essential to long-term profitability and competitiveness — is falling."  So fine, the problem corrects itself over time.  
  • He even acknowledges that corporations that are following his preferred investment strategy exist and are prospering -- he points to Google.   Google is a great example of exactly what he is missing. Search engines and Internet functionality that Google thrives on were not developed in corporate R&D departments.  I don't get how he can write so fondly about Google and simultaneously write that he wishes, say, US Steel, were investing more in R&D.  I would think having dinosaur corporations eschew trying to invest in these new areas, and having them return the money to their shareholders, and then having those individuals invest the money in startups like Google would be a good thing.  But like many Leftists he just can't get around the 1950's model.  At the end of the day, entrepreneurship is too chaotic -- the Left wants large corporations that it can easily see and control.


  1. Mike Powers:

    "So fine, the problem corrects itself over time."

    His concern is that the problem "correcting itself" means a whole bunch of people lose their jobs, and maybe those jobs come back somewhere else but that doesn't help Joe Middle Manager with two kids and a house that he owes more than it's worth.

  2. Mike Powers:

    You're right that leftists seem to imagine that A: all business owners are rich, B: all companies make vast profits, and C: both of those things were achieved by scurrilous means and so it's OK to do things that affect personal wealth and company profits.

  3. Joe:

    The 1950s model was terrible. We had three recessions from 1953 to 1960. Each short burst of economic expansion was followed by a very sharp economic contraction. And the "tight" labor market was forced on the economy through Jim Crow and other discriminatory laws. From 1950 through 1969 the employment-population ratio as measured by the BLS never went above 58.1 percent. During the aftermath of the most recent financial crisis the employment-population ratio never went below 58.2 percent. It currently stands at 59.0 percent. If one took the labor force participation of 66.0 percent (what it was in December 2007) and applied it throughout the 1950s and 1960s the U3 unemployment rate would have never gone below 11.9 percent for those two decades. The average UE rate using the December 2007 LFPR would have been 14.4 percent for the two decades. Given that most of the rest of the world spent these decades picking up the pieces after WWII one would have expected the US economy to perform much, much better.

    There was a decade long boom in the 1960s but the biggest reason the economy didn't suffer from a sharp and sudden economic contraction in the mid 1960s was because of the tax cut of the time. That tax cut was huge, taking the top rate from 91 percent to 70 percent. If you look at the inverse of that it meant that a person in the top bracket went from keeping 9 cents of each additional dollar earned to 30 cents. That is an after tax increase of more than 200 percent.

  4. NL7:

    There were also lots of exceptions, so the effective tax rate was considerably lower than the >90% marginal rate. But that distorted investment, with lots of doctors and lawyers investing in money-losing real estate just to get the tax losses. Corporations were also in some ways more tax efficient historically, which is one reason why corporations started to balloon.

  5. JKB:

    Here is a view of corporations from 1950 (The Big Change: America Transforms Itself 1900-195, Frederick Allen Lewis)

    "Is the big and successful corporation its own master, then? Not quite.

    "To begin with, it is severely circumscribed by the government. as Professor Sumner H. Slichter has said, one of the basic changes which have taken place in America during the last fifty years [1900-1950] is "the transformation of the economy form one of free enterprise to one of government guided enterprise....The new economy," says Dr. Slichter, "operates on the principle that fundamental decisions on who has what incomes, what is produced, and at what prices it s sold are determined by public policies." The government interferes with the course of prices by putting a floor under some, a ceiling over others; it regulates in numerous ways how goods may be advertised and sold, what businesses a corporation may be allowed to buy into, and how employees may be paid; in some states with Fair Employment laws it even has a say about who may be hired. "When a piece of business comes up,' writes Ed Tyng, "the first question is not likely to be 'Should we do it?' but 'Can we do it, under existing rules and regulations?' "He is writing about banking, but what he says hold good for many another business. Furthermore, in the collection of corporate income taxes, withholding taxes, social security taxes, and other levies the government imposes upon the corporation an intricate series of bookkeeping tasks which in some cases may be as onerous as those it must undertake on its own behalf. Thus the choices of enterprise are both hedged in and complicated by government."

    This was rolled back a bit in the 1980s and we prospered, along with a new industry that government hadn't got ahold of yet. But since 2000, great effort has been put forth to reimplement the controls, and we get a 1970s economy for the trouble.

