Sun, 16 Mar 2008

But what will they invest in?

It sometimes seems I spend too much of my time writing about taxes on the rich and the poor. It's uncomfortable territory on which to stake one's tent. People accuse you of socialism, and make sneering remarks about not getting the memo about the fall of the Soviet Union. This gets dull, to be honest, but the truth is I occupy this uncomfortable (and fairly lonely) little outpost not for ideology, but because the arithmetic drove me there. A transfer of taxes from rich people and corporations to the poor and middle is what we've experienced at both the state and national level over the past 25 years. There's simply no way to get around it, because that's what happened.

In Rhode Island, cuts in corporate and income taxes made up by increases in property taxes, forced the poor and middle to make up for the gains of the wealthy. At the federal level it was increases in payroll taxes and income tax rate cuts at the top levels as well as tax cuts on on certain kinds of income, like capital gains. If calling for the reversal of these trends allows a few people the opportunity to indulge their secret passion for invective, I don't mind so much.

Intellectually honest opponents will admit that all this is true, but then go on to say it's a good thing for the wealthy to have more money, because investors are necessary for our economy to grow. It is indeed true that without investment, our economic engine won't even turn over, let alone run smoothly, so it's worth considering the point. What do people with money do with that money?

The Federal Reserve tracks where Americans invest, so we can wallow in that data for a bit to see. In the last couple of years, investment in real estate -- the flow of dollars into purchases of housing -- has dropped precipitously, though it's still a bit higher than it was in 2003. People still need a place to live, I suppose. But investment in stocks has plummeted further. Almost a trillion dollars flowed out of the stock market in 2007. (Interestingly, the flow of money into mutual funds, though much smaller, was the other direction. Apparently people who buy their stocks through brokers are not as confident as people who buy via mutual funds.)

More discouraging than this is the ongoing disinvestment in small businesses. In 2003, Americans invested about $45 billion in small businesses of one kind or another, but in 2007, we took $57 billion out. The total value of investment in businesses rose, but that was likely because of increased real estate values. Where are we investing? Money market funds and cars, apparently. This is not a picture of an entrepreneurial nation.

There's more trouble in corporate America. According to those same Federal Reserve statistics of investments. Over the past few years, aggregate corporate profits have boomed, going from $424 billion in 2003 to more than $1 trillion in 2007. But the amount of productive capital in use has gone up only about 20% during that same time. The money put towards investment is apparently little more than enough to replace and upgrade equipment as it wears out. Where's the real money going? Mostly dividends to shareholders and financial investments.

And cash. A recent study by business professors at Georgetown University and Ohio State (link) found cash holdings at US corporations had tripled over the past decade. Companies use cash to hedge against uncertainty, so I guess we should be glad that corporate managers are accumulating reserves against hard times. But companies also use cash to invest in new products and processes, and we should all be concerned that they can't think of anything better to do with that cash than sit on it.

Overall, then, money is being pulled out of stocks and small businesses, and corporations aren't reinvesting their huge profits in anything productive. It isn't really that surprising, though. Ask yourself, if $40,000 dropped into your lap next week, what productive investments would you make with it? If you can't think of anything, you're apparently not alone.

Maybe you think opening a store sounds appealing? That's fine, but you have to pick something to sell that isn't sold for cheaper by Wal-Mart, Staples or Amazon.com. Maybe you invented something? A few years ago I investigated the possibilities of marketing an electronic clock I developed. I discovered that it was utterly impossible to make it more cheaply here than it could be made in China. At the volumes I could have reasonably hoped to generate, I couldn't even buy the parts for less than a finished clock would have cost from China.

To be sure, there are still niches to find and exploit, but in a world with the global competition we have now, those opportunities are narrower and more elusive than they once were. Our problem isn't a shortage of investors or funds to invest, but a real shortage of places to invest them.

Instead of showering our largesse on the investor class, shouldn't we instead be focusing our resources on all the other essential parts of the equation: the inventors, the markets, the workers, the supply chains? Just as an example, recent talk about finding renewable energy opportunities, like building blades for giant wind turbines at Quonset, or creating local markets for clean electricity, seem much more on target to address these problems than current state policies. If you understand our economic issues this way, slashing school and university funding to benefit investors hardly seems to answer the needs we face, but that's what's in store this year.

17:21 - 16 Mar 2008 [/y8/cols] link

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