Sunday, November 24, 2013
The Corporate Incentive Gap And Secular Stagnation
This is one of several articles that attempt to explain the slow growth of many western economies. This article lays some of the blame at short term corporate incentives. Households and investors have responded to monetary policy, which has kept interest rates low, by taking on more debt to consume or to purchase assets which have been appreciating. Household debt in the US is growing faster than GDP or household income. Households and financial investors are using debt to make purchases but corporations are not using their retained earnings to invest in long term projects. In the early 70's business investment was 15 times the payout in dividends. Today the ratio is less than 2. Corporate profits are at a post war high but they are being used to reward shareholders by increasing dividend payouts, or by stock buybacks which increase share prices. Corporate behavior is totally consistent with the incentive system that drives corporate behavior. Why should executives invest in projects which have a long term effect on stock prices when they might not be there to share in the rewards? It is also the best way to please many shareholders because they have a greater concern about the short term behavior of stock prices than they do in the price of the shares that they hold in the more distant future.