The combination of quite lovely profit margins and the Republican tax reforms have led to much worrying about what companies like Apple are doing with all that extra cash. They’re just returning it to shareholders rather than investing it in their businesses! All of which shows there’s nothing quite so conservative as a progressive when there’s something to whine about.
It’s entirely true that we’d like society’s stock of capital (which includes profits made in the past) to be spent upon investment in advancing society into the future. Both deepening the capital base and also researching new shiny stuff are how we get more to enjoy in the future. But what is being missed is that there are two ways to do this, the old and the new.
That missing the new is what is driving these sorts of complaints common to those like Sen. Elizabeth Warren, D-Mass. — you know, lawyers who know little economics. And it’s with a certain sadness that I have to announce that all too much of the business press believes the same incorrect tropes.
We’d expect it from Vox of course. Nowhere run by Ezra Klein is going to understand economics. “Apple took the GOP tax cut and turned it into a $100 billion stock buyback” — what a horrible headline. But it extends to places like Business Insider as well: “When President Donald Trump’s massive tax plan was announced last year, experts immediately feared the worst about how companies would spend the additional cash they’d soon have for deployment. They figured corporations would choose to enrich shareholders through buybacks and dividends, rather than reinvest in their business or create jobs.”
So much for experts, eh? What is being missed here is that money isn’t destroyed because it’s paid out to shareholders. All we’ve done is change the decisionmakers. Instead of it being the managers of the company that have just made the profits doing the deciding, it’s the owners of the money — yes, stockholders own companies — who decide where the new investment goes.
Which is where that conservatism comes in. There was a time when raising capital to pursue a new idea was a difficult and expensive thing. This led to a fashion, a reasonable one, for conglomerates. Companies like ITT argued, correctly enough for the age, that they could and should run many unrelated businesses, as they could take the profits from a successful one to apply to a new idea. The costs of raising new capital were such that this made sense, to recycle internally.
Then we neoliberals got involved, us market types. That increased financialization of society, those stock markets becoming more important, the manner in which Wall Street became larger. Raising capital for a new idea has never been easier nor cheaper, the very point of the changes. That means we don’t need nor even want profits from past successes to be limited within the companies that made them. We want, instead, them to be paid out to investors so that they can then be allocated into new investments.
The 2010s are very different from the 1960s. We positively desire money to flow out of successful companies so that it may flow into those that might be successful in the future, rather than, because of the costs of financial markets, to be allocated to new investments internally. Conglomerates are out of fashion for precisely this reason.
Apple and others ship profits back to investors? Yes, that’s the point. Those failing to grasp that point are those who just haven’t noted that financial markets really have changed in these past two generations and for the better. But then there’s nothing quite as conservative as a progressive on the warpath, is there?
Tim Worstall (@worstall) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute. You can read all his pieces at The Continental Telegraph.
