3 Takes on Investment in the United States: 1

Floyd Norris's blog discussed the level of stock buybacks. This subject relates to the discussion of the relative importance of savings and investment for the economy.

Norris, Floyd. 2008. "Profits Plunge, Buybacks Don't." (7 April). New York Times Blog

The corporate love of buying back stock -- which Wall Street encourages as much as it can -- reached new heights late last year. Standard & Poor's, which has been tracking buyback data for the S.&P. 500 since 1998, reports that in the fourth quarter of last year, companies in the index had net reported profits of $68 billion -- and spent $141 billion buying back stock. That was the first quarter in which the companies managed to spend double their net income in buybacks. The third quarter of 2007 had been the first time that buybacks exceeded profits for the companies.

With that surge, 2007 goes down as the first year in which buybacks exceeded profits for an entire year. The major companies of America, as a group, are acting as if they are in liquidation and have few good investment opportunities.

In the fourth quarter, profits were down 62 percent from a year earlier, and share buybacks were up 35 percent. Howard Silverblatt, S.&P.'s keeper of the numbers reports that over the last 13 quarters, since the buyback boom started in the fourth quarter of 2004, the companies in the index reported net earnings of $2.1 trillion. They paid out $721 billion in dividends and spent $1.4 trillion in buybacks. Their total capital spending came to $1.6 trillion.

Companies -- the non-financial ones, that is -- still have plenty of cash, so Mr. Silverblatt thinks buybacks will continue at a high level, although not as high as in 2007. One reason for buybacks is to avoid dilution of earnings from the exercising of stock options. Another is to boost reported earnings per share.

3 Takes on Investment in the United States: 2

Today's Wall Street Journal also has a piece that mentions the aging of the U.S. airlines' planes. I wrote a book almost 20 years ago that discussed how Keynes neglected replacement investment. Keynes, Investment Theory and the Economic Slowdown: The Role of Replacement Investment and q‑Ratios (NY and London: St. Martin's and Macmillan, 1989). Financialization has greatly compounded the problem. Here is an extract from the article:

Lunsford, J. Lynn. 2008. "Fleet Could Be Just Plane Trouble." Wall Street Journal (16 April): p. B 1.

Delta has roughly 119 gas-guzzling McDonnell Douglas MD-88s with an average age of 18 years, and Northwest has a fleet of more than 90 Douglas DC-9s with an average age nearing 40 years old. During the past three years, the bulk of the U.S. airline industry has sat largely on the sidelines while carriers from the rest of the world placed roughly 7,000 orders for the newest, most fuel-efficient jets. As a result, both Boeing and Airbus are largely sold out of planes until at least 2012.

3 Takes on Investment in the United States: 3

Regarding the question savings glut versus investment scarcity, a week ago, I wrote to the Washington Post journalist, Steve Mufson, asking how long he thought that Exxon's stock buybacks exceeded real investment. He told me he thought it was as long as he was covering the subject -- a couple of years. Today, the Wall Street Journal has a nice piece showing the data with a remarkable upward trend in stock buybacks.

All this is further evidence of this corrosive dominance of financialization.




Anders, George. 2008. "Exxon's Stingy Capital Spending May Haunt It." Wall Street Journal (16 April): p. B 2.

In 2007, Exxon spent 5.3% of revenue on exploration and capital outlays, down from 6.5% in 2003. The actual dollar amounts did increase, to $20.9 billion from $15.3 billion. But they didn't keep pace with Exxon's overall revenue growth, let alone soaring oil prices. Crude climbed to about $92 from $34 a barrel during that period. Meanwhile, the Irving, Texas, oil giant poured cash into stock buybacks. In 2007, Exxon repurchased $31.8 billion of its shares, up five-fold from the amount acquired in 2003. That activity helped earnings per share. It didn't increase oil output.

