The latest Street.com column is up: “Employment Reality Lies Between Poles.” It is a pretty fair and balanced look at the structural job problems Bush inherited, as well as some of his policies which may have made the situation worse. For those of you without a subscription, its loosely based on recent comments such as What is the Employment Situation Really Like? and Employment Situation: Worse than it looks?
The concept I haven’t been hitting on much is the possible impact of the dividend tax cut as a negative factor on hiring. Here’s an excerpt:
“The other major corporate tax change worth exploring is the dividend tax cuts. By creating a new ultra-low rate for dividend income, tax policy has encouraged firms to raise their dividend payouts. However, we know that many insiders and managers are also large shareholders of their firms. When they raise dividend payouts, they also get to pay themselves — and at the very advantageous tax rate of 15% vs. the 50% or more their salaries are taxed at. As we saw in the 1990s, management often finds it easy to make short-term decisions from which they personally benefit.
The new dividend tax rule has created an incentive for corporations to transfer working capital outside of the firm, and into the hands of shareholders. That has reduced the pool of capital that otherwise would be used to build new plants, make more capital improvements, and yes, hire new workers.
Even worse, my calculations show that more than half of all dividend-paying stocks are held in nontaxable accounts — pension funds, endowments, foreign investors, and retirement accounts. So these increased dividend payouts simply sit in these tax-advantaged accounts, in some cases, for decades, and there is no multiplier effect, because the money is neither spent nor reinvested in the broader economy. So instead of stimulating the economy, these monies lay fallow.”
Employment Reality
I have a new column up at Street.com: “Employment Reality Lies Between Poles.” For those of you without a subscription, its loosely based on recent comments such as What is the Employment Situation Really Like? and Employment Situation: Worse than…
But the money doesn’t actually lie fallow, does it? As it gets dumped back into the pension fund, or retirement account, it buys another investment. It may buy that investment from someone who goes out with their new found cash and buys a boat, or maybe a radio and a paint job for a boat he already has, or even… another investment!
Um, no.
When a fund buys shares in the open market, that merely moves money around. Its a transfer within a zero sum situation — it doesn’t build or create anything.
This is not to be confused with a capital expenditure (corporate purchase of goods and services) or hiring of new employees.
These activities have a multiplier effect — the cash moves from purchaser to retailer to manufacturer to laborer — again and again. This is not a zero sum effect — it has a real and measurable impact on GDP.
In fact, that is exactly what GDP is — the total amount of goods (i.e., CAPEX) and services (Employee compensation) that gets spent and re-spent.