Business and Economics

Corporate tax rates don't affect investment 6-17-17

Source: "Getting the most out of business taxes"  

No connectionThe standard GOP narrative involving corporate tax rates is that if you reduce the rate, you will increase business investment. The Economist divided the OECD countries into four quartiles based on their corporate tax rates, highest to lowest. They then looked at the relationship between the level of the corporate tax rate and bot business investment and corporate tax revenue - there is not much of a relationship. See chart. 
Some features of corporate tax rates - first, differences in rates can cause some companies to shop around for the best rate But other factors determine company location besides tax rates (supply chains, transportation access etc.). Also, the highest corporate tax rates tend to be in resource-rich countries. Natural resource extraction creates captive companies. Why don't we just eliminate the corporate tax rate altogether and just tax shareholders directly? First, many shareholders like pension plans are tax exempt. Also, eliminating the corporate tax would give incentives to individuals to incorporate themselves.

 

Skilled versus unskilled labor - wage ratios 6-17-17

Source: "Wages through the ages"  

Skilled versus unskilledHistorically, there have been two times in history where the ratio of skilled labor wages to unskilled labor wages fell dramatically. The first occurred after the Black Death in the 1300's. Here, lower interest rates and (I'm assuming) increased demand for skilled craftsmen resulted in large numbers of unskilled laborers apprentencing themselves and becoming skilled craftsmen. The surplus of skilled workers drove down skilled labor wages. And... shortages of unskilled labor due to the Plague allowed them to demand higher wages. During the Industrial Revolution, techology replaced skilled workers. Unskilled workers made up 20% of the labor force in 1700 but 40% by 1850. As the skilled jobs disappeared, the Gini coefficient rose. This has modern implications. As AI and automation threaten to wipe out skilled jobs considered impervious to automation before, can we expect the Gini coefficient to rise? Somber note: 4 out of 5 of the fastest-growing occupations in the country involve personal care, none require a college degree.

 

Tighter collection rules reduce credit 6/10/17

Source: "American third party debt collectors"       

American household debt is at $12.7 trillion (Q1 2017). Five percent of the total or $615 billion is in some stage of delinquency. Debt collectors from 6,000 different firms contact debtors more than one billion times per year. One in eight Americans has at least one account in collection with an average outstanding balance of $1,300.

Debt collectors either operate on a contingency fee basis in that they keep a percentage of whatever they collect and turn the rest over to the original creditor. Or they buy the debt outright and keep everything they collect. Both practices lead to over-persistent, over-zealous collection practices.

A new paper from Fonseca, Strair and Zahar shows that putting restrictions on debt collectors has a negative impact on the availability of credit. Borrowers in states where debt-collection practices are less intense (owing to stricter rules) received on average $213 less in car loans and $136 less in retail and other personal loans than borrowers in states where debt collectors had a freer hand.

Tech firms have excess cash 6-3-17

Source: "Schumpeter: Money mountains"       

Apple, Google (Alphabet), Microsoft, Amazon and Facebook are the five most valuable listed companies in the world. With a total market value of almost $3 trillion, they are the most valuable firms in history. They are notable in that they do relatively little stock buy-backs, pay relatively small dividends and thus are sitting on ever-growing amounts of cash.

Old style: a company sells a product and relies on that cash flow to fund operations. For expansion, old-style companies use debt. When profits are booked, they are either reinvested or paid out as dividends. These tech giants are retaining $330 billion of net cash (cash less debt). This cash retention is projected to reach $680 billion by 2020. 

Four possible reasons for this have been suggested. First, they are doing it for tax purposes - 80% of their cash is held abroad and if half of it were repatriated, the current tax bill would be $50 billion. Next, cash is always needed for R&D - but these five tech giants already spend a combined $100 billion on R&D every year. For perspective, total worldwide venture capital investments total about $150 billion. They could triple their R&D investments and still not quite use up all that cash.

The last two possible reasons are more troubling. Perhaps the Big 5 fear a stock market crash and are retaining the cash as a crisis fund. Or they believe that regulation and/or market disruption through new competition is inevitable, in which case the extra cash would be used to diversify away from the disrupted businesses.