> So much of the argument behind the 2017 tax cuts and the Fed's low interest rates was that they would spur real investment (that is, investment which increases productive capacity or improves productivity) that would benefit everyone, mainly through jobs.

Sure. Do we have any reason to think that's not working? When an investor makes a successful investment, and the company becomes very profitable and has spare cash they can't find a productive use for, and give it back to the original investors...

...what do you think the investor is going to do with it?

1) Look for another good investment (something they have a track record for doing)

2) Pile the money up in a big pile and have a bonfire, as they literally have no other ideas for what to do with the money.

3) Something else?

1 is the obvious answer, yet you seem to be the answer must be 2 and can't possibly be 1, but you provide no reason to think so, the linked article provides no reason to think so, and you don't even seem to have realised 1 is a possible outcome.

Further, you seem to be implicitly assuming that a company management who are not professional investors and who don't think they can find a good use for the money will still do a better job of making investments than the firm's investors, who are. Is there a reason for this?

Much of the money isn't going to other investments. It goes to savings. The top 1% save ~40% of their income. The bottom 90% save 4% of their income. The problem with giving money to the wealthy is that it doesn't go to startups, it leaves the economy and increases a number on someone's terminal. The best way to spur economic growth is to give money to people who will spend it quickly whether rich or poor. In general, it turns out most very wealthy people have little incentive to spend money quickly. Instead, they save to hedge against and profit from recessions. Your option 2) isn't some foolish strategy, it's literally what is happening. Some of the money goes to investments and the rest seeks to hedge against the risk of those investments.

I really don't understand how people still push some version of trickle-down economics. Corporate buybacks are exactly this. Using taxpayer money to fund it only hurts the long term value of the economy.

> Much of the money isn't going to other investments. It goes to savings.

This is nonsense. Saving in a bank expands the bank's ability to lend. Saving in treasury bonds finances government operations. Saving in the stock market provides the incentive for VCs to invest in startups. Saving in municipal or corporate bonds finances the leveraged operations of those entities, contributing to better long-term planning. Saving in gold at least turns the money over to someone else who will probably spend it on something more useful than gold. For the most part, saving is investment. Only in niche scenarios does saved money leave the money supply.

While investment and savings aren't opposites, they also aren't guaranteed to be linked, at least if by investment you mean "increase in productive capacity" rather than an accounting identity in some macroeconomic models.

Increasing a bank's ability to lend doesn't mean they will necessarily do it; the reserve ratio is an upper bound.

Also, even when they do make a loan, it also doesn't mean it will necessarily go towards building or improving productive assets. Sometimes loans go towards buying existing assets (such as houses) in a way that might just result in asset inflation. (As in, for example, stock buybacks.)

The idea of a "global savings glut" is somewhat controversial but not obviously nonsense. We can't learn anything by defining it away.

Buying existing assets only results in asset inflation if you lack a free market.

Otherwise, buying existing assets (such as houses) will increase the price which will trigger increased production of that asset.

Investment doesn't increase the size of the economy if it doesn't result in increased spending. Spending money on a product or service is the only way to grow the economy.

Investment often results in money effectively leaving the economy as its multiplier rates are much lower than giving the money to consumers who spend it quickly, usually to small businesses that spend the money quickly.

> Investment doesn't increase the size of the economy if it doesn't result in increased spending. Spending money on a product or service is the only way to grow the economy.

Outside of niche scenarios, investment opportunities only exist when there is a desire to spend money on a product or service, but no money is available to spend.

> Investment often results in money effectively leaving the economy as its multiplier rates are much lower than giving the money to consumers who spend it quickly, usually to small businesses that spend the money quickly.

A lower velocity of money is not the same thing as a reduction in the money supply.

I would normally buy this argument, however the data in the featured article indicates that increases to bank balance sheets through corporate lending simply return to the bank via savings rates for the wealthy.

Traditional models of money supply were built around agricultural and industrial uses of the money supply, and it's not inherently clear that the current model is yielding anything other than higher asset prices.

>> This is nonsense. Saving in a bank expands the bank's ability to lend.

Haha, maybe 100 years ago when banking still worked like that this would be true. Nowadays bank deposits are probably almost entirely irrelevant for banks' lending capacity, as they just lever outstanding debt and whatever other non-transparent assets they can manage to slap a value on without breaking any laws.

Also, there is no mystery what happens with the wealth accumulated by the 0.1%. Piketty wrote an 800-page book about it. It's just moved abroad where it can not be taxed easily and mostly sits there idle to be passed on to next generations. One would have to be stuck very firmly in the Silicon Valley bubble to think much more than a tiny percentage of this wealth is used to be 're-invested in new enterprises'.

Bank lending is not tied in any way to the amount of deposits they have on hand:

https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...

>saved money leave the money supply.

And in that situation, it marginally increases the value of everyone else's dollar, increasing the value of their investments.

