I still don’t really understand your economic analysis. Increased money in financial markets tends to mean increased capital for firms that do actual things (of course, there are more efficient vs less efficient ways the financial system can distribute capital).
The U.S., in Noah Smith’s phrasing, doesn’t build things anymore (obviously not quite true but is relatively) because our domestic economy is service-based and manufacturing is off-shored. There is no scenario in an international pool of labor where manufacturing becomes relatively cheaper here than other places (unless mostly automated), thus it doesn't happen here. All that is required to ensure the continuation of such a state is naval power and international market integration.
It's not complicated. Firms generally pay out a portion of their earnings to shareholders as dividends and retain the rest. Before 1980, retained earnings were invested into real, productive capital; stock buybacks were illegal.
Today firms use their retained earnings for stock buybacks. Over the long run. the average real after-tax ROE in business has been about 5%. Given this ROE, stock buybacks will deliver a superior short-term return to shareholders than does investing in the business to grow earnings. This is why firms use their earnings for stock buybacks rather than investing in the business.
Back in the day, firms invested in their business because the returns available to them from financial investments were less than those available from business. Firms were willing to invest in lower-return (or more risky) projects than today because the financial alternative was worse.
Since 1980 the financial alternative has generally been better, which is why this thing called financialization of the economy has happened. Simply put, why bust your ass running a business when you can sit on your ass and earn a higher return as an investor?
Sure but this just follows the first order transaction from the perspective of a given firm. The dividends/buyback liquidity can be pumped into new firms. The financialization today would seem more to do with the fact the top firms are the ones doing this on particularly high performing sectors (tech & finance).
I think this speaks to deeper structural problems with barriers to entry/regulatory capture and a lack of innovation and entrepreneurship (some of this is demographic related).
Sure it can be pumped into new firms, but it won't be unless the ROI from the new investments exceeds that available from financial markets. If financial returns are high as they are with stock buybacks and Fed QE adding buying power that previously wasn't there, then fewer investments will meet the higher return criterion and there will be less growth and less building of stuff.
I guess I am questioning a few things. 1) whether financialization is really as wide-spread and problematic as alleged? How do we know? 2) If yes, is it a chicken-and-egg problem? Did financialization stagnate innovation and productivity? Or did innovation and productivity stagnation lead to financialization as a rational response? 3) Alternatively, despite financialization is the economic picture actually concerning? From a U.S.-centric perspective, it is hard to really get too worked up given the advantages over every other country. If it takes an enormous war in the Southeast Asia to make us worried (something that should be of concern globally), this isn't sounding the alarm on economic weakness, it is trying to be prepared to all possibilities (definitionally not the most efficient thing to do).
The fact that the S&P500 companies collectively are putting all their earnings into the stock market rather than invest in real growth as they did in the past is pretty strong evidence that financialization is widespread. Another is the growth of the financial sector.
As for chicken and egg. If innovation stagnation is responsible than one would expect ROE over time would have declined from levels during the postwar era., leading companies to invest in stock instead. Actually, after-tax ROE over the last decade have averaged 5.8% compared to 4.5% during the postwar era. So the innovations that companies choose to invest in are leading to a BETTER return than the ones they invested in during the era or strong growth. This is consistent with investors demanding a higher return from the pool of innovations available, so they invest in less of it.
As to where the economic picture is concerning, I ask is it concerning that low wage workers (about 40% of the workforce) have seen the standard of living their wages bring decline over the decades? It seems clear that concerns over economic slippage has led to working class folks embracing extreme politics: MAGA on the Right and Socialism on the Left. Because the latter group is completely excluded from the economic argument, they have largely thrown in with the social progressives, often called the "woke Left", to form a more potent political force. As time passed there is more and more talk of civil war. This seems like a problem to me.
Periods like this occur periodically. Last time we got out of it with the New Deal. The one before that with the Civil War. I prefer the former to the latter, which is why I am a New Dealer and not a MAGA Republican or Progressive Democrat.
One argument is that stuff to invest in has dried up. This idea is based on the idea that technology is this resource that exists out there and all you have to is exploit it.
Technology is not a resource. It is a product that is only created when there is a demand for it. As I pointed out in the article, a new resource (coal, agriculture) did not drive the rise of civilization or the industrial revolution, but rather the rise of civilization and capitalism created a demand for these resources, which were then used to further develop them.
Your argument about tech innovation is that it is mostly a "necessity is the mother of invention" story - a demand phenomenon. There are obvious rejoinders to this that have to be accommodated. For instance, demand for the iPhone was essentially created a priori. Many web 2.0 mobile applications are essentially new markets tacked on top of a telecom lineage. Inception-wise none of that looks very demand driven. Econ growth in general tends to be either doing what we've done in the past more efficiently or doing something new. I think we can probably model innovation like evolution since it is variation + selection. Demand in this case is the selection side of the equation but both sides are important. None of this speaks to the possibility space though which is where MM's energy and laws of life figure in.
On politics, I think there are a number of reasons to believe that hyper-polarization is better explained by non-material factors like aesthetics and cultural distance (specifically education) than class. Wokeness after-all is mostly patched together lit theories. I think for the same reasons, the likelihood of sustained and intense violence is low. We're Last Men - Men without Chest. The plea is for thymos not mammon.
The 60s/70s were significantly more tumultuous politically than today and the 80s/90s saw dramatically more violent crime. MAGA and Woke are lots of sound and fury signifying nothing. The energy of both those political meme are waning. Another good indicator here is that most elite usage of these political tropes is quite hollow and cynical. The true believers are the marks. There simply aren't the condition to forge another "New Deal." What would such a political vision even include? The median American already has way more discretionary income than any other citizen of a peer nation.
