Capital Investment And Growth

Recently we were discussing Reihan’s assertion (look it up it is really recent) that we should go for immediate expensing for capital expenditures rather than lowering corporate rates because capital expenditures are the path to productivity.  We were unconvinced because we see the path to productivity including software and R&D which are already immediately expensed.

Today we found a WSJ article by James Mackintosh that suggests some support for our vision.

Sidebar: We at first used argument rather than vision.  We changed it to vision because, as we said at the time, we have no data to provide.  It just makes sense to us that buildings and equipment are just part of the productivity story.  End Sidebar.

James is discussing the potential pitfalls of Amazon’s new headquarters.  As part of the background he reports:

The lesson from the long term is that companies with high capital spending tend to underperform. Kenneth French, a professor at the Tuck School of Business at Dartmouth College, calculates that shares in the 30% of U.S. companies with the lowest investment returned six times as much as those with the highest investment since 1963.

Along the way he gives examples of overspending including the 1840 British railway boom, peak oil, dot-com, and shipping.  In addition, James notes:

Investing in growth is more plausible. Academics have shown that higher R&D spending on average is followed by better stock performance than for companies with lower R&D spending.

James is far from conclusive on the subject but we continue to think that rates are more important than immediate expensing.  One reason is the evidence he provides on capital spending not leading to stock market price increases but R&D does.  Obviously, stock market prices and productivity are only weakly connected through profits.  It is not QED but it suggests some of the problems with capital spending.  It buttresses the basic argument that rates provide the incentive for profits and solve the problem with firms moving out of the country.  We have moved a little more strongly in favor of rate reductions over immediate expensing.

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Free Trade II

In the last post we were saying that the benefits of free trade were widespread and the costs were narrow.  We said that the government needed to be part of the solution as tariffs are reduced.  Mark Perry comments on and links to a paper by Scott Lincicome, Doomed To Repeat The Long History Of America’s Protectionist Failures, that quantifies the opportunity to benefit all involved.  Scott concludes:

These surveys show that, contrary to the fashionable rhetoric, American protectionism has repeatedly failed as an economic strategy.

Scott reviews the previous research and shows us the exorbitant costs of protectionism.  Here is Table 7:

So, there is an enormous opportunity for government to find a solution other than higher tariffs.  There is also an enormous opportunity to reduce or eliminate tariffs and provide net benefits.  As we said government should not be the whole solution to change but it can be part of it.  Eliminating tariffs is the best solution.  Not increasing tariffs is the minimum we can expect of responsible government.  Finding useful ways to facilitate change that will happen should be part of responsible government.

 

Math Depends Upon Assumptions

Glenn Reynolds, Instapundit, discusses aging in his USA Today column.  He is in favor of extending lifespans. One of the arguments he gives is:

If we could extend healthspan by 20 years — so that 85 is the new 65 and 90 is the new 70 — people could retire that much later, and those pension obligations would pose a much less pressing problem. [emphasis added]

Agreed.  If folks worked longer and kept roughly the same retirement span then personal, corporate, and governmental finances would brighten considerably.  Unfortunately, that is not what has happened historically.  Here is a chart we used to help students understand the changes in retirement over generations:

Retirement Age versus Life Expectancy

Year Average Male Retirement Age Average Male Life Expectancy Years in Retirement
1950 66.9 65.5 0
1960 65.2 66.8 1.6
1970 64.0 67.0 3.0
1980 63.0 70.1 7.1
1990 62.6 71.8 9.2
2000 62.3 74.1 11.8
2005 61.7 75.2 13.5

We are not positive where this comes from as it was just class information but we think at least part of it comes from Mark Perry at Carpe Diem so a general h/t to him.  Over 55 years the life expectance went up by almost 10 years but the retirement age went DOWN by over five.  It seems unlikely that increasing the life expectancy by 20 will increase the retirement age much if at all.  Increasing our lifespan seems more likely to darken finances, especially public finances.

We would support increasing our useful lifespan too.  You can’t play too much handball.  But increasing our lifespan is more likely to exacerbate the entitlement problem than solve it.  What do you think is the probability of Congress increasing the age for receiving Social Security to 85?

 

How Can This Be Right?

Kevin Williamson is his usual perceptive self at NRO when he says:

The Republican apparatus may be cowardly, craven, and more than a little corrupt, but it is not the main obstacle toward achieving meaningful conservative reform. The main obstacle toward achieving meaningful conservative reform is the same as the main obstacle to the success of the Libertarian party: Americans do not want what they are selling. The tasks of conservatives is to explain to Americans why they should. It will not be easy.

What is amazing is that he is right.  It has not been easy and it seems to get harder.  Kevin covers the the positive side of what Deidre Mccloskey calls the Great Enrichment.  Although he knows it well, in this article he does not bother to take the time to cover the failure of the alternative that we see so starkly in Venezuela.  Here is the December 2016 Venezuela travel warning from the US Government.  Here are some stories on the economic disaster in Venezuela.  Remember that Venezuela has the world’s largest oil reserves.

