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Shareholder value and crisis

The doctrine of "shareholder value" is a major structural transformations that make up what is called the vague term "financialization" of the economy. It became the foundation of corporate governance. And one of the causes of imbalances of contemporary economies. During the crisis, it has even led, as we shall see, misuse of public money.

As a management technique, shareholder value is now devoted exclusively to serving its shareholders, seeking to maximize its return on equity (ROE). This has multiple consequences. One of them is that companies retain a portion of lower and lower profits that are left after payment of taxes and interest on loans. These retained profits allow them, in particular, to self-finance their investment. Since the late 1970s, the profits are, on the contrary, more and more returned to shareholders as dividends. As the chart shows, the proportion of profits donated form of dividends during 2000 reached a level very high, so high that it threatens the flow of investment.



The 2008/2009 financial crisis has offered an extreme example of this imbalance that raises shareholder value.

While U.S. corporate profits were down sharply (-30% between 2006 and late 2008), they have strived to maintain a constant level of dividends distributed to shareholders. For this, she fell from profits not distributed, by giving their shareholders as dividends, proportion of increasingly strong profits. It took until the second half of 2009 for the share dividend decreases. And probably not just because American companies then started to charge their shareholders a portion of the cost of the crisis but also because the rebound in equity markets to compensate for the lower dividends from capital gains.



We see that in the last quarters of 2008, that the heart of the financial crisis, companies have distributed as dividends slightly over 100% of their profits. How is this possible? Very simply, companies have chosen to go into debt to pay dividends. It is, essentially, the financial firms that have resorted to borrowing to pay dividends to their shareholders, while their profits plummeted because of the crisis (a decrease 3-fold between early 2006 and late 2008). In autumn 2008, dividends accounted for 170% and profits of U.S. financial firms.

However, a significant proportion of loans that financed the dividend consisted of funds provided by the U.S. government to rescue the financial sector. As this study emphasizes the U.S. banks have therefore simply diverted the money from American taxpayers to pay their shareholders.

Moreover, as noted in this study always, shareholder value has led to an increasing risk taking, leading banks to increase their leverage before the crisis, to ensure to increase their profitability. This raises questions about the theoretical justifications for shareholder value. According to them, shareholders should obtain a higher yield than a risk-free, precisely because they take a risk, that of bankruptcy. But during the crisis financial, financial institutions have ignored the principle that one must always secure the payment of creditors before those of shareholders in bankruptcy. And they did it just to be able to ensure a constant return to their shareholders, even though the risk had materialized.

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The "common sense" and pensions

Amid a forum about negotiations on pensions written by Michel Godet, the man of common sense in economics, I find this sentence:

Indeed, assets, fewer market Labour will be in a strong position to negotiate their net pay and unwilling to pay more for the generations that have given them a debt which already stands at 150,000 euros per worker, if one takes into account commitments of State .

Concentrated "common sense" that is, in fact, factual Errour and misconceptions about retirement and debt of the French state. A sentence, four statements: four errors and approximations.

You found? No?

In order:

1. " assets, fewer market work ... . Prediction is certainly always difficult, especially when it comes to the future, but on demographic predictions to 20 years (Time Projection Mr. Bucket) are relatively reliable. However, to believe, the number of assets will remain stable by 2030 and even 2050.

2. "... be in a strong position to negotiate their wages net ... . Suppose that the number of assets decreases, which is probably wrong, as we have just seen. Nevertheless admit. So? Well that phrase is always at fault. It is based on a fallacy of thinking that the jobs are stable in number and are divided by assets who want to occupy. If they decline, the assets will therefore be in a strong position with employers and may raise their wages. This reasoning is based on "common sense", that is to say about what common sense knows: the micro level he experiences alone. At this level, the number of people who will request a morning job at the local job center obviously has no effect on the number of jobs that the agency will provide. But when it is at the level of the entire economy, it no longer the same. For an economy as a whole, the number of jobs, beyond the changes produced by cyclical economic activity, reflect fairly closely the number of assets. When the number of assets increases, the number of jobs is also increasing. That's what happened in France, with the exception of the decade and a half following the end of the war boom.


For example, in the years 1955-1965, the workforce is stagnant and same goes for the number of jobs, although growth is so exceptionally strong. Presumably they will do the same in 2030: stagnation of the working population and stagnation in the number of jobs 1.

3. " ... and reluctant to pay more for generations who have given them a debt which already stands at 150,000 euros per worker, taking into account the commitments of the State . "There are two inaccuracies that come together in the same statement.

