I attended the Government Economics Network Annual Conference yesterday. Top marks to all the speakers who presented some facinating talks on recent changes to the UK welfare system (Trevor Huddleston), new approaches to modelling household behaviour (Martin Weale), and a rolicking-good discussion of the persistent costs for individuals of unemployment spells (Tim Maloney). I strongly encourage other economists to get involved in these events, I myself have taken away new thinking about how I'm going to approach some of the modelling work I do thanks to Prof Weale.
But the thing which really got me thinking on the day was the panel discussion on "The Productivity Paradox". The cut and thrust is (and I'll go back and pull some OECD stats if they're not posted), New Zealand has been in the bottom third of the OECD countries for productivity for the last approximate 40 years. Prior to the late 1970's we were actually up in the top 25%, then within the space of a decade, we plunged to bottom third, and we've been there ever since.
Pretty horrible performance and the panel came up with some reasons why our comparative preformances compared to other OECD countries may be so bad. Lack of competition was touted, significant investment in low growth sectors another reason, wrong investment (ie not in high margin industries) a third. All very good reasons.
But for me, the relevant questions now - 40 years after the horse has bolted the pen - is what would it cost to improve productivity? Starting out from a low productivity base, being so far behind the eight-ball vis-a-vis other countries, what costs are imposed, and who pays, for even trying to get back into the top 25%? Lots of great ideas about shifting investment to high tech industries and etc, but within that picture, is that shift "costless"? And who "pays"?
I suspect rural areas, and workers pay. And that move is not costless.
more later as I build some evidence...
Addendum:
Statistics New Zealand publish "Innovation in New Zealand" an interesting little read... Lots of interesting content, including this summary: which included that in 2012, there was no link between innovators and non-innovators for performance measure perceptions such as productivity. While innovators aggregate profitability was twice that of non-innovators, however, innovations tended to occur in industries with small GDP contributions... Thats pretty much what Roger Procter was saying...
Saturday, December 15, 2012
Tuesday, December 11, 2012
It's not you, it's me!
Dear Blog,
It's not you, it's me. This time apart, this lack of posting is nothing you've done. I still love you!
But over this last week and a bit, I feel a gap has grown between us. I'm spending more time with my wife - my job, that I have not given you, my blog mistress, the time care and attention you so richly deserve.
But fear not sweet sweet blog mistress, Christmas break is coming. And I shall lavish sweet and tender affection upon you. I will share with you my inner economic thoughts. And I will once again upload graphs into your ample domain.
Until Christmas... Xxx
Yours, your overworked stress out civil servant,
James
Saturday, December 1, 2012
Real Markets and Money Markets
Last year, well before the US presidential election, I was in a bar having a heated conversation with some guy who had been listening to too much Tea Party rhetoric, although he wasn't aware of its origins at the time. From points 20, 21, 31, 32 cited in that link, part of the issues the Tea Party have is with the size of debt - there's too much of it, its all owned by the banks, and its growth is unsustainable.
Where this guy was coming from was that banks take yours and my money, then lend it out 5, 10, 15 whatever times, and every single time they're charging somebody interest on that debt! So mine or his deposited $100 gets lent out 5, 10, 15 whatever times and balloons out to $1500 worth of debt! And on that $1500, if it all gets paid back in a year, and the banks were able to charge 9%, then that's $135 worth of new debt that collectively the country owes purely because of how banks abuse yours and my deposits! Which means someone has to work harder, or work longer, or suffer under growing debt to pay $135 more debt than what existed 1 year ago!
He was getting quite heated about this - this was an outrage! Abusive bank practices perpetuate the proliferation of debt and were the road to madness. Then he went on to talk about how the US banking system is privately owned by US Central Banks - and this all added to the conspiracy of shadowy figures somewhere who's deep dark plan was to royally root America for some nefarious purpose, of which he could only speculate. But maybe Zionists were involved in there somewhere.... His thinking was American centric, obviously because he read something from someone over there.