You can't save money without directly or indirectly investing in something (https://en.wikipedia.org/wiki/Saving_identity)

"Saving in a bank expands the bank's ability to lend." Lending in modern banks is fractional reserve, they only have a fraction of what they send out in loans, there is literally no law or anything preventing them from typing on a computer and making way more loans than they have money.

> Much of the money isn't going to other investments. It goes to savings.

Savings and investments are synonyms in this context. See, eg, the savings identity (https://en.wikipedia.org/wiki/Saving_identity). When Joe Millionaire "saves" some money, he does so by investing it. That's what the word means.

> The problem with giving money to the wealthy is that it doesn't go to startups, it leaves the economy and increases a number on someone's terminal.

That's not how money or investment works.

> The best way to spur economic growth is to give money to people who will spend it quickly

Very possibly, but we're discussing who will invest it, not spend it, and as you note, the rich invest more of their income.

Savings being equal to investment isn't a material fact, it's an assumption built into some macroeconomic models. In order for savings to turn into an asset that increases production capacity (which is what we hope it's for), someone has to spend the money on building a new asset (or improving an existing one).

In particular, asset inflation (price of land or stock going up) doesn't increase productive capacity in any material sense.

And, that's what's worrying. How do we measure increase in productive capacity without assuming savings = investment? Also, the consumer price index doesn't measure inflation of assets owned by businesses. Are we assuming the market is efficient at pricing investments when it's actually just inflating?

It seems like this is something economists are likely to worry about. Is there a literature on this?

> Savings being equal to investment isn't a material fact, it's an assumption built into some macroeconomic models. In order for savings to turn into an asset that increases production capacity (which is what we hope it's for), someone has to spend the money on building a new asset (or improving an existing one).

Correct. I think the definition of savings in economics is wrong. I would suggest that the distinction between savings and investment is in with how much difficulty you can reverse your decision (that is, liquidity of the underlying asset). The boundary is fuzzy, but it is important to consider.

So for instance, if I buy a new production line for cars, I cannot easily sell it (for the same price). I am hoping that it was a good decision, because it's hard to reverse (if I see tomorrow, that people actually don't want cars, I cannot easily start to make tractors). That is a decision which is investment.

On the other hand, if I buy shares in a car company, and tomorrow I see that people don't want cars, I can change my mind, sell the shares, and buy some other company. This is savings, not investment.

The reason why the reversibility is important is because if you are an economic actor and make an irreversible decision (like purchasing/building a production line), then other actors in the economy, who have savings, gain a certain advantage - they can react to your decision. They can follow, or they can avoid your investment, depending on how it pans out.

This follows it's not always wise to invest, to make an irreversible decision. Sometimes it's better to wait - and that is saving. Therefore the distinction between savings and investment is actually very important for even macroeconomics. If you have an economy where everybody is waiting for good opportunity (saving), then there is no economic growth. They still can "formally" be investing (buying shares or other financial instruments from each other), but the irreversible (i.e. real) decisions do not get made.

Supply and demand balance out. The wheel spins slower if the money flows so disproportionately to the supply side that it lowers demand.

> The best way to spur economic growth is to give money to people who will spend it quickly whether rich or poor. In general, it turns out most very wealthy people have little incentive to spend money quickly. Instead, they save to hedge against and profit from recessions.

Right, you're talking about the velocity of money (https://www.aier.org/article/what-money-velocity-and-why-doe...) which I find a fascinating concept.

It does feel like money is pooling, because as corporations buy back their stock, there is also less stock for others to buy. Since a lot of retirement vehicles in America rely on buying stock, specifically the S&P500, this can really be tricky. Many companies have resisted going public, get bought out by private equity, etc. Private companies are very hard to invest in, requiring a certain amount of wealth and connections. But I think this is why we're in a huge easy VC money startup economy. The money is looking for a place to be invested, and as some analysts say, TINA - there is no alternative, that is, they need to be invested, but the price of assets they can purchase is getting worryingly high.

https://www.bloomberg.com/opinion/articles/2018-04-09/where-...

> Right, you're talking about the velocity of money (https://www.aier.org/article/what-money-velocity-and-why-doe...) which I find a fascinating concept.

Actually the relevant concept is the marginal utility of wealth:

https://www.economicshelp.org/blog/12309/concepts/diminishin...

As other commentators pointed out: Savings and investments are two sides of the same coin here. The money which is used for saving will be invested somewhere - even if the person who owns it just keeps it in an account on the bank.

The problem I see is that the money almost exclusively goes to startups. In the last 10 years the startup scene in the US has been doing very well - not in terms of profits but in terms of funding. This giant "pool of money" created by the FED however mostly benefits just a small part of the workforce: Notably the engineers, scientists, managers, lawyers, investment bankers, etc. in the startup hotspots: In cities like SF, NYC, Seattle, Houston, etc. This is a problem for society because while wages for some parts of the workforce keep growing other workers are left with stagnating wages.

