Shift Happens
In the late 1970’s, for example, rising inflation added an artificial capital gains component to the return on tangible assets, while rising income tax rates artificially depressed the after-tax returns on financial assets. The resulting shift of investor demands drove a boom in hard asset prices and destroyed three-quarters of the real value of the stock market.
As a second example, the 1981 Reagan policies of falling inflation and falling tax rates reversed this shift by boosting financial asset returns relative to returns on tangible assets. This led to a decade of restructuring in US industry, and to an eighteen year bull market in bonds and stocks which triggered a huge wave of investing in the 1990’s.
As a third example, the 1996 Telecom Act artificially subsidized the returns of some communications companies–cable operators and CLECs (Competitive Local Exchange Carriers, such as MCI and AT&T)-at the expense of the regional Bell operating companies. The resulting wedge driven between their respective returns on capital led to massive overinvestment in the former, and to a multi- trillion dollar loss of market value for the latter, and contributed to both the stock market bubble of the late 1990’s and the severe recession since then.
Shift happens internationally too. The opening of China to foreign investors has exposed the gap between Chinese returns and ours. The result has been a massive flow of capital out of the US , the EU, and Japan and into China , millions of unemployed manufacturing workers, and growing trade tensions.
