Corporate Economics Question

[dismal]

As I said, very few people have any real understanding of the macro-economy. The only relevant demand is the demand for the stuff you sell, or intend to sell. If there is no demand for four cylinder riding lawnmowers, it doesn't how much corporate taxes are cut, or how much expendable income increases. You aren't going to sell anymore lawnmowers and you certainly aren't going to add another assembly line to make more.

I'm afraid that list doesn't include you.

No investment, they aren't going to add the assembly line no matter how many people want mowers. You'll just get inflation instead.

Next, we'll analyze the sequence of chicken and egg production.

However, before that, please explain why a company would invest in capital improvements, if they did not believe demand existed for increased production. In the meantime, my statement on macro-economics remains unchallenged.

Demand is necessary for me to invest capital but not sufficient.

Let's say I'm thinking about drilling an oil well. I have no doubt that the demand exists for the oil. What I don't know is whether I can earn enough return to offset the risk.

The risks include 1) the well might cost more than I estimate, 2) the oil price I receive might be lower than I estimate, 3) I might not get as much oil as I estimate

Whether the government says "I'm going to take a) 0% b) 50% or c) 90% of your profit" affects my return quite a lot but does not affect the risks much - except to the extent vendors pass on their additional costs in their service rates.

Lower return, same risk means less capital gets invested.

 

[bilby]

Sure. But what are the chances that there will be a lack of investment capital in a situation where the demand exists? Banks like to loan money to people who want to grow their business and who can show that the demand exists to support that growth. And banks are not going to run out of money to lend.

There need never be a shortage of investment capital; And certainly there is no shortage of it at the moment - have you seen how low interest rates are? The economy is AWASH with capital looking for a worthwhile investment.

The reverse, however - a lack of demand, in a situation where investment capital is present - also leads to a lack of expansion. And that is exactly the situation we see in today's economy.

One can argue about whether the economy will only sometimes benefit from a demand stimulus, or whether it will always benefit from such a stimulus; But the idea that a demand stimulus wouldn't benefit the economy as it stands today is absurd.

I am happy to accept as a working hypothesis that it is not useful to stimulate demand in an economy where interest rates and inflation are high, without also doing something to stimulate investment. But we are not currently in an economy where interest rates and inflation are high. What the economy needs right now is an injection of demand, and the best way to achieve that would be to encourage wages growth, at the expense of profits. If we ever get back to high interest and/or high inflation, then at that time we can discuss the merits of suppressing wages in favour of increasing profits - after all, profits are far from infinite, as I am sure you are aware.

People invest capital when the return is sufficient to compensate for the risk.

It's axiomatic that when you lower the return without changing the risk there will be less capital invested.

Yes, indeed. And the main cause today of low returns is a lack of demand, due to a lack of disposable funds for the majority of the population. So unless something is done to boost demand, no amount of cheap capital will help.

Not to mention, when the government takes your money you have less money to invest.

Sure. However, right now (and for the last several decades at least), there is far more capital than there are viable investment opportunities, and as long as the money the government takes is less than the difference between the amount available and the amount actually used, there's no problem. If you need a $million to invest, and you earned $2million, and paid $500k in tax, you can afford the investment. If your taxes fall to $400,000, you can still afford the investment - for a net change in affordability of zero - you still have the same ability to invest a $million, despite having an extra $100,000 in your pockets; the opportunity hasn't grown, so the amount you will invest hasn't either. There's no point in investing $1.1 or even $1.5million, unless the public have enough ready cash to buy the additional 10 to 50% of product that this extra investment will produce.

Cutting taxes to fix this 'problem' is justified if (and ONLY if) there is a shortage of capital - which there is not. You can tell when capital is in short supply, because its price goes up - that is, interest rates are high. Interest rates are not high; therefore taxes do not need to be cut to increase the supply of investment capital.

 

[bilby]

Banks don't loan to startups.

They do here. But it's irrelevant anyway; money is fungible, so if it's getting cheaper in one area of the economy, it will get cheaper in all of them.

