Stockholders gain at the expense of the rest of us

Unemployment is now officially below 6%, but the point is still valid.

Large businesses such as General Motors earmark less money for workers’ pay and for investment, research and technology compared to earlier eras.

They do this in order to be able to hand over more money to stockholders in the form of dividends and stock buybacks.

The reason is that stockholders have leverage and workers don’t, and stockholders no longer take the long view. In 1960, the average stockholder owned a stock for eight years, Harold Meyerson reported in the Washington Post.  Now they sell their stocks after four months, and, when high-frequency trading is factored in, it’s 22 seconds.[1]

Passive, short-term stockholders, unlike the original investors, contribute little or nothing to the value of a company.  Why should their interests be paramount?

We Americans are writing off the future

The United States will not have a good future unless we Americans today invest in schools, scientific research and physical infrastructure.  The top chart shows how much less we spend today, as a fraction of our national wealth, than an earlier generation did immediately following World War Two.  The “gross” investment is total spending on the future; the “net” investment is what was spent over and above what was needed for maintenance of what we had.

The bottom chart shows the projections of the various budget plans before Congress.  Only the “Congressional Progressive Caucus” proposes an increase in investment.

I don’t have a target figure of what percentage of GDP we ought to be investing in the future, but I think that the “net” figure on the first chart ought to be greater than 1 percent.  It is perilously close to a minus figure, which means we are not spending enough to keep up with deterioration.

The United States as a nation invests a lot in improving our technology for surveillance and waging war.  We need science, education, transportation and communication, and we ought to be investing in that as well.

Why the investment drought?

The Reagan administration’s economic theory was that if the top tax rates were cut, it would give rich people an incentive to invest their money instead of spending it.  At the time, I thought this was plausible enough to be worth trying.  But, as the chart shows, it hasn’t worked out.  Investment is lower now than it was in the pre-Reagan days when the top tax rate was 70 percent.

I don’t advocate returning tax rates to 70 percent, but when you stop and think about it, the higher taxes are, the more reason you have to plow profits back into business rather than pay out huge dividends and executive salaries.  High taxes reduce the take-home profits, but they also reduce the impact of loss, since losses can be used as tax write-offs.

The Obama administration’s economic theory seems to be that if the Federal Reserve System pumps enough money into banks and financial institutions, they’ll invest it and revive the economy.  This doesn’t seem to be working either.

We need a new economic theory.

Another hat tip to The Atlantic’s Derek Thompson for The Most Important Graphs of 2011.