Financial shenanigans wiped out all productivity gains from digital technology

The new report from the Deloitte Center for the Edge says that, "return on assets for U.S. companies has steadily fallen to almost one quarter of 1965 levels,at the same time that we have seen continued, albeit much more modest, improvements in labor productivity." Jon Taplin explains, "any productivity gains from the digital revolution have been more than wiped out by our corporate (as well as personal) addiction to debt. To understand this, it's important to grasp the difference between return on equity (the classic Wall Street measurement) and return on assets...By masking their absolutely dismal performance in the last 40 years in ROA, by taking on more and more debt to juice ROE, both Wall Street and America's corporate elite are engaged in a massive shell game, in which the average investor is the mark."

America's Corporate Shell Game (Jon Taplin)

The Shift Index (Deloitte Center for the Edge)


  1. stuff and nonsense, by balderdash! I have it on good authority from the Association of Former Really Big Company’s CEOs and Emperor Palpatine Enthusiasts that it is quite the other way around. It’s all this bloody digital technology that caused the collapse by keeping track.

  2. Oh NO! I guess I need to trade in 2008’s standard of living for 1965 so I’d be 9.4 times better off?!?!?

  3. But I added my spouse to the workforce, cut my lunch, increased my standard work day to 11 hours, and added at least one weekend day.

  4. Well, let me say that I just don’t care.

    Why? Because I always thought that these “computers” were going to free us from toil because they’d do our jobs while we’d be free to puruse our hobbies and other spiritually rewarding endeavors.

    Instead, all of that “slack” created by the computer revolution was grabbed instantly by our corporate overlords.

    So screw ’em if it’s costing them a little more to get some work done.

  5. That fails to draw the obvious corrolary that if we didn’t have the gains from technology our current financial situation would look that much worse…

  6. I am about to head out the door so I have not picked through the article, so maybe I am missing something, but isn’t this a “no shit Sherlock” scenario? Isn’t this kind of what you would expect in a post industrial economy? When a manufacturing company buys big ticket industrial assets, one kind of assumes it is going to play a direct roll in making profit. In an industrial economy, if you are in the widget industry, when you buy assets they tend to be things like widget makers that are there to make more widgets.

    On the other hand, in a post industrial economy, buying assets doesn’t signify a sudden bump in productivity. In fact, it probably often results in the reverse. If you upgrade your widget office that does widget design and outsources the manufacturing, buying more stuff generally isn’t going to see sudden large bumps in profit. It isn’t like a nicer office suddenly results in producing and selling 20% more widgets.

    Like I said, maybe I am missing something, but the fact that the link between profitability and assets (which don’t include people BTW, assets are things that can be readily changed to cash) is decoupling seems like what you would expect and want.

    What I would find interesting is to see how return on personnel has changed. How much does hiring one more engineer or designer improve profitability? I am no economist, but in a post industrial economy that sounds like a more interesting figure to mull over than to look at how buying more “stuff” affects profitability.

  7. This is what you get when you hand over responsible corporate governance to asset strippers, merge’n’turf artists, corporate raiders, and the MBA crowd who believe that business is interchangable and management skills are universally applicable.

    Circa 1960, the USA (and then other western economies, led by the UK) switched track from wealth creation to wealth concentration. Which, in the short term, makes the rich richer. But in the long term, the hang-over is a bitch.

  8. So, what are they saying here?

    That the cost of process, implementation and replacement of technology instituted to replace the labor workforce is not paying off?

    We’re installing new technology and throwing it away so fast that it doesn’t have time to pay off?

    That we’re not appropriately deploying new technology?

    That we’re not really buying equipment, tooling and plant with the money we go into debt for?

    That most of our companies out there in touting “economics of scale” have really been on the path to becoming “too big to succeed”?

    That we’ve been working on “doing more with less” to the point that we’re “attempting to do everything with nothing”?

    “Potential Performance” far outstrips “necessary production”?

    “Relevant and actionable” is MBA (Mostly Bloody Aweful) speak for (we hope) planning and implementation? Failure to plan is a plan to fail?

    Would a simple removal of one letter from “Shift” better explain what our problem is?

  9. Corporaitons seek a level of debt as high as possible that doesn’t threaten solvency because of the tax code. Debt is cheaper than equity to capitalize with.

  10. After reading Jon Taplin’s blog, I will sum up something that I’ve felt for a long time.

    Businesses best succeed where they:
    A) Produce a needed product or service.
    B) Keep the customers happy.
    C) Keep the workers happy.

    And eventually fail when they:
    A) Keep the Stockholders happy.
    B) Keep the Executives happy.
    C) Keep the money lenders happy.

    D) cost of products and services must be reduced to increase profits
    E) customer expectations aren’t a priority
    F) get rid of the workers, they are an expense that reduces the return for stockholders, compensation for executives and servicing of debt costs.

  11. how did it happen? Those who were supposed to prevent it (judges, regulators, politicians) were long ago purchased by the profit takers – when they weren’t already one and the same. What will keep it from happening again? Nothing.

