Macro, Finance, and Inequality
Paper Session
Friday, Jan. 5, 2024 10:15 AM - 12:15 PM (CST)
- Chair: Leila Davis, University of Massachusetts-Boston
Corporate Taxation and Market Power Wealth
Abstract
We study the aggregate and distributional effects of corporate tax reforms when market power is heterogeneous across sectors and firms. We use a life-cycle model with incomplete markets in which capital and equity do not always move in tandem when corporate tax policy changes. On the one hand, the increase in the tax rate causes the classic partial equilibrium effect of reducing the demand for capital; an effect that can be greater or lower depending on different provisions in the tax code and sectoral characteristics. On the other hand, the tax reduces the value of equity wealth due to the taxation of market power rents, shifting the supply of aggregate equity downward and inducing a negative effect on equity returns. This novel general equilibrium effect reduces the cost of capital and is typically expansionary. In our benchmark calibration, designed to match a realistic distribution of markups and markdowns, as well as the institutional details of the US corporate tax code, increasing the corporate tax rate can stimulate aggregate investment, output, and wages. Moreover, a reform of this type reduces wealth inequality as equity shareholders are concentrated at the top.The Myth that Shareholders are Always Investors
Abstract
The assumption that financial assets become real capital assets is so deeply buried that it can be hard to see. The misidentification of buying and selling financial assets with productive investment in goods-and-services production is not only conceptually confused, it also has the pernicious effect of supporting the framework of shareholder primacy in theories of the corporation: the idea that the purpose of all corporate activity should be to the benefit of shareholders. This article demonstrates that shareholders of corporations whose equity trades on the stock markets are, in large part, not “investors,” and the financial assets that they hold are not “capital.” I examine sources of funds used for real investment by publicly-traded companies, and trace the sources of funds used for investment in the private markets by focusing on private equity deal making. I then question why, if firms finance the majority of their investment through other means, we continue to give shareholders the exclusive power in corporate governance.Financialization, External Constraint And Democracy: Challenges for Changes in Peripheral Economies
Abstract
During the last three decades, with the rise of globalization and financialization, peripheral economies have experienced a strong external constraint that materializes in the difficulty of accessing foreign currency. Faced with a constant deficit in the balance of payments, southern countries increase their levels of external debt, both public and private, to maintain access to international markets. This requires the consolidation of public finances and a constant fiscal adjustment hand in hand with demanding fiscal rules. With the arrival of new waves of progressive governments in regions such as South America, the first major obstacle to complying with an agenda for changing the productive structure and social transformation is found in the macro-financial sphere. Consequently, fiscal rules and the payment of debt service emerge as the containing wall for the implementation of agendas with a deep Keynesian spirit in the 21st century. This paper explores the limits of democratic decisions in the face of sound finance consecration and, at the same time, raises real scenarios such as the strengthening of industrial and commercial alliances at the regional level through a unified and regional payment system that lowers the pressure of the external constraint.Stable Profit Rates in a Time of Rising Market Power: The Role of Financial and Intangible Assets in the U.S. Corporate Sector
Abstract
In this paper, we analyze the intersection between profit margins, profit rates, and the asset composition of U.S. nonfinancial corporations after 1980. First, we document trends in the profit margin and profit rates. In line with the literature on market power, we show an almost 50% rise in the aggregate profit margin, defined by profits relative to sales, in the U.S. nonfinancialcorporate sector after 1980. At the same time, however, the aggregate profit rate, defined by profits relative to total assets, is steady. To reconcile these two patterns, we show that the sales-to-asset ratio (or firms' `asset utilization') falls after 1980, putting downward pressure on the profit rate that offsets rising margins. We also unpack two aspects of this decline. First, we show that the decline in the sales-to-asset ratio reflects a growing share of financial and intangible assets in total assets. In fact, the sales-to-(fixed) capital ratio is largely steady over time. Second, we show that the year-to-year decline in the sales-to-asset ratio reflects decline within continuing firms. These patterns link profitability dynamics to the widespread increase in financial and intangible assets and help clarify a picture of rising profit margins together with stagnant investment.
Inflation in Times of Overlapping Emergencies: Systemically Significant Prices from an Input-output Perspective
Abstract
In the overlapping global emergencies of the pandemic, climate change and geopolitical confrontations, supply shocks have become frequent and inflation has returned. This raises the question how sector-specific shocks are related to overall price stability. This paper simulates price shocks in an input-output model to identify sectors which present systemic vulnerabilities for monetary stability in the US. We call these prices systemically significant. We find that in our simulations the pre-pandemic average price volatilities and the price shocks in the COVID-19 and Ukraine war inflation yield an almost identical set of systemically significant prices. The sectors with systemically significant prices fall into three groups: energy, basic production inputs other than energy, basic necessities, and commercial and financial infrastructure. Specifically, they are “Petroleum and coal products”, “Oil and gas extraction”, “Utilities”, “Chemical products”, “Farms”, “Food and beverage and tobacco products”, “Housing”, and “Wholesale trade”. We argue that in times of overlapping emergencies, economic stabilization needs to go beyond monetary policy and requires institutions and policies that can target these systemically significant sectors.JEL Classifications
- B5 - Current Heterodox Approaches
- E1 - General Aggregative Models