You need a balance.

Yes, and I am arguing for a restoration of that balance, which is now way off its optimum.

I am happy to accept as a working hypothesis that it is not useful to stimulate demand in an economy where interest rates and inflation are high, without also doing something to stimulate investment. But we are not currently in an economy where interest rates and inflation are high. What the economy needs right now is an injection of demand, and the best way to achieve that would be to encourage wages growth, at the expense of profits. If we ever get back to high interest and/or high inflation, then at that time we can discuss the merits of suppressing wages in favour of increasing profits - after all, profits are far from infinite, as I am sure you are aware.

Today's economy still hasn't recovered from the 2008 crash. I don't believe we should be making a permanent shift in response to a temporary problem.

Nine years is a lot of temporary.

And I am not talking about a permanent anything.

 

[Bronzeage]

Next, we'll analyze the sequence of chicken and egg production.

However, before that, please explain why a company would invest in capital improvements, if they did not believe demand existed for increased production. In the meantime, my statement on macro-economics remains unchallenged.

Demand is necessary for me to invest capital but not sufficient.

Let's say I'm thinking about drilling an oil well. I have no doubt that the demand exists for the oil. What I don't know is whether I can earn enough return to offset the risk.

The risks include 1) the well might cost more than I estimate, 2) the oil price I receive might be lower than I estimate, 3) I might not get as much oil as I estimate

Whether the government says "I'm going to take a) 0% b) 50% or c) 90% of your profit" affects my return quite a lot but does not affect the risks much - except to the extent vendors pass on their additional costs in their service rates.

Lower return, same risk means less capital gets invested.

Here's another lesson in macro-economics. When production is increased, without "pent-up demand", prices for the product will fall.

A fall in prices, means low return on investment, which is much the same effect as a higher tax rate. It's a trap that no company wants to fall into.

Any economic plan which proposes a tax cut for corporations, but neglects any move to stimulate consumer demand, is simply going to increase the pay of the top executives. They know that there's no profit in reinvestment, so they'll buy a yacht with a bigger swimming pool.

 

[bilby]

Next, we'll analyze the sequence of chicken and egg production.

However, before that, please explain why a company would invest in capital improvements, if they did not believe demand existed for increased production. In the meantime, my statement on macro-economics remains unchallenged.

Demand is necessary for me to invest capital but not sufficient.

Let's say I'm thinking about drilling an oil well. I have no doubt that the demand exists for the oil. What I don't know is whether I can earn enough return to offset the risk.

The risks include 1) the well might cost more than I estimate, 2) the oil price I receive might be lower than I estimate, 3) I might not get as much oil as I estimate

Whether the government says "I'm going to take a) 0% b) 50% or c) 90% of your profit" affects my return quite a lot but does not affect the risks much - except to the extent vendors pass on their additional costs in their service rates.

Lower return, same risk means less capital gets invested.

You are right that demand is necessary, but not sufficient; However the other necessary elements already exist - cheap money, good infrastructure. The stimulation of demand would reduce risk in the current economy. If, as, and when that ceases to be the case, then we can start worrying about whatever the new constraint on the economy and investment might be.

Effort expended on reducing the impact of a non-constraint is waste. It has no impact on throughput.

 

[dismal]

right now (and for the last several decades at least), there is far more capital than there are viable investment opportunities

Wow, if only there were some magic wand we could wave to instantly make all investment opportunities more rewarding without changing their risk perhaps all this capital would be put to better use.

 

[bilby]

right now (and for the last several decades at least), there is far more capital than there are viable investment opportunities

Wow, if only there were some magic wand we could wave to instantly make all investment opportunities more rewarding without changing their risk perhaps all this capital would be put to better use.

Well, you could stop doing pointless things that cannot achieve that objective, such as further increasing the available capital by reducing taxes; And start doing something effective, like providing more money to the mass of consumers who will thereby become more likely to purchase the products produced by these investments, and hence lower the risk.