In economics, we like to think of the world in models, our favour being market models. In these models, economic activity occurs in separate and discrete markets which are all, however, deeply inter-related. Stylised models of the economy talk about the:
Within this picture all the markets quantities are deeply integrated, with changes in one market effecting others all other markets. There's disagreement about the pace of change, and whether changes propagate simultaneously or with lag. But just assume for the moment, that changes ultimately occur. Each individual market have both quantity and price dimensions, where changes in quantities demanded and supplied affect the market's prices. And its normally the prices generated within each market which connect the different markets together (a bit of a simplification, but run with this for a bit).
Decreases in the quantity of labour for hire in the Labour Market increases wage prices, and adds to the cost of producing goods and services in the Goods Market. Increased wage prices also increase the financial capital needed for production in the Goods Market, increasing the demand for money in the Money Market, putting pressure in interest rates. Increased costs of production leads to increased costs of New Zealand goods and services, which relative to the Rest of the Work, decreases the overseas demand for our goods and services. Decreases in demand lead business to reduce the amount of goods and services they produce, decreasing thier demand for labour. Decreasing in the demand for labour puts downward pressure on wages back in the Labour market, and the initial "shock" to the system which started in the Labour Market is returns back to the Labour Market through the interaction the shock has had throughout the system.
That's only one potential "channel" for the transmission of shocks and responses around the model. Potentially, the increase in interest rates can attract overseas capital as one response, and that itself has implications within the system.
But the important point is that everything is connected, everything is inter-related, and no market is an "island" where changes can occur in isolation. Economists create careers perturbing models like this and getting a sense about how changes oscillate through and around "the system".
Getting back to the this bar-fly's point: bank's can't make money and debt in isolation - the demand for finance is tied to the demand for goods and services, which is itself tied to production. They match dollar-for-dollar. Increase in debt is match by a corresponding increases in amounts spent on goods and services, which matches dollar for dollar to an increase in the returns to the incomes of the factor's for production. Interest payments are achievable because production processes generate "value added" - an excess of income over the costs of production. In fact, that's the engine of economic growth and why the Gross Domestic Production of economies normally increases over time :)
Thinking about markets and models of the economy is how economists avoid fuzzy thinking, especially from unbalanced political rhetoric.
Where this guy was coming from was that banks take yours and my money, then lend it out 5, 10, 15 whatever times, and every single time they're charging somebody interest on that debt! So mine or his deposited $100 gets lent out 5, 10, 15 whatever times and balloons out to $1500 worth of debt! And on that $1500, if it all gets paid back in a year, and the banks were able to charge 9%, then that's $135 worth of new debt that collectively the country owes purely because of how banks abuse yours and my deposits! Which means someone has to work harder, or work longer, or suffer under growing debt to pay $135 more debt than what existed 1 year ago!
He was getting quite heated about this - this was an outrage! Abusive bank practices perpetuate the proliferation of debt and were the road to madness. Then he went on to talk about how the US banking system is privately owned by US Central Banks - and this all added to the conspiracy of shadowy figures somewhere who's deep dark plan was to royally root America for some nefarious purpose, of which he could only speculate. But maybe Zionists were involved in there somewhere.... His thinking was American centric, obviously because he read something from someone over there.
In economics, we like to think of the world in models, our favour being market models. In these models, economic activity occurs in separate and discrete markets which are all, however, deeply inter-related. Stylised models of the economy talk about the:
- Labour Market: where workers sell their labour efforts to producers and receive a wage which they use to consume or invest.
- Goods Market: where producers use financial capital (paying interest) to employ workers (paying wages) to produce goods and services which are sold for profit (receiving prices) to either domestic or overseas consumers.
- Money Market: where financial capital is supplied by lenders and financially intermediated to borrowers in return for interest.
- The Rest of the World: where quantities of goods and money comes from or goes to. Changes in the rest of the world demand for New Zealand goods or financial assets effects New Zealand's exchange rate.
Within this picture all the markets quantities are deeply integrated, with changes in one market effecting others all other markets. There's disagreement about the pace of change, and whether changes propagate simultaneously or with lag. But just assume for the moment, that changes ultimately occur. Each individual market have both quantity and price dimensions, where changes in quantities demanded and supplied affect the market's prices. And its normally the prices generated within each market which connect the different markets together (a bit of a simplification, but run with this for a bit).