Virginia Tech Massacre Anniversary: Guns and Suicide

Tomorrow (April 16) is the first anniversary of the massacre/suicide at Virginia Tech. While moves have been made to restrict access to guns by the mentally disturbed, no other such moves have been made in Virginia. People like John Lott oppose such moves, arguing that allowing people to carry guns on campuses and in other public places reduces homicides (Lott has also been dumping on Obama for his supposedly bitter unhappiness with gun ownership). The data on that is a mixed bag, but another aspect of this is much clearer and a part of the VA Tech story, the very strong link between gun ownership rates and suicide rates within the US. It is just a lot easier to kill oneself if there are lots of guns around, and one does not have a chance to second guess one's intention.

I have done some digging around and guesstimate that if the US as a whole had the gun onwership rates one finds in the lowest states, we would see on the order of 10,000 fewer suicides per year in the US. That is more than the total killed on 9/11 or US military killed in Iraq. Here is a sources on suicide rates: http://www.suicidology.org/displaycommon.cfm?an=1&subarticlenbr=21. Here is a source on gun ownership: http://www.swivel.com/data_sets/show/100359. The five highest states in gun ownership are Wyoming, Montana, South Dakota, West Virginia, and Idaho. The highest states in suicide rates are Montana, Nevada, Alaska, New Mexico, and Wyoming. The five lowest states in gun ownership are D.C., New Jersey, New York, Rhode Island, and Massachusetts. The five lowest states in suicide rates are D.C., New Jersey, New York, Massachusetts, and Rhode Island.

John McCain Proposes More Global Warming and Fiscal Irresponsibility

A hat tip to Greg Mankiw for alerting us to this:

John McCain wants the federal government to free people from paying gasoline taxes this summer and ensure that college students can secure loans this fall, a pair of proposals aimed at stemming pain from the country's troubled economy. At the same time, the certain Republican presidential nominee says Democratic rivals Barack Obama and Hillary Rodham Clinton would impose the single largest tax increase since World War II by allowing tax cuts pushed to passage by President Bush to expire." Both promise big 'change.' And a trillion dollars in new taxes over the next decade would certainly fit that description," McCain said in remarks prepared for delivery Tuesday. "All these tax increases are the fine print under the slogan of 'hope:' They're going to raise your taxes by thousands of dollars per year -- and they have the audacity to hope you don't mind." That was a play on the title of an Obama book.

Greg calls this news bad news for the Pigou Club. It certainly represents McCain’s desire to pander to the average Joe. But shouldn’t we remind McCain of something Milton Friedman said: “to spend is to tax”. McCain just wants to have more deferred taxes in the form of continuing high Federal deficits. I know this is the modern GOP playbook to winning elections, but it is a terrible way to run a nation’s finances.

Update: Greg in an update brings us an analysis from Len Burman and Eric Toder that notes that suppliers would capture most of the gasoline tax reduction with little accruing to consumers. Jared Bernstein agrees:

the gas tax holiday is smart politics but lousy policy. As Taplin aptly described, high gas prices are sending an important economic signal and jamming that signal is ill-advised. On the other hand, as one of the commenters points out, this idea could really help some strapped families. The problem is there's absolutely nothing to stop the oil companies from claiming a big chunk of this subsidy by raising the pretax price of gas at the pump. Prices go up in the summer anyway, and I'll bet you a gallon of premium that they go up even more than usual, such that some of that 18.4 cents/gallon ends up back in Exxon's wallet, not yours. Which leaves us with a nice little transfer from taxpayers to oil companies. Nice work, John.

Jared discuss other aspects of McCain’s fiscal proposals that we should really worry about.

Savings Glut or Investment Deficiency?

Brad Setser points us to table A.16 of the IMF's latest WEO and notes:

the emerging world’s savings surplus stems from a “glut” of savings, not a “drought” of investment. In 2007, the savings rate of the emerging world savings was almost 10% of GDP higher than its 1986-2001 average. Investment was up as well – in 2007, it was about 4% higher than its 1986-2001 average. However the rise in the emerging world’s savings was so large that the emerging world could investment more “at home” and still have plenty left over to lend to the US and Europe. That meets my definition of a “glut.”

