Monday, December 12, 2005
The New York Times demands that companies waste their money
The New York Times is running an editorial this morning calling for corporations to reduce dividends and instead reinvest the money "in the future health of those same businesses." Specifically,
This is perhaps the most economically ignorant point ever made on the pages of the New York Times, which is saying a lot. If, as you read this (perhaps in a Princeton lecture hall), Paul Krugman is in your field of view, please ask him whether he subscribes to this stupidity.
As everybody knows, "corporate chieftains" are, generally speaking, builders of business empires. Size matters. A lot. That's how they got to be "corporate chieftains." Indeed, they often prefer to increase the size of their companies even at some cost to share price appreciation. Why? Because bigger is better, more fun, and more lucrative for the management. By and large, "corporate chieftains" do not return cash to stockholders unless they are absolutely convinced that a dividend (or share repurchase, which is economically the same thing) will generate a significantly higher return than investing "in the future health" of their business. When does that condition obtain? When a business is shrinking, or inherently slow growing and in need of no new incremental capital.
In theory, dividends are paid when they will, in the opinion of management and the board, earn a higher return in the hands of the stockholders than invested "in the future health" of the business. In practice, they are only paid when they will earn a significantly higher return in the hands of the stockholders, because "corporate chieftains" tend to have a high regard for their own ability to earn a high rate of return.
Many businesses, including many large corporations, are fundamentally shrinking. Do the editors really want grocery store companies to build a zillion new stores, just to sustain their growth rates? Do they think Altria needs to "invest in the future health" of its tobacco business? Any oil company that does not replace its reserves with new discoveries or acquired assets is shrinking. Should it invest surplus cash in probable dry holes, or should it return the extra money to stockholders who will invest it in an entirely different industry?
We should rejoice when a large corporation returns profits to its stockholders. It is a sign that its management has humbly concluded that its owners would be better off investing money elsewhere. That means more and cheaper capital for existing and start-up businesses that need the money more and can prove it by paying a higher rate of return. Sure, some companies will shrink and eventually die. Good. They should die. Indeed, the critical insight of American capitalism is that the destruction of businesses, including large corporations, is usually a good thing in the long run. It liberates human, physical and financial capital to a higher use. The slow liquidation, break-up or quick slaughter of a large company clears away the forest canopy so that new businesses can sprout and grow big in its stead. The cone of the jack pine only opens and drops its seeds in the aftermath of a forest fire. The same is true for many of the new businesses that will create opportunities for Americans in the next generation.
Do the editors of the New York Times really mean what they say? If so, they reveal an attraction to big corporate stability that is almost European in tone and manifestly bad for the American economy.
Even as consumers are driving the economy and spending money they do not have in this holiday season, American businesses are sitting on hoards of cash. The best idea the corporate chieftains can come up with is to write dividend checks and buy up their own shares in record quantities. That's money in the pockets of wealthy investors. It's also more of the kind of short-term thinking this country can ill afford in an era of global competition. Instead, more should be invested in the future health of those same businesses.
This is perhaps the most economically ignorant point ever made on the pages of the New York Times, which is saying a lot. If, as you read this (perhaps in a Princeton lecture hall), Paul Krugman is in your field of view, please ask him whether he subscribes to this stupidity.
As everybody knows, "corporate chieftains" are, generally speaking, builders of business empires. Size matters. A lot. That's how they got to be "corporate chieftains." Indeed, they often prefer to increase the size of their companies even at some cost to share price appreciation. Why? Because bigger is better, more fun, and more lucrative for the management. By and large, "corporate chieftains" do not return cash to stockholders unless they are absolutely convinced that a dividend (or share repurchase, which is economically the same thing) will generate a significantly higher return than investing "in the future health" of their business. When does that condition obtain? When a business is shrinking, or inherently slow growing and in need of no new incremental capital.
In theory, dividends are paid when they will, in the opinion of management and the board, earn a higher return in the hands of the stockholders than invested "in the future health" of the business. In practice, they are only paid when they will earn a significantly higher return in the hands of the stockholders, because "corporate chieftains" tend to have a high regard for their own ability to earn a high rate of return.
Many businesses, including many large corporations, are fundamentally shrinking. Do the editors really want grocery store companies to build a zillion new stores, just to sustain their growth rates? Do they think Altria needs to "invest in the future health" of its tobacco business? Any oil company that does not replace its reserves with new discoveries or acquired assets is shrinking. Should it invest surplus cash in probable dry holes, or should it return the extra money to stockholders who will invest it in an entirely different industry?
We should rejoice when a large corporation returns profits to its stockholders. It is a sign that its management has humbly concluded that its owners would be better off investing money elsewhere. That means more and cheaper capital for existing and start-up businesses that need the money more and can prove it by paying a higher rate of return. Sure, some companies will shrink and eventually die. Good. They should die. Indeed, the critical insight of American capitalism is that the destruction of businesses, including large corporations, is usually a good thing in the long run. It liberates human, physical and financial capital to a higher use. The slow liquidation, break-up or quick slaughter of a large company clears away the forest canopy so that new businesses can sprout and grow big in its stead. The cone of the jack pine only opens and drops its seeds in the aftermath of a forest fire. The same is true for many of the new businesses that will create opportunities for Americans in the next generation.
Do the editors of the New York Times really mean what they say? If so, they reveal an attraction to big corporate stability that is almost European in tone and manifestly bad for the American economy.
3 Comments:
By 
Cardinalpark, at
Mon Dec 12, 08:37:00 AM:
By ScurvyOaks, at
Mon Dec 12, 10:04:00 AM:
Those dividends and share repurchases will also result in federal income tax at the shareholder level, helping the federal budget deficit. But that's such an obvious point that the NYT couldn't possibly have missed it, right?
By Dawnfire82, at
Mon Dec 12, 04:25:00 PM:
If a European "we don't quite understand capitalism" style article is gonna be printed in this country, aren't you glad it was the NYT? At least no one should be surprised.