Decreases in the quantity of labour for hire in the Labour Market increases wage prices, and adds to the cost of producing goods and services in the Goods Market. Increased wage prices also increase the financial capital needed for production in the Goods Market, increasing the demand for money in the Money Market, putting pressure in interest rates. Increased costs of production leads to increased costs of New Zealand goods and services, which relative to the Rest of the Work, decreases the overseas demand for our goods and services. Decreases in demand lead business to reduce the amount of goods and services they produce, decreasing thier demand for labour. Decreasing in the demand for labour puts downward pressure on wages back in the Labour market, and the initial "shock" to the system which started in the Labour Market is returns back to the Labour Market through the interaction the shock has had throughout the system.
That's only one potential "channel" for the transmission of shocks and responses around the model. Potentially, the increase in interest rates can attract overseas capital as one response, and that itself has implications within the system.
But the important point is that everything is connected, everything is inter-related, and no market is an "island" where changes can occur in isolation. Economists create careers perturbing models like this and getting a sense about how changes oscillate through and around "the system".
Getting back to the this bar-fly's point: bank's can't make money and debt in isolation - the demand for finance is tied to the demand for goods and services, which is itself tied to production. They match dollar-for-dollar. Increase in debt is match by a corresponding increases in amounts spent on goods and services, which matches dollar for dollar to an increase in the returns to the incomes of the factor's for production. Interest payments are achievable because production processes generate "value added" - an excess of income over the costs of production. In fact, that's the engine of economic growth and why the Gross Domestic Production of economies normally increases over time :)
Thinking about markets and models of the economy is how economists avoid fuzzy thinking, especially from unbalanced political rhetoric.
Saturday, November 17, 2012
Price Elasticity and New Zealand Retail Sales
Statistics New Zealand, with their recent Retail Statistics
released a bit of a bombshell: not only was an decline in retail trade
unexpected, but things which (used to) NEVER fall - like supermarket
and grocery store sales - declined.
The thing about supermarket and groceries is that, since everyone needs to eat, they are considered "inelastic" goods - changes in the demand for "groceries" is relatively insensitive to changes in their price. If the price of groceries or supermarket items increase, people can't easily substitute away into consuming other alternative commodities, like things sold from "motor vehicle and parts" retailing store The same thing with petrol: in the short term, the quantity of petrol the country consumes is insensitive to variations in petrol costs.
Prices and quantities always move in opposite ways: price falls stimulate increased quantities sold, and on the flip side price increases reduce the quantities of good sold. Couple this with the notion of price elasticity. If the price of an inelastic good goes up then, becuase the quantity sold is relatively insensitive to price, the quantity sold falls by less then the price increase. A price increase, coupled with a smaller quantity decrease means that the value of total sales should actually increase.
Similarly, if the price of an inelastic goods falls, then inelasticity means the quantity sold will increase by less then the price decrease. A price decrease coupled with a smaller quantity increase means the total value of sales should decline.
Compare that against "elastic" goods, normally associated with discretionary purchases. Yes everybody needs food, but not everybody needs a new ball, or other recreational good. Small changes in the price of recreational goods can lead to comparatively larger changes in the quantities sold. A small price drop will lead to a large quantity increase, and the value of total sales should increase. A small price increase will lead to a large quantity fall and the value of total sales should fall.
Here's the quarterly changes in Retail Sales of recreational goods (elastic) side-by-side with supermarket goods (inelastic) from Stats NZ's data.
While
the graphs are similar(ish), Recreational goods has spent more time in
negative growth than supermarkets. Most of the period around the Global
Financial Crisis (2008 - 2010) recreation good retail sales were spent
in decline, compared to approximately 3 quarters for Supermarkets. When consumer incomes where most uncertain, it was recreational goods whose sales declined comparatively the most.
