Profits are too high. America needs a giant dose of competition | Hacker News Reader

Profits are too high. America needs a giant dose of competition

economist.com

655 pointsbainsfather333 comments

...and those profits are not being reinvested in new projects, new ventures, and new markets.

Instead, large corporations have been accumulating historically high amounts of cash, which is just sitting on their balance sheets, idle.[1]

It's definitely not due to lack of greed. Corporations in the US are very much driven by profit motives: whenever they identify an opportunity to make a profit from customers, they take advantage of it.

Therefore, it must be that they aren't identifying enough attractive opportunities in which to invest that growing mountain of cash.

Meanwhile, the US middle class appears to be struggling with stagnant wages and limited opportunity.[2]

We have engine trouble, and no agreement on how to fix it.

[1] https://www.stlouisfed.org/Publications/Regional-Economist/J...

[2] https://www.washingtonpost.com/local/happy-days-no-more-midd...

We have engine trouble partially because the US consumer has historically been the oil of the global economy.

Now big business is ahead of its consumers (too many now under employed or unemployed), hence less opportunities to invest those cash mountains.

As Andy Grove said, we need to optimize for jobs too. Else we simply don't have balance in the overall ecosystem, as we are now seeing.

Too much cash? Pay people more! Really that simple. Money has a momentum, a speed by which it flows through an economy. Eventually those mountains of capital will disappear because there is no one left to buy what is being sold.

Those are profits, if you are able to operate your company to the degree that one is able to accumulate the cash, then there is no reason to increase liabilities to accomplish a task.

If you want to spread the wealth around, then you need the government to perform this task.

It is in no companies fiscal interest to pay their employees more. They want you to work for as little as you agree to while producing as much return for the company as possible.

The real solution is to just do a UBI. If this is not an obvious call sign of how the efficiencies of recent decades are obsoleting human labor in general I don't know what is. Redistribute that money so consumers have spending power again.

> It is in no companies fiscal interest to pay their employees more.

I'm actually not sure this is true. From a short term perspective, perhaps. But longer term it is more beneficial for everyone if there is more money to be spent.

You said you're differentiating between long and short term, but I think you're actually talking about the difference between "one company's interest" and "all companies' interests". It is possibly in all companies' interest to all pay their employees more as it would stimulate demand for their products. But any given individual company's own workers are such a vanishingly small fraction of its own customer base that it could hardly ever be argued that it would be best for that particular company to pay its own workers more for the purposes of stimulating demand.

Your workers will be more invested if they can comfortably afford the product, though. Obviously this depends on the market.

Oh, no doubt that can be a reason. The literature around the "efficiency wage" is well developed [1], my comment was only disputing that there were a reason to pay above market clearing wages for reasons of stimulating demand.

[1](https://en.wikipedia.org/wiki/Efficiency_wage)

Your workers will be more invested if they can comfortably afford the product, though.

Most of the companies I've worked for I would never buy their product: either because I didn't need it, or because I knew its true quality, or both.

I wonder if this is different for companies like Walmart / Costco / Meijer where they carry the majority of goods you need day to day. What if they started paying their employees higher wages, meanwhile giving them discounts at the store to encourage them to spend there? Maybe the lowered profit margins could be made up by the increased spending at their store. Not to mention it would also be a good PR move

Obviously, you would have to avoid the "Company Store" problem.

I think it could be a terrible PR move. If you effectively pay your employees less and justify by giving them discounts. A program that begins with good intentions could end badly. Especially if the program is conceived in an era of high profits. In low profits, management makes different decisions. Also, you often get new management.

I'm a bit confused, where does the effectively paying less come from? I suggested they increase their pay while also giving them a discount at the store to give them an incentive to spend their new income at the store.

I communicated poorly. Paying your employees more and giving them a discount is harmless. Lots of employees receive a discount.

I meant you run into problems when you end up effectively paying them less and justifying via a larger discount.

Management could end up doing this gradually as times get tough. For example, a company announces lay offs and pay cuts, but softens the blow with a larger discount.

I guess I'm recommending caution. I would avoid making a discount a major part of employee compensation. A worker deciding to apply for jobs at Walmart and Costco could end up weighing a better health plan against a higher discount on basic goods. That seems problematic to me.

Thanks for clarifying, this makes a lot of sense.

Employee discounts can't be very high or else employees will set up side businesses buying up cheap products and then reselling them on eBay or whatever (arbitrage). This directly hurts the employer's profits. With an employee discount of 10% or so it's usually not worth the hassle. But when discounts go over ~20% it gives employees an incentive to act unethically. Employers can partially counteract that by limiting purchase quantities but it becomes a huge hassle to enforce.

It is in no companies fiscal interest to pay their employees more.

In the short-run, yes. In the long run, perhaps not. From retention to training to quality issues, it can make sense to pay more.

Universal basic income is a bandaid on the fact that the short-term, market-driven focus of capitalism under-values people and seems to be creating a winner take all game that will eventually end the game itself, if balance isn't restored.

I'm not opposed to UBI – it may well be the best option at this point, but I'd also like to figure out how to incentivize the system to look at long-term consequences as well. (Though, I recognize I'm far from the first down this line of thought).

> From retention to training to quality issues, it can make sense to pay more.

Depends on how consolidated the industry has been, and whether the firms that are left can collude or silently set norms to put ceilings on pay and quality.

Capitalism isn't inherently short-term oriented. This has more to do with the incentives in & the regulatory framework of the system (consider requirements for quarterly reporting & the whole expectations game that has risen from that requirement.)

Capitalism isn't inherently short-term oriented.

No, but people do tend to be. We seem to be wired to value near-term gains much more strongly than long-term gains -- http://www.behavioraleconomics.com/mini-encyclopedia-of-be/t...

This then drives us to create the systems that focus on near-term rewards – like the quarterly reporting and equities that can be traded at a moment's notice, etc. etc.

I see a lot of parallels with the political system.

If you let the masses take charge, you're going to a get a more wild, dynamic, unpredictable outcome. In the stock market this new "democracy" manifests as extremely short hold times, in the political arena, as fringe candidates that party elites would never have let win the primaries, had they been in charge.

I, for one, hold stocks for a long time, and hope companies do optimize for the long term, but I realize I may be in the minority.

Companies tend to not think in the long term - they are encouraged by investors, lenders and the market to think in very short planning horizons.

A recent experience when trying to get a personal mortgage as a company director underscored this:

"Your profits are down! Your business must be failing!!"

"No, we opted to re-invest some of the substantial amount of cash we're sitting on, and therefore took a hit to profitability this year so as to be more profitable in the future."

"So your business is failing?"

Consider this at a grand scale and you understand the incentives within which corporations operate. Everything is about the quarterly earnings report.

Worse. Its about management bonuses. "Should we compensate floor mechanics better in our factory? How would that affect my bonus this quarter? It would be smaller? Then hell no." That's all it takes to explain myopic businesses. And so much of our manufacturing sector are motivated in just this way.

Self-interest is not necessarily myopia. The problem in your example is that payroll somehow affects a manager's bonus which is asinine (not saying it's not common).

Profit includes everything, affects everything. And that's the common (universal?) stockholder-value metric.

This isn't as crazy as it sounds.

Look at a typical main street business: retailer, car dealership, restaurant, etc. There is no "R&D". Profits scale linearly with revenue; it's not so crazy to jump from "profit is down" to "business is failing".

In fact, the very definition of a "high-technology company" is one that reinvests a large amount of revenue into development. The exact threshold varies, but 20-30% and most people agree you're into "high tech" land. For comparison, consumer product goods companies like P&G spend some 10% of their revenue on marketing/advertising. http://adage.com/article/special-report-pg-at-175/procter-ga...

The real issue is that "Business" doesn't yet understand the economics of software companies. They have no tangible assets, their cash cycles are vastly different from most other companies, and they grow in discontinuous, sharp, nonlinear ways. You'll see this bias all over the economy if you look.

"Silicon Valley companies are overhyped, THEY HAVE NO PROFITS"

"That company is failing, it's going under"

Amazon is the grand counterexample, look at how much of a head-scratcher that company is to Wall Street to get an idea of how puzzling this is to Joe Business Guy.

> They want you to work for as little as you agree to

This implies retention. It also implies a certain level of quality or the agreement fails. So your long run argument falls flat.

Yes, you can pay more to get more quality. This is not at odds with wanting you to work for as little as you will agree to.

If you want more long term business thinking you want more private companies. Once you go public, personal ambition goes out the window - all that matters is the share price and quarterly growth forecasts, because then the people that own and run the company are no longer passionate innovators, but the investors, who are only looking to make money.

We talk about how the tech industry has a problem with employer / employee loyalty where you should expect to work for a half dozen companies by 35, but even moreso investors have zero loyalty whatsoever, and will jump at the first sign of declining growth.

So entrepreneurship is only half the battle - we also need to incentivize more Dells that either revert from public to private or just get more new business startups that aren't looking to just cash out and sink the business.

> It is in no companies fiscal interest to pay their employees more.

Henry Ford realized just how wrong this is almost a hundred years ago. He realized that if you don't pay your workers enough they you won't have demand, and growth is driven by demand. It's a feedback loop. This is why having so much wealth concentrated at the top is so bad, it stifles growth. You end up with a stagnant middle ages type economy.

Based on the documentaries I've watched, the real reason Henry Ford lifted wages to $5 was to solve retention issues. Working at the car factory was a pretty bad job, and employees were constantly leaving. Before the wage hike, he hired 52000 people in a year to maintain a staff of 14000.

More or less the same reasoning: if you spend more on employees they can cost you less in the long run, just as spending more on shoes means they will last you far longer than junk that wears away.

One hope of mine, an actual capitalist solution to this problem of capitalism, is that companies start investing in their service employees more as an asset, not as a disposable automaton (eg, using higher quality service as a differentiation, which I think is even possible in the low margin / low price areas of business).

Already in service industries, it seems like current companies that focus on employees more have higher reputations overall, and often have higher growth despite higher expenses on employees. Costco and Trader Joe's vs. Wal-Mart is the frequently cited example of this sort of case scenario, but there are plenty of others.

Unfortunately, I'm not sure that a large portion of the investor class is really great for evaluating long-term value, and too focused on the quarter end. (Quite a number of the better service oriented companies are not public owned.)

For the same reason, I'll be honest, while UBI is another way around increasing automation, I just can't see the same short-term oriented investor class fully getting behind this concept, at this time.

The last time we had a similar scenario (the Gilded Age), it took a lot of unrest for things to get better for the manufacturing worker class. Unfortunately I wonder if a similar future will happen for the service worker class if something doesn't change...

> One hope of mine, an actual capitalist solution to this problem of capitalism, is that companies start investing in their service employees more as an asset, not as a disposable automaton (eg, using higher quality service as a differentiation, which I think is even possible in the low margin / low price areas of business).

A sentiment I agree with, but if the recent Yelp call center fiasco is any evidence, I don't find it terribly likely.

I think competing on service quality is only possible where either consumers will accept a price differential or you can manage to avoid any kind of price differential.

If I'm at a self-service gas station using the self-service pump and paying at the self-service machine, I really don't care if there's good service from the person behind the counter inside. I certainly wouldn't want to pay more for better service from a person I don't ever interact with.

>The last time we had a similar scenario (the Gilded Age), it took a lot of unrest for things to get better for the manufacturing worker class. Unfortunately I wonder if a similar future will happen for the service worker class if something doesn't change...

Let's say it: it took the Russian Revolution to get the Western owning classes sufficiently scared that they decided to buy wholesale into Bismarckism and social-democracy.

What's their incentive?

Indeed, but unfortunately everything has been set up to provide a strong motive to hoard rather than spend cash.

The thing is, when you hoard wealth as numbers on a balance sheet rather than spending it, you are actually destroying that wealth. Money which is not in motion is not money.

I find it absolutely insane that we take the excess, the bounty, the benefit of the efforts of centuries of technological and industrial progress, and rather than enjoying those benefits, convert them into numbers in a ledger that one can look at and go "uh huh", which provide no benefit to man nor beast.

It's the biggest scam ever pulled, and we all willingly engage in it. Marx pointed it out as "the accumulation and destruction of crystallised labour-time by the owners of the means of production" (I paraphrase) in Kapital - and absolutely bingo has changed since then.

UBI is in my mind the way to go - tax the ever living hell out of cash reserves, which would promote re-investment and the use of cash - and use the proceeds from that tax to pay a UBI.

> Money which is not in motion is not money.

Absolutely the most important thing that can be said. My response to moralizing and angst over how the economically disadvantaged spend welfare money, or judgment about "lazy" people who wouldn't continue to work in the face of basic income is "who gives a fuck? As long as they spend the money, its moving and the economy moves with it."

Money has gravity. It will always move towards those concentrations of wealth that exist at the top and away from the bottom. Without a mechanism of some kind to remove it from the top and inject it into the bottom, it will never move in any way that provides benefit to the larger economy, and might as well be a closed system.

A bit of a tangent here, but:

> "who gives a fuck? As long as they spend the money, its moving and the economy moves with it."

What they spend it on matters. The economy and thus society is shaped by consumer demand. Not just how much people want(and can afford), but what people want (and can afford).

This is true, and may be a market failure, but the basic problem is independant of that problem :

Companies largely don't see opportunities for improvement of the economy anymore.

The hoarding of cash is a symptom of this, not a cause. This is also a problem that can't be fixed by financial rearrangement, however creative. And we should keep in mind that improving things by meddling with financials is really hard, destroying entire economies with that same meddling is very, very easy.

We should do more basic research. That might help. Might.

When it comes to the problem you identified, I think the cause is QE and cheap loans. How do these profits work ? Well, easy : every bit of revenue coming in becomes profit and you use loans to finance everything. In some cases, they literally use loans to buy raw materials instead of revenue. In sadly more than a few cases, loans are being used directly to be paid out as profits, either directly or through share buybacks.

This seems to me a stupid deal for shareholders : you're trading equivalent value for a senior position in the liquidity chain. But it has that "money now" ring to it, of course.

This is not sustainable, and will blow wide open once interest rates rise again. And they will rise as sure as the sun will come up. Either because some central bank causes inflation, or because they simply stop pushing down interest rates.