If you buy shares from anyone, either they were comfortable with their previous asset allocation (and will therefore seek to re-invest that money in some other stock), they were selling shares to rebalance their portfolio, or they were selling shares as part of their planned selling to fund their retirement or meet the obligations of their pension payouts (in which case that money will be spent in the economy).

It's only in the middle case (which I think is the most rare of the three) where the share buyback money ends up as savings. (And even there, it's likely in government bonds, lowering the cost of government borrowing when done in aggregate.)

I think it is a bit more complicated than that. The bottom 90% keep a big chunk of what little savings they have in cash or cash equivalents. The top 1% invest most of their savings in treasuries (investing in federal spending) or equities (businesses) or other investments (real estate, etc). This is why many believe it is sensible to reduce taxes for the wealthy; perhaps they will continue to invest the savings in private businesses.

Non-rich spending stimulates the economy more than rich investing. The rich are out of ideas to invest. The non rich spending more would give the rich new ideas to better invest the money they already do.

There are more complex analyses, but the above one gets the job done.

The counterpoint is that there are critical public infrastructure and welfare projects that could be funded by taxing the wealthy more (possibly in exchange for taxing the poorer less). Cutting taxes on wealthy seems to trigger recessions and depressions due to drying up aggregate demand for goods and services.

> Instead, they save to hedge against and profit from recessions.

You are arguing that non-governmental investment/stimulus in the depths of a recession is a bad thing?

There's a famous quote:

> Socialism never took root in America because the poor see themselves not as an exploited proletariat but as temporarily embarrassed millionaires.

If you were aspiring to be the next Bezos or Gates, you too might be inclined to support tax policies that would benefit your future self.

If you had a heart, you may care about the financial outcomes for other people. And if you had any sense, you would realize balancing economic inequality remains precarious and our current levels are closest to the period right before the depression.

Socialism isn't an absolute, it's a spectrum. Most people don't seem to care about the lack of privatized fire fighting as it existed in ancient Rome.

I'm in complete agreement with you, but we're on a forum with many people who have had great financial success and definitely benefit short-term from the tax policies. That's the reality of the community.

I would add that I'm one of the people who's benefited. There seems to be an unspoken belief that progressives are only those who have lost economically. I've gone from an ivy-league education to a 6-figure salary out of college to self-funding a profitable business making $4M/year. I'm also in my mid 20s.

In my business, almost all of my employees are low-skill. I pay everyone at least a living wage and it's impossible to ignore the realities of their lives. When I make more money, it goes to our savings. When I give an employee a raise, they buy something they need immediately, like a new car or new clothes.

Your savings go into a bank, which loans it out to people who spend it.

Banks don't loan out deposits, their ability to make loans isn't dependent upon savings:

https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...

people like his employees who get a loan to pay for their new car.

Yes. Nobody borrows money and sits on the cash, they take loans to spend it.

In fact, due to fractional reserve banking, a multiple of the amount put into a savings account is loaned out and spent!

In your mid-20s, putting excess savings in a bank is probably not the ideal asset allocation.

Oh but it is going in a wonderful investment: consolidation of elite power.

When “gains every quarter” are the goal and the measure of “gains” is finance, if you own all the valuable assets up for trade in the finance market...

But that’s ridiculous!

Humans are not and never will be rational actors. They carry their childhood memes with them for life via their brains. Offer some science that refutes it if you got it, but the functional processes of literal reality trump our conscious gut and that’s a well debated fact of human behavior.

The narrative has always been “protect inherited power.”

We see Tonight show hosts, religious true believers, true believers in capitalism, etc stand up to protect the “torch” they’ve been handed. Symbolism above all else.

Finance is another source of illusory power that we have a habit of blindly bestowing on others for emotional feels, before utilitarian value. Not saying that’s good or bad, it’s just what I find to be a reasonable summarization.

What a shock! Tim Cook and the rest aren’t investing in r&d. But their era was corporate micromanagement. Business of financial economy. Not nation state building and rivalry, which flooded the economy with public investment dollars via high taxation.

Do you have any evidence supporting your "obvious" answer? Can you explain why investors have pumped $15 trillion into bonds with negative yields if there are so many good investment opportunities around?

Because yield is only meaningful when considered in a context with risk, and many investing agents are risk averse enough to include a large amount of low-yield low-risk investments in their investment mixture.

Ergo, the only investments left worth making (>0% yield) are high risk. Treasuries and “safe” bonds are close enough to 0 that I round down for the purpose of this comment.

Apple has ~$250 billion in cash on hand. Berkshire Hathaway has $122 billion. Alphabet has ~$100 billion. Where do you invest when all that is left is the roulette table (sidenote: Alphabet should be making risky bets: Alpha Bet [Alpha is investment return above benchmark])?