It's not magic, just mathematics - but it could just work.

 

[dismal]

right now (and for the last several decades at least), there is far more capital than there are viable investment opportunities

Wow, if only there were some magic wand we could wave to instantly make all investment opportunities more rewarding without changing their risk perhaps all this capital would be put to better use.

Well, you could stop doing pointless things that cannot achieve that objective, such as further increasing the available capital by reducing taxes; And start doing something effective, like providing more money to the mass of consumers who will thereby become more likely to purchase the products produced by these investments, and hence lower the risk.

It's not magic, just mathematics - but it could just work.

What's really weird is I have spent my entire career making capital investment decisions and have yet to see anyone ever once bring up macro level "demand". Yet, taxes somehow actually do make it into the financial models.

It's almost like you can't count on the peanut gallery at this website to give an accurate view of reality.

 

[jonatha]

What's really weird is I have spent my entire career making capital investment decisions

So *that's* what happened

 

[bilby]

Well, you could stop doing pointless things that cannot achieve that objective, such as further increasing the available capital by reducing taxes; And start doing something effective, like providing more money to the mass of consumers who will thereby become more likely to purchase the products produced by these investments, and hence lower the risk.

It's not magic, just mathematics - but it could just work.

What's really weird is I have spent my entire career making capital investment decisions and have yet to see anyone ever once bring up macro level "demand". Yet, taxes somehow actually do make it into the financial models.

It's almost like you can't count on the peanut gallery at this website to give an accurate view of reality.

Really? You have never seen anyone look at a sales forecast? You have led a very sheltered life then. Or do you imagine that sales forecasts are not an assessment of expected demand?

 

[Elixir]

Well, you could stop doing pointless things that cannot achieve that objective, such as further increasing the available capital by reducing taxes; And start doing something effective, like providing more money to the mass of consumers who will thereby become more likely to purchase the products produced by these investments, and hence lower the risk.

It's not magic, just mathematics - but it could just work.

What's really weird is I have spent my entire career making capital investment decisions and have yet to see anyone ever once bring up macro level "demand". Yet, taxes somehow actually do make it into the financial models.

It's almost like you can't count on the peanut gallery at this website to give an accurate view of reality.

Really? You have never seen anyone look at a sales forecast? You have led a very sheltered life then. Or do you imagine that sales forecasts are not an assessment of expected demand?

I've been spending half of every December doing sales forecasts broken out by channel, and trying to anticipate the behavior of each channel's customer base. It's a VERY soft science.
ETA: Trump isn't making it any easier.

 

[Alcoholic Actuary]

Really? You have never seen anyone look at a sales forecast? You have led a very sheltered life then. Or do you imagine that sales forecasts are not an assessment of expected demand?

I've been spending half of every December doing sales forecasts broken out by channel, and trying to anticipate the behavior of each channel's customer base. It's a VERY soft science.
ETA: Trump isn't making it any easier.

You mean to tell us that your forecasts aren't through the roof now that your onerous tax burden has been lifted???kindofatwo? I'm shocked.

aa

 

[Elixir]

Really? You have never seen anyone look at a sales forecast? You have led a very sheltered life then. Or do you imagine that sales forecasts are not an assessment of expected demand?

I've been spending half of every December doing sales forecasts broken out by channel, and trying to anticipate the behavior of each channel's customer base. It's a VERY soft science.
ETA: Trump isn't making it any easier.

You mean to tell us that your forecasts aren't through the roof now that your onerous tax burden has been lifted???kindofatwo? I'm shocked.

aa

Hell no! The end users of the stuff we make and sell are not billionaires. Maybe a little bit over average income (they're dispropotionately gun owners) and many are in the income brackets that will get hit hardest.

 

[steve_bank]

In what way does my purchase of stock result in a company creating more jobs?

People say this business about “Wealthy people are job creators because they are inveseting in business so they can expand.” And, “wealthy people are investing in America, unlike those who are spending every penny of their paycheck,” and “that’s why the estate tax is bad because it discourages investment.”