It's worth pointing out that the hoarding of cash is caused in very large part by the tax code. If a corporation has cash they don't need then the natural thing is to give it to their investors and let them figure out what to do with it, but the tax code causes that to be a "realization event" that requires tax to be immediately paid. So hoarding cash (and collecting interest on the whole of it) is more profitable than transferring it to someone else who will only be able to collect interest on the after-tax portion of it.

>We should do more basic research. That might help. Might.

Also infrastructure. Seriously. In much of the world outside of Europe and Japan, most people simply don't have access to very good infrastructure for basic needs like transportation, food, water, and health. Sure, it's a public good, but it's money being left on the table by the global economy since capitalism systematically under-invests in public goods.

Good point. Even in the west infrastructure could be improved massively with easy and immediate economic benefits. I regularly see the infrastructure in France and the UK, and frankly, both countries certainly could use an upgrade of their roads, harbours and trains.

I have a hard time with any rhetoric that requires me to accept a radical redefinition. Pray tell me, how is something that did not go away destroyed?

Money now is more valuable than money in the future. The difference between the two, when the money is sitting still in some vault, is destroyed value.

As an extreme case, suppose 1 person has all the money in the world and won't spend any of it and everybody else has nothing. What use is that money?

But it did go away - "away" meaning stuck where it will not be spent. We could theoretically get it back if it moves again, but if things keep going the way they are now, that money will never move.

"Destroyed" may be the wrong term, but the purpose of money is to facilitate transactions.

One dollar that changes hands ten times in a year has contributed more to the economy, and created more effective wealth, than ten dollars that spend the whole year lying in a safe.

Facilitated the creation of wealth is more accurate than created wealth.

> The thing is, when you hoard wealth as numbers on a balance sheet rather than spending it, you are actually destroying that wealth. Money which is not in motion is not money.

Completely wrong.

It is insane to see this kind of basic communist rhetoric on Hackernews.

If I hide a billion dollar under my mattress for decades, it means that there's that much less dollars chasing goods and services. The effect will be as if those dollars had been destroyed : the total wealth will remain constant, but the value of all the other dollars remaining in the circulation will increase.

Let me repeat : the wealth remains constant, it is not destroyed. Cars in driveways are not going to explode. Crops will not spontaneously catch in fire. People will not forget the skills they have.

> The effect will be as if those dollars had been destroyed : the total wealth will remain constant, but the value of all the other dollars remaining in the circulation will increase.

Which causes deflation. Specifically in this case wage deflation. And then because people have less money, they can't use their cars and crops and skills because people don't have as much money to pay for gas or food or the services of others.

>Specifically in this case wage deflation.

How?

How is this specifically wage deflation?

That's a hell of a quantum leap.

If anything, wages are much more resistant to downward pressure than goods. (People really don't like getting a paycut.) So even if the value of dollars increase, most people keep the same wage. In extreme cases, in can even end up in layoff, because people are now paid too much in comparison of everything else in the market.

I would take deflation over inflation any day. Inflation eats away anything you try to keep for a rainy day, while at the same time reducing the value of your paycheck. This means that you must constantly negotiate (or beg, depending on your position) for a raise or you fall behind.

> How is this specifically wage deflation?

You're asking how hoarding cash instead of paying higher wages causes wage deflation?

> If anything, wages are much more resistant to downward pressure than goods.

Wage deflation relative to CPI. Wages remain stagnant or increase less than prices.

We would have overall deflation if The Fed wasn't printing money to offset the corporate hoarding. Which is almost certainly better than overall deflation but is still quite bad for people who are paying more for things but not getting paid more.

> I would take deflation over inflation any day.

Deflation was a primary cause of the Great Depression. Deflation is very bad.

> Inflation eats away anything you try to keep for a rainy day, while at the same time reducing the value of your paycheck.

Inflation doesn't eat the value of stuff. If you own a home or stocks then inflation causes their value to increase proportionally.

The problem is when there is price inflation without wage inflation. Which is caused by corporations hoarding cash instead of paying higher wages.

> You're asking how hoarding cash instead of paying higher wages causes wage deflation?

No, I'm asking how deflation in general causes wage deflation. Your post was in answer to deflation caused by hiding/destroying cash.

> Wage deflation relative to CPI. Wages remain stagnant or increase less than prices.

So it's not related to the increase of value in the currency caused by hiding away 1 billion under a mattress. You used the same term but for different context/meaning. The weird thing is how you phrased it as if it was a causal relationship.

> Deflation was a primary cause of the Great Depression. Deflation is very bad.

There's many factors for the US Great Depression (such as previous inflation). There's also the relative speed at which those things occur. Both can be destabilizing in high enough magnitude. But deflation is the natural result of a growing economy and better efficiency. If it was bad, civilisations would have self-destructed every time they came up with a better way to do things. Imagine a new technique that would reduce food prices by 50%. Would this be a good, or a bad thing?

> inflation doesn't eat the value of stuff. If you own a home or stocks then inflation causes their value to increase proportionally.

Sure, I never said to the contrary. What's your point? People should stop saving money and buy everything around them instead? There's a huge cost to that, especially in real estate.

> No, I'm asking how deflation in general causes wage deflation. Your post was in answer to deflation caused by hiding/destroying cash.

Deflation most affects the party who would otherwise have first received the money that was removed from the economy.

> But deflation is the natural result of a growing economy and better efficiency. If it was bad, civilisations would have self-destructed every time they came up with a better way to do things. Imagine a new technique that would reduce food prices by 50%. Would this be a good, or a bad thing?

Costs are different than prices. Reducing the cost of producing food is good. Reducing prices is generally bad -- it's better to increase the price of everything else by creating new money and leave the price of food constant. Because reducing prices creates an incentive to hoard currency, which is very bad for the economy. It makes currency an investment that competes with actually productive investments and reduces the speed of money which reduces economic activity.

> People should stop saving money and buy everything around them instead?

That's already what people do. Who literally hoards cash?

It's pretty difficult to say there is actual price inflation these days. Most central banks target 2% and don't make that.

>> Inflation eats away anything you try to keep for a rainy day, while at the same time reducing the value of your paycheck.

> Inflation doesn't eat the value of stuff. If you own a home or stocks then inflation causes their value to increase proportionally.

The paper-value of one's home does not matter. Everybody needs a place to live - the next liquidity event will be after they die. You're advocating the fallacy behind the continual housing bubble (and all these renovations people do for personal comfort but lie to themselves about it being financially beneficial, but I digress).

Stocks are one of the least-worst places to park savings. Which forms a bubble of dumb money "investing" in things it knows nothing about, but simply following the herd to safety (and then following it out).

Savings are what gives individuals power and autonomy. Debt creates an obligation which must be continually serviced. If one is reliant on their income, they lose the power to walk away from their job. The only bit of flexibility they have is to play different masters off one another, but given what's at stake the employers certainly know this game and compete as little as possible.

Analyze your own position. Calculate out how many months per year you have to work for previously-rare survival goods of food/clothes/electricity, versus how many simply go to paying (a bank) rent on housing/etc. Then look into how much it would actually cost to build a dwelling, versus how much of that cost is solely due to being financialized. Running from the bogeyman of deflation, we've basically recreated indentured servitude for the modern day! It's no wonder the middle class is fading - when your personal autonomy is the difference between two large numbers, the only answers are go big or go home.

Housing prices aren't what they are because of inflation. They are what they are because of restrictions on creating more housing units. If there was more housing on the market then the price would go down and people would spend less of their money on housing. Urban housing prices have increased faster than overall inflation simply because we're not building enough of it.

Where does the demand-side elasticity come from? Unless the decades-in-the-making housing bubble actually pops, housing will always be a sellers' market. If the monthly cost of housing actually started tending towards the amortized cost of construction, the builders would immediately stop just as they did during the last mini-crisis. This idea that the "value" of housing should be continually skyrocketing is baked in our national religion!

It's the monetary policy that creates ever-more rope for people to hang themselves with. The debt<->collateral relationship is circular - every cut to interest rates / down payments directly increases the capital value by the corresponding amount. This has destroyed the idea of ownership, making it impossible to permanently get ahead of the treadmill.

(IMHO this economic weather is directly tied to the centralizing trend of communications technology growing the asymmetry of power that is ever-better at siphoning surplus away from individuals. Giving individuals the power to repudiate a mortgage while avoiding eviction would also correct prices)

> Where does the demand-side elasticity come from?

If you make more money available then housing prices go up to consume essentially all of it. But that's how markets with highly inelastic supply behave. Yet we can build arbitrarily many housing units. So why haven't we built more? Urban housing prices have been high for many years. Plenty of time for the market to react. Something must be preventing it.

> If the monthly cost of housing actually started tending towards the amortized cost of construction, the builders would immediately stop just as they did during the last mini-crisis.

Of course they stop when it becomes unprofitable. What would you expect them to do?

The problem is this: Increasing the supply of housing can cause housing prices to fall very quickly. From a social perspective that's what we want, but from a construction company perspective the last thing they want is to pay a lot for land that loses its value while they're holding it.

The way to mitigate that risk is to buy less land and build more housing on it. But if zoning regulations don't allow that then they build nothing. Hence the problem.

And in a world with deflation, putting money under the mattress is actually a good investment strategy.

The resulting deflationary spiral is self-reinforcing. Fear of this state is why central banks try to create a consistent level of inflation.

And yet the bona fide purpose of economic competition is to always be lowering prices through optimization, the technology sector being the strongest (most meta) example of this. If the deflation doom sayers were as prescient as they purport, we'd all still be using 386s waiting for Intel to announce they've created the fastest chip they will ever be able to.

In fact, the system is bistable. Inflation has the same self-reinforcing spiral, and we're living it! The moneyprinters' metric (CPI) has become the goal unto itself - anything technological keeps getting ever-cheaper, so anything that can be financialized (the quickest feedback path where printed money returns to the CPI) shoots through the roof.

I have no idea where you're getting your opinion about "deflation doom sayers" from.

But you're right that the system has some bistability. A deflationary spiral with declining production and lifestyle can sustain itself for a long time. It is also sustainable to maintain a moderate inflationary spiral with ever increasing production and improving lifestyle.

Given that choice, isn't it obvious why bankers try to keep the latter option going?

But it is not actually bistable. Keeping moderate inflation going requires continual intervention. It is easy to fall off the rails into a hyper-inflationary disaster. It is easy to fall off the rails the other way into a deflationary disaster. And continued success creates the moral hazard of overconfidence in the stability of the system. This overconfidence leads to risky behavior which in the end WILL result in disaster.

We came close to that in 2008.

It is unclear to me whether it is better to have regular smaller disasters, or occasional large ones. But pushing off the next disaster is always better in the short run.

The classic story about the deflation bogeyman is that if prices will be lower tomorrow, people won't buy things today. This is demonstrably false with regards to technology purchases, and obviously false with regards to necessities like food. People may delay purchases, but this is a good thing if say you're concerned about resource depletion or general efficiency.

I'd say we're in the making of a hyper-inflationary disaster, as central banks continue to apply their top-down prescription of "productivity", forcing people to work full time make-work jobs (eg FIRE) rather than letting the majority slowly build up savings and create economic conditions that naturally lead to working less (as one would expect from uh, technological progress). The message just won't be received until the petrodollar has completely disintegrated though.

The deflationary spiral only starts to set in when the increase in wealth due to deflation competes with the potential increase in wealth from trying to use capital productively.

So it isn't necessarily a problem if you can wait a year and then buy a better computer with the same money. But it IS a problem if your best investment strategy for that year would have been to put the money under the mattress instead of loaning it out, investing in stocks, or some other activity that keeps money circulating.

As for a hyper-inflationary disaster, the exact monetary injection you use to stave off deflation can also create inflation. This is why central banks have such a challenge on their hands. They are trying to balance the economy between nasty extremes, while trying to satisfy contradictory goals.

Can you contact me? I have some questions about your assertions I'd like to take offline, particularly about your "petrodollar" comment below.

You seem to misunderstand money.

Hoarding causes general deflation; to capital, as well as wages. Its effect is the same as distributing the value of the hoarded money across the money supply.

Deflation causes people to feel as if they have more money, not less. Money that is more valuable (deflated), purchases more value.

And while deflation has knock-on effects that are problematic, I'll add that the government backing any fiat currency has ample tools to combat it (creating inflation by printing currency).

> Hoarding causes general deflation; to capital, as well as wages.

Eventually causes general deflation. The whole problem with deflation is that it isn't evenly distributed. If the price of everything whatsoever increased or decreased by the same percentage at the same time then there would be no trouble.

The problem is the period of time between when people start being paid less and when things start to cost less. Or between when things start to cost more and when people start to be paid more. And during that period of time, companies hoard yet more cash which perpetuates the cycle.

That is only true if you are not simultaneously creating new money to replace the money that has been effectively been withdrawn from the system - which is precisely what the fed, the Bank of England, etc., do when they churn out new currency.

If there were a constant and fixed supply of money, what you say would be true - but there is not, and therefore what you say is false.

Cars in driveways will not explode, crops will not catch on fire, but the incremental benefit from increased efficiency will never be realised in any tangible fashion.

Also, nice stoop to the ad-hominem - I'm no communist. Are you a primitive randroid?

No, you are trying to move the goalpost.

You try to move away from "hiding money destroy wealth" and establish the ground to go to something like "printing money steals value". It is absolutely NOT the same thing.

I explained your logic was erroneous. Hiding money away does not destroy wealth.

By the way, printing money doesn't destroy wealth either, it transfers it. You can argue that it's evil all you want (and I would agree), but that's NOT the same thing as saying that destroying money destroys wealth.

> Completely wrong. It is insane to see this kind of basic communist rhetoric on Hackernews.

Please re-read the HN guidelines, which ask you not to call names in comments.

https://news.ycombinator.com/newsguidelines.html

No names were called. An adjective was applied to the rhetorical content. ;-)

Pejorative adjectives are a form of calling names. There are no grammatical loopholes here.

s/communist/capitalist/

Capitalist economies must continually grow to be healthy. Savings which is not invested does not create growth.

A healthy growth is a stable, slow rate. If growth is too fast, an economy should stop investing to slow things down. If growth is too slow, an economy should invest more. Unfortunately, neither of those are natural actions. People like to invest more during fast growth and invest less during slow growth. Thus boom-and-bust.

Not to mention that it's really, really not being stored under a mattress. Even Tim Cook's mattress isn't big enough to store that much cash. As mentioned elsewhere on the thread[0], it's being reinvested.

