Monday, February 29, 2016

European Media In Disbelief About Trump's Rise

This article provides a sample of the media coverage in Europe about Trump's success in the GOP primaries.  Much of it is satirical and critical, but Trump is viewed more favorably in the Czech and Russian media which argue that he reflects popular discontent with the US political system.  Trump is also viewed favorably by right wing populist parties which have also taken strong positions against immigration and multiculturalism.

While the media coverage of Trump in Europe has been extensive and very popular it fails to recognize a critical distinction between the rise of right wing populist parties in Europe and Trump's success in the US.  Trump has not spawned a new populist party like those in Europe which failed to find a home in any of the major political parties.  Trump threatens to take over one of America's two major political parties.  His position on immigration, race, and other conservative issues only differs from those of his two major contenders in style, not in substance.  Trump has been winning GOP primaries by convincing the GOP electorate that he will be more vigorous in supporting their goals than the other candidates.  His language is crude, and less subtle, than that of the other candidates and that has been one of the keys to his success.  He speaks like one of them.  The real issue in the GOP primary campaign is that Trump has capitalized on positions that the Republican Party has nurtured in it's base.  He has successfully taken them to an extreme.  The Southern Strategy has come home to roost in the Republican Party.  He is not trusted by GOP establishment because he may not be the kind of puppet to which the Party elite has become comfortable.  It prefers candidates who talk the right wing conservative game in the election cycle but which will focus on the economic policies of the elite after they are elected.  The Republican Party has lost control of its identity with the rise of Donald Trump.  They are totally confused about how to proceed if Trump is nominated and if he would manage to become President. 

Friday, February 26, 2016

US Politics In The Age Of Trivia

Ted Cruz and Marco Rubio ganged up on Donald Trump in last night's GOP "debate" which turned into a bar room brawl.  The media responded to the debate by describing the magnitude of the blows that each candidate inflicted on the other candidate.  Marco Rubio was declared the winner of the brawl and he was praised for finally showing why he would make a good president.  He landed the most solid blows to The Donald, who was stunned by the ferocity of the attacks, and was backed into a corner from which he failed to escape.

In case anyone wondered how any of these candidates would run the economy, which is less interesting to watch than a bar room brawl, this article provides a simple analysis of their economic plans.  It shows that each of the candidates has a serious problem in handling addition and subtraction.  Each of them rewards the electorate by cutting taxes substantially.  They also reward their followers by making a promise that is dear to many of them.  They propose to amend the Constitution so that the federal government cannot run a budget deficit.  That creates a real problem for which they will need to invent a new system of mathematics.  The tax cuts that they promise to their base that hates to pay taxes, create a huge hole in the federal budget.  They will have to cut federal spending by a similar amount in order to conform to the balanced budget amendment to the Constitution that they propose.  Furthermore, in order to demonstrate their commitment to strengthening the US military which has been weakened by a Democratic President, who is not really a US citizen, they will substantially increase the military budget.  They are silent about the government programs that they must cut in order to pay for their tax cuts and the increase in military spending.  Their only salvation is that their electoral base is more interested in the manliness that they put on display in their debates than it is about silly details in the federal budgets that they proposed.  The media also seem to share their interests.  They are better at judging the manliness of the candidates than they are at dealing with boring budget proposals.  After all, they have to attract large audiences to their columns and TV news reports.  That is how they are judged.

Wednesday, February 24, 2016

Saudi And Russia Make The Case For Efficient Markets

Saudi and Russian oil producers agreed to freeze oil production at current levels.  That decision will make things difficult for high cost producers who wanted a cut in oil production to avoid a further decline in the price of oil.  A Saudi official told an audience of energy producers in Houston that they should respect the market forces that are underway.  The market will determine which producers will survive.  The high cost producers of shale oil and Canadian tar sand oil will need to cut costs to compete with low cost Saudi and Russian producers.  If they are unable to become more efficient they market will force them out of business just as it is supposed to do.  Prices will continue to fall in response to an imbalance between supply and demand drive them out of business.

