Why Are Corporations Hoarding Trillions? | Hacker News Reader

Why Are Corporations Hoarding Trillions?

nytimes.com

241 pointshvo399 comments

Looks like the TL;DR of this article is: "Corporate leadership, being so much smarter than the rest of us dummies, sees something big on the horizon coming. They're saving all their cash so they can later invest because "the next transformative innovation could be just around the corner". Apparently they're smart enough to hoard all this cash, but not smart enough to know exactly what that transformative innovation is so they can get started on it right now.

Let me propose an alternate theory: They're no smarter than the rest of us, and NOBODY knows what to invest in anymore. Corporate leadership is uncreative and can't think of anything else to do with that money that will produce returns in excess of what they're already doing. Shareholders don't want the money back (they'll just turn around and invest it into another company that already has a pile of cash). And they sure as shit won't throw a bone to employees (whose wages have been stagnant for a decade). So, what are they going to do with it all? Who knows? Let it sit in a bank account!

As a corporation, the traditional thing to do with cash you don't need is to return it to your owners, either through dividends or through share repurchases: If the owners wanted to own money sitting in a bank account, they could put the money in a bank account themselves. If they wanted to own a company, they'd be better off owning just the business part without a chunk of low-return cash attached. Beyond basic liquidity needs, a pile of cash can only drag a company down.

Naturally, returning money works much better when taxes on dividends are low, or when stock prices are low (so you can give the remaining owners a better bang for the buck). Both taxes and stock prices have risen since the crash, however, and spending a cash horde on taxes or on overpriced company stock are a worse drag on the company than holding it.

If you expect your shareholders to get much better overall tax treatment on the money sometime in the relatively near future, it makes a lot of sense to hold on to it.

Especially with respect to money earned abroad, I'd think that's a decent guess. In particular, I'd expect there will be another one-time-only-we-really-mean-it-this-time repatriation holiday in 2017 or 18.

> In particular, I'd expect there will be another one-time-only-we-really-mean-it-this-time repatriation holiday in 2017 or 18.

Nobody even really takes advantage of those because it isn't about repatriation. It's about the interest.

If you have a pile of cash (really investment securities) held by MegaCorp in some low tax jurisdiction, it pays the low tax rate on the interest the money generates. If you repatriate the money and then invest it in the same things MegaCorp was, now the taxes you owe on the future interest are in the high tax jurisdiction. Nobody is interested in doing that even if you could repatriate the money tax-free.

The only reason to repatriate the money is if you want to spend it, which large investors don't do with most of their money (because they make far more than they spend), and which anybody can do at any time by selling shares, which has preferable tax treatment to dividends anyway but has the unfortunate side effect of leaving the entire pile of cash (and all subsequent interest) inside the original corporation forever.

The only way to get around this is to stop taxing investment income. Which is of course completely unfair to everyone else unless you also stop taxing earned income and tax consumption instead. The objection then being that taxing consumption instead of income is advantageous to rich investors who spend a smaller percentage of their income than other people, except that that is the status quo.

Qualified dividends are taxed at the long term capital gain rate. One time, special dividends aren't, but that's just a reason to use a regular dividend instead.

Investors could just sell shares if they wanted to raise money, but then they lose out on future growth in the company's value. Sending out profits to shareholders in the form of a regular dividend allows owners to have a concentrated investment in the business the company is in rather than it being diluted with some low risk / low return pile of investments.

The 2004 holiday saw about $312B repatriated. That may not be a huge number compared to the $1.9T discussed in the article but it hardly supports the claim that "nobody even really takes advantage".

> Qualified dividends are taxed at the long term capital gain rate. One time, special dividends aren't, but that's just a reason to use a regular dividend instead.

That's not what I mean by preferred tax treatment.

If you get $120 as a dividend then you have $120 worth of taxable income. If you sell $120 worth of shares which you bought at $100 then you have $20 worth of taxable income. Even if the rate is the same, you're still paying significantly less in taxes because less of it is considered income.

> Investors could just sell shares if they wanted to raise money, but then they lose out on future growth in the company's value. Sending out profits to shareholders in the form of a regular dividend allows owners to have a concentrated investment in the business the company is in rather than it being diluted with some low risk / low return pile of investments.

Yes, that is the problem we would like to prevent.

But investors prefer that bad thing to happen over paying more taxes, so it does.

> The 2004 holiday saw about $312B repatriated. That may not be a huge number compared to the $1.9T discussed in the article but it hardly supports the claim that "nobody even really takes advantage".

I obviously didn't mean that literally zero people take advantage of it. That is not a large percentage of the total. And how much of that "repatriated" money is actually still in the country and not just an instance of people taking advantage of the tax holiday by moving money into the country during the holiday to reset their tax basis in it and then moving it back out to a tax haven again?

Could they just be trying to put off paying their taxes until a Republican gets elected and lowers the rates?

I doubt even a Republican would be willing to lower corporate income taxes. Nominal rates haven't been touched for quite a while; politicians opted instead to just allow the loopholes and safe havens to continue lowering the effective rate, and corporations seemed to be happy about that.

The likely reason for corporations holding onto cash is the lesser impact deferrals can make in today's markets. Companies are becoming larger and larger umbrellas every year, and as the need to hire new people presents itself, the unfortunate realization for them is that they must look to the bigger cities for their best talent. NYC, LA, SF, DC, etc., are the best places to acquire talent, and they are also home to some of the highest tax rates in the country.

This makes talent acquisition increasingly expensive, and that means less money that can go to the offshore safe havens that allow deferrals to be so lucrative for companies. So, companies hire as little as possible, and though corporate revenues are decreasing rapidly as a result, it's better for them than having to face a rather unstable business environment in the US, where all your massive infrastructure and talent investments may be useless in just a few years' time.

I believe that the US is becoming increasingly unfriendly to businesses, and the lack of political cooperation in DC is showing executives just how true that reality is. My contention is that businesses are holding onto cash because they may need to make sudden and quick moves in the near-future. They will either make huge hiring moves and will build out massive new infrastructure to support it -- or they will GTFO of the US while they have the chance.

>I doubt even a Republican would be willing to lower corporate income taxes.

I think a lot of people expect some type of future repatriation period that would allow these companies to bring their cash stateside at a reduced tax rate during a short temporary window. It is something the government has done in the past and it probably makes sense to do again sometime soon. I wouldn't want to be the CEO who overpays taxes by billions just because I wasn't patient enough to wait for another one of these tax break windows.

These tax repatriation deals are getting to be like "immigration reform". Once you start doing it, no matter how much you say "This is the last time! Honest!" people factor the next amnesty into their calculations. In both cases the fact that people believe it will happen increases the likelihood they are correct.

I would love to see the US corporate income tax eliminated, but this kind of one-time tax amnesty thing is bad policy.

> In both cases the fact that people believe it will happen increases the likelihood they are correct.

More like the people that want it to happen have enough collective influence to buy off Congress to make it happen so long as there isn't a pesky POTUS with an itchy veto pen finger.

Doesn't matter. If companies can afford to wait (and they can), Congress will eventually be seduced by the prospect of billions in free tax money. When Congress finally does it they can pay off all their interest groups without raising taxes. Nobody has to be paid off.

As time goes on, that pot of money gets bigger and bigger. The more people expect a tax amnesty, the more companies will just leave the money where it is instead of repatriating and paying taxes at the current rate, which just sweetens the pot even more.

Also, the president isn't any less beholden to donors. Do you think Obama would stand in the way of something Goldman Sachs (#3 donor) wanted? I don't.

> If the owners wanted to own money sitting in a bank account, they could put the money in a bank account themselves.

This logic is completely absurd. The assumption of a shareholder trusting a company to hold cash "in a bank account" is that there's value in the ability for the company to deploy it rapidly in the event that they need it. If the shareholders held it in their collective bank accounts, then in the event that the company had an opportunity requiring a big chunk of cash, they'd have to go through some complicated (and perhaps too slow) steps to acquire it.

I have a brokerage account and a checking account, and an ATM card for the latter alone: and yet I keep a reasonable sum of money in the brokerage account so that I can execute a trade with short notice (i.e. without first waiting for a cash transfer from my checking acct). By your logic, "If I wanted to hold cash in the bank, I would hold it in a bank".

I dont think that is what he meant. I think he meant that investing in a company who's value is 30% stock is like investing 70% into an company, and 30% into a low interest savings account.

That said, I don't agree. A company having cash reserves has value beyond money sitting in a personal savings account.

Tech companies specifically have seen their historical predecessors disappear very quickly - Sun and SGI nearly evaporated, IBM has had 16 quarters of shrinking earnings. So tech company execs hoard cash in the hope that if they get blindsided they'll have time to recover. I'm pretty sure this is Eric Schmidt's explicit strategy.

Also, as someone else noted, a lot of this cash is "trapped" overseas as it would cost 35% to repatriate it to the US. The logical thing to do would be to move more operations out of the US to balance expenses with revenues but I guess there are issues with doing that.

"Nearly Half of So-Called “Offshore” Funds Already in the United States"

"Corporations are able to invest their foreign earnings in U.S. assets without treating them as “repatriated” and subject to taxation, because the federal tax code, specifically Section 956(c)(2), already allows U.S. corporations to use foreign funds to make a wide range of U.S. investments without incurring tax liability."

https://www.hsgac.senate.gov/subcommittees/investigations/me...

That doesn't change anything. Cash on hand, even outside of the US lowers cost of capital, potentially almost to zero.

Paying the money to shareholders would imply double or triple taxation before the money is with the shareholders. (once, returning the money (corporate tax), once capital gains tax, then income tax or corporate tax again in the case of corporate shareholder). Just so we're clear, that means 35% and then another 35% or 50% tax, or 57% up to 67% tax.

So I think the original argument stands. The company has a choice. Either spend 3x the money on something that will make the stock price go up (like creating an offshore entity buying your own stock if you want to do this rather directly), or give 60% to the US government, 40% to the shareholders. That's why buybacks, which have been proven inefficient to say the least, still happen. They'd have to be 3x as inefficient to break even.

And from the perspective of the management itself : that's either a trillion dollars under their direct control (not quite property, but ...) or 400 billion payout to shareholders, none of it under their control. As long as they can get away with it, they'll keep it. Just look at what Amazon does to it's shareholders.

And they sure as shit won't throw a bone to employees (whose wages have been stagnant for a decade)

Labor rates have been stagnant for a decade -> disposable income is eaten up be inflation -> consumers have less money to spend on new and novel products and services -> there's less incentive to invent new and novel products and services -> there's no innovative companies to invest in -> companies pile up cash in banks, but don't think to invest in their employees

In real terms, wages have been stagnant since 1981-ish.

Sadly it is even worse - think early 70s. http://www.pewresearch.org/fact-tank/2014/10/09/for-most-wor...

Aren't your two paragraphs really two ways of saying the same thing?

If to follow buffet's cues, it would be smart to save when valuations are huge so you can make acquisitions on the cheap side when correction moves through.

In Buffett's day, value investing made a lot of sense and allowed Buffett to put out wise-sounding soundbites like "I don't invest in what I don't understand" and helped shore up the folksy image of Berkshire Hathaway, who owned ostensibly uncomplicated companies like Heinz.

But today we live in a world where the way to make money is through regulatory arbitrage (Uber) or startups chasing risky business models. Additionally, accounting trickery is orders of magnitude more elaborate today, and high frequency trading may have permanently impacted traditional models of volatility.

Of course, this applies only to publicly traded companies. My overall point is that determining value from fundamentals alone is nowhere near as straightforward as it used to be.

Sorry but no. It ALWAYS makes sense to sell high and buy low, even if you're buying the exact same company. In other words, just find one value play if you want, and follow the cycle.

The skill is in determining what high and low is - i.e. you do need to have a sense of what the asset is worth. The easy answer is - figure out what its worth to you. i.e. what level of earnings or dividend does it seem attractive, and then accordingly, what is too cheap and what is too expensive. Obviously, take into account debt and other liabilities if you can.

That's why its necessary to understand the basic business model.

The tricky part is the temperament to do nothing when others are in a frenzy. Only a few transactions in your entire lifespan will determine the vast majority of your performance.

That is an oversimplification that assumes that markets are efficient and there is no information asymmetry and evrryone operates on a long investment time horizon. If Warren Buffett and I both invested in Goldman Sachs in 2008, I would have to base my decision based on quarterly earnings reports and my guesses on the direction of Fed's monetary policy. Buffett on the other hand would be invited inside the Goldman boardroom and likely told of the company's situation without the sort of CFO doublespeak that occurs during an earnings call.

Dividends get taxed, hoarding money helps your price/book ratio.

The interesting thing is that by letting it sit in a bank account they really are throwing a bone to the employee. Not their employees in particular, but all users of US currency (which is the sort of people their employees are) are wealthier by X if a corporation hordes X, under the quantity theory of money.

> Let it sit in a bank account!

Money does not sit in bank accounts. The banks loan it out. It's why there are things like "free checking" - the banks make money by loaning it out, not storing it for you.

Yes, but also:

> Corporations, it seems, may have amassed at least a good chunk of that $1.9 trillion in mysterious savings because the stock market is rewarding them for it.

What's the rationale for that? Perhaps low cash reserves correlates strongly with poor outcomes, and the association gets extrapolated into meaningless territory. But if there's so much cash, why not increase dividends?

The only companies named in the article are Google, Apple, and GM. What's "big on the horizon" for tech and auto companies? Autonomous transportation.

After "horse-and-sun-powered agrarian economy" and "electricity-and-motor-powered industrial economy" and "silicon-based information economy", it seems we're going to "automation-based service economy".

The US is out of demand. Workers are spent out. Thus, there's no need to increase output, because nobody has the money to buy it. The US has huge excess manufacturing capacity, thousands of malls which could handle more traffic ("there's always parking at Sears", a rather pathetic ad), and services which could handle more business. There's a glut of capital, plenty of available unemployed or underemployed workers, no shortage of commercial real estate outside of a few cities, but no way to use it.

The CEO of WalMart has mentioned this. They have a direct view into the spent-out economy - same-store sales data. Sales decline each week after payday, then recover after payday. Sales move to necessities later in the month.

That's why companies aren't investing in capacity.

This is the ultimate problem with "trickle down" economics. Capital doesn't drive growth. Lack of capital limits growth, but excess capital doesn't generate additional growth. Demand drives growth and 35 years of stagnant wages (wages are basically where they were in 1981) have put a chokehold on growth.

This is why you have the seemingly incongruous effect of high taxes encouraging growth and low taxes stifling it. Ultimately "high taxes" tend to effect the rich a lot more than the poor, and the money ends up being redistributed somewhat equally, spurring demand as the poor can suddenly afford a lot more good and services.

That's not "trickle down" economics, which is not actually a real thing at all. That's a nonsensical political term that the Democrats seized upon during Reagan's "supply side" economic policy; which has beginnings much earlier than Reagan, and likely older than Jean-Baptiste Say's formulation.

There isn't an idea that alone "capital drives growth," that's an idea that Keynes came up with by misreading Jean-Baptiste Say. Paraphrasing him to say that "supply creates its own demand," which we all know is nonsensical, but that's not what Jean-Baptiste Say was saying. The idea is far more complicated than your simple explanation offers, though I sympathize with your view (though, at least the second paragraph is almost entirely wrong), it is narrow in its scope to the study of economics.

It doesn't really matter who said or misunderstood what, does it? I don't mean this as a personal attack but your comment is devoid of content.

There is a school of economics, sometimes called the "freshwater school" (from the Chicago School and Milton Friedman) which claims you can't run out of demand. This is a classic position. But productivity is now so good that we can run out of demand. Classically, countries ran out of land, labor, capital, or management before they ran out of demand. There were occasional recessions, but that wasn't a permanent condition. That's over in the US. Plenty of land outside NY and SF, lots of workers (some might need retraining, but it's not like the real labor shortage of WWII), oceans of capital, and lots of experienced managers. But nothing to do with it, because the demand isn't there.

This is an alien concept to many people and economic policy makers. See the parent article. They report on a capital glut, but are puzzled that it exists. The Fed keeps pumping capital into the economy in hopes it will fuel growth. But pumping capital into a capital glut doesn't do much.

Look at Japan since 1989. Japan hit this about two decades before the US did. They never really figured out what to do about it. That's discouraging, because if Japan had a solution, we'd have a success to look at.

So nobody really knows what to do about a capital glut and a demand shortage.

> But pumping capital into a capital glut doesn't do much.

I believe this is a phenomenon captured by the term "Pushing on a string."

Instead of injecting money top-down through the Federal Reserve and large banks, they could inject it bottom-up in selected industries. Invest $1 trillion in biotech. Some will succeed and produce amazing advances. Most will fail, but they'll still drive employment, education, services, etc. targeting that industry, driving down the cost of inputs to the biotech sector for decades.

Of course, this can be done not completely blindly, by investing 10 to 1 with existing investors, or providing a guarantee to return 50% of lost capital, or having milestones companies need to hit, or have experts in the field provide "votes" toward getting higher levels of funding after examining their progress so far.

We don't want governments trying to pick winners, or generally even having an industrial policy at all. Their track record has been far worse than private investors. And politically it's impossible to justify when a large government investment fails. For example, look at Solyndra.

At better approach to stimulating demand would be to offer a cash prize or a guaranteed purchase contract for specific innovations that meet defined criteria. For example, what if the US federal government offered to purchase 10 million doses of a 90%+ effective Zika virus vaccine at $100 per dose? I'll bet that would encourage private investors to take a gamble.

You are suggesting what already exists, plus a guarantee. How does your guarantee change behavior? We already have the expectation of payoff for success, that's how we got to this point to begin with.

Well, if the government is going to drop money from helicopters, I would at least prefer they ATTEMPT to do so in a way that might lead to some scientific advancement. They could also just send everyone a check for $1000, but although that would create some demand, it wouldn't likely lead to investments in long-term payoff high-risk science. I understand and somewhat sympathize with the idea that we don't want the government telling us to do with our money, and maybe we should let people spend that $1000 however they want, but I'm proposing trying to kill two birds with one stone here and also at least ATTEMPT to put the money initially in the hands of people trying to create something rather than just consume some basic goods.