Pretty much. Information availability has made the investing ecosystem efficient enough that pretty much anything worth doing gets funded, and it's hard to find unfunded things that are worth doing. Where do you invest in such a scenario? Well, in a broad mixture of structurally unrelated high-risk investments that have acceptable yield, with a fat anchor of very low risk, very low yield investments.

Alphabet does make risky bets, they spin off new companies constantly, and on their last earnings report lost about $1 billion/quarter on it.

What do you think happens to the money invested in bond offerings?

Well this is about companies borrowing money, so in this case returns to investors. Those investors then pay taxes in whatever country they reside in, and use a fraction of what remains to look for new investments.

As the article points out, money is moving around but that’s it.

Imagine what would happen if investors didn’t buy bonds?

Isn’t this the logic behind trickle down economics? Is that theory so uncontroversial now that it speaks for itself?

Or is there a different step in this “giving rich people more money means it finds its way to poor people” s/rich people/investors/ s/poor people/jobs/ ?

"Trickle down" economics is a strawman that mischaracterizes supply side economics:

https://www.youtube.com/watch?v=VlWCnA7TbNU

I am unfortunately not in a position to watch a 100min lecture at the moment. The Wikipedia entry for trickle down economics mentions it originated as a joke:

The term "trickle-down" originated as a joke by humorist Will Rogers and today is often used to criticize economic policies which favor the wealthy or privileged while being framed as good for the average citizen.

However, it goes on to say:

David Stockman, who as Ronald Reagan's budget director championed Reagan's tax cuts at first, later became critical of them and told journalist William Greider that "supply-side economics" is the trickle-down idea:

With a quote by David Stockman:

”It's kind of hard to sell 'trickle down,' so the supply-side formula was the only way to get a tax policy that was really 'trickle down.' Supply-side is 'trickle-down' theory.”

— David Stockman, The Atlantic

I’m sure the video touches on this, but do you have a summary for why it’s a straw man mischaracterisation?

It's not really a strawman, it's just what people call it when they want to make fun of what people claim to be supply side economics. Whether or not the people who practice it or came up with it call it trickle down is completely irrelevant to discussing "trickle down" economics.

Wasn't that already the original assumption?

Help rich entity; rich entity will help the rest of the economy?

Everyone helps the economy. Making it rich vs poor is kind of absurd.

Inequality is not as bad as it is made out to be. With our current level of automation for goods and services consumed by the masses, a high degree of equality would already result in mass unemployment since only so many people are needed to operate the highly automated production that would benefit an equal society.

Inequality on the other hand creates a LOT of diversity in demand for goods and services and this in turn drives a lot of job creation.

You need a LOT of people to build a $350 million yacht for example. If no one could afford something like that, it wouldn't be built and those jobs would no longer exist.

Furthermore, besides helping the economy via investments and spending on things that only they can afford, they also help in philanthropic ways that no government would be capable of helping:

https://slatestarcodex.com/2019/07/29/against-against-billio...

> 2) Pile the money up in a big pile and have a bonfire, as they literally have no other ideas for what to do with the money.

See: Softbank

The disconnect would be between a gov. agency freeing money for national companies, and investors who can invest in whatever they want, including investing in other countries and bribing the gov. to free more money.

As you point out investors are not stupid, but why should they be trusted to do the right thing for everyone else ?

They shouldn't, which is why the corporate tax rate should be raised.

There are a ton of things to spending all this money on.

Overpopulation is the foundation of human suffering and is driving us to extinction. There's is a clear negative correlation between educated women and population growth. How about setting up some scholarship funds?

When we run out of oil, there will be a second dark age. The metals required to make steel and electronics will basically become inaccessible when we cannot afford to power the machines which excavate and transport the material. Not to mention the famines which will ensue when we can't fuel the trucks that supply remote settlements like Los Angeles with food. How about building out the infrastructure required to transition away from fossil fuels?

The plankton provide 2/3 of the oxygen we breathe and our industries are currently making vast areas of the ocean completely uninhabitable for them. How about protecting the photosynthesizing life in the sea that we all need to survive?

I mean, the instructions are written on the wall, in big, bold, red capital letters. Only a fool would throw his or her hands in the air and say that there's nothing else to do.

The linked article seems to provide statistics indicating that it's not working. So I believe #2.

It didn't even address the point. It analysed what companies were doing, not what the recipients of the money were doing.

Oh, so the idea is that buying back stock is effectively just transferring money to investors?

I guess that explains why I was confused by the parent comment.

I still do believe that giving money directly to social/governmental programs is more effective then giving it to the ultra-rich who may or may not have an incentive to spend it in a way that aligns with the country's interests, but that's a topic for another day.

>Do we have any reason to think that's not working?

Interesting way of shifting the burden of proof and reversing the null hypothesis but I will bite.

How about the non-partisan federal Congressional Research Service report?

https://www.washingtonpost.com/business/2019/05/31/trump-tax...

