Too Much Money

For several years I have taken two weeks each fall to drive around the American southwest. I do this in a Volkswagen Golf TDI — a diesel car.

Here it is last year, waiting out a cloudburst on a desert road in New Mexico:

The desert washes, normally dry gullys, turn into small rivers:

In these situations, patience is key.

The car has served me well and gets fabulous fuel economy to boot. When you can go well over 500 miles on a tank of fuel, it allows for a bit of spontaneity on a long trip.

Of course I know about Dieselgate. How could I not? There was as much noise about it as there might have been had the San Andreas fault let go and state of California drifted off into the Pacific.

I had the car upgraded. And it’s a crying shame that some marvelous technology as well as God knows how many thousands of man-years of institutional knowledge ended up down the drain due to executive malfeasance and the subsequent feeding frenzy.

And what a feeding frenzy! You have to wonder how many billions of dollars the legal profession pocketed from this.

Of course, I’m aware of the problem of nitrogen oxide emissions. Terrible. Right?

Consider another scandal involving nitrogen oxides. You probably haven’t heard of it. The EPA has spent five years investigating the “tuner” market. Basically, a number of companies sell devices that allow you to reprogram engine controls in your vehicle. If it’s a street vehicle, it’s probably illegal.

The EPA investigated this in the context of 500,000 diesel pickup trucks. You know, trucks like Silverados and Rams. The report wasn’t published, but it was leaked:

The report found “significant amounts of excess air pollution caused by tampering” with diesel pickup truck emissions controls. The technology is essentially an at-home version of the factory-installed “defeat devices” embedded into hundreds of thousands of vehicles in the United States by Volkswagen, which was forced to pay $14.7 billion in the U.S. to settle claims stemming from the scandal.

The report said “diesel tuners” will allow the trucks to release more than 570,000 tons of nitrogen dioxide, a pollutant linked to heart and lung disease and premature death, over the lifetime of the vehicles. That is more than ten times the excess nitrogen oxide emissions attributed to the factory-altered Volkswagens sold domestically.

New York Times, November 25, 2020, emphasis mine.

Ten times the effect of Dieselgate. And this is just a sample. And it’s on-going. But no media noise. No feeding frenzy. Because no billions of dollars tantalizing lawyers and attorneys-general and eager plaintiffs. You could say that VW made two mistakes: they did something dishonest and stupid, and they had too much money. Other people have done, and continue to do, far more damage. But the damage was never really the point.

That’s worth repeating: the public damage was never the point.

It isn’t news that many large firms (including so-called tech companies like Apple) pour billions of dollars annually into buying back their own stock. They even go into debt to do it. The objective is to increase earnings-per-share by decreasing the number of shares, which should then cause the share price to rise (as long as earnings stay up), which can then translate into a payday for large investors when they unload their shares.

This has been a practice since the 1980s, when SEC rules were changed to allow it. But it came into sharp relief (and generated a brief burst of outrage) when these same firms wanted bailouts as the COVID crunch threatened to push them into insolvency.

The US airline industry has spent a decade shoving itself into harm’s way by strip-mining their balance sheets to fund share buybacks and goose top executive stock options.

David Stockman, March 21, 2017

A little more color:

So get this: The big four US airlines – Delta, United, American, and Southwest – whose stocks are now getting crushed because they may run out of cash in a few months, would be the primary recipients of that $50 billion bailout, well after they wasted, blew, and incinerated willfully and recklessly together $43.7 billion in cash on share buybacks since 2012 for the sole purpose of enriching the very shareholders that will now be bailed out by the taxpayer…

The S&P 500 companies, including those that are now asking for huge bailouts from taxpayers and from the Fed, have blown, wasted and incinerated together $4.5 trillion with a T in cash to buy back their own shares just since 2012.

Wolf Richter, March 17, 2020

Setting aside the moral hazard of bailing out firms that don’t do enough during good times to insure their own survival in tough times, there is a clear pattern. Big investors (and they have to be big to influence corporate behavior) are not so much interested in investment per se, as they are in getting their hands on cash now. Human nature, right? And since these “investors” are necessarily big, the amounts of cash at stake are necessarily stupendous. And whether the boards and management teams of these firms have the imagination to actually invest that cash in new endeavors that will generate a return over the long run is irrelevant. Because investment is not the point.

I find this disturbing. Possibly because I have memories of early days of computing and communications, of real investment and creative ferment. Wireless technologies, for example, have grown so complex and sophisticated today that no one company, neither Ericsson nor Nokia in its best days, could possibly undertake to develop on its own something like 5G mobile wireless technology. Or even 4G. And I have no doubt this is true in many other industries.

Of course it’s foolish to ask or expect intelligent, resourceful people to act against their own immediate interests, or to forgo an immediate gain. That isn’t the point, and it’s why outrage so often expressed over stock buybacks and other financial engineering is misplaced. Yet we are asked to take on faith that whatever big investors and big firms and high-powered law partnerships do is by definition the most efficient allocation of capital. Or that arbitrage performs important functions of price discovery and market lubrication. Or something equally tendentious and untestable that Milton Friedman might have said, but that sounds suspiciously like what I used to hear in Sunday school as a child: “Have faith. All will be revealed after death.”

So what happens to capitalism if there is too much capital? Do major league capitalists increasingly turn to the game of acquiring shares of existing liquidity? And increasingly lose patience with actual investment? If so, you have to wonder whether technological progress will increasingly be left to farm teams and amateurs — or to hungrier competitors elsewhere.

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