But then the money would be going to engineers and other educated people, who already have decent incomes and job prospects. There is no benefit to the poorer classes with that system.

Not claiming I have a panacea here, but wouldn't either a more aggressive minimum wage or a basic minimum income raise the ability for more people to act on the desire to buy? I assure you the demand for tons of stuff exists, but the means to buy it does not.

Back in 2013, HuffPost ran an article pointing out that had minimum wage kept up with inflation, it would be $10.50/hr and actually more like $21 if it had kept up with productivity growth [0]. That, of course, assumes that the original minimum wage rate was set reasonably, but I can promise you that few people, save some well-educated counter-cutlurists, can live on $7.50/hr these days. And even if they could, they wouldn't really be spurring demand in the greater economy.

[0] http://www.huffingtonpost.com/2013/02/13/minimum-wage-produc...

A basic minimum income is the right answer, but not for the purpose of increasing demand. People demanding to increase demand is utterly silly. We have succeeded as a civilization: we are providing far more than we could ask for. In the big picture, what does increasing demand really do for us?

But there's definitely a need to reduce poverty. And there's a need to allow ourselves to stop working as hard as we do. A basic minimum income would help accomplish these things. Where do we get the money from? It doesn't really matter, there's plenty of it sloshing around. As Charlie Munger said:

“This has basically never happened before in my whole life. I can remember 1½ percent rates. It certainly surprised all the economists. It surprised the people who created the life insurance industry in Japan, who basically all went broke because they guaranteed to pay a 3% interest rate. I think everybody’s been surprised by it, including all the people who are in the economics profession who kind of pretend they knew it all along. But I think practically everybody was flabbergasted. I was flabbergasted when they went low; when they went negative in Europe – I’m really flabbergasted. How many in this room would have predicted negative interest rates in Europe? Raise your hands. [No hands go up]. That’s exactly the way I feel. How can I be an expert in something I never even thought about that seems so unlikely. It’s new territory….

I think something so strange and so important is likely to have consequences. I think it’s highly likely that the people who confidently think they know the consequences – none of whom predicted this – now they know what’s going to happen next? Again, the witch doctors. You ask me what’s going to happen? Hell, I don’t know what’s going to happen. I regard it all as very weird. If interest rates go to zero and all the governments in the world print money like crazy and prices go down – of course I’m confused. Anybody who is intelligent who is not confused doesn’t understand the situation very well. If you find it puzzling, your brain is working correctly.”

We have succeeded as a civilization: we are providing far more than we could ask for.

Really? There is nothing you could improve in the human condition that would make life better?

For those people with an excess of capital, with current knowledge of science, no.

For the people with no excess of capital, though, we can improve the situation.

Of course there is. The point is, we've reached the stage of our advancement when, on aggregate, we produce more than we actually need. Our current issues are with distribution of what is being produced.

Not sure that I would agree there. What if the "excess" production funds a cure for cancer? What if that cure requires additional resources?

The world isn't static.

I'll try by best not to sound like a raging sociopath here.

In pure economic terms, curing cancer has little benefit to society. Cancer is not any one specific disease. It's a class of diseases, of which there are thousands (or more) of variants.

We may stumble on some amazingly technologically advanced cure to some forms of cancer but the more rare the form, the less likely there will ever be a treatment.

Most people get upset when you talk about humans as assets because we're indoctrinated at a very young age to value human life above all else.

If you can, in fact, speak about humans in economic terms of supply/demand. We have an overabundance of people, and nothing useful to give them jobs to do.

It's like the current oil market. Oil was highly valued due to the inelasticity of supply. Now that there is a glut of over supply and inelasticity greatly reduced, the value has dropped dramatically.

The supply of humans capable of doing useful work used to be somewhat constrained. Now, we have more people than can be reasonably assigned to do useful work without essentially paying them to warm a chair. Yet, like the oil market nothing is stopping people from having more kids and increasing the supply. The government even directly subsidizes people for the number of children they have due the persistent belief that GDP is directly dependent on population.

People can increase their value proposition by earning many degrees and racking up huge amounts of debt but, unless you're going to work in the industries that are thriving, it's a buyers market for employers.

Business owners have their choice pick of the herd. They can keep wages as low as possible and skim more cream off the top because there's a line out the door of people waiting the replace a worker who quits.

Who knows, maybe this is just the supply limit (ie in environmental science terms) as it applies to the human population. Poverty and misery is the expected result of making too many people before we can come up with enough useful reasons to sustain them.

I've been thinking along similar lines recently.

One counter to this argument is that as this process of overpopulation (relative to useful jobs) begins to happen, standard of living decreases.* As standard of living decreases on average, people start to have less children. So the imbalance is somewhat self-correcting, it's just that human lives are getting to be longer while the time between inventions that obviate the need for human labor seems to be getting shorter.

Longer average lifespans (with the same legal retirement age for social security, medical benefits) exacerbate this problem.

But there is always one industry that can be fueled by human lives and that looks great on an economic balance sheet - war. It decreases surplus labor, increases nationalism and social cohesion (if people generally see the necessity of the war), and injects a huge stimulus of demand into the economy through gov spending on all sorts of goods for the war effort, as well as investments in R&D that adds to the country's infrastructure base.

If the latency between idle/restless/poor/disenfranchised population and meaningful/useful jobs gets to be too large, then all it takes is a spark to start a protest, rebellion, or war as people have nothing else to really live for.

* I would use GDP/capita to have a more quantifiable benchmark, but I find GDP to be almost completely useless when accounting for things that matter to actual human beings such as quality of social cohesion, potential social mobility, amount of pollution, etc.

> As standard of living decreases on average, people start to have less children

That seems counter to all actual evidence doesn't it? The places with the poorest standards of living have the most children and visa verse.

I think he's talking about people who are at a decent standard of living that becomes reduced, thus the potential parents not "wanting to bring a child into this troubled world."

I believe I fit squarely in to that category. I'm just old enough to have seen the fall of 'corporations who hire for life' in to 'everyone for themselves' employment. It is a disheartening drop in live stability.

You may find that the relationship between birth rate and standard of living is the opposite of what you described.

We actually have some pretty good existing examples to draw from to conclude this. Japan has arguably the highest standard of living, but also a decreaseing birth rate.

Women in Australia and America are having children later in life, and having fewer of them as well.

Meanwhile in developing countries where access to birth control and education are more limited, birth rates are sky high.

"Not sure that I would agree there. What if the "excess" production funds a cure for cancer? What if that cure requires additional resources?"

Production does not fund other things, and disease cures are not something that people willingly buy. Excess production just wastes resources on things people do not want to buy (unsold automobile inventory, etc.) and is enabled by access to too much speculative capital. Redistribution of that capital (in the form of higher taxes) into government-mandated and funded research programs to find cures for cancer is how you find a cure for cancer. Disease research in the United States is not funded by pouring water on your head (http://www.nbcnews.com/health/health-news/ice-bucket-challen...) or Tim Ferriss (https://www.crowdrise.com/timferriss), but by the $30 billion budget of the National Institutes of Health.

The poor would love to have newer cars, consume more services, have nicer homes, etc. So then how are we producing more than we need?

Just because some people can't afford things doesn't mean those things aren't over-produced. Every year there are a large, large number of brand new cars that don't get sold, and are marked down when the next model year comes in. Likewise there are structures that get built and never sell out. A building of condos near my house never got bought, so they turned them into apartments for far, far cheaper than they were priced as condos. We overproduce clothes so much that there are several nation-wide retail stores specializing in overstock merchandise for very cheap (TJ Maxx for example). All of these things are places where we have more than necessary production, so priced get driven down to where they are more affordable for poorer people.

The person you replied to said "production isn't the problem, distribution is", and you seemed to agree with that in your comment. Getting poor people cars and houses and services isn't a production problem, it's a distribution problem. It's a pricing problem. It's an efficiency problem. Producing more cars isn't going to make them easier for poor people to afford.

That doesn't really make a lot of sense. Demand is pretty predictable for stuff like that, and the producers have no reason to waste resources producing more than is necessary.

And even when they do overestimate demand, like you said, it gets marked down. So it all gets consumed in the end, and the producers might not even take that big of a loss depending on how much it was marked down. And the poor people benefit from that too of course.

Unless people start throwing away new cars then they aren't over producing.

Except there isn't one producer, there's many competing ones, so you have overproduction because everyone hopes to get more market share than they actually have. Over that, there's overproduction in many areas (especially food) for a very silly reason - that people will buy more when there's more stuff around it (aka. no one wants to buy the last few carrots). It doesn't get consumed, and poor people don't benefit from it. It gets thrown away.

About throwing away new things - heard of planned obsolescence? That's what companies now do to cope with falling demand. Yes, your car maker does it too.

Large corporations are not stupid. They have decades of sales data. They can definitely predict demand a year in advance, and they do.

I don't actually think they are overproducing. They make a huge markup on new cars, so having to discount a few that don't sell isn't a loss.

Also factories are pretty much large fixed costs. Overproducing actually doesn't cost that much. The car might only cost $500 worth of raw materials, but the cost of the factories and infrastructure necessary to turn that into a car is massive.

>(aka. no one wants to buy the last few carrots)

Which is literally only true for vegetables, not the economy in general. And you only need to sacrifice a handful of vegetables to for it, so it's a fixed cost.

Look at the Cash for Clunkers program a few years back. People were paid to bring in their old, but still functioning cars, and buy new ones. Many of those old cars were still fully functioning, and not that old. We have the production capacity for so much more than we actually make. You're right, they can predict sales so they're not making 1,000,000 units more than they can sell, but they CAN make that many. The thing about overproduction is, like you mentioned, it doesn't last for long. Demand drops, they shut down plants, they close shifts, they fire workers. Believe me, I live in Michigan and have many friends and family workers who work (or worked) in the auto industry. We have the ability to churn out hundreds of millions of more cars every year than we actually do. Like you said, we don't do that because it doesn't make financial sense.

But just because we don't overproduce right now doesn't mean we couldn't if we wanted to. I'm still not seeing where production is the problem. If production was the limiting factor, they would be running the factories 24/7 instead of shutting them down. The only reason to underproduce is to increase demand. But if you lower supply and demand doesn't increase, you've already been overproducing. So if they're closing factories, it means they've been overproducing.

>Look at the Cash for Clunkers program a few years back.

Which was done just after a recession. That's not evidence of overproduction in general, just one year when demand unexpectedly went down.

>But just because we don't overproduce right now doesn't mean we couldn't if we wanted to. I'm still not seeing where production is the problem. If production was the limiting factor, they would be running the factories 24/7 instead of shutting them down.

But if we can produce so many cars, why are cars still expensive? Shouldn't the ability to create massive supply drive the price down a lot?

There are plenty of people that want new cars. And are willing to pay for them. It's not like we have more cars than people actually want. It just costs a lot to make a car. And that cost includes fixed costs like the factory itself. But factories wouldn't be closing down if other costs weren't also very large.

Yes in theory we could make millions more cars than we do. But not for free. It would require buying more materials, hiring more workers, building new production lines, etc. Those costs must be greater than the expected return for selling another car. Otherwise they would already be doing it.

Just because I can't make a product cheaper doesn't mean I can't produce more of it. Why don't we make cheaper and cheaper cars? Because people who can afford new cars would rather spend more money to get nice features and safer cars. People who can't afford new cars would rather buy a used car with nice features and a good safety rating. We've had several sub-$10k on the market. They don't sell well. No one wants to buy a brand new Geo Metro or the original Kia Rio or a Chevy Tracker when they can buy a five year old Ford Taurus that is better equipped for cheaper. The used car market is the reason we don't have cheaper brand new cars, not production. And luckily we have so many used cars because we produce so many new cars every year.

But again, we're talking economics right now. The subject is production. Once again I ask: you said we're limited by our ability to produce, do you have anything to back that up? And no, saying "it costs a lot of money" is not proof of a production bottleneck, it's proof that companies hire accountants.

So at this point I'm going to step away from this conversation because I don't think it's going anywhere. You've made me think a bit about economics, so thanks. Good conversation.

The poor would love to have newer cars, consume more services, have nicer homes, etc. So then how are we producing more than we need?

People regularly die from starvation, but the world produces more than enough food to feed everyone. It is a problem of distribution.

To say this is merely a problem with distribution is absurd.

There are hundreds of thousands of vacant homes in San Bernardino, there are many thousands of homeless that could easily be transported there. If those homeless were to move into those homes they would soon be evicted or arrested and imprisoned. This is an issue with ownership, not distribution. Much food from local restaurants, cafes, and grocery stores is thrown out every day as it nears expiration. Thousands of hungry would love to enjoy this food rather than waste it. This food could be donated or even left out for people to scavenge, yet it ends up in locked dumpsters. Again, this doesn't sound like a distribution problem but instead a problem with ownership.

We do produce more than we need, if need is conditioned on ability to pay.

That's the exact same thing. If we say wealth is not distributed evenly, that's the same thing as saying that only a few people own most things and many people own hardly anything.

Redistributing wealth means spreading out ownership more.

I misunderstood. To say it is a "distribution problem" read to me as if distribution was a verb: that is to say "everyone could have what they want if only the means to move people and things around were available".

The statement "the US is out of demand" is equivalent with the statement "we are producing more than we need". Don't argue with me, argue with the parent.

What I'm arguing for is on how we should look at universal basic income. Some people see UBI as a way to increase aggregate demand. I see UBI as a way to get rid of poverty, so there would be no such thing as what you call "the poor". The difference is that I don't see a lack of aggregate demand as a problem. If we could rid our society of poverty without making a dent in aggregate demand, I see that as a win.

Another way to think about it is in terms of productivity. Do we really need to make everyone more productive? Do we need to be make the poor maximally productive before lifting them out of poverty? Why can't we just lift them out of poverty?

It seems like what you're trying to say is more that we're trying to optimize economic and industrial processes that are already more than optimized enough for what we need, rather than we've "run out of demand" as such.

I should have said that "we are providing the maximum that we possibly can". It just seems like there's no marginal benefit to increased productivity right now. There's lots we could do to hurt the human condition: we could always just put a bunch of people to work building weapons, and have those weapons kill a bunch of unemployed people. But if there could exist some grand new way to improve the human condition right now, the money and the jobs just don't seem to be materializing for that. And there's plenty of money and plenty of workers around.

We haven't "made life better" since we learned how to make fire, seems odd to think we'd start now. Making shit and making life better are two distinct things. Economic production and wealth creation are just fun games.

> Where do we get the money from? It doesn't really matter, there's plenty of it sloshing around.<

That's like saying "Restaurants have food, and there are homeless people in the city, so why can't we distribute the food from the restaurant to hungry homeless people in the city?".

If you were to distribute foods from the restaurant to the hungry people in the city, then these restaurants won't produce that food, because they are not a charity, they are in the business.

Similarly, if you don't figure out where this money would come from, you will soon stop seeing all this money you want to give away.

I used to manage a restaurant. All unmarketable but edible waste went to homeless shelters. Remaining inedible but unspoiled food went to pig farmers. Remaining spoiled food went to composting facilities. Our target market loved all of those policies.

I know someone would talk about the wasted food in a restaurant when I am talking about the non-wasted food.

Wasted food includes what didn't sell. And honestly, it didn't occur to me that you were suggesting that restaurants would be expected to donate marketable food. Markets, restaurants, etc often lock waste containers, to prevent theft.

The economics of this inertia is easy to understand, and there are readily available remedies. The world faces a deficiency of aggregate demand, brought on by a combination of growing inequality and a mindless wave of fiscal austerity...The only cure for the world's malaise is an increase in aggregate demand. Far-reaching redistribution of income would help, as would deep reform of our financial system -- not just to prevent it from imposing harm on the rest of us, but also to get banks and other financial institutions to do what they are supposed to do: match long-term savings to long-term investment needs.

Simplified primer by Joseph stiglitz.

http://huffpost.com/us/entry/world-economy-2016_b_8908560.ht...

That often cited minimum wage statistic also just so hapens to start at a time when minimum wage was near it's all time high on an inflation adjusted basis. Why do you suppose that is?

A basic income is a far better solution than our current mess of bureaucratic welfare programs that are both inefficient and rife with harmful unintended consequences for those they intend to support. Milton Friedman's "negative income tax" was intended to be a basic income until it was bastardized into the EITC.

One thing I don't understand about basic income is how to deal with children. If the parents get the basic income of a child, then that will incentivize some people to have more kids simply to get more money.

If you don't give basic income for kids, then people with a lot of kids won't be able to live.

Of course, you can adjust the amount between the too extremes of full basic income and no basic income for kids, but just because you have a target standard of living and give the parents money to meet that for the kids, doesn't mean the parents aren't going to turn around and spend that money on themselves. They might not care that their kids are in poverty as long as they get the drugs/alcohol/new car/fashionable clothes or whatever.

As you already stated, bureaucratic welfare programs don't work, so what is the solution here?

I've never seen this discussed, and it seems like a major oversight of the basic income proponents.

Provide free contraceptives alongside the free money.

I've never bought the idea that welfare recipients would bear children strategically. Surely after the first child, they'd realize that this was a difficult way to increase their top-line income. Not sure where I'd look for data on this, but my gut feeling is that poor people who have a bunch of poorly-cared-for-children get pregnant because they're bad at planning ahead, not because they've been inventivized by a subsidy.

Growing up in Alabama, I met tons of poor people that did exactly that and they'd tell you about it.

Second and third children are not as difficult as they keep each other busy.

I think you're mistakingly assuming the kind of person who would do this would provide a similar (or any kind of) quality of life to their kids that you would.

I know of 3 small children in my own life whose parents collect welfare, and are meth addicted.