Also from: http://nymag.com/intelligencer/2019/07/gdp-report-trump-tax-...

>In May, the Congressional Research Service (CRS) found no sign that the Trump tax cuts made any discernible contribution to growth, wages, or business investment. Corporations did not plow their windfalls into exceptionally productive and innovative ventures. Instead, they mostly threw their handouts onto the giant pile of cash they were already sitting on, and/or returned it to their (predominantly rich) shareholders.

>Now, it appears that the CRS analysis may have actually been a bit too kind to Trump’s signature legislation. The federal government’s latest report on economic growth suggests that business investment has been even weaker than previously thought. Initially, the Bureau of Economic Analysis (BEA) estimated that America’s gross domestic product expanded by 3 percent in 2018 (on a fourth-quarter-over-fourth-quarter basis). This week, the BEA revised that figure down to 2.5 percent — due, in part, to decelerating growth in business investment.

>Meanwhile, in its initial estimate for the second quarter of this year, the BEA found that GDP grew by 2.1 percent, while business investment declined. Corporations haven’t been growing the economy by ramping up investments in its productive capacity (a.k.a. growing the economy’s “supply side”).

>Consumers and the federal government have been doing so by spending more money on goods and services (a.k.a. increasing aggregate demand)

>Bottom line on Q2 GDP: Business investment was terrible. It came in at -0.6%, the worst since early 2016.

I don't know,.they could pay employees more, or provide vetter benefits. The evidence it's not working is that there is no inflation except in stocks and real estate.

Employers aren’t going to pay more until employees start asking for more. Employees don’t ask for more because labor isn’t an efficient market like stocks or real estate. Employees tend to set their asking prices too low because they lack up to date pricing information. Outside of unionized labor and government, employers deliberately conceal salary information and make it difficult to do a valuation of a job based on comparable positions.

I don’t see how this can change unless the information gap between employers and employees is eliminated.

If you raise corporate tax, then companies will be incentivized to pay higher wages. Because either the IRS will take the money and burn it, or they can do something useful with it.

Corporations won't spontaneously pay more for labor any more than they would spontaneously pay more for parts or raw materials. If a corporation chooses to spend more on expenses, then it will tend to spend on things that increase its value. Those things may include spending more on advertising to bring in new business or moving to a fancier office to impresses new clients. Paying more for labor, however, is like paying more for electricity; it doesn't add any value.

Divide your first bullet-point into two: invest in humans or invest in non-humans.

You're talking past the point. The ultimate selling point which the OP was emphasizing is an increase in jobs. Investing in automation, which is literally how many companies used the freed up tax reserves, is a net decrease in labor demand and therefore a net decrease in jobs, so the argument that this is increasing labor demand is BS.

And yes, creating 50 jobs that automate away 1000 jobs is a net loss of 950 jobs. Even if those 50 happen to be in tech or other industries that you benefit from.

> creating 50 jobs that automate away 1000 jobs is a net loss of 950 jobs

Keeping 950 jobs that are technologically uncompetitive is a good way to create a crisis down the road. Let's not confuse the investment and automation debates.

It has always been the case, throughout human history, that advances in technology have reduced the need for some jobs. Given that, the goal should not be to prevent it from happening; you can't in any sustainable way. Rather, making sure that there are other things for the people that would have held those jobs should be the goal. New jobs, reducing the need for jobs altogether, or something else.

But standing in the way of progress telling it to stop is never going to be a realistic solution.

No one is saying that. The evidence shows that companies are spending on automation, so the argument that tax cuts for corporations are going to lead to an increase in labor are dubious at best and utter nonsense at worst.

The best way to stimulate labor is to stimulate demand, aka giving money to the people who will spend. It's sickening to see people pretend that massive corporate tax cuts and middle-wage tax hikes are going to do anything other than reduce labor demand.

Say a company buys back 2 billion in stock, rather than investing it in new equipment. Does that reduce the amount of money invested in the economy? The answer depends on what the investors who sold do with that money. If they invest it somewhere else, then the company's decision doesn't reduce the amount invested in the economy.

I don't believe private investors decide they'd rather buy a yacht than invest their money just because a company bought back shares. More likely, the share buyback just moved money from a mature company to growth stocks or startups, which is exactly what should happen in a healthy economy.

Put another way...should Dinosaur Oil Inc use their profits to build another refinery even when they don't think it makes financial sense...or should they buy back stock, make their investors happy, and then be in a more vulnerable position when the investors turn around and fund Shiny Solar Inc?

Much of the money isn't going to startups. It goes to savings. The top 1% save ~40% of their income. The bottom 90% save 4% of their income. The problem with giving money to the wealthy is that it doesn't go to startups, it leaves the economy and increases a number on someone's terminal.

The best way to spur economic growth is to give money to people who will spend it quickly whether rich or poor. In general, it turns out most very wealthy people have little incentive to spend money quickly. Instead, they save to hedge against and profit from recessions.

