Cisco CEO Chuck Robbins an Idiot or a Liar, You Decide…

So today on CNBC Cisco CEO, Chuck Robbins explained that if they were to repatriate their offshore cash back to the US he would use the money to reward shareholders through buybacks and dividends and then do some M&A.  He claims cash distribution to shareholders in lieu of actual economic stimulating investments creates jobs by way of mutual funds, which make the soon to be out of work Americans from his M&A activity feel good about their income….

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I mean where does one even begin picking apart this absurdity of logic??  It probably is not even worthy of a detailed response.  But I wanted to note, on record, that these are the type of moronic and asinine thought processes coming out of corporate America that are killing the American middle class and will destroy even most on top unless the bottom 80% are handed a stipend to go out and buy products produced by corporations.  If Chuck truly believes what he says, well he is an idiot.  If he has even a shred of economic acumen then he is a liar.  I’ll leave it to you to decide.

But before you decide let me show you a few charts.  First chart below depicts real total wages and salaries (i.e. labor income) as a multiple of real corporate dividends paid.  You will notice the multiple peaks at 24x in 1975, averages 20x from1950 through 1990 and bottoms today at 8x.

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But remember cash distributions don’t just reallocate capital from labor income they also reallocate away from domestic private investment.  So let’s take a look at the multiple of domestic private business investment to corporate dividends as well.

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Clearly we see a pattern of forsaking economically stimulative investments for cash payouts of which 85% get reinvested into secondary financial markets that have zero economic stimulative effect i.e. never hit a corporate balance sheet or income statement.

Now Cisco CEO Chuck Robbins suggests that this phenomenon of shifting capex and labor income to dividends is actually a positive thing for the economy.  So let’s have a look.  The next chart depicts a 5 year moving average of per capita real GDP growth over the same period.

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What we find is that average real economic growth per capita (this is an important measure of individual prosperity) has fallen by more than 50% over the same time period.

Over the past 6 months I have provided a library of research proving that reallocating capital from domestic private investment and labor income in favor of cash distributions has not only resulted in massive deterioration of economic growth but has necessarily relied on private and public debt to fund the deteriorating growth that remains.  I’ve had several prominent PhD experts call me names but I’ve had none of them challenge my research and argument.  I challenge any and all economists to attack my assertion that this secular trend of reallocating capex and labor income to profit (which is the most economically inefficient use of capital) is destroying the long term US economy.  I’m sincerely looking to receive the strongest arguments as this only helps us at the Institute for Sensible Economics refine our research.

 

14 thoughts on “Cisco CEO Chuck Robbins an Idiot or a Liar, You Decide…

  1. This rant is incredibly ignorant of how markets work. A firm should only invest if the net return exceeds their cost of capital. All the rest of their earnings should be given back to the owners so they can decide how best to allocate their wealth. It shouldn’t be up to the hired hands who have an interest in creating bigger fiefdoms. The idea that the money if given to the owners would “end up in secondary financial markets” is a non sequitor. The author really wants the owners to be patsies so the management teams can fritter away their wealth.

    1. It’s hard to ignore your two main points: name calling and mind reading. The author is not ignorant of how markets work, he simply doesn’t agree with your opinion (people who you disagree with are not ignorant; really now you’re not 12 years old, right?). And you certainly can not read the author’s mind to determine what he wants (apart from what he clearly states in his article).

      Aside from those two glaring points, your main argument relates to markets and how firms invest and who gets to decide. CISCO clearly does not follow your advice with respect to investment, as they have at least 50 billion dollars (stats say 71 billion cash on hand) that is not being returned to owners. They did pay out 5 billion in 2016 dividends, but they also hold 34 billion in debt. Obviously there’s capital investment, shareholder return, and parked cash going on in CISCO’s real market world, none of which fits your simplified micro-economics take on how things work. Management is making the calls on what to do with profits, and will some of it goes back to the owners a lot does not. It’s for certain that workers are not making any of the calls on what to do with profit. I’d say the author’s opinion of what CISCO’s CEO says he’d do and why it is not in line with the outcomes the CEO says it would achieve is closer to the real world than your introductory text book analysis.

      CISCO is profitable within the current regulatory environment. This is not in question. It’s what they should do in the coming change to regulatory environment that is in question. Should they invest the 50 billion for purposes of growth (creating future shareholder value, hopefully, as well as job growth and GDP growth for the US) or should they return the money to their shareholders? Given how CISCO has operated in the past, I would find it hard to believe they would take the 50 billion and use it for growth in the US. Their CEO pretty much says they won’t, even though he is likely lying with respect to why.

  2. I would throw greedy in the mix of descriptors. The comp packages in corporate America should be charted as well since they are another result of the mentioned practices.

    One more thought, I struggle to label any corporation “great” today. Sure, they can be great based on short term financials but are they great in their customer’s eyes? It is so seldom today that I am satisfied with a product or service that when it does happen, it seems like Christmas. Back to the author’s point, do buybacks and dividends increase customer satisfaction (and repeat sales and new customers)?

  3. Do you actually think Cisco is currently refraining from engaging in economically stimulative activity that would generate a positive return right now. Cisco doesn’t need to repatriate cash to invest in projects that generate a return. If Cisco has those projects it is doing them now.