There already are tax and welfare benefits to having children, and indeed it does incentivize having them when you really can't afford them. It doesn't seem sustainable long term, but we'll see. I don't think it's a problem with basic income any more than the current system. The bigger issue I find with basic income is that proposals typically don't include any mention of price control on the seller side and purchase control on the buyer side. Poor people are often trapped there because every local actor selling them stuff is trying to maximize rent extraction, and they continually buy things that are expensive and bad for them (case in point the recent cigarette article). Landlords get a lot of money from rent extraction, since they're paid in rent directly. It's even worse with universal, unconditional basic income. If as a landlord I hear everyone in my apartment complex is now getting an unconditional basic income of $20k/yr, guess what, next year rent prices are going up by around $20k, with lowered adjustments to account for other actors (like local food suppliers) also competing for this extra $20k/person/yr. This is basically the same thing that has happened to student loans. Without authoritarian measures to restrict economic freedom, which in addition to being authoritarian must also be good measures so as to not backfire as every other centrally planned economy has, basic income has no real chance at a large scale. In America in particular, authoritarian anything is a no-go.

No one who has children (and raised them without a nanny) would ever think this way. Kids are far too much work. $50k/yr wouldn't be enough

A landlord may try to increase rent knowing that the tenants now have a basic income, however that creates an opportunity for someone else to provide housing at a cheaper price - it's no different from any other market, as long as you don't have massive supply-side restrictions like in some major cities.

Housing has significant switching costs. It's not as if you can simply switch to buying a different brand of bread.

You've got to search for an alternate location, consider schools, work, commutes. Neighbors. Etc.

I can see major arguments for managing rent as a social function.

Though that depends heavily on supply and demand factors as well.

The best way of fixing this is to make sure that there is an over-supply of housing (located NEAR the jobs) and to make it as easy as possible to move.

Economic incentives should encourage local, suitable (even for apartments) housing in an area to be approximately equal to the number of jobs in that area (then pad up slightly for BIG if that's also an 'employer').

Pay people to get IUDs or vascectomies. Some might argue that this is corrosive, but:

1) If a single mother/father only spent 1 hour a week taking care of their kid, they would surely be punished for neglect. So we are willing to literally coerce people who choose to be parents into working at least 52*18...938 hours. At a minimum wage of $5.35, that is at least $5,000 of coercion.

2) If we have a workable basic income, then someone shouldn't find themselves in the desperate position of having a medical procedure done to make ends meet unless we don't have universal healthcare.

All I came up was pay for services instead of income for children.

Imagine the minimum income for children was diverted into services. So the government buys free clothes, school breakfasts+lunches, and medical insurance. This decreases the cost for a poor family to raise a child which allows you to give less money per child, and reduces the incentives for child farming.

> that will incentivize some people to have more kids simply to get more money.

This sounds like the edge case a non-parent would bring up. People who make poor life choices make them for far less insightful reasons that time-value calculus.

It would take an unbelievable amount of money for me to have another kid. It would be cheaper to buy my retirement.

My ideas of basic income always end up with the first implementation of basic income to be an amount of money just barely above what is needed to keep an individual above poverty. We have to ease society into this transition, and just like we shouldn't give the BI in one lump yearly sum(especially since most basic income proposals include almost completely gutting other safety nets) we shouldn't make perverse incentives to collect additional BI by neglecting their children.

Maybe for the first 20 years of the program every child affords a parent some additional BI based on the child's age. Raising a child when health care is inexpensive(my vision of BI does include pretty much free health care), job's are optional, and schooling is free makes the most expensive times to be early in the child's life when they are constantly outgrowing their clothing and beds and using up diapers at an impressive rate.

Eventually the amount of BI awarded becomes sufficient for most family situations(Star Trek post-scarcity style) or other factors like perfect birth control allow us to remove the child BI bonus.

True, though there are studies from elsewhere, which provide also a sampling of methodologies for determining a minimum living wage, dating to the early 19th century.

A living wage means just that: what is required to support a worker, their family, including children, and educate them, to provide the next generation of workers. Adam Smith discusses this at length in Wealth of Nations (Book 1, Chapter 8: https://en.m.wikisource.org/wiki/The_Wealth_of_Nations/Book_...)

You'll find other examples in Richard Meier, Science and Economic Development, 1966, dating to California during the Great Depression.

Chances are that land rents and goods prices would adjust to soak up the gains in wages. No guarantees there, though.

You index it to inflation of course.

Japan did massive fiscal stimulus ("bottom up") and capital injections ("top down") from the BoJ and it still has crawled compared to other economies.

China has for years done intense injections into its economy (both top and bottom down), with worker training programs, state owned enterprises, etc; and now they became so reliant on the artificial demand created by their own government that they have huge slack in inventories. There's a reason why copper/steel/oil are plunging.

There aren't many, if any, examples of "demand drives growth" working in a long term situation. In the short run economies simply need to work out their gluts, and slack. Famously coined "creative destruction," the unhealthy aspect (especially after Keynes) is that growth become a policy goal rather than sustainability in that growth. To this Keynes said "in the long run we're all dead," putting short term growth into focus of government policy makers rather than long term growth which often requires negative GDP growth and recessions.

Anyhow, you're also mischaracterizing the Chicago School and Milton Friedman. There is no claim that you can "never run out of demand." And the "freshwater school" is about discretionary policy of government policy, not whatever you just tried to say. This is one reason why Friedman was fond of the "Friedman rule" or the "K% Rule," because it took discretionary powers away from the Federal Reserve. The idea is that with rational expectation of monetary growth the market can set its expectations to not be prone to monetary policy failures. The same is true of government failures. The idea of "market failure" is a criticism, but the Chicago School doesn't deny market failure exists, only that the government should have a limited discretionary role involved in picking up any demand slack.

If the government bought wheat, for instance, to keep its price high and keep farmers employed; then burns it, this creates asset misallocations, though it is technically creating demand (this still happens to this day.) A policy measure is put into place to address a problem, but instead of the market correcting to shift to different types of production it continues its course and creates slack in other areas (such as too little corn, or soy.)

"If the government bought wheat, for instance, to keep its price high and keep farmers employed; then burns it, this creates asset misallocations, though it is technically creating demand (this still happens to this day.)"

This has been done successfully but without the burning. Just keep the price stables buying when the price fall and selling when the price goes up.

The idea of a buffer should be easy to understand here in HN. It can be done with all kind of things: http://bilbo.economicoutlook.net/blog/?p=23578

This "creative destruction" doesn't look very rational, don't you think? Is it not the goal of an economy to provide a good life for the human beings in that economy?

We should be able to do better than destroy capital in order to start again the game, but this time with less people owning more of the pie.

But that doesn't create demand, it just shifts it to the next year. That's not what the parent comments are talking about.

And there is no need for the government to be involved in that either. If there was really predictable price fluctuations between years, investors could make money buying up commodities on good years and selling during bad years (and they do.)

It's not me who said that it created demand. The grandparent suggested it.

I just said that it have been used successfully as a way of buffering prices, without the need of burning anything, in comparison to this "creative destruction" that he sees as necessary.

Well if you don't burn it, then you have to sell it at some point. When you sell it, you decrease demand. So it can work to stabilize prices, but it isn't going to stop a recession.

Obviously I'm not explaining myself very well. I will make a last try.

The comment I was answering, talked about a government buffering mechanism as something wrong and destructive (burning real wealth). I just pointed that this kind of mechanism is not necessarily destructive.

In the next paragraph he proposes that the only way to go out of recessions is the "creative destruction" of capitalism. This is effective destruction of real wealth. It seems, that if the markets decide to destroy real wealth, then it's OK.

My answer was only about that and I was not saying that the buffering mechanism created demand.

Interestingly enough, even if I was not claiming anything about that before, there is a buffering mechanism that would create demand, and keep inflation in check: Job Guarantee as a buffer mechanism of jobs.

http://www.epicoalition.org/docs/buffer_stock_employment_mod...

I am not totally convinced about the idea myself, but I think it deserves more attention

I think the "you can't tun out of demand" idea is more universal than just Freshwater economics. Even Keynes resorted to "animal spirits" to explain things. Once velocity picked up, you had the Postwar Boom.

The connective tissue is that in order to think that, it helps if you think there's untapped demand constrained by monetary policy.

At the margins, the cost of additional production is so low that there are multiple deflationary pressures even if everything looks normal.

The basic Market Monetarist ( the intellectual sons & daughters of Friedman ) stuff these days is quite interesting. It's very little fun because there's nothing to it to where you can have a "program" - either spending or austerity - to fit the ( lack of ) ideology[1]. So policy makers aren't interested. My favorite Monetarist - Scott Sumner - gets dismissed by such as Paul Krugman, saying that the stories are too hard; that's the politics are wrong[2]. It's not an assault on it even; just a dismissal. Very enlightening.

[1] which is in itself an ideology with certain blinders on - one I ascribe to, unfortunately.

[2] which I think means it has no politics and resembles control theory too much. If everybody can buy the Monetary Policy expansion pack for MATLAB and check the economists' work, there won't be any economists beyond a level....

I wonder if there are any schools of economics that don't view demand and growth as critical. So what if demand is low? This is definitely an oversimplification, but I'm wondering, what if that means people are satisfied with what they have. Is there inherently anything wrong in that? If we create a self-sustaining economy that doesn't grow much (but still evolves) it doesn't seem like such a problem to me. Culturally, I think we just assume growth = good.

Instead of trying to increase demand to match supply, what if we decreased supply, like having a four hour workweek?

Classical economics does not claim to want to increase demand, and Keynesian economic only wants to correct for unnaturally low (or high) demand due to short run fluctuations.

There is nothing wrong with a four hour work week. The reason people still work long hours is not careful engineering of the economy to keep demand high, but people's natural desire for essentials like healthcare, and also luxuries and status-signalling goods. Also hours seem to be decreasing in Europe, which has a different culture to the US.

Also, one (left-wing) colleague of mine made the following point to me when I said something similar about economic growth: Would I be happy to see the world level out on a 1920's standard of living, including healthcare? If not, why is the current standard of living acceptable? Especially when a given average standard of living will also entail people who are much worse off. So to raise the standard of the worst off, we most likely need growth for everyone.

Freshwater and saltwater are anachronistic distinctions that no longer apply. They were highly aggregated and misleading definitions even when they were relevant.

The Chicago School has always been quite diverse, from its early days with Frank Knight, Jacob Viner and Henry Simons to later periods of law and economics, new institutionalism and other tendencies.

Saltwater/freshwater came about because of a dispute in the dominant neo-Keynesian macro at the time (which both sides subscribed to) regarding the IS-LM model and the Phillips curve unemployment-inflation trade-off. Naive expositions of IS-LM had ignored the money demand function, which Friedman pointed out and ended up kickstarting the monetarist controversy. Phelps and Friedman also discovered a flaw in the absolutist Phillips curve and augmented it for rational expectations in 1968, destroying its former validity and anticipating the ensuing stagflation. This influenced Barro and Lucas to start the rational expectations revolution in macroeconomics, but it ended up being taken overboard to model always-clearing markets and other perfections.

Make no mistake, though. Both sides were operating in the same general framework. Most Chicagoites absolutely did not deny that there could be aggregate demand shortfalls. They were mostly Keynesians like the rest.

What to do about it: a basic income.

Both freshwater and saltwater (for reference, these refer to geographical locations in the US: Chicago and Minnesota near lakes, and MIT, Harvard, Yale, Stanford, etc. near the coasts) claim that you can't run out of demand, in the long run.

These schools differ in their analysis of the business cycle, that is the fluctuations around equilibrium output that are called booms and recessions/depressions. Saltwater economists believe that you can have too little/too much demand during booms/recessions. These are generally called "out of equilibrium" conditions. Neither group claim that in equilibrium, you can run out of demand.

Source: I have a PhD in economics.

EDIT: also see vezzy-fnord's answer, most "Freshwater" economists are and were some kind of Keynesian.

See also Say's Law. Early 19th c.

> So nobody really knows what to do about a capital glut and a demand shortage.

Sure they do. The concept of "Unlimited Wants" and Thorstein Veblen's "Pecuniary Canons of Taste" pretty much wrap up a capital glut. Spend it. Money flows somewhere. A demand shortage is not necessarily permanent (horse carriages vs automobiles withstanding)...that's one of the many reasons why the word pivot exists in YC vernacular. Everyone/everything living consumes. There are demands that are fundamental, and demands that are extraordinary. A market exists for all demands, no matter how small or how large. Demands = needs small or great. If you are selling buggy whips in the automobile age, yeah, you might have a demand shortage...so think and pivot. Absolutes have a place in extremum; an exercise left to the reader.

That's simple. You tax sitting on money not earmarked for a recognized task (EG: Saving up for big investment X (named) such as college, a new home/building, etc.) or for rainy day funds; but you also limit the maximum that can be stashed for such tasks.

Then with that tax you re-invest in infrastructure, exploration of new resources, and even missions to space. (I'd rather we have a (robotic) mission to the asteroid belt than mars...).

There isn't an idea that alone "capital drives growth," that's an idea

How is it not an idea and an idea simultaneously

Economics.

The fundamental concept of "trickle down" -- legislate to further enrich the already-wealthy, and those less well-off will become more well-off as an indirect effect -- is way older than Reagan. William Jennings Bryan bashed on it in his "Cross of Gold" speech in 1896.

> money ends up being redistributed somewhat equally, spurring demand as the poor can suddenly afford a lot more good and services.

Does it? Maybe I'm just cynical but the idea of raising taxes on the wealthy sounds to me like just moving money from one set of rich white guys to another set of rich white guys. I vote one of them in to power at the local elementary school and the other every time I pull out my wallet. I'm not really convinced that either group as a whole spends their money more responsibly.

If we already had a social safety net reform in place, knew how much it was going to cost, and then pushed for higher taxes in order to directly fund the new safety net, that would be different. I think that's what PG meant recently when he said something along the lines of 'focus on poverty, not on income inequality'.

Government spending often involves a huge number of well paid workers. The phrase "Good enough for Government work." started because governments often have very high standards. ex: Compare accessibility on the web between government websites and startups. It's been diluted for various reasons that basically boil down to indirect corruption.

PS: One of the odd things is just how poor people used to be. Work minimum wage for 1 week and you can avoid starvation for ~1 year. Yet, people used to regularly starve.

That's not what that phrase means at all. "good enough for government work" is akin to "close enough", a reference to the half-assed nature of most government work.

That's what we take it to mean today. And sure it was used in a negative context as early as 1960, but was first used in 1906.

Remember historically most people where poor by our standards. Yes, the things that survive where of high quality, but a lot of junk did not make it. Consider what a 'sod' roof meant. https://en.wikipedia.org/wiki/Sod_roof#/media/File:Norskfolk...

Now picture such a thing without modern materials to keep dirt from falling on you. Granted, the floor is often hard pack dirt anyway and done well it's ok. But, again poor and minimally trained.

PS: Sure, if you where rich or competent you could go beyond that standard and there was plenty of high quality stuff made. But, the average farm house, private trail, foot bridge etc... was crap.

Capital seems to drive a lot of jobs to create startups that hire people. They might make it or they might not but at least they produced something that might eventually grow. Without capital dev jobs. No dev job, no sale job, no marketing jobs and etc.

What we both want is basic income. But I'm not sure about taxing "rich" who could easily leave. Then you're not taxing the "rich" any more.

This is only the case in frothy markets, like the Valley.

I hate the argument of the rich "leaving"

Where are they going to go? And once you come to the logical conclusion that only a few outliers will actually "leave", they will leave a void that someone will fill, and be taxed.

I'm not sure about American prefences but in Europe people tend to use Switzerland, Monaco and Malta. In Asia, you have Hong Kong and Singapore, both relatively safe and decent countries. Maybe Macau, but I'm not sure.

You're also assuming the government can just "implement" the "ideas" you have and everything will be alright. As if they really rich will give in without resistance. It doesn't work with drugs, it won't work with money. You add laws, they find loop holes, and I'm pretty sure the private sector can afford smarter people than the government. The government will be too slow and inefficient to tackle this, unless you turn into Germany BOM ;-). So now you're spending resources to gain resources, which... might stimulate the economy, sure, heh gotta spend money to make money, aye?

Jokes aside, to make things easier, imagine the war on drugs. It doesn't work no matter how much you yell drugs are bad. You can tell "tax" the rich, but as an idea it doesn't mean shit, unless you manage to implement it, which I have my doubts.

The best solutions are always the most pragmatic ones, it can be hard to see it when ones views are clouded with personal feelings. I can admit I that there are some things I wouldn't want to compromise on.. again, Germany.

I'm also suspecting you're assuming leave as in physically leaving, you're in for a surprise when you find out that the truly rich can have the cake and eat it so no one would "fill" their void if there are options, and there will always be options for someone who is truly rich.

Otherwise you just end up taxing the shit out of regular employees, some who makes higher salaries in volatile markets.

Your conclusion isn't logical. Human nature, machines, etc etc.

I'm coming around to the opinion that taxes on income are a bad idea. Income flows to people as they're trying to accumulate wealth, trying to climb from lower to middle to upper class. Higher taxes on income, especially highly progressive taxes, make it harder for people to move between social classes.

The focus on income tax creates a situation where the person who makes $200k/yr but has a net worth of $0 gets taxed far more than the person whose investments bring them $100k/yr and they have a net worth of $2,500,000.

Oh, and their lifestyle might be about the same despite the disparity in income, because one of them needs to work for a living so they'll need to live somewhere close to jobs, pay more for transportation, etc.

Higher income tax is great, if you're already wealthy. If I was wealthy, I'd be very happy people if stay focused on that. But I think taxing accumulated wealth is a much better way of leveling the playing field over time and also making sure capital stays in productive use. France already has something like a 0.5-1% "solidarity tax" on wealth, and it's a progressive tax.

According to Piketty, the return on capital has historically been around 5% per year, and returns are better at scale. For multi-billion dollar funds, the rates are around 9-10%. The "Financial Independence/ Retire Early" people who plan for pessimistic scenarios say to expect 4% return. Let's say it's reliable to expect 2-3%.

At $10M a person can expect about $200-300k in income. If we have a wealth tax of 1% their investment income after taxes reduces to $100-200k. If they want to maintain their previous standard of living, they need to make about $100k per year.

At $100M let's say economies of scale start to happen and even in a pessimistic scenario you can expect a 4% return. If we have a 2% wealth tax at this point, the person can still expect an investment-only income of $2M per year.

You can see where this is going. At $1B with a 5% pessimistic return, 3% wealth tax, $20M investment income. At $10B with a 6% pessimistic return, 4% wealth tax, $200M investment income.