So we know that capitalism works and socialism doesn’t.  Why were the 2016 presidential nominees from both parties so repulsed by capitalism?  Why is capitalistic success a hard sell and the hope that socialism won’t fail for the umpteenth consecutive time an easy sell?  We try to stick at it but it is a challenge to point out the obvious over and over again.  We give Kevin credit for creating new and pointed ways to make the obvious obvious.

Ending Slavery

Richard Brookhiser has a history lesson for The Donald on avoiding the Civil War in the current (5/29/17) NRODT.  One part, ending slavery by buying them, fits into our expertise from almost 40 years ago.  We believe there was a financial opportunity to avoid the Civil Was that politics failed to find.  Here we only consider the financial cost but the human cost of the Civil War, like slavery, is huge.

Sidebar One: We wrote this paper for a grad class in economic history almost 40 years ago.  We don’t have the references or the exact details anymore so we are painting with a broad brush.  End Sidebar One.

It seems simple because the Civil War was extraordinarily expensive that the government could buy out the slaves and avoid the Civil War and everybody would be at least as well off.  For example, here is an estimate of the actual cost that comes in at over $6 billion.  So when Richard quotes estimates from $600 to $900 million it is easy to wonder why there was a war.

Sidebar Two: There is strong evidence of an efficient market in slaves.  Given the pertinent characteristics like age and gender, the value of a slave can be reasonably estimated based on prices of actual sales.  According to the census there were almost 4 million slaves in the US in 1860 so Richard is estimating an average cost of $150 to $225.  Of course, individual prices would depend on pertinent characteristics.  A 20 year-old male will be worth more than a 60 year-old female.  End Sidebar Two

The problem with this analysis is that it is after the fact or ex-post.  Nobody expected that the Civil War would be as long or costly as it was and both sides thought they would win.  The analysis needs to be ex-ante.  What did folks think the Civil War would cost before it started?  They, see Sidebar, expected it to last a few months and cost a small number of millions.  The financial solution, and this was discussed, was to free the slaves at birth and death (B&D).  The  B&D solution reduces the costs in two ways.  First, babies are cheap because they are not productive for several years.  Second, it reduces the present value of the expenditures because the amounts are paid later.  It also provides a plausible way out for both sides because it doesn’t end slavery immediately.  For the same reason, it will have negative reactions too.

The bottom line is that it would have worked.  The present value of B&D expenditures was less than the expected cost of the Civil War.  It was not easily avoidable but it was avoidable.    James Buchanan might have been worse that our Immediate Past President.

Corbyn Tries Rhyming

UK Labour leader Jeremy Corbyn is looking for ideas.  It looks like Jeremy is going for ideas that have been well tested.  The WSJ reports:

In a throwback to the politics of the early 1980s in Britain, the manifesto listed commitments to nationalize railways and water companies and to increase taxes on corporations and the top 5% of earners.

The 128-page document also promised to raise the minimum wage and to create a National Investment Bank with regional branches to finance small-business lending, policies the party hopes will strike a chord with voters wearied by years of sluggish earnings growth and a long squeeze on public spending.

So Jeremy plans to nationalize, tax, and try and pick winners.  It is about as full blown socialism as it gets.  We know what will happen.  Socialism has destroyed Venezuela.  Do we really need a link for Venezuela?  OK but you really need to read more.  Remember that it has the largest oil reserves in the world.  Maggie saved the UK from socialism a few decades ago:

On moving into 10 Downing Street, Thatcher introduced a series of political and economic initiatives intended to reverse high unemployment and Britain’s struggles in the wake of the Winter of Discontent and an ongoing recession.[nb 1] Her political philosophy and economic policies emphasised deregulation (particularly of the financial sector), flexible labour markets, the privatisation of state-owned companies, and reducing the power and influence of trade unions. Thatcher’s popularity during her first years in office waned amid recession and high unemployment, until victory in the 1982 Falklands War and the recovering economy brought a resurgence of support, resulting in her decisive re-election in 1983.

There seems to be disagreement about who said, “History doesn’t repeat itself but it sometimes rhymes.”  Everyone would want credit for such an insight.  We see the socialist, fascists, Communists, and others trying slightly different versions.  It doesn’t work and it won’t.

The persistence of socialism given its record of failure is amazing.  It is easier to understand the hostility towards capitalism despite its success.  Envy is a powerful force in the world.

Chuck Connors And George

George Will recently compared the life of billionaires a century ago to the middle class today.  We remembered the Rifleman, played by Chuck Connors (one of twelve people to have played in both MLB and the NBA), being pejoratively referred to as sodbuster by the ranchers.  George’s insight that being a billionaire a century ago would be a lower quality of life than what most middle class folks in America face today.  George also reminds us that because of inflation a billion dollars in 1916 is worth $23 billion today.

Our point is that we spent a few hours busting the sod as part of a landscaping project this weekend.  The lives of lives of those folks a century or more ago was tough, really tough.  Work was really work.  We did about 800 square feet.  The work for acres is hard to imagine.  As George points out life expectancy was short and Chuck played a widower.

You might switch with a billionaire from a century ago if you had certain preferences.  For example, if you wanted lots of servants you might switch but if you like electronics you would not.  On the other hand, it would take very interesting preferences to want to switch from 2017 middle class America to middle class America of a century or more ago.  Nasty, brutish, and short would be a good comparison to current life.