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.
The Toronto Stock Exchange falls 0.58% to 19,031.64
* The Toronto Stock Exchange’s TSX falls 0.58 percent to 19,031.64
* Leading the index were Laurentian Bank of Canada <LB.TO>, up 5.6%, goeasy Ltd, up 4.5%, and Air Canada, higher by 4.4%.
* Lagging shares were Turquoise Hill Resources Ltd, down 7.0%, Silvercrest Metals Inc, down 5.5%, and New Gold Inc, lower by 4.8%.
* On the TSX 73 issues rose and 154 fell as a 0.5-to-1 ratio favored decliners. There were 13 new highs and no new lows, with total volume of 171.6 million shares.
* The most heavily traded shares by volume were Enbridge Inc, Suncor Energy Inc and Air Canada.
* The TSX’s energy group fell 1.21 points, or 1.1%, while the financials sector climbed 0.02 points, or 0.0%.
* West Texas Intermediate crude futures rose 0.51%, or $0.31, to $61.66 a barrel. Brent crude rose 0.43%, or $0.28, to $65.6
* The TSX is up 9.2% for the year.
This summary was machine generated April 22 at 21:03 GMT.
Canadian dollars hold on to Wednesday’s rally
By Fergal Smith
TORONTO (Reuters) -The Canadian dollar was little changed against its U.S. counterpart on Thursday as a decline in risk appetite was offset by the Bank of Canada‘s more hawkish stance, with the currency holding on to its gains from the prior day.
The loonie was trading nearly unchanged at 1.2500 to the greenback, or 80.00 U.S. cents, having traded in a range of 1.2472 to 1.2534.
It was one of only three G10 currencies to keep pace with the U.S. dollar as U.S. stocks dived on reports that President Joe Biden planned to propose nearly doubling the capital gains tax.
The others were the Swiss franc and the Japanese yen, which are both renowned safe-haven currencies.
“The BoC’s relatively hawkish move yesterday may have moved USD-CAD’s trading band down a notch,” said Ronald Simpson, managing director, global currency analysis at Action Economics, adding that the shift in yield spreads has supported the loonie.
The gap between Canada‘s 10-year yield and its U.S. equivalent has declined to just 3 basis points in favor of the U.S. bond from 19 basis points at the start of the month.
On Wednesday, the Canadian dollar touched its strongest intraday level in one month at 1.2455 after the Bank of Canada signaled it could start hiking interest rates in late 2022. The central bank sharply boosted its outlook for the Canadian economy and cut the pace of bond purchases to C$3 billion a week from C$4 billion.
“I would advise penciling in a further taper (of bond buying) at the July MPR meeting,” Derek Holt, vice president of capital markets economics at Scotiabank, said in a note, referring to the bank’s monetary policy report.
The price of oil, one of Canada‘s major exports, settled 0.1% higher at $61.43 a barrel.
Canada‘s 10-year yield was little changed at 1.522%.
(Reporting by Fergal Smith; Editing by William Maclean and Peter Cooney)
Canadian annual inflation rate doubles
By Steve Scherer
OTTAWA (Reuters) – Canada‘s annual inflation rate doubled to 2.2% in March, Statistics Canada said on Wednesday, as the central bank signaled economic slack would likely be absorbed earlier than it had previously forecast.
Previously, the Bank of Canada had said it would be 2023 before inflation returned sustainably to its 2% target. On Tuesday, the central bank said it would happen in the second half of next year. In the meantime, inflation would temporarily breach its target, the bank said.
Part of the March price bounce is due to a statistical effect caused by a sharp deceleration last year during the coronavirus pandemic, Statscan said.
The bank also held its key overnight interest rate at a record low 0.25% as expected.
Analysts polled by Reuters had expected the annual rate to rise to 2.3% in March, up from 1.1% in February. Energy prices gained 19.1% on a year-on-year basis, while inflation excluding gasoline and food rose 0.9% versus a year ago.
“The headline spike, as expected, is largely an energy story, but there are some signs that underlying pressures are starting to show up,” said Nathan Janzen, senior economist at the Royal Bank of Canada.
“The Bank of Canada‘s core measures also moved higher on the month, with two of them very slightly above the Bank of Canada‘s midpoint 2% inflation target,” Janzen said.
CPI common, which the central bank calls the best gauge of the economy’s underperformance, was 1.5%, slightly higher than the 1.4% forecast by analysts.
CPI median rose to 2.1% from 2.0% in February, and CPI trim was 2.2% in March, up from a revised 2.0% in the previous month.
But Derek Holt, vice president of capital markets economics at Scotiabank, said the annual rate is not being driven solely by a statistical effect.
“This isn’t just base effect-driven, it’s pretty remarkable resilience in terms of underlying inflation pressures,” he said.
The bank now expects Canada‘s economy will grow 6.5% in 2021, up from its January forecast of 4.0%, with real GDP growth of 3.7% in 2022, down from a previous forecast of 4.8%.
After the Bank of Canada announcement, the Canadian dollar strengthened 0.9% to 1.2499 to the greenback, or 80.01 U.S. cents, its biggest gain since last June.
(Reporting by Steve Scherer; Editing by Paul Simao and Alistair Bell)
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