The nice side effect of this is that the mere scale of capital doesn't provide competitive advantage. The wealth tax should be designed to even out the advantage of scale so that larger accumulations of capital need to be put to best use.

Putting some numbers on the napkin... The US has an aggregate net worth of $85 trillion dollars. The federal budget is $4 trillion. Assuming a power law distribution of net worth, let's guesstimate an average 2% tax on that $85 trillion, which comes out to $1.7 trillion. We could roughly cut income taxes in half or eliminate them except at very high levels ($1M+) if we used a wealth tax instead.

The important thing to note here is that the wealth tax still leaves about 2% investment income, it doesn't reduce the total over time. I think it's great that people can accumulate wealth and then live on it, or pass it on to the next generation. But it would be great if we can keep the income at around 1-2% so that the nearly guaranteed increase in accumulated wealth is the same or less than the growth rate of the economy, meaning that people who build businesses today have the ability to reach the same heights as those who built businesses yesterday, without extraordinary luck or blunders by those with wealth.

One big issue is feasibility: It's much easier to track, meter, and tax income as it changes hands than it is to track/meter/tax accumulated wealth.

This is like a litmus test for the right answer. We immediately jump to feasibility. We know it'll work, it'll just be hard.

> This is like a litmus test for the right answer. We immediately jump to feasibility.

Uh, I don't see how that follows. Sometimes "it is not feasible" is first objection simply because it's the easiest to articulate and support.

I mean, not everything is equivalent to a proposal to, say, kill all the poor: https://www.youtube.com/watch?v=owI7DOeO_yg

There was something subtly hilarious about seeing a Vanguard investment ad before that clip.

Feasibility is a valid concern. Here's what I think.

Stocks are traded on public exchanges. Land and buildings stay in one place. Private jets need to land at airports and they each have a tail number. Most things to be sold efficiently are sold in public marketplaces. There are probably some assets that are hard to track, just like there is currently income that is hard to track. Some people are paid in cash and don't report it. A whole multi-billion-dollar black market of drugs, prostitution, etc. exists that is largely not income taxed. It happens. But in general income tax works, and a wealth tax would too.

A huge amount of wealth is tied up in land, which is ultra difficult to assess the value of without actually selling it.

land is already valued for "tax" purposes as council rates.

Actually it is much harder to tax income than wealth hence why there is so much tax avoidance. The simplest way is tax the asset directly and let who ever owns it pay the tax. The block of land is taxed, the bank account is taxed, the bond is taxed, the factory is taxed, the truck is taxed, the cow is taxed, the patent is taxed, the copyright on a movie is taxed, etc, etc.

If you did this you would not need a very high tax rate (my guess is something around 1%) and it would encourage efficient allocation of assets. Of course the owners of all these assets won’t be happy and since they are very powerful this idea has zero chance of ever being adopted.

I actually /really/ like this idea. It also implies that anything of such value must be registered and that it only gets taxed that one time.

For the intangible things I would say that an open bidding process every census period would be a good way of judging what the market thinks it's worth. Adjustments might be necessary for changes in the constitution of an asset. (E.G. There's now a building, discovered natural resource, or it's part of a different sized lot unit.) Approximations in resource description could be used to round up/down and group together the units in an area for some anonymity and consistency.

To prevent collusion in 'sitting' on an area those who own it would also be required to bid in buying it back. If they come out over the median bid then they get their land back (but are taxed at the rate they sold it for), if they don't then they can keep the land but get taxed at the 95th percentile bid rate for that area. The top 1% of bidders would also have the option of buying any asset forfeitures within that area at the price that they listed. That would also be the assessed tax value of that land for that period.

opinion that taxes on income are a bad idea

Do you mean earned income, aka labor? vs unearned income, aka capital?

If you are advocating the shift of tax burden from labor back unto capital, reversing policy of the last 35 years (Reaganomics), then I agree with you.

>unearned income, aka capital

capital isn't unearned - it has to have come from somewhere (perhaps the grandfather generation).

It's a technical phrase, not a value statement.

Unearned income refers to income received by virtue of owning property (known as property income), inheritance, pensions and payments received from public welfare. The three major forms of unearned income based on property ownership are rent, received from the ownership of natural resources; interest, received by virtue of owning financial assets; and profit, received from the ownership of capital equipment. As such, unearned income is often categorized as "passive income".

https://en.wikipedia.org/wiki/Unearned_income

This covers the policy debate part, which you may be referring to:

https://en.wikipedia.org/wiki/Unearned_income#Taxation

I'm all for higher taxes on capital, maybe with some exceptions on the amount of capital gains tax to pay on your first €10m. But honestly, a wealth tax is just demotivating. Not every wealthy person invests their new found riches. It makes sense only to tax gains from investments, but only gains. Not making money on your capital? No problem, you don't pay. If you are, you do pay extra tax. I don't even think it's a bad idea to group income and capital gains together, as long as you can offset losses from capital against taxes on income.

Second point against a pure wealth tax: some of that wealth might be tied up in very illiquid assets (say, a castle worth €20m), meaning you might not be able to keep them because you have to pay the annual wealth tax. Or in say, art, which can be highly volatile in its valuation. This will automatically lead to disputes with tax authorities about valuations, etc etc. Not exactly fun to deal with + it's hard to enforce/verify

> Second point against a pure wealth tax: some of that wealth might be tied up in very illiquid assets

Isn't this an argument against real estate taxes in general, which are universally accepted? There are mechanisms to recover those taxes eventually.

Right. For example, if we don't like the idea of someone with wealth but no income needing to sell off part of their land or stocks every year, we could attach a debt to them that would be paid later when they eventually do sell some of their assets, or upon their death, etc. This could be arranged like a government loan with a low fixed interest rate, so if they wait 10 years to pay their taxes they'd owe their taxes plus some reasonable interest rate.

I think wealth is a very natural thing to tax. The state creates and guarantees to protect a property right in land/personal effects/corporate equity/etc. In return, it taxes you 1-2% of the value of that property right each year.

This is a literal protection racket. Usually people at least make the effort to use euphemisms so it's not so obvious.

With the exception of the US, who taxes its citizens globally, I would assume this would push many people to move abroad to a country without a wealth tax. France is great and all, but I wouldn't want to be a tax resident there. If you're worth €50m, it's just too expensive.

Given you already paid capital gains tax (or income tax) when you generated that wealth, there's also the double taxation component. Wealth taxes (at least to me) seem like a great way to punish people who are doing well.

At the end of the day, we're living in a globalised world, where borders matter less and less (at least in the west).

Doesn't seem natural to me, in that most wealth is indivisible, non-fungible, etc. It's the "oh, just give me half the baby" problem writ large.

That said, land value tax and seigniorage seem like the best taxes on many metrics.

Wow, that's actually a really good idea.

I think I have a new thing to wishfully ramble about at the pub.

Just for clarification, and I know you did not mentioned the GOP, but Republicans did not champion the idea of "trickle down economics".

http://rare.us/story/memo-to-liberals-theres-no-such-thing-a...

    This is the ultimate problem with 'trickle down' economics.

What economists/politicians promote something called "trickle down" economics?

    This is why you have the seemingly incongruous effect of high taxes encouraging growth and low taxes stifling it.

Reference, please?

The money gets distributed somewhat equally? I beg to differ...

I live in DC and if there's one thing government spending does, it increases the number of Lamborghinis on the road. A lot of the new money around here comes directly from government defense spending going to consulting firms which has a strong tendency to make the rich even richer.

a simple response would be progressive taxation. Tax assets, ideally non productive ones, and redistribute to the poor for use in non discretionary spending - like dinner.

A modern "new deal" for elder care would also do the trick..

> A modern "new deal" for elder care would also do the trick..

Oh please no! Boomers have already pillaged and mortgaged the futures of the youth enough already. The last thing we need is for them to stick it one more time with a new set of unpaid indefinite obligations.

For a simpler approach, just give everybody $X (00 or 000?) either one off or repeatedly. It's as progressive as it gets and at least some youth will benefit.

unpaid indefinite obligations

I'm pretty sure elder care isn't indefinite. Maybe we end it after this current generation of old people (our parents/grandparents) are no longer around.

One of the biggest social problems we'll face in the next 10 years is millions of people with dementia who can't take care of themselves just... existing. What do we do?

One fun story I've heard is a doctor gave an old woman with full blown dementia an operation to keep her alive, then she lived another 15 years just completely out of touch with the world. The family had to sell all her belongings (eating through their inheritance too), then pay even more to keep her in full time care. It makes no sense, but that's the standard set of rules. Little known fact: before medicare will pay out for extend services, they force your relatives to sell all your belongings (property, land, investments, etc) to pay for medical services before any other payments kick in.

Kind of like with executive power, however, once you start giving out benefits like social security, you can't put the toothpaste back in the tube.

Once you reach 65 and are eligible to start receiving payments, are you going to be okay when they say "nope, well's dry?" You would if you didn't realize they had been garnishing your salary for thirty years. But anyone with any sense of responsibility would be furious if they decided to just stop paying benefits after one generation.

Besides, how do you decide when a generation ends to stop paying?!

No one "decides". Nature takes its course.

There will always be old people and their numbers (as a percentage of the population) are only set to increase.

At least until we start hosting Carousel.

If there's one thing that keeps surprising me about Americans, it's the ability to recite, with a straight face, the most blatant, self serving propaganda:

https://fair.org/home/convincing-the-young-to-blame-the-old-...

http://www.nakedcapitalism.com/2014/01/three-card-monte-gene...

Counterpoint:

Chicago pension crisis for retiring boomers.

https://www.illinoispolicy.org/chicagos-63-billion-debt-burd...

"When you include the city’s share of Cook County’s debt, Chicago’s total pension debt increases to $32 billion."

Rahm's Record $589M Property Tax Hike OK'd

https://www.dnainfo.com/chicago/20151028/downtown/record-pro...

Note, this tax increase just gets Chicago above water for 48 months. It does not remotely solve the problem. Chicagoans are expected to receive massive tax increases for years going forward.

"the mayor’s tax hike will be $1.9 billion short of the extra contributions needed through 2025."

http://www.illinoispolicy.org/mayor-emanuels-property-tax-hi...

An opinion piece that shrieks about raising property taxes on land owners and demands that it's only fair that retirees have their incomes slashed instead? A counterpoint?

Taxes might be a good short term band-aid, but I suspect that there will need to be reform in labor laws for lasting effect.

What kind of reforms would be possible? My concern is the impact on SMEs and also competitiveness, but looking at what goes on in the USA vs. Europe it's clear that there is gigantic room for manoeuvre

> The US is out of demand

How is the US out of demand? Peak consumption years of population are between twenties and fifties and the biggest cohort of US demographics - the millennials - is just getting started. They crossed over the Boomers last year and now are the largest group. Behind them the younger (Gen Z) equally large in size is ready to backfill in another 15 years. It is true that demand from Boomers is done, but the Gen X's are not big enough to backfill the falling demand.

And what good is a large population of people in their peak consumption years if they have no money with which to consume?

So long as you have a low-paid workforce who have to save their money (either themselves or via insurance companies) in case they get an infected tooth or need to see a doctor for an antibiotic prescription, you'll have low consumption spending and low growth.

even medium to highly paid workforce members aren't entirely capable of spending en masse these days.

I'd love to stop paying $3500/month in rent, but any property to buy around here has a median price of $1.2 million. Unless we all move to rural Indiana, housing + healthcare is designed to eat 100% of your after-tax income with no room for further growth.

(of course, that's assuming you're just a putz serial employee like myself and not a wise investor who can share the success of 1,000 companies at once without having to do any real work yourself.)

There is a lot of middle ground between the valley and rural Indiana. Depending on how you drove to get there, the northern route would take you through Salt Lake City, just north of Denver, Omaha, Des Moines, and just south of Chicago. A southern route would take you north of Phoenix, Albuquerque, Oklahoma City, just east of St. Louis, and possibly through Indianapolis. I would bet every one of those cities would have multiple opportunities for medium-highly paid workforce members while also providing affordable housing.

In Portland, OR, my healthcare is 4% and my 2k+ house in the burbs (30 min commute) is <20%.

At $3500/mo (about $750k house), there are over 500 house available right now[0] just in the actual city of Portland (not including suburbs). And that's just limiting it to 2bd 1.25ba (and above) detached houses (not including condos, duplexes, etc)

It's totally possible to work and live somewhere other than California.

[0] - https://www.redfin.com/city/30772/OR/Portland/filter#!uipt=1...

Yeah but rain. I lived in Oregon for 22 years, and I've been living in California since 2012 and although its been through a drought, let me tell you some things I don't miss after being back in Oregon for the holidays. Waking up to gray, gloomy skies, with rain pouring down. Waking up to the dark at 7am in the Winter. Sunset at 4:30. It actually gets cold haha.

The summers are amazing though!

You get spoiled living here and thats why people like it.

Totally agree

Aren't you leaving out the most important differentiation between Portland and SF?

The amount of available jobs and their salaries is vastly different in each location.

One minute of searching for "software developer" on indeed.com:

SF: 7,223 jobs, median $95k Portland, OR: 1,222 jobs, median $80k

It's obviously a smaller market. I'm just suggesting that it's possible, and providing some anecdata.

From a real standard of living, the cut in pay is overwhelming made up by the fact that I live in my own detached 2k+ sqft house on a .25 acre of land (and at significantly less than $3500/mo). Again, just looking at the city of SF directly, there are 13 homes for sale under $750k with a min of 2bd/1.25ba. Take a pay cut, have access to 40 times as many houses.

It's possible to do software development and not pay $3500. Which was what the above poster was talking about "I'd love to stop paying $3500/month in rent, but any property to buy around here has a median price of $1.2 million."

the most important differentiation between Portland and SF?

Also, the most important differentiation between Portland and SF is the weather. Anyone will skill can get a job here (I've never had to look more than a couple weeks).

How many software developer jobs do you need? 1222 sounds like it would provide quite a bit of choice. Plus, there's probably fewer people looking for those jobs in Portland. Not to mention the fact that the salary is 20% higher in SF, but rent is 60% higher in SF [1]. I'd say that's a pretty big win for Portland.

[1] http://www.numbeo.com/cost-of-living/compare_cities.jsp?coun...

Atlanta has a great tech scene, and the housing costs are extremely affordable. I pay $900/mo rent for two bedrooms and one bathroom in the extremely popular Inman Park neighborhood. I draw the same salary that my coworkers in SF do and don't have to worry about rent, state taxes, or anything of the sort. The Atlanta food and art scenes are great. We have wonderful communities, lots of events, and the weather is pretty great.

Hey, I live in Indiana! I'm hiring a full-stack software engineer if anyone wants to get in on the 2500 sq-ft homes for 200k.

The US is out of demand because wages for Gen X and millennials have been minimized by decades of shift in the power balance between employers & labor, on top of that, many millennials have been saddled with much higher education costs compared to Gen X and especially the Boomer generation. So even as careers progress and wages rise due to experience, some of that margin of money isn't going to disposable consumer spending, it's going to go to loan repayment. That money then spends more time circulating in the financial service sector vs other sectors where there is a greater amount of real value creation and real growth.

>the biggest cohort of US demographics - the millennials - is just getting started

As a millennial, this is hilarious to me. I hope your startup doesn't depend on millennials consuming ANYTHING. The best you can MAYBE achieve is having people disable their adblocker.

Most people I know either don't have much money or have a lot and don't care to spend it.

> Peak consumption years of population are between twenties and fifties and the biggest cohort of US demographics - the millennials - is just getting started.

They have no money to spend and little to spend it on. This has a ripple effect.

Many of them don't want to buy cars--Uber/Lyft allows them to dodge that (for now). Lots of them aren't getting married--this then drops spending of the household since they don't have children which sucks up vast amounts of resources. etc.

Genx and y are hit pretty hard between increased taxes to take care of Boomer retirement entitlements, public sector union pensions and other 1970s deals coming to roost, and significant student debt. These are expenses the previous generations didn't have to worry about.

With a lower tax load and no student loan payments, my economic life would be fairly different. At least a second car, definitely more travel, nicer house, more random spending, etc. When we do hiring here I'm floored by how low entry-level salaries are for people with 4 year degrees and 1-4 years of work. Hell, we opened a coordinator level position recently and got resumes for people mid-career dying for work.

I think the economic picture isn't as pretty as some stats make it out to be. x, y, and z just won't have Boomer wealth and our economy must adapt to that. Its not the end of the world, but it won't be like the Clinton years again.

Also, there's a pretty rough calculation in regards to real estate prices vs income. A middle class income in the 70s got you a decent house with a reasonable percentage of your salary to pay for it. That relationship is kinda crazy now as high real estate prices have become the norm. I couldn't afford my parent's house I grew up in and I make 3 to 4x what they made. Fixed for inflation, I make easily 2x what they made.

Lots of millennials are deep in debt due to student loans. Also, with jobs being more precarious, I wouldn't be surprised to see a much higher individual saving rate for the millennial cohort. This would then correspond with lower aggregate discretionary consumption.

> the millennials - is just getting started...

Yeah, but they're all broke and living with their parents.

> The CEO of WarMart has mentioned this

So a business model of screwing every penny out of your staff and suppliers can result in customers too poor to buy your merchandise?

Who could have forseen this?

How much do you want to pay for goods in order for that cashier to make 40K?

I would argue that the overall economy is more productive when the lowest wages meet some minimal living line (higher than we have now). This causes businesses to search to meet a higher efficiency of value creation in order to stay in business. The evolutionary culling of poor efficiency businesses drives a virtuous cycle for our civilization and economy in the long term.

If the companies are searching for a way to leverage lower wages for employees - that isn't real value creation. Driving wages too low, we get our current economic stagnation.

The money for a cashier to make a livable wage doesn't have to come from increasing the costs of all goods. The point of the article was essentially that companies have more money than they know what do with. If they paid their employees more, not only would it be better for the employees, it would be better for the company as more money in the hands of the poor will drive up demand for goods.

