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Comment by Lazare | Hacker News Reader

> So much of the argument behind the 2017 tax cuts and the Fed's low interest rates was that they would spur real investment (that is, investment which increases productive capacity or improves productivity) that would benefit everyone, mainly through jobs.

Sure. Do we have any reason to think that's not working? When an investor makes a successful investment, and the company becomes very profitable and has spare cash they can't find a productive use for, and give it back to the original investors...

...what do you think the investor is going to do with it?

1) Look for another good investment (something they have a track record for doing)

2) Pile the money up in a big pile and have a bonfire, as they literally have no other ideas for what to do with the money.

3) Something else?

1 is the obvious answer, yet you seem to be the answer must be 2 and can't possibly be 1, but you provide no reason to think so, the linked article provides no reason to think so, and you don't even seem to have realised 1 is a possible outcome.

Further, you seem to be implicitly assuming that a company management who are not professional investors and who don't think they can find a good use for the money will still do a better job of making investments than the firm's investors, who are. Is there a reason for this?

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Much of the money isn't going to other investments. It goes to savings. The top 1% save ~40% of their income. The bottom 90% save 4% of their income. The problem with giving money to the wealthy is that it doesn't go to startups, it leaves the economy and increases a number on someone's terminal. The best way to spur economic growth is to give money to people who will spend it quickly whether rich or poor. In general, it turns out most very wealthy people have little incentive to spend money quickly. Instead, they save to hedge against and profit from recessions. Your option 2) isn't some foolish strategy, it's literally what is happening. Some of the money goes to investments and the rest seeks to hedge against the risk of those investments.

I really don't understand how people still push some version of trickle-down economics. Corporate buybacks are exactly this. Using taxpayer money to fund it only hurts the long term value of the economy.

> Much of the money isn't going to other investments. It goes to savings.

This is nonsense. Saving in a bank expands the bank's ability to lend. Saving in treasury bonds finances government operations. Saving in the stock market provides the incentive for VCs to invest in startups. Saving in municipal or corporate bonds finances the leveraged operations of those entities, contributing to better long-term planning. Saving in gold at least turns the money over to someone else who will probably spend it on something more useful than gold. For the most part, saving is investment. Only in niche scenarios does saved money leave the money supply.

While investment and savings aren't opposites, they also aren't guaranteed to be linked, at least if by investment you mean "increase in productive capacity" rather than an accounting identity in some macroeconomic models.

Increasing a bank's ability to lend doesn't mean they will necessarily do it; the reserve ratio is an upper bound.

Also, even when they do make a loan, it also doesn't mean it will necessarily go towards building or improving productive assets. Sometimes loans go towards buying existing assets (such as houses) in a way that might just result in asset inflation. (As in, for example, stock buybacks.)

The idea of a "global savings glut" is somewhat controversial but not obviously nonsense. We can't learn anything by defining it away.

Buying existing assets only results in asset inflation if you lack a free market.

Otherwise, buying existing assets (such as houses) will increase the price which will trigger increased production of that asset.

Investment doesn't increase the size of the economy if it doesn't result in increased spending. Spending money on a product or service is the only way to grow the economy.

Investment often results in money effectively leaving the economy as its multiplier rates are much lower than giving the money to consumers who spend it quickly, usually to small businesses that spend the money quickly.

> Investment doesn't increase the size of the economy if it doesn't result in increased spending. Spending money on a product or service is the only way to grow the economy.

Outside of niche scenarios, investment opportunities only exist when there is a desire to spend money on a product or service, but no money is available to spend.

> Investment often results in money effectively leaving the economy as its multiplier rates are much lower than giving the money to consumers who spend it quickly, usually to small businesses that spend the money quickly.

A lower velocity of money is not the same thing as a reduction in the money supply.

I would normally buy this argument, however the data in the featured article indicates that increases to bank balance sheets through corporate lending simply return to the bank via savings rates for the wealthy.

