[DEBATE] : Krugman: Another Economic Disconnect
Riaz K. Tayob
riazt at iafrica.com
Tue May 1 17:33:25 BST 2007
the problem with trickle down... in the US
New York Times OP-ED COLUMNIST
Another Economic Disconnect
By PAUL KRUGMAN
Published: April 30, 2007
Last fall Edward Lazear, the Bush administration's top economist,
explained that what's good for corporations is good for America.
"Profits," he declared, "provide the incentive for physical capital
investment, and physical capital growth contributes to productivity
growth. Thus profits are important not only for investors but also for
the workers who benefit from the growth in productivity."
In other words, ask not for whom the closing bell tolls; it tolls for thee.
Unfortunately, these days none of what Mr. Lazear said seems to be true.
In the Bush years high profits haven't led to high investment, and
rising productivity hasn't led to rising wages.
The second of those two disconnects has gotten a lot of attention
because of its political consequences. The administration and its allies
whine that they aren't getting credit for a great economy, but because
wages have been stagnant - the median worker's earnings, adjusted for
inflation, haven't gone up at all since the current economic expansion
began in 2001 - the economy feels anything but great to most Americans.
Less attention, however, has been given to the first disconnect: the
failure of high profits to produce an investment boom.
Since President Bush took office, the combination of rising productivity
and stagnant wages - workers are producing more, but they aren't getting
paid more - has led to a veritable profit gusher, with corporate profits
more than doubling since 2000. Last year, profits as a share of national
income were at the highest level ever recorded.
You might have expected this gusher of profits, which surely owes
something to the Bush administration's pro-corporate, anti-labor tilt,
to produce a corresponding gusher of business investment. But the
reality has been more of a trickle. Nonresidential investment - that is,
investment other than housing construction - has grown very slowly by
historical standards. As a share of G.D.P., nonresidential investment
remains far below its levels of the late 1990s, and it has been
declining for the last two quarters.
Why aren't corporations investing, and what does the lack of business
investment mean for the economy?
It's possible that sluggish business investment reflects lack of
confidence in the economic outlook - a lack of confidence that's
understandable given the bursting of the housing bubble, which has
already caused G.D.P. growth to slow to a crawl.
But as Floyd Norris recently reported in The Times, there is a more
disturbing possibility. Instead of investing in physical capital, many
companies are using profits to buy back their own stock. And cynics
suggest that the purpose of these buybacks is to produce a temporary
rise in stock prices that increases the value of executives' stock
options, even if it's against the long-term interests of investors.
It's not a far-fetched idea. Researchers at the Federal Reserve have
found evidence that company decisions about stock buybacks are strongly
influenced by "agency conflicts," a genteel term for self-dealing by
corporate insiders. In the 1990s that kind of self-dealing often led to
excessive investment, which at least left a tangible legacy behind. But
today the self-interest of management may be standing in the way of
Whatever the reasons, we now have an economy with incredibly high
profits and surprisingly low investment. This raises some immediate,
short-run concerns: with housing still in free fall and consumers ever
more stretched, optimistic projections for the economy depend on
vigorous growth in business investment. And that doesn't seem to be
The bigger issue, however, may be longer term. Mr. Lazear was right
about one thing: business investment plays an important role in raising
productivity. High investment in equipment and software was one major
reason for the productivity takeoff that began in the Clinton era, and
continued in the early years of this decade.
And low investment may be one reason productivity growth has slowed
dramatically over the last three years - another development that hasn't
received as much attention as it should.
In any case, next time someone tells you that any action that might
reduce corporate profits a bit - like actually enforcing health and
safety regulations or making it easier for workers to organize - will
reduce business investment, bear in mind that today's record profits
aren't being invested. Instead, they're being used to enrich executives
and a few lucky stock owners.
More information about the Debate-list