I think you mean, "If other companies(but not us) pay their employees more, then as consumers they can buy our stuff". I seriously doubt that giving an extra dollar to an employee generates more than a dollar in actual revenue looking solely at the purchases made by that employee. Maybe there are other social knock-on effects, but I don't see them spending more than $x on your own products when you give them $x.

One plausible exception would be for items so expensive that they're often financed with debt: A car manufacturing company might plausibly generate more than a dollar in revenue in the short-term if its employees borrowed money to finance it.

Another plausible exception would be if you gave someone a temporary raise, and they immediately started spending more and going further into debt(think buying a bigger house, bigger car, funding a bonus vacation on a credit card, etc.). Then when you cut their wages 6 months later, it's possible that for some items you would've convinced your own employees to spend more money than you gave them on your own products.

A third exception might be for companies that completely control the employees' spending. For example, a prison or a camp full of debt slaves might be paid $3/hour, but they could only spend it on overpriced company goods. Raising it to $4/hour still wouldn't exactly generate direct revenue over the long term, but it wouldn't cost the company much at all since they'd capture 100% of the spending. Anything short of that 100% is savings, and people might be more willing to spend down their savings if they thought money was easier to get. So you could - in the short term - make money by raising wages. Doubly-so if you extend them credit(on top of whatever debt they're working off).

I can't think of a way that the "giving people more money gives them more money to give back to you" argument actually works that doesn't involve saddling them with debt. And these are merely plausible - I don't know that they're what would actually happen.

Actually, what does them being employees have to do with the argument? If that argument were valid, why wouldn't my local grocery store hand out free $20 bills to anyone who comes in, since this would spur them to buy stuff? Or if you were truly convinced that this would make the companies more money, you could easily be a millionaire by buying up a local McDonalds(with a government-backed loan), raising everyone's wages, and then when your income goes up by x% reselling the business for an x% increase on the $300,000 or so you bought the McDonald's for(and repeating this a couple times).

That doesn't hold. Look at the prices at Costco, and go read up on how well they pay.

I feel like before people should be allowed to put this forward as a serious argument, they should also put forward the numbers behind it.

How much of your current Walmart receipt goes to the non-executive-management in-store staff?

The implication of course is that it would be significant.

It's echoes of the uninformed arguments around the UAW though. Back in 2008 the $70 was all anyone could talk about. That despite the fact that included funding for benefits the Japanese automakers didn't provide because they were socialized. Also completely ignoring that total labor cost was around 10%. Just how much did people think it could be cut?

Cut compensation and benefits in half and you save a whopping $1,500 on that $30,000 car. You know, the domestic one that's already cheaper that you weren't considering in the first place.

So would I tolerate my grocery bill being 2% higher to give cashiers/stockers/etc a living wage? Absolutely. I pay a lot more than that just to avoid shopping at Walmart in the first place (the parking lot is always packed, the lines are long, the aisles a mess and it's further away than Fiesta, the asian market, Albertson's, Kroger's or Target).

What if the receipt was 10% higher? If it provided a living wage, decent benefits, and improved their stores generally then yeah, I probably would. The spread between the asian market and Target is already much much higher than that.

More than that? Not unless they excelled in some area. For packaged meats Target does a real decent job. For produce the asian market is where it's at. For bulk items at low prices Fiesta rules. The others are sort of middle-of-the-road in offerings, at decent, if not amazing prices.

But I seriously doubt anything like or above 10% would be close to necessary to achieve what was proposed.

Isn't the point of that statement in the context of this article that maybe we don't need to pay more for goods? If companies have so much extra capital, some of that could be turned into higher wages for employees, since we already are paying higher prices.

I don't actually have an opinion, but your statement is missing the point.

No more than I do now. I want the wage increase to come from lowering the company's profitability. And it is... In 2016 Walmart is spending $1.2bn more on wages, and in 2017 it'll spend $1.5bn more. That's without putting prices up. The 2014 wage hike hit the share price quite hard, but Walmart has the cash to do it and I imagine the shares will bounce back. I hope other businesses follow their lead.

http://www.theguardian.com/business/2015/oct/14/walmart-prof...

They aren't raising prices, however they are firing 16,000 employees:

http://www.zerohedge.com/news/2016-01-15/walmart-fire-16000-...

According to Walmart themselves (as reported by NPR) the hike in wages has nothing to do with the store closures, most of which are a failed concept of smaller Walmarts.

Sadly, what we'll see happen is more automation, self checkout, etc. Technology will ensure low skilled workers price themselves out of the economy. This, js likely, to some degree, part of the force resulting in net negative low skills worker immigration.

Too few skills (reading, maths) and now automation is coming to agriculture even fast food restaurants, and at $15 min wage, you can hire a high school dropout, if you really need manual labor.

>part of the force resulting in net negative low skills worker immigration.

That assumes that these workers are coming from countries where opportunities for paid work are equal to or better than those available in the US, and are equally lucrative. Many workers come from communities destroyed by the drug wars, or from economies ruined by corrupt governance. If those structural factors don't see improvement, the impact on net low-skilled migration to the US won't budge much.

Understood, but if there is no market for their labor due to structural changes in the economy (automated taxis, automated check out, mechanized fruit picking) as well as a better educated domestic workforce (high school grads) now willing t work at $15/hr what jobs exactly would they be coming for?

People in desperate situations aren't going to be stopped from coming to the US because the Fed/WSJ/BLS says there is no market for their labor. Migrant communities are extremely resourceful because they likely have experience in finding opportunities that others would pass on.

For a lot of people, decision making is based on which option allows them to just live another day; relative to their circumstances, we are exceptionally privileged to be able to make decisions based on the extent to which macroeconomic indicators impact our standard of living.

You're thinking about the state of the economy today and yesterday. Maybe you're only thinking about people who grew up south of the southern border. Low skill immigrants come from many places. Many pay lots of money to get here, if they don't see a market for their low skills, there is no reason to come here. Low hanging fruit [low skills jobs] are being replaced by automation, slowly, but it's on its way. Currently there is a net negative low skills immigrant flow. As automation accelerates, it's likely to increase low skills immigrant outflows. Conversely, we may see more net inflows of mid and high skills immigrants.

And, as minimum wages go up, high school graduates become more willing to work. At $10 you may not find manual labor worthwhile, but at $15 it looks more enticing. Now, immigrants typically work a little harder, but not so much to overcome a lack of education and poor communication skills --which can take years to develop if Eng is not their native lang.

As tech advances and "hollows out" low skilled labor from advanced economies, these economies will struggle to keep their mid skills labor market employed.

"One leading hypothesis is that firms employing low-wage workers—such as fast-food chains—have significant monopsony power in the labor market; that is, they are the principal purchasers of low-wage labor in a particular job market. And a monopsonist facing a price floor doesn’t necessarily buy less, just as a monopolist facing a price ceiling doesn’t necessarily sell less and may sell more."

- Krugman, http://www.nybooks.com/articles/2015/12/17/robert-reich-chal...

"The employment effect of the minimum wage is one of the most studied topics in all of economics. This report examines the most recent wave of this research – roughly since 2000 – to determine the best current estimates of the impact of increases in the minimum wage on the employment prospects of low-wage workers. The weight of that evidence points to little or no employment response to modest increases in the minimum wage."

Schmitt, https://cepr.net/documents/publications/min-wage-2013-02.pdf

Thanks for teaching me a new word (monopsony)! It's been a long while since my vocabulary has been increased with something that's not a millennial invention.

Farmers know that term very well. When the second loading ramp or grain elevator closes, and there's only one buyer left, farmers face a monopsony. Farmers have fought back with co-ops and Government price supports.

It's been a long while since my vocabulary has been increased with something that's not a millennial invention.

That means you're missing The Allusionist! http://www.theallusionist.org/

Less than you pay at Walmart.

When Walmart tried to compete with ALDI in Germany, they couldn’t. They gave up after just a few years, because ALDI managed to have lower prices and higher wages, because they had optimized every single process to maximum efficiency.

Not in my neighborhood. The few malls are packed, have to search for a space anywhere. Commercial real estate is going crazy! 10s of thousands of apartments going up all over. Any place decent to eat has a wait. Demand is rocking in Midtown Atlanta!

That reflects more a demographics shift. For every gentrifying neighborhood in the inner city there are several rotting and dying small towns.

Midtown Atlanta is near Georgia Tech if I remember correctly. Anecdotally I've noticed that areas with a concentration of knowledge intensive industries and/or universities are much more economically vibrant than the rest of the country.

And a major reason workers are spent out is because of high rents. If the US would build enough housing in the major employment centers that the highly skilled workers wouldn't spend 90% of their after-tax income on fixed expenses, they'd have more money to spend to drive other businesses.

All the disposable income is being sucked into rents, and eventually that will make the economy run slower and slower, fewer sales to be made, businesses to close, more people to be unemployed, in a feedback loop until all the capital is held on one side of the table and there are a bunch of unemployed people on the other side who are willing to work, able to work, and want to buy things, but have no capital.

You are assuming the answer. (The old phrase for this was "begging the question"). Someone could easily ask "Why don't the landlords, who get all that money from rent, spend it on something, and thus drive growth?" And you can easily answer that: the wealthy spend less of their income, they save more, therefore the high profits from rent increase the savings glut, etc, etc, etc.

But you should state the answer directly rather than assuming it under a layer of indirection.

Good point, it is important that the rentiers do not spend as much as renters would, otherwise the same amount of spending would take place.

In your example, aren't you implying that landlords and other wealthy individuals aren't simply not spending, but actually hoarding cash?

Most wealthy individuals aren't holding cash, they put the money in a savings account or investment that has a return. This money appears to be held to most people, but even money in a savings account makes its way back into the economy by affecting the reserve requirements of banks. Its a proportional effect, because reserve requirements are greater than 0% but lower than 100%, but it still contributes.

If they actually are hoarding, the question is why and in the past that is usually because savings returns and investment returns are expected to be negative. In which case, thats the problem to solve.

In theory that money in a savings account or investment vehicle gets circulated back into the rest of the economy, but I think what we're seeing is that cash is tied up in some sort of buffer/holding effect in the financial sector, basically accumulating in ineffective places. The bulk of the money certainly doesn't seem to be circulating through the hands of individuals where it would likely spur more economic activity than we're seeing now.

This is a really interesting observation. I've never heard someone mention a "buffer/holding effect" before, but that makes a lot of sense.

I wonder if it's something like... the average individual spends half of whatever cash they have available every year... but the average business that takes investment lets 6 to 12 months of it sit in accounts. I realize the bank would then loan against the money in those accounts, but is it "turtles all the way down"?

I'll have to refresh my understanding of fractional reserve banking, but I don't think a loan from Bank A being put into Bank B and so on can lead to infinite money supply. If I remember correctly it somehow leads to some multiple of the input money being generated. Here's a Wikipedia article about it:

https://en.wikipedia.org/wiki/Money_multiplier#Reserves_firs...

At some point all the institutions sitting on their money eventually does result in that money being sat on, and not being circulated through the economy.

That's the textbook model of money creation, but it's outdated. See "Money creation in the modern economy", by the central Bank of England: http://www.bankofengland.co.uk/publications/Documents/quarte...

Money creation in practice differs from some popular misconceptions — banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits. (...)

Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.

>Most wealthy individuals aren't holding cash, they put the money in a savings account or investment that has a return.

Not necessarily true, given what the yields on savings accounts have been recently. Yes, a completely rational actor will invest capital in whatever market is currently generating the highest rate of return. But people are not rational actors. More specifically, people tend to be extremely loss averse - they will go to far greater lengths to avoid a result of -$1 than they will go to achieve a result of +$1, even though the delta (a dollar either way) is exactly the same for both situations. This loss aversion only gets worse when you scale up the numbers to -$1,000,000 and +$1,000,000.

This is why higher levels of inequality are correlated with lower growth. Capital owning rentiers are entirely happy with a 2% (or less) rate of return, so long as the risk of a negative rate of return is negligible. Meanwhile entrepreneurs who can generate much higher rates of return (but with a correspondingly higher probability of negative returns) are starved for capital.

While you're right the wealthy people don't usually hold all most of their cash in their mattresses or checking accounts, that's not the definition of "hoarding cash" in the context of the story posted here.

In corporate finance and equities analysis, the term "cash equivalents" includes very liquid short-term investments like US treasuries, CDs and money-market accounts.

> If they actually are hoarding, the question is why and in the past that is usually because savings returns and investment returns are expected to be negative. In which case, thats the problem to solve.

Er, no. The question is why companies -- which traditionally need to borrow money to operate -- are keeping large amounts of savings (earning positive but still very small returns) instead of increasing their capital expenditures by building factories, or writing more software, etc.

Land, or housing, Rent are ridiculous in the 20th century. Depending on where you live you may finally get the bad taste of this medicine.

I remember some journals ( it was Financial Times or Wall Street etc type ) making the relationship case. Stating people has actually been making less money when rent is deducted.

The cost of living is high, people used to say this without putting things into perspective. Cost of Foods / Transport and Rent may be high in London, but you do get a higher minimum wages. Compared this some South Asia Countries where Cost of Foods and Transport is low but Rent is exceptionally, and there may be no minimum wages or wages are comparatively low.

Our of the all four cost of living, Food, Transport, Clothes and Home, Home takes the biggest cost percentage. More then 50%. And it happens that only Home; Land, Rent / Property prices is an investment option out of the 4, and are suspected to be driven up and down by market / monopoly / government.

The world needs to start looking into Property market and tax on its profits, both selling or leasing. As well as allowing % of rent to be deducted in tax calculation.

I strongly believe, that anyone making more then the average median income ( so called middle class ) should be able to afford to buy or rent a house, that has heating in winter and can afford a 10 min Hot shower without skimming on their entertainment like movies, and be able to have decent meals a week while making some savings. The world we are at now are having middle class passing more of their wealth into property market and their living standard aren't that much different then lower class.

Is this so bad? Falling into something of a European-type rut with permanent 8-12% unemployment and modest GDP gains? I remember the 90s. Everyone was buying shit non-stop. What kind of life is that? Sure it created jobs and growth but to the ludicrous end where we refused to accept the gravy train was ending. I remember Bush 43 pleading for Americans to "go back shopping" the black friday after 9/11 when the writing was finally on the wall. Its perverse.

I think if we want a shorter work-week, more holidays, and more leisure then we have to concede a bit on demand/buying shit. The endless race for growth eventually hits the laws of diminishing returns hard. Worst of all, automation is here in significant ways now. A lot of jobs are going to be gone forever with very limited new growth to make up for it. If I'm automating the responsibilities of hundreds of employees, I just don't see what can make up for it. A handful of devs, managers, sysadmins, etc can replace a significant number of jobs nowadays.

I think aging Western economies have a long adaptation process ahead of them to later stages capitalism and this is one of the first signs this move is now mandatory. How we handle automation, slow growth, etc will be the political fights of the future. We're already seeing some implementations of Guaranteed Minimum Income and other things completely unthinkable 30 years ago.

"a shorter work-week, more holidays, and more leisure"

You do see that there is a price to pay for that, right?

Future generations pay the cost, not you. So you are deciding to imperil people who are children, or who do not yet exist. There's a clear line to draw from "more holidays" and "more leisure" to "fewer diseases cured" and "E.U.-style fiscal crisis."

The American tradition of working away continuously, hacking away, jamming hard on a challenge all night is really, really a good thing. It's saved the world a few times. It's good.

>So you are deciding to imperil people who are children, or who do not yet exist.

I'd much rather have my grandkids enjoy a 24 hour workweek and be surrounded by automation than continuing the keep up this house of cards with its 50-60 hours work weeks, endless stress, constant retraining, constant layoffs, endless warfare for resources, etc to keep the status quo afloat.

Its clear to me that Bush 43 was our last hurrah for the old way of doing things. Automation is just eating the world and denying that is just not going to help us.

>The American tradition of working away continuously, hacking away, jamming hard on a challenge all night is really, really a good thing.

Creative people will always be this way. You're confusing values with jobs. The hardest and best projects in my life were done with zero exception of monetary gain. Ask any hacker. They'd be doing this shit anyway. Linus had no idea Linux would go anywhere, for example, and thought of his project as being largely academic at first.

Given our Protestant work ethic and deference to corporations, it seems like we're more likely to approach the Japanese/East Asian workaholic model to the grey late capitalist future, sadly.

"Is this so bad? Falling into something of a European-type rut with permanent 8% unemployment and modest GDP gains? I remember the 90s. Everyone was buying shit non-stop. What kind of life is that?"

It was a pretty fabulous kind of life. People felt rich, there were shiny new buildings going up everywhere, the government's budget was running at a surplus, there was a general feeling of optimism and hope for the future. Given the choice, I'll pick that over trying to come up with reasons why our current situation of general political and economic misery is somehow morally better.

But obviously the '90s were not sustainable. What we are going through today is the payback period (with interest) for Greenspan's economic policies.

"But obviously the '90s were not sustainable."

Sorry, it's not obvious to me at least. Can you explain why they weren't sustainable?

You are certainly right that it was fun.

But basically the hypergrowth of the '90s was borrowed from the future. All policy was good if GDP grew. Greenspan noodled on the problem--"irrational exuberance"--but unfortunately became convinced the existing pyramid scheme was working. He's since publicly expressed regret over a ton of those decisions.

While statistics are tricky, I think there's a decent chance your entire premise - that we have all had a modest cut to our hours in exchange for less consumer goods - is untrue.

http://www.mybudget360.com/wp-content/uploads/2011/07/index_...

http://bigpicture.typepad.com/comments/images/wsj_prod_vs_ho...

https://qzprod.files.wordpress.com/2014/09/average-annual-ho...

especially for allegedly supervisory positions with job security & a salary, which no longer have to pay overtime; Hours worked per full-time employee has gone up, while part-time hourly positions have become much more common. Hourly jobs we now expect to work just enough that no benefits are offered (~39.9 hours), and double up to 78.8 hours over two jobs if we want to actually support a family... the better half of retail jobs will respect that sort of arrangement, while the worse half will require you to work 25-39 hours virtually "on-call", coming in whenever a gap presents itself, if you want to achieve that many hours.

The death of the labor movement has not helped the situation.