I really don't understand how people still push some version of trickle-down economics. Corporate buybacks are exactly this. Using taxpayer money to fund it only hurts the long term value of the economy.

When you say 'save', what do you mean? They aren't putting it in a mattress in their house... they are 'saving' it in investments that fund the economy.

There's a quote from It's a Wonderful Life that I always think of in this context:

"You're thinking of this place all wrong. As if I had the money back in a safe. The money's not here. Your money's in Joe's house...right next to yours. And in the Kennedy house, and Mrs. Macklin's house, and a hundred others. Why, you're lending them the money to build, and then, they're going to pay it back to you as best they can. Now what are you going to do? Foreclose on them?"

The whole point of finance, the social purpose, is that it prevents everyone (rich or not so rich) with assets from letting them sit idle.

Money does sit idle. It's used to hedge against recessions and acquire assets when their price is the lowest. Have you ever heard of liquidity?

The whole point of finance is to maximize returns on investment. One strong strategy is to build liquidity before economic (or industry) downturns to cheaply acquire assets. This idleness happens at a much greater rate for the wealthy than the poor. And by poor, I mean the bottom 90% of society. They don't have the luxury of savings. This means it's of greater value to give them money because they spend it quickly . The economy doesn't grow when companies buy back stock, it grows when someone has enough money to pay for medical treatments or to buy a new car.

The money they're talking about isn't peoples income, it's companies buying stock. The people they buy it from turn around and invest it elsewhere. Likewise, the "40%" saved isn't sitting in a vault somewhere, it's also invested.

Unless that company is also sitting on billions in cash reserves.

Even cash reserves end up loaned to others. Unless the company puts it under a mattress. Those reserves typically end up I low risk short term bonds and the like. Low risk, but not just sitting.

The only 'saved money actually doing nothing' scenario I can think if is when it gets deposited in a bank who then turns around and hold those funds at the central bank because they have nothing else to do with it. Central banks in many currencies these days offer negative deposit rates to discourage that behaviour and thus to the extent it happens it tends to only be over a very short period of time.

Of course it doesn't mean that investors/banks who receive the money reinvest it in the same country - if there is a dearth of opportunities in eg the US and Europe then this type of activity may result in increased investment in emerging markets.

Not literal cash, it's in accounts, accounts that pay interest, interest earned from investment

Or in shell companies in the Cayman's waiting for the next payroll tax holiday.

Maybe that should be the focus of attention vs stock buybacks.

> The best way to spur economic growth is to give money to people who will spend it quickly whether rich or poor. In general, it turns out most very wealthy people have little incentive to spend money quickly. Instead, they save to hedge against and profit from recessions.

This is plain incorrect. Spending on the value-less services and goods makes the economy as a whole poorer, and the more you spend the more you impoverish.

I don't understand what you mean, because you say "the best way to spur economic growth is to give money to people who will spend it quickly". That is "trickle down economics" as I understand what people mean by the phrase, and I agree(?) that it makes no sense. Broken windows, etc.

Trickle down is associated with supply side economics; giving money for people to spend means increasing aggregate demand, which is the opposite.

"Giving money for people to spend", what does that mean though? You write a note on it? "Plz spend on chzburger, kthxbye"

Or is it like you use body language? Giving money for people to spend is done like this, while giving money for people to save is done like this.

Every time someone buys an investment, they're buying it from someone who is cashing out, quite possibly to buy a cheeseburger. It makes no sense to call this a "trickle", of course, because it's not a small fraction of the money.

If that's the policy goal would it not be much easier to just build programs to support startups and entrepreneurs?

Take the converse construction. "Let's raise taxes on companies and wealthy individuals so the government can get into the winner-picking business of investing in startups and entrepreneurs." I would personally object to that policy.

It doesn't have to be "winner picking" you could have some policy like subsidizing private sector business loans for small business, coupled with additional small business tax breaks (maybe payroll tax breaks as well?). This would accomplish the goal of encouraging small businessess without the government having to evaluate small businesses on their merits.

That's basically a planned market and those do not work without a perfect government that has total access over all information in the economy. Such a government will probably never exist.

Remember you are talking about denying a CEO the ability to decide whether to invest or not invest in additional production capacity and instead assigning this task to the government. The CEO has more information about his own company than the government, which means that the government is not capable of making this decision. The government is also insulated from the consequences of making the wrong decision, if a company loses revenue or even shuts down the government is not directly affected.

The government will also intrinsically allocate money based on political considerations, which are not necessarily congruent with practical ones.

What? How does what I commented at all resemble a planned market?

I elaborated a little on an alternative proposal for increasing investment at https://news.ycombinator.com/item?id=20665196

I think the only thing similar to planned economy here is that you're shifting tax burden and resources invested from larger companies to smaller companies. The idea being that small companies are a beneficial resource because they contribute more directly and locally to their economies.