Traditional models of money supply were built around agricultural and industrial uses of the money supply, and it's not inherently clear that the current model is yielding anything other than higher asset prices.

>> This is nonsense. Saving in a bank expands the bank's ability to lend.

Haha, maybe 100 years ago when banking still worked like that this would be true. Nowadays bank deposits are probably almost entirely irrelevant for banks' lending capacity, as they just lever outstanding debt and whatever other non-transparent assets they can manage to slap a value on without breaking any laws.

Also, there is no mystery what happens with the wealth accumulated by the 0.1%. Piketty wrote an 800-page book about it. It's just moved abroad where it can not be taxed easily and mostly sits there idle to be passed on to next generations. One would have to be stuck very firmly in the Silicon Valley bubble to think much more than a tiny percentage of this wealth is used to be 're-invested in new enterprises'.

Bank lending is not tied in any way to the amount of deposits they have on hand:

https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...

>saved money leave the money supply.

And in that situation, it marginally increases the value of everyone else's dollar, increasing the value of their investments.

You can't save money without directly or indirectly investing in something (https://en.wikipedia.org/wiki/Saving_identity)

"Saving in a bank expands the bank's ability to lend." Lending in modern banks is fractional reserve, they only have a fraction of what they send out in loans, there is literally no law or anything preventing them from typing on a computer and making way more loans than they have money.

> Much of the money isn't going to other investments. It goes to savings.

Savings and investments are synonyms in this context. See, eg, the savings identity (https://en.wikipedia.org/wiki/Saving_identity). When Joe Millionaire "saves" some money, he does so by investing it. That's what the word means.

> The problem with giving money to the wealthy is that it doesn't go to startups, it leaves the economy and increases a number on someone's terminal.

That's not how money or investment works.

> The best way to spur economic growth is to give money to people who will spend it quickly

Very possibly, but we're discussing who will invest it, not spend it, and as you note, the rich invest more of their income.

Savings being equal to investment isn't a material fact, it's an assumption built into some macroeconomic models. In order for savings to turn into an asset that increases production capacity (which is what we hope it's for), someone has to spend the money on building a new asset (or improving an existing one).

In particular, asset inflation (price of land or stock going up) doesn't increase productive capacity in any material sense.

And, that's what's worrying. How do we measure increase in productive capacity without assuming savings = investment? Also, the consumer price index doesn't measure inflation of assets owned by businesses. Are we assuming the market is efficient at pricing investments when it's actually just inflating?

It seems like this is something economists are likely to worry about. Is there a literature on this?

> Savings being equal to investment isn't a material fact, it's an assumption built into some macroeconomic models. In order for savings to turn into an asset that increases production capacity (which is what we hope it's for), someone has to spend the money on building a new asset (or improving an existing one).

Correct. I think the definition of savings in economics is wrong. I would suggest that the distinction between savings and investment is in with how much difficulty you can reverse your decision (that is, liquidity of the underlying asset). The boundary is fuzzy, but it is important to consider.

So for instance, if I buy a new production line for cars, I cannot easily sell it (for the same price). I am hoping that it was a good decision, because it's hard to reverse (if I see tomorrow, that people actually don't want cars, I cannot easily start to make tractors). That is a decision which is investment.

On the other hand, if I buy shares in a car company, and tomorrow I see that people don't want cars, I can change my mind, sell the shares, and buy some other company. This is savings, not investment.

The reason why the reversibility is important is because if you are an economic actor and make an irreversible decision (like purchasing/building a production line), then other actors in the economy, who have savings, gain a certain advantage - they can react to your decision. They can follow, or they can avoid your investment, depending on how it pans out.

This follows it's not always wise to invest, to make an irreversible decision. Sometimes it's better to wait - and that is saving. Therefore the distinction between savings and investment is actually very important for even macroeconomics. If you have an economy where everybody is waiting for good opportunity (saving), then there is no economic growth. They still can "formally" be investing (buying shares or other financial instruments from each other), but the irreversible (i.e. real) decisions do not get made.