The best I could find to support your argument is

http://b-i.forbesimg.com/theapothecary/files/2013/07/PTEcono...

http://ibankcoin.com/news/files/2013/04/labor-force-particip...

Then it is time yet again to invent new ways for Americans to consume.

An economy turns not on capital but the movement of capital from one place to another (ie trade). Atm the money is with corporations. They don't actually want it. They would rather have customers buying their products than money sitting in a box. The role of government in resolving this impasse is to somehow make that parked money move again. Either take it via taxes (very difficult as the US does not generally tax assets) or get the corporations to spent it willingly.

I'd vote for a rule that would mandate dividend payouts by corporations that hoard money. Define a fixed amount that is acceptable, say 25% of net worth, and any liquid assets above that number must be paid as dividends. That will move a pile of money from corporations to wealthy stockholders, which in turn pay taxes and hopefully will spend some on products. Yes, it is a "trickle-down" approach, but I think that is the only approach the US electorate can stomach these days. Or, to avoid paying said dividends, corporations would invest in/hire people who would then pay taxes and otherwise keep the money flowing through the economy.

So the money goes back to the rich? Where it doesn't get spent.

Most wealthy individuals spend a much smaller percentage of their income on consumption compared to the middle class. It then makes sense for aggregate demand to decline as the size and overall spending capacity of the middle class declines.

Unfortunately the dysfunction in U.S. politics prevents the government from pursuing policies that explicitly buttress the middle class. What happens instead are more indirect interventions like the Fed-driven stimulation of asset prices and increased defense spending. (Both of which benefit relatively narrow segments of society.)

Somewhen in the last decades the decision has been made that the majority of gains should go to the top earners.

An easy way for demand to rise would be if wages didn't stagnate but went up with productivity. The top earners won't spend more money if you give them more. And new products won't be bought if no one can afford them.

Is this really feasible in a globalized economy? If wages were constantly forced higher wouldn't companies simply offshore increasing amounts of their labor or headquarter in another country?

I don't know how you could enforce this. But as I wrote before, as long as the elite keeps capturing all gains from productivity for themselves, demand will stay low.

Maybe there are tax schemes that encourage paying higher wages but I don't know.

Measuring the movement of money is called "the economy".

One strategy for "growth" could be cashectomies via taxing windfall profits, idle assets, or just because.

Another could be changing from measuring consumption (GDP) and to something else, like happiness, life expectancy, or standard of living.

Maybe we need to start spending these trillions on expanding out into the Solar System?

This is exactly what http://thelightsinthetunnel.com predicts will happen.

All this money could be potential demand if companies invested it. The company I work for is sitting on a pile of cash while at the same time seeing a downtrend in revenue, buying back shares and paying out dividends. In theory the company should be investing this money in building future products, but it's not.

It's a combination of many factors. CEOs and management aren't motivated to invest in the long term of companies. A lot of big companies are structured so it is very difficult for them to apply capital in a way that facilitates growth. They are risk averse. This is esp. true when there is an air of global economic uncertainty like we've had over the last decade or so. This produces motivation to have a large capital safety buffer (because e.g. if you don't have capital you wouldn't be able to borrow it). In turn this compounds the problem. We are in a low inflation environment so you can sit on your money without losing much value. Tax considerations force capital to remain where it can't effectively be used so US companies don't bring their cash back to spend in the US because they are trying to save the tax.

Individuals are also very cautious because of economic uncertainty. If I look at myself I find myself spending less and trying to save more. I don't buy things I don't really need. If I felt more secure I might spend more money.

> Sales decline each week after payday, then recover after payday.

This has always been true. My dad, a career Air Force officer, would shake his head at the servicemen who ate steak after payday, and were down to eating beans by the next.

Heck, I read Ambrose's book about the building of the intercontinental railroad in the 1860s, where he describes the profligate spending of the construction crews immediately after payday, and the Hell On Wheels camps that sprung up to take that money, providing hookers and blackjack.

Yes! And further, consumer credit is maxed out. Henry Ford knew that he had to pay his workers enough to buy his cars. But since the 70s, it's become sufficient that they be able to borrow enough. It's been a good run, but ...

I'm surprised nobody has mentioned the geopolitical advantages of hoarding cash. A big pile of untaxed, uninvested cash represents a significant political bargaining chip for the corporation in control of it.

Apple can extract more from negotiations with the US government, for example, when it's holding $100b USD offshore. Quite simply, that money is leverage.

Over the next several decades we will see the decline of the nation state as the primary geopolitical powerbroker. Corporations already exert significant control over politics, and this trend will only continue.

Perhaps what the executives see that us plebes do not, is that this geopolitical shift has already begun, and is much further along than anyone realizes.

Sigh, I was really hoping Cyberpunk stories from the 80s wouldn't turn out to be prophetic.

Unfortunately more of them come true every month...

On the bright side, at least cryptographers excel at predicting threat models.

In reality they have turned out to be the opposite of prophetic. National governments are more powerful today, relative to corporations, than they were in 1992, when Snow Crash was published.

In the 90s, a lot of people thought that businesses would leverage networked computer technologies to disrupt governments. People thought the Internet would be a new medium of exchanging information and wealth, impossible for governments to monitor and regulate.

Does anyone think that anymore? What we see today--thanks to Edward Snowden and others--is that the Internet is thoroughly dominated by national governments. They have the best hackers and invest in the strongest technologies. For example it's hard to think of a smarter tech company than Google, and the GCHQ picked their pocket easily with MUSCULAR. Rather that disrupting the government, core technology companies like AT&T enthusiastically work with the government.

I think it's a liability. The US government can at any time tax that cash, and if Apples execs refuse to pony up then they can have fun in jail.

If the US government decide to do that....

The government is slow and clumsy but Apple hires fast lawyers and lobbyists. So I wouldn't count on that.

Tax changes that are retroactive are extremely rare, mostly because they are seen as unfair - changing the rules after the game. And if you tax the offshore cash generated starting now, then corps will change their behavior to minimize tax paid.

>If the US government decide to do that....

And therein lies the rub. Apple can mount a better defense than the US prosecution can, by dint of their bottomless legal fund. Apple can also put forward a united front, whereas you would need to summon an unprecedented level of political will and bridge-building to simply prevent Congress from derailing the DOJ prosecution through infighting.

How many divisions does Apple have?

Also leverage against other companies who might challenge their position. No one is going to take on Walmart knowing that Walmart has the cash to undercut them while operating at a loss indefinitely while they drive the upstart out of the market.

There's legislation to prevent that.

No one has mentioned it because, for the U.S. at least, it's not an actual advantage.

U.S. treasuries transact at a global volume of about $1 trillion per day. $100 billion is a lot of money, but not enough to create any significant leverage in negotiations with the U.S. federal government.

U.S. jobs and U.S. customers are far better leverage, because they vote. Cash doesn't vote, and the Federal Reserve can create as much of it as the U.S. needs at any time.

According to this Bloomberg article, companies have $2.1 trillion sitting offshore for tax reasons [1]. They're probably waiting for Congress to let them bring home the cash, tax-free. However, the last time that happened (2004), it was done to encourage companies to create jobs. Instead, they spent it buying company stock. [2]

1 - http://www.bloomberg.com/news/articles/2015-03-04/u-s-compan...

2 - http://www.theguardian.com/money/us-money-blog/2015/jun/13/r...

As far as I know the US taxes the income of its citizens even when they live outside the US. So why can't the US just tax the offshore income of the companies?

"So why can't the US just tax the offshore income of the companies?"

There's 2.1 trillion reasons....

Because the US needs the businesses, not the other way around.

That's quite funny.

If the US blocked a company from it's market, that company would collapse practically overnight.

The US is the most profitable market in the world with the EU running not too far behind.

Think about Alibaba--it's profit is about connecting Chinese sellers to the profitable markets in the US and EU--not about connecting to other Chinese suppliers.

But the US can't just block offshore companies from its market without absolutely destroying its economy.

What do you think would happen if the US suddenly decided that no company can do business in the US without paying taxes to the US for their offshore profits?

They'll pay the taxes. Also grumble for a month maybe, then go quiet.

I don't think you realise just how much money that'd be.

You only have to injunct one. After a couple million in losses, they'll pay up. At that point, the threat of injunction would simply get the other ones to pay.

Or, you start seizing domestic property to pay taxes on the foreign assets.

Do NOT assume the government is ever powerless. It is always bigger than you.

The government might not be powerless, but exercising such power would be disastrous.

Also,

>After a couple million in losses

Leads me to believe you don't really understand the numbers we're talking about here. That's missing at least a couple of zeros.

Not at all. Shareholders would begin screaming at the management to pay the taxes almost immediately.

Losses wouldn't even make it to $100 million before management was replaced.

How on earth does replacing the management affect US tax code?

Nope. Lobbying dollars.

Not really, creating a hostile environment for businesses will obviously drive them away.

Lobbying has nothing to do with preventing a completely unrealistic scenario from happening.

Are you serious? Where could Apple establish itself if not for the US? Or Google? Or Facebook?

The government comes first, as a guarantor of civilization. Everything else comes later.

There's this whole continent of pretty civilised countries just to the east of US.

And in those countries too, businesses need the government.

And?

I think you're missing the point here, US double taxing foreign income would put everyone else at an insane competitive advantage.

Really? Other countries don't have taxes?

I'm not sure you follow, we're discussing double taxing here.

They would have to change the tax code.

It depends; if you are paying taxes to the government of the country you reside in (say, Australia), the US has a reciprocal agreement with them, and you are not charged tax two different times on your income.

On a company level, this seems to translate into "we have super low local tax rates, build companies and campuses here to boost our local economy!" (see: Ireland).

to a point, then double taxation kicks in (on income)

It may be sitting offshore for tax reasons, but even if it were sitting here (with higher taxes), it'd be sitting. Parked. Hoarded. Illiquid. Whatever you want to call it. Tax rates are the proximate cause here; what we really need to look at is the cost of capital, and why companies deem there to be no productive investment use for that excess cash.

If the companies spent their savings, rather than hoarding them, the economy would instantly grow, and we would most likely see more jobs with better pay.

The article makes it sound like these dollars are somehow being removed from the economy. If they're put in a bank, the bank loans it out to someone else. If they buy treasury bills, the government then takes the money and spends it. Even if all this money was converted to paper notes and stuffed into giant mattresses, the net effect would simply be to deflate the currency and increase the value of everyone else's money.

Hoarding money isn't like hoarding oil or rice or microchips. Maybe GM spending money would grow the economy more than GM loaning it to the federal government so they can spend it, maybe not. Depends on what they spend it on - the return on education is probably higher than the return on fancy pensions or factories for products that nobody buys.

> If they're put in a bank, the bank loans it out to someone else. If they buy treasury bills, the government then takes the money and spends it.

good call, this is Econ 101 stuff that most people just don't know. Saving money in a bank or government bonds is not the same as locking it in a vault or burying it in your backyard. It is still out moving around in the economy.

While the article certainly worded that portion poorly, there is a difference between monetary velocity of retained earnings parked in a mutual fund, and earnings plowed back into a business. In the former scenario, it takes a much longer time for the money to flow back into the purchase of goods and services. By reinvesting in the business, there is far less of a time lag for that to result in growth-generating economic activity.

I think difference between savings and investment (or consumption) is in reversibility. Savings are reversible, basically if you "invest" in any liquid enough assets that keep value, then you save. Investment (and consumption) is irreversible, once you made the decision, it's done deal - somebody does the work, energy is spent, entropy is produced and so on.

That's why, contrary to mainstream economic opinion, it is useful to save. Saving lets you react to investment from competitors, by postponing the decision after they made their move. This gives you advantage (power) if you're big enough.

"It is still out moving around in the economy."

What is this money doing if there is not profit perspective? Nothing. Nobody is claiming that we are short of money, the claim is that this money is not invested.

> If they're put in a bank, the bank loans it out to someone else

Except, that's not happening. The fed is paying banks to not lend out money.

This article does a good job of explaining:

http://www.dailyfinance.com/on/corporations-cash-hoard-trill...

Some interesting excerpts:

"Four of the top five holders of cash are tech companies ...who together possess...about 23 percent of all cash owned by corporate America today. Overall, the tech sector controls more than half of such cash"

"about 60 percent of [non-financial corporate] cash piles are offshore and subject to as much as 35 percent tax if brought back to the U.S."

The simple answer is that these companies have leveraged the immense economies of scale in their info-tech niches, and are soaking up billions of consumers' money but there's nothing else for them to buy.

This is the sort of purchasing power imbalance that caused the Great Depression. The good news is that even if Depression hits, we still have access to web apps.

Another viewpoint might be that if the economy is indeed in for a slow or down period (which is certainly not a guarantee at this point), they will be better equipped to weather the storm and seize opportunities that arise (ex: acquiring competitors who could not survive).

Personally I'd love to see them throw around that cash to bring serious competition to a few specific markets. Cell phones and cable are the big ones (and Google is already getting started there). Looks like they are plans to do similar things with VR, robotics, and automated vehicles.

We may not have farms, but at least we'll still have farmville.

It's the same reason I save my money: for opportunities when prices are low. This is especially relevant now that the stock market is tanking.

Most people with any kind of money think this way.

> It's the same reason I save my money: for opportunities when prices are low

The problem is: how do you know if the time is right (i.e. ten years later you can say "I invested in the lowest possible price")?

Possibility A: you invest too early, stock drops further and you can't recover in a reasonably long time frame (e.g. 1 year)

Possibility B: you invest too late, and people who invested before you made more profit in retrospect

Possibility C: you invest at the right time frame and made a nice chunk of cash

Possibility D, especially likely with unicorns: either A, B or C after a year... and two more years pass by, and the company goes bust (Myspace!)

The trick is, you don't invest during the downturn, hence all the cash hoarding.

You invest after it bottoms out for a while. Macro economies do not recover like a rocket, the window to invest is very large, so large that if you only recognized the bottoming out a couple years later, you still haven't missed the opportunity.

That is a really interesting point. So I've never invested in stocks before (preferring to invest in my own business) but have decided to diversify and am only seeking returns in a 5-15 year bracket (but want to minimize 1-5 year downside so it could potentially work as an extra emergency fund too).

I had assumed being 20%+ off of the highs, it'd be a good idea to start getting involved now, but.. maybe I should wait until a clear "bottom out" is showing?

So long as you don't wait forever. The market bottom of any exchange or stock is $0.00. The market, will likely never actually "bottom out". Look into DCA Dollar Cost Averaging. I personally, and professionally, manage DCA strategies with applying additional infusions during obvious lows (example: markets are down 10% in a given period). The bottom of a cycle can undulate "sideways" a bit over a period of weeks, months, years, decades with few discernible entry or exit points. Sometimes after an "event" occurs, the market/stock jumps XX% and opportunities may not occur again in the near future (goes sideways at new level). I note sideways markets/stocks and calculate the risk/reward if I deem it an opportune time. In most markets stocks don't go sideways forever.

Don't try to time the market, it's a fool's game. Do regular purchases of a broad index ETF (exchange traded fund, low fees!), AKA dollar cost averaging as another child mentions. If you are worried about downswings, keep your portfolio balanced to roughly 50% equities and 50% bonds (there are broad bond index ETFs too).

I can only offer you my personal opinion, which could well be wrong. I can take no responsibility for what you do with your money.

That said, my opinion is this: there's far more risk than potential reward in the market right now, even after this drop. This is probably the beginning of a bear market that could last, I don't know, anywhere from maybe 6 to 18 months. I would definitely not suggest buying until it's clearly over.

EDITED to add: here's a good summary: http://seekingalpha.com/article/3825236-bear-market-phases-s...

You don't know. Nobody knows. So you make your best guess, and you don't put all your eggs in one basket.

Who cares if the investment doesn't maximize potential profit? If someone invests $50 and gets $100 in return, that's great. If someone else invests $50 and gets $99.42 in return, that's great too, and who cares if someone made more 'profit' from buying and holding an imaginary financial instrument? The point is: buy "lower", sell "higher" is close enough to buy at the lowest point and sell at the highest point. But other factors come into play on why someone would sell at any time. Theoretically, ceteris paribus mutatis mutandis, if you invest in some company that happens to survive a thousand years into the future and has an annual average ROR of 7%, you should never sell it, even after your death if you want to maximize profit...buy low-ish, sell high-ish as convenient and with common sense. Theoretical perfectly maximized trades should not be the concern of the investor. Count dollars instead of pennies.

The problem you refer to is formally known as "Risk" aka Risk Capital.

>It's the same reason I save my money: for opportunities when prices are low.

So then you buy low, and no longer have money saved for even lower opportunities. The logic of this plan doesn't make sense. You can't both be saving for and spending on opportunities, and you have no way of knowing when or what opportunities might arise.

>Most people with any kind of money think this way.

According to...?

The logic of this plan is basic and has stood the test of time in any multi-party market. You can save and spend at the same time, I do it all of the time, it's called budgeting. You are mired in theoretical perfection, absolutism, and a misunderstanding of how to profit from investing or trading. On the Street this "plan" is referred to as "Keeping the Powder dry". You don't [rationally] blow the whole keg of powder on one trade. If I have $10k to invest, I might only invest ("fire", "blow", "shoot" )$2k at a current market/stock low and keep the rest "dry". What is your investment strategy? Invest at the market/stock highs?

According to...people that have actually invested. Some positions lose money, some make money, but you'll never know what it's like until you get off the bench and put some skin in the game. Always be comfortable with losing what you invested, because you might lose it. Always be comfortable with taking a profit, because you might lose it.

>What is your investment strategy? Invest at the market/stock highs?

I try to keep in mind that markets are unpredictable, and missing out on growth while you wait for the next crash can cost you money too, even if it doesn't feel as bad as a position you hold losing value. I invest about the same amount every paycheck whether people are crying bear, bull, bubble, or apocalypse.

Succinct. Exactly. Dollar Cost Averaging. For buys and when buying call options or selling puts, I increase commitment while maintaining the core strategy. Highs and lows are arbitrary in an irrational market. Profits can be increased if buying at "relative" lows or selling at "relative" highs. If a stock that trades at its highest yet value of $100/share falls to $80/share over a week because of a lawsuit claim or other similar construct, but the company is otherwise outperforming, that may be a buying opp (it may be a total loss, but that differential is risk/opportunity). That stock, at $80/share is at a "relative" low as compared to its high of $100. That is what I meant by low and high. Perfect maximization is possible, though almost always unlikely. Which is why your DCA strategy should outperform (depending on your investment choices, of course).