We can go further than this and look at the comparative elasticities of retails sales for Supermarkets and Recreational Goods. Statistics New Zealand also estimates and releases Retail trade sales deflators, which allow the separate price and quantity effects which comprise total retail sales to be disentangled from each other. I've separated changes in price with changes in quantities for Supermarket and Grocery retail sales,and Recreational Goods retail sales and scatter plot each below.
Based on the above data, supermarkets can afford to increase their prices by approximately 1.3% each quarter (where the red line above cross the x-axis) before they will start to notice a decline in the volume of stock sold. In contrast, Recreational Good stores will notice a drop off in quantity sold if they attempt to increase prices by more than 0.16% each quarter (where the green line intercepts the x-axis).
If Recreational Stores don't change prices, they can expect the quantity of goods sold to naturally increase by 0.17% each quarter (where the green line intercepts the y-axis). However, if supermarkets don't change prices, they can expect the quantity of goods sold to increase 1.5% each quarter (where the red line intercepts the y-axis). Not only in the natural increase in quantity sold significantly higher for supermarkets (this is the notion that people need to eat), but the effects price has in dampening demand is so much weaker.
In contrast, the natural increase in recreational goods sold is almost non-existant, and the effects of prices increases for recreational goods are dramatic and immediate. Any attempt to increase prices even just a little bit will lead to a decline in the quantity of recreational goods sold.
Coming back to the reason why the decline in retail sales was a bombshell, was that for the Sept 2012 quarter, the Supermarket Retail Sales deflator increased 0.78%. Based on estimated price elasticity, the quantity of goods sold should have increased by 0.62% (Supermarkets can lift prices by 1.3% before quantity declines). But, in fact, the quantity of supermarket goods sold fell 2.34% for the September 2012 quarter, based on Stats NZ's data. And the difference between -2.34% actual and a 0.62% estimated is so large that it tells us, the Economists, that something else just might be at play. Something else that lead to a shock increase in unemployment; that's lead to a decline in import demand; and that's lead to very little consumer price inflation.
All of these point to an issue with what's happening to wealth growth and total incomes within the New Zealand's Household insitutional sector.
The thing about supermarket and groceries is that, since everyone needs to eat, they are considered "inelastic" goods - changes in the demand for "groceries" is relatively insensitive to changes in their price. If the price of groceries or supermarket items increase, people can't easily substitute away into consuming other alternative commodities, like things sold from "motor vehicle and parts" retailing store The same thing with petrol: in the short term, the quantity of petrol the country consumes is insensitive to variations in petrol costs.
Prices and quantities always move in opposite ways: price falls stimulate increased quantities sold, and on the flip side price increases reduce the quantities of good sold. Couple this with the notion of price elasticity. If the price of an inelastic good goes up then, becuase the quantity sold is relatively insensitive to price, the quantity sold falls by less then the price increase. A price increase, coupled with a smaller quantity decrease means that the value of total sales should actually increase.
Similarly, if the price of an inelastic goods falls, then inelasticity means the quantity sold will increase by less then the price decrease. A price decrease coupled with a smaller quantity increase means the total value of sales should decline.
Compare that against "elastic" goods, normally associated with discretionary purchases. Yes everybody needs food, but not everybody needs a new ball, or other recreational good. Small changes in the price of recreational goods can lead to comparatively larger changes in the quantities sold. A small price drop will lead to a large quantity increase, and the value of total sales should increase. A small price increase will lead to a large quantity fall and the value of total sales should fall.
Here's the quarterly changes in Retail Sales of recreational goods (elastic) side-by-side with supermarket goods (inelastic) from Stats NZ's data.
 |
| Quarterly Change in Seasonally Adjusted Total Retail Sales: Recreational Goods |
 |
| Quarterly Change in Seasonally Adjusted Retail Sales: Supermarkets and Grocery Stores |
We can go further than this and look at the comparative elasticities of retails sales for Supermarkets and Recreational Goods. Statistics New Zealand also estimates and releases Retail trade sales deflators, which allow the separate price and quantity effects which comprise total retail sales to be disentangled from each other. I've separated changes in price with changes in quantities for Supermarket and Grocery retail sales,and Recreational Goods retail sales and scatter plot each below.
 |
| Changes in Prices and Quantities: New Zealand Supermarket and Recreational Good Retail Trade Data |
Based on the above data, supermarkets can afford to increase their prices by approximately 1.3% each quarter (where the red line above cross the x-axis) before they will start to notice a decline in the volume of stock sold. In contrast, Recreational Good stores will notice a drop off in quantity sold if they attempt to increase prices by more than 0.16% each quarter (where the green line intercepts the x-axis).