That was a tough message coming from a Saudi official who led the oil cartel which has carefully managed oil production to manage the price of oil for many years.  It wants to drive the high cost producers out of business so that the cartel can get back in the business of managing the price of oil. Many of the high cost producers have been borrowing heavily in order to survive the drop in prices.  Much of their debt has become junk debt with yields as high as 20%.  The banks that hold this debt are in as much trouble as the producers.

The Saudi minister must still be chuckling after delivering his message about efficient markets to an audience that firmly believes in the market system that is killing them.

Republcan Senate Refuses To Consider Any Obama Nominee For "Supreme" Court

The president has a constitutional right to nominate a candidate for the open position due to the death of Scalia.  Ordinarily, the Senate would go through the process of evaluating the candidate.  The Republican Senate,  and the Republican House of Representatives no longer recognizes the legitimacy of the president that was elected in 2012.  The Senate refuses to even consider a candidate for the vacant position.  The Republican House will not even meet with White House officials to consider the budget submitted by the Obama Administration.  This is not the typical kind of competition between two political parties that is expected in a democracy.  It reflects a total breakdown of the system of checks and balances in our system of governance.  The Republican Party is broken.  It is a revolutionary party that refuses to cooperate with a political party that does not support its revolution.  It attempted to impeach President Clinton and it has obstructed the Obama Administration during his entire presidency.  The Supreme Court has become part of its revolution.  It was supposed to be an apolitical referee of our judicial system, and it was our most respected political institution for most of its history.  That is no longer true.  Popular support for the "Supreme" Court has declined dramatically.  It is approaching the abysmal decline in popular support for our obstructionist Congress.

Tuesday, February 23, 2016

Analysis Of GOP Candidate's Tax Proposals

The GOP candidates are in strong agreement about tax policy.  All of them have proposed plans which make the tax system less progressive.  That is accomplished by reducing taxes on investment income and other taxes that are paid primarily by wealthy families.  All of the plans dramatically reduce federal tax income.  Trump's plan would cut federal tax revenues by $12 trillion over ten years.  Three organizations analyzed the proposals and summarized the results in this article

Since the tax cuts will reduce federal tax income budget deficits will skyrocket under the GOP plans.  There are two ways in which the tax cuts can contain rising budget deficits:  The government can cut spending or the tax cuts will magically grow the economy.  The experts believe that some growth might be derived from tax cuts but not in the order of magnitude required by the tax cuts.  The only way to pay for the tax cuts that go primarily to the rich is to cut spending on popular social welfare programs.  All of the candidates have avoided any discussion of cuts to these programs during their campaigns.  The debates have focused on social and religious values along with the fears that many have about immigration and terrorism. 

Marco Rubio argues that he will be the new Ronald Reagan who bring the Republican Party into the 21st century.  It would be more precise to argue that he and the other candidates would continue the policies introduced by Reagan which produced huge budget deficits because the tax cuts failed to grow the economy as he proposed.  Populists in both parties are concerned about their economic futures.  The Republican Party has put their solution on offer.  Let them eat social values and use tax policies to funnel more wealth and income to the super rich.

Monday, February 22, 2016

The Republican Establishment Has Selected Marco Rubio For President

The GOP primary elections were very bad for the establishment's favorite going into the elections.  Jeb Bush finally decided to withdraw from the primary campaign.  The GOP establishment has no choice but to throw its support to the empty suit with a young and pretty face who may have the ability to attract Spanish speaking voters.  Donald Trump could still win the nomination but the GOP establishment has thrown all of its support in the direction of an empty suit who has done nothing during his brief political career to establish presidential credentials.  Jeb Bush, who helped him to rise through the political ranks in Florida, must be astonished that Rubio has inherited his position as the GOP establishment's new favorite.