But this is not precisely the same as Bernanke's global savings glut – even if Brad tried to equate them as a follow-up to a comment. World savings and investment averaged 22.4% of world GDP over the 1986 to 2001 period. For the 2002 to 2004 period, world savings and investment dipped below 22.4% of GDP. Recently, world savings and investment relative to GDP have increased. If we look at savings and investment as a percent of GDP for the advanced nations, we see a decline in both – especially savings. The bottom line seems to be that the emerging and developing economies have been net lenders, while the advanced economies have been net borrowers with the U.S. leading the way in running current account deficits.

Brad continues:

I don’t think it entirely implausible that savings rates in both Asia and the Middle East might start to converge toward their long-term average. What goes up sometimes also comes down. An end to the emerging world’s savings glut would not be such a bad thing either. It would mean than the young and poor were supporting global demand growth – not the old and rich.

In other words, world consumption demand is likely to rise as Asia and the Middle East start to consume more. If Brad’s prediction is borne out, it will likely have two effects. One is that interest rates will rise unless we undergo another world investment decline. The second is that the U.S. will likely see more exports and hence a lower current account deficit.

Robert Stein’s Fiscally Neutral and Progressive Reduction in Taxes on Capital Income

Robert Stein and Ramesh Ponnuru have been pushing another supply-side proposal:

The two of us are among the conservatives who have proposed a tax reform that permanently reduces tax rates on capital gains, dividends, and estates, cuts the top income-tax rate and the corporate-tax rate, and abolishes the alternative minimum tax on individuals … Entin makes two objections to the plan. The first is that it raises marginal tax rates for some people. But almost every tax-reform plan raises tax rates for some people. Many supply-siders have long sought a flat tax of 17 percent. That proposal has many excellent features, but it would raise marginal tax rates on most taxpayers. We don’t recall Entin ever raising his voice against the flat tax for that reason. The question to ask about a proposed tax reform is not whether it raises tax rates for anyone, but what its net effect is. Our plan reduces the most damaging marginal tax rates. As under the flat tax, some people will see their rates rise, but the plan as a whole is both pro-growth and pro-family. Entin’s second objection is to the plan’s centerpiece: a large expansion of the child tax credit. We believe the credit should be bigger, should be applied against payroll taxes as well as income taxes, and should be available to all taxpayers (with no high-income phase-outs).

Cactus of Angrybear suggests that their proposal would make the tax system more regressive:

At least they're not delusional, like the tax-cuts pay for themselves crowd, and honest enough not to skirt the issue. But since this tax scheme is intended to help Paris Hilton, if marginal taxes for some people have to be raised, well, its quite likely that the some people who will get a tax hike are going to be more janitor-ish and less Paris Hilton-y. Anything else defeats the purpose of the rest of the tax scheme. Look for a hefty increase in the lower marginal tax brackets.

Cactus also posts a reply from Robert Stein:

The tax reform proposal that Ramesh Ponnuru and I have outlined would be substantially more progressive than the current tax code. It would also be substantially more progressive than the system under President Clinton. This is true whether one uses our framework to lower overall taxes or maintain revenue neutrality. We would enhance progressivity in three ways: First, we would provide a $4,000 tax credit per child that would be refundable versus both payroll taxes and income taxes. Second, although we would reduce the top marginal income tax rate, we would let the new lower rate kick in at a lower level. As a result, people in upper income brackets would end up making much higher overall tax payments despite facing a lower top marginal rate. Third, we would alter the mortgage interest deduction and charitable donation to make it available to more middle and lower income taxpayers (while less generous to the upscale) while getting rid of other itemized deductions that are predominantly used by upper income taxpayers. On net, almost everyone now in the 15% bracket or below would pay less in taxes. For those now in the 25% bracket or above, their aggregate taxes would go up, although (in general) not when they have children ages 0-18, and their top marginal rate would decline.

