The Profits-Investment Disconnect

Corporate cash, all dressed up with nowhere to go?

And monopoly power is just an example of rent seeking, about which Joe Stiglitz has written so eloquently. It now seems that the number 1 item in the American business model is to garner rents, not to invest in production.

8 2018-12-02 05:16:21 - JFC

"Of course, any time a business is successful there are socialists claiming that it's because they are exercising monopoly market power."

An absolute statement that is absolutely wrong. Dan, anti-trust policies have been weakened over the years which generates more monopolies, an unfortunate truism of capitalism. This suits those who depend on market power over simply running a good competitive business. It is the downfall of capitalism that this will lead to in the end. We are not threatened by socialism or socialists. Unfettered capitalism is the culprit. If your party wins the Senate and in 2016 the Presidency, we can expect this horrible trend to accelerate. Then we will have another Teddy to bring us back to reason.

0 2018-03-18 18:44:37 - Harold

The Administration is killing investment with its obtuse tax policies.
Consider Abbvie, Inc. the large pharmaceutical company. They have billions of dollars stashed overseas, earned on overseas sales and corporate taxes already paid on those overseas profits. Yet if the firm brings it back to the US to invest in plants and research it gets taxed a second time, which make no economic sense. So it proposed to acquire Dublin based Shire, PLC, which would move its tax HQ to Ireland, reduce its tax rate AND allow them to invest money in the US without the double taxation of profits. Naturally, Obama can't have that, calls them an economic traitor and changed the rules mid-deal to mix it. So instead, this week Abbvie announced a big new repurchase program and dividend increase.
Obama pats himself on the back for preventing alleged tax avoidance, while simultaneously killing thousands of very high paying US based jobs and all the tax revenue that would generate.
It creates strong tax incentives for behavior it doesn't like (tax inversion deals, substitution of part time workers for full time to avoid ACA mandates, etc.) and feigns outrage when entities act economically rationally. Obama's hatred for the "1%" and inequality blinds him to the idiotic, self defeating nature of his policies.

1 2017-10-05 01:06:37 - Rain on a lib parade

This is a long-term phenomenon, and industry specific. You might want to take a look at, which I would not pretend is the end of all arguments, but I think helps to establish some of the important "stylized facts" around this problem.

4 2017-01-19 14:02:45 - Danny Bachman

What? They're not using their profits to create new jobs? Better give them another tax break.

0 2017-01-04 05:58:00 - Winston Smith

The thing you're missing is the answer to the question of how are so many corporations can be so wildly profitable in a time when the effects of capitalism (competition, creative destruction, etc.) should be nipping at their heels and either forcing capital and labor investment or a reduction in profits.

Seems these reliable forces normally present in an economy based on capitalism are strangely absent. Asset and equity growth are not the issue.

2 2016-12-06 20:32:52 - timm0

If profitable companies are more inclined to return cash to stockholders, it suggests a belief that, right now, putting the profits towards expansion would not yield a worthwhile return. There's a lot of way to read those tea leaves but I wonder if it reflects a belief that there is no slack in demand for their industry.

4 2016-11-29 07:06:09 - Jennifer

When public corporations buy back stock they do not return cash to stockholders in the traditional sense of dividends. They will never need to pay dividends again, and may use the stock as a cash reservoir. The reporting on cash reserves for publicly held companies shows a massive surplus in this regard. The cheap money that is supposed to stimulate demand by financing new means of production is being used to pump up cash reserves. It is your tax dollar at work. Heads the people who make rules win, and tails the people who make goods and deliver services lose.

7 2016-10-19 10:43:18 - Kyle Reising

It's hard to believe that non-productive manipulation of profits to prop up stock prices can be sustained. Sooner or later one has to produce something and sell something, or am I trapped in the past? Has Wall Street figured out a way to continue the party without us?

0 2016-09-27 22:21:06 - Ken Wallace

Profit margins are high relative to history but that may reflect a shift in the economy more than a change in behavior. As services, software and other IP-based businesses take on a greater share of output, profit margins as measured by GAAP accounting are bound to rise (e.g., upfront costs are capitalized and theses expenses don't show up in the margin calculation).

Companies have also found they can generate higher profits from greater supply chain efficiencies (driven again by software) and higher worker productivity.

These gains on profit margins then have not been driven by revenue gains. After all the economy is growing slowly. As Krugman often states, we are suffering from a shortage in demand. Hence his call for more government spending.

So against that backdrop, why should companies invest to increase capacity?

It has nothing to do with monopoly power. Though I am sure Krugman will dream up some rationale and statistics to "prove" (at least in his mind) that it is.