 Paul Krugman has taken a look at Rubio's economic policies, which have the stamp of the Republican elite all over them,  and they are not surprising.  They are even worse than George Bush's policies.  Few of the Republican voters, who will determine the GOP candidate, are aware of Rubio's economic policies.  They have been rarely discussed during the GOP debates.  Moreover, it is hard to distinguish Rubio's policies from the other candidates who all favor cutting taxes for the rich and increasing federal budget deficits.  The resulting deficits provide the excuse for cutting federal spending on Social Security, Medicare and other social welfare programs.  Rubio and the other GOP candidates know little about these policies themselves.  They have all been developed by economists who work for think tanks funded by GOP billionaires.  Consequently, the contest is all about personalities and other extraneous factors.  Republicans will have to choose between an empty suit and an entertainer with an expensive hair cut.

The Melting Away Of Social Democracy In The North Atlantic Nations

Thomas Piketty wrote a book that sold 2.2 million copies in which he argued that the period following WW ll until around 1980 was an anomaly.  That was a period of rising income an wealth  equality and the establishment of a social democracy.  We have entered a new period in which income and wealth inequality are increasing rapidly and putting an end to the social democracy that was created during the anomaly.  Brad DeLong does a nice job of explaining Piketty's argument and some of the good and bad critiques of his book.  Piketty argued that steps could be taken to reverse the inequality trend that he described, but that it would take a major effort by governments to restore the period of social democracy that arose following the destruction of capital during the Great Depression and the second world war.  DeLong reached a pessimistic conclusion that is quoted below.  It would be hard for anyone observing the presidential primary campaigns to be positive about the ability of our political system to reverse the trends that are underway.  Unfortunately, very bad politicians get a lot of help from very bad economists who assist them in developing economic and social policies.

But right now money talks very loudly indeed. And I leave the Piketty debate more depressed about our ability to keep it from talking so loudly. What makes me more depressed? The Piketty debate itself does: The eagerness of so-many economists to aggressively make so many shoddy arguments that Piketty does not know what he is talking about--that makes me think that Piketty does indeed know what he is talking about.

Friday, February 19, 2016

Can And Should The US Economy Grow Faster Than Current Forecast?

The former president of the Minneapolis Fed argues that the US economy can grow at a 5% rate as some presidential candidates have suggested.  There are no technical reasons why that can't happen.  The questions is whether the benefits of stimulating the economy exceed the cost of doing so,  He answers that question in the affirmative because of two strong price signals:  low interest rates suggest that there is an excess of savings, and wage growth is well below productivity growth.  He believes that the benefits from faster growth exceed the cost of stimulating investment.  Moreover, monetary stimulus can't do it alone.  Fiscal policy is the only viable way to deal with the the lack of demand that would be required.  He concludes that there has been no better time to take the necessary steps in recent memory.  Of course, his conclusion would require a political response that it is out of the question in the US.

Tuesday, February 16, 2016

Why The US Presidential Election Will Last For 10,000 Years

In the previous 20,000 years natural events have determined the ebbs and flows of climate change.  We have entered a new period in which human behavior will determine what happens to our planet. What we do in the next 100 years will last for 10,000 years.  The carbon that we emit will last that long in our atmosphere. It is irreversible!!  We have a few decades to reduce carbon emissions so that the next 10,000 years will not alter our planet in ways that are difficult to imagine.  The survival of our species and our way of life is at issue.   What we do today will have a powerful impact on the next 100 generations that follow our generation.  That is why US presidential election will have an effect on our planet that will last for 10,000 years.

The US took a leadership role in the recent Paris conference that convinced China and other developing countries to commit to a reduction in carbon emissions.  The Supreme Court has cast a doubt on the ability of the EPA to carry out the plan to which we had agreed in Paris.  If we elect a Republican president another conservative justice will replace Scalia.  A Republican Party that controls all three branches of our government will back away from any effort to cut carbon emissions;  the rest of the world will be forced to follow its lead.  We will have wasted the opportunity that we have in the next few decades to reduce the long term impact of climate change on our planet.

