WASHINGTON, DC — Over the past 50 years, the American economy has transformed from a traditional capitalist system in which firms reinvest their profits to grow their capital stock to one in which the typical corporation disgorges cash to shareholders without replenishing its own capital, according to a new report by American Compass executive director Oren Cass. The consequence has been trillions of dollars flowing out from the real economy to the financial sector, accompanied by stagnating productivity and skyrocketing wealth inequality.
The report analyzes cash flows of publicly traded, U.S.-based companies over the past half century, finding a striking transition in recent decades that threatens to undermine the vitality of the American economy. The report places firms into three categories:
- Growers: Firms with capital expenditures in excess of EBITDA, which tap capital markets to finance investment;
- Sustainers: Firms with capital expenditures greater than consumption of fixed capital that also return cash to shareholders, with EBITDA sufficient for both; and
- Eroders: Firms that consume fixed capital faster than they make new capital expenditures, while still returning cash to shareholders, though EBITDA would be sufficient to replenish their capital base.
The analysis finds that from 1971–85, Sustainers averaged 82% of market capitalization and Eroders 6%. By 2000, the Eroder share had grown to 19%, and by 2017, Eroders had overtaken Sustainers, 49% to 40%. As a result, the rate of cash flowing out of the operating economy and into Wall Street’s pockets has more than doubled from 1.5% of GDP during 1971–85 to 4.0% during 2009–17.
In an accompanying essay, Cass introduces the concept of “non-investment”: a financial sector that trades assets amongst itself rather than channeling resources toward the creation of productive capacity in the real economy. To ensure that capitalism delivers on its promise, he argues that policymakers must consider a range of policies including broad disclosure requirements, higher taxes on the transactions and capital gains that fuel speculation, and new support for firms that invest in domestic capacity.
Policy Brief: Back to Basics for Corporate Finance
Ban stock buybacks and repeal business interest deductibility
At SVB, the Market Was the Failure
The market failure is that market actors are fallible and their efforts at pursuing their own interests do not necessarily lead smoothly to efficient outcomes that serve themselves or the common good.
Policy Brief: Public Pension Accountability
Require transparency in management of public money