[DEBATE] : Krugman: Another Economic Disconnect

[Riaz K. Tayob]

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 
productive investment.
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 
happening.
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.