Supply and demand balance out. The wheel spins slower if the money flows so disproportionately to the supply side that it lowers demand.

> The best way to spur economic growth is to give money to people who will spend it quickly whether rich or poor. In general, it turns out most very wealthy people have little incentive to spend money quickly. Instead, they save to hedge against and profit from recessions.

Right, you're talking about the velocity of money (https://www.aier.org/article/what-money-velocity-and-why-doe...) which I find a fascinating concept.

It does feel like money is pooling, because as corporations buy back their stock, there is also less stock for others to buy. Since a lot of retirement vehicles in America rely on buying stock, specifically the S&P500, this can really be tricky. Many companies have resisted going public, get bought out by private equity, etc. Private companies are very hard to invest in, requiring a certain amount of wealth and connections. But I think this is why we're in a huge easy VC money startup economy. The money is looking for a place to be invested, and as some analysts say, TINA - there is no alternative, that is, they need to be invested, but the price of assets they can purchase is getting worryingly high.

https://www.bloomberg.com/opinion/articles/2018-04-09/where-...

> Right, you're talking about the velocity of money (https://www.aier.org/article/what-money-velocity-and-why-doe...) which I find a fascinating concept.

Actually the relevant concept is the marginal utility of wealth:

https://www.economicshelp.org/blog/12309/concepts/diminishin...

As other commentators pointed out: Savings and investments are two sides of the same coin here. The money which is used for saving will be invested somewhere - even if the person who owns it just keeps it in an account on the bank.

The problem I see is that the money almost exclusively goes to startups. In the last 10 years the startup scene in the US has been doing very well - not in terms of profits but in terms of funding. This giant "pool of money" created by the FED however mostly benefits just a small part of the workforce: Notably the engineers, scientists, managers, lawyers, investment bankers, etc. in the startup hotspots: In cities like SF, NYC, Seattle, Houston, etc. This is a problem for society because while wages for some parts of the workforce keep growing other workers are left with stagnating wages.

If you buy shares from anyone, either they were comfortable with their previous asset allocation (and will therefore seek to re-invest that money in some other stock), they were selling shares to rebalance their portfolio, or they were selling shares as part of their planned selling to fund their retirement or meet the obligations of their pension payouts (in which case that money will be spent in the economy).

It's only in the middle case (which I think is the most rare of the three) where the share buyback money ends up as savings. (And even there, it's likely in government bonds, lowering the cost of government borrowing when done in aggregate.)

I think it is a bit more complicated than that. The bottom 90% keep a big chunk of what little savings they have in cash or cash equivalents. The top 1% invest most of their savings in treasuries (investing in federal spending) or equities (businesses) or other investments (real estate, etc). This is why many believe it is sensible to reduce taxes for the wealthy; perhaps they will continue to invest the savings in private businesses.

Non-rich spending stimulates the economy more than rich investing. The rich are out of ideas to invest. The non rich spending more would give the rich new ideas to better invest the money they already do.

There are more complex analyses, but the above one gets the job done.

The counterpoint is that there are critical public infrastructure and welfare projects that could be funded by taxing the wealthy more (possibly in exchange for taxing the poorer less). Cutting taxes on wealthy seems to trigger recessions and depressions due to drying up aggregate demand for goods and services.

> Instead, they save to hedge against and profit from recessions.

You are arguing that non-governmental investment/stimulus in the depths of a recession is a bad thing?

There's a famous quote:

> Socialism never took root in America because the poor see themselves not as an exploited proletariat but as temporarily embarrassed millionaires.

If you were aspiring to be the next Bezos or Gates, you too might be inclined to support tax policies that would benefit your future self.

If you had a heart, you may care about the financial outcomes for other people. And if you had any sense, you would realize balancing economic inequality remains precarious and our current levels are closest to the period right before the depression.

