Disgorge the Cash!

It's well known that some basic parameters of the economy changed around 1980, in a mutation that's often called neoliberalism or financialization. Here's one piece of that shift that doesn't get talked about much, but might be relevant to our current predicament.

Source: Flow of Funds

The blue line shows the after-tax profits of nonfinancial corporations. The dotted red line shows dividend payments by those same corporations, and the solid red line shows total payout to shareholders, that is dividends plus net share repurchases. All three are expressed as a share of trend GDP. The thing to look at it is the relationship between the blue line and the solid red one.

In the pre-neoliberal era, up until 1980 or so, nonfinancial businesses paid out about 40 percent of their profits to shareholders. But in most of the years since 1980, they've paid out more than all of them. In 2006, for example, nonfinancial corporations had after-tax earnings of $800 billion, and paid out $365 billion in dividends and $565 in net stock repurchases. In 2007, earnings were $750 billion, dividends were $480 billion, and net stock repurchases were $790 billion. (Yes, net stock repurchases exceeded after-tax profits.) In 2008 it was $600, $470, and $340 billion. And so on. [1]

It was a common trope in accounts of the housing bubble that greedy or shortsighted homeowners were extracting equity from their houses with second mortgages or cash-out refinancings to pay for extra consumption. What nobody mentioned was that the rentier class had been doing this longer, and on a much larger scale, to the country's productive enterprises. At the top of every boom in the neoliberal era, there's been a massive round of stock buybacks, which you could think of as shareholders cashing out their bubble wealth. It's a bit like the homeowners "using their houses as ATMs" during the 2000s. The difference, of course, is that if you took too much equity out of your house in the bubble, you're the one stuck with the mortgage payments today. Whereas when shareholders use businesses as ATMs, those businesses' workers and customers get to share the pain.

One way of thinking about this increase in the share of profits flowing out of the firm, is in terms of changing relations between managers and the owning class. The managerial capitalism of Galbraith or Berle and Means, with firms pursuing a variety of objectives and "owners" just one constituency among many, really existed, but only in the decades after World War II. That, anyway, is the argument of Dumenil and Levy's Crisis of Neoliberalism. In the postwar period,

corporations were managed with concerns, such as investment and technical change, significantly distinct from the creation of "shareholder value." Managers enjoyed relative freedom to act vis-a-vis owners, with a considerable share of profits retained within the firm for the purpose of investment. ... Neoliberalism put an end to this autonomy because it implied a containment of capitalist interests, and established a new compromise at the top of the social hierarchies... during the 1980s, the disciplinary aspect of the new relationship between the capitalist and the managerial classes was dominant... after 2000, managers had become a pillar of Finance. 

When I've heard Dumenil talk about this development, he calls the new configuration at the top a "loving marriage"; the book says, less evocatively, that today

income patterns suggest that a process of "hybridization" or merger is underway. ... The boundary between high-ranking managers and the capitalist classes is blurred.

The key thing is that at one point, large businesses really were run by people who, while autocratic within the firm and often vicious in defense of their privileges, really did identify with the particular businesses they managed and focused their energy on their survival and growth, and even on the sheer disinterested desire to do their kind of business well. You can find a few businesses that are still run like this -- I've been meaning to write a post on Steve Jobs -- but by far the dominant ethos among managers today is that a business exists only to enrich its shareholders, including, of course, senior managers themselves. Which they have done very successfully, as the graph above (or a look at the world outside) shows.

In terms of the specific process by which this cam about, the best guide is chapter 6 of Doug Henwood's Wall Street (available for free download here.) [2] As Doug makes clear, the increased payouts to shareholders didn't just happen. They're the result of a conscious, deliberate effort by owners of financial assets to reassert their claims on corporate income, using the carrot of high pay and stock for mangers and the stick of hostile takeovers for those who didn't come through. Here's Michael Jensen spelling out the problem from finance's point of view:

Conflicts of interest between shareholders and managers over payout policies are especially severe when the organization generates substantial cashflow. The problem is how to motivate managers to disgorge the cash rather than investing it at below the cost of capital or wasting it on organization inefficiencies [by which Jensen seems to have mostly meant high wages].

Peter Rona, also quoted in Wall Street, expresses the same thought but in a decidedly less finance-friendly way: Shareholders "take pretty much the same view of the corporation as a praying mantis does of her mate."

You don't see the overt Jensen-type arguments as much now that management at most firms is happy to disgorge all of its cash and then some. But they're not gone. A while back I saw a column in the business press -- wish I could remember where -- expressing outrage at Apple's huge cash reserves. Because they should be investing that in new technology, or expanding production and hiring people? Of course not. It's outrageous because that's the shareholders' money, and why isn't Apple handing it over immediately. More than that, why doesn't Apple issue a bunch of bonds, as much as the market will take, and pay the proceeds out to the shareholders too? From the point of view of the creatures on Wall Street, a company that prioritizes its long-term growth and survival is stealing from them.

UPDATE: Ah, here's the piece I was thinking of: Forget iPad, it's time for iGetsomemoneyback. From right before the iPad launch, it's a gem of the rentier mindset, complete with mockery of Apple for investing in this silly tablet thing instead of just handing all its money to Wall Street.

Why is Apple hoarding its cash? A company spokesman explains: "We have maintained our cash and strong balance sheet to preserve the flexibility to make strategic investments and/or acquisitions." ... Steve Jobs really doesn't need an acquisitions warchest of around $30 billion ... He should start handing back this money to stockholders through dividends. ... The money belongs to stockholders: Give. Indeed Jobs should go further. Apple should -- gasp -- start borrowing, and hand that money back, too.

Disgorge the cash!


SECOND UPDATE: Welcome to visitors from Dealbreaker, Felix Salmon and Powerline. If you like this, other posts here you might like include Selfish Masters, Selfless Servants; The Financial Crisis and the Recession; What Do Bosses Want?; and in sort of a different vein, Satisfaction.

[1] There's something very odd going on in the fourth quarter of 2005: According to the Flow of Funds, dividend payments by nonfinancial firms dropped to essentially zero. The shortfall was made up in the preceding and following quarters. I suspect there must be some tax change involved. Does anybody (Bruce Wilder, maybe) have any idea what it is?

[2] John Smithin's Macroeconomic Policy and the Future of Capitalism is also very good on this; it's subtitle ("the revenge of the rentiers") gives a better flavor of the argument than the bland title.