Thursday, March 19, 2015

Shareholder Capitalism Is Working Just Fine

Robert Samuelson defends our current system of shareholder capitalism in which 90% of corporate profits are used to buyback shares, or payout dividends to shareholders.  He argues that corporate managers would invest the profits if they could find profitable new investments.  They can't find profitable new investments because the economy has not recovered fully from the recession.  It would not be sensible for corporations to invest in unprofitable projects just to stimulate the economy.  Samuelson has conducted the trial and decided that the system is working just fine.  The trial that Samuelson held might have been more interesting if he had called some witnesses to the stand that were more critical of the shareholder value myth

Curiously, Samuelson has also opposed the use of fiscal policy to stimulate an economy in recession.  He favors cuts in government spending in order to balance the federal budget.  He assumes that business confidence would increase if there were less government borrowing and that would stimulate the economy.  That has not worked where it has been tried out in Europe.  Moreover, if business investment has been constrained by a lack of demand, as he argues, and aggressive monetary policy has not ended the recession, fiscal policy may be the only weapon remaining.  Cuts in government investment in order to balance the budget, paired with a low level of business investment, is not what is needed to restore the economy.

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