Investment and inequality: Stock markets for whom?
The world economy desperately needs more productive investment: to create jobs, to increase productivity and to meet critical global goals like combating climate change. But instead of more productive investment, we are getting rising stock markets. Sadly too many policymakers and journalists don’t know the difference.
Let’s start off with the basic confusion. Investment is when savings are used to pay for the creation of new productive assets–improvements in land, new buildings, machinery, computer software, the education of workers to create human capital. Households, companies and governments can all make investments, but certain types of investments, in public goods like roads or carbon emission controls, are more likely to be made by government.
Buying stocks and bonds on the stock market–the secondary market–may be something people can do with their savings, but it’s not an investment in the sense economists understand the word. No new productive assets are created when a person buys a share of stock on the secondary market.
So here is the paradox of post-crisis economic policy. Everyone agrees we need more investment, but too many governments have pursued economic policies based on austerity. These policies have cut public investment directly, and then cut jobs, wages and economic growth, which drives investment in the private sector.
In response first to the actual financial crisis and then to this fiscal madness, central banks in the US and Europe have cut short-term interest rates to near zero. When that was not enough to keep consumer demand alive and to fend off deflation, the central bankers began to intervene in long-term bond markets, buying bonds to keep long-term rates low.
Low interest rates, weak economies, and effectively bankrupt major banks combined to ensure that even though interest rates were very low, credit did not flow to a damaged real economy, but rather into secondary capital markets. Hence the paradox of low interest rates, low levels of investment and high stock prices. In advanced economies, corporate investment has declined by an average of 25% since the global financial crisis compared with pre-crisis forecasts, an IMF report said.
The punch line: with austerity policies came threats of deflation and recession. In response, central bankers sought to use monetary policy to counteract fiscal policy. Without any policy measures to push credit toward the real economy, the predictable result was that the banks poured credit into Wall Street speculative secondary capital market asset purchases.
From an inequality perspective, the results were terrible. In general, stocks and bonds are held by the more affluent, so the credit-fueled bidding war for secondary market assets added to the paper asset value of the wealthy, while doing nothing for most workers. In the US alone, shareholder returns reached more than US$903 billion in 2014, with $350 billion in dividends and $553 billion in buybacks.
Some have blamed central banks for keeping interest rates low. But that’s mistaken. Central banks, starting with the US Federal Reserve Board, rightly saw their economies heading toward recession and deflation and acted with the tools they had. As Federal Reserve Chair Ben Bernanke noted at the beginning of quantitative easing, the people who should have acted were in the US Congress; they should have moved to stimulate our economy and create jobs, rather than choke our economy with our particular brand of austerity, called the sequester. In Europe, of course, the austerity programme has been far worse, and the European Central Bank compounded it by initially raising rates in the face of an economic slowdown.
Policymakers in OECD countries really need to be focused on growth strategies that combine robust public investment with both macro and micro policies designed to create full employment and rising wages that will incentivise private investment.
If we want investment rather than speculation, and rising wages rather than runaway inequality, we need a global investment agenda that recognises that private investment starts when there are customers to buy the goods and services produced by the investments, and that investment for the public requires public investment.
*American Federation of Labor and Congress of Industrial Organizations, visit www.aflcio.org
FT (2015), “US companies on course to return $1tn to shareholders in 2015” in Financial Times, 12 April, www.ft.com/
IMF (2015), “Private Investment: what’s the holdup?”, in World Economic Outlook: Uneven Growth: Short- and Long-Term Factors, IMF April , Washington DC, see www.imf.org/external/pubs/ft/weo/2015/01