First, the famous metaphor loveth as "common sense" debt that one generation passes to the next, as that would pose a burden on the son of the weight of the shortsightedness and selfishness of their fathers.
This metaphor is, in this case, currently at 33% false ... The degree of truth depends, in fact, the number of French people who buy the debt of the French state. Again, the "common sense" that is based on experiments at the level of the economy. But the "common sense" is hard to understand that we can reason about an entire economy as one reason the small investor, only he knows. The small investor passes, indeed, its heritage (or its debts, if they want) and his heirs, and they are enriched or impoverished. But it is not the same at all investors combined. Let us consider the simplest case: when the French government debt is fully underwritten by the French. The next generation is she crushed the weight of the recklessness of his fathers? Not at all, because it is the same generation as the French state reimburses its debt. Overall, this generation is neither richer nor poorer. The debt is for the sole purpose of producing a redistribution of wealth even within this generation, without affecting the level of that wealth: the son of the previous generation of savers are, in net cash of from those whose parents did not spare. But taken together, they are neither rich nor poor. For the next generation is depleted, it is necessary that their parents have borrowed from foreigners. Currently, the French government debt is held for 2 / 3 by foreigners. We therefore impoverish for two thirds of the debt the next generation. (This proposal deserves various comments. But let us).

4. " ... if we take into account the commitments of the State . Understanding implicit commitments state, particularly pay the pensions of civil servants, which are not included in the measure of debt under the Maastricht Treaty. I do not mind if we take into account implicit liabilities, but then where is the famous "common sense" ? The purpose of negotiation on pensions is to determine what will be ... pension commitments and thus linked to them. We can not pretend that their level was already determined. It is characteristic of implicit liabilities: they are not debt, because their level is not irretrievably, because contractually fixed. The state does what he wants, or can, depending on their negotiations.

Moreover, common sense generally considers that what really needs an individual is constituted by the difference between what he has and what he is to rough. If you own a house worth 100,000 euros and that we should 200 000 euros in the bank, the real debt is 100 000 euros. For once, common sense is right, though strangely makes Michel Godet do not appeal. However, the French state has not only debts: it also has financial assets (equities, miscellaneous, etc.).. If we take this into account, public debt is over 84% of GDP but 53% (OECD data). Debt is no longer only about 30 000 euros per worker. That is, at once, much less spectacular. And yet, I do not entirely follow the right direction: the French state has other assets in addition to its financial assets such as houses of character , for example, that you can still deduct from its gross debt. But he better not follow the common sense so far: we doubtful that the state must sell.

can therefore ultimately be pleased that "this is not common sense prevails in this country," at least one call Miche bucket. This "common sense" is to rely on the experience of common sense of the economy, whereas knowledge about the economy, like any knowledge, was built in part to strong resistance against this meaning that we give away.

________________________________________________________

1 . The same reasoning helps explain why there is no reason to wait beyond the short-term adjustments, lower unemployment due to the stagnation of the workforce. If unemployment falls, it will not be for that.

German

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The German fantasy and deindustrialization (II) The fantasy

The fantasy is based in part on critical commercialism moron who joined industrialism thoughtless, takes the place of economic thought to many in France. This commercialism is a binary proposals: trade balance, though, trade deficit, bad. As its trade balance surplus is very, very, it's going very well for Germany. If one adds that it maintained a constant share of GDP in industry, so it has inserted her with competitiveness in globalization.

The problem is that mercantilism cretin ignores the fact that a trade surplus means nothing in itself: both in its causes and its consequences. There is no theoretical justification for the presence of a positive trade balance in any situation. In the case of Germany, the trade balance had a high economic cost. Not only for herself but also for other European countries.

We must start with an observation: contrary to what would commercialism moron, the huge German exports did not generate growth. On the contrary, since Germany has adopted the Agenda 2010 of regaining its competitiveness, economic growth has been anemic. Even before the 2009 recession, was one of the lowest in Europe.

Even in comparison with France, its growth rate is very low. Between 2000 and 2008, its GDP grew by only 10%. His economic recession in 2009 one of the most violent in the world finally reduced the rate of growth since 2000 to less than 5%. A decade almost white, yet one would like to pose as a success. Apart from Japan, no developed country has been as low growth over the period.

At this initial observation, we can add other indicators of failure. Germany has not created jobs between 2000 and 2010. Before the crisis, in 2008, it was created less than France (3% more as against 6%). Between 2000 and 2008, its unemployment rate has not declined (7.5%), while that of France rose from 9% to 7.8%.