You could argue that this is a distortion but I think it's a long way from a planned economy.

Well I guess that depends on how successful you imagine the government would be at running such a program.

If it is in the US, my intuition is that it wouldn't be very good.

So here's the issuing with buying back, it creates an artificial demand on the stock. As we know, demand increases price, so the price of the stock goes up. In order words becomes inflated. People's 401k, pension are invested in those stocks. Meanwhile, the folks CEO/Boards behind the buybacks cash out! The price of the stock doesn't reflect the real value in normal conditions. When the music stops, folks with 401k, pensions invested in those will be the ones losing big time!

This is not correct. Companies conducting buybacks do so at a low rate over a long period of time exactly to avoid having the impact that you're describing. Companies buy their shares back at the market price, and the normal transaction volume of a large companies shares dwarf the size of buybacks it may be conducting.

This is my understanding as well, but is there any law to this effect?

Why would there be a specific law covering this situation? It's an obvious violation of fiduciary responsibility to buy back shares in an inefficient, price-elevating fashion.

> it's certainly worth it to call bullshit that these governmental moves that everyone ends up paying for only end up benefiting the wealthy

If these companies made a large one-time dividend, would that be preferable to share buybacks?

On one hand, we have tax treatment. Dividends produce revenue now; share buybacks, only on the disposal of the shares. On the other hand...I don't see another hand. Share buybacks should be specially taxed at the corporate level.

Either way, companies returning money to shareholders is preferable to pursuing boondoggles. (I'd argue 100% of the buyback tax revenue fund basic research, but we know that's presently politically unrealistic.)

Every share they buy back is being disposed of by someone else, who is paying tax on their gain. The tax rate across all of the payees won’t be as high as it would be with a dividend, but it’s definitely not a tax free event.

Buybacks and special dividends are economically equivalent. Buybacks allows individual investors to either sell or hold.

The majority of investors would usually prefer to hold at a given point in time (or at least would prefer a choice of when to realise their gain), so unless the sum is so big that a buyback is not practical, it is usually preferable from an investor perspective as it lowers average friction costs.

In some jurisdictions buybacks may also be more tax efficient for some investors than special dividends (and this may be especially true for senior executives who make the decision on which to do), but that's not the case everywhere or for all investors (some may have a tax preference for dividends).

What are the investors going to do with that money? Any answer other than "put it under a mattress" would lead to either consumption growth or investment growth. Even if they are putting it under a mattress, that would just lead to consumption or investment growth at a future date.

No, it can lead to asset growth (look at stock market and real estate returns) without any increase in consumption or investment.

I think you misunderstood the main point of @whatshisface.

If a company buys back shares from an existing investor (EI), EI now has cash and is likely to either spend that money (if they're a retiree selling shares for income) or reinvest that cash into some other investment. It's very unlikely that they're going to keep that new money in cash or a savings account.

That doesn’t necessarily create jobs or trickle down. If billionaire A buys stock in billionaire B’s company that provides an automated web service, money may change hands but the workers may not see any difference in salary. Maybe they need to spin up a few additional cloud instances to handle a new business area, but that won’t meaningfully impact Amazon’s workload.

Or suppose they buy a painting from another billionaire for $20 million - did that really create any jobs or middle-class wealth?

What's the alternative? The company that has decided it's not worth using the money just creates a pile of unused cash or starts spreading into new businesses to get better returns on it.

You can argue against the tax implications of buybacks vs dividends but either corporations give profits back to investors or they will just have to continue to grow bigger and bigger, which I think the same people hate even more than buybacks.

The alternative is to not do the tax cuts.

Or target the tax cuts at the poor who will spend it on goods and services.

44% of people already don't pay any federal income tax. I wouldn't call it a tax cut to give someone already paying zero (or less) an even greater share of the treasury.

Alternative is you tax the profits at a higher tax rate (i.e. what the tax rate was before the tax cuts) and use the tax revenues to fund things that benefit the general public at large...

My bad I may have misread this thread to be about buybacks/dividends not taxation. I'm not against high taxes but with any level of taxation some companies are going to run into the problem of not having a useful way to use their money besides giving it back to investors (unless taxes are such that no company can succeed)

The alternative is taxing the living shit out of companies and giving it to people. Because that is how you grow the economy, by making sure people have money to spend on things.

But we live under capitalism so giving money to people is out of the question. Money is for billionaires and shareholders.

I don't trust anyone who says tax "companies" rather than "the rich". It's like universal income. If you're talking about taxing someone other than the rich, you are talking about taxing people who can't afford it. If you're talking about giving money to someone other than the poor, you're talking about giving money to people who don't need it. Not everything that is counter-intuitive is a deep insight.

Ah OK, taxing the living shit out of companies or the investors and giving that money to people who spend it immediately seems to me to have nothing to do with companies using their profits on buybacks or dividends. Even with more taxes, some companies are going to do well enough to have made more money than they know what to do with, and sometimes returning money to the investors is probably their best option.