  12. Going from producing goods to cooking books isn’t a decent long term plan.
    In the last two years we’ve been blindsided by items we get only from China that turn out to be dangerous.
    The drug heparin is produced in small quantity in the U.S.. It is a blood thinner and when you need it you need it. When the Chinese turned out poison heparin there was no plan B.
    If you use stock screening software that permits you to select various basic financial benchmarks, it’s amazing how few companies pass.
    One major household name (think smelly cleaning product) has negative stockholder’s equity. They’d gone on a buying binge and have to carry the excess they paid for companies as “goodwill” and amortize it. They are an ongoing concern albeit with a lot of risk in their path.

  13. very interestingly Alvin Toffler wrote a book called Future Shock where he predicts this very thing …. and more.

    He must of been in the know….

  14. There’s a whole other explanation that used to be discussed quite a lot, but no one seems to talk about much any more.

    Our infrastructure is aging.

    This article says that in the United States, CURRENT annual income has declined relative to TOTAL financial input. During and after WWII the US invested a LOT in roads, factories, etc. They got old. But in this analysis, those investments are still part of ‘Assets’.

    The ‘Assets’ being discussed in the source material for that graph are not Assets in the sense of “things you’ve got” they’re the financial term-of-art Assets which means the total money that has been put into an enterprise over all time.

    I suggest that the growth of debt (though it is problematic) is not nearly so big an issue as our failure to maintain and upgrade our infrastructure.

  15. So, tech workers wring out their brains and other labor bust their asses so some Wall Street asswipes can turn it into profit for themselves?

    And we accept this state of affairs because…

  16. Hard to disagree with the argument based on the facts provided. Corporate shenanigans, personal irresponsibility in regards to credit and mindless consumption all made this happen.

    I hope the post-consumer society, the ones who also create and share ideas and things, redefine our market. It’s up to us, intrawebs!!! Viva le REVOLUTION!!!!

  17. Honestly, I’m very, very unconvinced by the blog post you’ve linked to. The basic problem here is that they appear to be using the standard ROA formula: net profit/total assets. Initially, this sounds like a reasonable measure of profit, but it isn’t. It really just means that we are throwing away any part of the gains used to pay interest.

    Consider that we have two companies which I’ll call A and B. In 2007, both companies have $100 million dollars in assets, $100 million in market capitalization and are making $10 million dollars in profits each year. Now, that’s a pretty good ROA/ROE. ROE = 10%, ROA = 10%. All good.

    They both have some ability to grow, so let’s assume that they don’t pay that money back to stock holder, but instead invest it back in a way which maintains their profit ratio. So company A just does this and in 2008 has assets of $110 million and profits of $11 million, thus maintaining their 10% ROE and 10% ROA.

    On the other hand, company B wants to grow faster and discovers that via bonds or loans, they can receive $100 million in credit at 8% interest. Since they’re making 10% profit, that sounds pretty good to them. They go ahead and take that $100 million and invest it in their business along with the $10 million profit from last year. This gives them a total assets of $210 million. In 2008 they maintain their profit ratio and make $21 million as a result. However, they now need to pay $8 million in interest, leaving a net profit of $13 million. Share-holder are happy because their ROE is now $13 million/$110 million = 11.8%, better than the 10% from company A.

    But oh noes! Their ROA has gone down. It’s now $13 million/$210 million = 6.2%. Disaster! Well, actually, not so much. It’s only a problem if we assume that that $8 million paid in interest just disappeared. A more sane way to look at it is to treat the creditors as also getting a return on their money (which they are in the form of interest payments). So if you really want to see the total returns for company B relative to its assets, you should include the interest payments, meaning $21 million/$210 million = 10%, the exact same ROA as company A. Company B is not “engaging in a shell game”, they are making effective use of credit to grow their business and generate more profits than they otherwise would.

    This alternate way of calculating ROA (including interest payments in returns) is used by at least some economists. And if you want to actually measure economic growth and productivity: this does it. The other measure of ROA does not because it’s throwing away a significant portion of the profits for no reason. Basically it’s saying “only profits from the stock market matters, not the bond market or loans”.

    So all that a falling ROA for the overall economy means is that more companies are leveraging credit to grow their business than they were before. This is actually probably a positive thing. You’ll notice that over the period in question, GDP has risen steadily. It’s tough to argue that the economy as a whole has been getting stagnant in the last couple of decades. The logical conclusion is that total ROA is not a good measurement of total growth in the economy.