    Cisco has nothing to do with repatriated cash other than give it back to their shareholders and engage in wildly expensive M&A activity. That’s because with income and wealth inequality the way it is there isn’t enough consumption demand out there. The Cisco CEO didn’t create that environment. 36 years of public policy created that environment where the middle class is gutted. So there is nothing else for the CEO to say.

    Your fallacy here is to blame lower private investment / higher dividends as the cause when that is actually the symptom.

    1. The demand function is damaged bc of decades of poor economic policies. I’ve stated this in past articles. But the lower investment higher distributions, while a response to poor demand function, is now accelerating the problem into a death spiral of sorts. It’s become a chicken and the egg problem in that it’s now circular. Something has to give or it all falls down. Real full contraction is less than 5 yrs away. Mathematically speaking.

  4. I used to work for Cisco and let you tell you something: you’re idiot regardless of your damn charts.

    You want middle class jobs? Stop the H1-B abuse and then prolly Cisco will end up hiring more Americans.

    1. Yes trade agreements and immigration play a big role in the problem. I’ve stated this in prior research papers.

  5. I’m not an economist, but I’d like to offer some alternative interpretations of those charts.

    Keep in mind two related aspects of dividends that changed over that roughly-1950-to-now time period:

    1. Tax rates: dividends have always been considered “unearned income” and taxed at the recipient’s highest income rate. The highest marginal rate was well above 50% until 1982 when it was set at 50%, then reduced to 25% in 1988 before heading somewhat up again. Many higher income shareholders were against companies paying out too much in dividends since so much of the money would just go to the government instead of shareholders. The more the tax rates dropped, the more the shareholders favored higher dividends.

    2. The composition of the shareholder base of public companies has shifted from individual owners to tax free owners, as retirement plans of various sorts have exploded in size in recent decades. With a tax rate of 0%, pension plans are strong advocates of dividends, since they get to keep all the income. Yes, there were pension plans around in the 1950s-1970s as well, but they mainly owned bonds, because it was long considered imprudent for a pension plan to own more than a small percentage of equities.

    So all three charts reflect the big increase in cash dividends (I’m not sure whether stock buybacks are included in that, or not, and they have gotten much bigger too) starting in the 1980s. Many things have happened to the US economy since then, some good and some bad. When one considers what the alternative uses for cash are besides dividends and stock buybacks, it isn’t clear to me the logic of blaming the bad things in the economy in the last 30 years on that, versus all the other things going on in the economy, the country, and the world during that time period.

    Consider the alternative uses for the cash. In the 1950s, US companies were fat and happy because they had no effective foreign competition, certainly compared to what they have today. With little demand for cash dividends because of the high tax rates and because most shareholders would have to hand over most of the dividends to the government, companies accumulated excessive staff, overpaid everybody, and invested heavily in new lines of business where they had no competitive advantage. In the 1960s they started acquiring each other willy-nilly to create conglomerates, as they were called then, with little rationale. As foreign competition became more effective in the 1980s and since, this led to drastic downsizing of staff and facilities and the withdrawal from non-core businesses. It isn’t clear that the 1950s-60s way of operating is better than giving shareholders back excess cash, now that more shareholders get to keep more or all of the dividends, and letting them allocate it to new investments as they please.

    I think the weakness in capital investment in recent years partially reflects a change in what is considered investment, something that accountants have yet to catch up with. Salaries for software designers are really an investment for a company, it is just not a capital investment as traditionally defined.

    A big factor is also a lack of opportunities where a company thinks it can get a good return on investment. Why put up a new plant if your existing plant has loads of excess capacity? Bad investments with a low return won’t make for a strong economy.

    I think, in general, you have cause and effect backwards. Rather than “proving that reallocating capital from domestic private investment and labor income in favor of cash distributions has…resulted in massive deterioration of economic growth”, I would say that a big reduction in economic growth prospects has caused companies to hold up on expansion and hiring. With nothing to be gained by piling up cash that won’t be needed and can’t be invested to earn a decent ROI, companies have, quite reasonably, returned the excess capital to their owners.

    [I may have missed the post where you feel you proved the cause and effect as you stated, rather than my reverse claim. Could you please point me to that? Thanks.]

    The important issue is not how companies respond to inferior growth prospects, but why is the outlook so subdued? My leading candidate is the huge growth in recent decades of a parasitic government that takes people’s earnings and misspends them, and creates incentives for malinvestment and conspicuous consumption that pretends to be investment (e.g., McMansions.) The Keynesian promotion of consumption over investment hasn’t helped, nor has the monetarist push for artificially low interest rates which, through a variety of mechanisms, reduces the ROI of investments throughout the economy.

    If by some miracle we could drastically downsize the government, and take economic policy away from the stranglehold that statist economists have had on it here and elsewhere for many decades, then the reduced parasitic drag would create more high ROI investment opportunities. Neither companies nor their shareholders would want higher dividends, because the companies could again have high return opportunities in which to invest.

    1. Read The Matrix Exposed, a paper I wrote recently on ZH. I’ve been very forgiving of CEO’s. This article today is attacking Robbins for suggesting cash distributions is an economic stimulus for middle class America.

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