If Recreational Stores don't change prices, they can expect the quantity of goods sold to naturally increase by 0.17% each quarter (where the green line intercepts the y-axis). However, if supermarkets don't change prices, they can expect the quantity of goods sold to increase 1.5% each quarter (where the red line intercepts the y-axis). Not only in the natural increase in quantity sold significantly higher for supermarkets (this is the notion that people need to eat), but the effects price has in dampening demand is so much weaker.
In contrast, the natural increase in recreational goods sold is almost non-existant, and the effects of prices increases for recreational goods are dramatic and immediate. Any attempt to increase prices even just a little bit will lead to a decline in the quantity of recreational goods sold.
Coming back to the reason why the decline in retail sales was a bombshell, was that for the Sept 2012 quarter, the Supermarket Retail Sales deflator increased 0.78%. Based on estimated price elasticity, the quantity of goods sold should have increased by 0.62% (Supermarkets can lift prices by 1.3% before quantity declines). But, in fact, the quantity of supermarket goods sold fell 2.34% for the September 2012 quarter, based on Stats NZ's data. And the difference between -2.34% actual and a 0.62% estimated is so large that it tells us, the Economists, that something else just might be at play. Something else that lead to a shock increase in unemployment; that's lead to a decline in import demand; and that's lead to very little consumer price inflation.
All of these point to an issue with what's happening to wealth growth and total incomes within the New Zealand's Household insitutional sector.
Monday, November 12, 2012
Quantum theory and train passengers
I read some where that quantum theory wasn't a theory about the behaviour of the very small, it was a theory about the behaviour of the isolated. The argument goes that even you, if separated from other particles to interact with would start displaying quantum theory properties. It just so happens that the level of separation and disconnection needed to generate quantum theory effects only really occurs at sub atomic particle level where the comparative space between particles is very large.
That and at the train station passenger level.
Cueing up waiting for the Central Wellington - Melling train, there's a whole cluster of people non-interacting, with heads in smart phones, earphones in ears actively non-interacting with each other.
Standing back and observing them, I'm waiting to witness something equivalent to Schrodinger Quantum Entanglement Principal as the passengers, wrapped in their music and web surfing, unconsciously but simultaneously start rotating in unison but in opposite directions with each other...
That and at the train station passenger level.
Cueing up waiting for the Central Wellington - Melling train, there's a whole cluster of people non-interacting, with heads in smart phones, earphones in ears actively non-interacting with each other.
Standing back and observing them, I'm waiting to witness something equivalent to Schrodinger Quantum Entanglement Principal as the passengers, wrapped in their music and web surfing, unconsciously but simultaneously start rotating in unison but in opposite directions with each other...
Saturday, November 10, 2012
Unemployment and the Business Cycle
There's been a lot of recent discussion about Statistics New Zealand's latest Household Labour Force Statistics (HLFS) which are used to define 'the' unemployment rate. Quite correctly, there has been an outcry over how the unemployment rate is the highest its been in 13 years, mainly from a decrease in the number of people who are no longer in employment.
Over the business cycle, profitability and employment are counter-cyclical. Business profits are the first variable to decline in a recession, followed next by business investment. Employment growth declines next, and then unemployment increases. As unemployment increases, business profitability improves and you get the funny situation New Zealand is currently in where unemployment is increasing despite business profits being high. Growth in business profits lead to growth in business invesment. Growth in business investment leads to increases in labour employment and decreases in unemployment.
And so "is" the economic business cycle.
