Looking for the Economy-Wide Impact

Abstract

Abstract Chapter 2 considers whether basic data supports the significance of those channels through which stock market short-termism is seen as seriously damaging the economy. One purported channel from the stock market to economic weakness is that said to be that its impatience with R&D induces less of it and corporations are cutting it; but corporate R&D has been steadily rising, and it’s rising faster than the economy is growing; this widespread view of severe R&D cutbacks is simply false. That reality lowers the policy stakes, by making the question not whether corporate R&D is being cut (it isn’t) but whether it’s rising fast enough and whether a differently-configured stock market would induce it to rise faster. Another purported channel is that the stock market’s short-termism forces business to invest less in new factories and equipment unwisely. While the United States is indeed investing less, its weakening investment is no less than that in wealthy economies that do not rely as heavily on stock markets. Something else seems to be at work. As for the third channel—forcing corporations to drain away their cash to stockholders, mostly via stock buybacks, thereby crippling our economic future—a full analysis of the buyback transaction shows that buybacks, when fully accounted for, are not draining cash out of US corporations. None of these channels to economic degradation receives strong support from the data. Some versions are simply incorrect.