Honest question: don't pension funds also own a big part of the shareholder pie?

Correct.

If they are buying it from investors what do you think the investors are doing with that money then?

That borrowed billion doesn’t just then disappear into the ether. It gets reinvested.

idk how this is a surprise. Companies have been going based on speculation. Using buyback they are skyrocketting their value, which is why this used to be illegal. And tax cuts cannot be used as a justification for adding more departments, because tax cuts are uncertain year to year, so best to base your business on known variables. So they take the tax cuts and then create more value. How could you expect them to do anything else?

Maybe the educated folks on HN couldnt expect anything else.

But most people believed the current Administrations reasoning, which was that the tax cut would benefit them by stimulating the economy (eg trickle down economics), which to educated people was obvious BS.

It's debatable whether most people believed it. It was an argument bandied and a bunch of politicians passed a law. It was not put up to a popular vote (like you would see with Propositions in California).

All we can really say about the beliefs of Americans is captured by a recent CBS News Poll:

> Far fewer think the middle class (31 percent) and homeowners (25 percent) have been helped. More Americans think those groups have been hurt rather than helped by the new law.

https://www.cbsnews.com/news/2019-taxes-most-say-new-tax-law...

US corporate debt markets are fairly mature, so the investment and cash influx events are decoupled. It’s not like modern large companies get paid on Mondays and allocate capital by Tuesday.

Companies can always sell more bonds or shares when they have a major investment coming, the stock / bond buybacks buy time, improve credit standing and create a cushion for that future investment event.

Could all this stock buyback cause an acceleration into the company merger trend (or the opposite)?

When you go to McDonald's and see the picture of the burger on their over head menu does it look like a reheated microwave Patty or a juicy burger?

Of course it looks like a juicy burger even though you know full well that's not even remotely what you are going to get.

How would the tax cut pass if they didn't pass it off as a juicy burger full well knowing that they were going to give a microwaved burger instead.

Trickle down economics doesn't work.

A majority of Americans hold stock via retirement plans and such. Unfortunately the government systematically preventa many people from investing their money

It was obvious then and should be even more obvious now that it was bs, just like saying reducing taxes gives the govt more tax over time because the economy grows. This is used as an excuse but it's been shown yet again this is not what happens in reality.

Bastiat warned centuries ago about the dangers of nominal money.

If the companies borrow money and do nothing with it, they are not provoking scarcity of any kind, they are storing bits of a bank account still, doing nothing at all.

Unemployment is down to 3.7% I believe. So a benefit has probably been more jobs.

Is 401k really something that only small % of the populace has?

Any given increase in average investment yields translates into a much smaller percentage increase in total income for most workers with 401Ks than it provides to people whose primary income stream is investment income.

You mean like people who saved in their 401(k) for 30 years and are now living off it?

People who are living exclusively on 401k income are, by far, a minority of people with 401k’s, yes.

why does it have to be exclusively 401k?

Because people whose support comes from other sources have the income-boosting effects of anything that bumps investment yields reduced in proportion to their non-investment sources of income.

Yes, a lot of (especially the upper income segment) of the working class has some investments, particularly in retirement accounts; this doesn't mean they generally see the same income benefit as major capitalists from policies that boost investment yield.

I think you're failing to see the larger picture.

Buybacks are the correct option for these companies, because otherwise they would be burning money on stupid projects or acquisitions. The money goes back to shareholders, via higher stock prices. They then need to put this somewhere, and many just buy more stock. Stock valuations rise(lowering expected returns), and this causes more sophisticated investors to leave the general public markets and look for opportunities elsewhere... resulting in the 'real investment' that you want. Large, established, public companies are NOT the right vehicle for this investment to happen through.

Also, you need to read through the fake news headlines a bit. The top 10 companies are responsible for a disproportionate amount of these buybacks. Smaller companies probably have ways to use the extra tax cut money. Apple may not have needed lower taxes, but pretending like all companies are in Apple's fortunate financial position, and hinging your argument on that is like arguing that lotties are the best use of money because you won the lottery.

It seems like he is seeing the bigger picture.

The other reason this is a smart move for companies is that it gives them another tool for the upcoming recession that they can leverage to raise capital, should they need it.

As this is a direct response to my comment, I don't have the ability to downvote this, but everytime I read "fake news" these days I translate that to "this news that I disagree with that doesn't conform to my world view, so I'm just going to regurgitate the BS phrase 'fake news' without actually pointing out what is factually false."

Fake news, click-bait, misleading, agenda driven reporting; call it what you like. I did provide extra information to contextualize why I called it that, not sure why you are so mad.

We need progressive corporate taxation.

Do we? Ideally corporate tax would be 0%, and the people actually pocketing cash out of the company entirely would be taxed.

You mean embezzlement should be taxed