Socialism isn't an absolute, it's a spectrum. Most people don't seem to care about the lack of privatized fire fighting as it existed in ancient Rome.

I'm in complete agreement with you, but we're on a forum with many people who have had great financial success and definitely benefit short-term from the tax policies. That's the reality of the community.

I would add that I'm one of the people who's benefited. There seems to be an unspoken belief that progressives are only those who have lost economically. I've gone from an ivy-league education to a 6-figure salary out of college to self-funding a profitable business making $4M/year. I'm also in my mid 20s.

In my business, almost all of my employees are low-skill. I pay everyone at least a living wage and it's impossible to ignore the realities of their lives. When I make more money, it goes to our savings. When I give an employee a raise, they buy something they need immediately, like a new car or new clothes.

Your savings go into a bank, which loans it out to people who spend it.

Banks don't loan out deposits, their ability to make loans isn't dependent upon savings:

https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...

people like his employees who get a loan to pay for their new car.

Yes. Nobody borrows money and sits on the cash, they take loans to spend it.

In fact, due to fractional reserve banking, a multiple of the amount put into a savings account is loaned out and spent!

In your mid-20s, putting excess savings in a bank is probably not the ideal asset allocation.

Oh but it is going in a wonderful investment: consolidation of elite power.

When “gains every quarter” are the goal and the measure of “gains” is finance, if you own all the valuable assets up for trade in the finance market...

But that’s ridiculous!

Humans are not and never will be rational actors. They carry their childhood memes with them for life via their brains. Offer some science that refutes it if you got it, but the functional processes of literal reality trump our conscious gut and that’s a well debated fact of human behavior.

The narrative has always been “protect inherited power.”

We see Tonight show hosts, religious true believers, true believers in capitalism, etc stand up to protect the “torch” they’ve been handed. Symbolism above all else.

Finance is another source of illusory power that we have a habit of blindly bestowing on others for emotional feels, before utilitarian value. Not saying that’s good or bad, it’s just what I find to be a reasonable summarization.

What a shock! Tim Cook and the rest aren’t investing in r&d. But their era was corporate micromanagement. Business of financial economy. Not nation state building and rivalry, which flooded the economy with public investment dollars via high taxation.

Do you have any evidence supporting your "obvious" answer? Can you explain why investors have pumped $15 trillion into bonds with negative yields if there are so many good investment opportunities around?

Because yield is only meaningful when considered in a context with risk, and many investing agents are risk averse enough to include a large amount of low-yield low-risk investments in their investment mixture.

Ergo, the only investments left worth making (>0% yield) are high risk. Treasuries and “safe” bonds are close enough to 0 that I round down for the purpose of this comment.

Apple has ~$250 billion in cash on hand. Berkshire Hathaway has $122 billion. Alphabet has ~$100 billion. Where do you invest when all that is left is the roulette table (sidenote: Alphabet should be making risky bets: Alpha Bet [Alpha is investment return above benchmark])?

Pretty much. Information availability has made the investing ecosystem efficient enough that pretty much anything worth doing gets funded, and it's hard to find unfunded things that are worth doing. Where do you invest in such a scenario? Well, in a broad mixture of structurally unrelated high-risk investments that have acceptable yield, with a fat anchor of very low risk, very low yield investments.

Alphabet does make risky bets, they spin off new companies constantly, and on their last earnings report lost about $1 billion/quarter on it.

What do you think happens to the money invested in bond offerings?

Well this is about companies borrowing money, so in this case returns to investors. Those investors then pay taxes in whatever country they reside in, and use a fraction of what remains to look for new investments.

As the article points out, money is moving around but that’s it.

Imagine what would happen if investors didn’t buy bonds?

Isn’t this the logic behind trickle down economics? Is that theory so uncontroversial now that it speaks for itself?

Or is there a different step in this “giving rich people more money means it finds its way to poor people” s/rich people/investors/ s/poor people/jobs/ ?

