What’s Missing From the Trump Economic Boom

Growth and productivity are up, but investment is a soft spot, and neither right nor left has good answers.

Yet if many workers still feel not entirely secure, there’s a reason: investment. Several policy improvements of the Trump era have buoyed business investment compared with the recent past. But America is nowhere near reversing long-run declines in business investment that continue to stress many households notwithstanding the good economic times.

A suggestive exploration of the problem emerges in a recent report released by Mr. Trump’s erstwhile rival Sen. Marco Rubio. It describes an American economy that somehow has forgotten how to invest.

Net private fixed investment (expenditures on equipment, machinery or property minus depreciation) averaged around 8% of gross domestic product between 1947 and 1990, with significant spikes during booms—it hit 10% of GDP under Ronald Reagan. It has lagged since then, however. As of late 2018, amid another burst of GDP growth, net investment was barely half the Reagan level.

The low net-investment baseline Mr. Trump inherited (from Republican and Democratic predecessors alike) doesn’t fully explain today’s shortfall. Despite faster growth, investment has not accelerated under Mr. Trump as much as during past periods of economic strength. Net investment grew by

  • 8% in 2006,
  • 10.9% in 1998 and
  • 16.7% in 1984

—the peaks of those business cycles. Mr. Trump managed investment growth of only 6.9% in 2018 and the rate is drifting downward again, not least thanks to Mr. Trump’s antitrade policies.

The cause of this is not a lack of cash in corporate America. Since 2000, nonfinancial firms have become net creditors in most years rather than net debtors. This is astounding. For most of our history the sole purpose of a nonbanking company was to receive capital from others so as to invest productively. Now on aggregate they distribute capital to others so that those guys can invest somewhere else. This phenomenon underlies the recent trend toward aggressive share buybacks.

This long-term downward trend in business investment raises a question about how well America will sustain its recent productivity gains. Absent sustained productivity growth, voters will be right to question the potential longevity of the current boom. Without parsing earnings press releases, employees can tell when their companies seem to have a plan to invest in long-term growth. A sense of directionless management can contribute to a gnawing unease about job security. This can produce unpredictable political consequences, whatever the GDP data say.

What to do about this is open to debate. The Rubio report’s ruminations about poor market incentives for longer-term investment are fine so far as they go, although its complaint about shareholder short-termism is partly belied by two of the corporate success stories it cites. Tesla and Amazon are conspicuous net debtors that continue to invest heavily back into their businesses. It can be done, and investors will tolerate it.

The 2017 tax reform and Mr. Trump’s mammoth deregulation drive are necessary conditions for an investment revival, as the recent investment uptick shows. But comparing recent trends with the historical norm, it’s clear these policies are not sufficient to restore the level of investment America needs. Can Mr. Trump figure out what is? Since he’s a longtime businessman you’d think so, except that his business experience lies exclusively in real estate and marketing—one of which features low productivity and the other low fixed-asset investment.

Nor do Democrats have any more of a clue. The common refrain from the left, with many melodic variations, is that if the private economy won’t invest in productivity enhancements, the government must.

Did these folks sleep through the past decade? With business not investing, government already has become the “investor of first resort” via its own deficit spending. The result has been a mix of social-welfare blowouts driven by political short-termism (indistinguishable, in productivity terms, from the worst charges laid against shareholders) and such crackerjack business plans as Solyndra.

Politicians continue casting about for productivity solutions. The danger is that 2020 becomes merely another contest to decide whom voters distrust the least to deliver one.

Booming Buybacks Aren’t Likely to Wane Despite Market Volatility

Repurchases of blockbuster stock amounts during two recent pullbacks signal firms didn’t see market declines as worrying

Companies spend billions repurchasing shares because less stock outstanding helps make their profits appear stronger by boosting per-share earnings—a gauge investors typically use to justify a company’s stock price. Some investors counter that buybacks don’t actually add to a company’s net profit, and the capital could be used on other things.

Apple Inc., Oracle Corp. and Cisco Systems Inc. were the biggest buyers of their own stock in 2018, repurchasing a total of $126 billion of shares, according to S&P Dow Jones Indices. In April, the iPhone maker said it would add $75 billion to its buyback program.

“We’re in the fortunate position of generating more cash than we need to run our business and invest confidently in our future,” Apple Chief Executive Tim Cook said during the company’s earnings call last month.

Some analysts say companies’ willingness to buy back shares has been among the factors driving the latest stages of the 10-year bull market. And companies repurchasing shares during a downturn could help buoy markets.

