Corporate Economics Question

[Rhea]

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?

 

[whollygoats]

"People say"?

People say a LOT of stupid things.

 

[Rhea]

Very true. And these comments rang hollow with me. But I figured, hey, why not see if there’s some aspect I hadn’t considered. Because right now I’m not seeing how people living off (or trying to pass on without income tax) “investments” are actually doing anything positive for the nation as is their argument for not paying taxes.

 

[bilby]

Buying stock from another investor (by FAR the most common way to buy stock) has almost no effect on the company at all.

Buying new stock (eg at an IPO) is an investment in the company; But if you go online today and buy 1,000 shares in Apple, the money you spend on the shares just goes to another guy who bought shares from another guy, who bought shares ... who bought shares from Apple years and years ago when they were dirt cheap. Your hoped-for existence in the mind of that original investor is just about the only contribution you made to Apple with your purchase. Basically, you just made a bet that the shares will increase in value faster than whatever else you could have put the money into.

One of those other options was to go to the casino and put the money on black at the roulette table; However at the moment, most analysts believe that Apple stock has a significantly higher expected future value than casino chips on black. The stockbroker is acting as bookie; and your 'investment' is just as beneficial to Apple as you betting on the Kentucky Derby is beneficial to the jockey who rides the horse you picked - ie not at all.

Perhaps the Apple execs get a small confidence boost from seeing the share price rising; But your purchase could actually cause the price to fall (if you buy for less than the last trade). Perhaps the jockey gets a small confidence boost from seeing the odds offered by the bookies shorten a little due to your bet - but realistically, you are not having any impact in either case.

Direct investment - IPOs, corporate bonds, etc - is a minuscule fraction of investment as a whole. The stock market dwarfs it, and the derivatives market dwarfs the stock market; and these markets don't do jack shit to fund the companies involved. What they do is provide liquidity; They allow money to flow freely around the economy, and in so doing to provide price signals about which companies are doing well, and which are doing poorly. How highly we should value these liquidity services is highly debatable. Particularly as the whole system relies on asymmetric information - its survival depends on it not doing its job well. If the price signals are always 'correct', then nobody can make any money. People getting rich in the stocks and derivatives markets are a clear indication that those markets are not performing very well.

Similarly, if horseracing odds were a precise indicator of the probability that a given horse would win, the bookmakers would make no money, and the punters would (on average) break even. The difference being that nobody pretends that betting on the horses is providing a valuable 'odds calculation' service, without which we would have trouble knowing which horses were the best racers.

 

[dismal]

The initial sale of stock by the company provides the company with capital that can be used to expand.

The liquidity provided by sales of stock in the aftermarket sale are necessary to effect the initial sale.

 

[coloradoatheist]

As dismal said, without the secondary market, no primary market. Also companies issue stock all the time, just not as big or fancy as an IPO. It's used as compensation for employees of the company. And last, but the most important. Companies use stock price to gauge how the company is performing.

 

[jonatha]

The initial sale of stock by the company provides the company with capital that can be used to expand.

The liquidity provided by sales of stock in the aftermarket sale are necessary to effect the initial sale.

Which is why capital gains should be completely untaxed. Or maybe subject to a negative rate.

</GOP>

(Pity about all that lack of liquidity during the 1990 boom years, when the maximum rate was 28%...)

 

[Bronzeage]

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?

Very few people have any real understanding of the Macro-economy.

If a corporation wanted to reduce it's tax bill and invest in America, it could do that now. All the money spent on the purchase of land, building a factory, and filling it with heavy equipment, reduces the profits in the short term and thus reduces taxes. There is a spurious economic theory which holds that the the threat of taxes on enormous profits is what prevents a business from building the factory. Businesses expand when they think they can make more money by investing, than by sitting on the cash. Cutting the tax rate does nothing, if there isn't an accompanying increase in demand for whatever they produce.

Of course, if people are already spending every penny of their paycheck on necessities, there isn't any money left over to demand stuff with. Funny how that works.

 

[Horatio Parker]

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?

Very few people have any real understanding of the Macro-economy.