[0] https://news.ycombinator.com/item?id=11382429

> when you hoard wealth as numbers on a balance sheet rather than spending it, you are actually destroying that wealth

They aren't hiding it in their mattress, they're investing it.

Invested dollars absolutely do circulate through the economy.

That isn't necessarily true. If they "invest" by buying stocks of other large companies, the money goes to the previous investors in those companies. Those investors may then use the money to buy stocks in other large companies and so on. There is no requirement that the money ever gets back into the real economy.

Nonsense. This conjures to mind a giant wheelbarrow of paper dollars being pushed around between various buildings on wall street.

The money we're talking about is held in banks as deposits. Big purchases means one account number is debited and another is credited, but the money remains in banks. Those bank deposits are used for lending. Money still participates in the economy.

> Those bank deposits are used for lending.

Those bank deposits can be used for lending. That doesn't mean they are. And banks can currently borrow from The Fed at practically no interest, so the effect you're describing currently doesn't exist.

It's also entirely independent of the original money. The money would also be deposited in a bank and used for lending if it was paid to employees as wages.

Fed discount window loans are rarely used in practice, generally have a term of 12 hours except in rare circumstances and are fully collateralized. The idea that banks use the discount window routinely to get free government money is malarkey.

> The thing is, when you hoard wealth as numbers on a balance sheet rather than spending it, you are actually destroying that wealth. Money which is not in motion is not money.

People who withold their stash of money from the market cause deflation, meaning they just increased the value of money in other people's pockets (what others can buy for the same amount of cash).

So there's no loss for other people in the economy. The only loser is the company doing the witholding and its employees.

Other people had already benefited from the iPhone they bought or whatever.

Absolute amount of money in the economy doesn't matter much.

They only cause deflation if you don't have a central reserve bank churning out currency to replace that which has been withdrawn. If this did cause deflation, you would be seeing deflation in the markets right now - but you are not, you are seeing inflation due to Q.E..

Surely it still causes the same amount of deflation whether currency is printed or not? It's just in your case there is also inflation which offsets the deflation: meaning there is slightly less inflation than there would have been without any hoarding?

"When one person pushes on this wall it is stationary; so if two pushed it would move"

The action of the Fed is not constant; it is a reaction to the level of inflation/deflation. When the Fed is succeeding in meeting their target, any variation in inflationary/deflationary forces is cancelled.

Of course, Fed interventions are not perfect at accomplishing that goal; they don't always have the force to meet their targets, and all interventions have side effects. But to treat the Fed's actions as independent of economic conditions seems to mischaracterise its function entirely.

> The thing is, when you hoard wealth as numbers on a balance sheet rather than spending it, you are actually destroying that wealth. Money which is not in motion is not money.

This money is not simply sitting under a mattress. It's being reinvested, often in low risk treasury bonds, lowering the cost of borrowing for the government. A small fraction of it might be allocated to equity, and a smaller fraction of that might be allocated to startups, etc.

Setting aside the UBI goal, even if they weren't returning the money to the investment cycle, your funding scheme is difficult to implement. The importance of cash reserves varies from company to company:

1. Some have pretty much no reserves, and when the overnight market collapsed in 2008, their ability to make payroll was suddenly in question. Otherwise productive companies had operations jeopardized by their financial arrangement. A tax on cash reserves would create additional incentive to produce more risky companies.

2. Banks have huge liabilites and cash reserves in the form of deposits. They're even required to keep certain amounts of money in liquid cash reserves. Do you propose offsetting cash on hand with liabilities owed?

3. Apple actually took out a huge loan against overseas money to fund a dividend. Overseas money is currently not taxable, do you wish to change that? Do you even need to tax reserves if you do?

4. Using the same company for another example: Apple is reputed to finance their supplier's manufacturing facilities. Do you want non-Apple companies to make investments in their company, their supply chain, etc. they currently aren't making? One has to assume boards don't approve capital investments aren't profitable. If the choices are pay a taxable dividend, hold as highly taxable cash, or invest it at a slightly negative, we may see more unproductive investments.

Note that I'm not against UBI, but we have to think about how changes to tax law results in changes in behavior.

These are all good points. It should also be pointed out that the Fed is now paying interest on excess reserves, and has been since 2008. This is basically free money to banks who retain extra reserves on their balance sheets. This was put in place to incentivize excess reserves to hopefully counteract the losses on mortgage backed securities until the housing market and wage inflation could catch up with all the money that was printed with mortgages and derivative securities between 2001 and 2007. Unfortunately everyone was caught somewhat unaware, because while it seemed like inflation was low, it actually was too high. At lot of it went into the oil markets as well. What the Fed is doing now is simulating low inflation by having a sort of reverse black hole of interest on excess reserves. They are going to track that up as they raise interest rates and that will give them a new tool to control the money supply. Lower that rate, and the banks will have to invest it elsewhere, stimulating investment. All of this is only necessary because Congress won't increase government spending, which has been the traditional way we've gotten out of these things.. We needed more like a 10T stimulus to really fix stuff..

Tl;Dr the Fed doesn't know what the f--- its doing, and empirically there's no sign things are going to get better.

What makes you think they would have been able to manage an even bigger stimulus any more effectively

That's not a good tl;dr. The Fed only controls monetary policy and does not affect fiscal policy, which is Congress' responsibility. The Fed is doing a seemingly good job with the only tools available to them.

If you define "good job" as the rich getting richer and the poor getting poorer, then fine.

> This money is not simply sitting under a mattress. It's being reinvested, often in low risk treasury bonds, lowering the cost of borrowing for the government. A small fraction of it might be allocated to equity, and a smaller fraction of that might be allocated to startups, etc.

Reinvesting cash in low return investments is not what a company should be about (unless it's an insurance company). It's basic company finance that if you can't reinvest into the company to increase earnings at a greater rate than a bond, then you should get rid of the cash (pay dividends). I'm not talking about apple here, just pointing out that reinvesting into low risk treasuries isn't much different to putting it under a mattress.

>This money is not simply sitting under a mattress. It's being reinvested, often in low risk treasury bonds, lowering the cost of borrowing for the government.

Quite true. But if the government then takes the cheap bond-prices, turns around, and implements fiscal austerity (because it ostensibly has too hard a time paying back those low-risk, low-interest bonds!), well then we've got a very funny situation. Then we've got the situation that people are being taxed so that the government can pay for-profit firms to hold their money while producing fewer public services and goods than before.

Or, in very short, we've then got a situation in which the public is being forced to pay tribute to large financial firms.

Wouldn't the forced reinvestment of cash back into the economy drive up inflation?

Also, aren't the Corp's hoarding cash because interest rates are artificially low?

Is the 'cash' really paper money or something like hard currency (gold coins, etc...). In that case 'hoarding the hard currency is not really destroying it, and when the investment options include tying up the money for some time with only a small return on investment, maybe hoarding is the best answer.

Corporations are hoarding cash because last time they did so the government caved and gave them a "tax holiday". They're doing it again because they believe the government is unwilling to take any actions to get at the money, and will eventually give them another "tax holiday".

This "Tax all the things!" mentality is what got us into the current situation.

If a company is going to incur an enormous tax liability by earning the money under one taxing authority, it will make sense for them to push that revenue to a subsidiary incorporated under a different taxing authority. One with a lower burden.

If, for example, the effective tax rate in the US is about 40% and the effective tax rate in Elbonia is 25%, for a sufficiently large corporation, it makes financial sense to incorporate a subsidiary in Elbonia to handle European and Asian business transactions. If the disparity is large enough, it not only makes sense to do so, it starts to border on insanity not to do it.

As other have pointed out, these reserves aren't mountains of cash sitting in vaults. It's money that's being lent for interest and invested elsewhere.

> Money which is not in motion is not money.

You're re-defining money in order to make your statement true. That doesn't make your statement true, it merely makes your definition wrong.

Money is (at least) two things: It is a facilitator of transactions, and it is also a store of value. You're saying that, if any particular chunk of money is (for a time) no longer being used for the first purpose, it ceases to be money. But it's perfectly serving the second function. You have to completely ignore that in order to reach your conclusion.

I suspect that your presuppositions are preventing you from looking at this objectively.

>tax the ever living hell out of cash reserves

The wealthy will simply move money amongst themselves, cronyism will run rampant. By disoncentivising savings, in favor of investment, you'll absolutely destroy upward mobility and moreover push middle and lower income folks into directly or indirectly paying for the investment capital of the wealthy (or politically connected) class, socializing the risk and privatizing the gains.

Even if you make the taxable reserves progressively scaled, the inflation brought about by your ubi scheme will creep brackets higher than legislators can respond. Any attempt to automate bracket movement with measured cpi rates will suffer from cpi fudging

Your proposal is a recipe for social stratification and class warfare hell. It's effectively what we are doing now, except taken to 11.

Exactly right.

The right public policy decision is probably to drive interest rates more negative.

As a saver with cash in the bank that's not in my personal best interest, but it's probably the right macroeconomic strategy.

"The thing is, when you hoard wealth as numbers on a balance sheet rather than spending it, you are actually destroying that wealth."

Money != Wealth, for one.

If you hold money on a balance sheet, you are not destroying anything. In fact, you are reducing inflation since inflation is more money chasing less goods.

> you are reducing inflation

Except that FED will counter that effect because they are keeping stable inflation. People who don't save like you do will still be in exactly the same situation as they were before you decided to save.

If all of the rich people one time decided to spend their money on something that touches real economy (not just stock gambling) it would drive up inflation, possibly too fast for FED to counter it.

"FED will counter that effect"

Of course not. Since the original statement was about holding gobs of money on a balance sheet, it is clear that regardless of what the FED does, you would increase inflation by spending that money rather than keeping it on the balance sheet. Therefore, holding that money reduces inflation(since the other option was to spend that money and increase inflation).

This is a tragedy of the commons. It's in almost everybody's best interest to pay people more. But any individual company has a strong incentive to keep labor costs as low as possible, as long as all of their competitors are doing the same.

if you pay people more it could show up in inflation numbers and the Federal Reserve might have to stop printing so much money.

> Too much cash? Pay people more!

Companies have no incentive to do that. Paying your employees more doesn't directly lead to more profit.

If a firm has market power (which airlines certainly do, in no small part because of the massive regulatory and financial barriers to entry) there's no economic reason for them to pay people more money just because they have extra cash.

In some cases (Google, Facebook), they are paying more, but since the number of employees is relatively small, it makes little difference in the amount of cash they accumulate.

This might be true for many large corporations, but hard to study, since aggregate salaries are not public for any one company.

It's a public goods game. It's in everyone's best interest to pay all employees more, but it's in no one's best interest unless everyone else does it too.

Capitalism provides an answer, but it's not to pay people more. Wages are determined by the labor market, and employers should pay market prices.

Rather, capitalism's answer is for companies to return the cash to their shareholders. This can be done either through stock buybacks or dividends.

I'm not enough of an expert to speculate on what happens next. Maybe this would just shuffle the hording problem around. But this would be a very simple first step that works entirely within the parameters of our current system.

That would require repatriating that cash, with tax consequences. An incredible amount of wealth has moved from the US economy to tax haven bank accounts for tax reasons, and the IRS doesn't want to set a precedent where you would be allowed to bring it back tax-free.

About giving it back to shareholders instead? They are the ones to which that money is entitled too.

Sounds great, but you're asking a group of separate entities to make microeconomic decisions in order to have macroeconomic impact. And unfortunately, it must doesn't work that way.

Same way that it's better for the local economy if I were to go out to eat every night. But it's definitely not better for ME, which is why I don't do that.

You need a better solution or incentive than "macroeconomic hope".

If corporations are confident they would pay out unused cash as dividends. That they are hoarding is a sign that they have no confidence in their own future..

>Technology firm Apple was holding $181.1 billion offshore, more than any other U.S. company, and would owe an estimated $59.2 billion in U.S. taxes if it tried to bring the money back to the United States from its three overseas tax havens, the study said.

Source: http://www.reuters.com/article/us-usa-tax-offshore-idUSKCN0S...

Or that they can't think of anything with high enough potential returns that makes it worthwhile investing that cash into their own businesses.

or the future of the market they are in, nothing specific about them

There is research [1] that points out that cash hoarding is in a sense an opportunity: with cash you can get better M&A deals, be better prepared to jump in on new technology, etc. Other investments compete with this opportunity.

[1] http://www.nytimes.com/2016/01/24/magazine/why-are-corporati...

Though the obvious question is "for how long?" This explanation only makes sense if that cash eventually gets spent (not necessarily all spent down to $0, but companies can't keep having rising ratios of cash to value forever).

this is not directly related to the OP article though, which was about profit rather than cash reserves

Is it truly idle? Imagine I have $20MM dollars. I put it in the bank. The bank is at liberty to create more money via loans because it has this deposit.

Money isn't physical, it's not in a vault, in the main.

Isn't the main problem that the economy is structured to reward rentiers which is stifling wealth creation and diverting energies into pointless activity like gaming financial markets, speculating on real-estate etc.

Rent extraction has become so efficient it is able to immediately swallow any productivity gains. We are becoming more productive and seeing rents rise.

Exhibit A: Silicon Valley and hub.

> Therefore, it must be that they aren't identifying enough attractive opportunities in which to invest that growing mountain of cash.

There is a different possibility: anybody who has piles of cash on hand at the bottom of a recession will make a killing...with short term gains regularly exceeding 100%. Anybody who doesn't have cash on hand gets bought up at a huge discount by those that do. American companies that are stockpiling cash may see ample investment opportunities, but they could possibly be overshadowed by economic stability risks.

There are no attractive opportunities because large swaths of the population simply have no money to spend. With student loans, stagnant wages, and rising costs for housing and healthcare, there's little money left of for a lot of people to buy something new.

Increase wages and markets will be created. There may be some lag as people dig themselves out from under debt, but the longer we wait, the harder it's going to be.

The savings rate is continuing to increase, so people have money to spend and are choosing not to [1].

http://www.bea.gov/newsreleases/national/pi/pinewsrelease.ht...

No mention of medians. So it could as well be just one guy saving a lot of money.

Is this true across all economic levels or is this an average so it could be the rich and upper-middle class saving more.

Seems across the board.

https://www.washingtonpost.com/news/get-there/wp/2016/03/29/...

> Increase wages and markets will be created.