The IPPC which has focused our attention of the next 100 years is involved in relatively short term predictions about the effects of climate change.  Economists are in the habit of discounting the future 100 years from now under the assumption that benefits that we get from mitigation are less valuable than benefits we give up today.  The short term predictions about the effects of climate change over the next 100 years are less accurate than the long term impact of climate change over the next 10,000 years.  We can be fairly certain about the catastrophic effects from climate change over that period.  Some of those changes are described in this article.

Monday, February 15, 2016

Antonin Scalia Attacked Democratic Foreign Policy At Age 16

Ronald Reagan appointed Antonin Scalia, who recently passed away, to the Supreme Court during his administration.  Scalia got an early start as an advocate for the Republican Party.  The NYT reports that Scalia was in a debate at age 16 in which he argued that the Democratic Party was weak on Communism.  He claimed that its foreign policy had allowed Communism to spread across the world.  He also argued that US prosperity under the Democratic Party was due to a war economy.
Its easy to understand how Scalia grew up to be a rabid Republican and a future appointee to the Supreme Court in the Reagan era.

The GOP won the presidential election under Dwight Eisenhower.  He was not an opponent of big government.  Eisenhower was responsible for the development of the interstate highway system.

Saturday, February 13, 2016

Washington Post Editorial In Favor Of Incremental Change In Politics

The Washington Post agrees with Hillary Clinton's strategy against Bernie Sanders.  Clinton claims that she shares his sentiments but that he has not shown how they could be implemented.  Clinton is correct.  They would be difficult to implement.  The Post editorial argues that our system of checks and balances is responsible for the difficulty.  The system was set up to promote incremental change and to resist radical change.  I have two problems with the Post's editorial.  In the first place, Obama was elected in 2008 by an electorate who wanted the changes that he advocated.  The Democratic Party was given a majority in the House and in the Senate to support those changes.  The system of checks and balances, that the Post editorial supports, limited the ability of our elected government to deal with the Great Recession, and the reform a healthcare system that limited access to proper care, and is more expensive than any other healthcare system in the world.  Furthermore, the Republican Party has done everything possible to undermine the healthcare bill that was passed by our Congress.  The gridlock that we have endured for eight years suggests that there a flaws in the system of checks and balances.  In the second place, the problems that Bernie Sanders and Hillary Clinton acknowledge are serious problems that need to be addressed.  Does the Post believe that we should do nothing about them because they are too difficult to implement?  They are serious problems that undermine our democratic system.  Most of them are problems acknowledged by the Post.  Should we nothing about global warming, rising income and wealth inequality, the dependence of electoral system on financial support from anonymous contributors, and a higher education system that has become too expensive for the majority of our citizens as states have systematically reduced their funding?  Our current system of checks and balances does not serve us well.  If the Republican Party has its way these problems will only worsen over time.  The Post should not be praising a system of checks and balances that has produced gridlock.  It should be promoting a means to reduce gridlock.

Thursday, February 11, 2016

Washington Post Editorial On Donald Trump And Bernie Sanders

This Washington Post editorial is critical of both Donald Trump and Bernie Sanders.  It is particularly harsh on Donald Trump and the ugliness of his message.  It dismisses Bernie Sanders as a well meaning politician who has the right values but impractical solutions to the problems that concern him.