0 2016-09-13 09:20:37 - Tim
A nightmare that could come true! Gotta get out that vote!
2 2016-08-17 00:31:00 - Benjamin Stockton

One thing is LA was designed around the freeway system and that has made urban sprawl worse. As mentioned by another commenter, LA has plenty of freeways. A carbon tax would be better with funds being used for public infrastructure.

0 2016-08-11 21:11:30 - Jason

To support the comment by Mendes, even the FRED graph for this article looks like a lagged relationship. On the previous two cycles, profits peaked a couple of years before investment. And both times investment was at its peak (around 2001 and 2008), profits were at their low point.

0 2016-07-12 22:27:42 - JStodder

The intellectual property that underlies monopoly power has been purchased and consolidated so there is not much left to invest in. There are often only a handful of big players in each industry. Businesses that use labor rather than monopoly power are less profitable due in part to the tax code that adds 15.3% payroll tax to each U.S. job.
Replace the payroll taxes and full employment, higher salaries and economic growth will follow. Apple might consider U.S. manufacturing and stop worrying about using its vast reserves to buy back its own stock.

3 2016-07-12 15:25:52 - Eugene Patrick Devany

Profits are high but investment is low. Perhaps this is caused by rapid growth or progress.

China is growing rapidly, so why are they lending us money. Why doesn't their growth absorb their savings.

When you are running a factory in a super high growth environment you have to realize that your success is like to be very short lived. With high growth comes rapidly growing wages which means the Chinese low wage business strategy will only work for a short time. You need to earn your money back quick. This produces what are called high profits, but are really the return of capital, not return on capital.

In America we do not have high measured rates of growth, yet technical progress is very rapid. The case of Blockbuster illustrates the point.

In the past you expected your industry might be wrecked by a new competitor with a new technology. Blockbuster was done in by video vending machines, Redbox etc, DVDs by mail, Netflix etc, video streaming. Netflix again, and public libraries trying to make up their circulation losses on books by loaning DVDs. It wasn't one new technology, it was many. This is because we have rapid, largely unmeasured, progress.

The rich are raking in what many think are profits, but really they are simply getting their capital back quickly because the businesses they own are in danger of collapse.

But remember it is progress, good change, that will bring their businesses crashing down.

0 2016-07-07 18:29:37 - Richard Bruce

I still want to know: how does that affect the relationship between profits and inflation?

I expect monopoly rents would not inflate - if anything, inflation might drive actual investment and thus drive monopoly rents DOWN;
real estate bubbles do inflate, but do they inflate proportionally-faster when core inflation is high?;
likewise, ponzi schemes and whatever other manipulation of financial instruments;
and, if profits are extracted in the distribution network rather than from production, inflation vs. other currencies would make imports less competitive and cost Walmart et al. their profits.

Hate to belabor this point, but I still find it highly implausible that the 0.0001% are foolish in their tight money goldbuggery. They may be unempathetic and isolated but they're not stupid.

0 2016-06-28 20:48:54 - Sam

I think you are missing the biggest point about stock buybacks.

They save money on taxes.

They help create capital gains on money that should have been returned to the investor as dividend income.

The other reasons are nowhere near as important.

0 2016-06-09 03:08:31 - njqhecht

You know the answer, Dr. Krugman--they know that there's a lack of demand, so practically every company is in the boat of the highly profitable but no-growth business, of which there are many examples even in normal times. These are not normal times, so many more companies find themselves being quite profitable while not growing. The economically sensible response is to extract cash.

5 2016-06-07 18:13:29 - TrumanTown

Krugman argues here that even if monetary policy increases the value of stocks and the profits of the big corporations, such as Apple or GM, those companies might give those profits to shareholders in higher dividends or buybacks of shares, rather than actually build more factories in the US and create jobs.

Or use those profits to create jobs in Asia, where labor costs are lower, rather than the US.

But remember, government spending is more than 40% of GDP. This of course interferes with all of the usual macroeconomic models because the government behavior is not the aggregate of free market participants who try to maximize utility. Government decisions are arrived at by other than "market forces."

Yet monetary policy provides low interest rates for the government, even negative interest rates, which the government can take advantage of using fiscal policy.

For example, the US government could FOLLOW CHINA'S LEAD and build high speed rails from Chicago to New York, and a freeway system for LA (which suffers from gridlock on its overcrowded freeway system).

The loans would be at negative real interest rates. Imagine if the government were to PAY YOU 2% interest on your mortgage!

It should therefore be a NO-BRAINER to build infrastructure IN ADDITION to lose monetary policy.

Instead, Obama squandered ARRA dollars on higher EITC payments for families with children. Instead of providing the JOBS PROGRAM that Americans needed he paid the poor to have larger families.

1 2016-05-12 22:34:21 - Bret Winter

The Fed seems to be “signaling” that levels of investment are adequate.

1 2016-05-10 14:07:54 - Ed

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