Andy Haldane, Bank Of England's Chief Economist, Gets Shareholder Capitalism Entirely Wrong

It's a bit of a worry when central bankers get caught up in the latest fashionable nonsense to sweep through the intelligentsia. They're supposed to be the sensible, even conservative, people who don't succumb to the winds of public opinion in that fashion. But that is what seems to have happened to Andy Haldane, the chief economist at the Bank of England. For he's currently spouting the sort of nonsense that Will Hutton has made a career out of making up. Anglo-Saxon capitalism in this reading is failing because it is returning too much money to shareholders. More should be kept within corporations for reinvestment: you'll note that this is similar to the sort of thing that Hillary Clinton is saying. The thing is it's simply wrong. It's true that corporations return more to shareholders these days than they used to: but that's simply because the idea of a conglomerate has gone out of style. Rather than money being reinvested in the specific corporation that the profit was made in it now flows out of that organisation and then into new investments elsewhere. The reason for this is the reduction in the cost of using the capital markets: and this is a good thing, not a bad one.

One report is here:

British businesses are giving too much money to shareholders and not investing enough, the Bank of England’s chief economist Andy Haldane has said. He warned that firms were “eating themselves” by favouring shareholder dividend payouts over investing their profits.

That tendency, Haldane said, was to blame for “subpar” growth in some economies, including Britain’s, in recent decades.

The Financial Times gives another:

“The main reason why world growth has been subpar is because businesses have not been investing sufficiently,” Mr Haldane said. He added this was the consequence of companies returning money to shareholders via dividend payments and share buybacks rather than financing new projects.

The BoE chief economist quoted figures showing that while in the 1970s only 10 per cent of company profits were returned to shareholders, this figure has now climbed up to 60-70 per cent.
Businesses “are almost eating themselves”, he told Newsnight.
Mr Haldane said that while the public limited company model that dominates British and US capitalism has served the world well, “you can have too much of a good thing”.

I'm sorry but this is just wrong. We would be worried if the general level of investment in the economy was going down: or at least we might be. Certainly for Britain there's been a small drop in domestic business investment over the decades: but a good part of this is simply because of the definition of investment. If you buy a software package then that's an investment. If you buy Microsoft's Office 365 in the cloud then this is not classified as an investment: it's a current expense. But you're still getting your productivity raised (well, maybe, it is a Microsoft product after all) by spending money on software. And the fall is nothing like at all the sort of magnitude of change that is being described there. From memory we're talking about that domestic investment dropping from 16% of GDP to 14% or so over this time period. Haldane is talking about the big listed companies returning six times as much of their profits to shareholders as they used to.

So, that money being paid out must be going back into investment somewhere. And it is: it's being invested in all those new companies, that Venture Capital, those software and apps firms and all the rest.

Essentially, what we've got is the decline of the conglomerate as the favoured investment vehicle. As an example, BP (British Petroleum as was). They made large investments in the 1970s and 1980s into solar power. Shell into coal at about the same time. Not because they had any real knowledge of those industries, nor really any competence. But because that's what you did: you made money somewhere and instead of giving it to the shareholders you dreamt up something else to do with it. Today, instead of trying to do this stuff internally in a company that doesn't have any real skill at it, you give the profits back to the shareholders and they decide whether to invest in coal, or solar, or software, or whatever. That corporate payouts have risen very strongly but total investment hasn't fallen much means that this must be happening.

As to why, this is simply because financial markets are more efficient now. Any large company can raise as much capital as it needs without much problem or cost. If it's got a good project the banks and or the public markets will stump up pretty much any amount of capital. Thus there's no major cost to paying out profits from extant successful businesses: as there was in the past when capital raising was much more expensive.

These payments out to shareholders aren't being lost to the economy. They're not even, in the main, being lost to investment. They're just not being reinvested at the level of the original company. They're being invested in entirely different companies. All of which is almost certainly a more effective and efficient method of allocating capital by the way.

This political concern over corporate payouts is simply wrong: we therefore don't need a policy innovation to stop people doing it.