One can't take issue with the editorial's critique of Donald Trump. He has a nasty message, and he has no meaningful way of dealing with the problems that he raises.  Our real concern should be the appeal that Trump has to millions of Republicans.  They have been sensitized to the issues that he raises by the Republican propaganda machine.  The major difference between Trump and his primary opponents is one of style.  In fact, that is what makes him attractive to low income Republicans and even to some low income Democrats.  They have real concerns about most of the issues that Republicans have been using to generate fears which they hope to blame on Democrats.  Their solution to a host of problems is quite simple.  Throw the rascals out of office and your fears can be set aside. That is an easy solution to a number of very complex and difficult issues that are poorly understood and not easily fixed.  Consequently, little will be done to deal with them if a Republican is elected to office.  That is less true about the economic issues which have been part of the Republican orthodoxy for a long time.  Taxes will be reduced for the super rich,  government regulations will be weakened and budget deficits that result from tax cuts will be used as the rationale for reducing the cost of social welfare programs.

I won't comment on the practicality of the solutions to some of the economic issues raised by Bernie Sanders.  I will accept the editorial's conclusion that they a properly motivated, and that Sanders is well meaning.  We need someone in the Whitehouse who is willing to address those issues.  There is no chance that a Republican would do anything to meaningfully address those issues.  Fortunately, the Republican Party has not produced a presidential candidate that will have the broad appeal that is necessary to win a general election.  Without Trump, they are left with Ted Cruz whose positions on the issues that matter to most voters will be easy to attack.  Marco Rubio has been given the opportunity to strut his stuff and he has been exposed as empty suit who is only capable of repeating his campaign slogans.  Jeb Bush, who was the party favorite prior to the primary campaign, has shown that he cannot even sell himself to other Republicans.  Hopefully, the battle between Hillary Clinton and Bernie Sanders will not divide the party.  If Clinton wins the nomination she will need all of the help that she can get from those who supported Sanders with enthusiasm that has not been visible in the Clinton campaign.

The Sky May Not Be Falling In The US

If you think that a lot of strange sounds are coming out of the US primary campaigns,  the sounds seem even stranger to a German journalist.  There are a lot of differences between the consensus building parliamentary system in Germany, and the US winner take all system, but the strangest sounds of all are coming from Republicans who claim that the sky is falling.  The rest of the world does not believe that story.  The US is still regarded as the nation with the most powerful military that offers protection to Germany and the rest of the world.  One is forced to give credit to the right wing media in the US.  It has convinced information poor Americans that the sky has been falling for eight years under Democratic leadership.  Our military is no longer powerful, and our economy, which has recovered better from the recession than economies in the rest of the world, is a disaster.  That has spawned numerous "Chicken Little's" who are running for the GOP presidential nomination; they claim that they can rebuild America by cutting taxes and government regulations.  Indeed, we live in an imaginary world that seems quite different to those who have not been subject to right wing propaganda.

Republican Court Blocks US Effort To Fight Climate Change

The Republican Court, which used to be called the Supreme Court, took an unusual step to block the EPA from enforcing President Obama's effort to shift the production of electricity from coal to cleaner fuels.  It agreed to delay the implementation of the EPA rule until it decided whether it was constitutional.  Ordinarily, the court takes no action until it hears a complaint that is still being dealt with by a lower level federal court.  The suit was brought to the court by 27 states controlled by Republican governors. The EPA has been under attack by the coal industry, and its supporters in government, since the EPA announced its rule. 

The Republican Court's decision comes at a bad time.  An agreement was reached in Paris by national governments from around the globe to reduce carbon emissions.  The US played a key role in this agreement because it had not agreed to other international efforts to reduce carbon emissions.  If the US cannot implement its commitment to reduce carbon emissions, other nations may renege on their commitments.  That would be a terrible outcome for future generations.  It would also send a bad single to the rest of the world about US leadership.  One of its two political parties is dependent upon the ignorance of its constituents to remain in power.  Half of its members do not believe in the theory of evolution and they have been instructed to reject the scientific evidence for global warming.  A notion dependent upon ignorance for political power cannot remain a global leader for very long.

Wednesday, February 10, 2016

Can Either Political Party Survive The Primary Campaigns?