I still don’t really understand your economic analysis. Increased money in financial markets tends to mean increased capital for firms that do actual things (of course, there are more efficient vs less efficient ways the financial system can distribute capital).
The U.S., in Noah Smith’s phrasing, doesn’t build things anymore (obviously not quite true but is relatively) because our domestic economy is service-based and manufacturing is off-shored. There is no scenario in an international pool of labor where manufacturing becomes relatively cheaper here than other places (unless mostly automated), thus it doesn't happen here. All that is required to ensure the continuation of such a state is naval power and international market integration.
It's not complicated. Firms generally pay out a portion of their earnings to shareholders as dividends and retain the rest. Before 1980, retained earnings were invested into real, productive capital; stock buybacks were illegal.
Today firms use their retained earnings for stock buybacks. Over the long run. the average real after-tax ROE in business has been about 5%. Given this ROE, stock buybacks will deliver a superior short-term return to shareholders than does investing in the business to grow earnings. This is why firms use their earnings for stock buybacks rather than investing in the business.
Back in the day, firms invested in their business because the returns available to them from financial investments were less than those available from business. Firms were willing to invest in lower-return (or more risky) projects than today because the financial alternative was worse.
Since 1980 the financial alternative has generally been better, which is why this thing called financialization of the economy has happened. Simply put, why bust your ass running a business when you can sit on your ass and earn a higher return as an investor?
Sure but this just follows the first order transaction from the perspective of a given firm. The dividends/buyback liquidity can be pumped into new firms. The financialization today would seem more to do with the fact the top firms are the ones doing this on particularly high performing sectors (tech & finance).
I think this speaks to deeper structural problems with barriers to entry/regulatory capture and a lack of innovation and entrepreneurship (some of this is demographic related).
Sure it can be pumped into new firms, but it won't be unless the ROI from the new investments exceeds that available from financial markets. If financial returns are high as they are with stock buybacks and Fed QE adding buying power that previously wasn't there, then fewer investments will meet the higher return criterion and there will be less growth and less building of stuff.
I guess I am questioning a few things. 1) whether financialization is really as wide-spread and problematic as alleged? How do we know? 2) If yes, is it a chicken-and-egg problem? Did financialization stagnate innovation and productivity? Or did innovation and productivity stagnation lead to financialization as a rational response? 3) Alternatively, despite financialization is the economic picture actually concerning? From a U.S.-centric perspective, it is hard to really get too worked up given the advantages over every other country. If it takes an enormous war in the Southeast Asia to make us worried (something that should be of concern globally), this isn't sounding the alarm on economic weakness, it is trying to be prepared to all possibilities (definitionally not the most efficient thing to do).
The fact that the S&P500 companies collectively are putting all their earnings into the stock market rather than invest in real growth as they did in the past is pretty strong evidence that financialization is widespread. Another is the growth of the financial sector.
As for chicken and egg. If innovation stagnation is responsible than one would expect ROE over time would have declined from levels during the postwar era., leading companies to invest in stock instead. Actually, after-tax ROE over the last decade have averaged 5.8% compared to 4.5% during the postwar era. So the innovations that companies choose to invest in are leading to a BETTER return than the ones they invested in during the era or strong growth. This is consistent with investors demanding a higher return from the pool of innovations available, so they invest in less of it.
As to where the economic picture is concerning, I ask is it concerning that low wage workers (about 40% of the workforce) have seen the standard of living their wages bring decline over the decades? It seems clear that concerns over economic slippage has led to working class folks embracing extreme politics: MAGA on the Right and Socialism on the Left. Because the latter group is completely excluded from the economic argument, they have largely thrown in with the social progressives, often called the "woke Left", to form a more potent political force. As time passed there is more and more talk of civil war. This seems like a problem to me.
Periods like this occur periodically. Last time we got out of it with the New Deal. The one before that with the Civil War. I prefer the former to the latter, which is why I am a New Dealer and not a MAGA Republican or Progressive Democrat.
One argument is that stuff to invest in has dried up. This idea is based on the idea that technology is this resource that exists out there and all you have to is exploit it.
Technology is not a resource. It is a product that is only created when there is a demand for it. As I pointed out in the article, a new resource (coal, agriculture) did not drive the rise of civilization or the industrial revolution, but rather the rise of civilization and capitalism created a demand for these resources, which were then used to further develop them.
Your argument about tech innovation is that it is mostly a "necessity is the mother of invention" story - a demand phenomenon. There are obvious rejoinders to this that have to be accommodated. For instance, demand for the iPhone was essentially created a priori. Many web 2.0 mobile applications are essentially new markets tacked on top of a telecom lineage. Inception-wise none of that looks very demand driven. Econ growth in general tends to be either doing what we've done in the past more efficiently or doing something new. I think we can probably model innovation like evolution since it is variation + selection. Demand in this case is the selection side of the equation but both sides are important. None of this speaks to the possibility space though which is where MM's energy and laws of life figure in.
On politics, I think there are a number of reasons to believe that hyper-polarization is better explained by non-material factors like aesthetics and cultural distance (specifically education) than class. Wokeness after-all is mostly patched together lit theories. I think for the same reasons, the likelihood of sustained and intense violence is low. We're Last Men - Men without Chest. The plea is for thymos not mammon.
The 60s/70s were significantly more tumultuous politically than today and the 80s/90s saw dramatically more violent crime. MAGA and Woke are lots of sound and fury signifying nothing. The energy of both those political meme are waning. Another good indicator here is that most elite usage of these political tropes is quite hollow and cynical. The true believers are the marks. There simply aren't the condition to forge another "New Deal." What would such a political vision even include? The median American already has way more discretionary income than any other citizen of a peer nation.