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Economy

Wall Street’s fixation on quick profits wreaking havoc in the ‘real’ economy, report says – The Washington Post

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4 years ago

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The analysis by Oren Cass, a senior fellow at the Manhattan Institute and a former adviser to Mitt Romney’s 2012 presidential campaign, finds that much of the money that businesses once funneled into productivity-increasing assets — structures, equipment and intellectual property — is now being diverted to shareholders instead.

This pursuit of short-term payouts over long-term investment appears to be depressing economic growth, the report finds, exacerbating inequality and making it harder than ever for American workers and their families to get ahead.

Historically, profitable businesses return some of their excess earnings to shareholders and invest much of the rest back into the company in the form of new machines, new buildings and intellectual property. These so-called capital investments have traditionally been one of the drivers of economic growth.

But, as many economists have observed, such investments have been on the wane for decades in the United States, particularly relative to gross domestic product and corporate profits. Cass digs into these numbers at the company level, which dates back to 1971, characterizing firms into two main categories: eroders, who allow their capital assets to depreciate to pay their shareholders; and sustainers, who invest in their capital assets at a rate faster than depreciation, ensuring their assets grow.

Sustainers “can and do invest in new assets faster than they use up existing ones,” Cass writes. “Most companies in a well-functioning capitalist economy should be Sustainers and, historically, most were.”

Eroders, by contrast, “actively disinvest from themselves, allowing their capital bases to erode even while paying to shareholders the resources they would have needed if they wanted to maintain their health.”

There’s also a third category of business, called growers, which need to borrow to fund levels of growth that are currently beyond the scale of their profits.

Cass makes a startling finding: In the 1970s, less than 20 percent of the money in U.S. stock markets was in the so-called eroders. But by 2017 close to half of it was.

Over the same period, the market capitalization of sustainers dropped by a similar amount.

Cass notes, for instance, that technology firm Cisco spent $101 billion buying back shares of its stock in the past 15 years but invested only $15 billion over the same period.

Then there’s IBM: In the 1970s, according to Cass’s analysis, it sent 30 cents to shareholders for every $1 it invested. But by 2014, it was paying them $5 for every $1 in capital investments.

Most economists say the rise of the shareholder primacy theory of business — which states that a company’s first duty is to maximize profits for its shareholders — is a major driver of this shift.

“Milton Friedman’s famous essay (‘The Social Responsibility of Business Is To Increase Its Profits’) is seen as marking a sea-change in thinking because it said shareholders come first and anything else is inefficient,” Cass wrote via email. “And shareholders, perhaps rationally, seem relatively more interested in short-run profits” than in long-term investment.

This shift in thinking was accompanied by an explosion of creative profit-seeking in the financial sector. “Some private equity firms said ‘actually, if we buy these [companies] up and sell them off for parts, or squeeze the workers and the suppliers and cut capital investment and load on a lot of debt … we could get a lot more money out than we’re going to have to pay,” Cass wrote.

Some economists view this sort of behavior as beneficial to society. Kevin Hassett, head of the Council of Economic Advisers under Trump, told The Post in 2018 that when a company buys back its stock, a person invested in that company either “buys some other stock or invests in some other business that actually needs the money. The money is reinvested and is increasing the efficiency of the economy by moving cash to the firms that need it the most.”

But Cass says the practice has grown so widespread, and actual investment has declined so much, that it’s turned into a game of investment hot potato: Companies pay off shareholders, who invest in other companies, which pay off their shareholders, who invest in still other companies, over and over ad infinitum. At every step in the chain there’s a financial firm taking a cut, and very little money ends up making its way back to what Cass calls the “real” economy of goods and nonfinancial services.

“The problem arises when the financial sector stops serving the real economy and instead the real economy serves the financial sector,” Cass said. “The assets in the real economy become merely the medium that the financial sector uses to conduct a variety of non-investment activities for its own profit.”

Not all economists agree with Cass’s diagnosis. Don Schneider, former chief economist of the House Ways and Means Committee, noted in a lengthy Twitter thread that other ways of measuring business investment don’t show the same decline seen in analyses by Cass and others. He added that the literature on business investment is “really conflicting, with many compelling theories & measures of investment to assess them by” and that it provides “no good definitive answers.”

All told, Cass says, it’s a recipe for economic stagnation across the board. “The nation’s capital base is smaller by literally trillions of dollars as a result, representing untold enterprises never built, innovations never pursued, and workers never given opportunity,” he writes.

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Economy

Canada’s unemployment rate holds steady at 6.5% in October, economy adds 15,000 jobs

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22 hours ago

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November 8, 2024

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OTTAWA – Canada’s unemployment rate held steady at 6.5 per cent last month as hiring remained weak across the economy.

Statistics Canada’s labour force survey on Friday said employment rose by a modest 15,000 jobs in October.

Business, building and support services saw the largest gain in employment.

Meanwhile, finance, insurance, real estate, rental and leasing experienced the largest decline.

Many economists see weakness in the job market continuing in the short term, before the Bank of Canada’s interest rate cuts spark a rebound in economic growth next year.