The rich and the poor both pay less taxes? Wow – this sounds like the George W. Bush tax cut – which was NOT fiscally neutral. I guess one could design such a tax proposal but that would basically be one that screwed the middle class. Here’s my bottom line – reducing taxes on capital income would require increasing taxes on employment income if fiscal neutrality is to be maintained. That sounds regressive to me. Of course, Stein’s claim that his proposal is fiscally neutral appears to be suspect.

We’ve seen supply-siders make these claims before. They often claim that reductions in taxes on capital income can increase tax revenues and benefit the poor. Usually their claims are not supported by a real analysis. If someone knows if anyone has analyzed the Ponnuru-Stein proposal, I’d love to see the results.

On Turning 60

Yeah, that is me, tomorrow, April 12, 2008. No, I do not feel it. But I know that I will no longer be able to consider myself unequivocally "middle-aged" (and I remember thinking that being middle-aged was not so great).

I note for those who are interested that 60 is the Big One in Chinese Taoism, where the usual 12-year cycle of years being associated with animals (this is the Year of the Rat, my year) is compounded by there being 5 of these, each associated with an element, like earth, air, water, and fire (do not remember what the fifth one is for the Chinese). So, the whole thing comes back around after 60. Indeed, each of the 60 years has a specific deity associated with it. I saw all 60 depicted in a Taoist temple in Souzhou, China a few years ago, some smiling, some ferocious, most looking pretty human, but some rather fantastic. Anyway, there are 60 of them, and the one I was born under is back again.

How George Bush Solved the Immigration Problem

President George Bush has one major policy victory for which he has not received sufficient credit. Illegal immigration has been one of the most contentious issues in American policy in recent years. Brilliant minds have tried to put together some compromise that would stem the flow of illegal immigrants.

But President Bush has developed a policy that has proved effective -- a policy that no one had even considered. The Wall Street Journal today reports that illegal immigration has suddenly dropped. By reducing the number of domestic jobs, President Bush has cut of illegal immigration at its source -- the economic equivalent of the Gordian knot.

Other less enlightened people tried to develop policies to increase the number of jobs, but only Bush realized that employment has pernicious effects, earning him an exalted place in the Pantheon of economic policy.

Scandalous

It is scandalous that nowhere in what passes for mainstream macroeconomics will you find anything that helps you understand what Hyman Minsky called "financial fragility" - the inherent instability of the credit system - and the implications for the real economy. No models - nothing!! - Nothing in a macroeconomics textbook that would aid in understanding the current crisis, and countless previous cises in the history of capitalism, therefore. Here is an exception which miserably confirms the rule: in Mankiw's intermediate level text, he gives passing mention to Fisher's debt-deflation account of the Great Depression. But the key insight of Fisher's article (not by any means original to him - see Hawtrey, Marx and others) , i. e., the self-amplifying nature of credit expansions and contractions - is not mentioned at all. Instead, Fisher chez Mankiw is made to say that Fisher saw falling prices redistributing wealth from debtors with a high marginal propensity to spend out of wealth to creditors with a low marginal propensity to spend out of wealth, thus reducing consumption. And that's it. It would be funny if it weren't so sad.

MORE SMOKE

by the Sandwichman

The Sandwichman continues to ponder how the Big Lie works as a message. Exhibit "A" is "More Doctors Smoke Camels than any other Cigarette." Let's begin from the premise that the relative popularity of cigarette brands among medical professionals is not really the issue. I mean, who cares? But is the insinuation that "cigarettes are good for your health" at all believable? Was it ever? I suspect not.

The clue to how the Big Lie works may lie in the very unbelievability of the message.

Adolf Hitler had something revealing to say about this in Mein Kampf. He talked about how people eventually "submit" to the repeated propaganda message. They don't come to believe it. They simply give up.

