Retirement: Not Just for People?

By Philip Brewer on 18 September 2012 4 comments
Photo: Alan Gee

This has always been true — almost all the economic value of a typical household is the future value of its members' labor.

With a little foresight, this will change over time. As your career progresses, you build up savings and investments, with the goal of replacing your income from labor with income from financial assets, preparing for some future time when you can no longer work. You accumulate other assets as well. Household goods, once purchased, continue to provide value for years or decades. If you pay off your mortgage (rather than doing a series of cash-out refinances), you eventually own a house you can live in. (See also: What It Really Costs to Own a Home)

A lot of what I've written here at Wise Bread has been to advocate for this shift. To advocate for making it early. To advocate for making it consciously.

One thing that I hadn't really thought about until recently, is that corporations have been making much the same shift.

Until around 1980, the economic value of a corporation was almost entirely the value of its productive capacity. Over the next decade or two, that changed. Instead of investing in plant and equipment, corporations found it more profitable to set up financing arms, to lend their customers the money to buy their products. During the 1990s and early 2000s, companies like General Electric and General Motors found that their money-lending businesses made much more money than their manufacturing businesses.

This had a lot of negative side effects. It led to the elimination of good manufacturing jobs, only partially offset by the creation of finance jobs. This shift, as much as off-shoring, was what eliminated six million manufacturing jobs over the past 20 years.

It also made corporations much less answerable to their customers. Before, companies either produced what people wanted to buy, or else their profits suffered. After this shift, it scarcely mattered what corporations produced, because so much of their income was investment income.

Basically, the corporations could retire.

This shift only benefits the management — they can now report reliable profits without having to actually do any work.

It might be nice if the harmful effects on workers would be enough to promote change, but I don't think that's going to happen. Fortunately, this whole thing is also a negative for shareholders — the corporate structure doesn't provide any value-add for the shareholders. (Really, it's of negative value — another layer of expense and another layer of taxation.) The shareholders would be much better off simply getting their money back and investing it themselves.

So, although the negative side effects are large, I don't think they're permanent. I foresee an end to the days of retired corporations. If you own stock in such a corporation, you might consider whether your money would be better off in a company that actually does or makes something.

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Guest's picture

Corporations are a perfectly good vehicle for investment - typically better than doing so as an individual. If you're getting double taxed, you're doing it wrong.

That's not to say that limited partnerships or other more pass-through structures don't have their place. But a conventional C corp is not bad generally.

Philip Brewer's picture

I don't see it as ever being a win, in the cases I'm describing, where the underlying business is withering away. Even if you avoid actually paying additional taxes, you still have to deal with the additional layer of paperwork, accountants to file it, and so on.

There are, of course, many reasons for a corporate structure if there's a real business underneath.

Guest's picture

I'm not sure I entirely agree with the premise of corporations getting into financial services. back in the 1970s that was all the rage, when companies like Chris Craft, Greyhound and even Xerox got into "financial services" to cover for failing core businesses. In the case of Greyhound and Chris Craft, they never came back (the bus line today is a new corporation that bought the name).

Most of these misguided corporate strategies were unwound in the 80s as the era of the corporate raiders forced most public corporations to sell off non-core units. GM got relieved of GMAC (now Ally Bank) as part of their bailout. GE is the exception, not the rule. Solid corporations like Dupont, IBM, Apple, Dow, Pfizer, are pretty much dedicated to their core businesses.

So... with only a small number of exceptions, the companies you invest in today are either providers of service or producers of products.

Guest's picture

This article talks about corporations taking lending or financing route to enable people to purchase more products. However, corporations can also invest in stocks, gold, etc as a portfolio investment, which will also open a stream of Investment Income in addition to operational income. Several companies such as Apple, who have plenty of cash reserves can use their funds either for buybacks or dividend, or retain profits to invest in new ventures. When these corporations reach a stage where they dont have much opportunities to invest, then investing the funds makes a lot of sense.
If a significant portion of that goes to equity the company can enjoy good returns over the long term.