Federal Reserve quantitative easing (QE), in addition to blowing the speculative “everything bubble” and suppressing productive lending for a decade in the American and European economies, has also suppressed business capital investment, according to strong circumstantial evidence of a newly published study.
Oren Cass, on American Compass — an “American System Republican” site — has published an analysis of American corporate capital investment which studies all U.S.-headquartered businesses in the S&P database from the 1970s to 2018. He calls it “a systematic, firm-level study of declining business investment and the recent transformation of the typical American corporation’s business strategy to one that disgorges cash to shareholders while failing to replenish its capital base.” https://americancompass.org/wp-content/uploads/2021/03/AC-ResearchReport_Corporate-Erosion-of-Capitalism_Final_Updated.pdf
The study divided firms into “growers,” sustainers” and “eroders,” depending on whether they invest more than their net earnings in new plant and equipment (using capital markets to do so and postponing dividends), maintain or “sustain” their capital while also paying dividends, or give their capital away in the form of dividends and stock buybacks. The study found a dramatic reversal since 2000, and especially since 2012 in the era of QE, in regard to which category forms the majority of all firms.
“Growers” have been falling since the late 1970s, when they were 15% of all reporting U.S.-based companies’ capital, to less than 5% now. “Sustainers” represented 59% of the capitalization on stock markets up through 2000, but in 2018 they had fallen to 40%. “Eroders,” which had 20% of capitalization in 2000, by 2018 had grabbed 51% of it.
Cass emphasizes that this shift is independent of economic sector; i.e., it does not show the economy evolving toward sectors with lighter capital, so much as all sectors trashing their capital. “Eroders” rose to 47% of the capital of the manufacturing sector, for example, and 52% of the IT sector. He concludes that the “flow of capital out of the operating sector” of the economy since 2009 has been $3.1 trillion [pbg]