"Trickle down" economics is a strawman that mischaracterizes supply side economics:

https://www.youtube.com/watch?v=VlWCnA7TbNU

I am unfortunately not in a position to watch a 100min lecture at the moment. The Wikipedia entry for trickle down economics mentions it originated as a joke:

The term "trickle-down" originated as a joke by humorist Will Rogers and today is often used to criticize economic policies which favor the wealthy or privileged while being framed as good for the average citizen.

However, it goes on to say:

David Stockman, who as Ronald Reagan's budget director championed Reagan's tax cuts at first, later became critical of them and told journalist William Greider that "supply-side economics" is the trickle-down idea:

With a quote by David Stockman:

”It's kind of hard to sell 'trickle down,' so the supply-side formula was the only way to get a tax policy that was really 'trickle down.' Supply-side is 'trickle-down' theory.”

— David Stockman, The Atlantic

I’m sure the video touches on this, but do you have a summary for why it’s a straw man mischaracterisation?

It's not really a strawman, it's just what people call it when they want to make fun of what people claim to be supply side economics. Whether or not the people who practice it or came up with it call it trickle down is completely irrelevant to discussing "trickle down" economics.

Wasn't that already the original assumption?

Help rich entity; rich entity will help the rest of the economy?

Everyone helps the economy. Making it rich vs poor is kind of absurd.

Inequality is not as bad as it is made out to be. With our current level of automation for goods and services consumed by the masses, a high degree of equality would already result in mass unemployment since only so many people are needed to operate the highly automated production that would benefit an equal society.

Inequality on the other hand creates a LOT of diversity in demand for goods and services and this in turn drives a lot of job creation.

You need a LOT of people to build a $350 million yacht for example. If no one could afford something like that, it wouldn't be built and those jobs would no longer exist.

Furthermore, besides helping the economy via investments and spending on things that only they can afford, they also help in philanthropic ways that no government would be capable of helping:

https://slatestarcodex.com/2019/07/29/against-against-billio...

> 2) Pile the money up in a big pile and have a bonfire, as they literally have no other ideas for what to do with the money.

See: Softbank

The disconnect would be between a gov. agency freeing money for national companies, and investors who can invest in whatever they want, including investing in other countries and bribing the gov. to free more money.

As you point out investors are not stupid, but why should they be trusted to do the right thing for everyone else ?

They shouldn't, which is why the corporate tax rate should be raised.

There are a ton of things to spending all this money on.

Overpopulation is the foundation of human suffering and is driving us to extinction. There's is a clear negative correlation between educated women and population growth. How about setting up some scholarship funds?

When we run out of oil, there will be a second dark age. The metals required to make steel and electronics will basically become inaccessible when we cannot afford to power the machines which excavate and transport the material. Not to mention the famines which will ensue when we can't fuel the trucks that supply remote settlements like Los Angeles with food. How about building out the infrastructure required to transition away from fossil fuels?

The plankton provide 2/3 of the oxygen we breathe and our industries are currently making vast areas of the ocean completely uninhabitable for them. How about protecting the photosynthesizing life in the sea that we all need to survive?

I mean, the instructions are written on the wall, in big, bold, red capital letters. Only a fool would throw his or her hands in the air and say that there's nothing else to do.

The linked article seems to provide statistics indicating that it's not working. So I believe #2.

It didn't even address the point. It analysed what companies were doing, not what the recipients of the money were doing.

Oh, so the idea is that buying back stock is effectively just transferring money to investors?

I guess that explains why I was confused by the parent comment.

I still do believe that giving money directly to social/governmental programs is more effective then giving it to the ultra-rich who may or may not have an incentive to spend it in a way that aligns with the country's interests, but that's a topic for another day.

>Do we have any reason to think that's not working?

Interesting way of shifting the burden of proof and reversing the null hypothesis but I will bite.

