Posts Tagged ‘Investment’

USA failing to make the needed public investment

June 2, 2016


If you own a house or an automobile, you know you have to spend a certain amount on maintenance to keep it in good repair.  If you don’t, you’ll have problems and a bigger expense in the long run.

The same is true if you own business property, except that if you’re in business, you would want to expand and improve and not just maintain things as they are.

Governmental infrastructure needs to be maintained as well.  Our roads and bridges, airports and seaports, water and sewerage systems and other facilities don’t take care of themselves.

The chart above shows there’s a problem.   Net investment—investment minus depreciation—has fallen over the years.  In some years, it has been a negative figure, meaning the federal government isn’t keeping up with what is needed.

Putting people to work on public infrastructure projects is a good way to stimulate the economy, which has been largely missing during the current recovery.  But the main reason is that public investment is necessary if we are to have a good economy.


Why millennials don’t save money

July 8, 2015

Duncan Black, a blogger in Philadelphia, explains:

How do you expect people to start their careers with a hundred thousand dollars in debt, and then save for a down payment, and then save for retirement?  This is un-possible even with high paying jobs, which most people don’t have.

It’s true that the magic of compound interest works really well if you start saving at age 21 and continue until retirement, but it’s also true that it’s stupid to save if investment returns are lower than the interest rates on the absurd amount of debt that you were supposed to rack up to enter civilized life.

Really no one should go into this much debt to go to college, but The Kids Today don’t even have the option of cheap public universities like The Kids In My Day did.

via Eschaton.

This is also the reason why the Millennial generation doesn’t spend money in the consumer economy the way previous generations did.

Stockholders gain at the expense of the rest of us

March 13, 2015

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?


Forgetful mutual fund investors perform best

September 15, 2014

c-75Proponents of Social Security privatization say that the average investor will do better investing the money that goes to Social Security taxes in the stock market.  The chart above, which is from Business Insider, shows the problem with this.

It is true enough that, over a long period of time, stock market averages, such as the Russell 2000 or the Standard & Poor’s 500, do better than Treasury bonds.  But most of us don’t do that.

We get overoptimistic when stock prices are going up and panic when stock prices are going down.  So we buy high and sell low—the opposite of what a smart investor should do.

The following is from an exchange between Barry Rithotz, a financial adviser and blogger, and James O’Shaughessy, of O’Shaughessy Asset Management, on Bloomberg Radio.

O’Shaughnessy: “Fidelity had done a study as to which accounts had done the best at Fidelity.  And what they found was…”

Ritholtz: “They were dead.”

O’Shaughnessy: “…No, that’s close though! They were the accounts of people who forgot they had an account at Fidelity.”

via Business Insider.

Ritholtz told about some of his experiences in estate planning, where a family fought over inherited assets for 10 or 20 years, didn’t touch them in the meantime and found those 10 or 20 years were the best period of performance.


Why the investment drought?

January 2, 2012

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.