>"On the Street this "plan" is referred to as "Keeping the Powder dry".

Oh, I know what it's called "On the Street". And it's bull.

>You can save and spend at the same time, I do it all of the time, it's called budgeting."

Huh?

>$2k at a current market/stock low and keep the rest "dry".

But why just $2k? That might be the bottom, and then you've missed out putting those dollars to work.

>What is your investment strategy? Invest at the market/stock highs?

I can't predict the highs or the lows, just like you can't, so it's not part of any strategy I implement.

>According to...people that have actually invested.

You mean me? I've even done it for a living, with other people's money. Imagine that.

>Always be comfortable with losing what you invested, because you might lose it.

I get it now, you're just a random spouting aphorisms you've read.

Un-invested money can still earn interest or be put into other profitable, but less risky vehicles. I do not know any professional traders or investors that put 100% of their money for investments in one trade.

>I get it now, you're just a random spouting aphorisms you've read.

Yeah, those aphorisms, with their pathetic grains of truth, what a fool I am.

Troll, Google my "aphorisms" in quotes. I don't seem to come up with any results in google. I'm not a genius, I didn't come up with the concepts of "Keep some Powder dry", "Buy low, Sell high", or basic arithmetic. You offer exactly nothing in terms of "strategy". I'd love to see your Series 7 exam results.

"Always be comfortable with losing what you invested, because you might lose it." - Google it.

When everybody is thinking that way about capital purchases, you get a deflationary spiral...

Only until people with money decide that prices are low.

Which is only a bad thing when everyone is up to their eyeballs in debt.

HN is a terrible place for conversations about complex economic issues. Many comments seem to be both confused about basic concepts and trying to make political arguments. Not a recipe for enlightenment.

Since economics touches our every day lives so often, people often think they have a lot to say on the subject but underestimate how little they know. Imagine if you got the same group of people with the same educational background from HN together (college-educated, usually, but not a specialist) and had them debate unsettled questions in geology or astrophysics. Surely not a single original or useful insight would come of it unless an actual geologist or astrophysicist happened to stop by, and I think economics is closer to those subjects than some people realize.

Yeah, I've noticed the average knowledge standard for programming issues is very high, economics less so. Then again I'm not sure where you do go for exceptional conversations about economics.

It's not that hard. This is an entrepreneurs/programmers forum. If you want better economics insights, go to where economists hang out.

A few ideas: Read popular blogs of well-known respected economists, look at their comment's section. You'll find both really good articles, and serious discussions between actual economists.

I don't get it. The article does not point out even an attempt to ask the leaders of the said corporations - "Why?".

Its better to ask to get some semblance of their thinking instead of pure speculation.

It's easier to speculate than do actual journalism. Particularly ideological journalism, a la the New York Times.

The author seems to have a kind of old century overconfidence in the value of the dollar. I hope he uses only one currency for pratical reasons.

And I would rather read an article that use ratios between liquid/static moneys those corporations got instead of random values.

(I'm one of those that believes static money has no value, had and/or may have, but in reality it's absolute zero).

Why would the author substitute the terms 'cash', 'savings' and 'profits' in the article given their entirely different meanings? Corporations could be sitting on trillions of dollars in 'cash' if they wanted, with zero 'savings' and zero 'profits'. The whole article seems somewhat contradictory.

I don't think the reasons are that hard to understand. M&A opportunities outside the core business are especially hard to integrate in the software sector. Google and Apple never got social right - social is a field with such extreme network effects that it tends to create natural monopolies. Buying up smaller companies in that field doesn't provide a lot of help in cracking FB's castle.

OTOH, Apple and Google are outcompeting each other in mobile - no other company is currently making big inroads, not even MS, even though they see it as a critical playing field for their future.

And why would one of the big tech giants buy out old-economy companies (eg. in automotive) if they believe disrupting that field with innovation is much more likely to succeed?

In the end, the international financial system let's them get away with hoarding and shuffling around the billions and the companies don't see killer investment opportunities. In a low-inflation period, just stuffing the money under the pillow is probably better than burning it on failed M&A.

Summary: Many large corporations in pharma, auto, tech are becoming net savers in order to (1) avoid the taxes associated with purchasing and maintaining new assets; (2) have a warchest of cash for M&A activity as cash deals are generally much cheaper than equity/debt deals, and M&A can be more cost-effective than R&D if done correctly.

Author is unconvinced that this covers the whole picture, and offers this meta-explanation: Through the 20th century, as we shifted from a horse-and-sun-powered agrarian economy to an electricity-and-motor-powered industrial economy to a silicon-based information economy, it was clear that every company had to invest in the new thing that was coming.

Simplified: there isn't enough promising new tech out there to soak up all of the cash in circulation. This is a common theme that has economists asking: what will be the 4th industrial revolution, and when will we see it? [1]

Is the cash hoarding good or bad? Author thinks good: If corporate leaders and their investors truly believed that the future were bleak, that innovation and economic growth were irreparably slowing, there would be little reason to hold on to all that cash. AKA that we are on the cusp of a new wave of innovation.

Personally I don't believe this matches up with leading business cycle indicators, such as the stock market, employment rates, and trends federal spending as a percentage of GDP. [2] But what do I know - there could be an R&D lab somewhere out there that is tantalizingly close to bringing the next paradigm-shifting technology to market. I'd love to know what that could be.

[1] http://www.nber.org/papers/w18315.pdf

[2] http://www.usgovernmentspending.com/recent_spending

Seems to be autonomous transportation. Hence auto and tech. Google, Apple, and GM are the only companies named in the article.

Google says they'll be ready in 2020. Apple TV has the biggest share of the streaming TV hardware market [1] and Watch almost brought in $2B last year [2]... but iPhone and iPod sales are sagging [3]. GM just put $500M into Lyft. Ford is pivoting to software and services. And so on.

"Driverless" has the potential to be more like horse shoes or "iron horses" or "horseless carriages" than, say, western saddles or dieselification or automatic transmissions. Historically, dramatic changes in ground transportation seem connected with dramatic changes in how people spend time, where they live, and what they work on and value and eat.

As for pharma, maybe the patent cliff? By 2020, patents on Plavix, Singulair, Diovan, Lipitor, Rituxan, Humira, Novolog, and Avastin will be expired.

1. http://advanced-television.com/2015/11/06/apple-tv-31-of-str... 2. http://www.ibtimes.com/apple-watch-sales-topped-17b-apple-in... 3. http://www.cnbc.com/2016/01/20/iphone-sales-worse-than-expec...

The economy grows and you get inflation when interest rates are lowered. It shrinks and you are likely to get deflation when rates are raised. The rate lever was getting reduced over the last 30 years and is not at zero. Anyone can see the only way for rates to go is up, and the value of cash is likely to increase in the near future. I honestly don't see any need for mystery in that.

There's also the notion that a companies stock price should be tied to its dividends, or at the very least it's ability to pay a dividend. If you want to buy low/sell high, you're assuming you are smarter than other people. If you want to buy and get income from dividends/profits you are a more realistic investor and will be interested in the P/E ratio. A hoard of cash is going to help stabilize the stock price - market cap should never fall below the value of the assets.

What's the point of stabilizing stock, price, when instead you can just have cash in bank plus an unstable lowe price stock?

Keeping the stock price high fends off hostile takeovers and negative feedback loops from nervous sellers.

This is my main theory about why companies are hoarding cash. They're tired of being at the mercy of the traders.

> Remarkably, the United States government was able to tax all that productive corporate behavior so much that it came close to paying off all its debts for the first time in 160 years.

The current US debt is over 18.900.000.000.000 $ (http://www.usdebtclock.org/#). Am I getting the author right that the US managed to put on 18 B $ in 20 years?!

Trillion.

Here's a chart of debt as a proportion of GDP:

http://dailyreckoning.com/dr-content/uploads/2015/06/Histori...

Why is it that people always talk about only one side of the accounting ledger?

The US has a net worth of nearly $150 trillion dollars. Who cares about the absolute value of debt?

That $150 trillion - is that book value, or fair value?

I assume it's a combination of both; I very much doubt that all ~$250 TRILLION in assets are being marked-to-market.

And, being as how both assets and liabilities will use the same accounting measure, I don't think it matters.

That's not absolute debt, that is debt relative to GDP as a percentage. Its a measure of, effectively, how long it would take the US to pay off its debt if it forced itself to operate in the green, since there is a limit on how much you can tax out of an economy without causing it to contract, and GDP is a flawed but relative measure of what you can potentially tax.

So where is the equivalent graph showing the rate of growth of assets as a percentage of GDP?

It's one sided accounting that people love to trot out as a big scary thing. The net worth of the US is growing; what else matters?

The federal government doesn't own the entire country. What's the net worth of the federal government?

It's a function that takes into account how much it can tax the entire country, of course.

Yeah, I'm not sure what the author was trying to say there, because that's not even close to true. The US wasn't getting anywhere near to paying off the national debt in the 1990s.

https://en.wikipedia.org/wiki/National_debt_of_the_United_St...

Debt, especially public debt, went down substantially for the first time in decades in the 1990s. Debt-to-GDP went down about 15%. https://en.wikipedia.org/wiki/File:USDebt.png

Had partisan politics not destroyed the progress, public debt would be almost gone in 20-30 years.

At the dawn of the 2nd Bush administration, the US was projected to pay off its debt within ~10 years. The tax breaks and wars following 9/11 wrecked that projection, obviously.

This chart illustrates the cost of those policies: https://www.washingtonpost.com/blogs/ezra-klein/wp/2012/08/2...

Hmm, maybe my recollection of 10 years to pay off the debt is incorrect.

In any event, I remember the exact moment my dreams of having the debt paid down died: when Greenspan went before Congress to testify on the Bush tax cuts. He gave them the political cover they needed.

Yeah. I don't quite know what the article author meant when he said that either. Perusing these two US Treasury tables, I get a distinctly different impression:

https://www.treasurydirect.gov/govt/reports/pd/histdebt/hist...

I guess it depends on what the meaning of "close" is.

No. In the 90s, there was a brief period where the US managed to not have a deficit (ie, it was taking in as much as it was spending). The US has never eliminated its debt, nor should it; that would essentially mean withdrawing the US dollar from circulation.

How? If they owe you 10 $ and they pay you 10 $ it doesn't seem like the 10 $ got withdrawn. Quite the opposite actually.

> The US has never eliminated its debt, nor should it; that would essentially mean withdrawing the US dollar from circulation.

To the best of my knowledge, the standard debt calculations do not include outstanding currency, though they do include outstanding bonds.

Actually, for a brief period under Andrew Jackson's presidency we did pay off all our debt.

It would mean withdrawing Treasury bonds, not the dollar.

>> The current US debt is over 18.900.000.000.000 Am I getting the author right that the US managed to put on 18 B $ in 20 years?!

Google image search: https://www.google.com/search?q=US+debt&biw=1217&bih=755&sou...

Check this one: http://wolfstreet.com/2014/12/02/us-national-debt-jumps-181-...

So not quite, but at the end of Clinton there was a small surplus. Bush looked at that surplus and said the following:

1) There's a surplus 2) We're not sure why 3) We don't think it will go away 4) Tax brakes and refunds for everyone!

I'm not sure how 3 can be said in light of 2. But we all got a check instead of reducing the debt.

#4 was really "tax breaks for the rich". The check everyone else got was just an early chunk of their normal refund check.

Surpluses are a big problem to the "starve the beast" strategy though. The whole point is to run the government out of money so it is forced to reduce or shut down programs that are otherwise quite popular. That's why we implemented huge handouts to billionaires and not one but two unfunded wars.

> and not one but two unfunded wars.

Afghanistan was certainly a justified war, and Iraq was done under false pretenses and badly executed, but (if done right) it would have been worth the effort.

Fighting oppressive regimes is always worth the price. The only thing that must not happen (yet again) is to fuck up the "what happens after neutralization of regime forces" part.

Implementing a Marshall-like plan for Afghanistan and Iraq would certainly have led both countries to a richer life instead of the clusterfuck that both countries are now. Thousands of soldiers, millions of civilians unneccessary dead, all only because of political fuck ups.

> but (if done right) it would have been worth the effort.

You could say that about literally any failed initiative in history.

One can argue that even with a Marshall-like plan the region was doomed from the start. The country is not homogeneous like a European nation or especially Japan. It is made up of several ethnic groups who all want to dominate/eradicate the others. The British carefully drew the lines in the middle east to make sure the powers there would never be a threat to their empire and would instead be forever embroiled in petty tribal rivalries and incessant power grabs. It also insures that whomever is in power doesn't care about roughly half of the country and will almost certainly be corrupt as hell.

The only power system that seems to work is the hideously authoritarian dictatorships, because they're the only ones who can make people believe that everybody is being oppressed equally and who have the agility to violently and ruthlessly quash uprisings while they are still small and peaceful.

Of course even if the maps were redrawn to match the ethnic boundaries you would still have fairly regular border skirmishes. Due to the gender politics in the region there is always a need to get rid of the excess young males, and fighting otherwise pointless border wars is the time honored way to accomplish that.

> The British carefully drew the lines in the middle east to make sure the powers there would never be a threat to their empire and would instead be forever embroiled in petty tribal rivalries and incessant power grabs. It also insures that whomever is in power doesn't care about roughly half of the country and will almost certainly be corrupt as hell.

And it wasn't just the Middle East where this happened, it's happened all over Africa too, and the big colonial powers - again the Brits, the Portuguese, the Spanish, Dutch and the Germans - all did their part in creating the clusterfuck the entire region is suffering from to this day.

> Fighting oppressive regimes is always worth the price

Yes if there is a long term strategy in place. USA wasted billions on Iraq, it didn't make the middle more stable.

> Implementing a Marshall-like plan for Afghanistan and Iraq would certainly have led both countries to a richer life instead of the clusterfuck that both countries are now.

I don't believe that. The Marshall plan worked in Europe because despite all the nazi stuff, Europeans were somehow reasonable and could draw conclusions from their mistakes. Afghanistan, Iraq and co have a highly tribal culture, with a total different mindset than Europeans. The Talibans are still here, 14 years after and they still view the west as "the great Satan". Do you really think folks like these are reasonable? can they compromise ? I believe they cannot, that's their culture. No matter how much money one give these guys , unless there is a cultural shift, one is not going to achieve anything.

Can you elaborate on what the "starve the beast" strategy is?

Spend recklessly until the government is out of money, then use the crisis as an excuse to cut back on popular services.

https://en.wikipedia.org/wiki/Starve_the_beast

There was only a surplus if you included Social Security funds that are (IMHO) mistakenly considered general revenue.

> ... Social Security funds that are (IMHO) mistakenly considered general revenue.

Why? Social security has always been a tax and a welfare system.

Not really. It's a bit partisan on tone, but the actual debt graph on this article is interesting. Basically there have been three big changes in direction for US national debt since WW2. Sharp upturns on Reagan and George W's watches, and a strong downturn under Clinton's.

http://zfacts.com/p/318.html

At first blush I wonder if the downturn under Clinton's administration is related to reduced defense spending due to all the base closures during that time period.

And change of Congress in 1994.

I think it's a long and complicated story. Some credit Clinton with it, others say Gingrich's did far more. Maybe partly it was luck due to the swings and roundabouts of the economic cycle. To be honest I think politicians can't really control these things, the best they can do is cause as little harm as possible. Even positive policies simply create the conditions for the economy to improve. They don't actually make it improve.

The article is entirely wrong about this, which discredits the author's assumptions about everything else they described entirely. The US was nowhere near paying off its debts. It was just close to not accruing any new debt for about a year or so. We still had trillions in debt and never reduced it.

One theory I'm currently fond of is that the band of growth where unicorns live ($100mil -> $1bil in valuation) used to be accessible to the public markets, but it's recently only become available to private investors.

This creates weird distortions in investment behavior, because it means investments seeking this behavior have to trickle down to VC or acquisition. This could be way this comes about -- by investing in Google or Apple, you're effectively investing in a 10-year VC fund. Sure they're sitting on a lot, but hopefully they make enough acquisitions with it + "raise" enough more during that time that it looks like the cash is going to work.

I think my favorite part of this article is realizing how deep we all are in spin ... "disinflation"? What the hell is that?

Do you mean "deflation"?

But for pity's sake, let's not call a spade a spade and use the word "stagflation" which is what Japan went through, and where the US is heading. The Fed can't give banks money fast enough and consumer spending is stagnating. Sounds like a recipe for stagnating inflation to me.

EDIT: My bad ... disinflation refers specifically to a decrease in inflation. Stupid English beating me again with a word for everything ;)

Theoretically the value of all that cash should be baked into the share price. If shareholders think they can better invest the money, they can sell their shares take their money elsewhere, and only have to pay capital gains tax.

If the companies repatriate the cash, they have to pay tax right now which eats up a substantial percentage. Then they still have to find something to do with the cash. If they pay it out to shareholders there will be an additional dividend tax at the individual level so most shareholders would receive like 50 cents on the dollar for the dollars abroad.

By this logic, every dollar abroad should be worth only 50 cent in the price of a share - after all, that's the real value of that cash after all taxes (contrasted to the accounting value of the dollars on the companies' annual report).

You're right that it's probably discounted somehow by some investors, but it's also worth it's full value if they choose to spend it abroad, so it's not necessarily worth exactly what it would be worth if they repatriated it and paid it out as dividends. The discount depends on what the shareholders think will happen to the money, and I don't think anyone is predicting repatriation any time soon.

Shareholders have to sell the business AND the cash together. That's the concern. If you want to invest in the say 10% ROI business, you have to also invest in the 0% ROI cash hoard at the same time, at a fixed proportion.

Expenditures and investments by these companies have to be justified on the basis of expected returns. The constraints sequestering the money:

- Valuations for acquisitions that exceed expected ROI. - Taxes on repatriated funds. - Dearth of top-end human talent to manage the acquisitions and investments. - Pervasive fear in corporate board rooms that the day of reckoning for quantitative easing and US debt is still ahead. - Changing demographics whereby consumers wealth is held by low spenders (older folks), rather than high spenders (younger folks).