Donald Trump got more votes in the New Hampshire primary than the total votes collected by Cruz, Rubio and Jeb Bush.  Republican party leaders don't believe that Trump can win in a general election  and they were ready to converge on Marco Rubio until he crashed and burned in New Hampshire.  That leaves them with Ted Cruz who could not win a general election, and Jeb Bush who has had problems selling himself to the GOP electorate. 

Hillary Clinton's performance in Iowa and New Hampshire raises concerns about her ability to win a general election.  Bernie Sanders has generated more enthusiasm than Clinton within the liberal wing of the Democratic Party.  Nobody expected Sanders to do as well as he has and his performance in Iowa and New Hampshire will bolster his campaign going forward.  Party leaders have to be concerned about a candidate, who describes himself as a socialist, in a general election.

The lackluster performance of establishment politicians in both parties may reflect a more general concern in the electorate.  Neither political party seems to satisfy the concerns that bother their constituents.  Donald Trump and Ted Cruz appeal to two different segments of the GOP base but that makes them vulnerable in general election.  Bernie Sanders appeals to one of the mainstay segments of the Democratic base but he would be vulnerable in a general election.  That leaves the party with a candidate that has yet to generate enthusiasm in her base and who has a track record in government that is open to attack.  The electorate is searching for a leader who can address their concerns but our system has not produced that leader.

Tuesday, February 9, 2016

Why Do Oil Companies Continue To Produce Oil When Demand Is Weak?

Economist love the law of supply and demand.  The law holds that supply will shrink in response to cuts in demand. Producers will cut supply rather than accept falling prices. Oil producers continue to pump oil despite falling demand.  They continue to pump oil for a good reason.  Producers typically finance production by taking on debt.  The amount of debt that they hold has risen dramatically in the last few years.  They are forced to pump oil and sell it at low prices in order to service their debt.  They also need to take on additional debt at higher interest rates. 

David Brooks Explains Why He Will Miss President Obama

David Brooks is Mr. Republican, so this op-ed about President Obama's character must have been difficult for him to write.  He has been underwhelmed by the candidates competing for their party's presidential nomination.  They lack what President Obama has displayed over the last eight years.  It starts with integrity that is coupled with humility.  There have been no scandals in his administration because he has been thoughtful about whom he has appointed to key jobs.  His intelligence and thoughtfulness is also evident in the policies that he advocated.  He was able to pass an important healthcare bill because it extended healthcare benefits to many citizens without totally disrupting the existing healthcare system.  Bernie Sanders' healthcare proposal is too radical and disruptive.  He might also mentioned the silly attacks on his healthcare plan that have become part of the Republican catechism.  Brooks' favorite party has voted to repeal the Affordable Care Act over 60 times.  They did this with the knowledge that it would not withstand a presidential veto, and that it would be terribly disruptive to families and to the entire healthcare system.  Its no wonder that Brooks will miss the intelligence and integrity that he finds in President Obama.  It is in scarce supply in the Republican Party.

Friday, February 5, 2016

Who Benefits From Rubio's Tax Plan?

Marco Rubio's tax plan eliminates the tax on capital gains and dividend income.  Previous cuts in those taxes by GOP administrations have lowered them well below the taxes that most of us pay for earned income from wages.  A graph in this post shows the distribution of taxes paid on capital gains and dividend income.  The great majority of the taxes are paid  by those in the top 0.1% and the remainder in the top 1%.  Cutting these taxes does nothing for the economy, and it shifts the tax burden to other tax payers.  All of the GOP candidates have proposed tax cuts for the wealthiest Americans but Rubio has outdone them all.  Its no wonder that he is the favored candidate within the GOP establishment. 