What happened? Germany has applied to the letter, wishing that the strategy to be competitive, we must lower the cost of labor. Thus, although it had less gains in productivity than France (12% in productivity per hour between 2000 and 2007, against 15% for France), the unit labor costs declined significantly, while that it increased in France.

When a company gains in productivity, it can do three things. It can increase wages. If it's growing as much as productivity gains, unit cost of labor, that is to say what it costs to pay compensation to produce a unit of a given product, remains constant. If it does not increase wages, unit labor cost declines and the company can then do two things: either lower its prices, redistributing gains in productivity to consumers, either increase its profits are redistributed, and that to its shareholders, the gains in productivity. (In fact, these three possibilities are combined in greater or lesser extent).

German companies, encouraged by their government chose to increase only slightly wages. This enabled them, in 8 years, to lower the unit labor cost by over 10%. This corresponded to a strategy that set out Baverez: reclaiming the international price competitiveness by making possible lower prices made in Germany. This strategy of regaining price competitiveness is apparently a success, since the German trade balance was multiplied by 3 between 2000 and 2008, reaching nearly 180 billion euros (10% of the GDP of France).

But success is apparent. This strategy has, in fact, leads to break the internal dynamics of growth, which remains important for large countries like Germany, creating significant imbalances in the macroeconomic dynamics.

First, wages have hardly increased, while prices fell does not commensurate with productivity gains. German companies have considerably increased their profitability. It happened during the 2000s, a transformation of historic proportions in the distribution of value added in Germany.
margin rate increased by 6% points between 2000 and 2008 reaching a record high, while it remained stable in France. The profitability of German companies has increased significantly.

However, these developments have led to anemic domestic demand to a level such that the increase in demand Exterior has been able to compensate. First, wage stagnation has caused a stagnation of consumption.

Moreover, contrary to what Baverez, carried away by the force of fantasy, the remarkable increase in the profitability of German companies has not led to a "tremendous momentum for reinvestment," but on the contrary. (The investment growth has even reached a level so low that it is worrying for the future of German competitiveness.)

final sluggish consumption, coupled with the small rise in investment, resulted in a stagnation domestic demand, the rise in the trade balance has not compensated.

The strategy to regain competitiveness by lowering the cost of labor is not a royal road, but a perilous path, because it threatens to break the internal macro dynamic equilibrium. In this perilous road, Germany has partly lost. Control its labor costs is not the miracle solution to globalization, contrary to what N. Baverez. This can not suffice, and it can even be dangerous.

But we must qualify by adding something decisive. Efforts in terms of labor costs Germany were much less rewarded as one might think. They were little with changes in the exchange rate of the euro. If we consider the unit labor costs in Germany in dollars, not euros, and thus taking into account changes in the exchange rate euro / dollar, it has indeed evolved very differently.


The cost of labor has not declined but increased considerably, by almost 40%, as the exchange rate of the euro against the dollar increased during the 2000s. This has led to a loss of price competitiveness of Germany outside the euro area and countries whose currencies are pegged to the euro. Because, contrary to what one reads almost always, the competitiveness of German industry has also been affected by significant revaluation of the euro.

The entire increase in its trade balance has made in Europe, particularly in the euro area. Its trade surplus with the rest of the world have declined since 2002, ie the same year that the value of the euro dollar began to rise, taking with him a price increase in dollar Made in Germany .

And that's where it touches the bottom rear anti-cooperative in the European calendar 2010. With changes in the exchange rate euro / dollar, the area where Germany could preferentially increase its trade balance is the euro, since, by definition, the exchange rate is no impact.

But it is a basic truth in international economics: while the trade surplus to a deficit counterpart. For a country to have surplus, you have that others are in deficit. In other words, seeking trade surpluses, the price of a stagnant demand Indoor, Germany has pursued a strategy of counter-cooperative in other European countries. She received less growth, and has widened the trade imbalances in the euro area. The trade deficit of France is partly caused by this strategy. But it pales in relation to that of Greece or Spain. The deficits of these countries have certainly been fed by internal dynamics (including speculative Spain), which are the primary cause. But they are also the ones who in part made possible the German trade surplus. And now that these deficits lead to a massive financial crisis, Germany is refusing to pay, and do finally made that given the evidence of risk.

This strategy of competitiveness by lowering the cost of labor is not a setback for Germany: it is also a failure for the other European countries, and even more deeply for European integration, in it reveals a profound inability to macroeconomic coordination at European level against national egoism.