But what form might such submission or surrender take?

Here's my hypothesis: when subjected to a repeated, patently unbelievable message people eventually come to discount and ignore the message. But they don't do so with a great deal of precision. Instead, they tend to put up a mental screen that blunts the propaganda message by indiscriminately also shutting out "similar" messages on the same general topic -- including the countervailing message that smoking is bad for you. Of course this filtering would be most effective if it also enabled people to ignore unwelcome information. Thus the take away from "more doctors smoke camels" would be "don't pay any attention to evidence that smoking is bad for you."

THE KEYNESIAN CURE

by the Sandwichman

J. Bradford DeLong calls for "more aggregate demand". Some of the responses:

"More debt! Let's party!" "Maybe we should stop looking for ways to keep moving at locomotive speeds. Take a walk for a while." "So, the levees have failed and flooding has ensued. Your plan is to pump like mad then rebuild in the same place." "But what is really appalling and scary is that the best answer you and others can come up with is 'go out and spend' until we find the next locomotive." "The commodities price run up is far more than the effect of speculation, but rather an indication that the world economy is straining against fundamental physical limits." "New times ahead, not more of the same with variations."

Can you say "paradigm shift"? But wait. There is a Keynesian cure available. The ultimate solution put forward by Keynes and identified by him explicitly as one of three essential "ingredients of a cure." Why do our self-styled Keynesians insist on restricting their policy too kit to only two of those three ingredients and eschewing the third and ultimate ingredient?

In a letter to the poet, T.S. Eliot, dated April 5, 1945, John Maynard Keynes identified shorter hours of work as one of three "ingredients of a cure" for unemployment. The other two ingredients were investment and more consumption. Keynes regarded investment as "first aid," while he called working less the "ultimate solution." A more thorough and formal presentation of his view appeared in a note Keynes prepared in May 1943 on "The Long-Term Problem of Full Employment. In that note, Keynes projected three phases of post-war economic performance. During the third phase, estimated to commence some ten to fifteen years after the end of the war, "It becomes necessary to encourage wise consumption and discourage saving, –and to absorb some part of the unwanted surplus by increased leisure, more holidays (which are a wonderfully good way of getting rid of money) and shorter hours."

KRUGMAN CATCHES UP TO SANDWICHMAN

by the Sandwichman

Krugman, April 8: "Cheap food, like cheap oil, may be a thing of the past."
Sandwichman, February 18: Every kind of planted crop has increased in price by 30% to 50% over the past few months. This will have a huge impact on food prices.

Recession Hits Home

There is an old wisecrack that "If s/he is laid off, it is a slowdown; if you are laid off it is a recession, and if I am laid off it is a depression." In this regard, I am now feeling the recession. While visiting her in the San Francisco Bay area, my oldest daughter, Meagan, a 36-year old single mother with a three year old son, was laid off from her CA-state paid job as a counselor to disturbed teenagers, this following nearly being evicted when her landlord was foreclosed on and was evicted after his subprime mortgage (obtained in 2005) was reset, on top of which her car went blooey while we were there (I have just returned to Virginia). Weird that these days local government jobs are among those most vulnerable in the current downturn, although that sector of government has always been more pro-cyclical than the federal government.

Ironically, besides visiting family members, I was also there to attend a conference at the San Francisco Fed (Society for Nonlinear Dynamics and Econometrics). The redoubtable Jim Hamilton of econbrowser gave a talk (summary figures available at his blog) on state diffusion of recessions. The last two have followed different and interesting patterns. The word on the current one is that while some states are being hit harder, they are all going down simultaneously, no diffusion from state to state, with him saying it hit in last quarter, after a deceleration beginning in second quarter last year. Oh yes, I also heard that at least at the FRBSF they do not use the word, "recession." The preferred term is "adverse economic conditions."

