Why companies are rewarding shareholders instead of investing in the real economy


Lydia DePillis in The Washington Post's Wonkblog (via Doug Henwood) (image Jewel Samad/AFP/Getty Images):

In the past several years, profits have been increasingly paid back out to shareholders, rather than invested in hiring more people and paying them better. And lately, companies have even been borrowing money to make those shareholder payouts, because with interest rates so low, it’s a relatively cheap way to push stock prices higher.

That’s according to a new paper from the Roosevelt Institute, a left-leaning think tank that's launching a project exploring how the financialization of the economy has unlinked corporates from the well-being of regular people.

“The health of the financial system might matter less for the real economy than it once did,” writes J.W. Mason, an assistant professor of economics at John Jay College who wrote the paper, “because finance is no longer an instrument for getting money into productive businesses, but for getting money out of them.”

If it holds up, that has some pretty serious implications for how the Federal Reserve should go about tending the “real economy” in the future.

Here’s the data at the center of the report: In the 1960s, 40 percent of earnings and borrowing used to go into investment. In the 1980s, that figure fell to less than 10 percent, and hasn’t risen since. Instead of investment, borrowing is now closely correlated with shareholder payouts, which have nearly doubled as a share of corporate assets since the 1980s.

So what happened in the 1980s? The “shareholder revolution,” starting with a wave of hostile takeovers, propelled a shift in American corporate governance. Investors began demanding more control over the firm’s cash flow. Rather than plowing profits back into expansion and employee welfare, managers would pay them out in the form of dividends.

The years since the recession have given firms even more of an incentive to dispense cash rather than invest in growth: The Fed’s policy of keeping interest rates low has made credit cheap, and with weak consumer demand, high-yield investment opportunities have been scarce. So instead, companies have been borrowing in order to buy back stock, which boosts their share price and keeps investors happy — but doesn’t give anything back to the world of job listings and salary freezes, where most of us still exist.

More here.