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Saturday, December 3, 2022
KUALA LUMPUR, Malaysia, Mar 17 2020 (IPS) - ‘Getting government out of the way’, the neoliberal ‘free market’ mantra, was supposed to boost private investment. Instead, business investment has declined as a consequence. Many economies now seem incapable of making much needed investments to sustain growth, apparently due to ‘capital allocation’ problems.
As William Lazonick’s Profits without Prosperity has argued, the outcome has been ‘predatory value extraction’, rather than ‘value creation’. Although mainly discussing the US, his seminal Harvard Business Review article offers invaluable insights into financial investment trends and their implications.
Not growth promoting
Trump’s 2017 corporate tax cut was supposed to increase private investments, raising output and jobs growth. Although investment increased in early 2018, capital spending soon stalled, lowering growth projections.
By mid-2019, S&P 500 companies were spending more to buy back their own shares than on fresh capital investment. Prospects of a major investment boom, due to the generous tax cut, are no longer taken seriously.
Apple’s stock buybacks, which had started in 2013, totaled US$326 billion by the end of 2019, accelerating after Trump’s 2017 tax cuts. There is no indication that Apple significantly increased investing in capital-intensive, fundamental innovations as a consequence.
Among major US corporations, Apple is among the few well-placed with sufficient resources to finance new manufacturing capacity and major technological advances. Without sufficient investment in productivity-enhancing technologies, facilities, equipment, training, etc., US productivity has stagnated, dimming its future economic prospects.
The US Fed’s unconventional monetary policies following the 2008-2009 financial crisis and more recent Trump administration deregulatory policy initiatives have not delivered strong investment and output growth, but asset price inflation instead.
Companies have responded to quantitative easing with more debt-financed buybacks, while US corporate investment has continued to decline, as shares of output, corporate profits or market capitalization, since the 1980s.
There is little evidence that more handsome corporate profits — e.g., due to cost savings, from weaker anti-trust and other regulations, cheaper labour and lower taxes, both at home and abroad — have significantly increased real investments in the US economy.
Enabling value extraction
Lazonick and Shin’s new book, Predatory Value Extraction: How the Looting of the Business Corporation Became the US Norm and How Sustainable Prosperity Can Be Restored argues that while stock prices are driven by innovation, speculation and manipulation, share buybacks have become a major means of lucrative financial market manipulation.
The free enterprise system is supposed to efficiently allocate capital for private corporations to make the most productive investments. A company’s retained profits are the basis of corporate finance, which can then be leveraged with debt, although Lazonick’s analysis of corporate finance challenges the misleading Modigliani-Miller presumption that equity and debt are perfect substitutes.
But market finance ideology sees the stock market as a superior allocator of resources for investment in companies, which it rarely is. While share buybacks have raised stock market indices, such indicators may be quite disconnected from real corporate performance.
Share buybacks imply that US corporations have no better investment options than to further raise already high, over-valued financial asset prices, thus reducing investment resources for future growth. It also enables private equity investors, such as venture capital, to liquidate their investments in productive assets.
This raises doubts about both the corporation and the financial system. Either the corporation is dysfunctional, as investments in the real economy are still needed, or finance is being misallocated, due to poor, or worse, perverse incentives. As corporations cannot productively invest finance, the system is clearly dysfunctional.
As the financial system is increasingly enabling and promoting value extraction, at the expense of badly needed value creation, neoliberal economics has been increasingly exposed as sophistry by contemporary developments and trends.
More portfolio investments in financial markets have worsened economic inequality as half of Americans own no shares. US wealth concentration is higher than in most other developed countries, with the top 10 per cent owning over 80 percent, while the top one per cent has almost 40 per cent.
As corporations are acknowledging they have no use of much capital, the state can use such investible resources to fund sorely needed public investment. Taxing ‘capital returns’ to shareholders is considered efficient in such circumstances as the taxpayer has acknowledged no use for the cash.
Meanwhile, government spending on public services and infrastructure investment has declined significantly over recent decades. Cutting government spending has been a neoliberal policy objective for many decades, but financial market trends may well have unwittingly created the conditions for mitigating some of its worse consequences.
Those opposing such government efforts claim to be defending markets and capitalism, although share buybacks effectively undermine their claims. Growing predatory value extraction, instead of value creation, raises the question of whether capitalism can be saved from itself.
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