Thread by @annastansbury

Today in @washingtonpost, @LHSummers and I respond to @MarcoRubio's report on American Investment in the 21st Century.

The short version: we think Sen. Rubio is raising a really important issue - but we disagree with the diagnosis.

A thread (1/18)

washingtonpost.com/opinions/2019/…

So what's this all about? The Rubio report highlighted a very striking recent trend: the decline in investment & rise in savings by U.S. private companies. We should be concerned: investment is central to productivity growth and therefore to wage growth. (2/18)

Even more striking: typically, the corporate sector is a net borrower, borrowing to invest in capital goods and future production. But the fall in investment & rise in saving has been so big that the U.S. corporate sector is now a net lender to the rest of the economy (3/18)

Rubio argued that this is a result of shareholder primacy, which has “tilted business decision-making toward delivering returns quickly and predictably to investors, rather than building long-term capabilities through investment and production”. (4/18)

rubio.senate.gov/public/index.c…

There are many good arguments against a single focus on maximizing shareholder value. (I often make them!)

But @LHSummers and I are skeptical that shareholder capitalism and corporate short-termism are at the root of the decline in American investment, for 5 reasons: (5/18)

1. The rise in corporate net lending is a global trend. Gruber & Kamin (@federalreserve) and Dao & @chiara_maggi (@imf) document positive corporate net lending in UK, Canada, Japan and Netherlands since 2000, and in Germany more recently. (6/18)

Corporate investment is lower than forecasts would have predicted in 2000 for not just the US but also the UK, France and Germany (Gruber & Kamin). And corporate saving has risen in all 10 of the world's largest economies (Chen, Karabarbounis & Neiman @ChicagoBooth) (7/18)

If shareholder capitalism were the key cause, you'd expect falling corporate investment and rising net lending to show up most in countries with the strongest variants of shareholder capitalism, like the US. There is some correlation... (see interesting work by @niredeker) (8/18)

...but to us, the fact that it’s happening across so many countries with different institutions suggests to us that other explanations - not shareholder capitalism - are likely more central. (9/18)

2. Similarly, you'd expect to see publicly listed companies - which are under more short-term pressure from shareholders - to see bigger falls in investment than private companies. But that doesn't seem to be the case (per evidence from @ThomasPHI2 & Gutierrez) (10/18)

3. How short-termist really are shareholders? They don't seem to be in tech. 84% of tech IPOs are for companies making no profits (Ritter) - including Uber, valued at $70 billion with almost no profits. Amazon made its first quarterly profit 4 years after its IPO. (11/18)

More broadly, if shareholders chase short-term earnings at the expense of long-term investment, you might expect growth stocks to have outperformed value stocks (which have high earnings relative to price) - but over the long term, you've seen the opposite (Fama & French) (12/18)

4. It's far from clear that a long-termist institution building approach always works that well. GM and GE both embarked on big investment pushes, justified by long term visions, in the decades prior to their bankruptcy or near collapse (respectively). (13/18)

It's at least arguable that shareholders have too little and not too much power. There's lots of research in this vein: one example is Bertrand and @m_sendhil, who show that the presence of at least one large shareholder is associated with better discipline of CEO pay. (14/18)

5. And - there are several other explanations for the decline in investment which we regard as more likely to be important (though the jury is still out). These include rising monopoly power (Farhi & Gourio, Gutierrez & @ThomasPHI2), reducing firms' propensity to invest; (15/18)

... a falling price of capital goods (Karabarbounis, Neiman & Chen, @B_Eichengreen), reducing the amount of saving that can be absorbed by investment; and lower capital intensity of production with the rise of services & the digital economy (16/18)

While the fall in private investment should certainly be investigated further, we also shouldn't forget that public investment - in education, health, infrastructure, & green economy - can have big returns for productivity & pay - with additional equity benefits. (17/18)

Overall: Rubio has made an important contribution in highlighting & analyzing the decline in private investment. But we doubt shareholder capitalism is the key culprit - and it's important we do diagnose the problem correctly, because only then can we properly address it (18/18)