by Andrew White | July 9, 2015 | Comments Off on Banging on the Drum: US Needs More Competitors
I really felt that the article in today’s US print edition of the Wall Street Journal by Greg IP on point. it was titled, “Why Corporate America Needs Some More Competition“. The article summarizes a number of points already widely reported but not always in the same article or in a connected manner:
- Corporate profits are at or near to all-time highs
- New enterprise start-up rates are depressed and have been for a while
- Investment in capital remains depressed
- Interest rates are and have been very low for a long time
- Mergers and acquisitions are all the rage
The point is that the Fed is keeping interest rates low (and has pumped money into the economy) to try to encourage investment by the private sector. The addition of profit would also tend to suggest that investment in capital (to sustain and deliver future profits) would follow. But for some reasons corporate America is not following the rules. Some argue that extreme regulation is a limiting factor. I tend to agree. See Book Review – By the People, by Charles Murray. Some comment on the overall nervousness in the global economy. Some refer to the high level of business and corporate taxation in the country. I am sure all these facets play a role. But the issue is we have a problem.
One thing Greg Ip nicely does is connect the dots between the low levels of start-ups and how, over time, this leads to competition which drives the desire to invest in differentiated products and services in the future. The level of start-ups seems to be a very keen leading indicator. As the number has dropped off, the number of opportunities for the next P&G, or Unilever, or Ford, or whatever, diminish. Creative destruction is therefore hampered.
Now we have large firms spending a lot of money lobbying government in order to do what they can to preserve the status quo. Those same firms are spending more money on stock buy-backs, in order to inflate their stock price (EPS) which is often part of Executive pay requirements. So overall the market is following somewhat predictable behavior, but it is not the behavior we all want. We all want growth as that would raise all boats, and provide a bigger pie to share. Clearly this is not happening, yet. So a good little article that focuses on a key issue.
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