You might even say that a rising tide floats all boats. More money in the pockets of worker/consumers, more money spent on current and future products.

At least in the technology industry many investments are astronomically expensive. See the acquisitions of Instagram, Whatsapp, et al. Having huge amounts of cash allows companies to suddenly expand into new fields (robotics, self driving cars, etc) without having to borrow anew from banks or investors.

So Instagram and Whatapp are investing robotics and self driving cars? Even Google is divesting the robotics division possibly because there are no short term returns. The investors are focused on investments with low initial capital, high short-term returns. Many are not even concerned with productizing the technology but only packaging it up to sell to a deep pocket suitor company where it will whither and die (ie Yahoo.)

So there are a lot of critical infrastructure technologies not invested in. Take cellphone batteries for example. Imagine the market share you could get if you could double the life of current batteries? Instead the big investments are in a hundred different social, photo sharing and instant messaging apps.

They didn't divest their robotics division: they sold off one team due to a lack of cultural and technological fit - with the other groups in their robotics division.

Should be one of the laws of "economic thermodynamics" Money that isn't moving doesn't exist.

What amazes me is that shareholders let it happen. That money on the balance sheet belongs to them, either the company should invest it or give it back to the shareholders via dividends.

Actually, dividends and stock buybacks are at an all time high:

http://blogs.wsj.com/moneybeat/2015/05/07/stock-buybacks-hit...

http://www.reuters.com/investigates/special-report/usa-buyba...

Interesting, thanks!

What happens to the cash that is sitting on their balance sheets? They don't keep it under a mattress. It get stored in banks, and forms the fractional reserve for new loans. Who are those loans given to? Smaller businesses, mortgages on houses, etc.

At least, that would be true if the banks would lend. And if the companies would keep the money in local banks and not overseas. Our tax code encourages offshoring the money!!

Actually, a lot of it is known as "cash equivalents", which are generally liquid assets (but not actual cash for the most part) like T-Bills or other forms of securities (though, money market accounts are also used, which do go to banks).

And what happens to those cash equivalents? They really don't generate any movement of money but just store value?

The average middle class family has saved less than $1000. Perhaps they should start their own pile of cash to sit on. I'm not saying the middle has tons of "extra" money, but every tax "refund", every deposit on a new car, every up front amount for a new iPhone instead of waiting a year, etc - those are missed opportunities.

Corporations supposedly are playing the long game. Americans should ask themselves, in my own little Smith Inc., how can I be a bit more Apple and a bit less GM?

> The average middle class family has saved less than $1000.

What's the source for that number? Taken at face value, it sounds unbelievable.

It sounds believable to me; I'm surprised it's positive. The non-rich live on credit in America.

Really? Based on some quick googling it looks like "middle class" usually encompasses household incomes from about $35k-100k. You think that many people essentially contribute nothing to their 401k, HSA, etc?

Many work at jobs without those benefits, or take out loans against their retirement accounts. Also, I'm not sure if most calculations offset those amounts with debt.

That was based on a survey with the question "How much money do you have saved in your savings account?". I doubt most of the people who answered it included their 401k or HSA.

http://www.gobankingrates.com/savings-account/62-percent-ame...

70% of Americans are also net-debtors.

Actually, I misspoke, it's the average American.

http://www.marketwatch.com/story/most-americans-have-less-th...

However, at 62%, that likely includes a large amount of middle class.

The Economist also did a very interesting article about 6 months ago on the trend of cash piles being used for things like share buybacks and so on, with some additional theoretical background in the Economics Focus column explaining why it could lead to inefficient misallocation of capital. Worth a look if you are interested in pure econ, sorry I can't recall exactly when that came out.

Is there research on ways to tax balance sheets?

The biggest issue I see is, less governmental spending on R&D. Historically, private industry has waited and relied on government R&D to create new technologies ready for commercial application. (aka Internet)

It's understandable private R&D spending will be low. The government has done the hard work of figuring out hard problems.

What is going to happen if we continue to spend so little on R&D? Companies waiting around for "attractive opportunities" may never come.

I wonder what the trickle down people have to say about this. I thought the more money the job creators have the more they will invest.

It is sad (to me) that your comment has kicked off such spirited reply discussion, and it's all of limited value in evaluating the point made by the Economist article.

It's just not true that cash on a balance sheet is idle. Corporate cash sits in bank accounts, and banks use balances to leverage their business. It feeds the banking system, and gets redeployed as debt rather than as equity.

And if there are economic opportunities waiting for equity, that just means it's cheaper to invest in which should attract more investment capital, even if it doesn't come from corporate balance sheets or banks: there are plenty of rich people and rich institutions looking for places to invest their cash (see below). You simply can't draw conclusions as you have done the way you are doing it.

But the Economist is making a good case for what they are saying. So let me try to translate it into terms that the average HNer can understand: what you all call "unicorns" (what you all strive to create) represent successful business models that are actually terrifically bad for competition, and therefore terrifically bad for the economy. We should not be rooting for them to succeed.

Bill Gates did not create the personal computer revolution, he didn't really foster it, he simply monopolized it, and inasmuch as he did, it was bad for the economy. Compare what happened in software to what happened in hardware: actual competition has wrung all the profits out of "IBM compatibles": that was a good thing for consumers and the economy.

That mantle has now passed to Apple (after Apple basically failed during the period of Microsoft hegemony). Again super premium prices supported by proprietary means. Do consumers benefit from Apple's closed ecosystem? No, not from the closed part. We benefit from Apple's positive feature contributions, but that doesn't mean we should be willingly allowing Apple to capture so much of the consumer surplus (the "good stuff" about a product, measured in dollars) using what are known to be anti-competitive tactics. Why should Apple own "network effects" of standards for music or software distribution?

[trigger warning, sexual assault metaphor] Now before all the Apple fanboys and libertarians join forces and start submitting replies to me about how morally right it is that Apple be allowed to economically rape consumers, consider simpler cases.

The Uber business is simple to grok. So is Ebay's, so is Paypal's, so is Facebook's, so is Twitter's. These businesses are based on what we used to call "protocols", stop worshipping the founders as if they did something more amazing than right place/right time. SMS is a protocol. So is HTTP. When companies don't "own" them in the sense of owning the customer, customers benefit. When companies are allowed to "own" them in the sense of owning customers, customers do not benefit anyhwere near as much as we all can.

Think back to caveman times: the first guy to invent the bow and arrow did something really cool. And he benefited from it, tremendously, by catching a lot more deer and eating better. Wasn't that enough? would it have been better if nobody could copy him without paying him a tribute?

Apple's profits from the app store, Amazon's ownership of one-click shopping (whether due to the patent or not) should be compared to Twitter's ownership of short message broadcasts: tweeting will no doubt be ruined as something fun/useful if Twitter successfully figures out a way to monetize, and Twitter itself will be ruined if they don't. But that dichotomy is a false one based on the idea that Twitter should own short message broadcast: it's a simple useful protocol, the value in it is the value people put into their tweets, not that somebody thought of it. Thank god nobody owned HTTP, so could you all stop rooting for somebody owning short message broadcast? Fuck unicorns, they suck. Sure, Twitter thought of it first. So what? It wasn't much to think of. Same with Paypal. Sure they put in a lot of work, after thinking of a fairly basic idea. Did they make something great? Do you use Paypal routinely to exchange small amounts of money? No, you don't, because Paypal sucks and has always sucked because the goal of Paypal was to monopolize a business rather than create a useful payment system.

Thinking is something humans do, and we could just as easily say that if you don't want people copying your idea, keep it to yourself. If you don't want me humming Happy Birthday, don't teach it to me. But plenty of humans will think of neat things and teach it to others because that's what we do. billg was just the greedy one of the two, compared to the creativity of paula, just as Jobs was the greedy one of the two compared to the openness and creativity of Woz.

The notion that patent monopolies (to use one example of monopoly) encourage investment is true; however, it's completely unproven no matter how widely it is believed, that they encourage "the right" amount of investment, or even a desirable amount of investment. I'll tell you this: everybody I know who is a smart PhD post-doc researcher gets paid peanuts to try to figure out how to cure cancer, so how come we've set up a system where Wall Street douchebags get rich from pharmaceuticals without even coming up with a cure?

I'm not an "anti capitalist" left wing kook, I'm actually completely opposed to left wing nonsense. In addition to being an engineer, I'm an MBA. I love capitalism, but I love the type that the Economist is proposing, the capitalism of competition. My dry cleaner works his ass off and makes only accounting profit, not economic (unfair) profit, because my dry cleaner competes. Brin and Page as starving students would have been happy to make $10 million from inventing Google, or $100 million, so why should we reward them with scads of billions?

So, am I advocating stupid European regulation, or worse, redistribution? No, not at all. The answer is simple, and I didn't invent it, it's well known. If Google was broken up into 10 little Googles, Page and Brin could own just as much of all of them as they own of the one, nothing would be taken away from them. However, the little Googles would compete with each other, and their profits would be driven down to ordinary, normal, economically stimulative levels, and not stultifying, smothering, economically oppressive levels that stop the next generation of Page and Brin's from being able to compete with their own ideas.

Same with social networking, Zuckerberg would have been happy with getting modestly rich owning one of a number of competitors, we don't have to have a system that makes him the uberlord of one worldwide, only-game-in-town social network, and consumers would benefit from having a marketplace of facebooks, just like consumers benefited from a marketplace of bows and arrows.

I'm sick of unicorns, I'm sick of libertarians, and BTW, I myself am rich (well inside the 1%), well educated (economics and finance!) and smart, my money came from a slice of a monopoly, but I don't pretend that what happened in my case was either my doing or good for the economy. I'm not giving my money away, I like being rich, I'm just saying to the rest of you, stop rooting for unicorns, don't do this to yourselves. Don't advocate for a bigger slice of the economic pie for yourself, that's dumb: just advocate for competition; everybody benefits from lower prices.

I disagree with your point of view (which sounds to me like Adam Smith-style classical liberalism) but it would take too long to explain why. The nutshell is that you're still advocating capitalist means for socialist ends -- e.g. that the government should encourage competition as a social good, that new innovations are a limited resource unfairly seized by entrepreneurs, etc.

I think that yours is a reasonable point of view but I do still think it's in error and that it would lead to massive rights violations in practice. E.g. how would the Google subdivisions be forced to compete if Page and Brin still owned a controlling stake of each?

Have a read of this if you want an alternative point of view (yes, I'm a randroid). http://itech.fgcu.edu/faculty/bhobbs/Capitalism-The%20Unknow...

Thank you for having actually read and understood the article. It's been a pleasure seeing the Economist cover monopoly, rentiering, and the necessity of anti-trust action, and it's also been fun seeing you translate it all into HN-speak.

"An intense burst of consolidation will boost their profits more. Since 2008 American firms have engaged in one of the largest rounds of mergers in their country’s history, worth $10 trillion. Unlike earlier acquisitions aimed at building global empires, these mergers were largely aimed at consolidating in America, allowing the merged companies to increase their market shares and cut their costs."

I suspect being "Too big to fail" is another major reason for these mergers. Eric Dash actually let out a warning in the NY Times in 2008: http://www.nytimes.com/2008/11/01/business/01bank.html

"As the government makes taxpayer funds available to banks weakened by the financial crisis, the criteria being used to choose who gets money appears to be setting the stage for consolidation in the industry by favoring those most likely to survive."

Mega companies can make huge profits because they feel more confident taking huge risks. If we succeed - we profit. If we fail - we're too big to fail. This is commonly refered to as a Moral Hazard: https://en.wikipedia.org/wiki/Moral_hazard

Accordingly, the US is currently in qualitatively worse shape risk-wise because there are fewer banks with larger portfolios, and regulators are part of the chorus of revolving characters in the banking-government complex... making another structural or "mistake" (flash crash) failure more likely because of institutional resistance to more objectively deploy necessary measures (enforcement) to regulate economic behavior. Check out Robert Reich on Thom Hartmann for more. Elizabeth Warren and Peter Schiff probably have a thing or two to say as well.

"By the way, it cost us more — the S&L crisis cost the taxpayers more than the TARP did in 2008. So, I don’t know why he would cite that. In fact, the failure of a very large number of smaller institutions turned out to be much more expensive to the taxpayers. In fact, as far as the bailout of 2008 was concerned, we made money on that in the money that was extended to financial institutions.

And, by the way, it wasn’t just to big ones then. It was to small ones as well. The only institutions that weren’t able to pay us back were the auto companies. And I don’t think — I thought it was a good idea to pay them.

As to size, the question is not just to the size, but what would happen if they couldn’t pay their debts. And that’s what people ignore. We did two things in the legislation to deal with that. First of all, we made it much, much less likely that they would get so indebted that they couldn’t pay them back.

It’s not their overall size. It’s the indebtedness that’s the threat. You could not now have an AIG, which got itself $170 billion beyond what it could pay off in derivatives, because we do not allow institutions under the law now to get so indebted without the capital to back it up.

Secondly and most importantly, what we said is this: If a large institution can’t pay its debts, it fails. It is not too big to fail. It is put out of business, by law. No federal official can advance any money to pay its debts under the law until it is dissolved.

What then happens is this: It may be that we would have to borrow from the taxpayers to pay some of the debts, not all, as the previous law required, but if we have to pay some of the debts to prevent the failure of a large institution from having serious economic consequences, the treasury secretary is mandated by law to recover every penny from large — other large financial institutions.

And, again, it’s not the size of the institution, but the size of the unpaid indebtedness. Well, we have dealt with that by reducing the indebtedness and requiring that the institution will be dissolved if it fails."

Barney Frank on PBS NewsHour.

I've been investing for 30 years. My experience is, whenever a couple megacorps announce a merger, SELL!

The deals always look good on paper, but the reality of trying to merge two gigantic organizations is just an unrelenting, slow motion disaster.

The last time I got gulled into believing the hype was the AOL-TimeWarner merger.

It's also often a way for a new CEO to "prove" to the board that he/she is doing good work to propel the company forward.

The key is that they're going through the motions of "doing big things" rather than truly pursuing the best interests of the company.

Not limited to megacorps either. Plenty of smaller companies engage in this behavior.

CEO pay doesn't correlate with effectiveness but it correlates very strongly with company size.

