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April 15, 2006
Corporate Profits and Social Security Privatisation
You may or may not recall, a year or so ago, as the debate about the (part) privatisation of Social Security went on, several economists in the US released a paper showing that it would never work. That the returns to investment in the stock market (corporate profits and thus dividends and capital gains on stocks) were tied to the demographic growth of the country.
Thus, it simply wouldn’t be possible for the proposed private accounts to make the returns being discussed. Mathematically impossible in fact.
One point raised in response by Jim Glass was that there was no reason for stock gains in the US to depend entirely upon the US economy. Investment overseas might do it. Or perhaps even the faster growth of the overseas arms of US companies might.
Tsk, tsk, of course not, we were told, simply couldn’t happen.
Today, Brad Delong notes a piece in the NY Times.
The heightened mobility of capital allows companies to invest their profits around the globe with considerable freedom. "American companies really haven't been sinking much of their gains back into domestic investment," said Jared Bernstein, senior economist at the Economic Policy Institute in Washington. In the United States, nonresidential fixed investment as a percentage of G.D.P. fell to 11.56 percent in 2005 from 12.55 percent in 2000.
Thanks to globalization and the opening of new markets, Mr. King said, "it's increasingly difficult to argue that companies themselves are attached to a country." He notes, for example, that Vodafone, the giant British telecommunications company, has more than 80 percent of its sales and employment outside of Britain. And as of 2002, Mr. King found, the 50 largest multinational companies had 55 percent of their employees and 59 percent of their sales outside of their home countries.
The trend of corporate cosmopolitanism is most pronounced in Europe. In a report published last November, Mr. Artus of IXIS found that for the members of the German index, the DAX 30, about 53 percent of employment and 34 percent of sales were in Germany; for the companies in the CAC 40, the French index, 43 percent of employees and 35.5 percent of sales were in France.
The trend is less pronounced in the United States. Standard & Poor's estimates that the companies in the S.& P. 500 derive about 60 percent of their sales at home, according to Alec Young, equity market strategist at S.& P. But for some of the largest companies, like McDonald's, the domestic market counts for only one-third of revenue.
So that would be that Jim Glass was right then.
Just for your information, one of the authors of the paper showing that this could not possibly be true was Brad Delong. Another was the head of the EPI. Amazing how things can change in a year really.
Or was it just politics last time and politics now?
April 15, 2006 in Economics | Permalink
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Comments
Tim, if you are going to carry out this calculation, you have to subtract that part of the US GDP which has to be remitted to foreigners because of their ownership of part of the capital base of the USA. Since the USA is not investing overseas on a net basis (that big old current a/c deficit means it is doing the opposite; selling its own assets to foreigners). The reason Brad (and me) didn't take this possibility very seriously is that it would require a massive change in the US trade balance, which there is no very obvious reason to assume.
Tim adds: No it doesn’t. It only requires that US capital overseas earns greater returns that overseas capital in the US. And that is indeed what we tend to see isn’t it? US investments in India are getting a better return than say, German investments in the US? More importantly, it doesn’t even require that. It requires that firms listed in the US invest outside the US to get those higher returns. Which is exactly what the EPI guy is complaining they are doing.
BTW, if all of this is impossible how come we have 50% of the Footsie 100 profits coming from outside the UK.....I thought we’d been running a trade deficit outselves for the last few decades?
Posted by: dsquared | Apr 15, 2006 4:16:23 PM
Since when has consistency of logic been a hallmark of the left?
Posted by: The Remittance Man | Apr 16, 2006 1:37:46 PM
[ It only requires that US capital overseas earns greater returns that overseas capital in the US. ]
No, there's also clearly a constraint coming from the net investment position; the worse that gets, the larger the "dark matter" assumption has to be until you reach something totally implausible.
[And that is indeed what we tend to see isn’t it? US investments in India are getting a better return than say, German investments in the US? ]
US investments in India are not really all that profitable. The most profitable US investments overseas are and always have been those in Europe.
A lot of what drives the "dark matter" profitability gap is the much older average age of US overseas FDI, because a lot of it was carried out immediately after the war. In general, the profitability of investments is better the older they are. Note also that a big (and growing) chunk of the profits of US-listed companies goes to foreigners these days.
[BTW, if all of this is impossible how come we have 50% of the Footsie 100 profits coming from outside the UK.....I thought we’d been running a trade deficit outselves for the last few decades?]
mergers, mainly, plus foreign firms listing in London; the FTSE100 is really quite unrepresentative of the UK economy. Note that 35% of the FTSE100 is owned by foreigners, and nowhere near this for the USA.
Posted by: dsquared | Apr 18, 2006 8:25:09 AM