How about the non-partisan federal Congressional Research Service report?

https://www.washingtonpost.com/business/2019/05/31/trump-tax...

Also from: http://nymag.com/intelligencer/2019/07/gdp-report-trump-tax-...

>In May, the Congressional Research Service (CRS) found no sign that the Trump tax cuts made any discernible contribution to growth, wages, or business investment. Corporations did not plow their windfalls into exceptionally productive and innovative ventures. Instead, they mostly threw their handouts onto the giant pile of cash they were already sitting on, and/or returned it to their (predominantly rich) shareholders.

>Now, it appears that the CRS analysis may have actually been a bit too kind to Trump’s signature legislation. The federal government’s latest report on economic growth suggests that business investment has been even weaker than previously thought. Initially, the Bureau of Economic Analysis (BEA) estimated that America’s gross domestic product expanded by 3 percent in 2018 (on a fourth-quarter-over-fourth-quarter basis). This week, the BEA revised that figure down to 2.5 percent — due, in part, to decelerating growth in business investment.

>Meanwhile, in its initial estimate for the second quarter of this year, the BEA found that GDP grew by 2.1 percent, while business investment declined. Corporations haven’t been growing the economy by ramping up investments in its productive capacity (a.k.a. growing the economy’s “supply side”).

>Consumers and the federal government have been doing so by spending more money on goods and services (a.k.a. increasing aggregate demand)

>Bottom line on Q2 GDP: Business investment was terrible. It came in at -0.6%, the worst since early 2016.

I don't know,.they could pay employees more, or provide vetter benefits. The evidence it's not working is that there is no inflation except in stocks and real estate.

Employers aren’t going to pay more until employees start asking for more. Employees don’t ask for more because labor isn’t an efficient market like stocks or real estate. Employees tend to set their asking prices too low because they lack up to date pricing information. Outside of unionized labor and government, employers deliberately conceal salary information and make it difficult to do a valuation of a job based on comparable positions.

I don’t see how this can change unless the information gap between employers and employees is eliminated.

If you raise corporate tax, then companies will be incentivized to pay higher wages. Because either the IRS will take the money and burn it, or they can do something useful with it.

Corporations won't spontaneously pay more for labor any more than they would spontaneously pay more for parts or raw materials. If a corporation chooses to spend more on expenses, then it will tend to spend on things that increase its value. Those things may include spending more on advertising to bring in new business or moving to a fancier office to impresses new clients. Paying more for labor, however, is like paying more for electricity; it doesn't add any value.

Divide your first bullet-point into two: invest in humans or invest in non-humans.

You're talking past the point. The ultimate selling point which the OP was emphasizing is an increase in jobs. Investing in automation, which is literally how many companies used the freed up tax reserves, is a net decrease in labor demand and therefore a net decrease in jobs, so the argument that this is increasing labor demand is BS.

And yes, creating 50 jobs that automate away 1000 jobs is a net loss of 950 jobs. Even if those 50 happen to be in tech or other industries that you benefit from.

> creating 50 jobs that automate away 1000 jobs is a net loss of 950 jobs

Keeping 950 jobs that are technologically uncompetitive is a good way to create a crisis down the road. Let's not confuse the investment and automation debates.

It has always been the case, throughout human history, that advances in technology have reduced the need for some jobs. Given that, the goal should not be to prevent it from happening; you can't in any sustainable way. Rather, making sure that there are other things for the people that would have held those jobs should be the goal. New jobs, reducing the need for jobs altogether, or something else.

But standing in the way of progress telling it to stop is never going to be a realistic solution.

No one is saying that. The evidence shows that companies are spending on automation, so the argument that tax cuts for corporations are going to lead to an increase in labor are dubious at best and utter nonsense at worst.

The best way to stimulate labor is to stimulate demand, aka giving money to the people who will spend. It's sickening to see people pretend that massive corporate tax cuts and middle-wage tax hikes are going to do anything other than reduce labor demand.

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