There are two kinds of mergers: those between roughly orthogonal businesses that want to exploit some vague "synergies" between them (as in the AOL-TimeWarner case); and those between companies that were previously competitors, as in the constantly-growing brewery megacorp of Annheiser Busch. The latter is both much safer for investors, and much worse for customers, than the former; this type of merger has the direct goal of decreasing margin pressure by decreasing competition.

But the second type can also fail quite miserably. Daimler-Chrysler, Kmart-Sears, Sprint-Nextel...

Sure. But if it works, it's amazing for the shareholders. Just look at Anheuser-Busch Inbev (and their history of merging/consolidating) and their soon to be merger with SABMiller.

And if you don't have the appetite to risk the merged company, the reduction in competition will spill over into other firms. So if you see a marketplace consolidating and you think the reason is to decrease competition, then buy one of the remaining independent firms.

In my opinion, that's a third type of merger: When two ailing companies merge to try to save each other. Best avoided as well.

John Malone gave some interesting comments about synergies: https://youtu.be/v5QfCLeloEg?t=2038

Yes, mergers routinely destroy value http://www.overcomingbias.com/2010/03/hard-facts-mergers.htm...

And just because mergers often destroy value for investors it doesn't mean they don't destroy value for consuemrs and society. They often do both. They allow subverting of the markets and cost customers and society AND management messes up that excess profit oportunity so badly investors loss too.

I know of leaders at a company who shall remain unnamed that literally came right out and said (in private obviously) their last two mergers were to grow large enough to be too big to fail. So you're not at all off base.

>The profit bit of the picture, though, has changed a lot. Last year America’s airlines made $24 billion—more than Alphabet, the parent company of Google.

Wow, that's profound. An industry with 600k employees made more than Google last year! Next you'll be telling me the banking industry makes more than Microsoft!

Airlines need to make big profits in good years - they lose money like crazy in bad years. I don't know if it's still true, but at one time if you subtracted all the money US airlines lost from the money they made since the beginning of the industry you'd have a negative number.

To the larger point, this is what happens when you pile on a bunch of regulations and then allow industry to capture the regulators. The barriers to entry are raised so high it's impossible to have real competition.

>The barriers to entry are raised so high it's impossible to have real competition.

once again the government is responsible for it.

don't worry though, im sure somebody will call for the government to 'reform' the industry and make all the problems go away.

It's certainly not entirely the governments fault. Airlines need to be strongly regulated with good reason and pretending that they don't lobby and campaign to increase regulation that acts as a barrier to entry is myopic at best.

Why did you assume the OC meant the regulators was bad rather than their capture?

any regulator is bound to be captured because the special interest has more concentrated power compared to consumers.

Thus regulation always does the opposite of what it is supposed to do in the long run. This is a common theme with interference with the free market.

I'm not sure it has to be that way, though the more complex the regulations are the easier it is to influence regulators.

Under that government regulation, the industry has produced the safest mode of transportation ever seen, healthy competition, and extremely low prices. If that's an example of what government regulation produces, I say bring it on!

>I don't know if it's still true, but at one time if you subtracted all the money US airlines lost from the money they made since the beginning of the industry you'd have a negative number.

Out of curiosity, what does the landscape look like if you excluded carriers that went outright bankrupt?

Also, how are dividends considered?

Why would you exclude them? Survivorship bias is something that needs to be eliminated, not baked in.

I think it's worth seeing how the breakdown turns out between the survivors and failures. Are the losses concentrated in a small number of major train wrecks or dispersed evenly? etc.

That makes sense, I would be interested to seeing that too.

For the purposes of assessing the industry's profitability though, we cannot exclude them - if losses are because they were badly run and lost market share to other players, then their losses will be offset by the survivals (who then buy them out).

But what I'm interested in is to measure the general health of the living. Counting in the dead (from the entire history) makes no sense.

If you are interested in the general health of the current companies over the last few years, that would make sense.

But it does not properly assess the profitability of the industry - unless you think you can pick in advance who the survivors are going to be.

If you systematically ignore the companies that go bankrupt, you will have a picture of the industry that is far healthier than the reality.

Further - especially in the airlines industry - you can't even go back too many years with the examination of the current companies - because they are the results of many mergers. So you should also be including the companies that used to be, but got merged in the existing ones.

>Airlines need to make big profits in good years - they lose money like crazy in bad years. I don't know if it's still true, but at one time if you subtracted all the money US airlines lost from the money they made since the beginning of the industry you'd have a negative number.

Famously, Richard Branson once said:

If you want to be a Millionaire, start with a billion dollars and launch a new airline.

However, Branson (Virgin) has three of them. https://www.virgin.com/gateways/virginairlines

Virigin tend to take small ownership stakes in companies and just lease their name and branding out to them. In the case of Airlines they own 25% of Virgin America, 51% of Virgin Atlantic and 10% of Virgin Australia.

25% is the maximum "aliens" can own or vote in an airline flying domestically in the US, so while it might be a small stake, it's also the largest possible stake.

In which years did American Airlines last lose $24billion (or its equivalent accounting for inflation). Or do they have long streaks of smaller losses?

There is a small miscommunication here. It's America's airlines (the entire industry) not American Airlines (the company).

This article from November last year has more details: http://priceonomics.com/can-airlines-make-money/

> Overall, the industry has lost $35 billion since deregulation.

So in the last year alone, they made back 2/3rd of what they lost in the last 30 years?

Nominal dollars gets tough to think about. You should probably normalize to 2015 dollars and recalculate.

To the larger point, this is what happens when you pile on a bunch of regulations and then allow industry to capture the regulators.

Not using up one of my economist.com free articles per month, but I think this is what happens when an industry has the cost of their biggest variable expensive crash: http://www.macrotrends.net/1369/crude-oil-price-history-char...

Note that they'll tend to hedge their purchases, which protects them for a while from fuel cost increases while also delaying the benefit of decreases.

I think it is a myth that all companies want is light regulation and the evil guvmint comes in an cover them in red tape. A lot of the regulations have been lobbied for by companies to keep out competition. Just look at the recent Tesla cases.

You can go hundreds of years back and companies and businesses were already then busy at pushing through special privileges to keep their profits high.

It isn't a matter of whether you regulate or not, but about the quality of regulation and who it is aimed at regulating. When politics can be bought by power business interests you can bet there will be ever more regulations piled on which don't actually help consumers much.

> You can go hundreds of years back and companies and businesses were already then busy at pushing through special privileges to keep their profits high.

Guilds are probably the prime example. Government-enforced cartels established by the industries to keep up prices for centuries.

I don't disagree here, but I am concerned you may be overstating your point.

Regulation is rarely a case of being good or bad. Rather, various competing interests have valid points and some arbitration must be found between them. As the old saying goes (paraphrased), politics is about slogans. Governance is about choices.

Political systems exist for political purposes. So what happens over time in a democracy is that regulations that sound good get enacted while regulations that don't sound good are not. In addition, regulations are enacted that sound good even in cases that may not require any regulation at all.

To fix this, politicians use cartoonish slogans -- "all government is bad" or "we need somebody to protect us from corporations"

This response, while great for the political system, does nothing to address the underlying bug in the regulatory system.

>Regulation is rarely a case of being good or bad. Rather, various competing interests have valid points and some arbitration must be found between them.

A lot of the time it's just plain bad -- just the result of monetary influence and lobbying for unfair advantages.

It's good that this thread is pointing to quality rather than quantity of regulation -- but remember that "we" (i.e. voters and chattering internet posters) have no control over the making of regulation.

What we have some control over, is the process that makes regulation. And a process that makes it easy and convenient, will be easy and convenient for the insiders who work it.

Yes, agreed. Just trying to clear the field of all the straw men. I believe if folks can grasp why it doesn't work like that, they've got a better chance of working out how it might work. Otherwise we're still in slogan territory.

Yup, companies want regulation that isn't onerous for them. There's a big problem today in how the public talks about regulation, generally it's a very unsophisticated talk about the amount of regulation. This is like talking about programming in the form of SLOC, it's practically useless. The problem with regulation is making it effective, efficient (in terms of costs incurred by the government and by those being regulated), and not onerous. Unfortunately, in many cases we've missed the mark on all three of those. The result is that regulation sometimes actively drives out competition (because it's streamlined for the megacorps) while not being nearly effective enough to protect those it's intended to protect (consumers, workers, etc.)

The recent Tesla cases are examples of small companies trying to prevent their larger suppliers from making them obsolete.

A lot of anti-competitive law in the US is not "big vs small". Many of the biggies are small vs small or even small vs big - occupational licensing, exclusionary zoning, agricultural laws, lots of state level regulations designed to protect (not very large) incumbents.

Sadly protectionism is a widespread plague that doesn't fit any easy narratives.

Those not very large groups have very substantial lobbying efforts.

I don't dispute that. And they aren't necessarily small groups in aggregate - e.g., auto dealers are a large collection of small businesses.

I.e. that's a large number of small political donors in your state (highly motivated to donate to your opponents) vs one big corp in another state, plus of course rationally ignorant consumer/voters.

How about "old vs. new"? That fits Tesla (who are trying to disrupt old auto maker markets). That fits other scenarios that I've seen like, say, large media companies trying to use streaming Internet royalty rates to drive small streaming stations out of business... or (here in Florida) large brewery distributors attempting to prevent direct brewery sales from microbreweries.

It is a disease, and it won't go away until everyone stops playing the game of trying to legislate competitive advantage. Some of the worst complainers about protectionism unfortunately are the biggest players. Example: I remember when Gibson complained about their factories being raided, reportedly for using illegal timber (an environmental regulation that some also view as protectionism courtesy of the Pacific Northwest timber industry). It got a lot of press, but my initial reaction was one of schadenfreude. Because Gibson was notorious for playing their own "protectionism" game courtesy of a lot of dubious patent / copyright lawsuits on various competitors (eg Paul Reed Smith, Warmoth, Elderly), virtual rock band games (Guitar Hero and Rock Band), Paper Jamz guitars, and probably others I can't recall at the time.

I think the Tea Party story has nothing to do with companies wanting light regulation. The story is that "evil guvmint" enables the big boys in the private sector to seal up their industry with red tape. It matters little whether the government folks or company bosses gain more from the deal.

And that story is about making it harder to regulate. If regulations are technocratic decisions made according to vague or ever-changing rules, then lots of cosy deals are going to be done.

After working in the banking industry writing regulatory software, I realize that these regulations, while sometimes needed, can often be a way to keep other rivals out. There is no way a smaller bank can handle some of these without teams of hundreds.

Same in medical. It's too hard for startups to bring something to market so the big guys just wait to buy them up. And they like it that way.

>I think it is a myth that all companies want is light regulation and the evil guvmint comes in an cover them in red tape.

Oh, I agree. My point is once you set up a powerful regulatory apparatus the companies involved are going to capture it, or at least try to.

You need regulations, and you need regulators. But too much regulation is bad for consumers, because once it reaches a certain complexity only the insiders understand what's going on.

Is there lack of competition in the airline industry? It seems like the opposite. For any given trip I have half a dozen fungible choices and can instantly price compare and choose the cheapest one. That's a highly competitive market, not an uncompetitive one.

Also, even a 24 billion profit in a good year isn't exceptional given the industry has $160 billion in revenue. Google in 2015 made 23 billion in profit on only 75 billion in revenue.

Is that really true? Sure there are plenty of airlines, but I find they don't all compete head to head. For a given region or set of source/destinations, it seems to me you get only around 3-4 carriers which actually fly.

I've been looking at fares from DC to Rome and DC to Edinburgh. In both cases, there were MANY options... United, Aer Lingus, Turkish Airlines, Lufthansa, WOW, Iceland Air, Delta/KLM.

I also had to book return tickets from DC to Denver. Fewer choices domestically, but still Southwest, United, and Frontier.

It really depends on the route. Personally, I live in Chicago, which means I have lots of options going to midsized and large airports, and prices can be very competitive.⁰ Small airports are often served only by one of the three airlines with a large presence here (United, American, Southwest), and it's these routes that have higher prices. In the past, I've taken 13 hour (overnight) Megabus trips instead of <2 hour plane trips just because United's prices on some small monopoly route or another were so outrageous. For those who live in a town or city with few options like that, airline travel is a lot more expensive than it is for us lucky ones in hub cities, takes a lot longer because of transfers, and is a lot less flexible with flight times and such. This is a factor behind a lot of corporate HQ relocations to big cities, as well.

⁰ I actually recently bought a roundtrip to Denver for $32 fully inclusive of taxes and fees. Granted, it's on Spirit, which is only marginally better than the bus, but can't beat the price.

I would argue that there is _effectively_ lack of competition in the airline industry, (at least in the US):

- there are ~ 6 major airlines for a country of 320 million people. In Europe, there are many more (all the national carriers, plus lots of low-cost airlines)

- where are the low-cost carriers (like EasyJet or RyanAir)? JetBlue or SouthWest are not really low cost, they just have marginally better service than the old guard.

- customers are treated like dirt. Not just the ever-smaller seats and lack of any free food on domestic flights. It is even worse than that - they can change the agreed-on contract at any time, example: I paid extra $$ for a non-stop ticket LAX-BOS in June. A few days ago, I received an email form the airline apologizing for changing my ticket to a non-direct flight (which will take 3-4 hours longer), but there is no mention of any refund whatsoever.

Airline competition is local. When I lived in Denver I had tons of choice and prices were low. Now that I live in a smaller city, I have fewer choices and prices are higher. Jet Blue finally came recently and caused prices to drop across the board. But, if they leave I'm sure prices will go back up.

The Economist has an article about this subject, too:

"But a new paper by Jose Azar, Martin Schmalz and Isabel Tecu argues that trustbusters now need to look in a new direction: at concentrated ownership. If, for instance, a mutual fund owns shares in two rival companies in the same industry, it would not be in their best interest as shareholders to encourage them to act in a competitive way. The boss of Delta Airlines might propose a price war to boost his business. But would a mutual-fund manager who also owned shares in United Airlines be supportive? And would company managements be as keen to cut prices and fight for market share if they knew that their shareholders did not want them to?

Mssrs Azar, Schmalz and Tecu find evidence for exactly this in the airline industry. Including levels of common ownership in conventional measures drastically increases market concentration to more than ten times the level authorities say would be "likely to enhance market power"."

Bottom line: it looks like there should be competition, but maybe there isn't due to ownership structures.