SMOKIN'

by the Sandwichman

In the 1940s, the RJ Reynolds tobacco company conducted an ad campaign featuring the slogan, "More Doctors Smoke Camels than any other Cigarette." I would like to suggest a thought exercise that focuses on the peculiarities and strategems of that slogan. We could call this game "more economists smoke free enterprise than any other paradigm."

What can be learned from playing such a game? First, the importance of distinguishing between number, fact, truth, authority, image, assumption and innuendo. Second, the difficulty of criticizing a discourse that glides heedlessly from one kind of claim to another. The discourse in question isnt "medicine" or "economics" per se -- it just plays one on TV. Finally, I would like to offer the observation that it is precisely the agility of the pseudo-economic discourse in evading such a decisive critique -- rather than any specific error -- that marks economics itself as "unscientific".

In the Camels ad campaign, it was claimed that a nationwide survey of 113,597 doctors asked, "what cigarette do you smoke, Doctor?" The number is audacious -- as if it would not be enough to say "more than 100,000 doctors." Ah, if measurement be the food of science, count on the unrounded sum to be an unquestionable scientific fact indeed. According to Jackler and Proctor at Stanford School of Medicine, though, RJ Reynolds's surveyors handed out cartons of Camels at AMA conventions and then asked recipients what brand of cigarettes they smoked. Based on such a deliberate sample bias, the resulting number doesn't constitute a credible "fact".

But that's beside the point. What if more doctors did indeed smoke Camels? So what? The ad isn't just reporting a concocted fact. It is trading on the popular image of the medical doctor as a scientific, but at the same time, sympathetic and avuncular authority figure to produce the innuendo that if HE smokes Camels (in the iconography of the ads, doctors are almost exclusively male) then it must be GOOD FOR YOU.

The corresponding swindle relating to economics takes place outside of economic theory proper. When economists use theoretical abstractions in constructing their models, such as a perfectly competitive market, they are not necessarily claiming any such thing exists (or ever could exist) in the real world. Apologists for economic privilege, however, like to pretend that establishing free markets is a simple matter of "government getting out of the way." Left unsaid is that such magic inevitably requires that government first construct the very way that it is then supposed to get out of. The only thing in common between the economists' abstraction and the political propagandists' holy grail is the name "free market". Economics doesn't necessarily confuse the two. But all too often economists themselves and the economics profession as a whole honour those who do conflate glib apologetics with economic theory and marginalize those who criticize such obfuscation.

It is as if doctors and the medical profession were to smile benignly on the Camel ads, damnable innuendo and all... which, in effect, they did. According to Jackler and Proctor, the Camel ads appeared regularly in medical journals such as the Journal of the American Medical Association. R.J. Reynolds conducted its bogus surveys from booths at AMA conventions. Presumably, the medical profession didn't strenuosly object to the Camel ad campaign because the ads presented a flattering image of doctors as scientists and humanitarians. In the end, though, it was medical researchers and doctors who established the undeniable link between smoking and cancer. The Stanford Medical School hosts a fascinating and enlightening exhibit, "Not a cough in a carload: images from the tobacco industry campaign to hide the hazards of smoking."

Meanwhile, the economics profession continues to sanction or tolerate images and innuendo about economics that are not only at odds with "the facts" but are patently false, misleading and toxic. When a critic points out some glaring discrepancy of method or assumption, it is always possible to find a counter example. Not all economists, for that matter, "smoke free enterprise". But enough of them do to send up a toxic cloud of confusion and complacency.

Is it accidental that the most enthusiastic "smokers" among economists are often high-profile public personalities? One might even suspect they rise to prominence because they espouse a well-funded ideological position -- poster boys and girls for the "scientific credentials" of their sponsor's political slant on economics. "Doctors smoking Camels" tarnished the integrity of a medical establishment that condoned the fraudulent use of their professional image. "Economists smoking free enterprise" is no less worthy of ridicule.