.. “It takes capital from companies that are buying back their own equity and then moves that capital back to an investor so it can be redeployed into a company that’s growing,” said Scott Colyer, chief executive and chief investment officer at Advisors Asset Management. “Companies tend to amp up their buybacks when their stock price drops, which provides some support in the marketplace.”
.. Some analysts are concerned that technology companies accounted for too big a slice of the buyback pie. Last year, the top 20 companies repurchasing stock in the S&P 500—many of which were tech firms—accounted for 42% of all buybacks, compared with a 32% share in 2017, data from S&P Dow Jones Indices showed.

“The presumption is that 2020 will be a good year for buybacks, but that’s based on expectations that the economy remains strong and we don’t have a trade war,” said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. “Even though next year is supposed to be a great year for earnings and cash flow, we’re not there yet.”

Washington presents one potential hurdle for companies repurchasing stock. Democratic presidential candidates have signaled that they want to restrict how much stock U.S. companies can buy back, arguing that buybacks enrich shareholders at the expense of workers.

The Stock Buyback Panic

Repurchases reallocate under-utilized capital to more efficient purposes.

Stock buybacks are the latest bipartisan piñata, whacked by politicians on the left and right who misunderstand capital markets. A refresher course is in order lest Congress stampede and undermine the investment needed for growth.

Repurchasing shares is simply one way a company can return cash to owners if it lacks better ideas for investment. Tax reform increased corporate cash flow by cutting tax rates and letting companies repatriate their cash held overseas by paying a one-time tax rate of 15.5%.

Using Federal Reserve data, Dan Clifton of Strategas Research Partners estimates that companies repatriated $730 billion in 2018. CEOs have deployed that for multiple purposes including new investment, debt reduction, pension contributions, employee bonuses, wage and dividend increases and stock repurchases.

This is a policy success. Mr. Clifton calculates that capital expenditures by S&P 500 companies grew about $75 billion in 2018, the fourth-biggest annual gain since 1991. Average wages are growing by at least 3.4% year over

.. The Senators complain that “when corporations direct resources to buy back shares on this scale, they restrain their capacity to reinvest.” But the money doesn’t fall into a black hole. An investor who sells stock into a buyback will save or reinvest the proceeds. Walmart gives shareholders cash, and capital markets redirect it to some other useful end.

Banning buybacks won’t create better investment options inside companies. Instead CEOs may spend more on corporate jets or pet projects with marginal economic returns. They could let cash pile up. They could raise dividends, which would also move cash toward better investments. But Messrs. Schumer and Sanders likewise want to “seriously consider policies to limit the payout of dividends, perhaps through the tax code.”

Elizabeth Warren isn’t out to get capitalism. She’s out to save it.

The heart of the Accountable Capitalism Act is a requirement that companies with more than $1 billion in revenue obtain a corporate charter at the federal level, rather than basing themselves in the most loosely regulated state they can find. (Sorry, Delaware.)

This new charter is meant to address an epidemic of bad corporate behavior, especially the tendency of top executives to value profits over wider well-being. It would obligate executives to consider the interests of all corporate stakeholders — including employees, customers and communities — not just shareholders. It would require that at least 40 percent of company board members be elected by employees, an idea known as co-determination. The bill also contains provisions curbing stock buybacks, which tend to benefit only shareholders, and unilateral political expenditures.

.. it’s a distinct break from the neoliberal capitalism of the recent Democratic Party.

In the 1980s, Milton Friedman enshrined the idea of shareholder value maximization, which told businesses that their sole purpose was to maximize profit for their owners. Rather than pushing back against this obviously selfish, wealth-favoring theory, Democrats got on board. Sure, this framing might need a tweak here, a bit of regulation there, or the carrot of a tax break or two. But super-efficient big businesses would keep the broader economy chugging along for everyone — self-interest would mean we’d all win.

.. some 80 percent of stock market value is owned by 10 percent of the population, little of that benefit trickles down to the rest.

.. All that said, the Accountable Capitalism Act still relies on a fundamental belief that capitalism is good, even as a new generation of Democrats wants to upend that system altogether. On the left, winner-take-all competition — which Warren professes to “love,” by the way — is more and more seen as the root of our country’s ills, not something to preserve. A new wave of socialist candidates are loudly making that case.

.. But Warren isn’t out to get capitalism. She’s out to save it. The senator clearly believes that markets can create wealth.