Not that I disagree with you, but it's a country's industry. I'm sure as a whole, airlines as an international industry bring much more than Alphabet/Google.

regulations are also important to ensuring competition

Seriously? They're using airlines as the example of too-profitable companies? The industry was in total shambles for nearly an entire decade after 9/11. It's no wonder that they're hesitant to lower their margins.

I truly can't imagine an industry that would be more difficult to run a company in:

* Everything is highly regulated.

* The dominant expense is a highly-volatile commodity controlled mainly by unpredictable/hostile countries.

* Your product has been totally commoditized by airfare-pricing websites.

* People get angry at your company when the weather is bad.

* Use of your product is inextricably linked to the abhorrent process of airport security.

* There is the continual potential of a terrorist attack decimating your sales overnight.

Any decently smart airline is hoarding some profits, because if they don't they will go bankrupt the next time fuel costs spike or something scary happens during a U.S. flight.

> Your product has been totally commoditized by airfare-pricing websites.

That American made $24 billion last year without passing on anything to consumers shows that that is wrong. Pricing websites are under full control of the airlines at this point.

Savings are passed on to consumers, in part. Airline fares are near all time lows.

The point is that gas prices collapsed last year but ticket prices did not drop.

Why should the price of a ticket be neccessarily bound to gas price? Wouldn't most people pay the same price regardless of gas price?

When gas prices went up fares followed. When gas prices went down fares stayed the same (and profits soared).

The point of the article is that there is not enough competition. If there were more competition some of the profits would go to consumers instead of being hoarded by the companies.

You can't directly compare fares because there are more people on the flights (thanks to all those mergers there is a lot less route competition and flights are now often at capacity), there are more seats per plane (remember leg room?) and they charge for things that they didn't used to (luggage, having a reserved seat, food, etc).

> That American made $24 billion last year without passing on anything to consumers shows that that is wrong. Pricing websites are under full control of the airlines at this point.

You misread the article. That actual quote:

> The profit bit of the picture, though, has changed a lot. Last year America’s airlines made $24 billion—more than Alphabet, the parent company of Google.

Which is a ridiculous comparison. They're seriously comparing an entire industry to one company? If anything, the complaint should be that Alphabet makes too much money.

Yeah I thought that comparison was a little suspect

I totally read that the first time as "American Airlines", thinking it was a single airline that made more than Alphabet. What the hell does it mean to compare an industry to a company in another field?

Yeah that doesn't really make any sense. Comparisons to unrelated things can be helpful just to get a sense of how much money that is, but it doesn't do that in this case.

> they will go bankrupt the next time fuel costs spike

Commodity futures are a healthy market. It's easy to hedge the price of oil and take that completely out of your profit/loss calculation. Any airline who chooses not to is speculating on the price of oil, much like a hedge fund.

> the continual potential of a terrorist attack decimating your sales overnight.

They can probably buy insurance against that as well. The lease-holder of the WTC had an insurance policy that paid $3.5 billion per event. I forget if the attacks were considered one event or two.

Out of that list of reasons the airline industry would be so profitable, some do point toward healthy profitability in the form of risk premium (profit which can be used in a corresponding volatility buffer), but some support factors of pathological profitability.

For instance, the high degree of regulation has costs, but it also makes it far more do difficult for competitors to enter the market. Regulation is especially profitable in an industry like aviation where the major airlines are known to exert a great deal of control over their regulatory body, even compared to other industries.

Commoditization can also increase profits, by providing another barrier to entry; when flights are compared (automatically) by price, new firms have less opportunity to distinguish themselves and the economy of scale and start-up costs are especially painful for a hypothetical new airline.

In a working economy, competition is the check against profiteering; all of these factors making it difficult to run an airline ensure that nobody else can start, regardless of how profitable it would be to do so.

Yeah, there are plenty of regulations that companies rail against that were created to keep people OUT of competition. If you can't create a natural monopoly, create a bureaucratized one.

The velocity of money has fallen off a cliff since 2008 [1].

Money is not moving, that is bad for the lower, middle and most of all upper class and corporations.

Consumer driven economies with policies that kill off consumer buying power is a bad mixture. Wage stagnation and money that moves like molasses isn't a recipe for growth. Companies can only do buybacks for so long.

The trend is not good and CEOs don't see that changing [2].

About a third of respondents expect corporations to become more competitive within three years. Assessments of every element of the U.S. business environment improved between a 2011 survey and this latest one. The growing optimism "seems to reflect the cyclical rebound of the U.S. economy," the report said.

But what do business leaders see coming for workers in the next three years? Only 27 percent expect workers to enjoy higher pay, while 41 percent said wages and benefits would be falling.

Destruction of lower/middle consumer class since the 70s clearly charts in the shares of gross domestic income to persons [3], the long slide.

[1] https://research.stlouisfed.org/fred2/series/M2V

[2] http://www.npr.org/sections/thetwo-way/2014/09/08/346902566/...

[3] https://research.stlouisfed.org/fred2/series/W270RE1A156NBEA

>But what do business leaders see coming for workers in the next three years? Only 27 percent expect workers to enjoy higher pay, while 41 percent said wages and benefits would be falling.

I read this, and I am at ease, because it means that the end is in sight. Eventually, the system will collapse under its own horrid weight, and we can have another go at making a good society.

I think you underestimate how much a revolution sucks.

Nah. A revolution will suck a ton, just that it's inevitable if the current system of "rape the poor so that the rich can buy more vacation houses" continues.

To anyone who wants less government and more free markets, unfortunately greed works in such ways that price fixing and market segmentation is very prevalent. Everywhere, even Western Europe. You'd probably not expect it, but take backpacks as an example. German backpack manufacturers hold retailers to fixed prices, disallowing anything lower than the set price. Same for mattresses (the kind you sleep on). The result is an illusion of free markets but where those who try to sell cheaper either get their supply cut off or get bullied in other ways. Same racketeering goes on with ISPs, and these are strong arguments why regulation bodies need to exist and impose hefty fines. Why am I mentioning this? Well, unfortunately without regulation there's no real competition because companies will split up a market and also agree on unofficial pricing structures to keep it expensive.

Absolutely. Deregulated systems are every bit as vulnerable to greed and corruption as regulated ones. With regulation, you have to be careful to avoid rent-seeking schemes by established interests trying to raise barriers to competition. With deregulation, you have the obvious health, safety, and environmental risks, but you also have the issues of collusion that you mentioned, like price fixing and market segmentation.

Fwiw though, there are online-only mattress brands that bypass the establishment by delivering directly to the consumer.

But what other choices than regulation do we have? The regulation has to be regulated and fully transparent. I hope that as long every penny crossing the table is visible we'll have a positive outcome. e.g. US judges feeding inmates to private prison companies they have shares in is an extreme instance of where regulation and oversight failed.

> Fwiw though, there are online-only mattress brands that bypass the establishment by delivering directly to the consumer.

Yeah and there's one online-only mattress firm that is now shifting to making their own mattresses and selling them as "Anti-Cartel Mattress" and promptly the firms that tried to prevent them earlier from selling their products cheaper than fixed have been trying to sue them for the product name.

In German: http://www.tagesspiegel.de/wirtschaft/streit-um-eine-matratz...

People around here might not like it because in large our industry (SW) is based on IP but intellectual property is a huge artificial monopoly created under some economic rationalizations - but the reality is it's getting reduced to rent seeking and concentration of power/wealth.

I'm not sure abolishing the concept of IP (patents, copyright, etc.) is the right way to go about it - but I'm 100% certain that there are hideous abuses of the current IP laws and they need to be rewritten with a much more liberal and modern foundation.

Having software patents is questionable, having software patents last 20 years is straight out retarded - even if you could argue that some edge case software R&D would not get funded without patents (which is hard to believe because most of the time when something is patented people come up with alternatives and give them away for free simply to avoid patent issues - and that's arguably even more work because the solution space is smaller). A far more realistic software patent would be between 5 and 10 years.

Likewise for copyright - copyright claims should expire waaay before the 95 years.

That's part of it. Another part is old-school rent-seeking via real estate trolling (speculating), which is exactly like patent trolling.

But a lot of tech profits are just "network effects" and vendor lock-in and not really a result of any kind of government privileges.

Yet, if we had policies which fostered competition and open standards then we'd have less vendor lock-in.

I find it odd that economists generally ignore the field of human psychology / behavior in their assessments.

Things like mental and physical health, addictions and substance use, thought manipulation and mind control, the fears and desires, sexual fantasies, even popular movies and music affect the economy greatly.

Not just a little bit, but greatly. A CEO's addiction to cocaine or promiscuity will have an impact on his company's bottom line. A young man starts a disrupting startup because he got inspired by a sci-fi movie a couple of years earlier.

Adam Smith's "invisible hand" is "invisible" because those forces can't be explained by the mechanistic rules of economics or mathematics. We just need to look elsewhere for a comprehensive picture.

What makes customers choose a product over the other ? Why do some companies retain great talent better than others - and hence reap greater profits ? How does pop music affect industrial design ?

Of course, human behavior and psychology is hard to quantify, that is why it's being left out, but I think we can start to make these connections now that we have the tools and information available.

Take Google and Facebook - these companies make their profits from advertising. Tens of billions. Add the profits of the media market - print, tv, radio.

Now consider how all that advertising affects the demand curve in all the other industries.

And it's not just the quantity, it's also the quality of advertising - today's ads are scientifically designed to drill their way into our subconsciousness. The colors, the sounds, the motions, the emotions - all of these are carefully weighted so as just to make you want a certain brand over the other.

And now my favorite part - is there a connection between advertising, corporate profits, pollution and climate change ?

I think there is and it's a great one. To conclude, I think regulators should look at all these factors much deeper, determine the connection between mind and economy and exercise their influence by tuning other parts of society, not just traditional economic levers.

Of course this is a monumental task for humans, but AI might just be perfectly suited for this type of analyses.

I find it odd that economists generally ignore the field of human psychology / behavior in their assessments.

Psychology, especially social psychology, is an epistemological disaster area[1][2] and everyone would be better off ignoring its "findings", not just economists.

[1] http://www.nature.com/news/over-half-of-psychology-studies-f...

[2] http://michaelinzlicht.com/getting-better/2016/2/29/reckonin...

Economy is similar (though perhaps not as horrible) - economic Nobel laureates have profound disagreements w.r.t. basic "laws" of economy.

Out of curiosity, could you give an example?

Keynes vs Hayek (well Keynes didn't get a Nobel, but is nevertheless regarded as a seminal thinker in the field) - their views on the role the state can and should play in shaping the economy are totally opposite. The debate is unresolved to this day, with Keynesians taking an upper hand post-2008.

You mean to tell me a subject still in its infancy, studying some of the most complex and dynamic systems, has some bad findings? Shocking

As someone who studied psychology, I've always recognized a lot of it is a bunch of wankery (as everyone should). That doesn't mean you toss it out, it means you think critically about any findings. This is the same reason I'm wary of a lot of economic talk: it's another social science studying something possibly even more complex. People seem to often carry a definitive tone

What makes you think economists don't try to study all those things? Even the caricatured "homo economicus" model, while defined as being perfectly rational in the methods, had an utility function (ie, goals) that was completely subjective; the idea that it was necessarily an Ebenezer Scrooge type is nonsense.

I derive my conclusion based on articles I read in financial/economic press. I know that's not a very good heuristic, but somehow I feel like economic thought is mostly based on mathematical models and political science, while the study of human behavior and more generally, human mind is left to psychologists/psychiatrists as something marginally useful. I think economics and society in general would benefit greatly from a more unified theory.

I'm sure that hedge funds do exactly this and reap great returns as a result.

>political science

And political science isn't concerned with the behaviour of people or groups?

>benefit greatly from a more unified theory.

Economists are generally concerned with things that can be measured. As others have pointed out, psychological findings are often irreproducible. So what's the point in incorporating them into models?

And this all ignores the fact that behavioural economics is a popular and growing field...

Rather than calling it human behavior and psychology I prefer to call it human weakness.

Human weakness, bias, ignorance etc are like software bugs in systems that mostly can't be patched.

We have got so good at detecting and exploiting these bugs at speed and scale that all I see happening is another Greenspan type moment, where a future Google\Facebook CEO is sitting before a committee wondering how everything imploded.

I mean Google\Facebook\Twitter etc benefit from the traffic Porn, Trump and ISIS pay for and generate much more than anyone else does. It's ridiculous.

I'm not sure it's useful to dismiss human behaviour as human weakness. It is what it is, and adding in essentially a moral dimension won't add much to the analysis

It's not a bug, it's a feature!

Just because it can be taken advantage of doesn't make it a bug. There are reasons these features developed, they were/are evolutionary advantageous. Things like bias are important because they help make us more efficient. They create blind spots, but they also allow us to more wisely spend our limited processing power. We have to compartmentalize things to understand them, we have very limited capacities. We have to do mental rounding in order to make sense of the world around us, there's simply too much information.

> Of course this is a monumental task for humans, but AI might just be perfectly suited for this type of analyses.

How? AI doesn't magically solve problems, it still has to be programmed by a human, and as yet we really have no good models to assess exactly how, for example, cocaine abuse affects a CEO's performance.

Some of you who are actively working on this will probably smile at my naïveté, but I'll take a wild shot at an example anyway:

See people's music listening trends on Spotify (or torrents or whatever). Examine the lyrics (or lack of lyrics) of the songs.

I would guess that an AI could find patterns and relationships between what songs people listen to and their emotional or mental heath (plus many other indicators).

Are people falling in love or are they breaking up, are they having more or less sex ? Are people using more drugs, partying or drinking more ?

Now you have some macroeconomic indicators - vectors - which affect a wide range of industries - from contraceptives to baby cribs to concert tickets.

Again, a wild guess, but I think AI could be applied to this kind of fuzzy analyses and probably be quite effective at predicting economic trends.

>And now my favorite part - is there a connection between advertising, corporate profits, pollution and climate change ?

Sure, unless there is real popular pressure for change, they the all increase together ad maximum, reinforcing one another...

It's not that economists ignore human psychology / behaviour, rather economists are interested in finding simplified models that provide some kind of generalizable insight. The models will include varying levels of complexity depending on what question the economist is trying to answer and what data the economist could reasonably access.

In many cases what motivates a particular individual provides little insight into what happens in the economy as a whole. For example, a model of start-up success that included founder education level and sci-fi movies watched by founders would provide little, if any, greater insight than a model the model that looked at just education level. It's similar to over-fitting in machine learning – the extra parameter is probably harming the usefulness of the model by making it less general.