So, I own stock. And hopefully enough of it that I can pass on to my kids. But honestly, that’s not helping the economy at all. That’s hoarding. So why should I get a tax break if I’m doing that to the tune of $6M?

It all depends. A new or existing company may sell stock to finance growth in the end creating jobs. Some sell stock to finance investments. Some sell stocks to finance buying out a competitor reducing jobs.

Major companies today are not short of cash, they buy back stock and pay dividends on stocks.

Investing in stocks is a free market gamble. You bet on the company's value increasing over time.

 

[Loren Pechtel]

As I said, very few people have any real understanding of the macro-economy. The only relevant demand is the demand for the stuff you sell, or intend to sell. If there is no demand for four cylinder riding lawnmowers, it doesn't how much corporate taxes are cut, or how much expendable income increases. You aren't going to sell anymore lawnmowers and you certainly aren't going to add another assembly line to make more.

I'm afraid that list doesn't include you.

No investment, they aren't going to add the assembly line no matter how many people want mowers. You'll just get inflation instead.

Next, we'll analyze the sequence of chicken and egg production.

However, before that, please explain why a company would invest in capital improvements, if they did not believe demand existed for increased production. In the meantime, my statement on macro-economics remains unchallenged.

You're arguing it backwards.

Yes, a company won't invest if they don't believe they can sell more product. (Note, however, that that does not mean they believe there's unsatisfied demand. They could believe their offering is superior and they'll take market share from competitors.)

However, you seem to think the reverse is also true--that if there's demand they will invest in increased capacity. That is not true--they will only make such an investment if they have the money to do it with. (And they believe the additional sales will make the investment profitable. Consider the periodic shortages of ammunition we see. The ammunition makers know that it's political {rightist fearmongering} and won't last, thus they do not increase capacity even though they know there's demand.)

 

[steve_bank]

There is another issue. In volume manufacture as quantity increases cost per unit falls up to a point. There can be a point at which increasing volume can result in rising costs.

Production may be limited to less that total demand to keep interest and price up. Apple has done this. There is a sweet spot in manufacturing that yields max profit.

 

[coloradoatheist]

So when Apple decided to come out with the Iphone 8, did they say to themselves, "Hey we believe people now have $1000 in their pocket that they weren't going to spend until this phone came out?"

 

[bilby]

You mean to tell us that your forecasts aren't through the roof now that your onerous tax burden has been lifted???kindofatwo? I'm shocked.

aa

Hell no! The end users of the stuff we make and sell are not billionaires. Maybe a little bit over average income (they're dispropotionately gun owners) and many are in the income brackets that will get hit hardest.

You sell gunshot wound dressings?

 

[steve_bank]

So when Apple decided to come out with the Iphone 8, did they say to themselves, "Hey we believe people now have $1000 in their pocket that they weren't going to spend until this phone came out?"

Setting a price and production volume takes into account unit costs, customer psychology, culture, creating demand and so on. On the Harley commercials it sells the idea that Joe Average on the weekend can put on leathers and become a rebel.

Apple targets a specific demographic and knows how much on the average they can and will spend. That's what marketing does. Targeted market surveys even on lower level markets can cost hundreds of thousands dollars.A phenomena was discovered in the 80s. As PC costs drooped and usage went up software began to grow. It was found that when software as good or better than competition was priced too low people thought it was not as good as higher priced products. You can bet Apple puts a lot of analysis into pricing.

Back in the 60s a Cadillac didn't cost much more to make than other cars, but priced higher. Pure marketing, selling an image not a product. Apple sells an image as much as anything.

 

[Canard DuJour]

There is another issue. In volume manufacture as quantity increases cost per unit falls up to a point. There can be a point at which increasing volume can result in rising costs.

Yep and empirical research finds that ninety odd percent of manufacturers do not produce to the point of increasing unit costs. They produce well within capacity because they don't anticipate being able to sell the additional output. That's why capacity utilisation and growth were never higher than in the days of low inequality and high wage share.