Its a combination of factors.

I doubt that the current political climate would allow for this but I wonder what would happen if the U.S. implemented a basic income program and put in place extensive support for building out more knowledge based clusters across the nation. Places like NYC and the Bay are are doing VERY well overall. (That's also where many of the corporations with large balance sheets are based.)

Specific additional things I'm thinking of include free tuition, low cost small business / creative studio financing.

There's a saying something along the lines of:

"if somebody owes you a million dollars, they've got a problem. if somebody owes you a billion dollars, then you've got a problem."

I could be totally wrong, I'm not an economist -- but I think you encounter problems when you want to earn, let's say, 10% on $80 billion. To give an extreme example:

If you give me $1 and want a 100% return on your money, then hell yes I can double your money in a day and give you back $2. If you give me $1 million then I'm going to have trouble earning you much more than whatever a savings account offers, like 2%, because I don't have a way to put that much money to work.

Money doesn't magically grow, you give capital to somebody who's going to do something with it like pay some workers to produce a widget and sell them, making more money than they spent building widgets. When retail investors put money in a bank or in the stock market and it grows, it seems like it's just an automatic outcome. But somebody on the other end, after the money changes hands hundreds of thousands of times, has to be able to put that money to work.

Where are corporations collectively just going to dump trillions of dollars and expect it to magically grow?

An alternative narrative. This is classical economic group behavior near the top of a bubble. The fed has long goosed its lending programs with cheap money, in an effort to stimulate investment, and to avoid the spectre of spiraling deflation that they were worried would happen after the short deflation of 2009. Capitalists have then, rationally gone out in search of investments to yield a return. However, innovation is a limited resource at any given time, and we're close to tapping out on the amount of possible innovation. Moreover, realizing the full capacity of innovation is limited by the structure of society, wherein identifying entrepreneurs with actual potential is overtaken by identifying artificial 'signals' or 'tropes' of entrepreneurs: lots of false positives, charlatans, people with connections, or people who just got lucky once, are getting money, yields are decreasing.

Accordingly, as capitalists identify that it is becoming difficult to find real investments, their investment behavior decreases, just as the Fed is starting to pay banks to hold cash, to shore up reserves and make banks appear more resilient in the face of their "stress tests". This is artifical disinflation, but the worst type, because normally deflation helps the poor, but by the very mechanism of the current disinflation, it's going to the top. (Austrians: Why is giving money out disinflation? Because in this case it's tied to not lending, and private lending-based monetary expansion has a multiplier effect).

What to expect down the line:

A minor economic crisis as happens occasionally (black swans) will start triggering capitalists to start spending their cash reserves. As this spending hits the market, prices will go up, triggering inflation measures to start accurately reflecting the pent up monetary expansion that the Fed has undergone over the past 8 or so years. As the price of goods goes up, it will no longer make sense to hold onto cash, and moreover, the smart move will be to start investing in goods producers that can take advantage of these increasing prices.

We'll have an inflationary spiral spanning say 2016-2018. Don't worry, it won't be a Wiemar-republic level crisis, but it certainly will not be pleasant for the poorest Americans.

I probably have some details about the macroeconomics wrong, so we shall see whether my prediction comes true. I welcome counter-explanations, and corrections to what I have to say.

I should also say the strengthening dollar, partially due to the fed's disinflationary policy, and also due to external effects (OPEC oil activities, which are still priced in dollars) are making the dollar crazy strong relative to foreign currencies. Is disincentivising corporate spending and investment. This can't last. When the relative strength of the dollar starts to erode, take it as a leading indicator. Herding behavior will do the rest.

2 reasons ...

"Economists ... showed in a 2009 article that the increase in the cash-to-assets ratio of firms was related tightly to precautionary motives."

"[a] second motive is present for multinational firms and is due to repatriation taxes. ... firms may have incentives to keep foreign earnings abroad. As a consequence, in times of limited foreign investment opportunities and high profitability, these funds are likely to be held abroad in the form of cash."

from https://www.stlouisfed.org/Publications/Regional-Economist/J... : Why Are Corporations Holding So Much Cash?

If I were to venture a third reason, it would be that with rising interest rates looming, the cost of borrowing will go up; which might be a subset of the 1st ("precautionary") explanation above.

It seems to me that holding large amounts of cash is only viable when inflation stays low. So a higher level of inflation might cause the release of some of these huge cash reserves in the form of real investment (real in terms of hands doing work instead of moving the cash to some other financial instrument)...

I mean, cash doesn't need to literally be a pile of money right? It could be in some kind of ultra short term instrument that has some kind of inflation protection. Normal people could buy t-bonds to exactly match inflation. Not sure what options are out there when you have 100 billion dollars - but something like interest rate futures could hedge you against inflation risk.

Inflation goes hand in hand with growth, you can't hedge away changes in real value. If cash can be put to productive use, people who hoard it will do less well than those who put it to work.

I've often said that the key to improving investment is to eliminate corporate taxes, tax foreign currency movements (when money moves out of the country), and to put limits on the amount of unutilized/under-utilized assets a corporation can hold onto, and for how long.

Corporations better serve the public good when they are spending, and beyond that spending domestically. By shifting funds out of the country and/or otherwise sitting on assets, there's a reduction in economic potential as a whole and said corporation is less serving of the public good.

Corporations are meant to serve the public good by encouraging investment and limiting liability of investors not involved in decision making. Corporate behavior today doesn't reflect this.

Seems like that's a proposal that's trivial to exploit, I can think of at least a couple of ways off the top of my head: shell companies funds-shuffling, related companies wash buying/selling, etc.

Adding in another market distortion isn't going to help matters, you only create opportunities for people to game the system in an ever increasing effort to explore the law of unintended consequences.

Those funds are held (usually) as US Treasury securities, or are at least hedged against any local currency risk, much the same way that any sovereign maintains a certain amount of foreign currency reserve.

The most direct way to solve this issue is simply to say that profits earned in foreign jurisdictions are free from US tax. That's effectively what the British do and it's worked well for them vis a vis tax policy.

The second most direct way to solve this issue is to offer reduced taxes for profits earned overseas. This encourages an export-driven economy because funds earned overseas are taxed less than funds earned here.

The "problem" that everyone seems to be solving is: how do we enable the government to take the money of these evil corporations?

That's the wrong goal.

The best strategy is to align the goals of the country/people and the corporations. We haven't done that for a long time.

I'm not suggesting taking money from "evil" corporations... only in that money made in a locality should be taxed in that locality... getting rid of corporate 'income' taxes in favor of tariffs/vat and money exports would allow for that, with less opportunity for subverting the system, so to speak... At the end of the year, a tax refund could be given if you're a person, and transferred less than 100k out of the country.

It could be a much simpler system, with less bureaucracy needed. There are other possibilities as well. Right now, many corporations are holding onto funds, which doesn't help any economy, and worse, shifting those funds to holding companies to avoid taxes... What I'm suggesting would punish holding onto assets and encourage activity domestically... foreign goods will always be needed, and as such taxes would apply. VAT systems happen in lots of countries.

What makes you think that taxes aren't already being paid in the foreign jurisdictions?

This is a big part of the disconnect: if you (say, as Apple) sell a phone in Munich, you're paying the VAT tax in that country already.

Generally speaking, when you take the profits from your German sales back to the USA, in many (most, save a few exception) cases, you're going to pay corporate taxes on those profits now that they are repatriated back in the USA. So companies are incentivized to keep those profits in overseas jurisdictions to defer the US tax and reinvest in their overseas operations. Considering how much of their actual sales come from overseas, it's no wonder that they pursue this strategy.

EVEN IF a company wanted to be a "good US corporate citizen" and pay more taxes to the government, they'd be at a financial disadvantage to overseas companies doing business in the USA because THOSE companies DON'T have to pay tax on their overseas profits. That's why you see all of these companies set up in "corporate tax havens" that don't tax a single penny of offshore income. For one thing: it's damn easy to do international business through these companies because you effectively have a neutral ground from the perspective of finance. For another: you save money on taxes, allowing you to offer better terms to your customers and partners.

This kind of stuff only matters to the biggest corporations with multinational operations because the regulatory minefield associated with keeping track of laws and regs in lots of different countries is a nightmare and only a few top accounting firms have the talent to master it. Another reason why the law of unintended consequences shifts the tax burden to the little guy: he's not big enough to care about shifting his income overseas. When you create incentives by way of regulatory/tax arbitrage, you make it worth the while of a big multinational to invest the time and effort structure their deals so they take place in offshore jurisdictions.

This isn't money earned over seas, it's money earned in the U.S. then shifted overseas... Results from a few simple searches. Yes, it does only matter to the largest corporations, and investment firms which account for a huge percentage of wealth that further stretches an imbalance in property/wealth where fewer than 100 people have more than half the world's population combined.

I'm all for being able to make insane amounts of money, but there are limits to what is good for greater society and having underutilized holdings overseas for the simple purpose of tax avoidance isn't good for anyone. The money isn't being invested to earn more, and it isn't being spent to improve the economy. It's wasted in a corporate setting.. it should be re-invested, spent or dispersed to the share holders, who should then pay income taxes (baring a VAT/tariff system in place to replace it)

http://www.nytimes.com/2013/05/21/business/apple-avoided-bil...

http://motherboard.vice.com/read/apple-avoids-60-billion-in-...

http://arstechnica.com/business/2015/10/apple-google-microso...

This is incorrect: "Corporations are meant to serve the public good by encouraging investment and limiting liability of investors not involved in decision making" Corporations are meant to do one thing, make money for the share holders at any cost, by not breaking laws or not being caught breaking laws (or rewrite them). Corporate behavior today reflects this.

The key to improving investment is to prevent corporations from moving their wealth to offshore hideaways. The government must ensure that corporations better serve the public good, because many corporations receive multiple benefits from government: reduced taxes (too many), human resources & infrastructure (to name a few)

The comment you replied to isn't saying that all corporations serve the public good, it is saying that the grant of limited liability only makes sense if corporations in general end up being beneficial. If they aren't beneficial, we should stop granting investors limited liability.

If you want corporations acting in the public good, form Public Benefit Companies[1]. Until then, there is no reason to sacrifice shareholder confidence or profit potential to make the world a better place.

[1]: https://en.wikipedia.org/wiki/Public-benefit_corporation

Currency controls (taxing money movements out of a country) have serious problems. Foreign investment would dry up because they won't want any profits or capital gains taxed on exit. Domestic firms will suffer a severe penalty on trying to invest abroad, giving foreign companies that can a big competitive advantage. Buying foreign stuff would become more expensive, so the cost of foreign made goods would shoot up, also the cost of imported parts and commodities for local industries would rocket, killing domestic industry competitiveness. You'd have to also tax assets and goods moved abroad because otherwise people would buy stuff locally and sell it abroad as a tax dodge. Basically your whole economy would become massively distorted.

The liabilities side of US corporations balance sheet makes the cash holdings far less significant than they appear. When one imagines a "hoard", we don't assume the fire breathing dragon also has bills that match the equivalent of that hoard or beyond.

The expected EU tax payments for companies like Apple take another large bite out of how much of that cash is really their own.

The word "hoard" is correct ("a supply or accumulation that is hidden or carefully guarded for preservation, future use, etc.") but suggesting that this money can just be unleashed upon investors or the general population in the form of capex or wage increases is silly.

I think it's because the Fed's past easy-money policies (QE). The idea of QE is that the Fed puts a ton of cash into the market in order to encourage investment. However investment pushes asset valuations higher. Once asset valuations are high enough, people stop investing because the fundamentals don't support the valuations.

The money injected by the Fed will eventually be absorbed by inflation and the Fed reversing course and raising rates to suck money out of the market. But inflation's been low and the Fed's only done a single, very recent increase in interest rates, so "eventually" hasn't arrived yet.

I think the "big thing" they're waiting for is for the investment market to become less competitive. One way it becomes less competitive is with investors exiting the market (because they have things to spend their cash on, like bonds), another way it becomes less competitive is with more startups to invest in.

So by this analysis, the next couple years will be a great time to own equity/options in a startup -- those balance sheets are just waiting for the right opportunity to make an acquisition.

>The money injected by the Fed will eventually be absorbed by inflation and the Fed reversing course and raising rates to suck money out of the market. But inflation's been low and the Fed's only done a single, very recent increase in interest rates, so "eventually" hasn't arrived yet.

Do you understand the relationship between interest rates and inflation?

My understanding is that if Fed holds IR on bonds low, money exits bonds and goes into the market, causing inflationary effect (more money chasing same amount of goods). If Fed increases IR, money exits the market and goes into bonds, causing deflationary effect (less money chasing same amount of goods).

First, corporations are hoarding trillions collectively, not individually...Google, the example cited is banking 80 billion...others I'm guessing, much less...

Maybe "caution" has risen a notch in the CEO/Board investment repertoire...there aren't nearly as many sure things as there used to be...why is that? The chances of making a mistake have never been greater...

A large part of the uncertainty is likely dictated by the plain and simple fact that we Earthlings have now constructed a "global economy"...countries now share many of the same opportunities and risks, even when they're on opposing sides of the planet from one another...good times and hard times can now seep across borders and continents in ways they never could before...

In any economy wages, production, living standards, etc., eventually even out across the spectrum (global), and arrive at a stasis...

When that stasis is fully realized across the globe what will daily life be like for the average American, the Chinese, those in India, etc...?

My theory is that when the QE rounds started and trillions of dollars were pumped into the economy (major inflationary red flag), the velocity of money dropped like a rock (major deflationary red flag) as a natural reaction.

EDIT: The reason is likely tied to the fact that interest rates sat on the bottom for the last 5-8 years and holding money was just as valuable as investing it. See the article[1] on the St. Louis Fed's website.

1. https://www.stlouisfed.org/On-The-Economy/2014/September/Wha...

The increase in excess reserves is not mysterious. The Fed starting paying 0.25% on them in 2008 (now 0.50%) while other interest rates were near zero.

Eventually some minor crisis will trigger spending, all this excess cash will hit the system like a floodgate, and we will have an inflation spiral (because suddenly hoarding will be a bad idea). And the irony is that the ethical justification for the fed is that it is supposed to be countercyclical, and thus 'good for society'.

https://www.kreditopferhilfe.net/docs/S_and_P__Repeat_After_...

This is the NYT, and, I was hopeful they'd also include information about the state of company hoarding abroad as well as hoarding by foreign companies in their home nations, bjt they dont, so I don't know if this is uniquely American, or maybe its global, regional, etc.

That said I'd like to see a look into an international tax collection agreement among nations,like they have IP rights agreements, human rights agreements, etc. in order to render foreign holdings loopholes useless.

Here's a possible explanation. In the industrial days it made sense for companies to invest in plant and machinery. These days most of the value is intellectual capital and high wage employees. It makes sense to hold a load of cash so you can pay those high wage employees if there's a blip in sales.

(The industrial the mentioned, GM may have $15bn in cash but it also has $73bn in current liabilities so it's not really rolling in vast excesses)

Investing money is work. You have to sink resources into it. If you don't, then you will assuredly lose that money.

A guaranteed return is better than an assured loss.

Holding cash is essentially an investment in the sovereign government that controls that currency. Simply sitting on cash does not imply little or no risk.

It's not risk-less, but it's way less risky than every other alternative.

Possibly only if you are operating in a single market. If you have currency/soverign risk because you are selling in 100 countries, it's way more complex. I bet Apple doesn't consider all the rubles they have from their operations in Russia as less risky than parking it in US treasuries. The problem is getting it there...

> I bet Apple doesn't consider all the rubles they have from their operations in Russia as less risky than parking it in US treasuries.

They certainly have somebody looking at it.

There's more than one component to risk. Sure, holding rubles in a Russian bank is risky, but that risk isn't really of losing your whole pile all at once. So you have time to leave your position if it gets more dangerous.

They are not sitting on the cash. The article worded this very poorly. While all companies hold cash for managing day to day operations, a lot of the 2 trillion or whatever the number is, is parked in CDs, Treasuries, Bonds, etc. i.e., income-generating investments. Financial statements require companies to disclose "Cash and Cash Equivalents"; much of the hoarded money is in the form of investments that can be quickly converted to cash. It would be foolish to simply park non-essential funds in a savings account making 1%/yr.

What if it's just people (exec) thinking that we are going to see a huge contraction in liquidity in the next 10 years? It could be an early warning that the central banks have injected too much money into the economy and the economy, saturated, instead of surrender to hyperinflation has "decided" to put the money under the pillow before is scarce (higher interest rates again).

Investment in hard assets like factories has been in countries with low levels of property rights.

Better to let those countries provide the cash for building via state loans rather than the company investing it's own money. Then if the factory is confiscated or the company is kicked out of the country for whatever reason the loans are defaulted on and the company's money is intact.

The short answer is that everyone can see the current system is not sustainable, and that any change will be potentially catastrophic. Holding cash is going long on fear, and being prepared to deal with a massive crunch when it comes.

The solution is to just force them to bring the money back into the US and invest. And not let the fear foment inaction.

Very much reads like the paradox of saving, where saving for a downturn, actually causes the downturn.

It would be an interesting experiment to pay out a chunk of it as a bonus to their employees. Basically dump it into the economy that way.

> With $80 billion, Google could buy Uber...

No it couldn't, Uber isn't for sale.

It might be interesting to see how the rise in this cash hoarding correlates with the tendency to stop paying dividends to stock owners and instead focus on growth in stock price.

The hyperbole in the comments here is impressive.

What the CEO and upper management of these corporations say about this? Surely, they were asked about this by shareholders?

>Surely, they were asked about this by shareholders?

Except it's the hot, new Silicon Valley thing to structure your company as to not give your shareholders any power or voting rights.

But the worst offender they list is General Motors.

Many corporations seem to rather spend their money on share buybacks than on capex lately.

I suspect it's a taxation thing.

Better to give back the money as capital gains than as dividends.

What else are you going to do with it? Invest in your employees? Ha.

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