On the other hand, CEO cocaine addiction might be a very good predictor of company profits, but you would have a hard time getting accurate data for that regardless of how good your AI is. Furthermore, I could reasonably hypothesize that some CEO's would respond to cocaine by out-performing non-cocaine users while some would under-perform depending on physiological factors. Again, without massive invasions of privacy, economists will not be able to factor this into their models.

"On the other hand, CEO cocaine addiction might be a very good predictor of company profits" hmm looking at Wall Street it would seam a very good predictor.

> Things like mental and physical health, addictions and substance use, thought manipulation and mind control, the fears and desires, sexual fantasies, even popular movies and music affect the economy greatly.

> To conclude, I think regulators should look at all these factors much deeper, determine the connection between mind and economy and exercise their influence by tuning other parts of society, not just traditional economic levers.

Can you clarify? I'm probably just misreading you, but it sounds like you're implying that we should be "regulating" culture -- or even thought itself ("thought manipulation and mind control") -- in order to improve the economy. Just wanted to make sure I was reading that correctly.

If that is what you meant, could you give some kind of hypothetical example? Would this be like banning certain themes because they cause social unrest? Requiring shows to carry certain messages? Eliminating styles of music that lead to "unproductive" activities? Bonuses for creators of films that cause a jump in profits? I'm legitimately baffled.

Not at all. I wasn't trying to suggest any fixes. I was just rhetorically questioning the validity of our economic theory without including the "laws" of human behavior and the factors that influence it.

Culture and the economy are in a constant feedback loop and we should look at both components when building our theories.

There is this fallacy that companies offer customers what they want, when in fact companies do everything possible to suggest to people what they want or need by using all kinds of mind manipulation techniques. And the theory doesn't address this at all.

I don't know about regulation of culture - that never works as expected, but some activism is always welcome. Facebook or Google could potentially alter the whole global economy and ecology, just by carrying certain messages on their websites or apps.

Like "plant trees and recycle" ! Or .. "be generous, help the needy" or something like that.

Thanks, that makes a lot more sense then. Culture informs economy and vice versa, and it makes sense to study that. It just worries me when it looks like someone is advocating the elevation of economy over culture, especially when potential regulation is on the table.

Wages are flat, buy and hold strategies are decimated by bubbles, and any job can be eaten by globalization.

At the same time, profits are up, access to capital has never been cheaper, and global market access has never had fewer barriers to entry.

The question is not how do we create living-wage jobs for the American worker, the question is how do we get the American worker to quit his job and start a business?

The economy is quite clearly slanted toward the entrepreneur. We need to start getting Americans to invest their labor accordingly.

If every employee quits their job to start a business, who will all these new businesses employ?

Wal-Mart eagerly await the day when they can fire all their employees and rehire them as contractors.

I don't see how a sudden increase in the number of freelancers/entrepreneurs changes the tax classification of Wal-Mart employees.

This is a great illustration of what reducing the labor pool will do for the demand for labor.

Every laborer that turns entrepreneur will have a positive impact on wages, because it reduces the labor supply while simultaneously increasing the demand for labor.

Transaction costs have fallen far enough that businesses can be small enough to be run by one person, or at least a small number of people.

Twenty years ago a small ad agency (say) might have been a couple of sales/client-management types who did a bit of writing, a dedicated copywriter, a dedicated graphic designer, and an accountant who also did payroll and basic HR/legal and handled the office lease. Today each of those sales/client-management types could have their own business, working out of a managed shared office, outsourcing writing and graphics as necessary to the copywriter and graphic designer who have their own businesses (because the Internet means there's much less overhead outsourcing and communicating with freelancers), with payroll/legal outsourced to service companies (which probably means less people - maybe 3-5 people handling 10 companies - but each company actually ends up with better access to dedicated specialists than when they had to have one person handling all of those).

Meanwhile the supply of full-time copywriting/design/accounting jobs is decimated and wages plummet.

> The question is not how do we create living-wage jobs for the American worker, the question is how do we get the American worker to quit his job and start a business

Quite a bit, to be honest. Think about the response on social media to a post where a person starts a new company to one where a person announces he has a new job. The latter usually has more comments than the former. The narrative in America is still largely influenced by the post WWII and baby boomer eras. Go to school, find a job, work for a few decades, retire, and travel the world. Starting a business is considered risky. These need to change. The reality needs to be accepted by many people (including myself). Working for someone else is just as risky, if not more, than working for yourself. After all, you can put in a huge amount of effort, and find yourself on the street due to some exec's whim to reorg. Entrepreneurship is risky since the vast majority of new businesses fail, but the point that needs to be made is that each failure is a step in the process that leads to success.

Additionally, we need to reduce the message of consumerism. Think about it, after work and family, most people will sit on the couch and watch TV, rather than do creative or hard work. I do know the value of mental and physical relaxation, but the average American spends 5 hours watching TV. (how the hell do they find that much time?) If people took even an hour of that, and dedicated it to creative work or self improvement, they'd be in much better shape, mentally, physically, and emotionally. But that requires effort, and it's easier to live vicariously through others via some reality TV show.

Good first step: health care for everyone. How many people don't want to risk their medical future?

Another step: Affordable housing for everyone. How many people can't risk not having a place to live if they loose their income?

Another step: Affordable food for everyone. How many people can't risk not having food to nourish their bodies?

People won't start ventures if people aren't safe from coerced payment to producers of these commodities in order to survive.

How long will we as a society keep playing whack-a-mole trying to stop the symptoms while the disease is looking us right in the face? The problem with healthcare isn't necessarily that it's expensive, it's that it's a privately owned industry, and therefore free to gouge out prices. Internationally, health care is nowhere near as expensive as it is in the US.

The same thing happens with housing. Gentrification is a real problem that prices people out of their own homes. There are more unoccupied houses than there are homeless people. Housing/development corporations are also privately owned and price people out of living affordably.

Housing, education and healthcare are strange markets. The argument against nationalization is huge, monopolistic bureaucracies eliminate efficiencies that markets naturally create.

But what happens when the market creates an environment where a huge, monopolistic bureaucracy makes the purchasing decisions regarding homes and education (commercial lenders) and healthcare (insurance companies)? What's the practical difference between your insurance company/mortgage lender forcing life-changing decisions on you, and the government doing the same?

Only a small percentage of people can afford to pay 100% cash for housing, higher education, and healthcare. In a natural market, industries like this shouldn't be able to exist. So what's wrong with these markets?

Why does the median house cost ~$200k[0], but the median net worth is below $150k[1]? How can a market survive if most people can't afford what its selling, but they're buying it anyway?

You could also argue that over-regulation is part of the reason these costs are driven so high (nobody should have to pay $50 for an aspirin), but it's equally clear that market forces also gave overwhelming influence to these monopolistic bureaucracies.

It seems to me that the answer is either to nationalize the middle-man bureaucracies, giving everyone equal access to the services they pay for, or make the middle-man bureaucracies illegal - forcing the actual providers (hospitals, colleges, home builders/sellers) to subject their prices to real market forces.

I'd be fine with either, but none of the middling solutions so far have been effective.

[0]http://www.huffingtonpost.com/2014/03/13/median-home-price-2... [1]https://www.creditdonkey.com/average-american-savings-statis...

I prefer collectivization instead of nationalization. I agree that huge monopolies aren't going to be great.

I would support a federated organization of local hospitals and care facilities. Private ownership or management of hospitals by people who aren't members of the community they serve doesn't really make sense to me.

Same thing for housing. Why should some corporation that doesn't even live in the area or have a vested interest in making sure it is in harmony with the local community have control over the living situations of the people who are affected by it?

I prefer the idea of a nationalized provider of last resort. If the market is so efficient, why does it fear competition from a government entity?

that's quite a conclusion. how will the American worker deal with 90% failure rate of new businesses?

Start 10 businesses and stick with the winner(s).

+1 lol

> The question is not how do we create living-wage jobs for the American worker, the question is how do we get the American worker to quit his job and start a business?

after starting a business and running it for nearly a decade, let me tell you, this is nonsense. 99% of people do not want to work that hard, or take that much risk, or learn that much new stuff. they just don't. or if they say they do, they just won't. this is pure fantasy completely divorced from human reality.

So, make it less hard, less risky, and less requiring special knowledge?

sure, but that doesn't sound like much of a money maker. go ahead and prove me wrong, i guess ... whatever that means.

I'll always see that phenomena as a societal failure. It seems that overall, the country prefers to be divided with everyone not helping the government, not pay taxes (because for some reason, "government is the problem and can't get things done" (C) Reaganomics libertarians), and not even throwing money at scientific research.

It seems that wherever you look, things revolves around the accounting of money, but not around the thing that money can do, like run society and build things.

It's weird because now companies like Tesla and SpaceX are seen as disruptive, but the only thing they do differently is just avoiding business as usual and expanding markets. Ideally, capitalism should be dedicated to creating new markets all the time, but for some reason it stopped. Just like Neil Degrasse Tyson talked about NASA, it seems that without public agencies like NASA, nothing gets done.

Given the mountains of evidence for the economic evidence of science funding, it baffles me how little we spend on the NSF. Their entire annual budget is a measly $7 billion. NASA, at least is not doing so bad, and have seen an increase in public support and funding. The NSF, unfortunately, is a much more behind-the-scenes bureaucratic organization, and doesn't have sexy images of Martian sunsets and Plutonian topography to generate PR. Yet I would argue their work is much more essential, as the academic breakthroughs of today create the game-changing technologies of the future. The most depressing part is that we even have a surplus of PhD's who would make good use of NSF funds.

Profits are unusually high almost entirely due to two factors. First, the massive expansion of the global economy the last ~20 years has particularly benefited the top Fortune 500 companies, along with the artificially cheap dollar from ~2003-2014 (which has now reversed and is wrecking profits for that same club). The global economy has grown far faster than the US economy since the late 1990s, companies that had exposure to that were obviously going to benefit tremendously vs domestic oriented companies. Second, the substantial margins and profit of the top US tech companies, which have boomed more than any other companies over those 20 years.

Apple, Microsoft, Google, Oracle, Intel, Cisco, Qualcomm, etc

That's about $130 billion in profit, between those seven companies.

Oracle produces five Caterpillars worth of profit.

Apple's profit is nearly Berkshire Hathaway + Johnson & Johnson + Boeing + General Electric.

Or even more dramatic, if you were to do a three year average on profits, Apple would just about add up to these companies combined:

Union Pacific, Visa, 3M, Caterpillar, McDonalds, CVS, Walgreens, Costco, Target, Honeywell, GM, Ford, Lockheed, Boeing, UPS, Fedex, Delta, America Airlines

Microsoft is Goldman Sachs + Disney + Procter & Gamble.

Google's profit is roughly greater than the top 50 US defense contractors combined. You might as well just say it's equal to the entire US defense contracting industry combined.

Now strip out just Apple, Google and Microsoft, and then inflation adjust the remaining Fortune 500 back to a 1995 dollar and compare the group with the Fortune 500 of the mid to late 1990s. What you'll see, is US corporate profits are not that unusual and the top tech companies are producing a very large warping of the picture.

The point the article makes is that global companies make much more in their home markets than abroad.

It is not a problem if the money is somewhat recirculated within the economy (make projects for the general public, rejuvenate cities, create jobs, pay salaries). It is a big problem if the money is simply drained out of the economy and funnelled into fiscal havens.

Especially because this decimates the consumer base. When you've impoverished your nation's people, who will buy your products? The dysfunctional focus on short-term profits at the expense of overall economic health makes the economy sicker each year and this disease will continue to ravish the world as long as greedy children hold the power to do so.

The best way to keep out competition is to create barriers to entry. The onslaught of new laws and new regulations in any industry is the perfect barrier.

Think about it, how many startups can afford to hire a compliance staff that ensures they are keeping up with all the laws and regulations passed?

Look at how many pages were added to the Federal Register in the US last year, I think in total there was something like 60,000 pages.

Profits are "too high" because productivity is up due to technology and digitalization which means that less people are required to take advantage of tech and make more money.

Competition can't solve this because in tech most is a winner takes all so if anything competition will create even stronger few winners.

This is my thinking as well. Everyone worries about robots taking their jobs in the future, but we've had "robots" since office automation began in the 70s and 80s. Its a bit more obvious in the blue collar sector where a literal robot can take your welding job or whatever, but in the white collar sector, its still the same. There's so much more efficiency that people aren't in high demand anymore. It used to be even a "small" company was a few dozen people. Everyone needed an assistant, you had a whole team of people to do graphic work, a whole team of people to make copies, etc. That's a pretty far cry from a handful of people, a handful of computers, and a decent laser copier.

There's no fix here. The genie is out of the bottle from an economic perspective. We just have this long slog ahead of us of working with this new reality. I imagine things like guaranteed minimum income will be the fix here as these jobs are never coming back, nor will new jobs come and replace them as things become more and more efficient.

Between 1970 and 2000 there was also a massive expansion of the global workforce. Both in absolute numbers and in the percentage of the planet that was participating in global markets.

In many countries, women started working a lot more in that period. Other countries entered the global market (notably hundreds of millions of Indians and Chinese).

People talk about the rise of Africa being the next cheap source of labor, but that is a smaller number of people that is less uniformly educated than the above cohorts.

I don't think it is really all that strange that wages stagnated where they started out the highest. Maybe we in the US are actually on track for things to get better rather than worse.

The US is in just as bad shape. Many of the jobs created are actually freelance jobs which means no healthcare plans, more temp work less money (because more competitition)

The app market is a good example of a market where it looks like all this value is created, the problem is when you then look at who actually make a living there it's very few people.

This is the reality everywhere.

Uber is working on replacing their drivers. Truck Driver is the most common job in a majority of US states. What do you think is going to happen to them when trucks don't need them anymore.

There's ~ 2 million truck drivers in the US.

In 1970, the US work force was ~100 million.

Today it is ~150 million (~140 million in 2000).

My point isn't that things will be great tomorrow, it's that there were some really huge forces at work in recent decades too. Compared to the number of jobs created just in the US in the last 1/2 century, 2 million truckers isn't that big a deal (and there were hundreds of millions of jobs created outside the US too).

Of course it is individually a big deal to those truckers if they cannot find new jobs with equivalent pay, but I'm trying to take a step back and decide how much impact it will have on the broader economy.