  6. J_W_W:

    Yep, the Left hates an economy based on lots of small businesses and entrepreneurs, its just too hard to control. Much better to manage a few large companies. The fact that misses them is that in order to centrally manage an economy of few huge companies, you have to shrink the economy's dynamics and variability so that it can be easily understood. A managed economy can not actually grow because it is by default constrained and constricted too much by the central planners.

  7. Matthew Slyfield:

    If he was able to implement his preferred solution, those jobs would still go away, but they wouldn't come back ever.

  8. Matthew Slyfield:

    Scurrilous isn't strong enough to really capture how they feel. Infernal would probably do it.

  9. mesocyclone:

    The focus on big business has been striking with the Obama administration. Over and over again, Obama meets with "business leaders" - meaning CEO's of giant, often stale corporations. His only comment on smaller business has been "you didn't build that."

    I suspect this is because lefties like bigness - centralization of power - and they imagine that the whole economy works the way they imagine the government should work - a few big guys at the top running everything.

    Once again, lefties are exposed as suffering from a mental disorder.

  10. MNHawk:

    Maybe the banana republic created in Paul Robert's very image just isn't worth investing in?

  11. Craig Loehle:

    People want to freeze everything the way it is because we love security. The problem is that a) if you freeze your country, the rest of the world does not do the same, and pretty soon you are trying to sell buggies and sealing wax to a jet-age world, and b) the consequence of change is that most top companies of the 1950s or 1960 (pick a decade) are currently gone. Xerox where art thou? So even being a big company does not guarantee safety.
    What would actually help would be to lower the costs of changing jobs. For example, most 401k-type retirement plans are rear-loaded--that is the company pays most into it in your later years. In defined benefit plans, what matters most is years of service, so if you are 50 yrs old you dare not change jobs or if your company fails you get no retirement. Check out ads at universities--they only hire young assistant professors. Job mobility in academia? forget it.
    And of course the problem of bias against small business that was mentioned. Dodd-Frank and other laws make banks less likely to make loans to small businesses because they are "risky". The regulatory burden can be very difficult to navigate for a small company. Likewise, a small company can be sued into oblivion for trivial infractions such as ADA "violations" (see CA as great example) of labor dispute suits.
    If you wage war on business, don't be surprised that job mobility suffers. But surprised they are.

  12. bigmaq1980:

    Criminal? Gangster? Malevolent? Evil?

    And then there is: Obscene profits?

  13. Mark Alger:

    The problem is not enough leftists aren't told "Mind your own effing business!" and publicly and humiliatingly bitch-slapped when they fail to do so. Business owners need to sack up and take ownership of their own businesses.

  14. Nehemiah:

    Great job with this post Warren. The real nostalgia for me is the free market environment of the 50's & 60's. When we were on the gold standard and before price & wage freeze strategies. The wage freeze gave birth to employer provided health insurance which killed the free market characteristics of the healthcare industry.

  15. Nehemiah:

    One of the most under-appreciated shareholder risks is reinvestment risk, i.e., management plowing profits into projects where the return on capital is sub-optimal. Warren mentioned the conglomerate building binge where corporate
    managers tried to make their stock into mutual funds with a little of
    this and a little of that. A lot of capital was destroyed in that

    Although there are likely instances where stock buybacks are done to prop up share price, in most cases it is a prudent capital/risk management strategy. The reason the stock price goes up of course, is due to the demand created via the
    buyback. However, for savvy shareholders it may be a sign to take your profits because the business is reaching market maturity. Keep in mind it is executive management admitting that they do not have the wherewithal to redeploy the capital in high yield projects.

    If we ever changed tax policy so that dividends were either distributed pre-tax by the corporation or as being non-taxable to the shareholder you would probably see an end to stock buybacks.

  16. bigmaq1980:

    We have seen increasing re-investment risk due to "regime uncertainty".

    Add to that the zero interest rate policy (zirp), and corporations have been leveraging up...

    ...with little impact on output...

    With declining interest rates in the 2000s to now, buybacks are up...

    Are all these corporations, in aggregate, playing a smart financial strategy to increase their leverage when the economics of that commitment appear so shaky that they out to give that latent cash back to the shareholders in the form of stock buybacks?

    More likely a form of financial engineering, as they could just as easily do so via dividends, but buybacks have been increasing...