This pursuit of short-term payouts over long-term investment appears to be depressing economic growth, the report finds, exacerbating inequality and making it harder than ever for American workers and their families to get ahead.
Historically, profitable businesses return some of their excess earnings to shareholders and invest much of the rest back into the company in the form of new machines, new buildings and intellectual property. These so-called capital investments have traditionally been one of the drivers of economic growth.
But, as many economists have observed, such investments have been on the wane for decades in the United States, particularly relative to gross domestic product and corporate profits. Cass digs into these numbers at the company level, which dates back to 1971, characterizing firms into two main categories: eroders, who allow their capital assets to depreciate to pay their shareholders; and sustainers, who invest in their capital assets at a rate faster than depreciation, ensuring their assets grow.
Sustainers “can and do invest in new assets faster than they use up existing ones,” Cass writes. “Most companies in a well-functioning capitalist economy should be Sustainers and, historically, most were.”
Eroders, by contrast, “actively disinvest from themselves, allowing their capital bases to erode even while paying to shareholders the resources they would have needed if they wanted to maintain their health.”
There’s also a third category of business, called growers, which need to borrow to fund levels of growth that are currently beyond the scale of their profits.
Cass makes a startling finding: In the 1970s, less than 20 percent of the money in U.S. stock markets was in the so-called eroders. But by 2017 close to half of it was.
Over the same period, the market capitalization of sustainers dropped by a similar amount.
Cass notes, for instance, that technology firm Cisco spent $101 billion buying back shares of its stock in the past 15 years but invested only $15 billion over the same period.
Then there’s IBM: In the 1970s, according to Cass’s analysis, it sent 30 cents to shareholders for every $1 it invested. But by 2014, it was paying them $5 for every $1 in capital investments.
Most economists say the rise of the shareholder primacy theory of business — which states that a company’s first duty is to maximize profits for its shareholders — is a major driver of this shift.
“Milton Friedman’s famous essay (‘The Social Responsibility of Business Is To Increase Its Profits’) is seen as marking a sea-change in thinking because it said shareholders come first and anything else is inefficient,” Cass wrote via email. “And shareholders, perhaps rationally, seem relatively more interested in short-run profits” than in long-term investment.
This shift in thinking was accompanied by an explosion of creative profit-seeking in the financial sector. “Some private equity firms said ‘actually, if we buy these [companies] up and sell them off for parts, or squeeze the workers and the suppliers and cut capital investment and load on a lot of debt … we could get a lot more money out than we’re going to have to pay,” Cass wrote.
Some economists view this sort of behavior as beneficial to society. Kevin Hassett, head of the Council of Economic Advisers under Trump, told The Post in 2018 that when a company buys back its stock, a person invested in that company either “buys some other stock or invests in some other business that actually needs the money. The money is reinvested and is increasing the efficiency of the economy by moving cash to the firms that need it the most.”
But Cass says the practice has grown so widespread, and actual investment has declined so much, that it’s turned into a game of investment hot potato: Companies pay off shareholders, who invest in other companies, which pay off their shareholders, who invest in still other companies, over and over ad infinitum. At every step in the chain there’s a financial firm taking a cut, and very little money ends up making its way back to what Cass calls the “real” economy of goods and nonfinancial services.
“The problem arises when the financial sector stops serving the real economy and instead the real economy serves the financial sector,” Cass said. “The assets in the real economy become merely the medium that the financial sector uses to conduct a variety of non-investment activities for its own profit.”
Not all economists agree with Cass’s diagnosis. Don Schneider, former chief economist of the House Ways and Means Committee, noted in a lengthy Twitter thread that other ways of measuring business investment don’t show the same decline seen in analyses by Cass and others. He added that the literature on business investment is “really conflicting, with many compelling theories & measures of investment to assess them by” and that it provides “no good definitive answers.”
All told, Cass says, it’s a recipe for economic stagnation across the board. “The nation’s capital base is smaller by literally trillions of dollars as a result, representing untold enterprises never built, innovations never pursued, and workers never given opportunity,” he writes.