If a corporation wanted to reduce it's tax bill and invest in America, it could do that now. All the money spent on the purchase of land, building a factory, and filling it with heavy equipment, reduces the profits in the short term and thus reduces taxes. There is a spurious economic theory which holds that the the threat of taxes on enormous profits is what prevents a business from building the factory. Businesses expand when they think they can make more money by investing, than by sitting on the cash. Cutting the tax rate does nothing, if there isn't an accompanying increase in demand for whatever they produce.

Of course, if people are already spending every penny of their paycheck on necessities, there isn't any money left over to demand stuff with. Funny how that works.

Anything that we have the real resources for can be done. Any such financial restraints are self imposed.

 

[Loren Pechtel]

The initial sale of stock by the company provides the company with capital that can be used to expand.

The liquidity provided by sales of stock in the aftermarket sale are necessary to effect the initial sale.

This.

There are actually two factors at work here.

1) The secondary market provides a means of getting your money out. In a perfect market the value of a company is the net present value of the expected future dividends--but note that that inherently means you won't get all the value out of your investment because some of those dividends will be paid after you're dead. By being able to transfer shares you can get that value out, making it much more attractive for retirement savings.

2) Different people have different levels of risk tolerance. (This isn't just one's mental outlook. The more money you have the more risk you can tolerate and the older you are the less risk is acceptable.) As companies mature the risk level goes down--and thus it makes sense for the ownership to shift from the high risk people to the low risk people.

 

[coloradoatheist]

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?

Very few people have any real understanding of the Macro-economy.

If a corporation wanted to reduce it's tax bill and invest in America, it could do that now. All the money spent on the purchase of land, building a factory, and filling it with heavy equipment, reduces the profits in the short term and thus reduces taxes. There is a spurious economic theory which holds that the the threat of taxes on enormous profits is what prevents a business from building the factory. Businesses expand when they think they can make more money by investing, than by sitting on the cash. Cutting the tax rate does nothing, if there isn't an accompanying increase in demand for whatever they produce.

Of course, if people are already spending every penny of their paycheck on necessities, there isn't any money left over to demand stuff with. Funny how that works.

Except that's not a decision that companies decide on. They don't sit there and say, "We now have 1,000 people who have $25 free so we can get at that money" Companies are always trying to steal demand from other places and they make their decisions on how they can beat their competitors.

 

[Axulus]

Another thing to consider in addition to the liquidity: the more people who want to buy and hold stocks purchased from the secondary market, the higher the price will be. When a new offering is made, more money can be raised with a higher share value. Additionally, some people receive a significant percent of their compensation in the form of stock. It is a source of value to directly pay for employees. The higher the value of the stock, the more employees can be compensated using said stock.

 

[Bronzeage]

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?

Very few people have any real understanding of the Macro-economy.

If a corporation wanted to reduce it's tax bill and invest in America, it could do that now. All the money spent on the purchase of land, building a factory, and filling it with heavy equipment, reduces the profits in the short term and thus reduces taxes. There is a spurious economic theory which holds that the the threat of taxes on enormous profits is what prevents a business from building the factory. Businesses expand when they think they can make more money by investing, than by sitting on the cash. Cutting the tax rate does nothing, if there isn't an accompanying increase in demand for whatever they produce.

Of course, if people are already spending every penny of their paycheck on necessities, there isn't any money left over to demand stuff with. Funny how that works.

Except that's not a decision that companies decide on. They don't sit there and say, "We now have 1,000 people who have $25 free so we can get at that money" Companies are always trying to steal demand from other places and they make their decisions on how they can beat their competitors.

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.

 

[coloradoatheist]

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.

Companies don't do that though. They don't say, "We now feel that X number of people with a spare $150 in their pockets so they can now buy this lawnmower. They have to decide that people will buy this lawn mower instead of buying another lawn mower or that they would rather buy this lawn mower than going to the movies. The corporate tax rate comes into play in two instances. Actual taxes paid, and Net Present Value in financing projects. So the question is how often does the high corporate tax rate stop projects that should be undertaken.

 

[jonatha]

So the question is how often does the high corporate tax rate stop projects that should be undertaken.

Considering the large number of projects that are undertaken but shouldn't be, I'd say not nearly often enough...

 

[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.

 

[bilby]

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.

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.

 

[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.

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.

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

 

[Loren Pechtel]

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.

Banks don't loan to startups.

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.

You need a balance.

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.

 

[Bronzeage]

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.