So where's New Zealand in this profit-employment loop-de-loop? We're almost at the turn around stage where business profits have recovered and are growing, but before the business investment stage, where profits are used to expand productive capital and employment. Expect Statistics New Zealand's Gross Fixed Capital Investment statistics rate of growth to increase either this or next quarter.
The HLFS stats themselves were also interesting, not only for the significant 13 year peek in unemployment, but for how employment has decreased for some age groups,but increased for others. Here's the latest HLFS graphically. Older workers are doing ok - its the young and the middle aged workforces that have bourne the brunt of the recession.
And they've been wearing it for quite a few years...!
Over the business cycle, profitability and employment are counter-cyclical. Business profits are the first variable to decline in a recession, followed next by business investment. Employment growth declines next, and then unemployment increases. As unemployment increases, business profitability improves and you get the funny situation New Zealand is currently in where unemployment is increasing despite business profits being high. Growth in business profits lead to growth in business invesment. Growth in business investment leads to increases in labour employment and decreases in unemployment.
And so "is" the economic business cycle.
So where's New Zealand in this profit-employment loop-de-loop? We're almost at the turn around stage where business profits have recovered and are growing, but before the business investment stage, where profits are used to expand productive capital and employment. Expect Statistics New Zealand's Gross Fixed Capital Investment statistics rate of growth to increase either this or next quarter.
The HLFS stats themselves were also interesting, not only for the significant 13 year peek in unemployment, but for how employment has decreased for some age groups,but increased for others. Here's the latest HLFS graphically. Older workers are doing ok - its the young and the middle aged workforces that have bourne the brunt of the recession.
And they've been wearing it for quite a few years...!
Wednesday, October 24, 2012
Capital Markets and Economic Regulation
Tim Brown's, head of Infratil's "Capital Markets and Economic Regulation" area, thought provoking article in the Dominion Post's 24 October 2012 got me thinking about economic investment. Tim's thesis was New Zealand companies reinvest too little of their current profit, to the detriment of theirs - and ultimately New Zealand's - long term success and opportunities. The legacy of low New Zealand investment was low company capital growth, manifesting in low average returns from the New Zealand share market measured over an 18 year period.
Lets:
Against that "benefit", is the opportunity cost of reinvestment - the cost of not doing the next valuable alternative use of the profit, which is - in this instance - returning the profit to the shareholders. On the New Zealand share market, a market traded internationally, where the company competes with others for the attention of financial investors, the cost of not paying a dividend is high. The share price falls, the credibility of management is undermined, and investor attention shifts to alternative investment opportunities, all of which generate current and future issues for the company.
So Tim is absolutely right. From the companies perspective it probably does make sense for it to return current profit to existing shareholders and reduce the current and future impact on its share price. as opposed to reinvest the same money for a potential, maybe / could be increase in future profits.
Consequently, with less downside to reinvestment, and a higher relative upside to reinvestment, then economic theory would suggest companies which DON'T trade on the share market might have a higher rate of reinvestment. And if they did, than all of Tim's points follow: they have higher average rates of return, and they generate more economic value for their shareholders and New Zealand over time.
To illustrate my point, I've used Statistics New Zealand's Institutional Sector Accounts (ISA) from here. The ISA distinguish between "Private non-corporate producer enterprises" which I've labelled as "Small" and assume are not regularly traded on the stock exchange, and "Private corporate producer enterprises and producer boards" which are "Big" companies who either are, or are similar to traded share market companies.
From Graph 1, large companies pay more of their productive surplus to their employees than they retain in profits. Over time, they have been paying comparatively more to employees, and comparatively less to business owners. From Graph 2 below, large business have also not fundamentally changed their Total Income to Value Added rates. If they were reinvesting, then they would be increasing the amount of income they receive from all of their investment relative to their value added. And from Graph 2, they have not significantly altered the level of their total income to value added between 1999 - 2009.
All of this is entirely consistent with Tim's analysis.
The bit that differs from Tim's analysis is the comparative behaviour and investment outcomes of the Private non-corporate producers. From Graph 1, a significantly higher proportion of economic surplus is returned to owners than is paid to employed labour. From Graph 2, significantly more of that retained surplus has been reinvested, and led to high and increasing rates of total income to value added.
