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Borrowing Billions To Buy Stock, Not Invest

The long-standing link between corporate debt and capital expenditures has broken down.

Ben Holland and Liz Capo McCormick, with Alex Tanzi

When the Federal Reserve cuts interest rates, making it cheaper to borrow, it’s supposed to deliver a direct boost to the economy. But one key part of that machinery has broken down.

Business investment used to rise when U.S. companies took on more debt—because most companies borrowed to add capacity. Nowadays, they’re likelier to funnel the money to shareholders.

Investment is stuck at low levels by historical standards. President Donald Trump’s reduction in corporate taxes hasn’t changed the pattern. Neither has a decade of low interest rates, even before the Fed’s quarter-point cut on July 31.

It’s not that business stopped borrowing. As a share of gross domestic product, corporate debt has climbed to a record. What’s all but vanished is the correlation between how much companies borrow and how much they invest.

That long-standing relationship endured, albeit weakened, through the 1980s and ’90s as companies focused increasingly on driving shareholder value, says J.W. Mason, a fellow at the Roosevelt Institute in New York who’s been researching the topic. Now it’s gone, and Mason says the data suggest a different link. “If you can borrow on more favorable terms, you don’t necessarily invest more,” he says. “You might think this is an opportunity to give bigger payouts to shareholders. This is a big reason why monetary policy isn’t as effective as it used to be.”

Companies can return money to investors through share buybacks and dividends. Cash payments for acquisitions fit the category too—at least for an economist looking at the macro picture rather than at individual companies—because they’re another transaction where money goes to holders of already-existing assets.

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August 12, 2019

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