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German and deindustrialization (I)

Listening last Saturday The economy in question I reached the stage of fed up. For the umpteenth time, the fantasy of deindustrialization-who-causes-the-decline was convened ad nauseam. Nicolas Baverez was in full glee: he had said, and recent failures of French industrialists in Abu Dhabi and elsewhere in the evidence was striking. This fantasy, which seems to share any conservative man over 50 years, summed up in two propositions:

* A strong country is an industrial country.

* To maintain industrial competitiveness in globalization, we must know to contain labor costs.

France won because she failed to keep its costs. Germany succeeds because it has done the opposite.

This fantasy of désindustralisation is indeed a double fantasy of Germany. Germany, to believe Baverez is "the only European country favorably positioned in the global recovery because of its competitiveness and strength of its industry." Or, as he said Saturday "there is no inevitability to deindustrialization. An example is against Germany who managed to restore the competitiveness of the nation from its industry [...] thanks to the Agenda 2010 which was an impetus Reinvestment great but above control unit labor costs. "

Nothing could be further from the truth yet, or at least more questionable, as this double fantasy. Indeed, at first sight, it is the very opposite seems to be true: the ability of a country to maintain a constant share of GDP in the industrial field has no relationship or a negative relationship, with its economic dynamism, the German strategy is an almost complete failure, costly failure for the other European countries.

Let's start with the first proposal, therefore, who wants a developed country ought to be dynamically maintain a strong industrial base.

First, it must be remembered that industrial production has not declined in most developed countries. There is no de-industrialization in the sense that we produce each year fewer and fewer manufactured goods. The production of manufactured goods continues to rise in most developed countries, including France. But insofar as she thinks less quickly than production in other branches of GDP, its share in overall economic output decreases, sometimes sharply. Thus, in France, between 2000 and 2008, the value added in manufacturing rose 4.25% (and 30% between 1990 and 2008), while its place in the GDP declined sharply from 16% (18% in 1990) to 12%. Deindustrialization is relative, not absolute.



other hand, there is no evidence that the relative de-industrialization has a negative effect on the dynamism of an economy. Between 1990 and 2008, there is no link between the growth rate of an economy and the rate of change in the share of manufacturing in GDP.



Between 2000 and 2008, we see even show a negative relationship, although the correlation is low. Deindustrialized least one country has a relative point of view, the lower was its growth rate over the period. In other words, if we want to choose a strategy of specialization, there is no evidence that maintaining a constant proportion of its economic activity in the industrial field, as it reached Germany, is a good thing for a developed country. Quite the opposite seems true. In the case of Germany, this strategy has proved a failure: it has a growth rate of the lowest among all developed countries-even before the 2009 crisis, which has affected more than most other developed economies.



Clearly, while Asian countries become more competitive in the field, and the share of consumption devoted to industrial property continues to decline in all developed countries, there is probably better to do than willing, at all costs, to remain in the industry. And in any case, no evidence of the relevance of such a choice.


The rest of this post is here .

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The Great Schools, Universities and scholarships by Marc Bloch

analyzing the causes of the defeat of 1940, reads the Marc Bloch , 70 years ago. Any resemblance to contemporary situations can not be coincidental.

Some earlier systems [governments] had kept several large public bodies that they were far from head closely. Without doubt, considerations of party not wanting to intervene, often enough, in the selection of team leaders. Whichever way the wind blew at the time, they imposed designations were rarely the happiest. But the recruitment base was almost exclusively corporate.

Asylum favorite son of notable, the School of Political Science peopled with his students embassies, the Court of Auditors, the State Council, the Inspectorate of Finance. The École Polytechnique, which will build the benches are for life, the bonds of a wonderful solidarity, not only provide the staffs of the industry and it gave access to these careers of engineers state, where advancement obeys the laws of a quasi-mechanical automation. Universities, by means of a whole set of boards and committees, is co-opted almost entirely themselves, not without some dangers for the renewal of thought, that the present system has, temporarily, he said, abolished . [...]

The scheme had he right or wrong in respecting these ancient corporations? It can hold forth to the eye. Some will say, stability, tradition of honor. The other, to which I confess tilt, replied: routine, bureaucracy, arrogance collective. [...]

certainly would have been better promote, through grants, access to all administrative functions and refer to preparations universities, by broad general education system is the strength of British Civil Service .

Marc Bloch, strange defeat The , 1940 (pp. 191 and 192 of the Folio edition).

(Readers resident in countries where legislation on copyright is not as absurdly protective in France can find an electronic version of the book on Free Ebooks Free . PP are cited. 158 and 159 of the PDF version.)