Small companies tend to perceive higher relative benefits of reinvesting and face lower opportunity costs of reinvestment compared to larger companies. And, from Graph 2, they are generating exactly the investment/wealth behaviour Tim wished for stock market traded companies.
Maybe share markets are not great investment-enhancing economic vehicles?
Lets:
- Accept Tim's statistics and metrics and forget about which is "the correct" start and end points to measure international and inter-temporal average return rates;
- Accept Tim's analysis that low investment "caused" lower average returns to the New Zealand share market;
- Extend Tim's analysis, what else might be occurring?
Investment / Dividend Decision Making in Choice Economics
At a micro-economic level - the individual's decision-maker's perspective - existing companies choose to reinvest or return profit to their shareholders according to the options they face and the consequences of their choice. But the value of the reinvested profit generates only a likelihood or a probability that it increased profitability will result. No current investment is certain of generating a future profit. The expected, probable, "could be" or "may be likely" future profit increase (not the profit level) from reinvestment is the only benefit that could support a business reinvesting its now, known and certain current profit level.
Against that "benefit", is the opportunity cost of reinvestment - the cost of not doing the next valuable alternative use of the profit, which is - in this instance - returning the profit to the shareholders. On the New Zealand share market, a market traded internationally, where the company competes with others for the attention of financial investors, the cost of not paying a dividend is high. The share price falls, the credibility of management is undermined, and investor attention shifts to alternative investment opportunities, all of which generate current and future issues for the company.
So Tim is absolutely right. From the companies perspective it probably does make sense for it to return current profit to existing shareholders and reduce the current and future impact on its share price. as opposed to reinvest the same money for a potential, maybe / could be increase in future profits.
An Alternative Thesis: Sharemarket Trading Peverse Incentives
But let me suggest an alternative thesis: the low investment behaviour is the result of the public dog-eat-dog short term nature of the share market itself. Where companies DON'T trade on the share market, then the need to return a dividend as high as your neighbouring stock exchange company isn't so great. The expected net benefit from the could-be/may-be marginal profit from the reinvested returns less the opportunity cost of not paying a dividend is much more comparatively large.Consequently, with less downside to reinvestment, and a higher relative upside to reinvestment, then economic theory would suggest companies which DON'T trade on the share market might have a higher rate of reinvestment. And if they did, than all of Tim's points follow: they have higher average rates of return, and they generate more economic value for their shareholders and New Zealand over time.
To illustrate my point, I've used Statistics New Zealand's Institutional Sector Accounts (ISA) from here. The ISA distinguish between "Private non-corporate producer enterprises" which I've labelled as "Small" and assume are not regularly traded on the stock exchange, and "Private corporate producer enterprises and producer boards" which are "Big" companies who either are, or are similar to traded share market companies.
Graph 1: Returns to Factors of Production - Large/Small Companies
From Graph 1, large companies pay more of their productive surplus to their employees than they retain in profits. Over time, they have been paying comparatively more to employees, and comparatively less to business owners. From Graph 2 below, large business have also not fundamentally changed their Total Income to Value Added rates. If they were reinvesting, then they would be increasing the amount of income they receive from all of their investment relative to their value added. And from Graph 2, they have not significantly altered the level of their total income to value added between 1999 - 2009.
All of this is entirely consistent with Tim's analysis.
Graph 2:Total Income - including Investment Income to Value Added - Large/Small Companies
The bit that differs from Tim's analysis is the comparative behaviour and investment outcomes of the Private non-corporate producers. From Graph 1, a significantly higher proportion of economic surplus is returned to owners than is paid to employed labour. From Graph 2, significantly more of that retained surplus has been reinvested, and led to high and increasing rates of total income to value added.
Small companies tend to perceive higher relative benefits of reinvesting and face lower opportunity costs of reinvestment compared to larger companies. And, from Graph 2, they are generating exactly the investment/wealth behaviour Tim wished for stock market traded companies.
Maybe share markets are not great investment-enhancing economic vehicles?
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