Despite ongoing softness in the labour market, however, strong wage growth has raged on in Canada. Average hourly wages in October grew 4.9 per cent from a year ago, reaching $35.76.

Friday’s report also shed some light on the financial health of households.

According to the agency, 28.8 per cent of Canadians aged 15 or older were living in a household that had difficulty meeting financial needs – like food and housing – in the previous four weeks.

That was down from 33.1 per cent in October 2023 and 35.5 per cent in October 2022, but still above the 20.4 per cent figure recorded in October 2020.

People living in a rented home were more likely to report difficulty meeting financial needs, with nearly four in 10 reporting that was the case.

That compares with just under a quarter of those living in an owned home by a household member.

Immigrants were also more likely to report facing financial strain last month, with about four out of 10 immigrants who landed in the last year doing so.

That compares with about three in 10 more established immigrants and one in four of people born in Canada.

This report by The Canadian Press was first published Nov. 8, 2024.

The Canadian Press. All rights reserved.

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Economy

Health-care spending expected to outpace economy and reach $372 billion in 2024: CIHI

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2 days ago

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November 6, 2024

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The Canadian Institute for Health Information says health-care spending in Canada is projected to reach a new high in 2024.

The annual report released Thursday says total health spending is expected to hit $372 billion, or $9,054 per Canadian.

CIHI’s national analysis predicts expenditures will rise by 5.7 per cent in 2024, compared to 4.5 per cent in 2023 and 1.7 per cent in 2022.

This year’s health spending is estimated to represent 12.4 per cent of Canada’s gross domestic product. Excluding two years of the pandemic, it would be the highest ratio in the country’s history.

While it’s not unusual for health expenditures to outpace economic growth, the report says this could be the case for the next several years due to Canada’s growing population and its aging demographic.

Canada’s per capita spending on health care in 2022 was among the highest in the world, but still less than countries such as the United States and Sweden.

The report notes that the Canadian dental and pharmacare plans could push health-care spending even further as more people who previously couldn’t afford these services start using them.

This report by The Canadian Press was first published Nov. 7, 2024.

Canadian Press health coverage receives support through a partnership with the Canadian Medical Association. CP is solely responsible for this content.

The Canadian Press. All rights reserved.

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Economy

Trump’s victory sparks concerns over ripple effect on Canadian economy

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3 days ago

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November 6, 2024

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As Canadians wake up to news that Donald Trump will return to the White House, the president-elect’s protectionist stance is casting a spotlight on what effect his second term will have on Canada-U.S. economic ties.

Some Canadian business leaders have expressed worry over Trump’s promise to introduce a universal 10 per cent tariff on all American imports.

A Canadian Chamber of Commerce report released last month suggested those tariffs would shrink the Canadian economy, resulting in around $30 billion per year in economic costs.

More than 77 per cent of Canadian exports go to the U.S.

Canada’s manufacturing sector faces the biggest risk should Trump push forward on imposing broad tariffs, said Canadian Manufacturers and Exporters president and CEO Dennis Darby. He said the sector is the “most trade-exposed” within Canada.

“It’s in the U.S.’s best interest, it’s in our best interest, but most importantly for consumers across North America, that we’re able to trade goods, materials, ingredients, as we have under the trade agreements,” Darby said in an interview.

“It’s a more complex or complicated outcome than it would have been with the Democrats, but we’ve had to deal with this before and we’re going to do our best to deal with it again.”

American economists have also warned Trump’s plan could cause inflation and possibly a recession, which could have ripple effects in Canada.

It’s consumers who will ultimately feel the burden of any inflationary effect caused by broad tariffs, said Darby.

“A tariff tends to raise costs, and it ultimately raises prices, so that’s something that we have to be prepared for,” he said.

“It could tilt production mandates. A tariff makes goods more expensive, but on the same token, it also will make inputs for the U.S. more expensive.”

A report last month by TD economist Marc Ercolao said research shows a full-scale implementation of Trump’s tariff plan could lead to a near-five per cent reduction in Canadian export volumes to the U.S. by early-2027, relative to current baseline forecasts.

Retaliation by Canada would also increase costs for domestic producers, and push import volumes lower in the process.

“Slowing import activity mitigates some of the negative net trade impact on total GDP enough to avoid a technical recession, but still produces a period of extended stagnation through 2025 and 2026,” Ercolao said.

Since the Canada-United States-Mexico Agreement came into effect in 2020, trade between Canada and the U.S. has surged by 46 per cent, according to the Toronto Region Board of Trade.

With that deal is up for review in 2026, Canadian Chamber of Commerce president and CEO Candace Laing said the Canadian government “must collaborate effectively with the Trump administration to preserve and strengthen our bilateral economic partnership.”

“With an impressive $3.6 billion in daily trade, Canada and the United States are each other’s closest international partners. The secure and efficient flow of goods and people across our border … remains essential for the economies of both countries,” she said in a statement.

“By resisting tariffs and trade barriers that will only raise prices and hurt consumers in both countries, Canada and the United States can strengthen resilient cross-border supply chains that enhance our shared economic security.”

This report by The Canadian Press was first published Nov. 6, 2024.

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