First of all Truck Drivers are just fraction of the drivers fleet. There are cab drivers, schoolbus drivers and so one. The number is much higher.

Second of all you need to factor in that many of those jobs are not actually providing a full salary but are instead temp jobs with no special security attached to them.

Thirdly. The use keeps moving the goalpost on what they consider a job.

A job is not just a job. It comes with an income. An income which for most people is decreasing or stagnating.

http://www.npr.org/sections/money/2015/02/05/382664837/map-t...

I don't think it's that simple. There are few more factors at play:

For one, the markets are risky. Let's not forget that just a few years ago, bonds which were supposedly rated AAA were nothing but air. The entire economic system collapsed quite literally overnight. Many people lost faith in the "system". Currently our debt levels are higher than any economist is comfortable with, and just like in the case with the subprime mortgages, there is huge political pressure to keep the government's AAA rating, whether deserved or not: https://en.wikipedia.org/wiki/United_States_federal_governme...

Additionally, over the past decade we've seen an huge rise in the number of startups, and the number of companies looking to "disrupt" entire industries. In 2016, it's not completely unreasonable that a billion dollar company could go bankrupt within a few years due to whatever disruption comes from left field. Hoarding cash is a hedge against this type of risk, as it allows large companies to be flexible, acquire smaller, potential threats, or go on the offensive if/when it becomes necessary. i.e. Facebook's acquisition of Whatsapp for 19B

I don't think this is a competition issue. After the 2007-2010 credit crisis, US corporates have gone through a considerable effort of delevering, taking on less debt/financing risk. Consequently this has, and will continue, to increase net income.

If lack of competition is real, this should be reflected at the EBITDA level, and The Economist has not discussed this at all.

As a long-term subscriber of The Economist I'm a bit disappointed in this piece.

I like The Economist, but as a subscriber I notice two common trends:

1 - They really, REALLY, love to criticize America. 2 - They often have a really crappy understanding of micro-economic theory.

I can't speak to 2, but they often praise America. They say America has an unparalleled ability to assimilate immigrants. They also praise other odd things, like the entrepreneurial spirit of American religion, or the power of technology transfer between government researchers and industry, or the high productivity of American freight railroads. One reason I read the Economist is because they see beyond the daily noise to pick out the news that requires digging and thought.

When profits are too easy there's not much incentive to innovate, there's no hunger. You can see this in google who have dominated their niche of the market so strongly that they've lacked the drive to seriously pursue other markets and to invest in their products to bring them to true maturity. Or look at Apple, who have been coasting on their momentum for years. Initially the iPhone was ahead of the curve in every way, now they are in the traditional Microsoft space, adapting innovations from around the industry and, one hopes, implementing them well and integrating them into a cohesive experience. Yet you have some major design missteps that haven't caused them to stumble.

Though you could look at the entire smartphone/tablet industry in general as exemplary of the problem of easy money. Tablets have only slowly adapted to the role of content creation and work, because selling toys has been so insanely profitable there hasn't been a drive to do so.

The US industry needs a big dose of healthy taxation. I don't mean treat it like a windfall to trip over, I mean sensible taxation where the excess goes into infrastructure like bridges, roads, rail and urban planning and development as well as rural planning and development.

Of course something along these lines would require restructuring how we tax foreign earnings (being more in line with the rest of the world) and regulate inversions to make them less attractive.

It's a daydream and it won't happen but that's what we should do with the money, rather than pay fairly compensated employees more, with the exception of their hourlies, but that's more up to the states to decide.

The gist is if we have extra earnings use them in a way that will create long term benefits for all citizens --who are living with infrastructure past its designed lifetime, in many cases.

Do you know how much is spent on US infrastructure per year? Do you think it's the lack of funds responsible for sub-par US infrastructure?

No, but it looks like since after WWii we've been mostly reactive rather than forward looking and proactive.

There are tens of thousands of bridges in need of repair or replacement, for starters.

This article seems strange. Why does analysis include only american companies? Capital moves freely between state borders now, and shareholders of companies of that caliber can decide to invest in China, Europe or other regions all around the globe— but there's not even a hint of that information in the article.

The article's title is "Business in America". They do mention the retreat of foreign firms from the American market, and suggest this is partly due to American firms getting favourable advantages from their government, plus large incumbents being generally favoured.

Regarding your comment on capital - nothing stops foreign capital buying shares in American firms, indeed monopolies or businesses with large moats are very attractive to investors - but the article is not about who owns the firms.

I think that "Business in America" is a invalid concept altogether; there are just some companies that happen to pay taxes in america and are small enough so that they haven't expanded in other regions yet.

But all the markets that these companies operate on — labour markets, capital markets, produced goods markets, resource markets — are global ones. It's like that Sargasso sea: it's not really a separate body of water, it's just a part of Atlantic ocean that was named differently because of very small degree of separation.

>"Business in America" is a invalid concept altogether;

Agreed. If we want to have an efficient global market, we need to quit thinking in terms of the arbitrarily narrow scope of nationalism. Most people in the US have yet to realize the irony of a sovereign nation's tax payers bailing out super-sovereign multinational banks who hoard their money in foreign tax havens like the British Cayman Islands.

It was partly about pointing out the lack of competition in the US. The airline business was mentioned as an example. European airline industry e.g. experience much harder competition and that shows in American relation to opening up the American airline markets. American airlines are terrified of European carriers because they know they are far more competitive.

As a European I must say I have always been puzzled by American airlines. Why is e.g. the services and standards so terrible on American airlines when it is a country which in all other aspects seems so service obsessed. Even Air France has way friendlier and helpful staff than American airlines :-D

I guess this article explains some of the discrepancy. American airlines simply don't face much competition.

I wonder if this is bad news for Europe in the long run. America has had an integrated economy for a long time, and so the oligopoly has had time to form.

Might we see the same thing after 50 more years of the EU?

My guess is that it depends on how far the political unification goes.

The question isn't 'are profits too high?' But rather 'where do profits come from?'

I believe this to be one of the primary causes of stagnation of innovation by larger companies. The bottom line on the balance sheet _now_ is more important than long-term viability.

It's a bit depressing, honestly. A myopic focus on the self's now without regard for the future of what could be.

How does this thesis fit with manufacturers of 'premium' products? 'Premium' being those products that indeed compete with other products but are perceived as somehow better by consumers. Tablets are a good example: Though Android has all the market share, iOS generates all the profit. Does Apple need a giant dose of competition? Looks to me like they have it and still keep raking in the profits.

It is tricky to relate high profits to low competition. Sometimes both can happen together.

The histogram on the article shows IT/Technology and Finance as being 2 sectors with high profits, but these are sectors with a fierce, cut-throat level of competition.

Also, as Peter Thiel argued, healthy profits are vital to finance innovation.

Competition has driven down (non-union) wages and increased profits through aggregation/consolidation. Why compete for 20 years when you can borrow and spend to buy the competition and double your market with no chance for a startup to compete at the same level in a regulated market.

This isn't really about too much profitability, its about corporations getting large enough, diversified enough, and still having the ability to relocate their home, so that politicians cannot rely on them as cash cows for either political contributions or taxation.

I suppose if double-dutch and similar schemes wouldn't exist and they had to pay taxes like everyone else, there would be automatic reinvestment via government spending.

Maybe it's not that the profits are too high, but inequities of distribution are causing tangible, social externalities (Carrier moving to Mexico, undocumented workers rights abused in meatpacking facilities)? Perhaps more companies need worker representative groups with equity and voting board stakes as in Europe (even though investing in an employer is doubly risky)? When interests align, things toward working out compromises... treat people as just another disposable automaton, expect adversarialness, sabotage and/or rebellion.

> Maybe it's not that the profits are too high... Perhaps more companies need worker representative groups with equity

Or perhaps that money could just go back to the American consumer in the form of lower prices? That would be a far more equitable way to distribute it.

That has been tried for a few decades now, it doesn't really help.

Lower prices are useless when a lot of the money goes into rent.

Higher wages and better working conditions are required, so that people have more money they can spend.

It also helps in a global context, as the prices of imported products won't change much just based on your national policies.

> Higher wages and better working conditions are required, so that people have more money they can spend.

Higher wage doesn't do it alone, just as lower prices doesn't do it alone. Both need to work in concert to increase the worker's effective wealth.

Better conditions are tangential though definitely very important for an improved work/life balance.

> It also helps in a global context, as the prices of imported products won't change much just based on your national policies.

National policies, in the form of tariff, tax, and relative currency value, are enormous factors in the cost of imported goods.

> National policies, in the form of tariff, tax, and relative currency value, are enormous factors in the cost of imported goods.

National policies are meaningless nowadays, as international trade treaties force countries to get rid of tariffs, and to have a race to the bottom in taxes.

How do you plan on competing with the US when you have to import all their goods without tariffs, and have higher taxes yourself?

You can’t.

The free trade treaties directly threaten any model in which corporate taxes pay for the wealth of society, and instead only allow models in which society is paid for with the regressive VAT.

This is still a terribly underappreciated point. How helpful is it to have $199 TVs rather than $399 ones if most of your money is going to servicing student loans, credit cards, insurance, and apartment rent / housing. The gains in the form of lower prices are vastly outstripped by FIRE-related expenses.

> How helpful is it to have $199 TVs rather than $399 ones

Something I didn’t mention in the comment, but which is important:

This is a terribly regressive strategy. Those who profit the most are the rich – for them their expenses just went down by 50%.

But the poor don’t profit.

Yet again continuing to destroy the middle class, and making the american dream even more impossible.

> Those who profit the most are the rich – for them their expenses just went down by 50%. But the poor don’t profit.

Nonsense. The Rich spend a smaller portion of their income on manufactured goods, household necessities and household entertainment than the poor. Instead they send their money to things like real estate, fine dining, and travel.

> How helpful is it to have $199 TVs rather than $399 ones if most of your money is going to servicing student loans, credit cards, insurance, and apartment rent / housing

Credit cards are a distraction; if things are cheaper you'd spend less on them anyway. Aside from that...

Universities are a huge scam. Real estate - at least usable real estate - may be the same (existing interests never want you to build more of it) especially in places like the Bay Area. I agree.

But that's really a different matter, and I don't see how everyone collaborating to pay more for goods like TV would actually meaningfully impact the affordability of universities and real estate. Is there some notion that The Rich spend enough of their income on random consumer-goods like TVs so that this will act like a wealth transfer? Because if not, all you're doing is moving money around, and moving it awkwardly (filtering it through entrenched BigCorp processes along the way).

The other one, Insurance: I assume you mean Health Insurance. 96% of health insurance spending leaves the insurance company to the healthcare industry proper. And one of the too-profitable sectors our article identifies is, in fact, healthcare. Good thing we fixed expensive healthcare forever a few years back with all that really smart and super-effective legislation!!! cough

Trickle-down economics fantasy doesn't work because self-interest results in trickle-up.

One issue really is that there is an apparent lack of valuable, human-doable work to go around because of automation and a highly-connected, globalized world.

Zillions of us are basically working partial shit jobs because either employers don't want to pay benefits or there's no need (low demand/oversupply) for more skilled workers, but the university machine keeps cranking out overqualified people and plunging them into desperation of debt. Many times more entrepreneurs and support thereof are needed to create some decent jobs, because human ingenuity and capability is being left to rot in a fry cooker. (Edit: Investing/mentoring/etc. are hard-to-scale activities except perhaps socially, but they need to happen to utilize more people overall which can be paid more individually and could be where most wealth is created... not as many giant businesses but comfortable cash machines.)

>there is an apparent lack of valuable, human-doable work to go around

No, there's a lack of immediately profitable human-doable work to go around, and markets don't have the rationality or intelligence to invent mechanisms that guarantee it gets done as it should.

US infrastructure is falling apart. Health insurance is run by vampires. [1] Care for seniors has huge growth potential. Defence spending is one big F-35. Education at almost all levels is far behind where it should be. There are many areas where housing is unaffordable, and a housing program could fix that. Climate change mitigation is definitely going to need to become a thing.

Etc.

There's no lack of work that could be done. The problem is that the standard markets-ra-ra-ra ideology is too stupid and myopically self-interested to understand that sometimes lower profits and higher taxes in the short term can lead to much bigger profits in the longer term.

[1] Possibly literally.

Addressing most of your laundry list will not result in discernible added value. We can add arbitrary effort to the GDP to make the GDP grow, but we may have already seen all the benefits of that effort by the time it's measured.

The best examples you listed are infrastructure and housing. Both are valuable, assuming we build the things people actually want or need. But, again, we could build a thousand bridges to nowhere and a million new housing units in Detroit, boost our GDP, and waste money in the long run.

Senior care, education (qua education), and climate change mitigation are not obviously profitable, even in the long term. Maybe they're good, but good doesn't address the lack of wage growth for the under-four-years-of-college set.

I'm not sure that infrastructure projects need to be bridges to nowhere or housing in dead cities to be useful. There are plenty of infrastructure projects to be done in vibrant, growing cities/regions. Overdue road repair/maintenance, water and sewage modernization, park updates, library modernization and so on could do a lot with long-term benefits. Fiber as infrastructure has some promising potential (that is the city or county or whatnot installs and owns last mile fiber, with connection to one of several competitors for internet service).

"Defence spending is one big F-35"

Looking at the UK defense industry it does appear that the logical end point for defense procurement would appear to be having one fantastically expensive plane, ship & tank. That would then be too valuable to actually risk using....

The question isn't are profits too high...but rather, where do profits come from?

What a surprise. The Economist thinks the solution is more markets.

genrally america is being run by lobbies, so naturally, those "lobbies" get all the profits.

TODO: Create brand and company with open source designs, versioned products, and sell just above cost!

Unfair competition http://www.zerohedge.com/print/502779

I usually stay away from economist "writing."

Here some laughing points from this article:

* according to polling by Pew, a research outfit....

* Return on capital is at near-record levels, too (adjusted for goodwill).

* Together they own 10-20% of most American companies

* The spectre of very big online travel sites dominating the purchase of hotel rooms has led the hotel firms to consolidate, too

Care to explain the problems with those statements?

You're sure they are not obvious?

I'm not the GP but they're not obvious to me, either.

I'm pretty sure they're not obvious. What are the problems?

Also looking for some clarification here. Of all the things to nitpick about those are some strange choices.

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