    Now, all that said, there is some value in looking at the spread between a company’s ROE and ROA because it does show how leveraged the company is. The thing about interest and bond payments is that unlike stock dividends, they aren’t optional. When the economy turns south, you still have to make your loan and bond payments. In our scenario, if company B’s profit ratio falls to 5%, most of its earnings will be used just to pay interest, thus hampering its longer term growth. If their profit ratio falls to 2%, they won’t be able to make their payments and will go bankrupt. So the low ROA for GM was a warning sign not because GM was using its assets inefficiently (which it wasn’t once you include interest payments as a form of return), but because a much greater percentage of its assets were offset by loans than were part of the equity of the company. However, a more direct way to examine this would be to look at the ratio between total assets and loans or to examine the ratio between interest payments and total earnings (interest payments plus net profit).

    In summary all the blog post and the report you linked do is say “Oh noes! Businesses have been using credit more as a way to increase profits!” They don’t actually determine whether or not that credit is being put to good use or not. The blog post especially has a lot of unjustified alarmist language. The whole conclusion that this credit is “wiping out our productivity gains” is ludicrous. It only holds true when you assume that interest payments are being dumped into the sea. The more accurate (but less attention grabbing) conclusion is that a greater percentage of corporate earnings are being paid to banks and to bond holders. Is this a problem? Maybe. Is this a shell game? Are we “living in a fool’s paradise”? Definitely not.

  18. “Little is revealed about his political opinions except that he has an almost maniacal hatred of oppression, with which he identifies all the imperialistic nations of the world and does not hesitate to identify himself with those oppressed, be they Cretans rising against the Turks ruling them or poor Ceylonese pearl-divers eking out a living or even grey whales being attacked by cachalots. In Twenty Thousand Leagues Under the Sea, when Professor Arronax insinuates that he was violating maritime and international law, by sinking war-ships, he states that he was merely defending himself from his attackers and that the laws of the world on the surface did not apply to him any longer. In one scene in Jules Verne’s 20,000 Leagues Under the Sea, Nemo exclaims,

    “On the surface, they can still exercise their iniquitous laws, fight, devour each other, and indulge in all their earthly horrors. But thirty feet below the (sea’s) surface, their power ceases, their influence fades, and their dominion vanishes. Ah, monsieur, to live in the bosom of the sea! …. There I recognize no master! There I am free!”

  19. Our foriegn policy has been pretty shonky since about ’65 as well, but yeah, let’s blame the computers.

  20. Corporations require a charter from a state government. Thus they are contrivances that exist at the pleasure of the state. That is, of the people. We should not allow them to behave in ways that are detrimental to human beings.

    How about if we just disallow corporations to issue debt instruments? Then they would be required to convince investors that whatever they propose to do with the money invested will actually improve the world in such a way as to guarantee a return on the investment.

    Taxpayers in the United States are on the hook for egregious amounts of debt that AIG incurred. Why should we pay these taxes? We had no say in the decision-making that created the problem.

  21. This chart is about profitability, and profitability isn’t everything.

    That said, these days there’s no Manhattan Project or (first) moon landing to keep tech folks motivated. We need something BIG to work on, some unifying force, to motivate us.

  22. A very brief accounting tutorial…
    Assets = Liabilities + Equity.

    Profitability = Revenue – Expenses.

    Return on Assets = Revenue – Expenses / Assets.

    Investors are interested in ROI, not ROA. In fact, a low ROA generally indicates that a company is expanding as rapidly as possible or that a company is very large.

    For example, I would rather have a 1% ROA on a company with assets worth $1m than a 1000% ROA on a company worth $1.

    Another example of a popular but misleading percentage metric: GDP.

    Its great that an impoverished country’s GDP can grow at 12%. I applaud such growth. 12% of 30bn doesn’t amount to a bean in a can compared to 1% growth of a $10 trillion GDP.

    This doesn’t really bother me.

  23. #26 you only got this partly right.

    Equity = Assets – Liabilities. While you can state this the other way (as you did), you can only get the equity figure by subtracting liabilities from assets. (Equity is also called “net worth”).

    The article actually has it backwards. You can inflate ROA with borrowed money, but you can’t inflate ROE by the same method.

    Also investors are not really interested in ROI, for the same reasons you state for GDP. Management consultants love to banter about how high ROI is with their projects, but for the most part have a marginal effect on what really counts, ROE.

    This is basic Benjamin Graham/Warren Buffet stuff. If you have an investment portfolio worth a million dollars, what is better…25% ROI on 10% of your assets, or 5% ROE?

  24. Our economy isn’t post-industrial. We require more factories than ever. They just aren’t here, employing our people.

    “Post-industrial” is a term con artists wearing nice suits use to justify the annihilation of the American economy to enrich their cohort.

    Americans have achieved the ultimate level of victimization, not unlike that cow in the Millways restaurant which walks up to your table and asks you what part of itself you’d like for dinner today before toddling off to suicide for your dining pleasure.

  25. I see a lot of economic formula being bandied about. Excuse me, but the Smartest Men in the Room blew up the world using those shibboleths of ROE and similar cons.

    There are people who makes stuff and then get paid for it: the rest of the world are bullshitting middlemen who are posing as the real movers. That’s the core of the problem. Money doesn’t make wealth, it greases the opportunities to snark other people out of their wealth.

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