Wednesday, February 3, 2016

Iowa Has Spoken: Rubio Will Be The GOP Nominee

The prediction market expects that Rubio will survive the GOP primary battle and be its nominee for the presidency.  Rubio's rise in the prediction market came at the expense of Donald Trump who is no longer the heavy favorite among those who bet on the outcome.  Ted Cruz won the Iowa primary but his gain in the prediction market was small relative to Rubio's rise in the market.  Those who bet on the outcome believe that Rubio is only establishment candidate left standing, and that support from the establishment will coalesce around Rubio.   Of course, what happens next in New Hampshire is bound to affect the prediction market.  Its fairly clear, however, that some of the candidates will disappear and that Rubio's chances for the nomination have improved.  Donald Trump may not survive a poor performance in New Hampshire where he as been at the top in the polls. 

One of the consequences of the Iowa result is that the media coverage will converge on Rubio.  The response of the media to the early contests will shape the public response to the candidates just as the early polls have focused attention on The Donald.

The End Of The New Economic Normal

A number of economists have suggested that we are in for an extended period of slow economic growth.  That has become the new normal.  This article argues that we are reaching the end of the new normal.  He describes the headwinds that he observes and he is not optimistic about our ability to deal with them.  We have relied too heavily on monetary policy, which has approached its limits, and he does believe that policy makers are prepared to do what is necessary to preserve even the new normal.  He is concerned about the consequences of political dysfunction which may worsen as economic conditions deteriorate further.  Its hard to observe the trends that are underway in the developed economies and remain confident about a revival in the ability of our political system to respond to a worsening economic situation. 

Tuesday, February 2, 2016

Are US Stocks Overvalued?

The recent decline in US stock prices has caused many investors to worry about the return on US stocks.  Olivier Blanchard gives his answer to the question.  He looks at several ways to evaluate the return on stocks over time, using the price to earnings ratio, and he argues that there is a better way to answer the question.  He changes the question by comparing the return on stocks to the expected return on bonds.  The expected return on stocks is a function of dividend growth.   He assumes that dividends will grow at the expected rate of GDP growth.  Since the market anticipates low interest rates well into the future, the return on bonds will continue to be lower than the return on stocks.  Therefore, stocks are not overpriced compared to the return on bonds.  The equity premium will continue into the near future as long as anticipated growth in GDP and interest remain constant.

Monday, February 1, 2016

The Shareholder Value Myth

The shareholder value myth was originated by Milton Friedman in a 1970 article in the New York Times.  Michael Jensen picked up on Friedman's idea and co-authored an article that transformed corporate governance, particularly in the US.  There has seldom been an academic idea that has had a similar impact on society.  It was warmly embraced by corporate executives, and by Congress, which passed a law that made it easier for executives to receive the bulk of their compensation in the form of stock options.  Managing the stock price through share buybacks, and increasing dividend payouts to shareholders, has replaced other uses of cash in most of our large corporations.

One of the problems with the notion of shareholder value primacy is that it originated in economics.  Corporations are legal entities which are bound by corporate law.  This article was written by a prominent corporate legal scholar who argues that the shareholder value primacy concept is based upon a serious misunderstanding of corporate law.  More importantly, it argues that shareholders have different reasons for owning shares in corporations.  Many are short term speculators who only care about turning a quick profit; others are long term investors who may be harmed by management decisions that make the corporation less able to compete in the future.  Moreover, shareholders have different values.  Some may worry about the effect of corporate decisions on the broader society,  and others may support corporate behavior that ignores the social consequences of corporate behavior.  Its fairly clear that BP shareholders have suffered from the efforts of management to take safety risks in order to cut costs.  The oil spill in the Gulf also affected suppliers and businesses that depended upon clean water for their livelihood. The recent problems faced by Volkswagen provide another example of the costs to shareholders, and to other stakeholders, of management decisions that were narrowly focused on short term profits and the stock price.

The notion that corporations are owned by their shareholders, and that they are solely entitled to corporate profits, is compelling for many people.  Its easy to confuse a publically held corporation to a private business with a single owner.  Given the importance of the decisions made by our large publically held corporations, and the damages that are being done in the name of shareholder value,  its important to understand the weaknesses of the shareholder value primacy myth.  This article should be required reading in MBA programs.