The Alchemists of Wall Street

Clever financing may reward shareholders, but it does nothing to help the economy

  • Heidi Gutman / CNBC / NBCU / Getty Images

    Apple's share price jumped 5% on Carl Icahn's tweets that he owned a lot of Apple stock and had spoken to CEO Tim Cook about paying out bigger dividends.

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    Many investors like icahn would argue that a corporation's job is to get cash to shareholders most efficiently. In today's low-interest-rate environment, borrowing low to increase the dividend is certainly efficient. But there are plenty of long-term buy-and-hold investors like Warren Buffett and Vanguard founder Jack Bogle who warn that our capital markets have become too short term. And the short term is getting even shorter--even down to the millisecond--as speed traders have demonstrated. The entire value of the New York Stock Exchange in recent years has turned over roughly every 12 months, a rate that has doubled since the 1990s. As Buffett, who likens Wall Street to a restaurant with a casino, once told me, "You've now got a body of people [in the market] who've decided they'd rather to go to the casino than the restaurant."

    Another worry about the way Wall Street influences American business is that it increases income inequality. Many economists believe that inequality can ultimately slow growth in an economy like ours, which is 70% dependent on consumer spending. As University of Texas economist James Galbraith points out, there are 100 years of good data to show that "as asset markets get bigger, inequality does too." As Wall Street grows, it sucks the air out of the room and makes the rich richer while not necessarily fueling faster growth in the real economy.

    The disconnect between the stock price of Apple and the company's contribution to the larger economy can be seen in another way: taxes. One of the mind-bending reasons Apple is borrowing money is that it doesn't want to repatriate the cash it has in overseas accounts and be forced to pay U.S. tax rates on it. That we have a tax code that favors debt over equity and has allowed U.S. firms to shoulder a smaller share of the country's tax burden over the past 30 years, even while corporate profit as a share of GDP has been rising, is proof enough that there's a large disconnect between finance, big business and the rest of us.

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